Edgar Filing: FIRST BANCORP /PR/

FIRST BANCORP

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q/A
AMENDMENT NO. 1

Quarterly Report Pursuant to Section 13
of the Securities Exchange Act of 1934


For the Quarter ended		Commission File 001-14793
June 30, 2002

First BanCorp.
(Exact name of Corporation as specified in its charter)


Puerto Rico		66-0561882

(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

1519 Ponce de León Avenue, Stop 23
Santurce, Puerto Rico		00908

(Address of principal office)		(Zip Code)

Corporation’s telephone number, including area code:

(787) 729-8200

Indicate by check mark whether the Corporation (1) has filed all reports required by Section 13 of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Corporation was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Number of shares of the Corporation’s Common Stock outstanding as of August 12, 2002

26,615,452

TABLE OF CONTENTS


		CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
		CONSOLIDATED STATEMENTS OF INCOME
		CONSOLIDATED STATEMENTS OF CASH FLOWS
		CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
		CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
		PART I — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
PART II — OTHER INFORMATION
	ITEM 1. LEGAL PROCEEDINGS
	ITEM 2. CHANGES IN SECURITIES
	ITEM 3. DEFAULTS UPON SENIOR SECURITIES
	ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
	ITEM 5. OTHER INFORMATION
	ITEM 6. EXHIBITS AND REPORT ON FORM 8-K
SIGNATURES

EXPLANATORY NOTE

This Amendment No. 1 to Form 10-Q for the quarter ended on June 30, 2002 (the “Form 10-Q”) is being filed for the purpose of correcting the following error; on page 13 (Note 6) of the Corporation’s Form 10-Q, $23.5 million should replace the outstanding balance of Nortel Networks Corporation corporate bonds, currently printed as $18.5 million; no other changes are being made by means of this filing.

CONTENTS

PAGE

PART I

FINANCIAL INFORMATION

Item 1.

Financial Statements:

Consolidated Statements of Financial Condition

Consolidated Statements of Income

Consolidated Statements of Cash Flows

Consolidated Statements of Changes in Stockholders’ Equity

Consolidated Statements of Comprehensive Income

Notes to Consolidated Financial Statements

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

PART II

OTHER INFORMATION

Item 1.

Legal Proceedings

Item 2.

Changes in Securities

Item 3.

Defaults Upon Senior Securities

Item 4.

Submission of Matters to a Vote of Security Holders

Item 5.

Other Information

Item 6.

Exhibits and Report on Form 8-K

SIGNATURES

Forward Looking Statements. When used in this Form 10-Q or future filings by First BanCorp (the “Corporation”) 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 word of phrases “would be”, “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.

FIRST BANCORP

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited)


			June 30, 2002			December 31, 2001

Assets
Cash and due from banks			$	68,144,854		$	59,898,550

Money market instruments				43,009,631			34,564,568

Investment securities available for sale, at market:
	Securities pledged that can be repledged			1,994,774,831			2,988,828,088
	Other investment securities			216,387,544			385,419,989

		Total investment securities available for sale		2,211,162,375			3,374,248,077

Investment securities held to maturity, at cost:
	Securities pledged that can be repledged			1,083,267,413			171,152,930
	Other investment securities			388,276,209			113,142,662

		Total investment securities held to maturity		1,471,543,622			284,295,592

Federal Home Loan Bank (FHLB) stock				35,629,500			22,890,600

Loans net of allowance for loans losses of $104,150,526 (2001-$91,060,307)				4,564,399,217			4,213,089,836
Loans held for sale				21,520,469			4,629,562

		Total loans		4,585,919,686			4,217,719,398

Other real estate owned				1,183,566			1,455,577
Premises and equipment				76,031,012			76,155,620
Accrued interest receivable				34,841,537			37,630,883
Due from customers on acceptances				170,495			262,153
Other assets				121,370,660			88,396,770

		Total assets	$	8,649,006,938		$	8,197,517,788

Liabilities and Stockholders’ Equity
Liabilities:
	Non-interest bearing deposits		$	230,746,852		$	239,850,816
	Interest bearing deposits			4,512,974,109			3,858,703,322
	Federal funds purchased and securities sold under agreements to repurchase			2,660,487,501			2,997,173,944
	Advances from FHLB			336,000,000			343,700,000
	Bank acceptances outstanding			170,495			262,153
	Accounts payable and other liabilities			91,372,822			70,547,126

				7,831,751,779			7,510,237,361

Subordinated notes				84,363,223			84,361,525

Stockholders’ equity:
	Preferred stock, authorized 50,000,000 shares: issued and outstanding 14,420,000 shares at $25.00 liquidation value per share (2001 – 10,740,000)			360,500,000			268,500,000

	Common stock, $1.00 par value, authorized 250,000,000 shares; issued 29,881,052 shares (2001-29,852,552)			29,881,052			29,852,552
	Less: Treasury stock (at par value)			(3,280,600	)		(3,280,600	)

	Common stock outstanding			26,600,452			26,571,952

	Additional paid-in capital			11,685,627			14,214,877
	Capital reserve			60,000,000			60,000,000
	Legal surplus			136,792,514			136,792,514
	Retained earnings			134,885,621			103,132,913
	Accumulated other comprehensive income – unrealized gain (loss) on securities available for sale, net of tax of $809,241 (2001-$2,097,785)			2,427,722			(6,293,354	)

				732,891,936			602,918,902

Contingencies and commitments
		Total liabilities and stockholders’ equity	$	8,649,006,938		$	8,197,517,788

The accompanying notes are an integral part of these statements.

FIRST BANCORP

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)


			Three Months Ended					Six Months Ended

			June 30,			June 30,		June 30,			June 30,
			2002			2001		2002			2001

Interest income:
	Loans		$	84,794,833		$	89,078,153	$	168,289,311		$	180,315,454
	Investments			51,086,925			36,784,564		104,055,022			73,956,457
	Dividends on FHLB stock			466,163			314,742		719,452			655,814

		Total interest income		136,347,921			126,177,459		273,063,785			254,927,725

Interest expense:
	Deposits			33,736,063			41,388,925		66,279,582			85,653,959
	Short term borrowings			32,393,483			24,296,875		65,599,497			53,659,767
	Long term borrowings			1,695,112			2,391,160		3,390,224			5,039,211

		Total interest expense		67,824,658			68,076,960		135,269,303			144,352,937

		Net interest income		68,523,263			58,100,499		137,794,482			110,574,788

Provision for loan losses				14,500,499			17,800,000		34,300,998			32,800,000

Net interest income after provision for loan losses				54,022,764			40,300,499		103,493,484			77,774,788

Other income:
	Other fees on loans			5,465,426			5,171,189		10,728,121			9,794,770
	Service charges on deposit accounts			2,354,493			2,384,642		4,832,597			4,770,245
	Mortgage banking activities			895,838			825,102		1,309,744			933,353
	Gain (loss) on investments			(211,329	)		2,937,887		616,518			9,526,776
	Derivative loss			(2,253,522	)				(2,253,522	)
	Other operating income			4,746,834			3,021,981		8,255,051			5,799,218

		Total other income		10,997,740			14,340,801		23,488,509			30,824,362

Other operating expenses:
	Employees’ compensation and benefits			14,437,748			13,462,053		28,817,733			26,592,525
	Occupancy and equipment			6,862,318			6,017,382		13,689,546			11,827,640
	Business promotion			2,455,271			2,248,368		5,098,128			4,272,145
	Taxes			1,643,889			1,355,194		3,286,719			2,699,604
	Insurance			721,654			580,463		1,359,219			1,118,150
	Other			5,727,087			6,554,320		11,445,240			13,526,700

		Total other operating expenses		31,847,967			30,217,780		63,696,585			60,036,764

Income before income tax provision and cumulative effect of accounting change				33,172,537			24,423,520		63,285,408			48,562,386
Income tax provision				6,193,483			4,251,721		10,656,836			8,589,891

Income before cumulative effect of accounting change				26,979,054			20,171,799		52,628,572			39,972,495
Cumulative effect of accounting change, net of tax												(1,014,889	)

Net income			$	26,979,054		$	20,171,799	$	52,628,572		$	38,957,606

Net income available to common stockholders			$	20,228,052		$	17,003,049	$	39,724,295		$	32,620,103

Net income per common share-basic:
Income before cumulative effect of accounting change			$	0.76		$	0.64	$	1.49		$	1.27
Cumulative effect of accounting change												(0.04	)

Earnings per common share-basic			$	0.76		$	0.64	$	1.49		$	1.23

Net income per common share-diluted:
Income before cumulative effect of accounting change			$	0.75		$	0.64	$	1.48		$	1.26
Cumulative effect of accounting change												(0.04	)

Earnings per common share-diluted			$	0.75		$	0.64	$	1.48		$	1.22

Dividends declared per common share			$	0.15		$	0.13	$	0.30		$	0.26

The accompanying notes are an integral part of these statements.

FIRST BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


				Six Months			Six Months
				Ended			Ended
				June 30, 2002			June 30, 2001

Cash flows from operating activities:
	Net income			$	52,628,572		$	38,957,606

	Adjustments to reconcile net income to net cash provided by operating activities:
			Depreciation		5,649,614			4,508,530
			Core deposit intangible amortization		459,631			459,631
			Provision for loan losses		34,300,998			32,800,000
			Deferred tax asset provision		(6,400,930	)		(3,149,127	)
			Gain on sale of investments		(616,518	)		(9,526,776	)
			Increase in taxes payable		4,645,560			6,635,486
			Decrease (increase) in accrued interest receivable		2,789,347			(8,098,672	)
			Increase in accrued interest payable		4,949,898			3,584,482
			Amortization of deferred net loan fees		(1,000,656	)		394,770
			Increase in loans held for sale		(16,620,907	)
			Decrease in other assets		2,951,689			4,344,180
			Increase (decrease) in other liabilities		10,796,240			(4,865,149	)

			Total adjustments		41,903,966			27,087,355

			Net cash provided by operating activities		94,532,538			66,044,961

Cash flows from investing activities:
	Principal collected on loans				491,059,389			399,783,962
	Loans originated				(532,005,574	)		(592,510,027	)
	Purchase of loans				(354,645,777	)		(202,888,515	)
	Proceeds from sale of investments available for sale				547,538,534			317,687,253
	Purchase of securities held to maturity				(6,423,506,156	)		(80,801,786	)
	Purchase of securities available for sale				(6,721,924,357	)		(3,718,347,345	)
	Principal repayments and maturities of securities held to maturity				5,236,258,127			76,354,381
	Principal repayments of securities available for sale				7,348,923,095			3,314,059,225
	Additions to premises and equipment				(5,525,007	)		(8,725,925	)
	Purchase of FHLB stock				(12,738,900	)		(4,354,102	)

	Net cash used in investing activities				(426,566,626	)		(499,742,879	)

Cash flows from financing activities:
	Net increase in deposits				623,297,666			335,172,161
	Net decrease in federal funds purchased and securities sold under repurchase agreements				(335,495,597	)		(174,447,419	)
	FHLB advances paid/taken				(7,700,000	)		227,000,000
	Payments of notes payable							(6,446,115	)
	Dividends				(20,875,864	)		(13,260,653	)
	Exercise of stock options				593,250			1,355,211
	Issuance of preferred stock				88,906,000			89,900,000
	Treasury stock acquired							(1,317,388	)

	Net cash provided by financing activities				348,725,455			457,955,797

	Net (decrease) increase in cash and cash equivalents				16,691,367			24,257,879
	Cash and cash equivalents at beginning of period				94,463,118			65,392,939

	Cash and cash equivalents at end of period			$	111,154,485		$	89,650,818

Cash and cash equivalents include:
		Cash and due from banks		$	68,144,854		$	75,515,308
		Money market instruments			43,009,631			14,135,510

				$	111,154,485		$	89,650,818


Supplemental disclosures of cash flow information:
			Cash paid during the period for:
			Interest	$	130,319,405		$	140,768,455
			Income Taxes		7,236,912			2,965,487

The accompanying notes are an integral part of these statements.

FIRST BANCORP

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)


																	Accumulated
							Additional										other
		Preferred		Common			paid-in			Capital		Legal		Retained			comprehensive
		stock		stock			capital			reserve		surplus		earnings			income (loss)

December 31, 2000		$	165,000,000	$	26,424,152		$	16,567,516		$	50,000,000	$	126,792,514	$	69,275,152		$	(19,598,785	)
Net income															86,001,444
Other comprehensive income																		13,305,431
Issuance of preferred stock			103,500,000					(3,430,750	)
Addition to legal surplus													10,000,000		(10,000,000	)
Addition to capital reserve											10,000,000				(10,000,000	)
Treasury stock acquired					(86,200	)		(43,100	)						(1,800,385	)
Stock options exercised					234,000			1,121,211
Cash dividends:
	Common stock														(13,835,100	)
	Preferred stock														(16,508,198	)

December 31, 2001			268,500,000		26,571,952			14,214,877			60,000,000		136,792,514		103,132,913			(6,293,354	)
Net income															52,628,572
Other comprehensive income																		8,721,076
Issuance of preferred stock			92,000,000					(3,094,000	)
Stock options exercised					28,500			564,750
Cash dividends:
	Common stock														(7,971,588	)
	Preferred stock														(12,904,276	)

June 30, 2002		$	360,500,000	$	26,600,452		$	11,685,627		$	60,000,000	$	136,792,514	$	134,885,621		$	2,427,722

The accompanying notes are an integral part of these statements.

FIRST BANCORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)


		Three Months Ended					Six Months Ended

		June 30,		June 30,			June 30,			June 30,
		2002		2001			2002			2001

Net income		$	26,979,054	$	20,171,799		$	52,628,572		$	38,957,606

Other comprehensive income, net of tax:
Unrealized gain (losses) on securities:
	Unrealized holding gains (losses) arising during the period net of tax of $7,392,746 (2001-$4,280,397) for the quarter and $3,061,155 (2001-$2,178,859) for the six-month period		22,178,237		(12,841,190	)		9,183,465			6,536,578
	Less: reclassification adjustment for gains(losses) included in net income net of tax of $52,832 (2001-$734,472) for the quarter and $154,129 (2001-$2,381,694) for the six-month period		158,497		(2,203,415	)		(462,389	)		(7,145,082	)
Cumulative effect of accounting change, net of tax benefit of $331,500											994,500

Total other comprehensive (loss) income			22,336,734		(15,044,605	)		8,721,076			385,996

Comprehensive income		$	49,315,788	$	5,127,194		$	61,349,648		$	39,343,602

The accompanying notes are an integral part of these statements.

FIRST BANCORP

PART I – NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1 – NATURE OF BUSINESS

First BanCorp (the Corporation) is a financial holding company offering a full range of financial services. First BanCorp is subject to the Federal Bank Holding Company Act and to the regulations, supervision, and examination of the Federal Reserve Board.

FirstBank Puerto Rico (FirstBank 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 44 full-service banking branches in Puerto Rico and four in the U.S. Virgin Islands. It also has loan origination offices in Puerto Rico focusing on consumer loans and residential mortgage loans. In addition, through its wholly-owned subsidiaries, FirstBank operates other 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).

Effective August 2001, the Corporation entered into the insurance business through a wholly owned subsidiary, FirstBank Insurance Agency. This subsidiary is subject to the supervision, examination and regulation of the Office of the Commissioner of Insurance of Puerto Rico.

On April 25, 2002, the Corporation filed a Report on Form 8-K, reporting under item 5, a Definitive Agreement to acquire JPMorgan Chase’s Eastern Caribbean Region business in the U.S. Virgin Islands, British Virgin Islands and Barbados. On August 8, 2002, the Corporation received the approval for this transaction from the U.S. Virgin Islands Banking Board. This transaction is pending other regulatory approvals. Management expects that the acquisition will be completed during the second semester of 2002.

2 – ACCOUNTING POLICIES

The accounting and reporting policies of the Corporation and its subsidiaries conform with generally accepted accounting principles, and, as such, include amounts based on judgments, estimates and assumptions made by Management that affect the reported amounts of assets and 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. The accompanying unaudited financial statements have been prepared in accordance with the instructions for Form 10-Q. Complete information regarding the financial statements can be found in the notes to the financial statements for the year ended December 31, 2001 contained in the annual report of the Corporation. Certain amounts in the 2001 financial statements have been reclassified to conform with the 2002 presentation.

In the opinion of Management, the accompanying unaudited consolidated statements of financial condition and the related consolidated statements of income, of comprehensive income, of cash flows, and of changes in stockholders’ equity include all adjustments (consisting only of normal recurring accruals) necessary for a fair statement of the Corporation’s financial position at June 30, 2002, and the results of operations and the cash flows for the three and six months ended on June 30, 2002 and 2001. The results of operations for the three and six months ended on June 30, 2002, are not necessarily indicative of the results to be expected for the entire year.

New accounting pronouncements

During 2001 the Financial Accounting Standards Board (FASB) issued the following statements of financial accounting standards (SFAS):

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, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of SFAS No. 13, and Technical Corrections”. This statement rescinds SFAS No. 4, “Reporting Gains and Losses from Extinguishment of Debt, an amendment of APB Opinion No. 30”, which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as extraordinary item, net of related income tax effect. As a result, the criteria in Opinion No. 30 will now be used to classify those gains and losses. This amendment became effective on July 1, 2002. SFAS No.145 also amends SFAS No. 13, “Accounting for Leases”, which requires that certain lease modifications that have economics effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. 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, “Accounting for Costs Associated with Exit or Disposal Activities”. SFAS No. 146 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, with early application encouraged. Management expects that the adoption of this statement will not have a significant impact on the Corporation’s financial statements.

Goodwill and other intangible assets

During 2001 the FASB issued the SFAS No. 142, “Goodwill and Other Intangible Assets”. This statement addresses financial accounting and reporting for intangible assets acquired individually or with a group of other assets (but not those acquired in a business combination) at acquisition or subsequent to their acquisition. SFAS No. 142 also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. Specifically, under this statement, goodwill and other indefinite life intangibles will no longer be amortized but will be evaluated at least annually for impairment. The standard also provides a methodology for evaluating impairment of goodwill and other intangibles based on fair value. The provisions of this statement apply to fiscal years beginning after December 15, 2001. Retroactive application is not permitted. The Corporation does not have goodwill. Management has reviewed the Corporation’s core deposit intangible assets, and determined that there is no impairment of the intangible assets and that the useful life of ten years used to amortize them is the best estimate of the economic benefit period. At June 30, 2002, the Corporation has a core deposit intangible with a carrying amount of $6,739,808 (gross carrying amount of $9,170,846 and accumulated amortization of $2,431,038) included in the Other Assets category. The straight-line amortization expense for the period ended on June 30, 2002 amounted to $459,631. The estimated aggregate amortization expense for each of the five succeeding fiscal years will amount to approximately $919,260.

3 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The Corporation adopted SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, as amended, on January 1, 2001. Upon adoption of SFAS No. 133, as amended, a loss of approximately $1.3 million was recognized in the statement of income as a cumulative effect, as a result of unamortized premium paid for interest rate caps of $1.5 million less an estimated fair market value of $200,000.

At June 30, 2002, interest rate swap agreements with an aggregate notional amount of $2,035.9 million under which the Corporation agrees to pay variable-rates of interest are considered to be a hedge against changes in the fair value of the Corporation fixed-rate certificates of deposit. The interest rate swap agreements are reflected at its fair value of $8.1 million in the Corporation’s consolidated statement of financial condition as a swap asset with a corresponding increase in certificates of deposit by the same amount. The hedge relationship is estimated to be 100 percent effective; therefore, there is no impact on the statement of income nor on comprehensive income.

Interest rate swaps under which the Corporation agrees to pay fixed-rates of interest are considered to be a hedge against changes in the fair value attributable to market interest rates of fixed rate available for sale corporate bonds. Accordingly, the interest rate swap agreements and the securities being hedged are reflected at fair value in the Corporation’s consolidated statement of financial condition. The hedge relationship is estimated to be 100 percent effective; therefore, there is no impact on the statement of income. Interest rate swaps with an aggregate notional principal balance of $25 million had an unrealized loss of approximately $467,000 at June 30, 2002, attributable to credit risk which was recorded in accumulated comprehensive income net of income tax.

During the quarter ended on June 30, 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 $2.4 million was recorded to reflect changes in the fair value of these derivatives as a derivative loss in the Other Income section of the statement of income.

The Corporation also writes covered call options on securities maintained in the portfolio. The Corporation receives a premium on these call options. Changes in the fair value of these call options are recorded as derivative income or loss in the statement of income. For the quarter ended on June 30, 2002, a total of $132,737 was recorded as a derivative income in the Other Income section of the statement of income.

4 – STOCKHOLDERS’ EQUITY

Preferred stock

The Corporation has 50,000,000 shares of authorized non-cumulative and non-convertible preferred stock with a par value of $1, redeemable at the Corporation’s option subject to certain terms. This stock may be issued in series and the shares of each series shall have such rights and preferences as shall be fixed by the Board of Directors when authorizing the issuance of that particular series. During the period ended on June 30, 2002, the Corporation issued 3,680,000 shares of preferred stock (4,140,000 shares-2001; 3,000,000 shares-2000; 3,600,000 shares-1999). The liquidation value per share is $25. Annual dividends of $1.8125 per share (issuance of 2002), of $1.85 per share (issuance of 2001), of $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.

5 – EARNINGS PER COMMON SHARE

The calculations of earnings per common share for the three and six months ended on June 30, 2002 and 2001 are as follows:


				Three months ended						Six months ended
				June 30,						June 30,

				2002			2001			2002			2001

(In thousands, except per share data)
Income before cumulative effect of accounting change and dividend on preferred stock				$	26,979		$	20,172		$	52,628		$	39,973
Dividend on preferred stock					(6,751	)		(3,169	)		(12,904	)		(6,338	)

Income before cumulative effect of accounting change					20,228			17,003			39,724			33,635
Cumulative effect of accounting change														(1,015	)

Net income available to common stockholders				$	20,228		$	17,003		$	39,724		$	32,620

Earnings per common share basic:
	Weighted average common shares outstanding				26,575			26,597			26,573			26,550

Income before cumulative effect of accounting change				$	0.76		$	0.64		$	1.49		$	1.27
Cumulative effect of accounting change														(0.04	)

Earnings per common share basic				$	0.76		$	0.64		$	1.49		$	1.23

Earnings per common share diluted:
	Weighted average common shares and share equivalents:
		Average common shares outstanding			26,575			26,597			26,573			26,550
		Common stock equivalents – Options			430			174			355			158

			Total		27,005			26,771			26,928			26,708

Income before cumulative effect of accounting change				$	0.75		$	0.64		$	1.48		$	1.26
Cumulative effect of accounting change														(0.04	)

Earnings per common share diluted				$	0.75		$	0.64		$	1.48		$	1.22

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. At June 30, 2002, all options outstanding during the period have been included in the computation of outstanding shares. At June 30, 2001, 239,500 stock options were not included in the computation of outstanding shares because they were antidilutive.

6 – INVESTMENT SECURITIES

The amortized cost, gross unrealized gains and losses, approximate market value, weighted average yield and maturities of investment securities were as follows:

Investment Securities Available For Sale


				June 30, 2002											December 31, 2001

						Unrealized							Weighted				Unrealized							Weighted
				Amortized							Market		average		Amortized							Market		average
				cost		gains		(losses)			value		yield%		cost		gains		(losses)			value		yield%

				(Dollars in thousands)
U.S. Treasury Securities:
			Within 1 year												$	7,726	$	30				$	7,756		3.18
Obligations of other U.S Government Agencies:
			Within 1 year													407,324			$	(32	)		407,292		1.72
			After 5 to 10 years	$	750	$	7				$	757		5.60		500		1					501		5.59
			After 10 years		100,069		640	$	(1,062	)		99,647		7.57		87,519		469		(1,805	)		86,183		7.55
Puerto Rico Government Obligations:
			After 5 to 10 years		4,872		156					5,028		6.25		4,458		128					4,586		6.19
			After 10 years		5,659		272					5,931		6.31		5,932		151					6,083		6.34

United States and Puerto Rico Government Obligations				$	111,350	$	1,075	$	(1,062	)	$	111,363		7.44	$	513,459	$	779	$	(1,837	)	$	512,401		2.83

Mortgage backed securities:
		FHLMC certificates:
			Within 1 year												$	8						$	8		5.85
			After 1 to 5 years	$	361	$	13				$	374		6.81		112	$	4					116		7.63
			After 5 to 10 years		11,226		609					11,835		7.30		13,211		576					13,787		7.29
			After 10 years		7,142		287					7,429		6.92		8,030		172	$	(6	)		8,196		6.95

					18,729		909					19,638		7.15		21,361		752		(6	)		22,107		7.16

	GNMA certificates:
			After 5 to 10 years		4,112		104	$	(9	)		4,207		6.41		4,605		101					4,706		6.39
			After 10 years		1,855,803		30,765					1,886,568		6.45		2,515,953		12,672		(6,539	)		2,522,086		6.52

					1,859,915		30,869		(9	)		1,890,775		6.45		2,520,558		12,773		(6,539	)		2,526,792		6.52

	FNMA certificates:
			Within 1 year		24							24		5.77
			After 1 to 5 years		64		2					66		7.10		158		4					162		6.92
			After 5 to 10 years		94		5					99		7.29		124		5					129		7.32
			After 10 years		6,115		384					6,499		7.51		7,095		408					7,503		7.96

					6,297		391					6,688		7.50		7,377		417					7,794		7.93

Mortgage pass through certificates:
			After 10 years		1,452		21					1,473		8.41		1,958		38					1,996		8.70

Mortgage backed securities				$	1,886,393	$	32,190	$	(9	)	$	1,918,574		6.46	$	2,551,254	$	13,980	$	(6,545	)	$	2,558,689		6.53

Corporate bonds:
			Within 1 year	$	8,774	$	70				$	8,844		7.55	$	19,246	$	410				$	19,656		7.70
			After 1 to 5 years		86,471		799	$	(12,904	)		74,366		6.27		118,919		1,770	$	(2,899	)		117,790		6.68
			After 5 to 10 years		57,378		743		(1,837	)		56,284		7.66		114,855		77		(1,906	)		113,026		7.34
			After 10 years													18,531		328					18,859		7.35

Corporate bonds				$	152,623	$	1,612	$	(14,741	)	$	139,494		6.87	$	271,551	$	2,585	$	(4,805	)	$	269,331		7.08

Equity securities (without contractual maturity)				$	57,092	$	8,011	$	(23,372	)	$	41,731		1.24	$	45,115	$	4,901	$	(16,189	)	$	33,827		1.43

Total Investments Securities Available for Sale				$	2,207,458	$	42,888	$	(39,184	)	$	2,211,162		6.40	$	3,381,379	$	22,245	$	(29,376	)	$	3,374,248		5.95

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.

The Corporation’s bank subsidiary is restructuring its portfolio of mortgage backed securities available for sale, in order to shorten its duration to enable a future reinvestment, in the next two to four years, at expected higher interest rates. If rates stay at today’s levels, the proceeds would be reinvested at these lower levels. As a result, during late June 2002, approximately $550 million of 30 year mortgage backed securities and certain corporate bonds were sold. An additional amount of approximately $600 million of 30 year mortgage backed securities was sold during the third quarter, before the filing of this report. These sales of securities 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.

It is the Corporation’s policy to invest in corporate bonds, which at the time of the investment, are of an investment grade quality. The total carrying amount of the corporate bonds portfolio is $203.6 million, or 5.4% of total investments of the Corporation as of June 30, 2002. During the second quarter of 2002, two of the bonds in the FirstBank’s portfolio were downgraded to non-investment grade quality by the 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 performed an impairment analysis on these securities and determined 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 accordance with SFAS No. 115 in the statement of income. In addition, Management reclassified to non-accruing status the remaining carrying amount of $3.8 million as presented in the Non–performing Assets section of the Management Discussion Analysis of this report.

The Corporation’s equity securities portfolio carrying amount is $41.7 million, and its cost is $57.1 million as of June 30, 2002. The Corporation’s current policy guidelines limit the equities portfolio investments to $60 million, which is 1.6% of the Corporations total investments as of June 30, 2002. Management performed an impairment analysis on the Corporation’s investment in equity securities and determined that an other-than-temporary impairment had occurred in the case of a $2.3 million investment in WorldCom Corporation shares of common stock. In accordance with SFAS No. 115, the Corporation recorded a loss in the statement of income for such amount on this investment.

At June 30, 2002, Management determined that except for the impairment on the WorldCom Corporation bonds and stock, there are no other-than-temporary impairments on the rest of the bonds and equity securities portfolio. Management will continue monitoring the Corporation’s investment on individual corporate bonds and equity securities to identify any other-than-temporary impairment in accordance with SFAS No.115. Future other-than-temporary impairments may occur that would need to be recognized as a loss.

For the six-month ended on June 30, 2002, proceeds from the sale of securities amounted to $547.5 million (2001 – $317.7 million) resulting in gross realized gains of $15.4 million (2001 – $10.3 million), and gross realized losses of $14.8 million (2001 – $822,034).

Investment Securities Held to Maturity


			June 30, 2002											December 31, 2001

					Unrealized							Weighted				Unrealized							Weighted
			Amortized							Market		average		Amortized							Market		average
			cost		gains		(losses)			value		yield%		cost		gains		(losses)			value		yield%

			(Dollars in thousands)
U.S. Treasury Securities:
	Within 1 year		$	19,380						$	19,380		1.65
Obligations of U.S Government Agencies:
	Within 1 year			860,090			$	(115	)		859,975		1.84
	After 10 years			518,634	$	4,789		(1,893	)		521,530		7.70	$	211,194	$	3	$	(6,466	)	$	204,731		7.39
Puerto Rico Government Obligations:
	After 1 to 5 years			5,000		25					5,025		5.00		5,000							5,000		5.00
	After 10 years			4,217		404					4,621		6.50		4,084		228					4,312		6.50

United States and Puerto Rico Government Obligations			$	1,407,321	$	5,218	$	(2,008	)	$	1,410,531		4.02	$	220,278	$	231	$	(6,466	)	$	214,043		7.32

Corporate bonds:
		After 1 to 5 years	$	64,223	$	8	$	(153	)	$	64,078		3.46	$	64,018			$	(277	)	$	63,741		3.49

Total Investment Securities Held to Maturity			$	1,471,544	$	5,226	$	(2,161	)	$	1,474,609		4.00	$	284,296	$	231	$	(6,743	)	$	277,784		6.46

Expected maturities of mortgage backed securities and certain other securities might differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. At January 1, 2001, in connection with the adoption of SFAS No. 133, the Corporation transferred a portfolio of $207 million of GNMA certificates from 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.

7 – INVESTMENT IN FHLB STOCK

At June 30, 2002 and December 31, 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.

8 – LOANS RECEIVABLE

The following is a detail of the loan portfolio:


			June 30,			December 31,
			2002			2001

			(In thousands)
Residential real estate loans:
Secured by first mortgages:
	Conventional		$	1,170,043		$	955,573
	Insured by government agencies:
		Federal Housing Administration and Veterans Administration		34,967			25,211
		Puerto Rico Housing Bank and Finance Agency		21,229			23,513
Secured by second mortgages				7,242			8,088

				1,233,481			1,012,385
	Deferred net loan fees			(5,085	)		(5,107	)

Residential real estate loans				1,228,396			1,007,278

Commercial loans:
	Construction loans			214,647			219,396
	Commercial loans			1,289,359			1,238,173
	Commercial mortgage			777,341			688,922

Commercial loans				2,281,347			2,146,491

Finance leases				138,617			127,935

Consumer and other loans:
	Personal			361,505			362,490
	Personal lines of credit			10,757			11,216
	Auto			498,087			502,902
	Boat			47,177			39,570
	Credit card			162,771			176,226
	Home equity reserve loans			1,646			1,851
	Unearned interest			(61,754	)		(71,810	)

Consumer and other loans				1,020,189			1,022,445

Loans receivable				4,668,549			4,304,149
Allowance for loan losses				(104,150	)		(91,060	)

Loans receivable-net				4,564,399			4,213,089
Loans held for sale				21,521			4,630

Total loans			$	4,585,920		$	4,217,719

9 – IMPAIRED LOANS

At June 30, 2002, the Corporation had $31.3 million ($10.7 million at December 31, 2001) in commercial and real estate loans over $1,000,000 considered impaired with an allowance of $7.6 million ($3.7 million at December 31, 2001), of which $7.1 million was established based on the fair value of the collateral (2001-$2 million) and $500,000 was established based on the present value of expected future cash flows (2001-$1.7 million). The allowance for impairment loans is part of the allowance for loan losses. The average recorded investment in impaired loans amounted to $17 million for the six months ended on June 30, 2002 (2001 – $11.9 million). Interest income in the amount of approximately $570,000 and $84,000 was recognized on impaired loans for the period ended on June 30, 2002 and 2001, respectively.

10 – SEGMENT INFORMATION

The Corporation has three reportable segments: Retail business, Treasury and Investments, Commercial Corporate business and Other. 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 commissions income and earned discounts on tax credits purchased and utilized against income tax payments.

The accounting policies of the segments are the same as those described in Note 2 of the Corporation’s financial statements for the year ended December 31, 2001 contained in the annual report of the Corporation.

The Corporation evaluates the performance of the segments based on net interest income after the estimated provision 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 between the Treasury and Investment segment and the retail and commercial corporate 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 segment are based on market rates.

The following table presents information about the reportable segments (in thousands):


				Treasury and			Commercial
	Retail			Investments			Corporate			Other			Total

For the quarter ended June 30, 2002:
Interest income	$	54,842		$	51,553		$	29,953					$	136,348
Net (charge) credit for transfer of funds		(12,681	)		26,999			(14,318	)
Interest expense		(14,560	)		(53,264	)								(67,824	)
Net interest income		27,601			25,288			15,635						68,524
Provision for loan losses		(8,383	)					(6,117	)					(14,500	)
Other income		9,977			(2,295	)		1,103		$	2,212			10,997
Direct operating expenses		(18,173	)		(527	)		(1,359	)		(158	)		(20,217	)
Segment income	$	11,022		$	22,466		$	9,262		$	2,054		$	44,804
Average earning assets	$	2,230,054		$	3,571,237		$	2,178,420					$	7,979,711
For the period ended June 30, 2002:
Interest income	$	108,592		$	104,774		$	59,698					$	273,064
Net (charge) credit for transfer of funds		(23,770	)		52,071			(28,301	)
Interest expense		(29,276	)		(105,993	)								(135,269	)
Net interest income		55,546			50,852			31,397						137,795
Provision for loan losses		(21,328	)					(12,972	)					(34,300	)
Other income		19,430			(1,309	)		2,083		$	3,283			23,487
Direct operating expenses		(35,068	)		(1,076	)		(2,776	)		(276	)		(39,196	)
Segment income	$	18,580		$	48,467		$	17,731		$	3,007		$	87,786
Average earning assets	$	2,174,623		$	3,646,760		$	2,156,930					$	7,978,313


				Treasury and			Commercial
	Retail			Investments			Corporate			Other			Total

For the quarter ended June 30, 2001:
Interest income	$	54,398		$	37,099		$	34,680					$	126,177
Net (charge) credit for transfer of funds		(3,846	)		24,865			(21,019	)
Interest expense		(18,860	)		(49,217	)								(68,077	)
Net interest income		31,692			12,747			13,661						58,100
Provision for loan losses		(14,790	)					(3,010	)					(17,800	)
Other income		9,625			3,107			909		$	700			14,341
Direct operating expenses		(17,277	)		(444	)		(1,343	)		(61	)		(19,125	)
Segment income	$	9,250		$	15,410		$	10,217		$	639		$	35,516
Average earning assets	$	1,927,782		$	2,327,290		$	1,727,054					$	5,982,126
For the period ended June 30, 2001:
Interest income	$	108,394		$	74,612		$	71,921					$	254,927
Net (charge) credit for transfer of funds		(5,047	)		49,786			(44,739	)
Interest expense		(38,966	)		(105,387	)								(144,353	)
Net interest income		64,381			19,011			27,182						110,574
Provision for loan losses		(27,243	)					(5,557	)					(32,800	)
Other income		17,931			9,860			2,013		$	1,021			30,825
Direct operating expenses		(32,951	)		(885	)		(2,555	)		(119	)		(36,510	)
Segment income	$	22,118		$	27,986		$	21,083		$	902		$	72,089
Average earning assets	$	1,895,539		$	2,299,078		$	1,694,546					$	5,889,164

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


		Three months ended						Six months ended
		June 30,						June 30,

		2002			2001			2002			2001

Net income:
Total income for segments		$	44,804		$	35,515		$	87,786		$	72,089
Other operating expenses			(11,631	)		(11,091	)		(24,501	)		(23,526	)
Income taxes			(6,193	)		(4,252	)		(10,657	)		(8,590	)

Income before cumulative effect of accounting change			26,980			20,172			52,628			39,973
Cumulative effect of accounting change												(1,015	)

	Total consolidated net income	$	26,980		$	20,172		$	52,628		$	38,958

Average assets:
Total average earning assets for segments		$	7,979,711		$	5,982,126		$	7,978,313		$	5,889,164
Average non earning assets			318,514			370,904			318,802			329,687

	Total consolidated average assets	$	8,298,225		$	6,353,030		$	8,297,115		$	6,218,851

11 – INCOME TAX

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 position.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

SELECTED FINANCIAL DATA


		Three Months Ended					Six Months Ended
		June 30,					June 30

		2002			2001		2002		2001

Condensed income statements (in thousands):
	Interest income	$	136,348		$	126,178	$	273,064	$	254,928
	Interest expense		67,825			68,077		135,269		144,353

	Net interest income		68,523			58,101		137,795		110,575
	Provision for loan losses		14,500			17,800		34,301		32,800

	Net interest income after provision for loan losses		54,023			40,301		103,494		77,775
	Other income		11,209			11,403		22,872		21,298
	Gain on sale of investments		(211	)		2,938		617		9,527
	Other operating expense		31,848			30,218		63,697		60,037

	Income before income tax expense and cumulative effect of accounting change		33,173			24,424		63,286		48,563
	Income tax expense		6,194			4,252		10,657		8,590

	Income before cumulative effect of accounting change		26,979			20,172		52,629		39,973
	Cumulative effect of accounting change									(1,015	)

	Net income	$	26,979		$	20,172	$	52,629	$	38,958

	Net income available to common stockholders	$	20,228		$	17,003	$	39,724	$	32,620

Per common share results (diluted):
	Income before cumulative effect of accounting change	$	0.75		$	0.64	$	1.48	$	1.26
	Cumulative effect of accounting change									(0.04	)

	Net income per common share	$	0.75		$	0.64	$	1.48	$	1.22

	Cash dividends declared	$	0.15		$	0.13	$	0.30	$	0.26
Selected financial ratios (in percent):
	Average yield on earning assets (1)		7.41			8.77		7.47		8.93
	Cost of interest bearing liabilities		3.74			4.92		3.74		5.34
	Interest rate spread (1)		3.67			3.85		3.73		3.59
	Net interest margin (1)		4.04			4.28		4.09		4.06
	Net income to average total assets		1.30			1.27		1.27		1.25
	Net income to average total equity		15.07			17.39		15.12		17.00
	Net income to average common equity		22.75			22.91		22.53		22.33
	Average equity to average total assets		8.63			7.30		8.39		7.37
	Dividend payout ratio		19.70			20.39		20.07		21.22
	Efficiency ratio (2)		40.05			41.71		39.49		42.46


			June 30,		December 31,
			2002		2001

Regulatory capital ratios (in percent):
	Total capital to risk weighted assets			15.81		14.50
	Tier 1 capital to risk weighted assets			13.54		12.16
	Tier 1 capital to average assets			8.19		7.49
Balance sheet data (in thousands):
	Loans and loans held for sale		$	4,690,070	$	4,308,780
	Allowance for loan losses			104,150		91,060
	Investments			3,761,345		3,715,999
	Total assets			8,649,007		8,197,518
	Deposits			4,743,721		4,098,554
	Borrowings			3,080,851		3,425,236
	Total common equity			372,392		334,419
	Total equity			732,892		602,919
	Book value per common share		$	14.00	$	12.59
		Number of full service branches		48		48
		Loan origination offices		43		43

(1)		On a taxable equivalent basis.

(2)		Other operating expenses to the sum of net interest income and other income.

RESULTS OF OPERATIONS

First BanCorp’s results of operations depend primarily upon its net interest income, which is the difference between the interest income earned on its earning assets, including investment securities and loans, and the interest expense on its interest bearing liabilities including deposits and borrowings. The Corporation’s results of operations also depend on the provision for loan losses; other income, mainly service charges and fees on loans; operating expenses, such as personnel, occupancy and other costs; gains on sales of investments; and income taxes.

For the quarter ended on June 30, 2002, the Corporation recorded earnings of $26,979,054 or $0.76 per common share (basic) and $0.75 per share (diluted), a per share increase of 17.2% as compared to earnings of $20,171,799 or $0.64 per common share (basic and diluted) for the second quarter of 2001. Earnings for the six months ended on June 30, 2002 amounted to $52,628,572 or $1.49 per common share (basic) and $1.48 per common share (diluted), as compared to earnings of $38,957,606 or $1.23 per common share (basic) and $1.22 per common share (diluted) for the same period of 2001. On a per share basis-diluted, earnings for the six months ended on June 30, 2002 increased by 21.3% as compared to earnings for the six months ended on June 30, 2001.

Net Interest Income

Net interest income for the three and six months ended on June 30, 2002 increased by $10.4 million and $27.2 million, respectively, as compared with the same periods in 2001; or by $16.7 million and $43.4 million on a taxable equivalent basis. The interest rate spread and net interest margin, on a taxable equivalent basis, amounted to 3.67% and 4.04%, respectively, for the second quarter of 2002 as compared to 3.85% and 4.28%, respectively, for the second quarter of 2001. The interest rate spread and net interest margin on a taxable equivalent basis, amounted to 3.73% and 4.09%, respectively, for the six months ended on June 30, 2002 as compared to 3.59% and 4.06%, respectively, for the six months ended on June 30, 2001.

Part I of the following table presents average volumes and rates on a taxable equivalent basis and Part II describes the respective extent to which changes in interest rates and changes in volume of interest-related assets and liabilities have affected the Corporation’s interest income and interest expense during the periods indicated. For each category of earning assets and interest bearing liabilities, information is provided on changes attributable to (i) changes in volume (changes in volume multiplied by old rates), (ii) changes in rate (changes in rate multiplied by old volumes). Rate-volume variances (changes in rate multiplied by the changes in volume) have been allocated to the changes in volume and changes in rate based upon their respective percentage of the combined totals.

PART I


							Three months ended June 30,
			Average volume				Interest income (1) / expense				Average rate (1)

			2002		2001		2002		2001		2002			2001

			(Dollars in thousands)
Earning assets:
	Money market instruments		$	57,309	$	29,386	$	261	$	307		1.83	%		4.19	%
	Government obligations			915,941		571,042		14,668		9,071		6.42	%		6.37	%
	Mortgage backed securities			2,284,457		1,412,891		43,556		26,622		7.65	%		7.56	%
	FHLB stock			35,630		22,891		466		315		5.25	%		5.52	%
	Corporate bonds			270,724		296,205		4,273		6,440		6.33	%		8.72	%

		Total investments		3,564,061		2,332,415		63,224		42,755		7.12	%		7.35	%

	Residential real estate loans			1,136,570		825,260		17,556		16,442		6.20	%		7.99	%
	Construction			212,048		223,284		2,825		4,557		5.34	%		8.19	%
	Commercial loans			2,014,653		1,523,432		27,258		30,182		5.43	%		7.95	%
	Finance leases			135,061		128,155		3,657		3,691		10.86	%		11.55	%
	Consumer loans			1,017,214		1,037,461		34,659		35,152		13.67	%		13.59	%

Total loans (2)				4,515,546		3,737,592		85,955		90,024		7.64	%		9.66	%

		Total earning assets	$	8,079,607	$	6,070,007	$	149,179	$	132,779		7.41	%		8.77	%

Interest-bearing liabilities:
	Deposits		$	4,370,813	$	3,360,525	$	33,736	$	41,389		3.10	%		4.94	%
	Other borrowed funds			2,575,800		1,889,217		30,195		23,146		4.70	%		4.91	%
	FHLB advances			325,693		294,525		3,894		3,541		4.80	%		4.82	%

	Total interest-bearing liabilities		$	7,272,306	$	5,544,267	$	67,825	$	68,076		3.74	%		4.92	%

Net interest income							$	81,354	$	64,703

Interest rate spread												3.67	%		3.85	%
Net interest margin												4.04	%		4.28	%


							Six months ended June 30,
			Average volume				Interest income (1) / expense				Average rate (1)

			2002		2001		2002		2001		2002			2001

			(Dollars in thousands)
Earning assets:
	Money market instruments		$	50,924	$	17,348	$	461	$	375		1.83	%		4.36	%
	Government obligations			876,699		567,671		26,214		19,043		6.03	%		6.76	%
	Mortgage backed securities			2,371,471		1,450,139		90,933		52,396		7.73	%		7.29	%
	FHLB stock			29,577		20,774		719		656		4.90	%		6.37	%
	Corporate bonds			305,643		247,011		10,256		10,512		6.77	%		8.58	%

		Total investments		3,634,314		2,302,943		128,583		82,982		7.13	%		7.27	%

	Residential real estate loans			1,081,403		790,703		34,114		32,054		6.36	%		8.17	%
	Construction			212,409		217,881		5,713		9,690		5.42	%		8.97	%
	Commercial loans			1,987,221		1,497,514		54,176		62,231		5.50	%		8.38	%
	Finance leases			133,291		126,400		7,312		7,367		11.06	%		11.75	%
	Consumer loans			1,020,168		1,040,249		69,146		70,437		13.67	%		13.65	%

Total loans (2)				4,434,492		3,672,747		170,461		181,779		7.75	%		9.98	%

		Total earning assets	$	8,068,806	$	5,975,690	$	299,044	$	264,761		7.47	%		8.93	%

Interest-bearing liabilities:
	Deposits		$	4,233,784	$	3,283,354	$	66,280	$	85,654		3.16	%		5.26	%
	Other borrowed funds			2,731,440		1,958,174		61,193		53,586		4.52	%		5.52	%
	FHLB advances			325,781		205,092		7,797		5,112		4.83	%		5.03	%

	Total interest-bearing liabilities		$	7,291,005	$	5,446,620	$	135,270	$	144,352		3.74	%		5.34	%

Net interest income							$	163,774	$	120,409

Interest rate spread												3.73	%		3.59	%
Net interest margin												4.09	%		4.06	%

(1)		On a tax equivalent basis. The tax equivalent yield was computed dividing the interest rate spread on exempt assets by (1- statutory tax rate) and adding to it the cost of interest bearing liabilities. When adjusted to a tax equivalent basis, yields on taxable and exempt assets are comparative.

(2)		Non-accruing loans are included in the average balances.

PART II


			Three months ended on June 30,									Six months ended on June 30,
			2002 compared to 2001									2002 compared to 2001

			Variance			Variance						Variance			Variance
			due to			due to			Total			due to			due to			Total
			volume			rate			variance			volume			rate			variance

			(In thousands)
Interest income on earning assets:
	Money market instruments		$	211		$	(257	)	$	(46	)	$	519		$	(433	)	$	86
	Government obligations			5,523			74			5,597			9,856			(2,685	)		7,171
	Mortgage backed securities			16,614			320			16,934			35,148			3,389			38,537
	FHLB stock			172			(21	)		151			248			(185	)		63
	Corporate bonds			(549	)		(1,618	)		(2,167	)		2,187			(2,443	)		(256	)

		Total investments		21,971			(1,502	)		20,469			47,958			(2,357	)		45,601

	Consumer loans			(695	)		202			(493	)		(1,369	)		78			(1,291	)
	Real estate loans			5,518			(4,404	)		1,114			10,556			(8,496	)		2,060
	Construction loans			(203	)		(1,529	)		(1,732	)		(212	)		(3,765	)		(3,977	)
	Commercial loans			8,204			(11,128	)		(2,924	)		17,076			(25,131	)		(8,055	)
	Finance leases			194			(228	)		(34	)		394			(449	)		(55	)

		Total loans		13,018			(17,087	)		(4,069	)		26,445			(37,763	)		(11,318	)

		Total interest income		34,989			(18,589	)		16,400			74,403			(40,120	)		34,283

Interest expense on interest bearing liabilities:
	Deposits			10,159			(17,812	)		(7,653	)		20,082			(39,456	)		(19,374	)
	Other borrowed funds			8,243			(1,194	)		7,049			19,370			(11,763	)		7,607
	FHLB advances			375			(22	)		353			2,962			(277	)		2,685

		Total interest expense		18,777			(19,028	)		(251	)		42,414			(51,496	)		(9,082	)

Change in net interest income			$	16,212		$	439		$	16,651		$	31,989		$	11,376		$	43,365

Total interest income includes tax equivalent adjustments based on the Puerto Rico income tax rate of $12.8 million and $26.0 million for the three and six months ended on June 30, 2002, respectively, and of $6.6 million and $9.8 million for the three and six months ended on June 30, 2001, respectively. The adjustments have been made on debt securities (primarily United States and Puerto Rico government obligations) and on loans guaranteed by United States and Puerto Rico government agencies. The computation considers the interest expense disallowance as required by the Puerto Rico tax law.

Interest Income

Interest income increased by $10.2 million and $18.1 million for the three and six months ended on June 30, 2002, respectively, as compared to the same periods for 2001. When adjusted to a taxable equivalent basis, interest income increased by $16.4 million and $34.3 million for the three and six months ended on June 30, 2002, respectively, as compared to the same periods in 2001. The yield on earning assets, on a taxable equivalent basis, amounted to 7.41% and 8.77% for the three months ended on June 30, 2002 and 2001, respectively; and 7.47% and 8.93% for the six months ended on June 30, 2002 and 2001, respectively. The improvement in the interest income for the periods analyzed was due to the increase in the average volume of earning assets, partially offset by a lower yield due to lower market rates. The average volume of earning assets increased by $2,010 million and $2,093 million for the three and six months ended on June 30, 2002, respectively, as compared to the same periods in 2001.

The average volume of total investments increased by $1,231.6 million and $1,331.4 million for the three and six month period ended on June 30, 2002 as compared with the same periods in 2001, mostly concentrated in government obligations and mortgage backed securities.

The average volume of the loan portfolio increased by $778.0 million and $761.7 million for the three and six months ended on June 30, 2002, respectively, as compared with the same periods in 2001, mostly concentrated in residential real estate and commercial loans.

Interest Expense

Interest expense decreased by $252,000 and $9.1 million for the three and six months ended on June 30, 2002, respectively, as compared with the amounts recorded in the same periods of 2001. The decrease in the interest expense for the period ended on June 30, 2002 when compared with the same period last year, was the result of a decrease in the cost of interest bearing liabilities, due to lower market rates, causing a positive rate variance of $19 million and $51.5 million, for the three and six months period ended June 30, 2002. This positive effect was partially offset with an increase in the average volume of interest bearing liabilities generating a negative volume variance of $18.8 million and $42.4 million, for the three and six months period ended June 30, 2002. The cost of interest bearing liabilities decreased from 4.92% and 5.34% for the three and six month periods ended on June 30, 2001 to 3.74% for the three and six month periods ended on June 30, 2002.

Provision for Loan Losses

For the three and six months ended on June 30, 2002, the Corporation provided $14.5 million and $34.3 million for loan losses, as compared to $17.8 million and $32.8 million for the same periods of 2001. The provision for loan losses recorded for such periods was necessary to maintain the allowance for loan losses on the loan portfolio at a level that Management considers adequate to absorb losses inherent in the portfolio. The Corporation establishes a quarterly allowance for loan losses based on its asset classification report to cover the total amount of any assets classified as a “loss,” the probable loss exposure of other classified assets, and a percentage of the assets not classified. The adequacy of the allowance for loan losses is also based upon a number of additional factors including historical loan loss experience, current economic conditions, fair value of the underlying collateral, financial condition of the borrowers, and, as such, includes amounts based on judgments and estimates made by Management. Although Management believes that the allowance for loan losses is adequate, factors beyond the Corporation’s control, including factors affecting the Puerto Rico economy, may contribute to delinquencies and defaults thus necessitating additional reserves.

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.

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


		Three months ended						Six months ended
		June 30,						June 30,

		2002			2001			2002			2001

		(Dollars in thousands)
Allowance for loan losses, beginning of period		$	99,467		$	77,639		$	91,060		$	76,919
Provision for loan losses			14,500			17,800			34,301			32,800

Loans Charge-Offs:
	Residential real estate		(2	)					(38	)		(107	)
	Commercial		(1,420	)		(2,160	)		(2,266	)		(7,185	)
	Finance leases		(369	)		(689	)		(1,102	)		(1,352	)
	Consumer		(9,819	)		(10,501	)		(21,424	)		(20,625	)

Total charge-offs			(11,610	)		(13,350	)		(24,830	)		(29,269	)

Recoveries of loans previously charged-off:
	Commercial		180			21			191			82
	Finance leases		90			42			160			96
	Consumer		1,523			1,857			3,268			3,381

Total recoveries			1,793			1,920			3,619			3,559

Net charge-offs			(9,817	)		(11,430	)		(21,211	)		(25,710	)

Allowance for loan losses, end of period		$	104,150		$	84,009		$	104,150		$	84,009

Allowance for loan losses to total loans			2.22	%		2.18	%		2.22	%		2.18	%
Net charge-offs annualized to average loans outstanding during the period			0.87	%		1.22	%		0.96	%		1.40	%

Other Income


		Three months ended					Six months ended
		June 30,					June 30,

		2002			2001		2002			2001

		(Dollars in thousands)
	Other fees on loans	$	5,465		$	5,171	$	10,728		$	9,795
	Service charges on deposit accounts		2,354			2,385		4,833			4,770
	Mortgage banking activities		896			825		1,310			933
	Rental income		577			559		1,128			1,096
	Insurance income		570					996
	Other commissions		333			702		770			802
	Dividend on equity securities		170			169		328			333
	Other operating income		3,098			1,592		5,033			3,569

	Other income before gain (loss) on investments and derivative income (loss)		13,463			11,403		25,126			21,298

	Gain (loss) on sale of investments		13,961			2,938		15,039			9,527
	Impairment on investments		(14,172	)				(14,422	)

	Gain (loss) on investments		(211	)		2,938		617			9,527

	Derivative loss		(2,254	)				(2,254	)

Total		$	10,998		$	14,341	$	23,489		$	30,825

Other income primarily consists of fees on loans; service charges on deposit accounts; commissions derived from various banking, securities and insurance activities; net gains (losses) on sale of investments; and derivative income. Other fees on loans consist mainly of credit card fees and late charges collected on loans. The increase of approximately $294,000 and $933,000 during the three and six months ended on June 30, 2002, respectively, when compared with the same periods last year was mainly due to fees generated on the increased portfolio of loans.

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

Mortgage banking activities income reflects the servicing fees on residential mortgage loans originated by the Corporation and subsequently securitized or sold, and gain on sale of loans.

The Corporation’s subsidiary, First Leasing and Rental Corporation, generates income on the rental of various types of motor vehicles.

Insurance income includes the commissions earned by the new subsidiary FirstBank Insurance Agency, Inc.

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 (loss) on investment securities reflects gains or losses as a result of sales that are in consonance to the Corporation’s investment policies as well as impairments on securities held in the portfolio. During the second quarter of 2002 losses on the impairment of certain securities were realized as explained in Note 6 of this report. In addition, during the quarter ended on June 30, 2002 gains of $14 million on the sale of mortgage backed securities and corporate bonds were realized, as part of the Bank’s restructuring of the investment portfolio, as explained in Note 6 of this report.

The derivative income (loss) includes an unrealized loss of $2.4 million due to the valuation to fair value of a portfolio of swaps that does not qualify for hedge accounting in accordance with SFAS No. 133, as previously explained in Note 3 of this report.

Other Operating Expenses

The following table presents the detail of other operating expenses for the periods indicated:


		Three months ended					Six months ended
		June 30,					June 30,

		2002			2001		2002		2001

		(Dollars in thousands)
Employees’ compensation and benefits		$	14,438		$	13,463	$	28,818	$	26,593
Occupancy and equipment			6,862			6,018		13,690		11,828
Business promotion			2,455			2,248		5,098		4,272
Taxes			1,644			1,355		3,287		2,700
Insurance			722			580		1,359		1,118
Net cost (gain) of operations and disposition of other real estate owned			(70	)		27		51		128
Professional fees			751			619		1,491		1,164
Servicing and processing fees			1,359			1,188		2,644		2,503
Communications			1,352			1,368		2,651		2,659
Supplies and printing			457			325		741		658
Other			1,878			3,027		3,867		6,414

	Total	$	31,848		$	30,218	$	63,697	$	60,037

Operating expenses increased to $31.8 million and $63.7 million for the three and six months ended on June 30, 2002, respectively, as compared to $30.2 million and $60.0 million for the same periods in 2001. The increase in operating expenses for 2002 is mainly the result of technology investments and the general growth in the subsidiary Bank’s operations.

Management’s goal has been to make only expenditures that contribute clearly and directly to increase the efficiency and profitability of the Corporation. This control over other operating expenses has been an important factor contributing to the improvement 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, was 39.49% for the six months period ended June 30, 2002 as compared to 42.5% for the same period last year.

Provision for Income Tax

The provision for income tax amounted to $10.7 million (or 16.8% of pretax earnings) for the six months ended on June 30, 2002 as compared to $8.6 million (or 17.7% of pretax earnings) for the same period in 2001. The Corporation has maintained an effective tax rate lower than the statutory rate of 39% mainly by investing in obligations and loans exempt from federal and Puerto Rico income taxes.

FINANCIAL CONDITION

Assets

Total assets as of June 30, 2002 amounted to $8,649 million, an increase of $451 million as compared to total assets as of December 31, 2001 of $8,198 million. The increase was mainly the result of an increase of $381.3 million in total loans and $45.3 million in total investments and money market instruments.

The composition of loans receivable:


		June 30,		December 31,		Increase
		2002		2001		(Decrease)

		(Dollars in thousands)
Residential real estate loans		$	1,249,917	$	1,011,908	$	238,009

Commercial real estate loans			777,341		688,922		88,419
Construction loans			214,647		219,396		(4,749	)
Commercial loans			1,289,359		1,238,173		51,186

	Total commercial		2,281,347		2,146,491		134,856

Finance leases			138,617		127,935		10,682
Consumer and other loans			1,020,189		1,022,445		(2,256	)

	Total	$	4,690,070	$	4,308,779	$	381,291

The fluctuation in the loans receivable category was the net result of total loan origination and purchases of $886.7 million and repayments and other adjustments of $505.4 million. The Corporation continued its strategy of diversifying its loan portfolio composition through the origination of commercial loans and residential real estate loans. This resulted in an increase of $134.9 million in the commercial loan portfolio and of $238 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 $10.7 million.

Non-performing Assets

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

At June 30, 2002, total non-performing assets amounted to $79.4 million (0.92% 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. The Corporation’s allowance for loan losses to non-performing loans ratio was 148.1% at June 30, 2002 as compared to 124.7% and 113.6% at December 31, 2001 and 2000, respectively.

Past due loans are loans delinquent 90 days or more as to principal and/or interest and still accruing interest.

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


		June 30,			December 31,
		2002			2001			2000

		(Dollars in thousands)
Non-accruing loans:
	Residential real estate	$	18,544		$	18,540		$	15,977
	Commercial and commercial real estate		32,106			29,378			31,913
	Finance leases		2,514			2,469			2,032
	Consumer		17,167			22,611			17,794

			70,331			72,998			67,716

Other real estate owned (OREO)			1,184			1,456			2,981
Other repossessed property			4,147			4,596			3,374
Investment securities			3,750

Total non-performing assets		$	79,412		$	79,050		$	74,071

Past due loans		$	24,823		$	27,497		$	16,358
Non-performing assets to total assets			0.92	%		0.96	%		1.25	%
Non-performing loans to total loans			1.50	%		1.69	%		1.94	%
Allowance for loan losses		$	104,150		$	91,060		$	76,919
Allowance to total non-performing loans			148.09	%		124.74	%		113.59	%

Non-accruing Loans

Residential Real Estate Loans – The Corporation classifies all residential real estate loans delinquent 90 days or more in non-accruing status. Even though these loans are in non-accruing status, Management considers based on the value of the underlying collateral and the loan to value ratios, that no material losses will be incurred in this portfolio. Management’s understanding is based on the historical experience of the Corporation. Non-accruing residential real estate loans amounted to $18.5 million (1.48% of total residential real estate loans) at June 30, 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.

Commercial Loans – The Corporation places all 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 $32.1 million (1.41% of total commercial loans) at June 30, 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 June 30, 2002, there were only one non-accruing commercial loan of over $1 million, of $1.4 million.

Finance Leases – Finance leases are classified as non-accruing status when they are delinquent 90 days or more. Non-accruing finance leases amounted to $2.5 million (1.81% of total finance leases) at June 30, 2002, as compared to $2 million (1.93% of total finance leases) and $2 million (1.65% of total finance leases) at December 31, 2001 and 2000, respectively.

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 $17.2 million (1.68% of the total consumer loan portfolio) at June 30, 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.

Other Real Estate Owned (OREO)

OREO acquired in settlement of loans is carried at the lower of cost (carrying value of the loan) or fair value less estimated cost to sell off the real estate at the date of acquisition.

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 Bank’s investment in WorldCom Corporation bonds which was reclassified to non-accruing status on June 30, 2002 as explained in Note 6 of this 10-Q.

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

As of June 30, 2002, total liabilities amounted to $7,916 million, an increase of $321 million as compared to $7,595 million as of December 31, 2001. The increase in total liabilities was mainly due to: (1) an increase in total deposits of $645 million; (2) an increase in accounts payable and other liabilities of $20.7 million; net of a decrease in federal funds and securities sold under agreements to repurchase of $336.7 million; and (4) a decrease in advances from FHLB of $7.7 million.

The Corporation maintains unsecured standby lines of credit with other banks. At June 30, 2002, the Corporation’s total unused lines of credit with these banks amounted to approximately $180,000,000 (2001 – $180,000,000). At June 30, 2002, the Corporation has an available line of credit with the FHLB guaranteed with excess collateral, in the amount of $44,644,982. At June 30, 2002, the Corporation has available collateral that can be pledged with the FHLB to obtain additional line of credit in the amount of $604,377,482.

Capital

Total stockholders’ equity as of June 30, 2002 amounted to $733 million, increasing by $130 million from the amount as of December 31, 2001. The increase was mainly the result of earnings for the period ended on June 30, 2002 of $52.6 million, the issuance of 3,680,000 shares of preferred stock at $89 million, the issuance of 28,500 shares of common stock through the exercise of stock options with proceeds of $593,250, the positive fluctuation in the valuation of securities available for sale of $8.7 million, reduced by dividends paid of $20.9 million.

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, which vary from 0% to 100% depending on the nature of the asset.

At June 30, 2002 and December 31, 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.

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


								Regulatory requirements

								For capital
			Actual					adequacy purposes					To be well capitalized

			Amount		Ratio			Amount		Ratio			Amount		Ratio

			(Dollars in thousands)
At June 30, 2002
	Total Capital (to Risk-Weighted Assets):
		First BanCorp	$	789,966		15.81	%	$	399,693		8	%	$	499,616		10	%
		FirstBank		619,669		12.46	%		398,000		8	%		497,500		10	%
	Tier I Capital (to Risk-Weighted Assets):
		First BanCorp	$	676,485		13.54	%	$	199,846		4	%	$	299,770		6	%
		FirstBank		506,450		10.18	%		199,000		4	%		298,500		6	%
	Tier I Capital (to Average Assets):
		First BanCorp	$	676,485		8.19	%	$	247,809		3	%	$	413,015		5	%
		FirstBank		506,450		6.20	%		245,176		3	%		408,626		5	%
At December 31, 2001
	Total Capital (to Risk-Weighted Assets):
		First BanCorp	$	678,679		14.50	%	$	374,498		8	%	$	468,123		10	%
		FirstBank		590,652		12.75	%		370,472		8	%		463,090		10	%
	Tier I Capital (to Risk-Weighted Assets):
		First BanCorp	$	569,255		12.16	%	$	187,249		4	%	$	280,874		6	%
		FirstBank		481,850		10.41	%		185,236		4	%		277,854		6	%
	Tier I Capital (to Average Assets):
		First BanCorp	$	569,255		7.49	%	$	228,074		3	%	$	380,124		5	%
		FirstBank		481,850		6.40	%		225,738		3	%		376,231		5	%

Dividends

During the period ended June 30, 2002, the Corporation declared a quarterly cash dividend of $0.15 per common share representing a 15% increase over the quarterly cash dividend of $0.13 per common share declared for the same period in 2001. Total dividends declared per common share for the period ended on June 30, 2002 amounted to $8.0 million for an annualized dividend payout ratio of 20.07% as compared to $6.9 million for the period ended June 30, 2001 (or a 21.22% dividend payout ratio). Dividends declared on preferred stock amounted to $12.9 million for the period ended on June 30, 2002 as compared to $6.3 million for the same period last year.

Contractual Obligations and Commitments

The following table presents a detail of the maturities of contractual debt obligations and commitments to extend credit:


		Total		Less than 1 year		1-3 years		4-5 year		After 5 years

Contractual Obligations:
	Federal funds purchased and securities sold under agreements to repurchase, excluding accrued interest	$	2,649,830	$	574,870	$	156,500			$	1,818,460
	Advances from FHLB		336,000		13,000		50,000	$	100,000		273,000
	Subordinated Notes		84,363				84,363

Total Contractual Cash Obligations		$	3,070,193	$	587,870	$	290,863	$	100,000	$	2,091,460

Other Commitments:
	Lines of Credit	$	304,726	$	304,726
	Standby Letters of Credit		24,929		24,929
	Other Commercial Commitments		657,834		657,834

Total Commercial Commitments		$	987,489	$	987,489

The Corporation has obligations and commitments to make future payments under contracts, such as debt, 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.

The Corporation has obligations to make future payments under lease agreements contracts. The maturities of the operational leases are included on page 75 of the Corporation’s annual report to security holders for the year ended December 31, 2001.

Critical Accounting Policies and Practices

The information required herein is incorporated by reference from page 43 of the annual report to security holders for the year ended December 31, 2001.

Liquidity

Liquidity refers to the level of cash and eligible investments readily available to meet loan and investment commitments, potential deposit outflows and debt repayments. The Corporation’s liquidity position and liquidity targets are reviewed on a weekly basis by the Asset Liability Management and Investment Committee, using measures of liquidity developed by Management.

The Corporation’s 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 a supplementary source 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 investments, and the repayment of maturing deposit accounts and borrowings.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information required herein is incorporated by reference from pages 41 to 43 of the annual report to security holders for the year ended December 31, 2001.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Corporation is a defendant in a number of legal proceedings arising out of, and incidental to its business. Based on its review with counsel on the development of these matters to date, Management is of the opinion that the ultimate aggregate liability, if any, resulting from these pending proceedings will not have a material adverse effect on the accompanying consolidated financial statements.

ITEM 2. CHANGES IN SECURITIES

Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

ITEM 5. OTHER INFORMATION

For the preparation of the Corporation’s earnings release dated July 16, 2002, total average assets and total average earning assets were inadvertently erroneously calculated. As a result, the following numbers and ratios, which are computed based on the above-mentioned average balances were incorrectly presented in the release. The net interest margin for the six months ended June 30, 2002 was 4.09% as compared to 4.01% presented in the earnings release. Total average earning assets for the six month period ended June 30, 2002 was $8,069 million as compared to $8,232 million presented on the earnings release. Total average earning loans for the six months period ended June 30, 2002 was $4,434 million as compared to $4,597 million presented on the earnings release. Net write offs to average loans for the six month ended June 30, 2002 was 0.96% instead of 0.92% as reported in the earnings release. Average earnings assets, average loans, net interest margin and the net write offs to average loans for the quarter ended June 30, 2002 were correctly presented in the release. Total average assets for the three and six month period ended June 30, 2002 was $8,298 million and $8,297 million, respectively, as compared to $8,266 million and $8,281 million, respectively, presented on the earnings release. The return on assets for the quarter ended on June 30, 2002 was 1.30% instead of 1.31% as reported in the earnings release. The return on assets for the six month period ended on June 30, 2002 was correctly presented in the release.

ITEM 6. EXHIBITS AND REPORT ON FORM 8-K

Not applicable.

SIGNATURES

Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Corporation has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized:


		First BanCorp.

		Name of the Corporation

Date: August 15, 2002	By:	/s/ Angel Alvarez-Pérez, Esq

		Angel Alvarez-Pérez, Esq. Chairman, President and Chief Executive Officer

Date: August 15, 2002	By:	/s/ Annie Astor-Carbonell

		Annie Astor-Carbonell Senior Executive Vice President and Chief Financial Officer

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