As of December 31, 2001 the Corporation had borrowings totaling $2.5 billion which included embedded call options. The primary purpose of these transactions was to reduce the Corporation’s exposure to interest rate risk by lengthening the maturities of its liabilities, while keeping its funding costs low. In addition, the Corporation had, at year ended 2001, $600 million of inter- est rate caps. The Corporation also held $1,553 million of interest rate swap contracts, of which $1,495 million are used to convert wholesale funds obtained at fixed rates to low cost variable rate funding tied to LIBOR. This funding has repricing characteristics similar to various parts of the Corporation’s loan portfolio, and therefore, tends to provide a closer match between the repricing of assets and liabilities. The accounting and reporting policies of the Corporation and its sub- sidiaries conform with generally accepted accounting principles. A sum- mary of accounting policies and recently issued accounting pronounce- ments is included in Note 2 of the Corporation’s financial statements - “Summary of Significant Accounting Policies”. The reported amounts are based on judgments, estimates and assumptions made by Management that affect the recorded assets and liabilities and contingent assets and liabilities at the date of the financial statements and the reported amounts of rev- enues and expenses during the reporting periods. Actual results could dif- fer from those estimates, if different assumptions or conditions prevail. The Corporation classifies its investments in debt and equity securities into trading, held to maturity and available for sale securities. The available for sale securities are carried at fair value. The fair values of these securities were calculated based on quoted market prices and dealer quotes. Changes in the assumptions used in calculating the fair values, could affect the reported valuations. The Corporation maintains the allowance for loan losses at a level that Management considers adequate to absorb losses inherent in the loan portfolio. The adequacy of the allowance for loan losses is reviewed on a quarterly basis as part of the continuing evaluation of the quality of the assets. Groups of small balance, homogeneous loans are collectively evalu- ated for impairment. The portfolios of consumer loans, auto loans and finance leases are considered homogeneous and are evaluated collectively for impairment. In determining probable losses for each category of homo- geneous pools of loans, Management uses historical information about loan losses over several periods of time that reflect varying economic condi- tions and adjusts such historical data based on the current conditions, con- sidering information and trends on charge-offs, non-accrual loans and delin- quencies. The Corporation measures impairment individually for those commercial and real estate loans with a principal balance exceeding $1 mil- lion. An allowance is established based on the present value of expected future cash flows or the fair value of the collateral, if the loan is collateral dependent. Accordingly, the measurement of impairment for loans evalu- ated individually involves assumptions by Management as to the amount and timing of cash flows to be recovered and of appropriate discount rates. Where the loans are collateral dependent, Management generally obtains an independent appraisal.Those appraisals also involve estimates of future cash flows and appropriate discount rates or adjustments to comparable properties in determining fair values. The assumptions, judgments and estimates made by Management affect the reported amounts in the Corporation’s financial statements. Different amounts may result if reported under different conditions or using differ- ent assumptions. Critical Accounting Policies and Practices >. Use of Derivatives 0 43 First BanCorp.> 2001