UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13
of the Securities Exchange Act of 1934
For the fiscal year ended Commission File
December 31, 1998 001-14793
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 Leon Avenue, Stop 23
Santurce, Puerto Rico 00908
(Address of principal office) (Zip Code)
Corporation's telephone number, including area code:
(787) 729-8200
Securities registered under Section 12(b) of the Act:
Common Stock ($1.00 par value)
Title of Class
Securities registered under Section 12(g) of the Act:
Not applicable
Indicate by check mark whether the Corporation (1) has filed all reports
required to be filed 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 ___
Indicate by check mark if disclosure of delinquent filer pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Corporation's knowledge, in definite proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
<PAGE>
State the aggregate market value of the voting stock held by nonaffiliates of
the Corporation: $558,182,136 (based on the closing sales price of $24 at March
15, 1999 for such shares). Number of shares of Common Stock outstanding as of
March 15, 1999:
29,145,552
Documents Incorporated by Reference
(1) Portions of the annual report to security holders for the fiscal year ended
December 31, 1998 are incorporated by reference in Part I, II and IV; and (2)
Portions of the definite proxy statement filed on March 19, 1999 are
incorporated by reference in Part III and IV.
<PAGE>
FIRST BANCORP
CONTENTS
PART I
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Item 1. Business ........................................................................ 4
Item 2. Properties ........................................................................ 20
Item 3. Legal Proceedings ................................................................... 20
Item 4. Submission of Matters to a Vote of
Security Holders ................................................................ 20
PART II
Item 5. Market for Corporation's Common Equity and
Related Stockholder Matters ..................................................... 21
Item 6. Selected Financial Data ............................................................. 22
Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations..................................22
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk.................................................................22
Item 8. Financial Statements and Supplementary Data ......................................... 22
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure............................................22
PART III
Item 10. Directors, Executive Officers and Control
Persons of the Corporation ..................................................... 23
Item 11. Executive Compensation ...............................................................23
Item 12. Security Ownership of Certain Beneficial
Owners and Management.............................................................23
Item 13. Certain Relationships and Related Transactions........................................23
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K ............................................................. 24
SIGNATURES .............................................................................................26
</TABLE>
<PAGE>
PART I
Item 1. Business
GENERAL
First BanCorp. (the Corporation) is a publicly owned bank holding
company, registered under the Bank Holding Company Act of 1956, as amended and,
accordingly, subject to the supervision and regulation by the Federal Reserve
Board. The Corporation was incorporated on March 17, 1998 under the laws of the
Commonwealth of Puerto Rico to serve as the bank holding company for FirstBank
Puerto Rico (FirstBank or the Bank). As a result of this reorganization
consummated on October 1st, 1998, each of the Bank's outstanding shares of
common stock was converted into one share of common stock of the new bank
holding company. This reorganization was carried out pursuant to an Agreement
and Plan of Merger by and between the Corporation and the Bank.
Based on total assets, the Corporation is the second largest locally
owned bank holding company headquartered in the Commonwealth of Puerto Rico and
the third largest depository institution in Puerto Rico. The Corporation had
total assets of $4.017 billion, total deposits of $1.775 billion and total
tangible stockholders' equity of $270.4 million at December 31, 1998.
The Corporation's only subsidiary, FirstBank, conducts its business
through its main office located in San Juan, Puerto Rico, 38 full-service
branches in Puerto Rico and two branches in the U.S. Virgin Islands of St.
Thomas and St. Croix. The Bank also has nine loan origination offices focusing
on personal loans and credit cards, and four loan origination offices focusing
on auto loans. First chartered in 1948, FirstBank was the first savings and loan
association established in Puerto Rico. It has been a stockholder-owned
institution since January 1987. Effective at the close of business on October
31, 1994, FirstBank converted to a Puerto Rico chartered commercial bank. The
Bank is subject to supervision, examination and regulation by the Office of the
Commissioner of Financial Institutions of Puerto Rico (the Commissioner) and the
Federal Deposit Insurance Corporation (FDIC), which insures its deposits through
the Savings Association Insurance Fund (SAIF). FirstBank has two subsidiaries,
First Leasing and Rental Corporation, a vehicle leasing and daily rental company
with six offices, and First Federal Finance Corp. D/B/A Money Express "La
Financiera," a small loan company with 26 offices.
The Corporation has distinguished itself by providing innovative
marketing strategies and novel products to attract clients. Besides the branches
and lending offices described above, the Corporation has offered a telephone
information service called "Telebanco" since 1983. This was the first
telebanking service offered in Puerto Rico. The Corporation's clients have
access to an extensive ATM network with access in the U.S. Virgin Islands, the
U.S. mainland and all over the world. The Corporation was the first institution
in Puerto Rico to accept loan applications by fax, and was also the first
banking institution in Puerto Rico with a presence on the Internet. Clients can
now submit applications for some loans by way of the Corporation's web site. The
Corporation was also the first in Puerto Rico to open on weekends and the first
to offer in-store branches to its clients. The Corporation is committed to
continue providing the most efficient and cost effective banking services
possible in selected products niches. Management's long term goal is to
transform the Corporation into a conservatively managed, diversified financial
institution in order to position itself to deliver superior financial
performance.
<PAGE>
The information under the caption "1998: the Year in Review" on pages
12 to 15 and the information under Note 34 - Segment Information on pages 67 to
69 of the Corporation's annual report to security holders for the year ended
December 31, 1998 is incorporated herein by reference.
SUPERVISION AND REGULATION
Bank Holding Company Activities and Other Limitations. The Corporation
is subject to ongoing regulation, supervision, and examination by the Federal
Reserve Board, and is required to file with the Federal Reserve Board periodic
and annual reports and other information concerning its own business operations
and those of its subsidiaries. In addition, under the provisions of the Bank
Holding CompanyAct, a bank holding company must obtain Federal Reserve Board
approval before it acquires directly or indirectly ownership or control of more
than 5% of the voting shares of a second bank. Furthermore, Federal Reserve
Board approval must also be obtained before such a company acquires all or
substantially all of the assets of a second bank or merges or consolidates with
another bank holding company. The Federal Reserve Board also has authority to
issue cease and desist orders against holding companies and their non-bank
subsidiaries.
A bank holding company is prohibited under the Bank Holding Company
Act, with limited exceptions, from engaging, directly or indirectly, in any
business unrelated to the business of banking, managing or controlling
corporations. One of the exceptions to these prohibitions permits ownership by a
bank holding company of the shares of any company if the Federal Reserve Board,
after due notice and opportunity for hearing, by regulation or order has
determined that the activities of the company in question are so closely related
to the business of banking or of managing or controlling banks as to be a proper
incident thereto.
Under the Federal Reserve Board policy, a bank holding company such as
the Corporation is expected to act as a source of financial strength to its main
banking subsidiaries and to also commit support to them. This support may be
required at times when, absent such policy, the bank holding company might not
otherwise provide such support. In the event of a bank holding company's
bankruptcy, any commitment by the bank holding company to the federal bank
regulatory agency to maintain capital of a subsidiary bank will be assumed by
the bankruptcy trustee and be entitled to a priority of payment. In addition,
any capital loans by a bank holding company to any of its subsidiary banks must
be subordinated in right of payment to deposits and to certain other
indebtedness of such subsidiary bank. FirstBank is currently the only depository
institution subsidiary of the Corporation.
State Chartered Non-Member Bank. FirstBank is subject to extensive
regulation and examination by the Commissioner and the FDIC, and subject to
certain requirements established by the Federal Reserve Board. The federal and
state laws and regulations which are applicable to banks regulate, among other
things, the scope of their business, their investments, their reserves against
deposits, the timing and availability of deposited funds and the nature and
amount of and collateral for certain loans. In addition to the impact of
regulations, commercial banks are affected significantly by the actions of the
Federal Reserve Board as it attempts to control the money supply and credit
availability in order to influence the economy.
Dividend Restrictions. The Corporation is subject to certain
restrictions generally imposed on Puerto Rico corporations (i.e., that dividends
may be paid out only from the Corporation's net assets in excess of capital or
in the absence of such excess, from the Corporation's net earnings for such
fiscal year and/or the preceding fiscal year). The Federal Reserve Board has
also issued a policy statement that provides that bank holding companies should
generally pay dividends only out of current operating earnings.
<PAGE>
At present, the principal source of funds for the Corporation is
dividends from FirstBank. The ability of FirsBank to pay dividends on its common
stock is restricted by the Banking Law (as defined herein), the Federal Deposit
Insurance Act and FDIC regulations. In general terms, the Puerto Rico Banking
Law provides that when the expenditures of a bank are greater than receipts, the
excess of expenditures over receipts shall be charged against undistributed
profits of the bank and the balance, if any, shall be charged against the
required reserve fund of the bank. If there is no sufficient reserve fund to
cover such balance in whole or in part, the outstanding amount shall be charged
against the bank's capital account. The Puerto Rico Banking Law provides that
until said capital has been restored to its original amount and the reserve fund
to 20% of the original capital, the bank may not declare any dividends.
In general terms, the Federal Deposit Insurance Act and the FDIC
regulations restrict the payment of dividend when a bank is undercapitalized,
when a bank has failed to pay insurance assessments, or when there are safety
and soundness concerns regarding such bank.
Limitations on Transactions with Affiliates. Transactions between
financial institutions such as the Bank and any affiliate are governed by
Sections 23A and 23B of the Federal Reserve Act. An affiliate of a financial
institution is any company or entity, which controls, is controlled by or is
under common control with the financial institution. In a holding company
context, the parent bank holding company and any companies which are controlled
by such parent holding company are affiliates of the financial institution.
Generally, Sections 23A and 23B of the Federal Reserve Act (i) limit the extent
to which the financial institution or its subsidiaries may engage in "covered
transactions" with any one affiliate to an amount equal to 10% of such
institution's capital stock and surplus, and contain an aggregate limit on all
such transactions with all affiliates to an amount equal to 20% of such capital
stock and surplus and (ii) require that all such transactions be on terms
substantially the same, or at least as favorable, to the institution or
subsidiary as those provided to a non-affiliate. The term "covered transaction"
includes the making of loans, purchase of assets, issuance of a guarantee and
other similar transactions.
In addition, Sections 22(h) and (g) of the Federal Reserve Act place
restrictions on loans to executive officers, directors and principal
stockholders. Under Section 22(h) of the Federal Reserve Act loans to a
director, an executive officer and to a greater than 10% stockholder of a
financial institution, and certain affiliated interests of these, may not
exceed, together with all other outstanding loans to such person and affiliated
interests, the financial institution's loans to one borrower limit, generally
equal to 15% of the institution's unimpaired capital and surplus. Section 22(h)
of the Federal Reserve Act also requires that loans to directors, executive
officers and principal stockholders be made on terms substantially the same as
offered in comparable transactions to other persons and also requires prior
board approval for certain loans. In addition, the aggregate amount of
extensions of credit by a financial institution to insiders cannot exceed the
institution's unimpaired capital and surplus. Furthermore, Section 22(g) of the
Federal Reserve Act places additional restrictions on loans to executive
officers.
Capital Requirements. The Federal Reserve Board has adopted capital
adequacy guidelines pursuant to which it assesses the adequacy of capital in
examining and supervising a bank holding company and in analyzing applications
to it under the Bank Holding Company Act. The Federal Reserve Board capital
adequacy guidelines generally require bank holding companies to maintain total
capital equal to 8% of total risk-adjusted assets, with at least one-half of
that amount consisting of Tier I or core capital and up to one-half of that
amount consisting of Tier II or supplementary capital. Tier I capital for bank
holding companies generally consists of the sum of common stockholders' equity
and
<PAGE>
perpetual preferred stock, subject in the case of the latter to limitations
on the kind and amount of such stocks which may be included as Tier I capital,
less goodwill and, with certain exceptions, intangibles. Tier II capital
generally consists of hybrid capital instruments, perpetual preferred stock
which is not eligible to be included as Tier I capital; term subordinated debt
and intermediate-term preferred stock; and, subject to limitations, generally
allowances for loan losses. Assets are adjusted under the risk-based guidelines
to take into account different risk characteristics, with the categories ranging
from 0% (requiring no additional capital) for assets such as cash to 100% for
the bulk of assets which are typically held by a bank holding company, including
multi-family residential and commercial real estate loans, commercial business
loans and commercial loans. Off-balance sheet items also are adjusted to take
into account certain risk characteristics.
In addition to the risk-based capital requirements, the Federal Reserve
Board requires bank holding companies to maintain a minimum leverage capital
ratio of Tier I capital to total assets of 3.0%. Total assets for this purpose
does not include goodwill and any other intangible assets and investments that
the Federal Reserve Board determines should be deducted from Tier I capital. The
Federal Reserve Board has announced that the 3.0% Tier I leverage capital ratio
requirement is the minimum for the top-rated bank holding companies without a
supervisory, financial or operational weaknesses or deficiencies or those which
are not experiencing or anticipating significant growth. Other bank holding
companies will be expected to maintain Tier I leverage capital ratios of at
least 4.0% or more, depending on their overall condition. At December 31, 1998,
the Corporation exceeded each of its capital requirements and was a
well-capitalized institution as defined in the Federal Reserve Board
regulations.
FDIC Capital Requirements. The FDIC has promulgated regulations and
adopted a statement of policy regarding the capital adequacy of state-chartered
non-member banks like the Bank. These requirements are substantially similar to
those adopted by the Federal Reserve Board regarding bank holding companies, as
described above.
The FDIC also requires that banks meet a risk-based capital standard.
The risk-based capital standard for banks requires the maintenance of total
capital (which is defined as Tier I capital and supplementary (Tier 2) capital)
to risk weighted assets of 8%. In determining the amount of risk-weighted of 0%
to 100%, based on the risks the FDIC believes are inherent in the type of asset
or item. The components of Tier I capital are equivalent to those discussed
above under the 3% leverage capital standard. The components of supplementary
capital include certain perpetual preferred stock, certain mandatory convertible
securities, certain subordinated debt and intermediate preferred stock and
generally allowances for loan and lease losses. Allowance for loan and lease
losses includable in supplementary capital is limited to a maximum of 1.25% of
risk-weighted assets. Overall, the amount of capital counted toward
supplementary capital cannot exceed 100% of core capital.
The FDIC's capital regulations establish a minimum 3.0% Tier I capital
to total assets requirement for the most highly-rated state-chartered,
non-member banks, with an additional cushion of at least 100 to 200 basis points
for all other state-chartered, non-member banks, which effectively will increase
the minimum Tier I leverage ratio for such other banks to 4.0% to 5.0% or more.
Under the FDIC's regulation, the highest-rated banks are those that the FDIC
determines are not anticipating or experiencing significant growth and have well
diversified risk, including no undue interest rate risk exposure, excellent
asset quality, high liquidity, good earnings and, in general, which are
considered a strong banking organization and are rated composite I under the
Uniform Financial Institutions Rating System. Leverage or core capital is
defined as the sum of common stockholders' equity including retained earnings,
noncumulative perpetual preferred stock and related surplus, and minority
interests in consolidated subsidiaries, minus all intangible assets other than
certain qualifying supervisory
<PAGE>
goodwill and certain purchased mortgage servicing rights. At December 31,
1998, the Bank exceeded each of its capital requirements and was a
well-capitalized institution as defined in the FDIC regulations.
Activities and Investments. The activities and equity investments of
FDIC-insured, state-chartered banks such as the Bank are generally limited to
those that are permissible for national banks. Under regulations dealing with
equity investments, an insured state bank generally may not directly or
indirectly acquire or retain any equity investments of a type, or in an amount,
that is not permissible for a national bank. An insured state bank is not
prohibited from, among other things, (i) acquiring or retaining a majority
interest in a subsidiary, (ii) investing as a limited partner in a partnership
the sole purpose of which is direct or indirect investment in the acquisition,
rehabilitation or new construction of a qualified housing project, provided that
such limited partnership investments may not exceed 2% of the bank's total
assets, (iii) acquiring up to 10% of the voting stock of a company that solely
provides or reinsures directors', trustees' and officers' liability insurance
coverage or bankers' blanket bond group insurance coverage for insured
depository institutions, and (iv) acquiring or retaining the voting shares of a
depository institution if certain requirements are met. In addition, an insured
state-chartered bank may not, directly, or indirectly through a subsidiary,
engage as "principal" in any activity that is not permissible for a national
bank unless the FDIC has determined that such activity would pose no risk to the
insurance fund of which it is a member and the bank is in compliance with
applicable regulatory capital requirements. Any insured state-chartered bank
directly or indirectly engaged in any activity that is not permitted for a
national bank must cease the impermissible activity.
Puerto Rico Banking Law. As a commercial bank organized under the laws
of Commonwealth, FirstBank is subject to supervision, examination and regulation
by the Commissioner pursuant to the Puerto Rico Banking Law of 1933, as amended
(the Banking Law). The Banking Law contains provisions governing the
incorporation and organization, rights and responsibilities of directors,
officers and stockholders as well as the corporate powers, lending limitations,
capital requirements, investment requirements and other aspects of the Bank and
its affairs. In addition, the Commissioner is given extensive rule making power
and administrative discretion under the Banking Law.
The Banking Law authorizes Puerto Rico commercial banks to conduct
certain financial and related activities directly or through subsidiaries,
including finance leasing of personal property and operating a small loan
company.
The Banking Law requires every bank to maintain a legal reserve which
shall not be less than twenty percent (20%) of its demand liabilities, except
government deposits (federal, state and municipal) which are secured by actual
collateral. The reserve is required to be composed of any of the following
securities or combination thereof: (1) legal tender of the United States; (2)
checks on banks or trust companies located in any part of Puerto Rico, to be
presented for collection during the day following that on which they are
received, and (3) money deposited in other banks provided said deposits are
authorized by the Commissioner, subject to immediate collection.
The Banking Law permits Puerto Rico commercial banks to make loans to
any one person, firm, partnership or corporation, up to an aggregate amount of
fifteen percent (15%) of paid-in capital and reserve fund of the commercial
bank. If such loans are secured by collateral worth at least twenty-five percent
(25%) more than the amount of the loan, the aggregate maximum amount may reach
one third of the paid-in capital of the commercial bank, plus its reserve fund.
There are no restrictions under the Banking Law on the amount of loans which are
wholly secured by bonds, securities and other evidences of indebtedness of the
Government of the United States, of the Commonwealth of
<PAGE>
Puerto Rico, or by bonds, not in default, of municipalities or
instrumentalities of the Commonwealth of Puerto Rico.
The Banking Law also prohibits Puerto Rico commercial banks from making
loans secured by their own stock, and from purchasing their own stock, unless
such purchase is made pursuant to a stock repurchase program approved by the
Commissioner or is necessary to prevent losses because of a debt previously
contracted in good faith. The stock so purchased by the Puerto Rico commercial
bank must be sold by the bank in a public or private sale within one year from
the date of purchase.
The Banking Law provides that no officers, directors, agents or
employees of a Puerto Rico commercial bank may serve or discharge a position of
officer, director, agent or employee of another Puerto Rico commercial bank,
financial company, savings and loan association, trust company, company engaged
in granting mortgage loans or any other institution engaged in the money lending
business in Puerto Rico. This prohibition is not applicable to the subsidiaries
of a Puerto Rico commercial bank.
The Banking Law requires that Puerto Rico commercial banks strike each
year a general balance of their operations, and to submit such balance for
approval to a regular general meeting of stockholders, together with an
explanatory report thereon. The Banking Law also requires that at least ten
percent (10%) of the yearly net income of a Puerto Rico commercial bank be
credited annually, to a reserve fund. This apportionment is required to be done
every year until such reserve fund shall be equal to the total paid in capital
of the bank.
The Banking Law also provides that when the expenditures of a Puerto
Rico commercial bank are greater than receipts, the excess of the expenditures
over receipts shall be charged against the undistributed profits of the bank,
and the balance, if any, shall be charged against the reserve fund, as a
reduction thereof. If there is no reserve fund sufficient to cover such balance
in whole or in part, the outstanding amount shall be charged against the capital
account and no dividend shall be declared until said capital has been restored
to its original amount and the reserve fund to twenty percent (20%) of the
original capital.
The Finance Board, which is composed of the Commissioner, the Secretary
of the Treasury, the Secretary of Commerce, the Secretary of Consumer Affairs,
the President of the Housing Bank, the President of the Government Development
Bank of Puerto Rico, and three public interest representatives, has the
authority to regulate the maximum interest rates and finance charges that may be
charged on loans to individuals and unincorporated businesses in Puerto Rico.
The current regulations of the Finance Board provide that the applicable
interest rate on loans to individuals and unincorporated businesses, including
real estate development loans but excluding certain other personal and
commercial loans secured by mortgages on real estate properties, is to be
determined by free competition. The Finance Board also has authority to regulate
the maximum finance charges on retail installment sales contracts, which are
currently set at 21%, and for credit card purchases, which are currently set at
26%. There is no maximum rate set for installment sales contracts involving
motor vehicles, commercial, agricultural and industrial equipment, commercial
electric appliances and insurance premiums.
<PAGE>
MARKET AREA AND COMPETITION
Puerto Rico, where the banking market is highly competitive, is the
main geographic service area of the Corporation. At December 31, 1998, Puerto
Rico had 17 banking institutions with a total of approximately $43 billion in
assets according to industry statistics published by the Commissioner. The
Corporation ranked third based on total assets at December 31, 1998. The other
largest banks in order of size were Banco Popular de Puerto Rico and Banco
Santander Puerto Rico. Puerto Rico banks are subject to the same federal laws,
regulations and supervision that apply to similar institutions on the United
States mainland.
In addition, the Corporation competes with brokerage firms with retail
operations, credit unions, cooperatives, small loan companies and mortgage banks
in Puerto Rico.
The Corporation encounters intense competition in attracting and
retaining deposits and in its consumer and commercial lending activities. The
Corporation competes for loans with other financial institutions, some of which
are larger and have available resources greater than those of the Corporation.
There can be no assurance that in the future the Corporation will be able to
continue to increase its deposit base or originate loans in the manner or on the
terms on which it has done so in the past.
Management believes that the Corporation has been able to compete
effectively for deposits and loans by offering a variety of transaction account
products and loans with competitive features, by pricing its products at
competitive interest rates and by offering convenient branch locations and
emphasizing the quality of its service. The Corporation's ability to originate
loans depends primarily on the rates and fees charged and the service it
provides to its borrowers in making prompt credit decisions.
<PAGE>
FINANCIAL CONDITION
The Corporation's total assets at December 31, 1998 amounted to
$4,017.4 million, $690.0 million over the $3,327.4 million at December 31, 1997.
The increase in total assets was mainly the result of an increase in total
investments of $523.6 million plus an increase of $150.6 million in loans
receivable (net of the allowance for loan losses) and loans held for sale.
The Corporation's principal funding sources are branch-based deposits,
institutional deposits, federal funds purchased, securities sold under
agreements to repurchase, and notes.
The following table presents an average balance sheet as of the dates
indicated:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
December 31,
1998 1997 1996
-----------------------------------------------
Assets (In thousands)
Interest earning assets:
Deposits at Bank and other
short term investments $ 40,766 $ 67,969 $ 36,883
Government obligations 319,777 404,517 405,221
Mortgage backed securities 1,032,632 428,804 255,926
Other investment 1,150 519 3,920
FHLB stock 10,252 10,150 11,701
Consumer loans 1,032,704 1,090,991 985,554
Real estate loans 642,112 567,446 552,385
Commercial loans 324,426 250,757 207,745
------------- ------------ ------------
Total interest earning assets 3,403,819 2,821,153 2,459,335
Allowance for loan losses (58,613) (52,287) (53,089)
Total non-interest earnings assets 148,331 143,643 133,421
------------- ------------ ------------
Total assets $ 3,493,537 $2,912,509 $2,539,667
=========== ========== ==========
Liabilities and Stockholders' Equity
Interest bearing liabilities:
Deposits $1,494,530 $1,502,975 $1,441,612
Other borrowed funds 1,559,892 1,012,757 718,407
FHLB advances 4,515 15,157 25,637
-------------- ------------ ----------
Total interest bearing liabilities 3,058,937 2,530,889 2,185,656
Total non-interest bearing liabilities 182,369 168,515 170,348
------------ ----------- ------------
Total liabilities 3,241,306 2,699,404 2,356,004
Stockholders' equity 252,231 213,105 183,663
------------ ------------ -----------
Total liabilities and stockholders' equity $3,493,537 $2,912,509 $2,539,667
========== ========== ==========
</TABLE>
<PAGE>
The following table sets forth the maturity distribution of earning
assets at December 31, 1998:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998
Maturities
After one year
through five years After five years
Fixed Variable Fixed Variable
One year interest interest interest interest
or less rates rates rates rates Total
(In thousands)
Money market
securities $ 526 $ 526
Investment and
trading securities 312,830 $ 34,605 $ 2,585 $1,421,489 $ 28,454 1,799,963
Loans:
Commercial 68,890 62,390 44,867 29,701 162,701 368,549
Construction 13,232 50,707 63,939
Lease financing 23,636 28,578 52,214
Consumer 319,919 653,995 27,184 1,001,098
Residential Mortgage 14,902 40,241 2,257 250,512 307,912
Commercial Mortgage 18,999 5,871 90,624 17,580 193,268 26,342
----------- ------------ ---------- ------------- --------- ------------
Total Loans 459,578 791,075 188,455 324,977 355,969 2,120,054
----------- ---------- --------- ------------ --------- ------------
Total $ 772,934 $ 825,680 $191,040 $1,746,466 $384,423 $3,920,543
========== ========== ======== ========== ======== ==========
</TABLE>
LENDING ACTIVITIES
First BanCorp's lending activities are concentrated in the consumer and
commercial lines of business. At December 31, 1998 total consumer loans amounted
to $1,001.1 million, total commercial loans to $811.0 million, including $326.3
million in commercial real estate loans and $63.9 million in construction loans
that for financial reporting purposes are presented within the real estate
category, and total residential mortgage loans to $307.9 million. The consumer
loan portfolio consists principally of auto loans, personal loans and credit
cards. The Corporation's portfolio of commercial loans is composed in its
majority of asset based financing and commercial mortgage loans. First BanCorp
continues to originate long-term fixed rate residential real estate loans to
maintain this portfolio at the same level of prior years.
<PAGE>
The following table sets forth the composition of First BanCorp 's total loan
portfolio and the percentage of loans in each category to total loans in the
Corporation's portfolio at the dates indicated.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
1998 1997 1996 1995 1994
------------ ------------ ------------ -------------- --------
(In thousands)
Real estate loans:
Secured by first mortgages:
Residential $237,561 $223,098 $224,253 $ 231,744 $ 313,270
Commercial 326,342 306,734 256,227 210,645 175,415
Construction, land
acquisition and land
improvements 162,474 15,400 12,407 12,088 19,783
Insured by government
agencies:
Federal Housing
Administration and
Veterans Administration 8,185 10,176 9,282 12,418 6,505
Puerto Rico Housing Corporation
and Finance Agency 38,516 44,073 50,016 55,325 61,210
Secured by second mortgages 13,256 14,171 14,375 23,208 16,907
-------- -------- ----------- --------- ----------
786,334 613,652 566,560 545,428 593,090
Less:
Loans in process (98,535) (6,121) (2,198) (2,855) (5,971)
Deferred loan fees (10,246) (9,138) (8,531) (8,461) (8,484)
------- -------- ------------ ------------ ------
677,553 598,393 555,831 534,112 578,635
------- ------- ---------- ---------- ----------
Commercial loans:
Commercial loans 368,549 235,571 174,770 156,369 117,564
Finance Leases 52,214 42,500 58,481 32,965 9,278
--------- --------- ----------- ----------- ------------
420,763 278,071 233,251 189,334 126,842
-------- --------- ---------- ----------- ----------
Consumer loans:
Auto 512,116 512,938 510,083 329,296 255,112
Personal 472,588 676,965 749,732 619,549 412,979
Credit card 125,956 116,734 109,259 79,164 64,459
Boat 32,209 29,145 29,458 30,168 35,718
Home equity reserve 3,385 4,282 5,828 6,811 9,037
Agency for International
Development 128 148 651 795 929
Unearned finance interest (145,284) (267,599) (305,870) (238,146) (155,683)
----------- --------- --------- --------- ----------
1,001,098 1,072,613 1,099,141 827,637 622,551
--------- --------- --------- -------- -------
Loans receivable 2,099,413 1,949,077 1,888,223 1,551,083 1,328,028
Loans held for sale 20,642 10,225 7,851 5,523 173,244
----------- ----------- ------------ -------------- -------
Total loans 2,120,054 1,959,302 1,896,074 1,556,606 1,501,272
--------- --------- --------- --------- ---------
Less - Allowance for
loan losses (67,854) (57,712) (55,254) (55,009) (37,412)
------------ ----------- ----------- -------------- --------
Loans receivable - net $2,052,200 $1,901,590 $1,840,821 $1,501,597 $1,463,860
========== ========== ========== ========== ==========
</TABLE>
<PAGE>
The following table sets forth the composition of First BanCorp's total
loan portfolio before the allowance for loan losses and the weighted average
taxable equivalent interest rates of loans in each category at December 31,
1998.
<TABLE>
<S> <C> <C>
December 31, 1998
Weighted
(In thousands) average rate
Real estate loans $ 698,194 9.54%
Commercial loans 420,763 9.03%
Consumer and other loans
(net of unearned interest)
Auto 416,898 12.56%
Personal 425,834 16.92%
Credit card 125,956 15.50%
Boat 28,897 10.91%
Home equity reserve loans 3,385 12.88%
Agency for International Development 128 8.15%
---------------
Total consumer and other loans 1,001,098 14.76%
------------
Total $2,120,054 11.91%
==========
</TABLE>
Loan Activity
The following table sets forth certain additional data related to the
Corporation's loan portfolio net of the allowance for loan losses for the dates
indicated:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
For the year ended December 31,
----------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in thousands)
Beginning balance $1,901,590 $1,840,821 $1,501,597 $1,463,860 $1,207,475
---------- ---------- ---------- ---------- ----------
Consumer loans originated 371,333 569,620 823,884 663,056 631,021
Commercial loans originated 285,812 125,604 125,814 118,123 43,339
Real estate loans originated(1) 149,096 132,248 99,402 94,527 173,320
----------- ----------- ------------ ------------ ----------
Total loans originated 806,241 827,472 1,049,100 875,706 847,680
Purchase of loans 1,330 446 31,903
Sales of loans (1,250) (360,428) (6,488)
Repayments and securitization
of loans into mortgage backed securities (559,727) (665,175) (654,450) (436,616) (584,269)
Other decreases(2) (97,234) (100,278) (55,872) (40,925) (32,441)
------------- ------------ ------------- ------------ -----------
Net increase 150,610 60,769 339,224 37,737 256,385
------------ ------------- ------------ ------------ ------------
Ending balance $2,052,200 $1,901,590 $1,840,821 $1,501,597 $1,463,860
========== ========== ========== ========== ==========
Percentage increase 7.92% 3.30% 22.59% 2.58% 21.23%
(1) Includes commercial real estate loans.
(2) Includes the change in the allowance for loan losses and cancellation of loans due to the repossession of the
collateral.
</TABLE>
<PAGE>
Non-Performing Assets
The following table presents non-performing assets as of the dates
indicated:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
December 31,
1998 1997 1996
------------------------------------------------------
(In thousands)
Past due loans:
Commercial $ 6,986 $ 2,023 $ 2,412
-------- ------- -------
Consumer:
Personal 4,385 6,745 6,011
Credit cards 3,739 2,776 1,329
--------- --------- -------
Total consumer 8,124 9,521 7,340
--------- --------- -------
Total past due loans 15,110 11,544 9,752
-------- -------- -------
Non-accruing loans:
Real estate 17,399 12,249 12,795
-------- ------- --------
Commercial 12,823 16,143 12,712
-------- ------- --------
Consumer:
Personal 3,868 5,125 4,370
Auto 20,753 18,225 19,360
Boat 1,864 923 1,083
Credit cards 10 286
HERL 251 264 556
--------- ---------- ----------
Total Consumer 26,736 24,547 25,655
-------- -------- --------
Total non-accruing loans 56,958 52,939 51,162
-------- -------- --------
Non-performing loans 72,068 64,483 60,914
-------- -------- --------
Other real estate owned (OREO) 3,642 1,132 1,696
--------- --------- ---------
Other repossessed property:
Repossessed autos 1,929 7,354 6,949
Repossessed boats 348 1,348 617
--------- -------- ---------
Total other repossessed property 2,277 8,702 7,566
-------- ------- -------
Total non-performing assets $77,987 $74,317 $70,176
======= ======= =======
Non-performing assets to total assets 1.94% 2.23% 2.49%
Allowance for loan losses $67,854 $57,712 $55,254
Allowance to total non-performing
loans 94.15% 89.50% 90.71%
</TABLE>
Non-performing loans consist of non-accruing loans (loans as to which
interest is no longer being recognized) and past due loans (loans delinquent 90
days or more as to principal and/or interest, but still accruing interest).
INVESTMENT ACTIVITIES
The Corporation's investment is managed by the Treasury and Investment
Division, under the supervision of the Senior Vice President, Treasury and
Investments, who reports to the Corporation's Senior Executive Vice President
and Chief Financial Officer. Investment policy is set by the Corporation's Asset
Liability Management and Investment Committee (the ALCO), which includes the
President and Chief Executive Officer, the Senior Executive Vice President and
Chief Financial Officer, the Senior Executive Vice President and Chief Lending
Officer, the Executive Vice President
<PAGE>
President of Money Express, the Senior Vice President - Treasury and
Investments, and the Corporation's Economist. Significant investment
transactions are reported to the ALCO and on a monthly basis to the Board of
Directors through the expanded ALCO, which consists of officers who are members
of the ALCO plus two outside directors, one of whom acts as chairman.
The Corporation's investment policy is designed primarily to provide a
portfolio of high credit quality while seeking to optimize net interest income
within acceptable limits of interest rate risk, credit risk and liquidity. Under
the Corporation's current policy, the Treasury and Investments Division is
authorized to purchase and sell federal funds, certificates of deposit in other
banks, bankers' acceptances of commercial banks that are members of the FDIC,
mortgage backed securities, and U.S. and Puerto Rico obligations. In addition,
the Treasury and Investments Division is authorized to invest in securities
purchased under agreements to resell. As part of the Corporation's asset and
liability management, the Treasury and Investments Division also engages in
hedging activities as approved by the Board of Directors and as set forth in the
Corporation's hedging policy monitored by the ALCO.
SOURCES OF FUNDS
First BanCorp's principal funding sources are branch deposits,
collateralized deposits, federal funds purchased and securities sold under
agreements to repurchase, and notes. Through its banking branch system First
BanCorp offers individual non-interest bearing checking accounts, savings
accounts, personal interest-bearing checking accounts, certificates of deposit,
IRA accounts and commercial non-interest bearing checking accounts.
Deposit Accounts
Deposits represent First BanCorp's largest source of funding. The
Corporation's deposit accounts are insured up to applicable limits by the SAIF.
Management makes retail deposit pricing decisions periodically through the ALCO,
which adjusts the rates paid on retail deposits in response to general market
conditions and local competition. Pricing decisions take into account the rates
being offered by other local banks, LIBOR and mainland United States interest
rates. The following table presents the amount and weighted average interest
rates of deposit accounts as of each date indicated in the categories set forth
below, including the percentage of total assets represented by those deposits.
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Weighted average
rates at
December 31, December 31,
1998 1998 1997 1996
(Dollars in thousands)
Non-interest bearing checking accounts $173,104 $ 140,099 $ 135,707
Saving accounts 2.92% 416,424 403,129 412,511
Interest bearing checking accounts 3.52% 130,883 121,452 115,899
Certificate accounts 5.35% 1,054,634 929,955 1,039,809
----------- ------------ -----------
Total $1,775,045 $1,594,635 $1,703,926
========== ========== ==========
Weighted average rate on interest
bearing deposits 4.57%
Total deposits as a percentage of
total assets 44.18% 47.92% 60.38%
Weighted average rate during period
on interest bearing deposits 4.71% 4.80% 4.92%
The following table presents the average amounts of and the average
rate paid on certain deposit categories as of each date indicated:
1998 1997 1996
Average Average Average
Outstanding Outstanding Outstanding
Interest Interest Interest
Amount Rate Amount Rate Amount Rate
Deposits: (Dollars in thousands)
Non-interest bearing checking
accounts $ 145,357 $ 127,256 $ 126,661
Savings accounts 398,249 2.94% 400,998 3.03% 399,036 3.10%
Interest bearing checking
accounts 123,847 3.62% 116,852 3.57% 121,947 3.50%
Certificate accounts 972,433 5.58% 985,124 5.67% 920,629 5.90%
------------ ------------ ----------
$1,639,886 4.29% $1,630,230 4.43% $1,568,273 4.52%
========== ========== ==========
</TABLE>
Certificate accounts include institutional deposits which consist
mainly of brokered certificate of deposits, and certificates issued to agencies
of the Government of Puerto Rico. FDIC regulations adopted under FDICIA govern
the receipt of brokered deposits. Under these regulations, a bank cannot accept,
roll over or renew brokered deposits, which term is defined also to include any
deposit with an interest rate more than 75 basis points above prevailing rates,
unless (i) it is well capitalized or (ii) it is adequately capitalized and
receives a waiver from the FDIC. The Bank has no such restrictions since it is a
well capitalized institution.
The following table presents a maturity summary of certificates of
deposits with balances of $100,000 or more at December 31, 1998.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
(In thousands)
Three months or less $238,481
Over three months to six months 80,402
Over six months to one year 63,633
Over one year 284,857
---------
Total $667,374
========
</TABLE>
<PAGE>
Borrowings
The following table presents the amount and weighted average interest
rates of borrowings as of each date indicated in the categories set forth below.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Weighted average
rates at December 31, December 31,
---------------------- -----------------------------------
1998 1998 1997 1996
---- ------ ----- ----
(Dollars in thousands)
Borrowings:
Federal funds purchased and
securities sold under
agreements to repurchase 5.03% $1,620,630 $ 965,869 $584,857
FHLB-N.Y. advances 5.13% 2,600 29,000 14,100
Notes payable 5.42% 118,100 132,350 186,433
Other short-term borrowings 6.38% 86,595 231,505
Subordinated notes 8.14% 99,496 99,423 99,351
------------ ------------- ----------
Total 5.27% $1,927,421 $1,458,147 $884,741
========== ========== ========
Total borrowed funds as a percentage
of total assets 47.98% 43.82% 31.35%
Weighted average rate during period 5.41% 5.67% 5.65%
Short-term borrowings:
Securities sold under agreements to repurchase:
Average balance outstanding $1,220,717 $565,095 $455,552
Maximum amount outstanding at
any month end during period $1,638,714 $965,870 $584,857
Weighted average interest rate during the period 5.07% 5.08% 5.04%
Other short-term borrowings:
Average balance outstanding $111,237 $176,657
Maximum amount outstanding
at any month end during period $224,780 $250,000
Weighted average interest rate during period 6.39% 6.10%
</TABLE>
<PAGE>
CAPITAL
At December 31, 1998, total common stockholders' equity for the
Corporation amounted to $270.4 million, an increase of $34 million as compared
to $236.4 million at December 31, 1997.
The Corporation's actual and required ratios and amounts of total
risk-based capital, Tier I risk-based capital and Tier I leverage at December
31, 1998 and for the Bank at December 31, 1998 and 1997 were as follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Regulatory requirements
For capital To be
adequacy purposes well capitalized
Actual
Amount Ratio Amount Ratio Amount Ratio
At December 31, 1998 (Dollars in thousands)
Total Capital (to Risk-Weighted Assets):
First BanCorp $377,939 17.39% $173,835 8% $217,294 10%
FirstBank 372,015 17.12% 173,817 8% 217,271 10%
Tier I Capital (to Risk-Weighted Assets):
First BanCorp $250,910 11.55% $86,917 4% $130,376 6%
FirstBank 244,989 11.28% 86,909 4% 130,363 6%
Tier I Capital (to Average Assets):
First BanCorp $250,910 6.59% $152,272 4% $190,340 5%
FirstBank 244,989 6.44% 152,272 4% 190,340 5%
Regulatory requirements
For capital To be
adequacy purposes well capitalized
Actual
Amount Ratio Amount Ratio Amount Ratio
At December 31, 1998 (Dollars in thousands)
Total Capital (to Risk-Weighted Assets):
FirstBank $348,359 17.26% $161,452 8% $201,816 10%
Tier I Capital (to Risk-Weighted Assets):
FirstBank $223,481 11.07% $80,726 4% $121,089 6%
Tier I Capital (to Average Assets):
FirstBank $223,481 7.44% $120,101 4% $150,126 5%
</TABLE>
<PAGE>
Employees
At December 31, 1998 the Corporation employed 1,750 persons. None of
its employees are represented by a collective bargaining group. The Corporation
considers its employees' relations to be good.
Item 2. Properties
At December 31, 1998 First BanCorp owned three main offices premises,
12 branch and office premises, and four loan centers. All these premises are
located in Puerto Rico. In addition, at December 31, 1998, the Corporation
leased in Puerto Rico 26 branch premises, 35 loan and office centers and seven
other facilities. The Corporation leased two branch premises in the Virgin
Islands. Management believes that the Corporation's properties are well
maintained and are suitable for the Corporation's business as presently
conducted.
Main offices:
1. Headquarters Offices - Located at First Federal Building, 1519 Ponce de
Leon Avenue, Santurce, Puerto Rico, a 16 story office building.
Approximately 50% of the building and an underground three levels parking
lot are owned by the Corporation.
2. EDP & Operations Center - A five story structure located at 1506 Ponce de
Leon Avenue, Santurce, Puerto Rico. These facilities are fully occupied by
the Corporation.
3. Personal Lending and Branch Administration Center - A three story building
with a three levels parking lot located at 876 Munoz Rivera Avenue, corner
Jesus T. Pinero Avenue, Hato Rey , Puerto Rico. These facilities are fully
occupied by the Corporation.
Item 3. Legal Proceedings
The information required herein is incorporated by reference from page
69 of the annual report to security holders for the year ended December 31, 1998
(see Exhibit C to this Form 10-K).
Item 4. Submission of Matters to a Vote of Security Holders
No matters were voted upon during the fourth quarter of 1998.
<PAGE>
PART II
Item 5. Market for Corporation's Common Equity and Related Stockholder Matters
a) Market Information
The information required herein is incorporated by reference from page
35 of the annual report to security holders for the year ended December 31,
1998.
b) Holders
The information required herein is incorporated by reference from page
35 of the annual report to security holders for the year ended December 31,
1998.
c) Dividends
The Corporation has a policy providing for the payment of quarterly
cash dividends on its outstanding shares of common stock. Accordingly, the
Corporation declared a cash dividend of $0.05 per share for each quarter of
1996, $0.06 per share for each quarter of 1997 and $0.075 per share for each
quarter of 1998.
The Puerto Rico Internal Revenue Code requires the withholding of
income tax from dividends income derived by resident U.S. citizens, special
partnerships, trusts and estates and by non-resident U.S. citizens, custodians,
partnerships, and corporations from sources within Puerto Rico.
Resident U.S. Citizens
A special tax of 10% is imposed on eligible dividends paid to
individuals, special partnerships, trusts and estates to be applied to all
distributions unless the taxpayer specifically elects otherwise. Once this
election is made it is irrevocable. However, the taxpayer can elect to include
in gross income the eligible distributions received and take a credit for the
amount of tax withheld. If he does not make this election in his tax return,
then he can exclude from his gross income the distributions received and
reported without claiming the credit for the tax withheld.
Nonresident U.S. Citizens
Have the right to certain exemptions when a Withholding Tax Exemption
Certificate (Form 2732) is properly filled-in and filed with the Corporation.
The Corporation as withholding agent is authorized to withhold a tax of 10% only
from the excess of the income paid over the applicable tax-exempt amount.
U.S. Corporations and Partnerships
Corporations or partnerships not organized under Puerto Rico laws that
have not engaged in business or trade in Puerto Rico during the taxable year in
which the dividend is paid are subject to the 10% dividend tax withholding.
Corporations or partnerships not organized under the laws of Puerto
Rico that have engaged in trade or business in Puerto Rico corporations or
partnerships are not subject to the 10% retention, but they must declare the
dividend as gross income in their Puerto Rico income tax return.
<PAGE>
Item 6. Selected Financial Data
The information required herein is incorporated by reference from page
21 of the annual report to security holders for the year ended December 31,
1998.
tem 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information required herein is incorporated by reference from page 22
through 35 of the annual report to security holders for the year ended December
31, 1998.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information required herein is incorporated by reference from page
36 of the annual report to security holders for the year ended December 31,
1998.
Item 8. Financial Statements and Supplementary Data
The information required herein is incorporated by reference from page 38
through 71 of the annual report to security holders for the year ended December
31, 1998.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
<PAGE>
PART III
Item 10. Directors, Executive Officers and Control Persons of the Corporation
The information required herein is incorporated by reference to the
information under the captions "Information with respect to nominees for
directors of the Company, directors whose terms continue and executive officers
of the Company" and "Section 16(a) Compliance" in the Corporation's definite
proxy statement filed on March 19, 1999.
Item 11. Executive Compensation
The information required herein is incorporated by reference to the
information under the captions "Compensation of Directors", "Compensation of
Executive Officers", "Stock Options Plans", "Options/Grants in Last Fiscal
Year", "Aggregate Options/SAR Exercises in Last Fiscal Year and Fiscal Year-End
Options/SAR Values", "Employment Agreements", "Defined Contributions Retirement
Plan", "Report of the Compensation Committee", "Compensation Committee
Interlocks and Insider Participation", "Other Employment Benefits" and
"Performance of Common Stock" in the definite proxy statement filed on March 19,
1999.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required herein is incorporated by reference to the
information under the caption "Benefical Ownership of Securities" in the
Corporation's definite proxy statement filed on March 19, 1999.
Item 13. Certain Relationships and Related Transactions
The information required herein is incorporated by reference to the
information under the caption "Business Transactions Between the Company and its
Subsidiaries and Executive Officers and Directors" in the Corporation's definite
proxy statement filed on March 19, 1999.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) The following financial statements are included in Item 8 thereof:
Report of independent accountants
Consolidated Statements of Financial Condition at December
31, 1998 and 1997.
Consolidated Statements of Income for Each of the Three
Years in the Period Ended December 31, 1998.
Consolidated Statements of Changes in Stockholders' Equity
for Each of the Three Years in the Period Ended December 31,
1998.
Consolidated Statements of Comprehensive Income for each of
the Three Years in the Period Ended December 31, 1998.
Consolidated Statements of Cash Flows for Each of the Three
Years in the Period Ended December 31, 1998.
Notes to Consolidated Financial Statements.
(2) Financial statement schedules.
Schedules are omitted because they are not applicable or because the
required information is contained in the Consolidated Financial
Statements described in (a)(1) above or in the Notes thereto.
(3) Exhibits
The exhibits listed on the Exhibits Index on section (c) below are
filed herewith or are incorporated herein by reference.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended December
31, 1998.
(c) See Index to Exhibits on page 25 for the exhibits filed as a part of this
Form 10-K.
(d) Financial data schedules
Schedules are omitted because they are not applicable.
<PAGE>
Index to Exhibits
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
- - ---------------------------------- ---------------------------------------------------------- ------------------------------
No. Exhibit Page No.
- - ---------------------------------- ---------------------------------------------------------- ------------------------------
- - ---------------------------------- ---------------------------------------------------------- ------------------------------
2.0 Agreement and Plan of Merger dated March 31, 1998 by and (1)
between FirstBank, First Interim Bank and the
Corporation.
- - ---------------------------------- ---------------------------------------------------------- ------------------------------
- - ---------------------------------- ---------------------------------------------------------- ------------------------------
3.1 Certificate of Incorporation (1)
- - ---------------------------------- ---------------------------------------------------------- ------------------------------
- - ---------------------------------- ---------------------------------------------------------- ------------------------------
3.2 By-Laws (1)
- - ---------------------------------- ---------------------------------------------------------- ------------------------------
- - ---------------------------------- ---------------------------------------------------------- ------------------------------
4.0 Form of Common Stock Certificate (1)
- - ---------------------------------- ---------------------------------------------------------- ------------------------------
- - ---------------------------------- ---------------------------------------------------------- ------------------------------
10.1 FirstBank's 1987 Stock Option Plan -
- - ---------------------------------- ---------------------------------------------------------- ------------------------------
- - ---------------------------------- ---------------------------------------------------------- ------------------------------
10.2 FirstBank's 1997 Stock Option Plan -
- - ---------------------------------- ---------------------------------------------------------- ------------------------------
- - ---------------------------------- ---------------------------------------------------------- ------------------------------
10.3 Employment Agreement between FirstBank and Angel -
Alvarez-Perez
- - ---------------------------------- ---------------------------------------------------------- ------------------------------
- - ---------------------------------- ---------------------------------------------------------- ------------------------------
10.4 Employment Agreement between FirstBank and Annie Astor -
de Carbonell
- - ---------------------------------- ---------------------------------------------------------- ------------------------------
- - ---------------------------------- ---------------------------------------------------------- ------------------------------
10.5 Employment Agreement between FirstBank and Luis M. -
Beauchamp
- - ---------------------------------- ---------------------------------------------------------- ------------------------------
- - ---------------------------------- ---------------------------------------------------------- ------------------------------
10.6 Employee Agreement between FirsBank and Aurelio Aleman. -
- - ---------------------------------- ---------------------------------------------------------- ------------------------------
- - ---------------------------------- ---------------------------------------------------------- ------------------------------
10.7 Employment Agreement between FirstBank and Fernando L. -
Batlle.
- - ---------------------------------- ---------------------------------------------------------- ------------------------------
- - ---------------------------------- ---------------------------------------------------------- ------------------------------
10.8 Employment Agreement between FirstBank and Randolfo -
Rivera.
- - ---------------------------------- ---------------------------------------------------------- ------------------------------
- - ---------------------------------- ---------------------------------------------------------- ------------------------------
11.0 Statement Report to Shareholders for fiscal year ended (2)
December 31, 1998.
- - ---------------------------------- ---------------------------------------------------------- ------------------------------
- - ---------------------------------- ---------------------------------------------------------- ------------------------------
13.0 Annual Report to shareholders for fiscal year ended -
December 31, 1998.
- - ---------------------------------- ---------------------------------------------------------- ------------------------------
- - ---------------------------------- ---------------------------------------------------------- ------------------------------
21.0 List of subsidiaries (direct and indirect) -
- - ---------------------------------- ---------------------------------------------------------- ------------------------------
- - ---------------------------------- ---------------------------------------------------------- ------------------------------
27.0 Financial Data Schedule -
- - ---------------------------------- ---------------------------------------------------------- ------------------------------
(1) Incorporated by reference from Registration statement on Form-S-4 filed
by the Corporation on April 15, 1998. (2) Information is included on page 50 of
the Corporation's annual report to security holders and is incorporated by
reference herein (See Exhibit 13.0).
</TABLE>
<PAGE>
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 by the
undersigned, thereunto duly authorized.
FIRST BANCORP
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
By: /s/ Angel Alvarez-Perez Date: 03/23/99
Angel Alvarez Perez,
Chairman
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
/s/ Angel Alvarez-Perez Date: 03/23/99
Angel Alvarez Perez,
Chairman
President and Chief Executive Officer
/s/ Annie Astor de Carbonell Date: 03/23/99
Annie Astor de Carbonell, Director
Senior Executive Vice President and
Chief Financial Officer
/s/ Jose Julian Alvarez Date: 03/23/99
Jose Julian Alvarez, Director
/s/ Rafael Bouet Date: 03/23/99
Rafael Bouet, Director
/s/ Francisco D. Fernandez Date: 03/23/99
Francisco D. Fernandez, Director
<PAGE>
/s/ Armando Lopez Date: 03/23/99
Armando Lopez, Director
/s/ German Malaret, Date: 03/23/99
German Malaret, Director
/s/ Hector M. Nevares Date: 03/23/99
Hector M. Nevares, Director
/s/ Antonio Pavia Villamil Date: 03/23/99
Antonio Pavia Villamil, Director
/s/ Jose Teixidor Date: 03/23/99
Jose Teixidor, Director
/s/ Angel L. Umpierre Date: 03/23/99
Angel L. Umpierre, Director
/s/ Luis M. Beauchamp Date: 03/23/99
Luis M. Beauchamp,
Senior Executive Vice President and
Chief Lending Officer
/s/ Laura Villarino Tur Date: 03/23/99
Laura Villarino Tur,
Senior Vice President and
Controller
</TABLE>
<PAGE>
First Federal Savings Bank
1987 - AMENDED EMPLOYEE STOCK OPTION PLAN
1. PURPOSE
This Stock Option Plan (the "Option Plan") is intended to encourage stock
ownership by officers and other employees of First Federal Savings Bank (the
"Bank") or of subsidiary corporations, as defined in Section 425(f) of the
Internal Revenue Code of 1986, as amended (the "Code"), or as may be defined
pursuant to regulations that may be approved under Section 44A of the Puerto
Rico Income Tax Act of 1954, as amended (the "Act"), of the Bank (the
"Subsidiaries"), so that the person to whom the option is granted (the
"Optionee") may acquire or increase his or her propietary interest in the
success of the Bank, and to encourage the Optionee to remain in the employ of
the Bank or of its Subsidiaries.
At the time this Option Plan was established, the Act, as amended up to
date, did not contain any specific provisions with respect to stock options. On
October 6, 1987, the Act was amended by Act No. 2 which, among other things,
added Section 44A to the Act to provide specific provisions with respect to the
Puerto Rico income taxation of certain stock option plans. The Option Plan is
being restated in order to comply with the requirements of said Section 44A of
the Act.
2. ADMINISTRATION
(a) The Option Plan shall be administered by a committee of not less than
three directors of the Bank, none of whom is an officer or other salaried
employee of the Bank. The members of this committee (the "Compensation
Committee") shall be appointed by the Board of Directors and shall be
"disinterested persons" within the meaning of Rule 16b-3(b), - 3(d)(3) and -
3(e) of the Securities Exchange Act of 1934 (the "Act"). No person shall serve
as a member of the Compensation Committee if such person is then eligible, or
has been eligible at any time during the prior twelve months, to receive stock,
stock options or stock appreciation rights under the Option Plan or any other
option, stock purchase or similar plan of the Bank or its Subsidiaries, except
that eligibility to participate in the Stock Option Plan for Non-Employee
Directors of the Bank shall not disqualify such person from serving on the
Compensation Committee. A majority vote of the members of the Compensation
Committee shall be required for all its actions.
(b) the Compensation Committee shall have the power, subject to, and within
the limits of, the express provisions of the Option Plan and in furtherance of
its purposes;
(i) To determine from time to time which of the eligible persons shall be
granted options under the Option Plan and the time or times when, and the number
of shares for which, an option or options shall be granted to such persons;
(ii) To prescribe the other terms and provisions (which need no be
identical) of each option granted under the Option Plan to eligible persons;
(iii) To construe and interpret the Option Plan and options granted under
it, and to establish, amend, and revoke rules and regulations for its
administration. The Compensation Committee, in the exercise of this power, may
correct any defect or supply any omission, or reconcile any inconsistency in the
Option Plan, or in any option agreement, in the manner and to the extent it
shall deem necessary or expedient to make the Option Plan fully effective. In
exercising this power the Compensation Committee may retain counsel at the
expense of the Bank. All decisions and determinations by the Compensation
Committee in exercising this power shall be final and binding upon the Bank and
the Optionee;
(iv) To determine the duration and purpose of leaves of absence which may
be granted to an Optionee without constituting a termination of his or her
employment for purpose of the Option Plan; and
(v) Generally, to exercise such powers and to perform such acts as are
deemed necessary or expedient to promote the best interests of the Bank with
respect to the Option Plan.
(c) In the case of options granted after October 6, 1987 (date of
enhancement of Section 44A of the Act), the aggregate fair market value of the
shares, determined as of the time the option is granted, with respect to which
stock options granted under all stock option plans of the Bank and its
subsidiaries corporations are exercisable for the first time by an employee
during any calendar year, shall not exceed $100,000.
With respect to options granted prior to October 7, 1987, the Compensation
Committe is authorized and empowered, with the written consent of the person to
whom such option were granted, to vary the terms of said options comply with the
requirements of the preceding paragraph, if such action is necessary in order
for the provisions of Section 44A nof the Act to apply to such options."
3. STOCK
(a) The stock subject to the options shall be shares of the Bank's
authorized but unissued common stock, par value $0.01 per share (the "Common
Stock"). The number of shares for which options may be granted hereunder, and
under any other stock option plan of the Bank, whether or not an "incentive" or
"qualified" option under the Code, excluding the shares involved in the
unexercised portion of any canceled, terminated or expired options, shall not
exceed an aggregate of twenty percent (20%) of the number of shares of Common
Stock outstanding as of January 21, 1987, date upon which conversion of the Bank
from mutual to the stock form and the completion of the subscription and public
offerings were effective
(b) Whenever any outstanding option under the Option Plan expires, is
canceled or is otherwise terminated, the shares of Common Stock allocable to the
unexercised portion of such option may again be the subject of options under the
Option Plan, except for options surrendered as provided by Section 7 hereof.
4. ELIGIBILITY
(a) The persons who shall be eligible to receive options hereunder shall be
officers and other employees (i.e. persons employed 1,000 or more hours per
year) of the Bank or its Subsidiaries. Subject to the following provisions, the
Compensation Committee may from time to time grant options to one or more
eligible persons. An optionee may hold more than one option.
(b) No person shall be eligible to receive any option if, at the date of
grant, such person beneficially, directly or indirectly, owns in excess of ten
percent (10%) of the outstanding Common Stock of the Bank, and no option will be
granted to any other person to the extent such option, if exercised, would
increase the ownership of such person to an amount in excess of ten percent
(10%).
5. TERMS OF THE OPTION AGREEMENTS
Each option agreement shall contain such provisions as the Compensation
Committee shall from time to time deem appropriate. Option Agreements need not
be identical, but each option agreement by appropriate language shall include
the substance of all the following provisions:
(a) An option shall expire on the date specified in the option
agreement, which date shall not be later than the tenth anniversary of the date
on which the option was granted. All options must be granted by the tenth
anniversary of the effective date of the Option Plan.
(b) The minimum number of shares with respect to which an option may be
exercised at any one time shall be 100 shares, unless the number purchased is
the total number at the time available for purchase under the option.
(c) Each option shall be exercisable in such installments (which need
not be equal) and at such times as designated by the Compensation Committee. To
the extent not exercised, installments shall accumulate and be exercisable, in
whole or in part, at any time after becoming exercisable, but not later than the
date the option expires. No option granted hereunder shall be exercisable unless
and until the Option Plan has been ratified by the stockholders as specified in
Section 15 hereof.
(d) The purchase price per share of Common Stock under each option shall be
not less than the fair market value of the Common Stock subject to the option on
the date the option is granted. For this purpose, the fair market value of the
Common Stock shall be determined by the Compensation Committee, however, that
(i) with respect to the grant of options on the effective date of the
Conversion, fair market value shall be the initial public offering price of the
Common Stock in the Conversion, (ii) if the Common Stock is admitted to
quotation on he National Association of Securities Dealers Automated Quotation
System (the "NASDAQ System") on the date the option is granted, fair market
value shall not be less than the average of the highest bid and lowest asked
prices of Common Stock on the NASDAQ System on such date, or (iii) if the Common
Stock is admitted to trading on a national securities exchange on the date the
option is granted, fair market value shall not be less than the last sale price
reported for the Common Stock on such exchange on such date or on the last date
preceding such date on which a sale was reported.
(e) The Optionee shall not be deemed to be the holder of, or to have any of
the rights of a holder with respect to, any shares of Common Stock subject to
such option unless and until the option shall have been exercised pursuant to
the terms thereof, the Bank shall have issued and delivered the shares to the
Optionee, and the Optionee's name shall have been entered as a stockholder of
record on the books of the Bank. Thereupon, the Optionee shall have full voting,
dividend and other ownership rights with respect to such shares of Common Stock.
(f) Except as provided in Section l0 hereof:
(i) All options granted pursuant to an Option Plan shall not
be transferable, except by will or the laws of descent and distribution, and
shall be exercisable during the Optionee's lifetime only by the Optionee; and
(ii) No assignment or transfer of an option, or of the rights
represented thereby, whether voluntary or involuntary, by operation of law or
otherwise, shall vest in the assignee or transferee any interest or right in the
option whatsoever, but immediately upon any attempt to assign or transfer an
option, the same shall terminate and be of no force or effect.
(g) The option shall be subject to any provision necessary to assure
compliance with the securities laws of the United States, the Commonwealth of
Puerto Rico, or any state.
(h) For purposes of the Option Plan, the term "change in control" shall
be deemed to have taken place if: (i) an acquirer is deemed to have acquired
control of the Bank under the provisions of Section 574.4(a) of the regulations
of the Federal Home Loan Bank Board (the "Bank Board"); or (ii) as the result
of, or in connection with, any cash tender or exchange offer, merger or other
business combination, sale of assets or contested election, or any combination
of the foregoing transactions, the persons who were directors of the Bank before
such transaction shall cease to constitute a majority of the Board of Directors
of the Bank or of any successor institution.
6. METHOD OF EXERCISE, PAYMENT OF PURCHASE PRICE
(a) An option may be exercised by the Optionee delivering to the
Compensation Committee on any business day a written notice specifying the
number of shares of Common Stock the Optionee desires to purchase (the
"Notice").
(b) Payment for the shares of Common Stock purchased pursuant to the
exercise of an option shall be either in (i) cash in an amount equal to the
purchase price per share multiplied by the number of shares specified in the
Notice (the "Total Option Price"), or (ii) in the discretion of the Compensation
Committee, shares of Common Stock of the Bank, valued at the then fair market
value, determined as provided in Section 5 hereof, equal to or less than the
total Option Price, plus cash in an amount equal to the amount, if any, by which
the Total Option Price exceeds the fair market value of the Common Stock.
7. STOCK APPRECIATION RIGHTS, RELEASE OF FINANCIAL INFORMATION
(a) The Compensation Committee may, but shall not be obligated to,
grant the stock appreciation rights provided in this Section 7 at any time
subsequent to the grant of an option under the Option Plan. Subsequent to such
grant of the stock appreciation rights, if any, the Compensation Committee may,
but shall not be obligated to, authorize, on such terms and conditions as it
deems appropriate in each case, the Bank to accept the surrender by the Optionee
of the right to exercise an option granted under the Option Plan or portion
thereof in consideration for payment by the Bank of an amount equal to the
excess of the fair market value of the shares of Common Stock subject to such
option or portion thereof surrendered over the Total Option Price of such
shares. Such payment, at the discretion of the Compensation Committee, may be
made in shares of Common Stock valued at the then fair market value thereof,
determined as provided in Section 5 hereof, or in cash, or partly in cash and
partly in shares of Common Stock.
(b) Any election by an Optionee to exercise the stock appreciation
rights provided in this Section shall be made during the period beginning on the
third business day following the release for publication of quarterly or annual
financial information and ending on the twelfth business day following such
date. This condition shall be deemed to be satisfied when the specified
financial data appears on or in a wire service, financial news service or
newspaper of general circulation or is otherwise first made publicly available.
No stock appreciation rights may be exercised within six months of the date it
is granted except that this limitation shall not apply in the event death or
disability of the Optionee occurs prior to the expiration of the six-month
period. For purpose of this Section, the stock appreciation rights shall be
deemed to have been granted as of the date specified by the Compensation
Committee.
(c) A copy of the Bank's annual report to stockholders shall be
delivered to each Optionee. Upon request, the Bank shall furnish each optionee a
copy of its most recent annual report on FDIC Form 10-K and each quarterly
report and current report filed under the Act or with the Bank Board since the
end of the Bank's prior fiscal year.
(d) Any option surrendered as provided in this Section 7 shall be
canceled by the Bank and the shares subject to the option shall not be eligible
for further grants under the Option Plan.
8. USE OF PROCEEDS FROM STOCK
Proceeds from the sale of Common Stock pursuant to options granted
under the Option Plan shall constitute general funds of the Bank.
9. ADJUSTMENTS UPON CHANGE IN CAPITALIZATION
a) If the shares of the Bank's Common Stock as a whole are increased,
decreased or changed into, or exchanged for, a different number or kind of
shares or securities of the Bank, whether through merger, consolidation,
reorganization, recapitalization, reclassification, stock dividend, stock split,
combination of shares, exchange of shares, change in corporate structure or the
like, an appropriate and proportionate adjustment shall be made in the number
and kinds of shares subject to the Option Plan and in the number, kinds and per
share exercise price of shares subject to unexercised options or portions
thereof granted prior to any such change. Any such adjustment in an outstanding
option, however, shall be made without change in the total price applicable to
the unexercised portion of the option but with a corresponding adjustment in the
price for each share of Common Stock covered by the option.
(b) Upon dissolution or liquidation of the Bank, or upon
reorganization, merger or consolidation in which the Bank is not the surviving
corporation, or upon the sale of substantially all of the property of the Bank
to another corporation, the Option Plan and the options issued thereunder shall
terminate unless provision is made in connection with such transaction for the
assumption of options therefore granted, or the substitution for such options of
new options of the successor employer corporation or a parent or subsidiary
thereof, with appropriate adjustment as to the number and kind of shares and the
per share exercise prices. In the event of such termination, all outstanding
options shall be exercisable in full at least 30 days prior to the termination
date whether or not otherwise exercisable during such period.
(c) Adjustments under this Section shall be made by the Compensation
Committee, whose determination as to what adjustments shall be made, and the
extent thereof, shall be conclusive. The Compensation Committee shall have the
discretion and power in any such event to determine and to make effective
provisions for the acceleration of the time during which the option may be
exercised, notwithstanding the provisions of the option setting forth the date
or dates on which all or any part of it may be exercised. No fractional shares
of Common Stock shall be issued under the Option Plan on account of any
adjustment specified above.
10. TERMINATION OF EMPLOYMENT OR SERVICE
(a) In the event of the death of an Optionee while in the employ of the
Bank:
(i) The options, whether or not exercisable at the time of the
death of the Optionee, may be exercised, as provided in Section 6 hereof, by the
estate of the Optionee or by a person who acquired the right to exercise such
option by bequest or inheritance from such Optionee, within one year after the
date of such death but not later that the date on which the option would
otherwise expire; or
(ii) The Compensation Committee may, but shall not be obligated to, grant
if not theretofore granted, the stock appreciation rights provided in Section 7
hereof and may, but shall not be obligated to, authorize, if not theretofore
authorized, the Bank to accept surrender of the right to exercise an option or
any portion thereof under Section 7 of this Option Plan by the estate of the
Optionee, or by a person who acquired the right to exercise such option by
bequest or inheritance from such Optionee, within one year after the date of
such death but no later than the date on which the option would otherwise
expire.
(b) If the employment of an Optionee is terminated by reason of disability,
as determined by the Compensation Committee, the options held by such Optionee
may be exercised, whether or not exercisable at the time of such termination of
employment, within one year after such termination but not later than the date
on which such options would otherwise expire.
(c) If the employment of the Optionee is terminated for any reason other
than death or disability, options held by such Optionee shall, to the extent not
theretofore exercised, be canceled upon such termination and shall not
thereafter be exercisable: provided, however, that an Optionee whose employment
is terminated by retirement in accordance with the Bank's normal retirement
policies as determined by the Compensation Committee, or who is voluntarily or
involuntarily terminated within one year after a change in control of the Bank,
as defined in Section 5 (h) hereof, shall be permitted to exercise such options,
whether or not exercisable at the time of such termination, within three months
after the date of such termination but not later than the date on which the
options would otherwise expire.
(d) Notwithstanding the provisions of subsections (a), (b) and (c)
above, no option granted hereunder shall be exercisable prior to stockholders
ratification, as provided in Section 15 hereof.
11. AMENDMENT OF THE OPTION PLAN
The Board of Directors at any time, and from time to time, may amend
the Option Plan subject to any required regulatory approval and subject to the
limitation that, except as provided in Section 9 hereof, no amendment shall be
effective unless approved by vote of a majority of the total votes cast by the
stockholders of the Bank at an annual or special meeting held within twelve
months before or after the date of such amendment's adoption where such
amendment will:
(a) Increase the number of shares of Common Stock as to which options may
be granted under the Option Plan; (b) Change in substances Section 4 hereof
relating to eligibility to participate in the Option Plan; (c) Change the
minimum purchase price; or (d) Increase the maximum term of options as provided
herein.
Except as provided in Section 9 hereof, rights and obligations under
any option granted before amendment of the Option Plan shall not be altered or
impaired by amendment of the Option Plan, except with the consent of the person
to whom the option was granted.
12. TERMINATION OR SUSPENSION OF THE OPTION PLAN
The Board of Directors at any time may terminate or suspend the Option
Plan. Unless sooner terminated, the Option Plan shall terminate on the tenth
anniversary of the effective date specified in Section 15 hereof, but such
termination shall not affect any option theretofore granted. An option may not
be granted while the Option Plan is suspended or after it is terminated.
<PAGE>
Rights and obligations under any option granted while the Option Plan
is in effect shall not be altered nor impaired by suspension or termination of
the Option Plan under this Section 12 except with the consent of the Optionee.
13. NON EXCLUSIVlTY OF THE PLAN
Neither the adoption of the Option Plan by the Board of Directors nor
the submission of the Plan to the stockholders of the Bank for approval shall be
construed as creating any limitations on the power of the Board of Directors to
adopt such other incentive arrangements as it may deem desirable, including,
without limitation, the granting of stock options otherwise than under the
Option Plan, and such arrangements may be either applicable generally or only in
specific cases.
14. GOVERNMENT AND OTHER REGULATIONS, GOVERNING LAW
(a) The obligation of the Bank to sell and deliver shares of Common
Stock under options granted under the Option Plan shall be subject to all
applicable laws, rules and regulations and the obtaining of all such approvals
by governmental agencies as may be deemed necessary or appropriate by the Board
of Directors of the Bank.
(b) The Option Plan shall be governed by federal law.
(c) The Option Plan is intended to comply with Rule 16b-3 under the Act.
Any provision inconsistent with such Rule shall be inoperative and shall not
affect the validity of the Option Plan.
(d) Reference herein to the Code shall be deemed to include reference to
comparable provisions of Puerto Rico law, if any.
15. EFFECTIVE DATE OF OPTION PLAN, STOCKHOLDER APPROVAL
The Option Plan shall be effective upon commencement of the public
offering in connection with the conversion of the Bank or, if no public offering
is held, upon consummation of the Conversion; provided, however, that the Option
Plan shall be subject to the approval of the stockholders of the Bank by vote of
a majority of the total votes cast by its stockholders at an annual or special
meeting held within twelve months of such effective date. No options granted
under the Option Plan prior to such stockholder approval may be exercised until
such approval has been obtained.
<PAGE>
FirstBank
1997 EMPLOYEE STOCK OPTION PLAN
1. PURPOSE
The purpose of this 1997 Stock Option Plan (the "Option Plan") is to further the
success of FirstBank Puerto Rico (The "Bank") and its Subsidiaries (the
"Subsidiaries") as defined under Section 1046 of the Puerto Rico Internal
Revenue Code of 1994, by making available Common Stock of the Bank for purchase
by key officer or employees of the Bank or its Subsidiaries and to give such
persons a proprietary interest in the continued growth and success of the Bank.
The Plan is also intended to encourage Optionees to remain in the employ of the
Bank and to assist the Board of Directors and Management in the attraction and
recruitment of qualified officers to serve the Bank and/or its Subsidiaries. The
Plan is intended to comply with Section 1046 the Puerto Rico Internal Revenue
Code (the "P. R. Code") and regulations promulgated thereunder.
2. ADMINISTRATION
(a) The Option Plan shall be administered by a committee of the Board
of Directors (the "Compensation Committee") which shall be composed of not less
than three directors none of whom is an officer or other salaried employee of
the Bank or of a Subsidiary of the Bank. The members of the Compensation
Committee shall be appointed by the Board of Directors and all shall be
"disinterested persons" within the meaning of Rule 16b-3(c)(2)(i) of the
Securities Exchange Act of 1934 (the "Act"). No person shall serve as a member
of the Compensation Committee if such person is then eligible, or has been
eligible at any time during the prior twelve months, to receive stock, stock
options or stock appreciation rights under the Option Plan or any other option,
stock purchase or similar plan of the Bank or its Subsidiaries. A majority vote
of the members of the Compensation Committee shall be required for all actions.
(b) the Compensation Committee shall have the power, subject to, and
within the limits of, the express provisions of the Option Plan, and in
furtherance of the purposes of such plan:
(i) To determine from time to time which eligible persons shall be granted
options under the Option Plan and the time or times, and the number of shares
for which, an option or options shall be granted to such persons:
(ii) To prescribe the other terms and provisions (which need no be
identical) of each option granted under the Option Plan to eligible persons:
(iii) To construe and interpret the Option Plan and options granted under
it, and to establish, amend, and revoke rules and regulations for its
administration. The Compensation Committee, in the exercise of its powers, may
correct any defect or supply any omissions, or reconcile any inconsistency in
the Option Plan, or in any option agreement in the manner and to the extent it
shall deem necessary or expedient to make the Option Plan fully effective. In
exercising this power the Compensation Committee may retain counsel at the
expense of the Bank. All decisions and determinations by the Compensation
Committee in exercising this power shall be final and binding upon the Bank and
the Optionee:
(iv) To determine the duration and purpose of leaves of absence which may
be to an optionee without constituting a termination of his or her employment
for purpose of the Option Plan; and
(v) Generally to exercise such powers and to perform such acts as are
deemed necessary or expedient to promote the best interest of the Bank with
respect to the Option Plan.
(c) Pursuant to Section 1046(c)(6) of the P.R. Code in the case of options
granted under this 1997 Plan, the aggregate fair market value of the shares,
determined as of the time the option is granted, with respect to which stock
options granted under all stock option plans of the Bank and its Subsidiaries
are exercisable for the first time by an employee during any calendar year shall
not exceed S100,000.
3. STOCK SUBJECT TO PLAN
(a) The stock subject to the options shall be shares of authorized and
unissued common stock, par value S1.00 per share (the "Common Stock"). The
number of shares for which options may be granted hereunder shall be 1,449,352
of FirstBank Common Stock, which amount represents the number of remaining
shares that could have been granted under the Bank's prior plan at the time of
its termination. Such number shall be subject to adjustments as provided in
Section 9 hereof.
(b) Whenever any outstanding option under the Option Plan expires, is
canceled or is otherwise terminated, the shares of Common Stock allocable to the
unexercised portion of such option may again be subject of option under the
Option Plan, except for options surrendered as provided by Section 7 hereof.
4. ELIGIBILITY
(a) The persons who shall be eligible to receive options hereunder
shall be officers and other employees (i.e. persons employed 1,000 or more hours
per year) of the Bank or its Subsidiaries. Subject to the following provisions,
the Compensation Committee may from time to time grant options to one or more
eligible persons. An Optionee may hold more than one option.
(b) No person shall be eligible to receive any option if at the date of
grant, such person beneficially, directly or indirectly, owns in excess of ten
percent (10%) of the outstanding common stock of the Bank, and no option will be
granted to any other person to the extent such option, if exercised, would
increase such persons ownership to an amount in excess of ten percent (10%).
(c) Pursuant to Section 12 of the Puerto Rico Banking Law (7 LPRA 39),
no person may exercise an option to the extent that as a result of such exercise
such person would acquire beneficial ownership of five percent (5%) or more of
the then issued and outstanding Common Stock of the Bank, unless such person has
previously obtained the written approval of the Commissioner of Financial
institutions of P.R.
(d) The aggregate fair market value of the shares, determined as of the
time the option is granted, with respect to which the stock options, as defined
by Section 1046 of Puerto Rico Code, are exercisable for the first time in any
calendar year, under this plan or any other plan of the Bank, shall not exceed
S100,000.
5. TERMS OF THE OPTION AGREEMENTS
Each option agreement shall contain such provisions as the Compensation
Committee shall from time to time deem appropriate. Option Agreements need not
be identical, but each option agreement by appropriate language shall include
the substance of all the following provisions:
(a) An option shall expire on the date specified in the option
agreement, which date shall not be later than the tenth anniversary of the date
on which the option was granted. All options must be granted by the tenth
anniversary of the effective date of the Option Plan.
(b) The minimum number of shares with respect to which an option may be
exercised at any one time shall be 100 shares, unless the number purchased is
the total number available for purchase under the option at the time.
(c) Each option shall be exercisable in such installments (which need
not be equal) and at such times as designated by the Compensation Committee. To
the extent not exercised, installments shall accumulate and be exercisable, in
whole or in part. at any time after becoming exercisable, but not later than the
date of expiration of the option. No option granted hereunder shall be
exercisable unless and until the Option Plan has been ratified by the
stockholders as specified in Section 15 hereof.
(d) The purchase price of per share of Common Stock under each option
shall not be less than the fair market value of the Common Stock subject to the
option on the date the option is granted as determined by the Compensation
Committee. The fair market value shall not be less than the last sale price
reported for the Common Stock on the New York Stock Exchange on the date of
grant or on the last date preceding such date on which the sale was reported.
(e) The Optionee shall not be deemed to be the holder of, or to have
any rights of a holder with respect to, any shares of Common Stock subject to
such option unless and until the option shall have been exercised pursuant to
the terms thereof, the Bank shall have issued and delivered the shares to the
Optionee, and the Optionee's name shall have been entered as a stockholder of
record on the books of the Bank. Thereupon, the Optionee shall have full voting,
dividend and other ownership rights with respect to such shares of Common Stock.
(f) Except as provided in Section l0 hereof:
(i) All options granted pursuant to an Option Plan shall not
be transferable, except by will or the laws of descent and distribution. and
shall be exercisable during the Optionee's lifetime only by the Optionee; and
(ii) No assignment or transfer of an option, or of the rights
represented thereby, whether voluntary or involuntary, by operation of law or
otherwise, shall vest in the assignee or transferee any interest or right in the
option whatsoever, but immediately upon any attempt to assign or transfer an
option, the same shall terminate and be of no force or effect.
(g) The option shall be subject to any provision necessary to assure
compliance with the securities laws of the United States and of Puerto Rico, or
of any other jurisdiction in which the Bank or its Subsidiaries may have
qualifying employees.
(h) For purposes of the Option Plan, the term "change in control" shall
be deemed to have taken place if: (1) an acquirer is deemed to have acquired
control of the under provisions of Section 1817 of the Federal Deposit Insurance
Act (12 USC 1817[i]); or as a result of, or in connection with, any cash tender
or exchange offer, merger or other business combination, sale of assets or
contested election, or any combination of the foregoing transactions, the
persons who were directors of the Bank before such transaction shall cease to
constitute a majority of the Board of Directors of the Bank or of any successor
Institution.
6. METHOD OF EXERCISE, PAYMENT OF PURCHASE PRICE
(a) An option may be exercised by the Optionee by delivering to the
Compensation Committee on any business day a written notice specifying the
numbers of shares of Common Stock the Optionee desires to purchase (the
"Notice").
(b) Payment for the shares of common stock purchased pursuant to the
exercise of an option shall be either in (1) cash in an amount equal to the
purchase price per share multiplied by the number of shares specified in the
Notice (the "Total Option Price"), or in the discretion of the Compensation
Committee, shares of common stock of the Bank valued at the then fair market
value, determined as provided in Section 5 hereof, equal to or less than the
total Option Price, plus cash in an amount equal to the amount, if any, by which
the Total Option Price exceeds the fair market value of the Common Stock.
7. STOCK APPRECIATION RIGHTS, RELEASE OF FINANCIAL INFORMATION
(a) The Compensation Committee may, but shall not be obligated to,
grant the stock appreciation rights provided in this Section 7 at any time
subsequent to the grant of an option under the Option Plan. Subsequent to such
grant of the stock appreciation rights, if any, the Compensation Committee may,
but shall not be obligated to, authorize, on such terms and conditions as it
deems appropriate in each case, the Bank to accept surrender by the Optionee of
the right to exercise an option granted under the Option Plan or portion thereof
in consideration for payment by the Bank of an amount equal to the excess of the
fair market value of the shares of Common Stock subject to such option or
portion thereof surrendered over the Total Option Price of such shares. Such
payment, at the sole discretion of the Compensation Committee, may be made in
shares of Common Stock valued at the fair market value thereof, determined as
provided in Section 5 hereof, or in cash, or partly in cash and partly in shares
of Common Stock.
(b) Any election by an Optionee to exercise the stock appreciation
rights provided in this Section shall by made during the period beginning on the
third business day following the release for publication of quarterly or annual
financial information and ending on the twelfth business day following such
date. This condition shall be deemed to be satisfied when the specified
financial data appears on or in a wire service, financial news service or
newspaper of general circulation or is otherwise first made publicly available.
No stock appreciation rights may be exercised within six months of the date it
is granted except that this limitation shall not apply in the event death or
disability of the Optionee occurs prior to the expiration of the six month
period. For purpose of this Section, the stock appreciation rights shall be
deemed to have been granted as of the date specified by the Compensation
Committee.
(c) A copy of the Bank's Annual Report to Stockholders shall be
delivered to each Optionee. Upon request, the Bank shall furnish each optionee a
copy of its most recent annual report on FDIC Form F-2 and each quarterly
reports filed by the Bank under FDIC law.
(d) Any option surrendered as provided in this Section 7 shall be
canceled by the Bank and the shares subject to the option shall not be eligible
for further grants under the Option Plan.
8. USE OF PROCEEDS FROM STOCK
Proceeds from the sale of Common Stock pursuant to options granted
under the Option Plan shall constitute general funds of the Bank.
9. ADJUSTMENTS UPON CHANGE IN CAPITALIZATION
a) If the shares of the Bank's Common Stock as a whole are increased,
decreased or changed into, or exchanged for, a different number or kind of
shares or securities of the Bank, whether through merger, consolidation,
reorganization, recapitalization, reclassification, Stock dividend, stock split,
combination of shares, exchange of shares, change in corporate structure or the
like, an appropriate and proportionate adjustment shall be made in the number
and kinds of share subject to the Plan and in the number, kinds and per share
exercise price of shares subject to unexercised options or portions thereof
granted prior to any such change. Any such adjustment in an outstanding option,
however, shall be made without change in the total price applicable to the
unexercised portion of the option but with corresponding adjustment in the price
of each share of Common Stock covered by the option.
(b) Upon dissolution or liquidation of the Bank, or upon
reorganization, merger or consolidation in which the Bank is not the surviving
corporation, or upon the sale of substantially all of the property of the Bank
to another corporation, the Option Plan and the options issued thereunder shall
terminate unless provision is made in connection with such transaction for the
assumption of options therefore granted, or the substitution for such options of
new number and kinds of shares and the per share exercise prices. In the event
of such termination, all outstanding options shall be exercisable in full at
least 30 days prior to the termination date whether or not otherwise exercisable
during such period.
(c) Adjustments under this Section shall be made by the Compensation
Committee, whose determination as to what adjustments shall be made, and the
extent thereof, shall be conclusive. The Compensation Committee shall have the
discretion and power in any such event to determine and to make effective
provisions for the acceleration of the time during which the option may be
exercised, notwithstanding the provisions of the option setting forth the date
or dates which all or any part of it may be exercised. No fractional shares of
Common Stock shall be issued under the Option Plan on account of any adjustment
specified above.
10. TERMINATION OF EMPLOYMENT OR SERVICE
(a) In the event of the death of an Optionee while in the employ of the
Bank:
(i) The options. whether or not exercisable at the time of the
death of the Optionee, may be exercised, as provided in Section 6 hereof, by the
estate of the Optionee or by any person who acquired the right to exercise such
option by bequest or inheritance from such Optionee, within one year after the
date of such death but not later that the date on which the option would
otherwise expire: or
(ii) The Compensation Committee may, but shall not be
obligated to, grant if not theretofor granted, the stock appreciation rights
provided in Section 7 hereof and may, but shall not be obligated to, authorize,
if not theretofor authorized, the Bank to accept surrender of the right to
exercise an option or any portion thereof under Section 7 of this Option Plan by
the estate of the Optionee, or by a person who acquired the right to exercise
such option by bequest or inheritance from such Optionee, within one year after
the date of such death but no later than the date on which the option would
otherwise expire.
(b) If the employment of an Optionee is terminated by reason of
disability, as determined by the Compensation Committee, the options held by
such Optionee may be exercised, whether or not exercisable at the time of such
termination of employment, within one year after such termination but not later
than the date on which such options would otherwise expire.
(c) If the employment of the Optionee is terminated for any reason
other than death or disability, options held by such Optionee shall, to the
extent not theretofor exercised, be canceled upon such termination and shall not
thereafter be exercisable: provided, however, that an Optionee whose employment
is terminated by retirement in accordance with the Bank's normal retirement
policies. as determined by the Compensation Committee, or who is voluntarily or
involuntarily terminated within one year after a change in control of the Bank,
as defined in Section 5 (h) hereof, shall be permitted to exercise such options,
whether or not exercisable at the time of such termination, within three months
after the date of such termination but not later than the date on which the
options would otherwise expire.
(d) Notwithstanding the provisions of subsections (a), (b) and (c)
above, no option granted hereunder shall be exercisable prior to ratification of
the Plan by the stockholders, as provided in Section 15 hereof.
11. AMENDMENT OF THE OPTION PLAN
The Board of Directors at any time, and from time to time, may amend
the Option Plan subject to any required regulatory approval and subject to the
limitation that, except as provided in Section 9 hereof, no amendment shall be
effective unless approved by vote of a majority of the total votes cast by the
stockholders of the Bank at an annual or special meeting held within twelve
months before or after the date of such amendment's adoption where such
amendment will:
(a) Increase the number of shares of Common Stock as to which options
may be granted under the Option Plan; (b Change in substance Section 4
hereof relating to eligibility to participate in the Option Plan; (c)
Change the minimum purchase price; or (d) Increase the maximum term of
options as provided herein.
Except as provided in Section 9 hereof, rights and obligations under
any option granted before amendment of the Option Plan shall not be altered or
impaired by amendment of the Option Plan, except with the consent of the person
to whom the option was granted.
12. TERMINATION OR SUSPENSION OF THE OPTION PLAN
The Board of Directors at any time may terminate or suspend the Option
Plan. Unless sooner terminated, the Option Plan shall terminate on the tenth
anniversary of the effective date specified in Section 5 hereof, but such
termination shall not affect any option theretofor granted. An option may not be
granted while the Option Plan is suspended or after it is terminated.
Rights and obligations under any option granted while the Option Plan
is in effect shall not be altered nor impaired by suspension or termination of
the Option Plan under this Section 12 except with the consent of the Optionee.
13. NON EXCLUSIVlTY OF THE PLAN
Neither the adoption of the Option Plan by the Board of Directors nor
the submission of the Plan to the stockholders of the Bank for approval shall be
construed as creating any limitations on the power of the Board of Directors to
adopt such other incentive arrangements as it may deem desirable, including,
without limitation, the granting of stock options otherwise than under the
Option Plan, and such arrangements may be either applicable generally or only in
specific cases.
14. GOVERNMENT AND OTHER REGULATIONS, GOVERNING LAW
(a) The obligation of the Bank to sell and deliver shares of Common
Stock under options granted under the Option Plan shall be subject to all
applicable laws, rules and regulations and the obtaining of all such approvals
by governmental agencies as may be deemed necessary or appropriate by the Board
of Directors of the Bank.
(b) The Option Plan shall be governed by the laws of Puerto Rico and
any applicable federal law and regulations.
(c) The Option Plan is intended to comply with Rule 16b-3 under the
Act. Any provision inconsistent with such Rule shall be inoperative and shall
not affect the validity of the Option Plan.
15. EFFECTIVE DATE OF OPTION PLAN, STOCKHOLDER APPROVAL
The Option Plan shall be effective as of January 21, 1997, the date of
termination of the 1987 Employee Stock Option Plan, provided, however. that the
Option Plan shall be subject to the approval of the stockholders of the Bank by
vote of a majority of the total votes cast by its stockholders at an annual or
special meeting held within twelve months of such effective date. No options
granted under the Option Plan prior to such stockholder approval may be
exercised until such approval has been obtained.
<PAGE>
EMPLOYMENT AGREEMENT
AGREEMENT, dated as of May 14, 1998, by and between FIRSTBANK PUERTO
RICO (the "Bank") and Angel Alvarez Perez (the "Executive").
WHEREAS, the Bank wishes to retain the services of the Executive and
the retention of the Executive's services for and on behalf of the Bank is of
material importance to the preservation and enhancement of the value of the
Bank's business;
WHEREAS, the Board of Directors of the Bank has approved and authorized
the entry into this Agreement with the Executive to take effect immediately upon
execution of the same;
WHEREAS , the parties desire to enter into this Agreement setting forth
the terms and conditions of the employment relationship of the Bank and the
Executive;
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements herein, the parties hereto agree as follows:
1. Employment. The Bank agrees to continue to employ the Executive and
the Executive agrees to continue in the employment of the Bank for the period
stated in Paragraph 4 hereof and upon the other terms and conditions herein
provided.
2. Position and Responsibilities. The Executive is employed as
President and Chief Executive Officer, and shall carry out and render to the
Bank such services as are customarily performed by persons situated in a similar
executive and professional capacity. The Executive shall also perform such other
related duties as he may from time to time be reasonably directed, including,
but not limited to performing duties for the Bank or for any of its present or
future subsidiaries. The Executive shall report to the Board of Directors of the
Bank.
3. Duties. During the period of employment hereunder, and except for
illness, vacation periods, and reasonable leaves of absence, the Executive shall
devote his business time, attention, skill, and efforts to the faithful
performance of his duties hereunder as is customary for an executive holding a
similar position in a financial institution of comparable size.
The Executive agrees that during the term of his employment
hereunder, except with the express consent of the Board of Directors he will
not, directly or indirectly, engage or participate, become director of, or
render advisory or other services for, or in connection with, or become
interested in, or make any financial investment in any firm, corporation,
business entity or business enterprise competitive with or to any business of
the Bank; provided, however, that the Executive shall not thereby be precluded
or prohibited from owning passive investments, including investments in the
securities of other financial institutions, so long as such ownership does not
require him to devote substantial time to management or control of the business
or activities in which he has invested.
4. Term. The initial term of employment under this Agreement shall be
for a period of four (4) years, commencing on the date hereof and terminating
May 14, 2002. On each anniversary of the date of commencement of this Agreement,
the term of employment hereunder shall automatically be extended for an
additional one (1) year period beyond the then effective expiration date, unless
either party receives written notice, not less than 90 days prior to the
anniversary date, advising the other party that this Agreement shall not be
further extended. Any such written notice shall not affect any prior extensions
of the term of employment hereunder.
5. Standards. The Executive shall perform his duties and
responsibilities under this Agreement in accordance with such reasonable
standards as are established from time to time by the Board of Directors and/or
management of the Bank. The reasonableness of such standards shall be measured
against standards for executive performance generally prevailing in the banking
industry.
Notwithstanding anything to the contrary, nothing in this
Agreement will be interpreted in any manner which would tend to limit or
interfere with the authority or oversight duties and discretion of the Board of
Directors to establish adequate guidelines for the effective management of the
Bank.
6. Compensation and Reimbursement of Expenses.
a) Compensation
The Bank agrees to pay the Executive during the term of this Agreement a
base salary of not less than $550,000 per year. The performance of the Executive
shall be reviewed annually by the Board of Directors and the salary provided
herein may be increased, but not decreased, in accordance with the
recommendation of the Compensation Committee. The salary provided herein shall
not be paid less frequently than monthly.
b) Performance Bonus
In addition to the salary set forth above, the performance of the Executive
and of the Bank during each year of employment shall be evaluated on the basis
of the Bank's achievement of the predetermined business objectives contained in
the Bank's annual business plan. The contribution of the Executive to the
achievement of the Bank's annual business objectives and his performance in such
other functions as may be reasonably put under his charge, will be evaluated by
the President and Chief Executive Officer who may recommend to the Compensation
Committee payment of a performance bonus in an amount which the Compensation
Committee may determine at its discretion.
c) Stock Options
The Executive will be entitled to participate in and receive the benefits
of any stock option, profit sharing, or other plans, benefits and privileges
given to employees and executives of the Bank or its subsidiaries and affiliates
which now exist or may come into existence hereafter, to the extent commensurate
with his then duties and responsibilities, as fixed by the Compensation
Committee and approved by the Board of Directors. The terms and conditions of
such stock options will be within the parameters set forth in the employee stock
option plan of the Bank or other similar plan under which a benefit or privilege
is made available.
d) Automobile Expenses.
(i) The Bank shall provide the Executive with a company owned automobile.
Such automobile will be furnished in accordance with existing executive
automobile policy as approved by the Board of Directors. All expenses, including
but not limited to insurance, maintenance, repairs, fuel, and lubrication
services, shall be provided by the Bank.
(ii) Monthly or not more than thirty (30) days after the expenses are
incurred, the Bank shall pay or reimburse the Executive for any gasoline, oil
and maintenance or repair expenses which the Executive incurs directly in the
operation of the automobile provided hereunder.
e) Reimbursement of Expenses.
Not less frequently than monthly, the Bank shall pay or reimburse the
Executive for all reasonable travel and other expenses incurred by the Executive
in the performance of his duties under this Agreement.
f) Office.
The Bank shall furnish the Executive with a private office, a private
secretary and such other assistance and accommodations as shall be suitable to
the character of the Executive's position with the Bank and adequate for the
performance of his duties hereunder.
7. Participation in Benefit Plans. The payments and benefits provided
hereunder are in addition to any payment and benefits to which Executive may be
or may become entitled under any other present or future group employee benefit
plan or program of the Bank for which executives are or shall become eligible,
and the Executive shall be eligible to receive all benefits and entitlements for
which the executives are eligible under every such plan or program.
8. Voluntary Absences; Vacations and Sick Leave. The Executive shall be
entitled, without loss of pay, to absent himself voluntarily for reasonable
periods of time from the performance of his duties and responsibilities under
this Agreement. All such voluntary absences shall count either as paid vacation
time or sick leave, unless otherwise provided by the Board of Directors. The
Executive shall be entitled to an annual paid vacation of 21 working days per
year, or such longer periods as the Board of Directors may approve, which
vacations shall be scheduled by the Executive, taking into account the needs of
the Bank. The Executive may accumulate unused paid vacation time from one
calendar year to the next; provided, that such accumulation shall not exceed 36
working days of unused vacation time from prior years. The Executive shall be
entitled to up to 15 non-cumulative working days of paid sick leave per year or
such longer period as the Board of Directors may approve.
9. Benefits Payable Upon Disability or Death. The Bank shall, at all
times, maintain in effect disability and death benefits insurance for the
benefit of the Executive in an amount at least equal to that maintained for
executives of similar rank and which will not be less than that maintained by
the Bank for all officers and employees. Provided that the Bank may increase but
never decrease the benefits which the Executive and/or the Executive's heirs
would be entitled to thereunder.
10. Disability.
(a) If the Executive shall become disabled or incapacitated for a number of
consecutive days exceeding those to which he is entitled as sick-leave, and it
is determined that he will continue to temporarily be unable to perform his
duties under this Agreement, he shall nevertheless continue to receive 60% of
his compensation, exclusive of any benefits which may be in effect for Bank
employees under Paragraph 7 hereof until such time as he may rejoin active
employment. Upon returning to active duty, the Executive's full compensation as
set forth in this Agreement shall be reinstated. In the event that the Executive
returns to active employment on other than a full-time basis, then his
compensation (as set forth in Paragraph 6 of this Agreement) shall be reduced in
proportion to the time spent in said employment.
(b) For purposes of this Agreement, the Executive shall be deemed to be
permanently disabled or incapacitated if the Executive, due to physical or
mental illness, shall have been absent from his duties with the Bank on a
full-time basis for three consecutive months. In such case, the Board of
Directors may remove the Executive from employment and may employ another
executive in such capacity; provided, that, if the Executive shall not agree
with a determination to remove him/her because of disability or incapacity, the
question of the Executive's ability to continue in active employment shall be
submitted to an impartial and reputable physician selected by the parties hereto
and such physician's determination on the question of disability or incapacity
shall be binding. If it is determined that the Executive is permanently
disabled, he shall nevertheless continue to receive 60% of his compensation for
the remaining term of this Agreement.
(c) There shall be deducted from the amounts paid to the Executive
hereunder during any period of disability or incapacitation as described herein,
any amounts actually paid to the Executive pursuant to any disability insurance
or other similar such program, as provided in Paragraph 9 hereof, which the Bank
has instituted or may institute on behalf of its employees for the purpose of
compensating the Executive in the event of disability.
11. Termination of Employment.
(a) Without cause. The Board of Directors may, without cause, terminate
this Agreement at any time, by giving 90 days written notice to the Executive.
In such event, the Executive, if requested by the Board of Directors, shall
continue to render his services, and shall be paid his regular salary up to the
date of termination. In addition, the Executive shall be paid from the date of
termination a severance payment of four (4) years base salary (less all amounts
required to be withheld and deducted), such payment to be made in substantially
equal semimonthly installments on the fifteenth and last days of each month, or
if these days are nonbusiness days, the immediately preceding business day,
commencing with the month in which the date of termination occurs and continuing
for 24 consecutive semimonthly payment dates.
The Executive may, without cause, terminate the Agreement by giving 90 days
written notice to the Board of Directors. In such event, the Executive shall
continue to render his services and shall be paid his regular salary up to the
date of termination, but shall not receive any severance payment. In the event
that the Executive terminates his agreement without cause, the Bank shall be
entitled to enjoin the employment of the Executive as an officer or employee of
any significant competitor of the Bank for a period of one year. The term
"significant competitor" shall mean any bank, savings bank or savings and loan
association which at the date of its employment of the Executive has total
assets of one billion dollars or more and a home or branch office in any city in
Puerto Rico. In consideration of the Executive entering into this
non-competition agreement, he shall receive an amount of $50,000 which amount is
for purposes of this Agreement included as part of the Executive's base salary.
(b) With Cause. The Board of Directors may, at any time, terminate this
Agreement for cause. In such event, the Executive shall not be entitled to
receive any further compensation from the date of notice of termination. For the
purpose of this Agreement, "termination for cause" shall include any act or
omission on the part of the Executive which involves personal dishonesty,
willful misconduct, breach of fiduciary duty, a material violation of any law,
rule or regulation relating to the banking industry or a material breach of any
provision of this Agreement, such as the willful and continued failure of the
Executive to perform the duties herein set forth. No act or failure to act on
the Executive's part shall be considered "willful" unless done, or omitted to be
done, by him/her not in good faith and without reasonable belief that his action
or omission was in the best interest of the Bank. For purposes of this
paragraph, any act or omission to act on the part of the Executive in reliance
upon an opinion of counsel to the Bank or to the Executive shall not be deemed
to be willful or without reasonable belief that the act or omission to act was
in the best interest of the Bank.
The Executive may, with cause, terminate this Agreement. For purposes of
this paragraph, termination with cause shall mean a failure of the Bank to
comply with any material provision of this Agreement, which failure has not been
cured within 15 days of receipt of a written notice by the Executive of such
noncompliance by the Bank.
(c) If the Executive is suspended and/or prohibited from participating in
the conduct of the Bank's affairs by a notice or order served under Sections
8(e)(3), (e)(4) or (g)(1) of the Federal Deposit Insurance Act [12 USC
1818(e)(3), (e)(4) and (g)(1)], or any other similar provision of state or
federal law now in place or enacted in future, the Bank's obligations under this
Agreement shall be suspended as of the date of service, unless such prohibition
and/or suspension is stayed by appropriate proceedings. If after a hearing is
held and upon judicial review, the notice or order suspending and/or prohibiting
the Executive from participating in the affairs of the Bank is confirmed, then
this Agreement shall be terminated with cause. If the charges in the notice or
order are dismissed, the Bank shall: (i) pay the Executive all the compensation
withheld while the contractual obligations were suspended and (ii) reinstate, in
whole or in part, any of the obligations which were suspended.
(d) If the Bank is in default, as defined to mean an adjudication or other
official determination of a court of competent jurisdiction, the appropriate
Federal banking agency or other public authority pursuant to which a
conservator, receiver or other legal custodian is appointed for the Bank for the
purpose of liquidation, all obligations under this Agreement shall terminate as
of the date of default, but rights of the Executive to compensation earned as of
the date of termination shall not be affected.
(e) In the event that the Executive is terminated or he terminates this
Agreement, in a manner which violates the provisions of this Paragraph 11, as
determined by the arbitration procedure provided in Paragraph 21, the Executive
or the Bank, as the case may be, shall be entitled to reimbursement for all
reasonable costs, including attorney's fees, incurred by the Executive or the
Bank, as the case may be, in challenging such termination
12. Change in Control.
(a) If during the term of this Agreement there is a "change in control" of
the Bank, as such term is defined in sub-paragraph (c) hereunder, the Executive
shall be entitled to receive from the Bank a severance payment in consideration
of having bound himself to employment by the Bank and having foregone other
business or professional opportunities, actual or potential. The severance
payment shall be a lump sum cash payment equal to four (4) times the Executive's
total compensation, as the term is defined in Section 12(b) of this Agreement,
to be made on or before the fifth day following the date on which the change in
control occurs.
(b) For purposes of this section, the term total compensation shall mean
the Executive's base salary plus the highest cash Performance Bonus paid to the
Executive in any of the four (4) fiscal years prior to the date of the change in
control, and the value of any other benefits provided to the Executive during
the year in which the change in control occurs which are listed and attached
hereto as Exhibit A, as it may be amended from time to time.
(c) The term "change in control" shall be deemed to have taken place if:
(i) a third person, including a "group" as defined in Section 13(d)(3) of the
Securities Exchange Act of 1934, becomes the beneficial owner of shares of the
Bank having 25% or more of the total number of votes which may be cast for the
election of directors of the Bank or which, by cumulative voting, if permitted
by the Banks charter or bylaws, would enable such third person to elect 25% or
more of the directors of the Bank; or (ii) as the result of, or in connection
with, any cash tender or exchange offer, merger or any other business
combination, sales of assets or contested election, or any combination of the
foregoing transactions, the persons who were directors of the Bank before such
transaction shall cease to constitute a majority of the Board of the Bank or any
successor institution. Notwithstanding the provisions of this paragraph, a
change in control of the Bank shall not be deemed to have occurred in the event
the Bank undertakes a reorganization to form a bank holding company.
(d) Any payments made to the Executive pursuant to this Agreement are
subject to and conditioned upon their compliance with 12 USC 1828(k) and any
regulations promulgated thereunder. The Bank shall in good faith seek to obtain,
if necessary or required, any consents or approvals from the FDIC or any other
applicable regulatory agency and any successors thereto with respect to any
payments to be made or any benefits to be provided to the Executive pursuant to
the terms of this Agreement.
13. Confidentiality; Injunctive Relief. Recognizing that the knowledge
and information about, or relationships with, the business associates,
customers, clients, and agents of the Bank and its affiliated companies and the
business methods, systems, plans, and policies of the Bank and of its affiliated
companies which Executive has heretofore and shall hereafter receive, obtain, or
establish as an employee of the Bank or otherwise are valuable and unique assets
of the Bank, the Executive agrees that, during the continuance of this Agreement
and thereafter, he shall not (otherwise than pursuant to his duties hereunder)
disclose without the written consent of the Bank, any material or substantial,
confidential, or proprietary know-how, data, or information pertaining to the
Bank, or its business, personnel, or plans, to any person, firm, corporation, or
other entity, for any reason or purpose whatsoever. Executive acknowledges and
agrees that all memoranda, notes, records, and other documents made or compiled
by Executive or made available to Executive concerning the Bank's business shall
be the Bank's exclusive property and shall be delivered by Executive to the Bank
upon expiration or termination of this Agreement or at any other time upon the
request of the Company.
The provisions of this Paragraph 13 shall survive the
expiration or termination of this Agreement or any part thereof, without regard
to the reason therefor.
Executive hereby acknowledges that the services to be rendered
by him/her are of special, unique, and extraordinary character and, in
connection with such services, he will have access to confidential information
concerning the Bank's business. By reason of this, Executive consents and agrees
that if he violates any of the provisions of this Agreement with respect to
confidentiality, the Bank would sustain irreparable harm and, therefore, in
addition to any other remedies which the Bank may have under this Agreement or
otherwise, the Bank will be entitled to an injunction to be issued by any court
of competent jurisdiction restraining the Executive from committing or
continuing any such violation of this Agreement. The term "Confidential
Information" means: (1) proprietary information of the Bank; (2) information
marked or designated by the Bank as confidential; (3) information, whether or
not in written form and whether or not designated as confidential, which is
known to the Executive as treated by the Bank as confidential; and (4)
information provided to the Bank by third parties which the Bank is obligated to
keep confidential, specifically including Bank customer lists and information.
Confidential Information does not include any information now or hereafter
voluntarily disseminated by the Bank to the public, or which otherwise becomes
part of the public domain through lawful means.
14. No assignments. This Agreement is personal to each of the parties
hereto. Neither party may assign or delegate any of his or its rights or
obligations hereunder without first obtaining the written consent of the other
party. However, in the event of the death of the Executive all his rights to
receive payments hereunder shall become rights of his estate.
15. Benefits. Any benefits due or provided hereunder to the Executive shall
be in addition to, and not in substitution of, any benefit to which the
Executive is otherwise entitled to without regard to the Agreement.
16. Mitigation. The Executive shall not be obligated to seek other
employment in mitigation of the amounts payable or arrangements made under any
provision of this Agreement, and the obtaining of any such other employment
shall in no event effect any reduction of the Bank's obligation to make the
payments and arrangements required to be made under this Agreement.
17. Notices. All notices required by this Agreement to be given by one
party to the other shall be in writing and shall be deemed to have been
delivered either:
(a) When personally delivered to the Office of the Secretary of the Bank at
his regular corporate office, or the Executive in person; or
(b) Five days after depositing such notice in the United States mails,
certified mail with return receipt requested and postage prepaid, to: (i) the
Bank: c/o Office of the Secretary of the Bank FirstBank Puerto Rico PO Box 9146
Santurce, PR 00908-0146
(ii) the Executive:
Angel Alvarez Perez
S-9 Calle Jardin
Garden Hills
Guaynabo, PR 00969
or to such other address as either party may designate to the other by notice in
writing in accordance with the terms hereof.
18. Amendments or Additions; Action by Board of Directors. No amendments or
additions to this Agreement shall be binding unless in writing and signed by
both parties. The prior approval by a two-thirds affirmative vote of the full
Board of Directors of the Bank shall be required in order for the Bank to
authorize any amendments or additions to this Agreement, to give any consents or
waivers of provisions of this Agreement, or to take any other action under this
Agreement including any termination of the employment of the Executive with or
without cause under Paragraph 10 hereof.
19. Section Headings. The Paragraph headings used in this Agreement are
included solely for convenience and shall not affect, or be used in connection
with, the interpretation of this Agreement.
20. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
21. Governing Law. This Agreement shall be governed by the laws of the
Commonwealth of Puerto Rico. Venue for the litigation of any and all matters
arising under or in connection with this Agreement shall be in the Superior
Court for the Commonwealth of Puerto Rico, in San Juan, in the case of state
court jurisdiction, when clause 21 of this Agreement is not legally applicable.
22. Arbitration. Any controversy as to the interpretation of this
contract must be submitted before three arbitrators to be appointed by the
American Arbitration Association ("AAA"). The rules and regulations of the AAA
shall govern the procedures of said arbitration. The award of a majority of
arbitrators shall be binding and final on the parties.
FIRSTBANK PUERTO RICO
/S/ German Malaret
---------------------------
Chairman
ATTEST:/s/ Antonio Escriba
- - ---------------------------
EXECUTIVE:/s/Angel Alvarez
-----------------------------
<PAGE>
EMPLOYMENT AGREEMENT
AGREEMENT, dated as of May 14, 1998, by and between FIRSTBANK PUERTO
RICO (the "Bank") and Annie Astor de Carbonell (the "Executive").
WHEREAS, the Bank wishes to retain the services of the Executive and
the retention of the Executive's services for and on behalf of the Bank is of
material importance to the preservation and enhancement of the value of the
Bank's business;
WHEREAS, the Board of Directors of the Bank has approved and authorized
the entry into this Agreement with the Executive to take effect immediately upon
execution of the same;
WHEREAS , the parties desire to enter into this Agreement setting forth
the terms and conditions of the employment relationship of the Bank and the
Executive;
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements herein, the parties hereto agree as follows:
1. Employment. The Bank agrees to continue to employ the Executive and
the Executive agrees to continue in the employment of the Bank for the period
stated in Paragraph 4 hereof and upon the other terms and conditions herein
provided.
2. Position and Responsibilities. The Executive is employed as Senior
Executive Vice President, and shall carry out and render to the Bank such
services as are customarily performed by persons situated in a similar executive
and professional capacity. The Executive shall also perform such other related
duties as she may from time to time be reasonably directed, including, but not
limited to performing duties for the Bank or for any of its present or future
subsidiaries. The Executive shall report to the President and Chief Executive
Officer of the Bank, and/or to the Board of Directors of the Bank.
3. Duties. During the period of employment hereunder, and except for
illness, vacation periods, and reasonable leaves of absence, the Executive shall
devote her business time, attention, skill, and efforts to the faithful
performance of her duties hereunder as is customary for an executive holding a
similar position in a financial institution of comparable size.
The Executive agrees that during the term of her employment
hereunder, except with the express consent of the Board of Directors she will
not, directly or indirectly, engage or participate, become director of, or
render advisory or other services for, or in connection with, or become
interested in, or make any financial investment in any firm, corporation,
business entity or business enterprise competitive with or to any business of
the Bank; provided, however, that the Executive shall not thereby be precluded
or prohibited from owning passive investments, including investments in the
securities of other financial institutions, so long as such ownership does not
require her to devote substantial time to management or control of the business
or activities in which she has invested.
4. Term. The initial term of employment under this Agreement shall be
for a period of four (4) years, commencing on the date hereof and terminating
May 14, 2002. On each anniversary of the date of commencement of this Agreement,
the term of employment hereunder shall automatically be extended for an
additional one (1) year period beyond the then effective expiration date, unless
either party receives written notice, not less than 90 days prior to the
anniversary date, advising the other party that this Agreement shall not be
further extended. Any such written notice shall not affect any prior extensions
of the term of employment hereunder.
5. Standards. The Executive shall perform her duties and
responsibilities under this Agreement in accordance with such reasonable
standards as are established from time to time by the Board of Directors and/or
management of the Bank. The reasonableness of such standards shall be measured
against standards for executive performance generally prevailing in the banking
industry.
Notwithstanding anything to the contrary, nothing in this
Agreement will be interpreted in any manner which would tend to limit or
interfere with the authority or oversight duties and discretion of the Board of
Directors to establish adequate guidelines for the effective management of the
Bank.
6. Compensation and Reimbursement of Expenses.
a) Compensation
The Bank agrees to pay the Executive during the term of this Agreement a
base salary of not less than $265,000 per year. The performance of the Executive
shall be reviewed annually by the Board of Directors and the salary provided
herein may be increased, but not decreased, in accordance with the
recommendation of the Compensation Committee. The salary provided herein shall
not be paid less frequently than monthly.
b) Performance Bonus
In addition to the salary set forth above, the performance of the Executive
and of the Bank during each year of employment shall be evaluated on the basis
of the Bank's achievement of the predetermined business objectives contained in
the Bank's annual business plan. The contribution of the Executive to the
achievement of the Bank's annual business objectives and her performance in such
other functions as may be reasonably put under her charge, will be evaluated by
the President and Chief Executive Officer who may recommend to the Compensation
Committee payment of a performance bonus in an amount which the Compensation
Committee may determine at its discretion.
c) Stock Options
The Executive will be entitled to participate in and receive the benefits
of any stock option, profit sharing, or other plans, benefits and privileges
given to employees and executives of the Bank or its subsidiaries and affiliates
which now exist or may come into existence hereafter, to the extent commensurate
with her then duties and responsibilities, as fixed by the Compensation
Committee and approved by the Board of Directors. The terms and conditions of
such stock options will be within the parameters set forth in the employee stock
option plan of the Bank or other similar plan under which a benefit or privilege
is made available.
d) Automobile Expenses.
(i) The Bank shall provide the Executive with a company owned automobile.
Such automobile will be furnished in accordance with existing executive
automobile policy as approved by the Board of Directors. All expenses, including
but not limited to insurance, maintenance, repairs, fuel, and lubrication
services, shall be provided by the Bank.
(ii) Monthly or not more than thirty (30) days after the expenses are
incurred, the Bank shall pay or reimburse the Executive for any gasoline, oil
and maintenance or repair expenses which the Executive incurs directly in the
operation of the automobile provided hereunder.
e) Reimbursement of Expenses.
Not less frequently than monthly, the Bank shall pay or reimburse the
Executive for all reasonable travel and other expenses incurred by the Executive
in the performance of his duties under this Agreement.
f) Office. The Bank shall furnish the Executive with a private office, a
private secretary and such other assistance and accommodations as shall be
suitable to the character of the Executive's position with the Bank and adequate
for the performance of her duties hereunder.
7. Participation in Benefit Plans. The payments and benefits provided
hereunder are in addition to any payment and benefits to which Executive may be
or may become entitled under any other present or future group employee benefit
plan or program of the Bank for which executives are or shall become eligible,
and the Executive shall be eligible to receive all benefits and entitlements for
which the executives are eligible under every such plan or program.
8. Voluntary Absences; Vacations and Sick Leave. The Executive shall be
entitled, without loss of pay, to absent herself voluntarily for reasonable
periods of time from the performance of his duties and responsibilities under
this Agreement. All such voluntary absences shall count either as paid vacation
time or sick leave, unless otherwise provided by the Board of Directors. The
Executive shall be entitled to an annual paid vacation of 21 working days per
year, or such longer periods as the Board of Directors may approve, which
vacations shall be scheduled by the Executive with the prior approval of the
President and Chief Executive Officer, taking into account the needs of the
Bank. The Executive may accumulate unused paid vacation time from one calendar
year to the next; provided, that such accumulation shall not exceed 36 working
days of unused vacation time from prior years. The Executive shall be entitled
to up to 15 non-cumulative working days of paid sick leave per year or such
longer period as the Board of Directors may approve.
9. Benefits Payable Upon Disability or Death. The Bank shall, at all
times, maintain in effect disability and death benefits insurance for the
benefit of the Executive in an amount at least equal to that maintained for
executives of similar rank and which will not be less than that maintained by
the Bank for all officers and employees. Provided that the Bank may increase but
never decrease the benefits which the Executive and/or the Executive's heirs
would be entitled to thereunder.
10. Disability.
(a) If the Executive shall become disabled or incapacitated
for a number of consecutive days exceeding those to which she is entitled as
sick-leave, and it is determined that she will continue to temporarily be unable
to perform her duties under this Agreement, she shall nevertheless continue to
receive 60% of her compensation, exclusive of any benefits which may be in
effect for Bank employees under Paragraph 7 hereof until such time as she may
rejoin active employment. Upon returning to active duty, the Executive's full
compensation as set forth in this Agreement shall be reinstated. In the event
that the Executive returns to active employment on other than a full-time basis,
then her compensation (as set forth in Paragraph 6 of this Agreement) shall be
reduced in proportion to the time spent in said employment.
(b) For purposes of this Agreement, the Executive shall be
deemed to be permanently disabled or incapacitated if the Executive, due to
physical or mental illness, shall have been absent from his duties with the Bank
on a full-time basis for three consecutive months. In such case, the Board of
Directors may remove the Executive from employment and may employ another
executive in such capacity; provided, that, if the Executive shall not agree
with a determination to remove her because of disability or incapacity, the
question of the Executive's ability to continue in active employment shall be
submitted to an impartial and reputable physician selected by the parties hereto
and such physician's determination on the question of disability or incapacity
shall be binding. If it is determined that the Executive is permanently
disabled, she shall nevertheless continue to receive 60% of her compensation for
the remaining term of this Agreement.
(c) There shall be deducted from the
amounts paid to the Executive hereunder during any period of disability or
incapacitation as described herein, any amounts actually paid to the Executive
pursuant to any disability insurance or other similar such program, as provided
in Paragraph 9 hereof, which the Bank has instituted or may institute on behalf
of its employees for the purpose of compensating the Executive in the event of
disability.
11. Termination of Employment.
(a) Without cause. The Board of Directors may, without cause,
terminate this Agreement at any time, by giving 90 days written notice to the
Executive. In such event, the Executive, if requested by the Board of Directors,
shall continue to render her services, and shall be paid her regular salary up
to the date of termination. In addition, the Executive shall be paid from the
date of termination a severance payment of four (4) years base salary (less all
amounts required to be withheld and deducted), such payment to be made in
substantially equal semimonthly installments on the fifteenth and last days of
each month, or if these days are nonbusiness days, the immediately preceding
business day, commencing with the month in which the date of termination occurs
and continuing for 24 consecutive semimonthly payment dates.
The Executive may, without cause, terminate the Agreement by
giving 90 days written notice to the Board of Directors. In such event, the
Executive shall continue to render her services and shall be paid her regular
salary up to the date of termination, but shall not receive any severance
payment. In the event that the Executive terminates her agreement without cause,
the Bank shall be entitled to enjoin the employment of the Executive as an
officer or employee of any significant competitor of the Bank for a period of
one year. The term "significant competitor" shall mean any bank, savings bank or
savings and loan association which at the date of its employment of the
Executive has total assets of one billion dollars or more and a home or branch
office in any city in Puerto Rico. In consideration of the Executive entering
into this non-competition agreement, she shall receive an amount of $50,000
which amount is for purposes of this Agreement included as part of the
Executive's base salary.
(b) With Cause. The Board of Directors may, at any time,
terminate this Agreement for cause. In such event, the Executive shall not be
entitled to receive any further compensation from the date of notice of
termination. For the purpose of this Agreement, "termination for cause" shall
include any act or omission on the part of the Executive which involves personal
dishonesty, willful misconduct, breach of fiduciary duty, a material violation
of any law, rule or regulation relating to the banking industry or a material
breach of any provision of this Agreement, such as the willful and continued
failure of the Executive to perform the duties herein set forth. No act or
failure to act on the Executive's part shall be considered "willful" unless
done, or omitted to be done, by her not in good faith and without reasonable
belief that her action or omission was in the best interest of the Bank. For
purposes of this paragraph, any act or omission to act on the part of the
Executive in reliance upon an opinion of counsel to the Bank or to the Executive
shall not be deemed to be willful or without reasonable belief that the act or
omission to act was in the best interest of the Bank.
The Executive may, with cause, terminate this Agreement. For
purposes of this paragraph, termination with cause shall mean a failure of the
Bank to comply with any material provision of this Agreement, which failure has
not been cured within 15 days of receipt of a written notice by the Executive of
such noncompliance by the Bank.
(c) If the Executive is suspended and/or prohibited from
participating in the conduct of the Bank's affairs by a notice or order served
under Sections 8(e)(3), (e)(4) or (g)(1) of the Federal Deposit Insurance Act
[12 USC 1818(e)(3), (e)(4) and (g)(1)], or any other similar provision of state
or federal law now in place or enacted in future, the Bank's obligations under
this Agreement shall be suspended as of the date of service, unless such
prohibition and/or suspension is stayed by appropriate proceedings. If after a
hearing is held and upon judicial review, the notice or order suspending and/or
prohibiting the Executive from participating in the affairs of the Bank is
confirmed, then this Agreement shall be terminated with cause. If the charges in
the notice or order are dismissed, the Bank shall: (i) pay the Executive all the
compensation withheld while the contractual obligations were suspended and (ii)
reinstate, in whole or in part, any of the obligations which were suspended.
(d) If the Bank is in default, as defined to mean an
adjudication or other official determination of a court of competent
jurisdiction, the appropriate Federal banking agency or other public authority
pursuant to which a conservator, receiver or other legal custodian is appointed
for the Bank for the purpose of liquidation, all obligations under this
Agreement shall terminate as of the date of default, but rights of the Executive
to compensation earned as of the date of termination shall not be affected.
(e) In the event that the Executive is terminated or she
terminates this Agreement, in a manner which violates the provisions of this
Paragraph 11, as determined by the arbitration procedure provided in Paragraph
21, the Executive or the Bank, as the case may be, shall be entitled to
reimbursement for all reasonable costs, including attorney's fees, incurred by
the Executive or the Bank, as the case may be, in challenging such termination.
12. Change in Control.
(a) If during the term of this Agreement there is a "change in
control" of the Bank, as such term is defined in sub-paragraph (c) hereunder,
the Executive shall be entitled to receive from the Bank a severance payment in
consideration of having bound herself to employment by the Bank and having
foregone other business or professional opportunities, actual or potential. The
severance payment shall be a lump sum cash payment equal to four (4) times the
Executive's total compensation, as the term is defined in Section 12(b) of this
Agreement, to be made on or before the fifth day following the date on which the
change in control occurs.
(b) For purposes of this section, the term total compensation
shall mean the Executive's base salary plus the highest cash Performance Bonus
paid to the Executive in any of the four (4) fiscal years prior to the date of
the change in control, and the value of any other benefits provided to the
Executive during the year in which the change in control occurs which are listed
and attached hereto as Exhibit A, as it may be amended from time to time.
(c) The term "change in control" shall be deemed to have taken
place if: (i) a third person, including a "group" as defined in Section 13(d)(3)
of the Securities Exchange Act of 1934, becomes the beneficial owner of shares
of the Bank having 25% or more of the total number of votes which may be cast
for the election of directors of the Bank or which, by cumulative voting, if
permitted by the Banks charter or bylaws, would enable such third person to
elect 25% or more of the directors of the Bank; or (ii) as the result of, or in
connection with, any cash tender or exchange offer, merger or any other business
combination, sales of assets or contested election, or any combination of the
foregoing transactions, the persons who were directors of the Bank before such
transaction shall cease to constitute a majority of the Board of the Bank or any
successor institution. Notwithstanding the provisions of this paragraph, a
change in control of the Bank shall not be deemed to have occurred in the event
the Bank undertakes a reorganization to form a bank holding company.
(d) Any payments made to the Executive pursuant to this Agreement are
subject to and conditioned upon their compliance with 12 USC 1828(k) and any
regulations promulgated thereunder. The Bank shall in good faith seek to obtain,
if necessary or required, any consents or approvals from the FDIC or any other
applicable regulatory agency and any successors thereto with respect to any
payments to be made or any benefits to be provided to the Executive pursuant to
the terms of this Agreement.
13. Confidentiality; Injunctive Relief. Recognizing that the knowledge
and information about, or relationships with, the business associates,
customers, clients, and agents of the Bank and its affiliated companies and the
business methods, systems, plans, and policies of the Bank and of its affiliated
companies which Executive has heretofore and shall hereafter receive, obtain, or
establish as an employee of the Bank or otherwise are valuable and unique assets
of the Bank, the Executive agrees that, during the continuance of this Agreement
and thereafter, she shall not (otherwise than pursuant to her duties hereunder)
disclose without the written consent of the Bank, any material or substantial,
confidential, or proprietary know-how, data, or information pertaining to the
Bank, or its business, personnel, or plans, to any person, firm, corporation, or
other entity, for any reason or purpose whatsoever. Executive acknowledges and
agrees that all memoranda, notes, records, and other documents made or compiled
by Executive or made available to Executive concerning the Bank's business shall
be the Bank's exclusive property and shall be delivered by Executive to the Bank
upon expiration or termination of this Agreement or at any other time upon the
request of the Company.
The provisions of this Paragraph 13 shall survive the
expiration or termination of this Agreement or any part thereof, without regard
to the reason therefor.
Executive hereby acknowledges that the services to be rendered
by her are of special, unique, and extraordinary character and, in connection
with such services, she will have access to confidential information concerning
the Bank's business. By reason of this, Executive consents and agrees that if
she violates any of the provisions of this Agreement with respect to
confidentiality, the Bank would sustain irreparable harm and, therefore, in
addition to any other remedies which the Bank may have under this Agreement or
otherwise, the Bank will be entitled to an injunction to be issued by any court
of competent jurisdiction restraining the Executive from committing or
continuing any such violation of this Agreement. The term "Confidential
Information" means: (1) proprietary information of the Bank; (2) information
marked or designated by the Bank as confidential; (3) information, whether or
not in written form and whether or not designated as confidential, which is
known to the Executive as treated by the Bank as confidential; and (4)
information provided to the Bank by third parties which the Bank is obligated to
keep confidential, specifically including Bank customer lists and information.
Confidential Information does not include any information now or hereafter
voluntarily disseminated by the Bank to the public, or which otherwise becomes
part of the public domain through lawful means.
14. No assignments. This Agreement is personal to each of the parties
hereto. Neither party may assign or delegate any of his or its rights or
obligations hereunder without first obtaining the written consent of the other
party. However, in the event of the death of the Executive all his rights to
receive payments hereunder shall become rights of his estate.
15. Benefits. Any benefits due or provided hereunder to the Executive shall
be in addition to, and not in substitution of, any benefit to which the
Executive is otherwise entitled to without regard to the Agreement.
16. Mitigation. The Executive shall not be obligated to seek other
employment in mitigation of the amounts payable or arrangements made under any
provision of this Agreement, and the obtaining of any such other employment
shall in no event effect any reduction of the Bank's obligation to make the
payments and arrangements required to be made under this Agreement.
17. Notices. All notices required by this Agreement to be given by one
party to the other shall be in writing and shall be deemed to have been
delivered either:
(a) When personally delivered to the Office of the Secretary of the
Bank at his regular corporate office, or the Executive in person; or
(b) Five days after depositing such notice in the United
States mails, certified mail with return receipt requested and postage prepaid,
to:
(i) the Bank:
c/o Office of the Secretary of the Bank
FirstBank Puerto Rico
PO Box 9146
Santurce, PR 00908-0146
(ii) the Executive:
Mrs. Annie Astor de Carbonell
Parque de Santa Maria
M-12 Rosa St.
San Juan, PR 00927
or to such other address as either party may designate to the other by notice in
writing in accordance with the terms hereof.
18. Amendments or Additions; Action by Board of Directors. No
amendments or additions to this Agreement shall be binding unless in writing and
signed by both parties. The prior approval by a two-thirds affirmative vote of
the full Board of Directors of the Bank shall be required in order for the Bank
to authorize any amendments or additions to this Agreement, to give any consents
or waivers of provisions of this Agreement, or to take any other action under
this Agreement including any termination of the employment of the Executive with
or without cause under Paragraph 10 hereof.
19. Section Headings. The Paragraph headings used in this Agreement are
included solely for convenience and shall not affect, or be used in connection
with, the interpretation of this Agreement.
20. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
21. Governing Law. This Agreement shall be governed by the laws of the
Commonwealth of Puerto Rico. Venue for the litigation of any and all matters
arising under or in connection with this Agreement shall be in the Superior
Court for the Commonwealth of Puerto Rico, in San Juan, in the case of state
court jurisdiction, when clause 21 of this Agreement is not legally applicable.
22. Arbitration. Any controversy as to the interpretation of this
contract must be submitted before three arbitrators to be appointed by the
American Arbitration Association ("AAA"). The rules and regulations of the AAA
shall govern the procedures of said arbitration. The award of a majority of
arbitrators shall be binding and final on the parties.
FIRSTBANK PUERTO RICO
/S/ German Malaret
---------------------------
Chairman
ATTEST:/s/ Antonio Escriba
- - ---------------------------
EXECUTIVE:/s/Annie A. de Carbonell
--------------------------------
<PAGE>
<PAGE>
EMPLOYMENT AGREEMENT
AGREEMENT, dated as of May 14, 1998, by and between FIRSTBANK PUERTO
RICO (the "Bank") and Luis M. Beauchamp (the "Executive").
WHEREAS, the Bank wishes to retain the services of the Executive and
the retention of the Executive's services for and on behalf of the Bank is of
material importance to the preservation and enhancement of the value of the
Bank's business;
WHEREAS, the Board of Directors of the Bank has approved and authorized
the entry into this Agreement with the Executive to take effect immediately upon
execution of the same;
WHEREAS , the parties desire to enter into this Agreement setting forth
the terms and conditions of the employment relationship of the Bank and the
Executive;
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements herein, the parties hereto agree as follows:
1. Employment. The Bank agrees to continue to employ the Executive and
the Executive agrees to continue in the employment of the Bank for the period
stated in Paragraph 4 hereof and upon the other terms and conditions herein
provided.
2. Position and Responsibilities. The Executive is employed as Senior
Executive Vice President, and shall carry out and render to the Bank such
services as are customarily performed by persons situated in a similar executive
and professional capacity. The Executive shall also perform such other related
duties as he may from time to time be reasonably directed, including, but not
limited to performing duties for the Bank or for any of its present or future
subsidiaries. The Executive shall report to the President and Chief Executive
Officer of the Bank, and/or to the Board of Directors of the Bank.
3. Duties. During the period of employment hereunder, and except for
illness, vacation periods, and reasonable leaves of absence, the Executive shall
devote his business time, attention, skill, and efforts to the faithful
performance of his duties hereunder as is customary for an executive holding a
similar position in a financial institution of comparable size.
The Executive agrees that during the term of his employment
hereunder, except with the express consent of the Board of Directors he will
not, directly or indirectly, engage or participate, become director of, or
render advisory or other services for, or in connection with, or become
interested in, or make any financial investment in any firm, corporation,
business entity or business enterprise competitive with or to any business of
the Bank; provided, however, that the Executive shall not thereby be precluded
or prohibited from owning passive investments, including investments in the
securities of other financial institutions, so long as such ownership does not
require him to devote substantial time to management or control of the business
or activities in which he has invested.
4. Term. The initial term of employment under this Agreement shall be
for a period of four (4) years, commencing on the date hereof and terminating
May 14, 2002. On each anniversary of the date of commencement of this Agreement,
the term of employment hereunder shall automatically be extended for an
additional one (1) year period beyond the then effective expiration date, unless
either party receives written notice, not less than 90 days prior to the
anniversary date, advising the other party that this Agreement shall not be
further extended. Any such written notice shall not affect any prior extensions
of the term of employment hereunder.
5. Standards. The Executive shall perform his duties and
responsibilities under this Agreement in accordance with such reasonable
standards as are established from time to time by the Board of Directors and/or
management of the Bank. The reasonableness of such standards shall be measured
against standards for executive performance generally prevailing in the banking
industry.
Notwithstanding anything to the contrary, nothing in this
Agreement will be interpreted in any manner which would tend to limit or
interfere with the authority or oversight duties and discretion of the Board of
Directors to establish adequate guidelines for the effective management of the
Bank.
6. Compensation and Reimbursement of Expenses.
a) Compensation
The Bank agrees to pay the Executive during the term of this Agreement a
base salary of not less than $265,000 per year. The performance of the Executive
shall be reviewed annually by the Board of Directors and the salary provided
herein may be increased, but not decreased, in accordance with the
recommendation of the Compensation Committee. The salary provided herein shall
not be paid less frequently than monthly.
b) Performance Bonus
In addition to the salary set forth above, the performance of the Executive
and of the Bank during each year of employment shall be evaluated on the basis
of the Bank's achievement of the predetermined business objectives contained in
the Bank's annual business plan. The contribution of the Executive to the
achievement of the Bank's annual business objectives and his performance in such
other functions as may be reasonably put under his charge, will be evaluated by
the President and Chief Executive Officer who may recommend to the Compensation
Committee payment of a performance bonus in an amount which the Compensation
Committee may determine at its discretion.
c) Stock Options
The Executive will be entitled to participate in and receive the benefits
of any stock option, profit sharing, or other plans, benefits and privileges
given to employees and executives of the Bank or its subsidiaries and affiliates
which now exist or may come into existence hereafter, to the extent commensurate
with his then duties and responsibilities, as fixed by the Compensation
Committee and approved by the Board of Directors. The terms and conditions of
such stock options will be within the parameters set forth in the employee stock
option plan of the Bank or other similar plan under which a benefit or privilege
is made available.
d) Automobile Expenses.
(i) The Bank shall provide the Executive with a company owned automobile.
Such automobile will be furnished in accordance with existing executive
automobile policy as approved by the Board of Directors. All expenses, including
but not limited to insurance, maintenance, repairs, fuel, and lubrication
services, shall be provided by the Bank.
(ii) Monthly or not more than thirty (30) days after the expenses are
incurred, the Bank shall pay or reimburse the Executive for any gasoline, oil
and maintenance or repair expenses which the Executive incurs directly in the
operation of the automobile provided hereunder.
e) Reimbursement of Expenses.
Not less frequently than monthly, the Bank shall pay or reimburse the
Executive for all reasonable travel and other expenses incurred by the Executive
in the performance of his duties under this Agreement.
f) Office.
The Bank shall furnish the Executive with a private office, a private
secretary and such other assistance and accommodations as shall be suitable to
the character of the Executive's position with the Bank and adequate for the
performance of his duties hereunder.
7. Participation in Benefit Plans. The payments and benefits provided
hereunder are in addition to any payment and benefits to which Executive may be
or may become entitled under any other present or future group employee benefit
plan or program of the Bank for which executives are or shall become eligible,
and the Executive shall be eligible to receive all benefits and entitlements for
which the executives are eligible under every such plan or program.
8. Voluntary Absences; Vacations and Sick Leave. The Executive shall be
entitled, without loss of pay, to absent himself voluntarily for reasonable
periods of time from the performance of his duties and responsibilities under
this Agreement. All such voluntary absences shall count either as paid vacation
time or sick leave, unless otherwise provided by the Board of Directors. The
Executive shall be entitled to an annual paid vacation of 21 working days per
year, or such longer periods as the Board of Directors may approve, which
vacations shall be scheduled by the Executive with the prior approval of the
President and Chief Executive Officer, taking into account the needs of the
Bank. The Executive may accumulate unused paid vacation time from one calendar
year to the next; provided, that such accumulation shall not exceed 36 working
days of unused vacation time from prior years. The Executive shall be entitled
to up to 15 non-cumulative working days of paid sick leave per year or such
longer period as the Board of Directors may approve.
9. Benefits Payable Upon Disability or Death. The Bank shall, at all
times, maintain in effect disability and death benefits insurance for the
benefit of the Executive in an amount at least equal to that maintained for
executives of similar rank and which will not be less than that maintained by
the Bank for all officers and employees. Provided that the Bank may increase but
never decrease the benefits which the Executive and/or the Executive's heirs
would be entitled to thereunder.
10. Disability.
(a) If the Executive shall become disabled or incapacitated
for a number of consecutive days exceeding those to which he is entitled as
sick-leave, and it is determined that he will continue to temporarily be unable
to perform his duties under this Agreement, he shall nevertheless continue to
receive 60% of his compensation, exclusive of any benefits which may be in
effect for Bank employees under Paragraph 7 hereof until such time as he may
rejoin active employment. Upon returning to active duty, the Executive's full
compensation as set forth in this Agreement shall be reinstated. In the event
that the Executive returns to active employment on other than a full-time basis,
then his compensation (as set forth in Paragraph 6 of this Agreement) shall be
reduced in proportion to the time spent in said employment.
(b) For purposes of this Agreement, the Executive shall be
deemed to be permanently disabled or incapacitated if the Executive, due to
physical or mental illness, shall have been absent from his duties with the Bank
on a full-time basis for three consecutive months. In such case, the Board of
Directors may remove the Executive from employment and may employ another
executive in such capacity; provided, that, if the Executive shall not agree
with a determination to remove him/her because of disability or incapacity, the
question of the Executive's ability to continue in active employment shall be
submitted to an impartial and reputable physician selected by the parties hereto
and such physician's determination on the question of disability or incapacity
shall be binding. If it is determined that the Executive is permanently
disabled, he shall nevertheless continue to receive 60% of his compensation for
the remaining term of this Agreement.
(c) There shall be deducted from the amounts paid to the Executive
hereunder during any period of disability or incapacitation as described herein,
any amounts actually paid to the Executive pursuant to any disability insurance
or other similar such program, as provided in Paragraph 9 hereof, which the Bank
has instituted or may institute on behalf of its employees for the purpose of
compensating the Executive in the event of disability.
11. Termination of Employment.
(a) Without cause. The Board of Directors may, without cause,
terminate this Agreement at any time, by giving 90 days written notice to the
Executive. In such event, the Executive, if requested by the Board of Directors,
shall continue to render his services, and shall be paid his regular salary up
to the date of termination. In addition, the Executive shall be paid from the
date of termination a severance payment of four (4) years base salary (less all
amounts required to be withheld and deducted), such payment to be made in
substantially equal semimonthly installments on the fifteenth and last days of
each month, or if these days are nonbusiness days, the immediately preceding
business day, commencing with the month in which the date of termination occurs
and continuing for 24 consecutive semimonthly payment dates.
The Executive may, without cause, terminate the Agreement by
giving 90 days written notice to the Board of Directors. In such event, the
Executive shall continue to render his services and shall be paid his regular
salary up to the date of termination, but shall not receive any severance
payment. In the event that the Executive terminates his agreement without cause,
the Bank shall be entitled to enjoin the employment of the Executive as an
officer or employee of any significant competitor of the Bank for a period of
one year. The term "significant competitor" shall mean any bank, savings bank or
savings and loan association which at the date of its employment of the
Executive has total assets of one billion dollars or more and a home or branch
office in any city in Puerto Rico. In consideration of the Executive entering
into this non-competition agreement, he shall receive an amount of $50,000 which
amount is for purposes of this Agreement included as part of the Executive's
base salary.
(b) With Cause. The Board of Directors may, at any time,
terminate this Agreement for cause. In such event, the Executive shall not be
entitled to receive any further compensation from the date of notice of
termination. For the purpose of this Agreement, "termination for cause" shall
include any act or omission on the part of the Executive which involves personal
dishonesty, willful misconduct, breach of fiduciary duty, a material violation
of any law, rule or regulation relating to the banking industry or a material
breach of any provision of this Agreement, such as the willful and continued
failure of the Executive to perform the duties herein set forth. No act or
failure to act on the Executive's part shall be considered "willful" unless
done, or omitted to be done, by him/her not in good faith and without reasonable
belief that his action or omission was in the best interest of the Bank. For
purposes of this paragraph, any act or omission to act on the part of the
Executive in reliance upon an opinion of counsel to the Bank or to the Executive
shall not be deemed to be willful or without reasonable belief that the act or
omission to act was in the best interest of the Bank.
The Executive may, with cause, terminate this Agreement. For
purposes of this paragraph, termination with cause shall mean a failure of the
Bank to comply with any material provision of this Agreement, which failure has
not been cured within 15 days of receipt of a written notice by the Executive of
such noncompliance by the Bank.
(c) If the Executive is suspended and/or prohibited from
participating in the conduct of the Bank's affairs by a notice or order served
under Sections 8(e)(3), (e)(4) or (g)(1) of the Federal Deposit Insurance Act
[12 USC 1818(e)(3), (e)(4) and (g)(1)], or any other similar provision of state
or federal law now in place or enacted in future, the Bank's obligations under
this Agreement shall be suspended as of the date of service, unless such
prohibition and/or suspension is stayed by appropriate proceedings. If after a
hearing is held and upon judicial review, the notice or order suspending and/or
prohibiting the Executive from participating in the affairs of the Bank is
confirmed, then this Agreement shall be terminated with cause. If the charges in
the notice or order are dismissed, the Bank shall: (i) pay the Executive all the
compensation withheld while the contractual obligations were suspended and (ii)
reinstate, in whole or in part, any of the obligations which were suspended.
(d) If the Bank is in default, as defined to mean an
adjudication or other official determination of a court of competent
jurisdiction, the appropriate Federal banking agency or other public authority
pursuant to which a conservator, receiver or other legal custodian is appointed
for the Bank for the purpose of liquidation, all obligations under this
Agreement shall terminate as of the date of default, but rights of the Executive
to compensation earned as of the date of termination shall not be affected.
(e) In the event that the Executive is terminated or he
terminates this Agreement, in a manner which violates the provisions of this
Paragraph 11, as determined by the arbitration procedure provided in Paragraph
21, the Executive or the Bank, as the case may be, shall be entitled to
reimbursement for all reasonable costs, including attorney's fees, incurred by
the Executive or the Bank, as the case may be, in challenging such termination.
12. Change in Control.
(a) If during the term of this Agreement there is a "change in
control" of the Bank, as such term is defined in sub-paragraph (c) hereunder,
the Executive shall be entitled to receive from the Bank a severance payment in
consideration of having bound himself to employment by the Bank and having
foregone other business or professional opportunities, actual or potential. The
severance payment shall be a lump sum cash payment equal to four (4) times the
Executive's total compensation, as the term is defined in Section 12(b) of this
Agreement, to be made on or before the fifth day following the date on which the
change in control occurs.
(b) For purposes of this section, the term total compensation
shall mean the Executive's base salary plus the highest cash Performance Bonus
paid to the Executive in any of the four (4) fiscal years prior to the date of
the change in control, and the value of any other benefits provided to the
Executive during the year in which the change in control occurs which are listed
and attached hereto as Exhibit A, as it may be amended from time to time.
(c) The term "change in control" shall be deemed to have taken place if:
(i) a third person, including a "group" as defined in Section 13(d)(3) of the
Securities Exchange Act of 1934, becomes the beneficial owner of shares of the
Bank having 25% or more of the total number of votes which may be cast for the
election of directors of the Bank or which, by cumulative voting, if permitted
by the Banks charter or bylaws, would enable such third person to elect 25% or
more of the directors of the Bank; or (ii) as the result of, or in connection
with, any cash tender or exchange offer, merger or any other business
combination, sales of assets or contested election, or any combination of the
foregoing transactions, the persons who were directors of the Bank before such
transaction shall cease to constitute a majority of the Board of the Bank or any
successor institution. Notwithstanding the provisions of this paragraph, a
change in control of the Bank shall not be deemed to have occurred in the event
the Bank undertakes a reorganization to form a bank holding company.
(d) Any payments made to the Executive pursuant to this Agreement are
subject to and conditioned upon their compliance with 12 USC 1828(k) and any
regulations promulgated thereunder. The Bank shall in good faith seek to obtain,
if necessary or required, any consents or approvals from the FDIC or any other
applicable regulatory agency and any successors thereto with respect to any
payments to be made or any benefits to be provided to the Executive pursuant to
the terms of this Agreement.
13. Confidentiality; Injunctive Relief. Recognizing that the knowledge
and information about, or relationships with, the business associates,
customers, clients, and agents of the Bank and its affiliated companies and the
business methods, systems, plans, and policies of the Bank and of its affiliated
companies which Executive has heretofore and shall hereafter receive, obtain, or
establish as an employee of the Bank or otherwise are valuable and unique assets
of the Bank, the Executive agrees that, during the continuance of this Agreement
and thereafter, he shall not (otherwise than pursuant to his duties hereunder)
disclose without the written consent of the Bank, any material or substantial,
confidential, or proprietary know-how, data, or information pertaining to the
Bank, or its business, personnel, or plans, to any person, firm, corporation, or
other entity, for any reason or purpose whatsoever. Executive acknowledges and
agrees that all memoranda, notes, records, and other documents made or compiled
by Executive or made available to Executive concerning the Bank's business shall
be the Bank's exclusive property and shall be delivered by Executive to the Bank
upon expiration or termination of this Agreement or at any other time upon the
request of the Company.
The provisions of this Paragraph 13 shall survive the
expiration or termination of this Agreement or any part thereof, without regard
to the reason therefor.
Executive hereby acknowledges that the services to be rendered
by him/her are of special, unique, and extraordinary character and, in
connection with such services, he will have access to confidential information
concerning the Bank's business. By reason of this, Executive consents and agrees
that if he violates any of the provisions of this Agreement with respect to
confidentiality, the Bank would sustain irreparable harm and, therefore, in
addition to any other remedies which the Bank may have under this Agreement or
otherwise, the Bank will be entitled to an injunction to be issued by any court
of competent jurisdiction restraining the Executive from committing or
continuing any such violation of this Agreement. The term "Confidential
Information" means: (1) proprietary information of the Bank; (2) information
marked or designated by the Bank as confidential; (3) information, whether or
not in written form and whether or not designated as confidential, which is
known to the Executive as treated by the Bank as confidential; and (4)
information provided to the Bank by third parties which the Bank is obligated to
keep confidential, specifically including Bank customer lists and information.
Confidential Information does not include any information now or hereafter
voluntarily disseminated by the Bank to the public, or which otherwise becomes
part of the public domain through lawful means.
14. No assignments. This Agreement is personal to each of the parties
hereto. Neither party may assign or delegate any of his or its rights or
obligations hereunder without first obtaining the written consent of the other
party. However, in the event of the death of the Executive all his rights to
receive payments hereunder shall become rights of his estate.
15. Benefits. Any benefits due or provided hereunder to the Executive shall
be in addition to, and not in substitution of, any benefit to which the
Executive is otherwise entitled to without regard to the Agreement.
16. Mitigation. The Executive shall not be obligated to seek other
employment in mitigation of the amounts payable or arrangements made under any
provision of this Agreement, and the obtaining of any such other employment
shall in no event effect any reduction of the Bank's obligation to make the
payments and arrangements required to be made under this Agreement.
17. Notices. All notices required by this Agreement to be given by one
party to the other shall be in writing and shall be deemed to have been
delivered either:
(a) When personally delivered to the Office of the Secretary of the Bank at
his regular corporate office, or the Executive in person; or
(b) Five days after depositing such notice in the United
States mails, certified mail with return receipt requested and postage prepaid,
to:
(i) the Bank:
c/o Office of the Secretary of the Bank
FirstBank Puerto Rico
PO Box 9146
Santurce, PR 00908-0146
(ii) the Executive:
Mr. Luis M. Beauchamp
1678 Calle Geranio
Urb. San Francisco
Rio Piedras, PR 00927
or to such other address as either party may designate to the other by notice in
writing in accordance with the terms hereof.
18. Amendments or Additions; Action by Board of Directors. No
amendments or additions to this Agreement shall be binding unless in writing and
signed by both parties. The prior approval by a two-thirds affirmative vote of
the full Board of Directors of the Bank shall be required in order for the Bank
to authorize any amendments or additions to this Agreement, to give any consents
or waivers of provisions of this Agreement, or to take any other action under
this Agreement including any termination of the employment of the Executive with
or without cause under Paragraph 10 hereof.
19. Section Headings. The Paragraph headings used in this Agreement are
included solely for convenience and shall not affect, or be used in connection
with, the interpretation of this Agreement.
20. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
21. Governing Law. This Agreement shall be governed by the laws of the
Commonwealth of Puerto Rico. Venue for the litigation of any and all matters
arising under or in connection with this Agreement shall be in the Superior
Court for the Commonwealth of Puerto Rico, in San Juan, in the case of state
court jurisdiction, when clause 21 of this Agreement is not legally applicable.
22. Arbitration. Any controversy as to the interpretation of this
contract must be submitted before three arbitrators to be appointed by the
American Arbitration Association ("AAA"). The rules and regulations of the AAA
shall govern the procedures of said arbitration. The award of a majority of
arbitrators shall be binding and final on the parties.
FIRSTBANK PUERTO RICO
/S/ German Malaret
---------------------------
Chairman
ATTEST:/s/ Antonio Escriba
- - ---------------------------
EXECUTIVE:/s/Luis Beauchamp
-----------------------------
<PAGE>
EMPLOYMENT AGREEMENT
AGREEMENT, dated as of February 24, 1998, by and between FIRSTBANK
PUERTO RICO (the "Bank") and Aurelio Aleman (the "Executive").
WHEREAS, the Bank wishes to retain the services of the Executive and
the retention of the Executive's services for and on behalf of the Bank is of
material importance to the preservation and enhancement of the value of the
Bank's business;
WHEREAS, the Board of Directors of the Bank has approved and authorized
the entry into this Agreement with the Executive to take effect immediately upon
execution of the same;
WHEREAS , the parties desire to enter into this Agreement setting forth
the terms and conditions of the employment relationship of the Bank and the
Executive;
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements herein, the parties hereto agree as follows:
1. Employment. The Bank agrees to continue to employ the Executive and
the Executive agrees to continue in the employment of the Bank for the period
stated in Paragraph 4 hereof and upon the other terms and conditions herein
provided.
2. Position and Responsibilities. The Executive is employed as an Executive
Vice President, and shall carry out and render to the Bank such services as are
customarily performed by persons situated in a similar executive and
professional capacity. The Executive shall also perform such other related
duties as he/she may from time to time be reasonably directed, including, but
not limited to performing duties for the Bank or for any of its present or
future subsidiaries. The Executive shall report to the President and Chief
Executive Officer of the Bank, or to any Executive Officer designated by the
President or the Board of Directors.
3. Duties. During the period of employment hereunder, and except for
illness, vacation periods, and reasonable leaves of absence, the Executive shall
devote his/her business time, attention, skill, and efforts to the faithful
performance of his/her duties hereunder as is customary for an executive holding
a similar position in a financial institution of comparable size.
The Executive agrees that during the term of his/her employment
hereunder, except with the express consent of the Board of Directors he/she will
not, directly or indirectly, engage or participate, become director of, or
render advisory or other services for, or in connection with, or become
interested in, or make any financial investment in any firm, corporation,
business entity or business enterprise competitive with or to any business of
the Bank; provided, however, that the Executive shall not thereby be precluded
or prohibited from owning passive investments, including investments in the
securities of other financial institutions, so long as such ownership does not
require him/her to devote substantial time to management or control of the
business or activities in which he/she has invested.
4. Term. The initial term of employment under this Agreement shall be
for a period of four (4) years, commencing on the date hereof and terminating
February 24, 2002. On each anniversary of the date of commencement of this
Agreement, the term of employment hereunder shall automatically be extended for
an additional one (1) year period beyond the then effective expiration date,
unless either party receives written notice, not less than 90 days prior to the
anniversary date, advising the other party that this Agreement shall not be
further extended. Any such written notice shall not affect any prior extensions
of the term of employment hereunder.
5. Standards. The Executive shall perform his/her duties and
responsibilities under this Agreement in accordance with such reasonable
standards as are established from time to time by the Board of Directors and/or
management of the Bank. The reasonableness of such standards shall be measured
against standards for executive performance generally prevailing in the banking
industry.
Notwithstanding anything to the contrary, nothing in this
Agreement will be interpreted in any manner which would tend to limit or
interfere with the authority or oversight duties and discretion of the Board of
Directors to establish adequate guidelines for the effective management of the
Bank.
6. Compensation and Reimbursement of Expenses.
a) Compensation
The Bank agrees to pay the Executive during the term of this Agreement a
base salary of not less than $200,000 per year. The performance of the Executive
shall be reviewed annually by the Board of Directors and the salary provided
herein may be increased, but not decreased, in accordance with the
recommendation of the Compensation Committee. The salary provided herein shall
not be paid less frequently than monthly.
b) Performance Bonus
In addition to the salary set forth above, the performance of the Executive
and of the Bank during each year of employment shall be evaluated on the basis
of the Bank's achievement of the predetermined business objectives contained in
the Bank's annual business plan. The contribution of the Executive to the
achievement of the Bank's annual business objectives and his/her performance in
such other functions as may be reasonably put under his/her charge, will be
evaluated by the President and Chief Executive Officer who may recommend to the
Compensation Committee payment of a performance bonus in an amount which the
Compensation Committee may determine at its discretion.
c) Stock Options
The Executive will be entitled to participate in and receive the benefits
of any stock option, profit sharing, or other plans, benefits and privileges
given to employees and executives of the Bank or its subsidiaries and affiliates
which now exist or may come into existence hereafter, to the extent commensurate
with his/her then duties and responsibilities, as fixed by the Compensation
Committee and approved by the Board of Directors. The terms and conditions of
such stock options will be within the parameters set forth in the employee stock
option plan of the Bank or other similar plan under which a benefit or privilege
is made available.
d) Automobile Expenses.
(i) The Bank shall provide the Executive with a company owned automobile.
Such automobile will be furnished in accordance with existing executive
automobile policy as approved by the Board of Directors. All expenses, including
but not limited to insurance, maintenance, repairs, fuel, and lubrication
services, shall be provided by the Bank.
(ii) Monthly or not more than thirty (30) days after the expenses are
incurred, the Bank shall pay or reimburse the Executive for any gasoline, oil
and maintenance or repair expenses which the Executive incurs directly in the
operation of the automobile provided hereunder.
e) Reimbursement of Expenses.
Not less frequently than monthly, the Bank shall pay or reimburse the
Executive for all reasonable travel and other expenses incurred by the Executive
in the performance of his duties under this Agreement.
f) Office.
The Bank shall furnish the Executive with a private office, a private
secretary and such other assistance and accommodations as shall be suitable to
the character of the Executive's position with the Bank and adequate for the
performance of his/her duties hereunder.
7. Participation in Benefit Plans. The payments and benefits provided
hereunder are in addition to any payment and benefits to which Executive may be
or may become entitled under any other present or future group employee benefit
plan or program of the Bank for which executives are or shall become eligible,
and the Executive shall be eligible to receive all benefits and entitlements for
which the executives are eligible under every such plan or program.
8. Voluntary Absences; Vacations and Sick Leave. The Executive shall be
entitled, without loss of pay, to absent himself voluntarily for reasonable
periods of time from the performance of his duties and responsibilities under
this Agreement. All such voluntary absences shall count either as paid vacation
time or sick leave, unless otherwise provided by the Board of Directors. The
Executive shall be entitled to an annual paid vacation of 18 working days per
year, or such longer periods as the Board of Directors may approve, which
vacations shall be scheduled by the Executive with the prior approval of the
President and Chief Executive Officer or any other officer to whom the Executive
reports, taking into account the needs of the Bank. The Executive may accumulate
unused paid vacation time from one calendar year to the next; provided, that
such accumulation shall not exceed 36 working days of unused vacation time from
prior years. The Executive shall be entitled to up to 15 non-cumulative working
days of paid sick leave per year or such longer period as the Board of Directors
may approve.
9. Benefits Payable Upon Disability or Death. The Bank shall, at all
times, maintain in effect disability and death benefits insurance for the
benefit of the Executive in an amount at least equal to that maintained for
executives of similar rank and which will not be less than that maintained by
the Bank for all officers and employees. Provided that the Bank may increase but
never decrease the benefits which the Executive and/or the Executive's heirs
would be entitled to thereunder.
10. Disability.
(a) If the Executive shall become disabled or incapacitated
for a number of consecutive days exceeding those to which he/she is entitled as
sick-leave, and it is determined that he/she will continue to temporarily be
unable to perform his/her duties under this Agreement, he/she shall nevertheless
continue to receive 60% of his/her compensation, exclusive of any benefits which
may be in effect for Bank employees under Paragraph 7 hereof until such time as
he/she may rejoin active employment. Upon returning to active duty, the
Executive's full compensation as set forth in this Agreement shall be
reinstated. In the event that the Executive returns to active employment on
other than a full-time basis, then his/her compensation (as set forth in
Paragraph 6 of this Agreement) shall be reduced in proportion to the time spent
in said employment.
(b) For purposes of this Agreement, the Executive shall be deemed to be
permanently disabled or incapacitated if the Executive, due to physical or
mental illness, shall have been absent from his duties with the Bank on a
full-time basis for three consecutive months. In such case, the Board of
Directors may remove the Executive from employment and may employ another
executive in such capacity; provided, that, if the Executive shall not agree
with a determination to remove him/her because of disability or incapacity, the
question of the Executive's ability to continue in active employment shall be
submitted to an impartial and reputable physician selected by the parties hereto
and such physician's determination on the question of disability or incapacity
shall be binding. If it is determined that the Executive is permanently
disabled, he/she shall nevertheless continue to receive 60% of his/her
compensation for the remaining term of this Agreement.
(c) There shall be deducted from the amounts paid to the Executive
hereunder during any period of disability or incapacitation as described herein,
any amounts actually paid to the Executive pursuant to any disability insurance
or other similar such program, as provided in Paragraph 9 hereof, which the Bank
has instituted or may institute on behalf of its employees for the purpose of
compensating the Executive in the event of disability.
11. Termination of Employment.
(a) Without cause. The Board of Directors may, without cause,
terminate this Agreement at any time, by giving 90 days written notice to the
Executive. In such event, the Executive, if requested by the Board of Directors,
shall continue to render his/her services, and shall be paid his/her regular
salary up to the date of termination. In addition, the Executive shall be paid
from the date of termination a severance payment of four (4) years base salary
(less all amounts required to be withheld and deducted), such payment to be made
in substantially equal semimonthly installments on the fifteenth and last days
of each month, or if these days are nonbusiness days, the immediately preceding
business day, commencing with the month in which the date of termination occurs
and continuing for 24 consecutive semimonthly payment dates.
The Executive may, without cause, terminate the Agreement by giving 90 days
written notice to the Board of Directors. In such event, the Executive shall
continue to render his/her services and shall be paid his/her regular salary up
to the date of termination, but shall not receive any severance payment. In the
event that the Executive terminates his/her agreement without cause, the Bank
shall be entitled to enjoin the employment of the Executive as an officer or
employee of any significant competitor of the Bank for a period of one year. The
term "significant competitor" shall mean any bank, savings bank or savings and
loan association which at the date of its employment of the Executive has total
assets of one billion dollars or more and a home or branch office in any city in
Puerto Rico. In consideration of the Executive entering into this
non-competition agreement, he/she shall receive an amount of $50,000 which
amount is for purposes of this Agreement included as part of the Executive's
base salary. (b) With Cause. The Board of Directors may, at any time, terminate
this Agreement for cause. In such event, the Executive shall not be entitled to
receive any further compensation from the date of notice of termination. For the
purpose of this Agreement, "termination for cause" shall include any act or
omission on the part of the Executive which involves personal dishonesty,
willful misconduct, breach of fiduciary duty, a material violation of any law,
rule or regulation relating to the banking industry or a material breach of any
provision of this Agreement, such as the willful and continued failure of the
Executive to perform the duties herein set forth. No act or failure to act on
the Executive's part shall be considered "willful" unless done, or omitted to be
done, by him/her not in good faith and without reasonable belief that his/her
action or omission was in the best interest of the Bank. For purposes of this
paragraph, any act or omission to act on the part of the Executive in reliance
upon an opinion of counsel to the Bank or to the Executive shall not be deemed
to be willful or without reasonable belief that the act or omission to act was
in the best interest of the Bank. The Executive may, with cause, terminate this
Agreement. For purposes of this paragraph, termination with cause shall mean a
failure of the Bank to comply with any material provision of this Agreement,
which failure has not been cured within 15 days of receipt of a written notice
by the Executive of such noncompliance by the Bank. (c) If the Executive is
suspended and/or prohibited from participating in the conduct of the Bank's
affairs by a notice or order served under Sections 8(e)(3), (e)(4) or (g)(1) of
the Federal Deposit Insurance Act [12 USC 1818(e)(3), (e)(4) and (g)(1)], or any
other similar provision of state or federal law now in place or enacted in
future, the Bank's obligations under this Agreement shall be suspended as of the
date of service, unless such prohibition and/or suspension is stayed by
appropriate proceedings. If after a hearing is held and upon judicial review,
the notice or order suspending and/or prohibiting the Executive from
participating in the affairs of the Bank is confirmed, then this Agreement shall
be terminated with cause. If the charges in the notice or order are dismissed,
the Bank shall: (i) pay the Executive all the compensation withheld while the
contractual obligations were suspended and (ii) reinstate, in whole or in part,
any of the obligations which were suspended. (d) If the Bank is in default, as
defined to mean an adjudication or other official determination of a court of
competent jurisdiction, the appropriate Federal banking agency or other public
authority pursuant to which a conservator, receiver or other legal custodian is
appointed for the Bank for the purpose of liquidation, all obligations under
this Agreement shall terminate as of the date of default, but rights of the
Executive to compensation earned as of the date of termination shall not be
affected. (e) In the event that the Executive is terminated or he/she terminates
this Agreement, in a manner which violates the provisions of this Paragraph 11,
as determined by the arbitration procedure provided in Paragraph 21, the
Executive or the Bank, as the case may be, shall be entitled to reimbursement
for all reasonable costs, including attorney's fees, incurred by the Executive
or the Bank, as the case may be, in challenging such termination.
12. Change in Control. (a) If during the term of this Agreement there is a
"change in control" of the Bank, as such term is defined in sub-paragraph (c)
hereunder, the Executive shall be entitled to receive from the Bank a severance
payment in consideration of having bound himself to employment by the Bank and
having foregone other business or professional opportunities, actual or
potential. The severance payment shall be a lump sum cash payment equal to four
(4) times the Executive's total compensation, as the term is defined in Section
12(b) of this Agreement, to be made on or before the fifth day following the
date on which the change in control occurs. (b) For purposes of this section,
the term total compensation shall mean the Executive's base salary plus the
highest cash Performance Bonus paid to the Executive in any of the four (4)
fiscal years prior to the date of the change in control, and the value of any
other benefits provided to the Executive during the year in which the change in
control occurs which are listed and attached hereto as Exhibit A, as it may be
amended from time to time. (c) The term "change in control" shall be deemed to
have taken place if: (i) a third person, including a "group" as defined in
Section 13(d)(3) of the Securities Exchange Act of 1934, becomes the beneficial
owner of shares of the Bank having 25% or more of the total number of votes
which may be cast for the election of directors of the Bank or which, by
cumulative voting, if permitted by the Bank's charter or bylaws, would enable
such third person to elect 25% or more of the directors of the Bank; or (ii) as
the result of, or in connection with, any cash tender or exchange offer, merger
or any other business combination, sales of assets or contested election, or any
combination of the foregoing transactions, the persons who were directors of the
Bank before such transaction shall cease to constitute a majority of the Board
of the Bank or any successor institution. Notwithstanding the provisions of this
paragraph, a change in control of the Bank shall not be deemed to have occurred
in the event the Bank undertakes a reorganization to form a bank holding
company. (d) Any payments made to the Executive pursuant to this Agreement are
subject to and conditioned upon their compliance with 12 USC 1828(k) and any
regulations promulgated thereunder. The Bank shall in good faith seek to obtain,
if necessary or required, any consents or approvals from the FDIC or any other
applicable regulatory agency and any successors thereto with respect to any
payments to be made or any benefits to be provided to the Executive pursuant to
the terms of this Agreement.
13. Confidentiality; Injunctive Relief. Recognizing that the knowledge and
information about, or relationships with, the business associates, customers,
clients, and agents of the Bank and its affiliated companies and the business
methods, systems, plans, and policies of the Bank and of its affiliated
companies which Executive has heretofore and shall hereafter receive, obtain, or
establish as an employee of the Bank or otherwise are valuable and unique assets
of the Bank, the Executive agrees that, during the continuance of this Agreement
and thereafter, he/she shall not (otherwise than pursuant to his/her duties
hereunder) disclose without the written consent of the Bank, any material or
substantial, confidential, or proprietary know-how, data, or information
pertaining to the Bank, or its business, personnel, or plans, to any person,
firm, corporation, or other entity, for any reason or purpose whatsoever.
Executive acknowledges and agrees that all memoranda, notes, records, and other
documents made or compiled by Executive or made available to Executive
concerning the Bank's business shall be the Bank's exclusive property and shall
be delivered by Executive to the Bank upon expiration or termination of this
Agreement or at any other time upon the request of the Company. The provisions
of this Paragraph 13 shall survive the expiration or termination of this
Agreement or any part thereof, without regard to the reason therefor. Executive
hereby acknowledges that the services to be rendered by him/her are of special,
unique, and extraordinary character and, in connection with such services,
he/she will have access to confidential information concerning the Bank's
business. By reason of this, Executive consents and agrees that if he/she
violates any of the provisions of this Agreement with respect to
confidentiality, the Bank would sustain irreparable harm and, therefore, in
addition to any other remedies which the Bank may have under this Agreement or
otherwise, the Bank will be entitled to an injunction to be issued by any court
of competent jurisdiction restraining the Executive from committing or
continuing any such violation of this Agreement. The term "Confidential
Information" means: (1) proprietary information of the Bank; (2) information
marked or designated by the Bank as confidential; (3) information, whether or
not in written form and whether or not designated as confidential, which is
known to the Executive as treated by the Bank as confidential; and (4)
information provided to the Bank by third parties which the Bank is obligated to
keep confidential, specifically including Bank customer lists and information.
Confidential Information does not include any information now or hereafter
voluntarily disseminated by the Bank to the public, or which otherwise becomes
part of the public domain through lawful means.
14. No assignments. This Agreement is personal to each of the parties
hereto. Neither party may assign or delegate any of his or its rights or
obligations hereunder without first obtaining the written consent of the other
party. However, in the event of the death of the Executive all his rights to
receive payments hereunder shall become rights of his estate.
15. Benefits. Any benefits due or provided hereunder to the Executive shall
be in addition to, and not in substitution of, any benefit to which the
Executive is otherwise entitled to without regard to the Agreement.
16. Mitigation. The Executive shall not be obligated to seek other
employment in mitigation of the amounts payable or arrangements made under any
provision of this Agreement, and the obtaining of any such other employment
shall in no event effect any reduction of the Bank's obligation to make the
payments and arrangements required to be made under this Agreement.
17. Notices. All notices required by this Agreement to be given by one
party to the other shall be in writing and shall be deemed to have been
delivered either:
(a) When personally delivered to the Office of the Secretary of the Bank at
his regular corporate office, or the Executive in person; or
(b) Five days after depositing such notice in the United States mails,
certified mail with return receipt requested and postage prepaid, to:
(i) the Bank:
c/o Office of the Secretary of the Bank
FirstBank Puerto Rico
PO Box 9146
Santurce, PR 00908-0146
(ii) the Executive:
Mr. Aurelio Aleman
Calle San Paolo #4
Monte Alvernia
Guaynabo, PR 00969
or to such other address as either party may designate to the other by notice in
writing in accordance with the terms hereof.
18. Amendments or Additions; Action by Board of Directors. No
amendments or additions to this Agreement shall be binding unless in writing and
signed by both parties. The prior approval by a two-thirds affirmative vote of
the full Board of Directors of the Bank shall be required in order for the Bank
to authorize any amendments or additions to this Agreement, to give any consents
or waivers of provisions of this Agreement, or to take any other action under
this Agreement including any termination of the employment of the Executive with
or without cause under Paragraph 10 hereof.
19. Section Headings. The Paragraph headings used in this Agreement are
included solely for convenience and shall not affect, or be used in connection
with, the interpretation of this Agreement.
20. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
21. Governing Law. This Agreement shall be governed by the laws of the
Commonwealth of Puerto Rico. Venue for the litigation of any and all matters
arising under or in connection with this Agreement shall be in the Superior
Court for the Commonwealth of Puerto Rico, in San Juan, in the case of state
court jurisdiction, when clause 21 of this Agreement is not legally applicable.
22. Arbitration. Any controversy as to the interpretation of this
contract must be submitted before three arbitrators to be appointed by the
American Arbitration Association ("AAA"). The rules and regulations of the AAA
shall govern the procedures of said arbitration. The award of a majority of
arbitrators shall be binding and final on the parties.
FIRSTBANK PUERTO RICO
/S/ German Malaret
---------------------------
Chairman
ATTEST:/s/ Angel Alvarez-Perez
- - ----------------------------------
EXECUTIVE: /s/Aurelio Aleman
-----------------------------
<PAGE>
<PAGE>
EMPLOYMENT AGREEMENT
AGREEMENT, dated as of May 14, 1998, by and between FIRSTBANK PUERTO
RICO (the "Bank") and Fernando L. Batlle (the "Executive").
WHEREAS, the Bank wishes to retain the services of the Executive and
the retention of the Executive's services for and on behalf of the Bank is of
material importance to the preservation and enhancement of the value of the
Bank's business;
WHEREAS, the Board of Directors of the Bank has approved and authorized
the entry into this Agreement with the Executive to take effect immediately upon
execution of the same;
WHEREAS , the parties desire to enter into this Agreement setting forth
the terms and conditions of the employment relationship of the Bank and the
Executive;
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements herein, the parties hereto agree as follows:
1. Employment. The Bank agrees to continue to employ the Executive and
the Executive agrees to continue in the employment of the Bank for the period
stated in Paragraph 4 hereof and upon the other terms and conditions herein
provided.
2. Position and Responsibilities. The Executive is employed as an Executive
Vice President, and shall carry out and render to the Bank such services as are
customarily performed by persons situated in a similar executive and
professional capacity. The Executive shall also perform such other related
duties as he may from time to time be reasonably directed, including, but not
limited to performing duties for the Bank or for any of its present or future
subsidiaries. The Executive shall report to the President and Chief Executive
Officer of the Bank, or to any Executive Officer designated by the President or
the Board of Directors.
3. Duties. During the period of employment hereunder, and except for
illness, vacation periods, and reasonable leaves of absence, the Executive shall
devote his business time, attention, skill, and efforts to the faithful
performance of his duties hereunder as is customary for an executive holding a
similar position in a financial institution of comparable size.
The Executive agrees that during the term of his employment
hereunder, except with the express consent of the Board of Directors he will
not, directly or indirectly, engage or participate, become director of, or
render advisory or other services for, or in connection with, or become
interested in, or make any financial investment in any firm, corporation,
business entity or business enterprise competitive with or to any business of
the Bank; provided, however, that the Executive shall not thereby be precluded
or prohibited from owning passive investments, including investments in the
securities of other financial institutions, so long as such ownership does not
require him to devote substantial time to management or control of the business
or activities in which he has invested.
4. Term. The initial term of employment under this Agreement shall be
for a period of four (4) years, commencing on the date hereof and terminating
May 14, 2002. On each anniversary of the date of commencement of this Agreement,
the term of employment hereunder shall automatically be extended for an
additional one (1) year period beyond the then effective expiration date, unless
either party receives written notice, not less than 90 days prior to the
anniversary date, advising the other party that this Agreement shall not be
further extended. Any such written notice shall not affect any prior extensions
of the term of employment hereunder.
5. Standards. The Executive shall perform his duties and
responsibilities under this Agreement in accordance with such reasonable
standards as are established from time to time by the Board of Directors and/or
management of the Bank. The reasonableness of such standards shall be measured
against standards for executive performance generally prevailing in the banking
industry.
Notwithstanding anything to the contrary, nothing in this
Agreement will be interpreted in any manner which would tend to limit or
interfere with the authority or oversight duties and discretion of the Board of
Directors to establish adequate guidelines for the effective management of the
Bank.
6. Compensation and Reimbursement of Expenses.
a) Compensation
The Bank agrees to pay the Executive during the term of this Agreement a
base salary of not less than $200,000 per year. The performance of the Executive
shall be reviewed annually by the Board of Directors and the salary provided
herein may be increased, but not decreased, in accordance with the
recommendation of the Compensation Committee. The salary provided herein shall
not be paid less frequently than monthly.
b) Performance Bonus
In addition to the salary set forth above, the performance of the Executive
and of the Bank during each year of employment shall be evaluated on the basis
of the Bank's achievement of the predetermined business objectives contained in
the Bank's annual business plan. The contribution of the Executive to the
achievement of the Bank's annual business objectives and his performance in such
other functions as may be reasonably put under his charge, will be evaluated by
the President and Chief Executive Officer who may recommend to the Compensation
Committee payment of a performance bonus in an amount which the Compensation
Committee may determine at its discretion.
c) Stock Options
The Executive will be entitled to participate in and receive the benefits
of any stock option, profit sharing, or other plans, benefits and privileges
given to employees and executives of the Bank or its subsidiaries and affiliates
which now exist or may come into existence hereafter, to the extent commensurate
with his then duties and responsibilities, as fixed by the Compensation
Committee and approved by the Board of Directors. The terms and conditions of
such stock options will be within the parameters set forth in the employee stock
option plan of the Bank or other similar plan under which a benefit or privilege
is made available.
d) Automobile Expenses.
(i) The Bank shall provide the Executive with a company owned automobile.
Such automobile will be furnished in accordance with existing executive
automobile policy as approved by the Board of Directors. All expenses, including
but not limited to insurance, maintenance, repairs, fuel, and lubrication
services, shall be provided by the Bank.
(ii) Monthly or not more than thirty (30) days after the expenses are
incurred, the Bank shall pay or reimburse the Executive for any gasoline, oil
and maintenance or repair expenses which the Executive incurs directly in the
operation of the automobile provided hereunder.
e) Reimbursement of Expenses.
Not less frequently than monthly, the Bank shall pay or reimburse the
Executive for all reasonable travel and other expenses incurred by the Executive
in the performance of his duties under this Agreement.
f) Office.
The Bank shall furnish the Executive with a private office, a private
secretary and such other assistance and accommodations as shall be suitable to
the character of the Executive's position with the Bank and adequate for the
performance of his duties hereunder.
7. Participation in Benefit Plans. The payments and benefits provided
hereunder are in addition to any payment and benefits to which Executive may be
or may become entitled under any other present or future group employee benefit
plan or program of the Bank for which executives are or shall become eligible,
and the Executive shall be eligible to receive all benefits and entitlements for
which the executives are eligible under every such plan or program.
8. Voluntary Absences; Vacations and Sick Leave. The Executive shall be
entitled, without loss of pay, to absent himself voluntarily for reasonable
periods of time from the performance of his duties and responsibilities under
this Agreement. All such voluntary absences shall count either as paid vacation
time or sick leave, unless otherwise provided by the Board of Directors. The
Executive shall be entitled to an annual paid vacation of 18 working days per
year, or such longer periods as the Board of Directors may approve, which
vacations shall be scheduled by the Executive with the prior approval of the
President and Chief Executive Officer or any other officer to whom the Executive
reports, taking into account the needs of the Bank. The Executive may accumulate
unused paid vacation time from one calendar year to the next; provided, that
such accumulation shall not exceed 36 working days of unused vacation time from
prior years. The Executive shall be entitled to up to 15 non-cumulative working
days of paid sick leave per year or such longer period as the Board of Directors
may approve.
9. Benefits Payable Upon Disability or Death. The Bank shall, at all
times, maintain in effect disability and death benefits insurance for the
benefit of the Executive in an amount at least equal to that maintained for
executives of similar rank and which will not be less than that maintained by
the Bank for all officers and employees. Provided that the Bank may increase but
never decrease the benefits which the Executive and/or the Executive's heirs
would be entitled to thereunder.
10. Disability.
(a) If the Executive shall become disabled or incapacitated
for a number of consecutive days exceeding those to which he is entitled as
sick-leave, and it is determined that he will continue to temporarily be unable
to perform his duties under this Agreement, he shall nevertheless continue to
receive 60% of his compensation, exclusive of any benefits which may be in
effect for Bank employees under Paragraph 7 hereof until such time as he may
rejoin active employment. Upon returning to active duty, the Executive's full
compensation as set forth in this Agreement shall be reinstated. In the event
that the Executive returns to active employment on other than a full-time basis,
then his compensation (as set forth in Paragraph 6 of this Agreement) shall be
reduced in proportion to the time spent in said employment.
(b) For purposes of this Agreement, the Executive shall be
deemed to be permanently disabled or incapacitated if the Executive, due to
physical or mental illness, shall have been absent from his duties with the Bank
on a full-time basis for three consecutive months. In such case, the Board of
Directors may remove the Executive from employment and may employ another
executive in such capacity; provided, that, if the Executive shall not agree
with a determination to remove him/her because of disability or incapacity, the
question of the Executive's ability to continue in active employment shall be
submitted to an impartial and reputable physician selected by the parties hereto
and such physician's determination on the question of disability or incapacity
shall be binding. If it is determined that the Executive is permanently
disabled, he shall nevertheless continue to receive 60% of his compensation for
the remaining term of this Agreement.
(c) There shall be deducted from the amounts paid to the Executive
hereunder during any period of disability or incapacitation as described herein,
any amounts actually paid to the Executive pursuant to any disability insurance
or other similar such program, as provided in Paragraph 9 hereof, which the Bank
has instituted or may institute on behalf of its employees for the purpose of
compensating the Executive in the event of disability.
11. Termination of Employment.
(a) Without cause. The Board of Directors may, without cause,
terminate this Agreement at any time, by giving 90 days written notice to the
Executive. In such event, the Executive, if requested by the Board of Directors,
shall continue to render his services, and shall be paid his regular salary up
to the date of termination. In addition, the Executive shall be paid from the
date of termination a severance payment of four (4) years base salary (less all
amounts required to be withheld and deducted), such payment to be made in
substantially equal semimonthly installments on the fifteenth and last days of
each month, or if these days are nonbusiness days, the immediately preceding
business day, commencing with the month in which the date of termination occurs
and continuing for 24 consecutive semimonthly payment dates.
The Executive may, without cause, terminate the Agreement by
giving 90 days written notice to the Board of Directors. In such event, the
Executive shall continue to render his services and shall be paid his regular
salary up to the date of termination, but shall not receive any severance
payment. In the event that the Executive terminates his agreement without cause,
the Bank shall be entitled to enjoin the employment of the Executive as an
officer or employee of any significant competitor of the Bank for a period of
one year. The term "significant competitor" shall mean any bank, savings bank or
savings and loan association which at the date of its employment of the
Executive has total assets of one billion dollars or more and a home or branch
office in any city in Puerto Rico. In consideration of the Executive entering
into this non-competition agreement, he shall receive an amount of $50,000 which
amount is for purposes of this Agreement included as part of the Executive's
base salary.
(b) With Cause. The Board of Directors may, at any time,
terminate this Agreement for cause. In such event, the Executive shall not be
entitled to receive any further compensation from the date of notice of
termination. For the purpose of this Agreement, "termination for cause" shall
include any act or omission on the part of the Executive which involves personal
dishonesty, willful misconduct, breach of fiduciary duty, a material violation
of any law, rule or regulation relating to the banking industry or a material
breach of any provision of this Agreement, such as the willful and continued
failure of the Executive to perform the duties herein set forth. No act or
failure to act on the Executive's part shall be considered "willful" unless
done, or omitted to be done, by him/her not in good faith and without reasonable
belief that his action or omission was in the best interest of the Bank. For
purposes of this paragraph, any act or omission to act on the part of the
Executive in reliance upon an opinion of counsel to the Bank or to the Executive
shall not be deemed to be willful or without reasonable belief that the act or
omission to act was in the best interest of the Bank.
The Executive may, with cause, terminate this Agreement. For
purposes of this paragraph, termination with cause shall mean a failure of the
Bank to comply with any material provision of this Agreement, which failure has
not been cured within 15 days of receipt of a written notice by the Executive of
such noncompliance by the Bank.
(c) If the Executive is suspended and/or prohibited from
participating in the conduct of the Bank's affairs by a notice or order served
under Sections 8(e)(3), (e)(4) or (g)(1) of the Federal Deposit Insurance Act
[12 USC 1818(e)(3), (e)(4) and (g)(1)], or any other similar provision of state
or federal law now in place or enacted in future, the Bank's obligations under
this Agreement shall be suspended as of the date of service, unless such
prohibition and/or suspension is stayed by appropriate proceedings. If after a
hearing is held and upon judicial review, the notice or order suspending and/or
prohibiting the Executive from participating in the affairs of the Bank is
confirmed, then this Agreement shall be terminated with cause. If the charges in
the notice or order are dismissed, the Bank shall: (i) pay the Executive all the
compensation withheld while the contractual obligations were suspended and (ii)
reinstate, in whole or in part, any of the obligations which were suspended.
(d) If the Bank is in default, as defined to mean an
adjudication or other official determination of a court of competent
jurisdiction, the appropriate Federal banking agency or other public authority
pursuant to which a conservator, receiver or other legal custodian is appointed
for the Bank for the purpose of liquidation, all obligations under this
Agreement shall terminate as of the date of default, but rights of the Executive
to compensation earned as of the date of termination shall not be affected.
(e) In the event that the Executive is terminated or he
terminates this Agreement, in a manner which violates the provisions of this
Paragraph 11, as determined by the arbitration procedure provided in Paragraph
21, the Executive or the Bank, as the case may be, shall be entitled to
reimbursement for all reasonable costs, including attorney's fees, incurred by
the Executive or the Bank, as the case may be, in challenging such termination.
12. Change in Control.
(a) If during the term of this Agreement there is a "change in
control" of the Bank, as such term is defined in sub-paragraph (c) hereunder,
the Executive shall be entitled to receive from the Bank a severance payment in
consideration of having bound himself to employment by the Bank and having
foregone other business or professional opportunities, actual or potential. The
severance payment shall be a lump sum cash payment equal to four (4) times the
Executive's total compensation, as the term is defined in Section 12(b) of this
Agreement, to be made on or before the fifth day following the date on which the
change in control occurs.
(b) For purposes of this section, the term total compensation
shall mean the Executive's base salary plus the highest cash Performance Bonus
paid to the Executive in any of the four (4) fiscal years prior to the date of
the change in control, and the value of any other benefits provided to the
Executive during the year in which the change in control occurs which are listed
and attached hereto as Exhibit A, as it may be amended from time to time.
(c) The term "change in control" shall be deemed to have taken
place if: (i) a third person, including a "group" as defined in Section 13(d)(3)
of the Securities Exchange Act of 1934, becomes the beneficial owner of shares
of the Bank having 25% or more of the total number of votes which may be cast
for the election of directors of the Bank or which, by cumulative voting, if
permitted by the Bank's charter or bylaws, would enable such third person to
elect 25% or more of the directors of the Bank; or (ii) as the result of, or in
connection with, any cash tender or exchange offer, merger or any other business
combination, sales of assets or contested election, or any combination of the
foregoing transactions, the persons who were directors of the Bank before such
transaction shall cease to constitute a majority of the Board of the Bank or any
successor institution. Notwithstanding the provisions of this paragraph, a
change in control of the Bank shall not be deemed to have occurred in the event
the Bank undertakes a reorganization to form a bank holding company.
(d) Any payments made to the Executive pursuant to this Agreement are
subject to and conditioned upon their compliance with 12 USC 1828(k) and any
regulations promulgated thereunder. The Bank shall in good faith seek to obtain,
if necessary or required, any consents or approvals from the FDIC or any other
applicable regulatory agency and any successors thereto with respect to any
payments to be made or any benefits to be provided to the Executive pursuant to
the terms of this Agreement.
13. Confidentiality; Injunctive Relief. Recognizing that the knowledge
and information about, or relationships with, the business associates,
customers, clients, and agents of the Bank and its affiliated companies and the
business methods, systems, plans, and policies of the Bank and of its affiliated
companies which Executive has heretofore and shall hereafter receive, obtain, or
establish as an employee of the Bank or otherwise are valuable and unique assets
of the Bank, the Executive agrees that, during the continuance of this Agreement
and thereafter, he shall not (otherwise than pursuant to his duties hereunder)
disclose without the written consent of the Bank, any material or substantial,
confidential, or proprietary know-how, data, or information pertaining to the
Bank, or its business, personnel, or plans, to any person, firm, corporation, or
other entity, for any reason or purpose whatsoever. Executive acknowledges and
agrees that all memoranda, notes, records, and other documents made or compiled
by Executive or made available to Executive concerning the Bank's business shall
be the Bank's exclusive property and shall be delivered by Executive to the Bank
upon expiration or termination of this Agreement or at any other time upon the
request of the Company.
The provisions of this Paragraph 13 shall survive the
expiration or termination of this Agreement or any part thereof, without regard
to the reason therefor.
Executive hereby acknowledges that the services to be rendered
by him/her are of special, unique, and extraordinary character and, in
connection with such services, he will have access to confidential information
concerning the Bank's business. By reason of this, Executive consents and agrees
that if he violates any of the provisions of this Agreement with respect to
confidentiality, the Bank would sustain irreparable harm and, therefore, in
addition to any other remedies which the Bank may have under this Agreement or
otherwise, the Bank will be entitled to an injunction to be issued by any court
of competent jurisdiction restraining the Executive from committing or
continuing any such violation of this Agreement. The term "Confidential
Information" means: (1) proprietary information of the Bank; (2) information
marked or designated by the Bank as confidential; (3) information, whether or
not in written form and whether or not designated as confidential, which is
known to the Executive as treated by the Bank as confidential; and (4)
information provided to the Bank by third parties which the Bank is obligated to
keep confidential, specifically including Bank customer lists and information.
Confidential Information does not include any information now or hereafter
voluntarily disseminated by the Bank to the public, or which otherwise becomes
part of the public domain through lawful means.
14. No assignments. This Agreement is personal to each of the parties
hereto. Neither party may assign or delegate any of his or its rights or
obligations hereunder without first obtaining the written consent of the other
party. However, in the event of the death of the Executive all his rights to
receive payments hereunder shall become rights of his estate.
15. Benefits. Any benefits due or provided hereunder to the Executive shall
be in addition to, and not in substitution of, any benefit to which the
Executive is otherwise entitled to without regard to the Agreement.
16. Mitigation. The Executive shall not be obligated to seek other
employment in mitigation of the amounts payable or arrangements made under any
provision of this Agreement, and the obtaining of any such other employment
shall in no event effect any reduction of the Bank's obligation to make the
payments and arrangements required to be made under this Agreement.
17. Notices. All notices required by this Agreement to be given by one
party to the other shall be in writing and shall be deemed to have been
delivered either:
(a) When personally delivered to the Office of the Secretary of the Bank at
his regular corporate office, or the Executive in person; or
(b) Five days after depositing such notice in the United States mails,
certified mail with return receipt requested and postage prepaid, to: (i) the
Bank: c/o Office of the Secretary of the Bank FirstBank Puerto Rico PO Box 9146
Santurce, PR 00908-0146
(ii) the Executive:
Mr. Fernando L. Batlle
44 Calle Principe Alberto
Urb. Estancias Reales
Guaynabo, PR 00969
or to such other address as either party may designate to the other by notice in
writing in accordance with the terms hereof.
18. Amendments or Additions; Action by Board of Directors. No
amendments or additions to this Agreement shall be binding unless in writing and
signed by both parties. The prior approval by a two-thirds affirmative vote of
the full Board of Directors of the Bank shall be required in order for the Bank
to authorize any amendments or additions to this Agreement, to give any consents
or waivers of provisions of this Agreement, or to take any other action under
this Agreement including any termination of the employment of the Executive with
or without cause under Paragraph 10 hereof.
19. Section Headings. The Paragraph headings used in this Agreement are
included solely for convenience and shall not affect, or be used in connection
with, the interpretation of this Agreement.
20. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
21. Governing Law. This Agreement shall be governed by the laws of the
Commonwealth of Puerto Rico. Venue for the litigation of any and all matters
arising under or in connection with this Agreement shall be in the Superior
Court for the Commonwealth of Puerto Rico, in San Juan, in the case of state
court jurisdiction, when clause 21 of this Agreement is not legally applicable.
22. Arbitration. Any controversy as to the interpretation of this
contract must be submitted before three arbitrators to be appointed by the
American Arbitration Association ("AAA"). The rules and regulations of the AAA
shall govern the procedures of said arbitration. The award of a majority of
arbitrators shall be binding and final on the parties.
FIRSTBANK PUERTO RICO
/S/ German Malaret
---------------------------
Chairman
ATTEST:/s/ Antonio Escriba
- - ---------------------------
EXECUTIVE:/s/Fernando L. Batlle
-----------------------------
<PAGE>
<PAGE>
EMPLOYMENT AGREEMENT
AGREEMENT, dated as of May 26, 1998, by and between FIRSTBANK PUERTO
RICO (the "Bank") and Randolfo Rivera Sanfeliz (the "Executive").
WHEREAS, the Bank wishes to retain the services of the Executive and
the retention of the Executive's services for and on behalf of the Bank is of
material importance to the preservation and enhancement of the value of the
Bank's business;
WHEREAS, the Board of Directors of the Bank has approved and authorized
the entry into this Agreement with the Executive to take effect immediately upon
execution of the same;
WHEREAS , the parties desire to enter into this Agreement setting forth
the terms and conditions of the employment relationship of the Bank and the
Executive;
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements herein, the parties hereto agree as follows:
1. Employment. The Bank agrees to continue to employ the Executive and
the Executive agrees to continue in the employment of the Bank for the period
stated in Paragraph 4 hereof and upon the other terms and conditions herein
provided.
2. Position and Responsibilities. The Executive is employed as an Executive
Vice President, and shall carry out and render to the Bank such services as are
customarily performed by persons situated in a similar executive and
professional capacity. The Executive shall also perform such other related
duties as he may from time to time be reasonably directed, including, but not
limited to performing duties for the Bank or for any of its present or future
subsidiaries. The Executive shall report to the Senior Executive Vice President
and Chief Lending Officer of the Bank, or to any Executive Officer designated by
the President or the Board of Directors.
3. Duties. During the period of employment hereunder, and except for
illness, vacation periods, and reasonable leaves of absence, the Executive shall
devote his business time, attention, skill, and efforts to the faithful
performance of his duties hereunder as is customary for an executive holding a
similar position in a financial institution of comparable size.
The Executive agrees that during the term of his employment
hereunder, except with the express consent of the Board of Directors he will
not, directly or indirectly, engage or participate, become director of, or
render advisory or other services for, or in connection with, or become
interested in, or make any financial investment in any firm, corporation,
business entity or business enterprise competitive with or to any business of
the Bank; provided, however, that the Executive shall not thereby be precluded
or prohibited from owning passive investments, including investments in the
securities of other financial institutions, so long as such ownership does not
require him to devote substantial time to management or control of the business
or activities in which he has invested.
4. Term. The initial term of employment under this Agreement shall be
for a period of four (4) years, commencing on the date hereof and terminating
May 31, 2002. On each anniversary of the date of commencement of this Agreement,
the term of employment hereunder shall automatically be extended for an
additional one (1) year period beyond the then effective expiration date, unless
either party receives written notice, not less than ninety (90) days prior to
the anniversary date, advising the other party that this Agreement shall not be
further extended. Any such written notice shall not affect any prior extensions
of the term of employment hereunder.
5. Standards. The Executive shall perform his duties and
responsibilities under this Agreement in accordance with such reasonable
standards as are established from time to time by the Board of Directors and/or
management of the Bank. The reasonableness of such standards shall be measured
against standards for executive performance generally prevailing in the banking
industry.
Notwithstanding anything to the contrary, nothing in this
Agreement will be interpreted in any manner which would tend to limit or
interfere with the authority or oversight duties and discretion of the Board of
Directors to establish adequate guidelines for the effective management of the
Bank.
6. Compensation and Reimbursement of Expenses.
a) Compensation
The Bank agrees to pay the Executive during the term of this Agreement a
base salary of not less than two hundred thousand dollars ($200,000) per year,
and a signing bonus of fifty thousand dollars ($50,000) at the term of the
execution of this Employment Agreement. The performance of the Executive shall
be reviewed annually by the Board of Directors and the salary provided herein
may be increased, but not decreased, in accordance with the recommendation of
the Compensation Committee. The salary provided herein shall not be paid less
frequently than monthly.
b) Performance Bonus
In addition to the salary set forth above, the performance of the Executive
and of the Bank during each year of employment shall be evaluated on the basis
of the Bank's achievement of the predetermined business objectives contained in
the Bank's annual business plan. The contribution of the Executive to the
achievement of the Bank's annual business objectives and his performance in such
other functions as may be reasonably put under his charge, will be evaluated by
the President and Chief Executive Officer and/or the Senior Executive Vice
President and Chief Lending Officer who may recommend to the Compensation
Committee payment of a performance bonus in an amount which the Compensation
Committee may determine at its discretion. The performance bonus payable on
January 1999 and the performance bonus payable on January 2000 will not be less
than one hundred thousand dollars ($100,000) per each such years.
c) Stock Options
The Executive will be entitled to participate in and receive the benefits
of any stock option, profit sharing, or other plans, benefits and privileges
given to employees and executives of the Bank or its subsidiaries and affiliates
which now exist or may come into existence hereafter, to the extent commensurate
with his then duties and responsibilities, as fixed by the Compensation
Committee and approved by the Board of Directors. The terms and conditions of
such stock options will be within the parameters set forth in the employee stock
option plan of the Bank or other similar plan under which a benefit or privilege
is made available. Notwithstanding the above, simultaneously with the execution
of this Employment Agreement, and as an integral part of the recruitment package
agreed upon, the Executive will receive stock options for forty thousand
(40,000) shares.
d) Automobile Expenses.
(i) The Bank shall provide the Executive with a company owned automobile.
Such automobile will be furnished in accordance with existing executive
automobile policy as approved by the Board of Directors. All expenses, including
but not limited to insurance, maintenance, repairs, fuel, and lubrication
services, shall be provided by the Bank.
(ii) Monthly or not more than thirty (30) days after the expenses are
incurred, the Bank shall pay or reimburse the Executive for any gasoline, oil
and maintenance or repair expenses which the Executive incurs directly in the
operation of the automobile provided hereunder.
e) Reimbursement of Expenses.
Not less frequently than monthly, the Bank shall pay or reimburse the
Executive for all reasonable travel and other expenses incurred by the Executive
in the performance of his duties under this Agreement.
f) Office.
The Bank shall furnish the Executive with a private office, a private
secretary and such other assistance and accommodations as shall be suitable to
the character of the Executive's position with the Bank and adequate for the
performance of his duties hereunder.
g) Membership at club
The Bank shall pay all initiation and monthly fees related to a full
membership for the Executive in the Dorado Beach Hotel.
7. Participation in Benefit Plans. The payments and benefits provided
hereunder are in addition to any payment and benefits to which Executive may be
or may become entitled under any other present or future group employee benefit
plan or program of the Bank for which executives are or shall become eligible,
and the Executive shall be eligible to receive all benefits and entitlements for
which the executives are eligible under every such plan or program.
8. Voluntary Absences; Vacations and Sick Leave. The Executive shall be
entitled, without loss of pay, to absent himself voluntarily for reasonable
periods of time from the performance of his duties and responsibilities under
this Agreement. All such voluntary absences shall count either as paid vacation
time or sick leave, unless otherwise provided by the Board of Directors. The
Executive shall be entitled to an annual paid vacation of eighteen (18) working
days per year, or such longer periods as the Board of Directors may approve,
which vacations shall be scheduled by the Executive with the prior approval of
the Senior Executive Vice President and Chief Lending Officer, taking into
account the needs of the Bank. The Executive may accumulate unused paid vacation
time from one calendar year to the next; provided, that such accumulation shall
not exceed thirty-six (36) working days of unused vacation time from prior
years. The Executive shall be entitled to up to fifteen (15) non-cumulative
working days of paid sick leave per year or such longer period as the Board of
Directors may approve.
9. Benefits Payable Upon Disability or Death. The Bank shall, at all
times, maintain in effect disability and death benefits insurance for the
benefit of the Executive in an amount at least equal to that maintained for
executives of similar rank and which will not be less than that maintained by
the Bank for all officers and employees. Provided that the Bank may increase but
never decrease the benefits which the Executive and/or the Executive's heirs
would be entitled to thereunder.
10. Disability.
(a) If the Executive shall become disabled or incapacitated for a number of
consecutive days exceeding those to which he is entitled as sick-leave, and it
is determined that he will continue to temporarily be unable to perform his
duties under this Agreement, he shall nevertheless continue to receive sixty
percent (60%) of his total compensation, exclusive of any benefits which may be
in effect for Bank employees under Paragraph 7 hereof until such time as he may
rejoin active employment. Upon returning to active duty, the Executive's full
compensation as set forth in this Agreement shall be reinstated. In the event
that the Executive returns to active employment on other than a full-time basis,
then his compensation (as set forth in Paragraph 6 of this Agreement) shall be
reduced in proportion to the time spent in said employment.
(b) For purposes of this Agreement, the Executive shall be deemed to be
permanently disabled or incapacitated if the Executive, due to physical or
mental illness, shall have been absent from his duties with the Bank on a
full-time basis for three (3) consecutive months. In such case, the Board of
Directors may remove the Executive from employment and may employ another
executive in such capacity; provided, that, if the Executive shall not agree
with a determination to remove him because of disability or incapacity, the
question of the Executive's ability to continue in active employment shall be
submitted to an impartial and reputable physician selected by the parties hereto
and such physician's determination on the question of disability or incapacity
shall be binding. If it is determined that the Executive is permanently
disabled, he shall nevertheless continue to receive sixty percent (60%) of his
total compensation for the remaining term of this Agreement.
(c) There shall be deducted from the amounts paid to the Executive
hereunder during any period of disability or incapacitation as described herein,
any amounts actually paid to the Executive pursuant to any disability insurance
or other similar such program, as provided in Paragraph 9 hereof, which the Bank
has instituted or may institute on behalf of its employees for the purpose of
compensating the Executive in the event of disability.
11. Termination of Employment.
(a) Without cause. The Board of Directors may, without cause, terminate
this Agreement at any time, by giving ninety (90) days written notice to the
Executive. In such event, the Executive, if requested by the Board of Directors,
shall continue to render his services, and shall be paid his regular salary up
to the date of termination. In addition, the Executive shall be paid from the
date of termination a severance payment of four (4) years base salary (less all
amounts required to be withheld and deducted), such payment to be made in
substantially equal semimonthly installments on the fifteenth and last days of
each month, or if these days are nonbusiness days, the immediately preceding
business day, commencing with the month in which the date of termination occurs
and continuing for twenty-four (24) consecutive semimonthly payment dates.
The Executive may, without cause, terminate the Agreement by giving ninety
(90) days written notice to the Board of Directors. In such event, the Executive
shall continue to render his services and shall be paid his regular salary up to
the date of termination, but shall not receive any severance payment. In the
event that the Executive terminates his agreement without cause, the Bank shall
be entitled to enjoin the employment of the Executive as an officer or employee
of any significant competitor of the Bank for a period of one (1) year. The term
"significant competitor" shall mean any bank, savings bank or savings and loan
association which at the date of its employment of the Executive has total
assets of one billion dollars or more and a home or branch office in any city in
Puerto Rico. In consideration of the Executive entering into this
non-competition agreement, he shall receive an amount of $50,000 which amount is
for purposes of this Agreement included as part of the Executive's base salary.
(b) With Cause. The Board of Directors may, at any time, terminate this
Agreement for cause. In such event, the Executive shall not be entitled to
receive any further compensation from the date of notice of termination. For the
purpose of this Agreement, "termination for cause" shall include any act or
omission on the part of the Executive which involves personal dishonesty,
willful misconduct, breach of fiduciary duty, a material violation of any law,
rule or regulation relating to the banking industry or a material breach of any
provision of this Agreement, such as the willful and continued failure of the
Executive to perform the duties herein set forth. No act or failure to act on
the Executive's part shall be considered "willful" unless done, or omitted to be
done, by him not in good faith and without reasonable belief that his action or
omission was in the best interest of the Bank. For purposes of this paragraph,
any act or omission to act on the part of the Executive in reliance upon an
opinion of counsel to the Bank or to the Executive shall not be deemed to be
willful or without reasonable belief that the act or omission to act was in the
best interest of the Bank.
The Executive may, with cause, terminate this Agreement. For purposes of
this paragraph, termination with cause shall mean a failure of the Bank to
comply with any material provision of this Agreement, which failure has not been
cured within fifteen (15) days of receipt of a written notice by the Executive
of such noncompliance by the Bank, to such case the Executive shall be entitled
to the same severance payment set forth for cases of termination without cause
by the Bank.
(c) If the Executive is suspended and/or prohibited from participating in
the conduct of the Bank's affairs by a notice or order served under Sections
8(e)(3), (e)(4) or (g)(1) of the Federal Deposit Insurance Act [12 USC
1818(e)(3), (e)(4) and (g)(1)], or any other similar provision of state or
federal law now in place or enacted in future, the Bank's obligations under this
Agreement shall be suspended as of the date of service, unless such prohibition
and/or suspension is stayed by appropriate proceedings. If after a hearing is
held and upon judicial review, the notice or order suspending and/or prohibiting
the Executive from participating in the affairs of the Bank is confirmed, then
this Agreement shall be terminated with cause. If the charges in the notice or
order are dismissed, the Bank shall: (i) pay the Executive all the compensation
withheld while the contractual obligations were suspended and (ii) reinstate, in
whole or in part, any of the obligations which were suspended.
(d) If the Bank is in default, as defined to mean an adjudication or other
official determination of a court of competent jurisdiction, the appropriate
Federal banking agency or other public authority pursuant to which a
conservator, receiver or other legal custodian is appointed for the Bank for the
purpose of liquidation, all obligations under this Agreement shall terminate as
of the date of default, but rights of the Executive to compensation earned as of
the date of termination shall not be affected.
(e) In the event that the Executive is terminated or he terminates this
Agreement, in a manner which violates the provisions of this Paragraph 11, as
determined by the arbitration procedure provided in Paragraph 22, the Executive
or the Bank, as the case may be, shall be entitled to reimbursement for all
reasonable costs, including attorney's fees, incurred by the Executive or the
Bank, as the case may be, in challenging such termination.
12. Change in Control.
(a) If during the term of this Agreement there is a "change in control" of
the Bank, as such term is defined in sub-paragraph (c) hereunder, the Executive
shall be entitled to receive from the Bank a severance payment in consideration
of having bound himself to employment by the Bank and having foregone other
business or professional opportunities, actual or potential. The severance
payment shall be a lump sum cash payment equal to four (4) times the Executive's
total compensation, as the term is defined in Section 12(b) of this Agreement,
to be made on or before the fifth day following the date on which the change in
control occurs.
(b) For purposes of this section, the term total compensation shall mean
the Executive's base salary plus the highest cash Performance Bonus paid to the
Executive in any of the four (4) fiscal years prior to the date of the change in
control, and the value of any other benefits provided to the Executive during
the year in which the change in control occurs which are listed and attached
hereto as Exhibit A, as it may be amended from time to time.
(c) The term "change in control" shall be deemed to have taken place if:
(i) a third person, including a "group" as defined in Section 13(d)(3) of the
Securities Exchange Act of 1934, becomes the beneficial owner of shares of the
Bank having twenty-five percent (25%) or more of the total number of votes which
may be cast for the election of directors of the Bank or which, by cumulative
voting, if permitted by the Banks charter or bylaws, would enable such third
person to elect twenty-five percent (25%) or more of the directors of the Bank;
or (ii) as the result of, or in connection with, any cash tender or exchange
offer, merger or any other business combination, sales of assets or contested
election, or any combination of the foregoing transactions, the persons who were
directors of the Bank before such transaction shall cease to constitute a
majority of the Board of the Bank or any successor institution. Notwithstanding
the provisions of this paragraph, a change in control of the Bank shall not be
deemed to have occurred in the event the Bank undertakes a reorganization to
form a bank holding company.
(d) Any payments made to the Executive pursuant to this Agreement are
subject to and conditioned upon their compliance with 12 USC 1828(k) and any
regulations promulgated thereunder. The Bank shall in good faith seek to obtain,
if necessary or required, any consents or approvals from the FDIC or any other
applicable regulatory agency and any successors thereto with respect to any
payments to be made or any benefits to be provided to the Executive pursuant to
the terms of this Agreement.
13. Confidentiality; Injunctive Relief. Recognizing that the knowledge and
information about, or relationships with, the business associates, customers,
clients, and agents of the Bank and its affiliated companies and the business
methods, systems, plans, and policies of the Bank and of its affiliated
companies which Executive has heretofore and shall hereafter receive, obtain, or
establish as an employee of the Bank or otherwise are valuable and unique assets
of the Bank, the Executive agrees that, during the continuance of this Agreement
and thereafter, he shall not (otherwise than pursuant to his duties hereunder)
disclose without the written consent of the Bank, any material or substantial,
confidential, or proprietary know-how, data, or information pertaining to the
Bank, or its business, personnel, or plans, to any person, firm, corporation, or
other entity, for any reason or purpose whatsoever. Executive acknowledges and
agrees that all memoranda, notes, records, and other documents made or compiled
by Executive or made available to Executive concerning the Bank's business shall
be the Bank's exclusive property and shall be delivered by Executive to the Bank
upon expiration or termination of this Agreement or at any other time upon the
request of the Company.
The provisions of this Paragraph 13 shall survive the expiration or
termination of this Agreement or any part thereof, without regard to the reason
therefor.
Executive hereby acknowledges that the services to be rendered by him are
of special, unique, and extraordinary character and, in connection with such
services, he will have access to confidential information concerning the Bank's
business. By reason of this, Executive consents and agrees that if he violates
any of the provisions of this Agreement with respect to confidentiality, the
Bank would sustain irreparable harm and, therefore, in addition to any other
remedies which the Bank may have under this Agreement or otherwise, the Bank
will be entitled to an injunction to be issued by any court of competent
jurisdiction restraining the Executive from committing or continuing any such
violation of this Agreement. The term "Confidential Information" means: (1)
proprietary information of the Bank; (2) information marked or designated by the
Bank as confidential; (3) information, whether or not in written form and
whether or not designated as confidential, which is known to the Executive as
treated by the Bank as confidential; and (4) information provided to the Bank by
third parties which the Bank is obligated to keep confidential, specifically
including Bank customer lists and information. Confidential Information does not
include any information now or hereafter voluntarily disseminated by the Bank to
the public, or which otherwise becomes part of the public domain through lawful
means.
14. No assignments. This Agreement is personal to each of the parties
hereto. Neither party may assign or delegate any of his or its rights or
obligations hereunder without first obtaining the written consent of the other
party. However, in the event of the death of the Executive all his rights to
receive payments hereunder shall become rights of his estate.
15. Benefits. Any benefits due or provided hereunder to the Executive shall
be in addition to, and not in substitution of, any benefit to which the
Executive is otherwise entitled to without regard to the Agreement.
16. Mitigation. The Executive shall not be obligated to seek other
employment in mitigation of the amounts payable or arrangements made under any
provision of this Agreement, and the obtaining of any such other employment
shall in no event effect any reduction of the Bank's obligation to make the
payments and arrangements required to be made under this Agreement.
17. Notices. All notices required by this Agreement to be given by one
party to the other shall be in writing and shall be deemed to have been
delivered either:
(a) When personally delivered to the Office of the Secretary of the Bank at
his regular corporate office, or the Executive in person; or
(b) Five days after depositing such notice in the United States mails,
certified mail with return receipt requested and postage prepaid, to: (i) the
Bank: c/o Office of the Secretary of the Bank FirstBank Puerto Rico PO Box 9146
Santurce, PR 00908-0146
(ii) the Executive:
Mr. Randolfo Rivera Sanfeliz
Urb. Tierra Alta II
P-12 Calle Las Palomas
Guaynabo, PR 00969
or to such other address as either party may designate to the other by notice in
writing in accordance with the terms hereof.
18. Amendments or Additions; Action by Board of Directors. No
amendments or additions to this Agreement shall be binding unless in writing and
signed by both parties. The prior approval by a two-thirds affirmative vote of
the full Board of Directors of the Bank shall be required in order for the Bank
to authorize any amendments or additions to this Agreement, to give any consents
or waivers of provisions of this Agreement, or to take any other action under
this Agreement including any termination of the employment of the Executive with
or without cause under Paragraph 10 hereof.
19. Section Headings. The Paragraph headings used in this Agreement are
included solely for convenience and shall not affect, or be used in connection
with, the interpretation of this Agreement.
20. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
21. Governing Law. This Agreement shall be governed by the laws of the
Commonwealth of Puerto Rico. Venue for the litigation of any and all matters
arising under or in connection with this Agreement shall be in the Superior
Court for the Commonwealth of Puerto Rico, in San Juan, in the case of state
court jurisdiction, when clause 21 of this Agreement is not legally applicable.
22. Arbitration. Any controversy as to the interpretation of this
contract must be submitted before three (3) arbitrators to be appointed by the
American Arbitration Association ("AAA"). The rules and regulations of the AAA
shall govern the procedures of said arbitration. The award of a majority of
arbitrators shall be binding and final on the parties.
FIRSTBANK PUERTO RICO
/S/ German Malaret
---------------------------
Chairman
ATTEST:/s/ Antonio Escriba
- - ---------------------------
EXECUTIVE: /s/ Randolfo Rivera
-----------------------------
<PAGE>
<PAGE>
Constant evolution and solid performance
Annual Report 1998
[LOGO] 1First BanCorp
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What started out as a small community bank in the heart of Santurce, has become
one of the leading financial institutions in the Island and the second largest
locally owned financial services company in Puerto Rico.
In 1948 First Federal Savings & Loan Association began operations in Puerto
Rico. From its early days, the institution was committed to Puerto Rico's growth
and quality of life. In 1987, the institution became a savings bank, and in
1994, a commercial bank under the laws of Puerto Rico. In 1998, it was
reorganized as a bank holding company under the name of First BanCorp.
The first 50 years have been marked by constant innovation and the creation of
top quality services with one primary goal in mind: promoting the development in
Puerto Rico.
New technology, new branches and new products are part of First BanCorp's plan
to provide outstanding service to our customers while benefiting employees and
stockholders.
While the future brings on new challenges and opportunities, we reafirm our
commitment to quality services and products to our customers. A community that
has seen us grow and has been part of this growth. Because without them, there
would be no future, and success would not have been possible. Their loyalty is
our motivation for the next 50 years to come.
[LOGO] 1First BanCorp 50 Anniversary
2
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Financial Highlights 3
Business Profile 7
President's Letter 9
1998: The Year in Review 12
The Puerto Rico Economy 16
Board of Directors 17
Officers 18
Financial Review 21
Stockholders' Information 72
3
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<TABLE>
<S> <C> <C> <C> <C> <C> <C>
F i n a n c i a l H i g h l i g h t s
- - ------------------------------------------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------------------------------------------
In Thousands (Except for per share results) 1998 1997 Percentage
Increase
- - ------------------------------------------------------------------------------------------------------------------------------------
(Decrease)
- - ------------------------------------------------------------------------------------------------------------------------------------
Operating Results:
Net interest income $166,168 $154,731 7.39
Provision for loan losses 76,000 55,676 36.50
Other income 58,240 39,866 46.09
Other operating expenses 91,798 83,268 10.24
Income tax provision 4,798 8,125 (40.95)
Net income 51,812 47,528 9.01
Weighted average shares-basic* 29,586 30,036 (1.50)
Weighted average shares-diluted* 29,858 30,204 (1.15)
Per common share:
Net income - basic 1.75 1.58 10.76
Net income - diluted 1.74 1.58 10.13
At Year End:
Assets $4,017,352 $3,327,436 20.73
Loans 2,120,054 1,959,301 8.20
Allowance for loan losses 67,854 57,712 17.57
Investments 1,800,489 1,276,900 41.00
Deposits 1,775,045 1,594,635 11.31
Borrowings 1,930,488 1,461,582 32.08
Capital 270,368 236,379 14.38
* Retroactively adjusted for the 100% stock split distributed in 1998.
</TABLE>
4
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[GRAPHS]
5
<PAGE>
Performance of First BanCorp's Common Stock
[GRAPH]
6
<PAGE>
(P.R. GEOGRAPHIC MAP)
Branches - 40 Offices
Aguada 1
San Sebastian 1
Arecibo 1
Manati 1
Vega Baja 1
Dorado 1
Bayamon 4
Guaynabo 1
San Juan 10
Carolina 3
Humacao 1
Caguas 4
Aguas Buenas 1
Cidra 1
Guayama 1
Cayey 1
Barranquitas 1
Ponce 1
Yauco 1
Cabo Rojo 1
Mayaguez 1
Saint Thomas 1
Saint Croix 1
Money Express - 26 Offices
Aguada 1
Aguadilla 1
Isabela 1
San Sebastian 1
Arecibo 1
Manati 1
Vega Baja 1
Toa Baja 1
Bayamon 3
San Juan 3
Carolina 1
Rio Grande 1
Fajardo 1
Humacao 1
Yabucoa 1
Caguas 1
Guayama 1
Cayey 1
Ponce 1
Utuado 1
Yauco 1
Mayaguez 1
First Leasing & Rentals - 6 Offices
Isabela 1
Bayamon 1
San Juan 3
Caguas 1
Auto Loan Center - 4 Offices
Bayamon 1
San Juan 1
Caguas 1
Mayaguez 1
Loan Center - 9 Offices
Aguadilla 1
Moca 1
Barceloneta 1
Fajardo 1
Las Piedras 1
Juana Diaz 1
Utuado 1
San German 1
Mayaguez 1
Total 85 Offices
7
<PAGE>
Business Profile
First BanCorp ("the Corporation"), incorporated in Puerto Rico, is the holding
company for FirstBank ("the Bank"), the second largest locally owned Commercial
Bank in Puerto Rico. First BanCorp had total assets of $4.017 billion as of
December 31, 1998. First BanCorp operates primarily in the Puerto Rico banking
market, offering a wide selection of financial services to a growing number of
consumer and commercial customers. Commercial loans, consumer loans, mortgage
loans and investment securities are the most important areas of its business.
The Corporation has a $747 million portfolio of commercial loans, commercial
mortgages and other related commercial products. Its commercial clients include
a wide range of small and medium sized businesses and professional practices.
First BanCorp also has a $1.0 billion consumer loan portfolio, which is
concentrated in auto loans, personal loans and credit cards. Its $1.80 billion
investment portfolio consists mostly of U.S. government securities and mortgage
backed securities. In addition, First BanCorp has $372 million in residential
mortgage and construction loans. Fifteen years ago these mortgage loans were the
Corporation's principal line of business, but Management has moved to diversify
First BanCorp's operations in recent years. Approximately 1,750 full time
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 Bank". 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". Effective
October 1, 1998 the Bank reorganized, making FirstBank a subsidiary of the
holding company First BanCorp.
First BanCorp, which is a well-capitalized institution under federal standards,
operates 40 full service branches including two offices in the U.S. Virgin
Islands. The Corporation also has 13 loan centers in Puerto Rico. A second tier
subsidiary of First BanCorp, Money Express, operates 26 small loan offices
throughout Puerto Rico. First BanCorp also includes a second tier subsidiary
known as First Leasing, which rents and leases motor vehicles from its six
offices in Puerto Rico.
First BanCorp has distinguished itself by providing innovative marketing
strategies and novel products to attract clients. Besides its main branches and
specialized lending offices, the Corporation has offered a
8
<PAGE>
telephone information service called "Telebanco" since 1983. This was the
first telebanking service offered in Puerto Rico. First BanCorp clients have
access to an extensive ATM network with access to the U.S. Virgin Islands, the
U.S. mainland and all over the world. First BanCorp was the first institution in
Puerto Rico to accept loan applications by FAX. First BanCorp was also the first
banking institution in Puerto Rico with a presence on the Internet. Clients can
now submit applications for some loans by way of the Corporation's web site. 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 the first financial
institution in the world to offer an indexed CD whose interest is based on the
average appreciation of the Dow Jones Industrial Average and whose principal is
insured by the Federal Deposit Insurance Corporation ("FDIC").
First BanCorp and its subsidiaries are subject to supervision, examination and
regulation by the Federal Reserve Board, the Office of the Commissioner of
Financial Institutions of Puerto Rico and the FDIC.
First BanCorp is committed to continue providing the most efficient and cost
effective banking services possible in selected product niches. Management's
long term goal is to transform First BanCorp into a conservatively managed,
diversified financial institution that will deliver superior financial
performance in the years to come.
9
<PAGE>
President's Letter
[PHOTO]
Angel Alvarez-Perez
Chairman, President
and Chief Financial Officer
To our stockholders:
On behalf of the Board of Directors and staff of First BanCorp I am pleased to
submit our annual report for 1998, our fiftieth anniversary year. First BanCorp
earned $51.8 million or $1.74 per share in 1998. This represents a 10.1 percent
increase in earnings per share. The Corporation earned $47.5 million or $1.58
per share in 1997. During 1998 we also surpassed $4 billion in assets and $2
billion in loans. These achievements continue a record of consistent growth that
goes back to 1991.
Our institution converted to a bank holding company, First BanCorp, during 1998.
This reorganization will increase our agility in a changing regulatory
environment and give us the flexibility to take advantage of new business
opportunities.
We achieved these outstanding results in a difficult environment, with stronger
local competition due to continuing mergers in the local market. Bankruptcies
have also continued their uptrend on the Island. Although the growth of
bankruptcies has moderated in recent months, it has affected the entire Puerto
Rico financial services industry. As outgoing President of the Puerto Rico
Bankers' Association, I have had a unique opportunity to observe the broad
implications of this trend. Under my leadership the industry developed an
advertising campaign to educate consumers and steer them toward alternative ways
of dealing with financial problems.
Strengthening Management and Operations
Management has been working intensively to strengthen First BanCorp here in
Puerto Rico. We are placing greater emphasis on commercial lending, while adding
experienced managers and strengthening our technological base.
To begin with, we have enhanced our management team by bringing in senior
executives with extensive experience in consumer, mortgage and commercial
lending. We have also re-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
10
<PAGE>
our strengthened management team to improve efficiency and contribute new
ideas that will help us to increase our market share.
Second, we have made important additions to our branch network, opening four new
offices. Two of these new branches are modern, full service offices in local
shopping centers. The other two are in-store branches in principal towns away
from the San Juan metropolitan area. This makes a total of forty branches,
including two in the U.S. Virgin Islands.
Third, First BanCorp introduced new and innovative products during 1998. We were
the first financial institution in the world to offer an indexed CD whose
interest is based on the average appreciation of the Dow Jones Industrial
Average and whose principal is FDIC insured. This account allows depositors to
earn an equity market return on their bank deposits. We also introduced our
"First Class" auto loan program, which provides personalized service and
accelerated loan processing for participating dealers and their clients.
Finally, the Corporation inaugurated a new mortgage product that allows selected
clients to finance 105% of the assessed value of their property. Although
similar offerings are available on the U.S. mainland, no other bank in Puerto
Rico offers a similar product.
Fourth, we have changed our public relations and advertising strategy,
undertaking a focused marketing campaign of high quality. The Corporation has
also adopted a new, streamlined logo to symbolize the new First BanCorp.
Fifth, Management has continued to dedicate many hours of time to maintaining
strict cost controls. While First BanCorp has been outstanding in maintaining
low costs, as shown by our efficiency ratio of 46.5% in 1998, Management has
been examining ways to carry cost control even further. We have been
systematically analyzing all important functions of the Corporation, with the
objective of becoming more efficient and improving customer service.
Sixth, we have continued to invest in new technology, as we have been doing for
the past several years. During 1998 we installed a more powerful mainframe
computer, significantly improved our web site and finished converting all major
mainframe applications to more modern software. Our management recognizes the
importance of the technological revolution that has been changing the face of
the financial services industry. We will continue to take full advantage of
these new technologies.
11
<PAGE>
Seventh, the Information Technology area made substantial progress on our long
range plan to eliminate the year 2000 problem. Since Management began dealing
with this issue in 1996, we have dedicated countless staff resources to
resolving it. The Corporation has upgraded all critical systems to new platforms
that are year 2000 compliant, and is testing all systems in house. We will be
fully tested by March 1999. The total expenditure for year 2000 compliance will
range between $1.5 million and $2.0 million, excluding the cost of converting to
new systems which are year 2000.
Enhancing Shareholder Value
Our past efforts have paid off in strong earnings growth and stock appreciation,
which have benefited our shareholders. The total return to First BanCorp
shareholders in 1998 was 79.4%, including dividends of 30 cents per share after
adjustment for a two for one stock split. Investors who held First BanCorp stock
over the seven year period from year-end 1991 to year-end 1998 received a total
return of 3,398 percent, for an average annual growth rate of 66.1 percent on
their investment.
Puerto Rico government policy has contributed to the performance of our stock.
To stimulate the formation of a local capital market, the Puerto Rico government
has allowed local IRA holders to invest limited amounts in stocks of local
companies since 1997. This change in policy has broadened the market for stocks
of all Puerto Rican companies, including First BanCorp.
The Corporation began a stock repurchase program three years ago. During 1998 we
repurchased 317,600 shares. This brought total activity over the three years of
our share repurchase program to 1,663,450 shares, adjusted for splits,
representing a total investment of $21.8 million. In addition, officers and
directors of First BanCorp owned approximately 19 percent of its shares on
December 31, 1998. This shows their confidence in First BanCorp's future and
their commitment to keep its fundamentals sound.
As First BanCorp embarks on another half century of growth and service to the
Puerto Rico community, 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 First BanCorp will continue to provide outstanding service to its
clients, while benefiting employees and stockholders in the years to come.
Angel Alvarez-Perez
Chairman
President
Chief Executive Officer
12
<PAGE>
1998: The Year in Review
During 1998 First BanCorp exceeded $4 billion in total assets and $2 billion in
total loans for the first time. Loans grew by 8.2%, from $1.959 billion to
$2.120 billion. At the same time, the investment portfolio was expanding even
more rapidly from $1.277 billion to $1.800 billion. Deposits grew 11.3% from
$1.595 billion to $1.775 billion.
First BanCorp earned $51.8 million or $1.74 per share in 1998, as compared to
$47.5 million or $1.58 per share in 1997. Net income increased by 9%, or 10.1%
on a per share basis. Net interest income, the main source of earnings, grew
7.4% from $154.7 million last year to $166.2 million in 1998. Other income also
increased by $18.3 million, from $39.9 million in 1997 to $58.2 million in 1998.
This growth was mostly due to increases in trading income and gains on the sale
of investments. Due to strong earnings, shareholder equity rose by $34 million,
from $236.4 million at the end of 1997 to $270.4 million at December 31, 1998.
Management has achieved these gains in a highly competitive market in which
rising bankruptcies have been notable. This trend has affected the entire
financial services industry in Puerto Rico. In response, Management has
maintained tight underwriting standards while improving loan tracking and
collections systems. Also, the rate of increase in bankruptcies has declined in
the last few months of 1998.
Analysis of Key Financial Ratios
High spreads in the loan portfolio combined with strict cost controls have been
important features of First BanCorp's strategy in recent years. Last year these
factors, combined with a strong increase in trading and investment income,
helped the Corporation combine above-average returns on assets and capital with
a healthy growth in earnings. At the same time, the Corporation was able to show
a strong increase in reserves although loan losses grew during the year.
The results of these high spreads and cost controls are evident in the financial
ratios. The return on average assets was 1.48% in 1998, compared with the
annualized average of 1.15% for all FDIC insured financial institutions through
September 30. Similarly, First BanCorp's return on equity was 20.54% as compared
with a similar FDIC average of 13.31%. In 1998 the Corporation had a net
interest margin of 5.27% on a tax equivalent basis. At the same time Management
held the efficiency ratio at 46.5% in 1998 in spite of investments in new
information technology and new branches. The Corporation remains committed to
tight cost controls in the future.
Ample spreads allowed Management to maintain profitability even while the
provision for loan losses was expanding by $20.3 million from $55.7 million in
1997 to $76.0
13
<PAGE>
million in 1998. This, in turn, allowed to increase loan loss reserves by
$10.1 million, from $57.7 million at the end of 1997 to $67.8 million at
December 31, 1998. Although non-performing loans rose from 3.29% to 3.40% of
total loans during 1998 the increase in reserves more than compensated for the
rise in delinquencies. The reserve coverage ratio, which consists of total loan
loss reserves as a percentage of non-performing loans, rose from 89.5 percent at
the end of 1997 to 94.2 percent at December 31, 1998. Management's target is to
raise the reserve coverage ratio to 100%. The tightening in underwriting
standards that has been in effect for the past two years should bear fruit in
the future as loan losses return to normal levels.
Growth in Major Lending Areas
First BanCorp has achieved a strong position in several key lending areas in
Puerto Rico. The Corporation's loan portfolio has been expanding and
diversifying as Puerto Rico has grown and become more sophisticated. Here is an
outline of major developments in the lending area during 1998.
Commercial Loans
In recent years, a significant portion of the growth of this portfolio had come
from commercial mortgages. However, growth in that area was relatively limited
in 1998, as the portfolio grew by $19.6 million, from $306.7 million to $326.3
million. First BanCorp has made mortgage loans for businesses as diverse as
office buildings, restaurants with national franchises, professional offices and
shopping centers.
A major goal of the Corporation in 1998 was to expand commercial lending in
other areas besides mortgages. Management achieved this goal, expanding
commercial lending by $142.7 million from $278.1 million to $420.8 million. The
Corporation recruited experienced personnel to support this effort.
First BanCorp directs part of its commercial lending to small and medium sized
businesses, many of which are locally owned and managed. The Corporation is a
certified U.S. Small Business Administration ("SBA") lender, allowing rapid
processing of loans under this Federal program. First BanCorp also offers
commercial loans guaranteed by the local Economic Development Bank.
14
<PAGE>
Commercial lending executives are flexible in meeting the individualized needs
of each client, and they try to develop a mutually productive relationship. This
approach requires the continuous development of new methods and services as the
sophistication and diversity of Puerto Rico's business sector grows.
Residential Mortgage Loans
First BanCorp was active in the residential mortgage market during 1998.
Management introduced a new mortgage product that allows clients to finance 105%
of the assessed value of their property. This allows clients to take advantage
of generally rising property values on the Island. No other bank in Puerto Rico
offers this product. Because land is limited in Puerto Rico, property values
have risen steadily during the postwar period.
First BanCorp has also renewed its construction loan department, bringing in a
new executive with considerable experience in this area. Thanks to the financing
of new housing developments in the San Juan metropolitan area, construction
loans grew by $54.6 million from $9.3 million to $63.9 million during 1998. As
these projects are completed the Corporation will have the opportunity to obtain
part of the permanent financing. Management expects to be more active in
construction and mortgage financing than it has in the recent past.
Consumer Loans
The consumer loan portfolio declined by $71.5 million during 1998 as tighter
underwriting standards slowed new originations. Still, Management sees
considerable future potential in this area.
In auto loans First BanCorp introduced a new, personalized program for auto
dealers and their clients. This service, known as "First Class", assigns special
representatives to participating dealers so that they can process loans rapidly
by sending applications electronically to the main office. Clients will be able
to choose among three alternatives: a conventional auto loan, a loan with
reduced payments and a residual, or a lease. A distinctive "First Class" logo
identifies participating dealers.
First BanCorp's credit card portfolio grew by $9.3 million from $116.7 million
at the end of 1997 to $126.0 million as of last December 31. The Corporation
offers special cards with Texaco and the Puerto Rico Telephone Co., as well as a
collateralized card for clients who need to establish a credit record or who
cannot obtain access to credit through other channels. Under the "First Miles"
program, cardholders can obtain free airline travel as they use their credit
cards.
15
<PAGE>
First BanCorp also operates Money Express, a small loan subsidiary of FirstBank
with 26 offices throughout Puerto Rico. Management plans to expand the
activities of Money Express during the coming year. First Leasing, another
subsidiary of FirstBank, offers vehicle rental and leasing services.
First BanCorp's growing selection of consumer products reflects the needs and
demands of Puerto Rico's growing middle class. Management hopes to continue
expanding the variety and sophistication of consumer loans in the years to come.
Increasing Shareholder Value
The financial results reported here are part of a continuing trend of earnings
growth that has produced excellent value for shareholders. Return on average
equity was 20.54% in 1998. First BanCorp shareholders received a total return of
79.4% in 1998, and a cumulative increase in shareholder value of 3,398 percent
from year-end 1991 to year-end 1998. Although dividends were increased in 1998,
the dividend payout ratio remained low at 17.12% compared with 15.14% in 1997.
During 1998 the Corporation repurchased 317,600 common shares.
Management is optimistic about the future of First BanCorp. The range of
services it offers, its effective network of offices and branches supplemented
by new sales methods, its dedicated staff and its reputation with clients will
all contribute to future earnings growth. Management will continue its efforts
to improve First BanCorp's excellent performance in 1999 and in the years to
come.
16
<PAGE>
The Puerto Rico Economy
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 has been enjoying solid economic growth over most of the
1990's. Real GNP grew by 3.1% in fiscal 1998. Private economists are forecasting
2% to 3% real growth in the 1999 fiscal year. Management expects recent growth
patterns on the Island to continue, with some slowdown during the coming fiscal
year.
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 a part of the U.S. financial
system. Federal courts enforce U.S. laws here. Since Puerto Rico falls within
the U.S. for purposes of customs and migration, there is full mobility of funds,
people and goods between Puerto Rico and the U.S. mainland. Puerto Rico banks
are subject to the same Federal laws, regulations and supervision as other
financial institutions in the rest of the U.S. The Federal Deposit Insurance
Corporation insures the deposits of Puerto Rico chartered commercial banks,
including FirstBank, the banking subsidiary of First BanCorp.
Puerto Rico has made a rapid transition from poverty in the immediate postwar
period to prosperity today. Throughout this process the Island has attracted
industry using tax exemption. Many multinational corporations have substantial
operations here. During 1996 Congress repealed Section 936 of the Internal
Revenue Code, which provided Federal tax exemption for companies operating in
Puerto Rico. However, Congress also provided a ten year grandfather clause for
companies already operating here. Because Puerto Rico has a fiscal system
independent from that of the U.S., it can fashion local tax incentives to
attract or retain industry. A new law broadening and strengthening local tax
incentives went into effect on January 1, 1998.
Puerto Rico is becoming somewhat less dependent on manufacturing than it was in
the early postwar period. Manufacturing attracted by tax exemption is still an
important part of the island's economy. Nevertheless, Puerto Rico has been
diversifying its economic base to include tourism, business services and
transportation. As part of these changes the Island has been receiving U.S.
private investment in diverse areas such as hotels, financial services and large
retail stores. During the past year a slowdown in manufacturing growth was
balanced by strong construction activity, both private and public. Management is
very optimistic about Puerto Rico's economic future.
17
<PAGE>
Board of Directors
[PHOTO]
Angel Alvarez-Perez, Esq.
Chairman of First BanCorp
German Malaret, M.D.
Chairman of FirstBank
[PHOTO]
Annie Astor de Carbonell, C.P.A.
Angel L. Umpierre, C.P.A.
Jose Texidor
[PHOTO]
Antonio Pavia Villamil, M.D.
Francisco D. Fernandez, Eng.
Rafael Bouet, Eng.
[PHOTO]
Armando Lopez Ortiz, Eng.
Hector M. Nevares, Esq.
Jose Julian Alvarez
18
<PAGE>
FIRST BANCORP OFFICERS
[PHOTO]
Standing from left to right: Aida Garcia, Francisco Cortes, Aurelio
Aleman, Randolfo Rivera, Fernando L. Batlle, Luis Cabrera, Josianne M. Rossello
Seated from left to right: Luis Beauchamp, Angel Alvarez-Perez, Annie Astor de
Carbonell
PRESIDENT
Angel Alvarez-Perez
President and Chief
Executive Officer
SENIOR EXECUTIVE
VICE PRESIDENTS
Annie Astor de Carbonell
Chief Financial Officer
Luis M. Beauchamp
Chief Lending Officer
EXECUTIVE
VICE PRESIDENTS
Aurelio Aleman
Retail Banking
Fernando L. Batlle
Branch Banking
Mortgages &
Money Express
Francisco Cortes
Administrative Services
& Information Systems
Rodolfo Rivera
Corporate Services
SENIOR VICE
PRESIDENT
Nicolas Badillo
Data Center
Luis Cabrera
Treasury & Investments
Eva Candelario
Corporate Business
Development
Antonio Escriba
Secretary of the Board
Aida M. Garcia
Human Resources
Michael Garcia
Consumer Collection
Fernando Iglesias
Special Loans &
Credit Administration
Roger Lay
Internal Auditing
John Ortiz
Remote Banking
Haydee Rivera
Branch Banking
Operations
Julio Rivera
Construction Lending
Jose H. Rodriguez
Branch banking
Administration
Josianne M. Rosello
Marketing & Public
Relations
Demetrio Santiago
Auto Wholesale
Business
Laura Villarino
Controller
19
<PAGE>
VICE PRESIDENTS
William Alvarez
Area Business
Jose H. Aponte
Commercial Mortgage
Miguel Babilonia
Consumer Portfolio
Management
Juan E. Barnes
Branch Manager
Ana Colon
Centralized Accounting
Ada Davila
Branch Manager
Elizabeth de la Cruz
Mortgage Operations
Roberto Girald
Construction Lending
David Gonzalez
Corporate Business
Development
Daisy Gonzalez
Operational Accounting
Nelson Gonzalez
Corporate Business Development
Marcelo Lopez
Branch Banking
Administration
District Manager
Juanita Marrero
First Mortgage
Ivan Martinez
Project Manager
Miguel Mejias
System Development
Jose Negron
Floor Plan
Jaime Noble
First Leasing
Luis Orengo
Commercial Loans
Osvaldo Padilla
Corporate Business
Reynaldo Padilla
Auto Finance
Miguel Pimentel
Corporate Business
Development
Carlos Power
Auto Operations
Rolando Quevedo, Esq.
Legal Counsel
Jorge Rendon
Operational Support
Migdalia Rivera
Community Banking
Sandra Rivera
Auto Collection
Belinda Rodriguez
Remote Sales
Jose L. Rodriguez
Special Projects
Year 2000
Luis Rodriguez
Special Projects
Elizabeth Sanchez
Marine Financing
Roberto Sanchez
Marine Financing
Roberto Sanchez
Credit Risk
Carmen Torres
Branch Banking
Administration
District Manager
Raphael Torres
Branch Banking
Administration
District Manager
20
<PAGE>
SUBSIDIARIES
FIRST FEDERAL FINANCE CORPORATION
DBA MONEY EXPRESS "LA FINANCIERA"
Angel Alvarez-Perez
Chief Executive Officer
Fernando L. Batlle
President and Chief
Operating Officer
Orlando Velez
Vice President and
Operations Manager
FIRST LEASING AND RENTAL CORPORATION
Angel Alvarez-Perez, Esq.
Chief Executive Officer
Aurelio Aleman
President and Chief
Operating Officer
Jaime Noble
Vice President and
Manager Leasing Operation
William Velez
Vice President and
Manager Daily Rental Operation
21
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
SELECTED FINANCIAL DATA
Years ended December 31, 1998 1997 1996 1995 1994
(Dollars in thousands except for per share results)
Condensed Income Statements:
Total interest income $321,298 $285,160 $256,523 $208,488 $180,309
Total interest expense 155,130 130,429 113,027 96,838 76,674
Net interest income 166,168 154,731 143,496 111,650 103,635
Provision for loan losses 76,000 55,676 31,582 30,894 17,674
Other income 58,240 39,866 29,614 48,268 18,169
Other operating expenses 91,798 83,268 82,498 65,628 60,760
Unusual item - SAIF assessment 9,115
Income before income tax provision and
extraordinary item 56,610 55,653 49,915 63,396 43,370
Provision for income tax 4,798 8,125 12,281 14,295 12,385
Income before extraordinary item 51,812 47,528 37,634 49,101 30,985
Extraordinary item (429)
Net income 51,812 47,528 37,634 49,101 30,556
Per Common Share Results - Diluted (1):
Income before extraordinary item $1.74 $1.58 $1.22 $1.58 $1.01
Extraordinary item (.02)
Net income per common share $1.74 $1.58 $1.22 $1.58 $0.99
Cash dividends declared $0.30 $0.24 $0.20 $0.08
Average shares outstanding 29,586 30,036 30,794 30,592 29,977
Average shares diluted 29,858 30,204 30,952 31,118 30,859
Balance Sheet Data:
Loans and loans held for sale (net of
unearned interest) $2,120,054 $1,959,301 $1,896,074 $1,556,606 $1,501,273
Allowance for possible loan losses 67,854 57,712 55,254 55,009 37,413
Investments 1,800,489 1,276,900 830,980 785,747 595,555
Total assets 4,017,352 3,327,436 2,822,147 2,432,816 2,174,692
Deposits 1,775,045 1,594,635 1,703,926 1,518,367 1,493,445
Borrowings 1,930,488 1,458,148 884,741 698,097 536,278
Total capital (100% common equity) 270,368 236,379 191,142 171,202 120,015
Book value per common share, end of year (1) 9.17 7.93 6.32 5.51 3.99
Regulatory Capital Ratios (In Percent):
Total capital to risk weighted assets 17.39 17.26 15.25 16.17 9.76
Tier 1 capital to risk weighted assets 11.55 11.07 9.32 9.93 8.50
Tier 1 capital to average assets 6.59 7.44 6.65 6.82 5.74
Selected Financial Ratios (In Percent):
Net income to average total assets 1.48 1.63 1.48 2.22 1.53
Interest rate spread (2) 4.76 5.30 5.46 5.07 5.23
Net interest income to average earning assets (2) 5.27 5.83 6.03 5.59 5.65
Net yield on average earning assets (2) 9.83 10.45 10.63 10.12 9.63
Net cost on average interest bearing liabilities 5.07 5.15 5.17 5.05 4.40
Net income to average total equity 20.54 22.30 20.49 33.19 29.07
Average total equity to average total assets 7.22 7.32 7.23 6.68 5.27
Dividend payout ratio 17.12 15.14 16.32 5.06 N/A
Efficiency ratio (3) 46.46 45.45 47.66 47.71 49.88
Offices:
Number of full service branches 40 36 36 36 32
Loan origination offices 45 44 47 43 23
(1) Amounts presented were recalculated, when applicable, to retroactively
consider the effect of common stock splits. (2) Ratios were computed on a
taxable equivalent basis. (3) Other operating expenses to the sum of net
interest income and other income (excluding gain on sale of investments in 1998,
1997 and 1995, and gain on sale of subsidiary in 1995).
</TABLE>
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FINANCIAL REVIEW SUMMARY
For the year 1998, First BanCorp (the Corporation) recorded earnings of
$51,812,386 or $1.74 per common share as compared to $47,527,552 or $1.58 per
common share for 1997 and $37,633,791 or $1.22 per common share for 1996. First
BanCorp is the bank holding company for FirstBank (or the Bank).
Earnings for the year 1996 included a one time Savings Association
Insurance Fund (SAIF) industry wide deposit insurance assessment of $6,715,000
(net of tax) or $.22 per share. Excluding this unusual item, operational
amounted to $44,348,791 or $1.44 per share. All per share figures are presented
on a diluted basis.
The Corporation's continuous increase in net interest income and other
income and tight control over operating expenses net of the provision for loan
losses, have resulted in the sustained growth in net income. For 1998 as
compared to 1997, net income increased by $4,284,834 or $.16 per common share,
and for 1997 as compared to 1996, by $3,178,761 or $0.14 per common share,
excluding for 1996 the one time SAIF insurance assessment.
Return on average assets was 1.48% for 1998, 1.63% for 1997 and 1.48%
for 1996. Return on average common equity was 20.54% for 1998, 22.30% for 1997
and 20.49% for 1996. The decrease in the return on average assets and average
common equity for 1998 as compared to 1997 was due to the increase in total
assets and common equity, respectively.
RESULTS OF OPERATIONS
First BanCorp'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 paid on interest bearing liabilities, including deposits and
borrowings. The Corporation's results of operations also depend on the provision
for loan losses, operating expenses (such as personnel, occupancy and other
costs), on other income (mainly service charges and fees on loans), and on gains
on sale of investments.
Net Interest Income
The main component of the Corporation's results of operations is net
interest income. Net interest income is the difference between interest earned
on loans and investment securities (interest earning assets) and the interest
expense on deposits and borrowings (interest bearing liabilities). Net interest
income is the result of the spread between the yield of interest earning assets
and the cost of interest bearing liabilities, and the volume of such assets and
liabilities.
Net interest income increased to $166.2 million for 1998 from $154.7
million in 1997 and $143.5 million in 1996. The improvement was the result of
the continuous increase in the average volume of interest earning assets
together with a higher available capital and non-interest bearing liabilities to
fund those assets. This is reflected in an increase in the average volume of
interest earning assets by $582.7 million for 1998 as compared to 1997 and by
$361.8 million for 1997 as compared to 1996. Interest bearing liabilities
increased by $528.0 million for 1998 as compared to 1997 and by $345.2 million
for 1997 as compared to 1996.
23
<PAGE>
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.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Part I Average volume Interest income (1) / expense Average rate (1)
Year ended December 31, 1998 1997 1996 1998 1997 1996 1998 1997 1996
- - -------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Earning Assets:
Deposits at banks and other
short-term investments $ 40,766 $ 67,969$ 36,883 $ 2,028 $ 3,708 $ 1,959 4.97% 5.45% 5.31%
Government obligations 319,777 404,517 405,221 19,984 26,949 23,242 6.25% 6.66% 5.74%
Mortgage backed securities 1,032,632 428,804 255,926 77,463 34,942 18,142 7.50% 8.15% 7.09%
Other investment 1,150 519 3,920 186 22 190 16.14% 4.24% 4.85%
FHLB stock 10,252 10,150 11,701 743 670 756 7.25% 6.60% 6.46%
------------ ----------- ------------------------------ --------
Total investments 1,404,577 911,959 713,651 100,404 66,290 44,289 7.15% 7.27% 6.21%
----------- ---------- -------- -------- -------- ------
Consumer loans (2) 1,032,704 1,090,991 985,554 139,309 147,100 139,732 13.49% 13.48% 14.18%
Real estate loans (2) 642,112 567,446 552,385 63,789 56,985 55,894 9.93% 10.04% 10.12%
Commercial loans (2) 324,426 250,757 207,745 31,131 24,494 21,490 9.60% 9.77% 10.34%
------------ ----------- ----------- ------------------ ---------
Total loans 1,999,242 1,909,194 1,745,684 234,229 228,579 217,116 11.72% 11.97% 12.44%
----------- ----------- ---------- --------- --------- --------
Total earning assets $3,403,820 $2,821,153 $2,459,334 $334,633 $294,869 $261,405 9.83% 10.45% 10.63%
========== ========== ========== ======== ======== ========
Interest Bearing Liabilities:
Deposits $1,494,530 $1,502,975 $1,441,612 $70,418 $72,148 $ 70,964 4.71% 4.80% 4.92%
Other borrowed funds 1,559,892 1,012,757 718,407 84,460 57,419 40,608 5.41% 5.67% 5.65%
FHLB advances 4,515 15,157 25,637 252 864 1,455 5.58% 5.70% 5.68%
Total interest bearing
liabilities $3,058,937 $2,530,889 $2,185,656 $155,130 $130,431 $113,027 5.07% 5.15% 5.17%
========== ========== ========== ======== ======== ========
Net interest income $179,503 $164,438 $148,379
======== ======== ========
Interest rate spread 4.76% 5.30% 5.46%
Net interest margin 5.27% 5.83% 6.03%
(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.
</TABLE>
26
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Part II 1998 compared to 1997 1997 compared to 1996
Increase (decrease) Increase (decrease)
Due to: Due to:
Volume Rate Total Volume Rate Total
Earning assets: In thousands
Deposits at banks and other
short-term investments $(1,377) $(303) $ (1,680) $ 1,694 $ 54 $ 1,748
Government obligations (5,375) (1,589) (6,964) (44) 3,751 3,707
Mortgage backed securities 47,250 (4,729) 42,521 13,755 3,044 16,799
Other investment 50 114 164 (147) (21) (168)
FHLB stock 7 66 73 (101) 15 (86)
---------- -------- ---------- -------- --------- ---------
Total investments 40,555 (6,441) 34,114 15,157 6,843 22,000
------- ------ ------- ------- -------- -------
Consumer loans (7,861) 70 (7,791) 14,583 (7,215) 7,368
Real estate loans 7,458 (654) 6,804 1,518 (427) 1,091
Commercial loans 7,133 (496) 6,637 4,325 (1,321) 3,004
------- -------- -------- -------- -------- --------
Total loans 6,730 (1,080) 5,650 20,426 (8,963) 11,463
------- ------- -------- ------- -------- -------
Total interest income 47,285 (7,521) 39,764 35,583 (2,120) 33,463
------ ------- ------- ------- -------- -------
Interest bearing liabilities:
Deposits (403) (1,327) (1,730) 2,984 (1,800) 1,184
Borrowed funds 30,323 (3,282) 27,041 16,688 123 16,811
FHLB advances (594) (18) (612) (596) 5 (591)
------- -------- --------- --------- ----------- ---------
Total interest expense 29,326 (4,627) 24,699 19,076 (1,672) 17,404
-------- ------- -------- -------- -------- --------
Change in net interest income $17,959 $(2,894) $15,065 $16,507 $ (448) $16,059
======= ======= ======= ======= ======== =======
</TABLE>
Total interest income includes tax equivalent adjustments of $13.3 million,
$9.7 million and $4.9 million for 1998, 1997, and 1996, respectively.
On a tax equivalent basis, net interest income increased to $179.5
million for 1998 from $164.4 million for 1997, and $148.4 million for 1996. The
interest rate spread and net interest margin amounted to 4.76% and 5.27%,
respectively, for 1998, as compared to 5.30% and 5.83%, respectively, for 1997
and to 5.46% and 6.03%, respectively, for 1996.
The reduction in the interest rate spread and net interest margin for
1998 is mainly due to the increase of $492.6 million in the average volume of
total investments when compared to the average volume recorded for 1997. These
investments have a lower spread than loans but without the credit risk. In
addition, there was a reduction of $58.3 million in the average volume of
consumer loans, which are the assets with the highest spread but, also the
highest credit risk in the portfolio.
1998 compared to 1997
On a tax equivalent basis interest income increased by $39.8 million
for 1998 as compared to 1997. On a tax equivalent basis the yield on earning
assets was 9.83% for 1998 as compared to 10.45% for 1997. The improvement in
interest income was due to the increase in the average volume of investments of
$492.6 million, of real estate (mostly commercial real estate loans) and
commercial loans of $74.7 million and $73.7 million, respectively, net of a
decrease in consumer loans of $58.3 million. The increase in the commercial real
estate and commercial loans portfolio was the result of the Corporation's
strategy of diversifying its asset base, which was concentrated in consumer
loans. The consumer loan portfolio decreased as a result of the tightening
implemented early in 1997 of the underwriting standards for the origination of
these loans.
For the investment portfolio, the average volume of mortgage backed
securities increased in 1998 by $603.8 million. The tax equivalent yield on
mortgage backed securities was 7.50% in 1998 and 8.15% in 1997. The portfolio of
mortgage backed securities contributed $47.3 million in interest income due to
volume net of $4.7 million decrease in interest income due to rate. The average
volume of government obligations decreased by $84.7 million for 1998 as compared
to 1997, causing a total decrease in interest income of $7.0 million.
27
<PAGE>
For the loan portfolio, the growth in the average volume of commercial
loans represented an increase of $7.1 million in income due to volume, partially
offset by a reduction of $.5 million in interest income due to rate. The
reduction due to rate was mainly caused by various decreases in the prime rate
from 8.50% effective for 1997 through September 29, 1998 to 7.75% effective on
November 18, 1998. The average portfolio of mortgage loans increased for 1998,
representing a positive volume variance of $7.5 million. This increase was
mostly achieved in commercial real estate loans. The decrease in the average
volume of consumer loans caused a negative variance in interest income due to
volume of $7.9 million.
Interest expense increased by $24.7 million for 1998 as compared to
1997. This was the result of the increase in the average volume of interest
bearing liabilities of $528.0 million for 1998 as compared to 1997 with a volume
variance of $29.3 million. However, interest expense was affected by a decrease
of eight basis points in the cost of interest bearing liabilities from 5.15% for
1997 to 5.07% for 1998 causing a positive rate variance of $4.6 million for 1998
as compared to 1997.
1997 compared to 1996
On a tax equivalent basis interest income increased by $33.5 million
for 1997 as compared to 1996. On a tax equivalent basis the yield on earning
assets was 10.45% for 1997 as compared to 10.63% for 1996. The improvement in
interest income was primarily due to the increase in the average volume of
investments of $198.3 million and to an increase in the average volume of
consumer and commercial loans of $105.4 million and $43.0 million, respectively.
For the investment portfolio, the average volume of mortgage backed
securities increased in 1997 by $172.9 million. The tax equivalent yield on
mortgage backed securities increased from 7.09% for 1996 to 8.15% for 1997. The
portfolio of mortgage backed securities contributed $13.8 million in interest
income due to volume and $3.0 million in interest income due to yield
improvement. Interest income from investments was also positively affected by
the improvement in the tax equivalent yield of government obligations from 5.74%
in 1996 to 6.66% in 1997, representing an increase of $3.8 million in interest
income due to rate. To a lesser extent, investment income was positively
affected by an increase of $31.1 million in the average volume of short term
investments.
For the loan portfolio, the increase in the average volume of consumer
loans represented a growth of $14.6 million in interest income, which was
partially offset by a reduction of $7.2 million in interest income due to rate.
The yield on consumer loans decreased from 14.18% in 1996 to 13.48% in 1997 as a
result of the increase in non-accruing loans written off in 1997, and the
tightening of underwriting standards in the origination of consumer loans. Early
in 1997, stricter underwriting standards were implemented in response to the
industry wide increase in delinquencies and bankruptcies. As the credit quality
of the customers improves, the yield charged to the loans is lower, causing a
decrease in the average yield of the consumer loan portfolio.
The growth in the average volume of commercial loans represented an
increase of $4.3 million in income due to volume, partially offset by a
reduction of $1.3 million in interest income due to rate. The growth in the
commercial loan portfolio responded to the strategy of emphasizing commercial
loans to diversify the loan portfolio, which has been concentrated in consumer
loans. The average portfolio of mortgage loans increased for 1997, representing
a positive volume variance of $1.5 million. This increase was mostly recorded in
commercial real estate loans. The negative variance due to rate was mostly due
to loans that were placed in non accruing status. The prime rate was at 8.50%
for 1997 and 1996.
Interest expense increased by $17.4 million for 1997 as compared to
1996. The increase was the result of the increase in the average volume of
interest bearing liabilities of $345.2 million for 1997 as compared to 1996 with
an additional cost of $19.1 million. However, interest expense was positively
affected by a decrease of two basis points in the cost of interest bearing
liabilities from 5.17% for 1996 to 5.15% for 1997. This reduction was entirely
due to a decrease in the cost of interest bearing deposits from 4.92% in 1996 to
4.80% in 1997.
Provision for Loan Losses
During 1998, the Corporation provided $76.0 million for loan losses, a
significant increase as compared to $55.7 million in 1997 and $31.6 million in
1996.
The increased provision for loan losses recorded in 1998 was necessary
to cover net charge offs of $65.9 million, and to increase by $10.1 million the
allowance for loan losses at December 31, 1998 as compared to December 31, 1997.
This level of net charge offs resulted mainly from the increase in the level of
delinquencies and bankruptcies experienced in Puerto Rico during 1998. In
addition, net charge offs for 1998 included $8.9 million in loans written off as
a result of changes in the write off policy to a more conservative one. During
the first quarter of 1998 the Corporation changed its write off policy to
include personal unsecured loans in bankruptcy status and more than 30 days
delinquent. These loans were previously written off according to the general
regulatory guidance for unsecured personal loans which were 120 days delinquent.
As a result of this change, $4.5 million loans were written off during the first
quarter. During the fourth quarter of 1998 the Corporation changed the timing to
record the estimated partial write offs of certain auto loans and repossessed
units. This change resulted in an additional write off of $4.4 million of
previously reserved losses. Net charge offs for 1997 and 1996 amounted to $53.2
million and $31.3 million, respectively.
28
<PAGE>
The allowance activity for 1998, and prior two years was as follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Year ended December 31,
1998 1997 1996 1995 1994
(Dollars in thousands)
Allowance for loan losses, beginning of period $57,712 $55,254 $55,009 $37,413 $30,453
Provision for loan losses 76,000 55,675 31,582 30,894 17,674
-------- ------- -------- -------- -------
Loans charged off:
Real estate (168) (284) (492) (403) (839)
Commercial (4,150) (1,996) (942) (3,299) (4,329)
Consumer (67,906) (57,311) (33,295) (10,821) (6,753)
Recoveries and other adjustments 6,366 6,374 3,392 1,225 1,207
--------- --------- --------- -------- --------
Net charge offs (65,858) (53,217) (31,337) (13,298) (10,714)
-------- -------- -------- ------- -------
Allowance for loan losses, end of period $67,854 $57,712 $55,254 $55,009 $37,413
======= ======= ======= ======= =======
Allowance for loan losses to year end total
loans and loans held for sale 3.20% 2.95% 2.91% 3.53% 2.49%
Net charge offs to average loans
outstanding during the period 3.29% 2.79% 1.80% .93% .79%
</TABLE>
The Corporation maintains the allowance for loan losses at a level that
Management considers adequate to absorb losses inherent in the loan portfolio.
The adequacy of the allowance for loan losses is reviewed on a quarterly basis
as part of the continuing evaluation of the quality of the assets. This
evaluation is based upon a number of factors, including the followings:
historical loan loss experience, projected loan losses, loan portfolio
composition, 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.
Other Income
The following table presents the composition of other income.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1998 1997 1996
(In thousands)
Other fees on loans $11,158 $10,899 $10,651
Service charges on deposit accounts 7,844 7,363 6,184
Fees on loans serviced for others 1,617 2,670 3,993
Rental income 2,292 1,935 2,356
Other operating income 5,137 4,866 2,928
------- ------- -------
Other income before gain on
sale of investments and trading 28,048 27,733 26,112
Gain on sale of investments 26,827 11,388 4,857
Trading income (loss) 3,365 745 (1,355)
--------- ---------- --------
Total $58,240 $39,866 $29,614
======= ======= =======
</TABLE>
29
<PAGE>
Other income primarily consists of service charges on deposit accounts,
fees on loans, servicing income, commissions derived from various banking
activities, the results of trading activities and gains on sale of investments.
Other income before gains on the sale of investments and trading
activities increased to $28.0 million in 1998 from $27.7 million in 1997 and
$26.1 million in 1996. These variances were mainly due to fees and charges on
deposit and loan accounts and other fees on miscellaneous banking services,
partially offset by a decrease in fees on loans serviced for others.
Service charges on deposit accounts represent an important and stable
source of other income for the Corporation. This source of income increased to
$7.8 million in 1998 from $7.4 million in 1997 and $6.2 million in 1996.
Other fees on loans consist mainly of credit card fees and late charges
collected on loans. The increase in this source of income to $11.2 million in
1998 from $10.9 million in 1997 and $10.7 million in 1996 was due to fees
generated on the increased portfolio of commercial loans.
Fees on loans serviced for others primarily reflect the servicing fees
for the auto loan securitizations closed in 1995. It also includes servicing
fees on residential mortgage loans originated and subsequently securitized. Due
to the repayment of the auto loan portfolio securitized in 1995, the related
servicing income decreased from 1996 to 1998.
The Corporation's second tier subsidiary, First Leasing and Rental
Corporation, generates income on the rental of various types of motor vehicles.
This source of income has averaged $2.0 million in the past three years.
The other operating income category is composed of miscellaneous fees
such as check fees and rental of safe deposit boxes. For 1998 and 1997, other
operating income also includes earned discounts on tax credits purchased and
utilized against income tax payments.
The Corporation recorded $26.8 million in 1998, $11.4 million in 1997
and $4.9 million in 1996 from gains on sale of investment securities. These
sales of investments were realized as market opportunities arose and in response
to the Corporation's investment policies.
Other Operating Expenses
Other operating expenses amounted to $91.8 million for 1998 as compared to
$83.3 million for 1997 and $82.5 million for 1996. The following table presents
the components of other operating expenses.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1998 1997 1996
(In thousands)
Salaries and benefits $43,185 $38,644 $37,359
Occupancy and equipment 18,155 16,101 14,932
Deposit insurance premium 971 1,040 2,431
Other taxes and insurance 5,607 5,536 4,663
Professional and service fees 5,820 4,883 4,956
Business promotion 5,922 4,993 5,880
Communications 4,330 4,364 4,789
Real estate owned operations 42 (21) 219
Amortization of debt issue costs 691 788 873
Expense of rental equipment 1,226 1,184 1,113
Other 5,849 5,756 5,283
--------- -------- ---------
Total $91,798 $83,268 $82,498
======= ======= =======
</TABLE>
30
<PAGE>
Management's goal has been to make only expenditures that contribute
clearly and directly to increasing 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 best
measure of the success of this program is the efficiency ratio, which is the
ratio of other operating expenses to the sum of net interest income and other
recurring income. The Corporation's efficiency ratio was 46.46% for 1998 as
compared to 45.45% and 47.66% for 1997 and 1996, respectively.
For 1998 as compared to 1997, salary increases, incentive compensation
and increases in fringe benefits affected the salaries and benefits category for
all employees. Additional employees were hired to staff two full service
branches and two in-store branches that opened in 1998, to strengthen the
commercial lending business, the support areas of consumer lending such as
credit and collection, and other support areas of the Corporation. For 1997 as
compared to 1996, salaries and benefits were mainly affected by increases in
salary and fringe benefits.
The occupancy and equipment category consists of expenses associated
with premises, office and computer equipment, and other automated banking
equipment. The increase in the past three years was mainly affected by
enhancements of hardware and software through system conversions, which have
enabled the Corporation to offer new products, and to improve customer service
and portfolio servicing. For 1998, the increase was also due to the expansion of
the branch network mentioned above. Expenses related to the year 2000 issue also
affected this category (see Year 2000 section).
The increase in the professional and service fee category for 1998 was
mainly due to credit card processing and assessment fees related to the increase
in the portfolio and in the number of accounts. The increase in credit card
related fee income exceeded the related processing costs.
Business promotion costs amounted to $5.9 million for 1998 as compared
to $5.0 million in 1997, and $5.9 million for 1996. Business promotion expense
has been incurred to obtain the loan and deposit volumes achieved during those
years.
In 1998 and 1997, communications expense decreased as compared to 1996,
due to an improvement in the telephone and data line network.
Unusual Item
In 1996, FirstBank recorded the one time industry wide SAIF deposit
insurance special assessment as provided by the Omnibus Spending bill signed by
the President of the United States on September 30, 1996, in order to
recapitalize the SAIF. The Bank's assessment was $9.1 million, which represented
a net after tax expenditure of $6.7 million. On October 31, 1994, the Bank,
formerly a savings institution, converted its charter to a commercial bank, but
stayed in the SAIF because legal restrictions prevented the Bank from switching
to the Bank Insurance Fund.
Income Tax Expense
The provision for income tax amounted to $4.8 million (or 8% of pre-tax
earnings) for 1998 as compared to $8.1 million (or 15% of pre-tax earnings) in
1997, and $12.3 million (or 25% of pre-tax earnings) in 1996. 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
tax. Also the current income tax expense was reduced by the increase in loans
written off. For additional information relating to taxes, see Note 29 of the
Corporation's financial statements - "Income Taxes."
FINANCIAL CONDITION
Assets
The Corporation's total assets at December 31, 1998 amounted to
$4,017.4 million, $690.0 million over the $3,327.4 million at December 31, 1997.
The increase in total assets was mainly the result of an increase in total
investments of $523.6 million plus an increase of $150.6 million in loans
receivable (net of the allowance for loan losses) and loans held for sale.
The investment portfolio grew from $1,276.9 million at December 31,
1997 to $1,800.5 million at December 31, 1998. This resulted from the strategy
of purchasing $733.7 million in additional mortgage backed securities,
increasing the portfolio of mortgage backed securities to $1,492.5 million. The
portfolio of mortgage backed securities yielded 7.50% in 1998 as compared to
8.15% in 1997. Government obligations decreased by $211.8 million. Government
obligations yielded 6.25% in 1998 compared to 6.66% in 1997. The shift to
mortgage backed securities was due to the higher yield on these investments as
compared to government obligations.
31
<PAGE>
The increase in loans receivable of $150.6 million was composed of an
increase in commercial loans of $142.7 million and $89.6 million in real estate
loans, net of an increase in the allowance for loan losses of $10.1 million and
a decrease in consumer loans of $71.6 million.
The following table presents the composition of the loan portfolio
(including loans held for sale) at year-end for each of the last five years.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
% of % of % of % of % of
December 31, 1998 Total 1997 Total 1996 Total 1995 Total 1994 Total
(Dollars in thousands)
Real estate loans:
Residential $ 307,912 15 $ 292,604 15 $ 297,246 16 $ 319,758 21 $ 406,653 28
Commercial 326,342 16 306,734 16 256,227 14 210,645 14 175,415 12
Construction and land 63,939 3 9,279 1 10,209 1 9,233 1 13,812 1
---------- ---- ------------ --- ----------- --- ---------- --- ----------- ---
698,193 34 608,617 32 563,682 31 539,636 36 595,880 41
Commercial loans 420,763 20 278,071 15 233,251 12 189,334 13 126,842 9
Consumer loans 1,001,098 49 1,072,613 56 1,099,141 60 827,636 55 778,551 53
--------- ---- ----------- --- ----------- ---- --------- ---- ---------- ----
Total 2,120,054 103 1,959,301 103 1,896,074 103 1,556,606 104 1,501,273 103
Allowance for
loan losses (67,854) (3) (57,712) (3) (55,254) (3) (55,009) (4) (37,413) (3)
----------- ---- ------------ ---- ----------- ---- ------------ --- ----------- ---
Net loans $2,052,200 100 $1,901,589 100 $1,840,820 100 $1,501,597 100 $1,463,860 100
========== === ========== === ========== === ========== === ========== ===
</TABLE>
Early in 1997, the Corporation tightened its underwriting standards for
the origination of consumer loans because of the industry wide higher trend in
delinquencies and bankruptcies. This resulted in a decrease in the consumer loan
portfolio from $1,072.6 million at December 31, 1997 to $1,001.1 million at
December 31, 1998.
During 1998, the Corporation continued emphasizing the origination of
commercial loans as a strategy to diversify the loan portfolio, which is
concentrated in consumer loans. Most of the commercial loans originated are
asset based loans. The portfolio of commercial loans includes also floor plan
financing to dealers, which has enhanced the Corporation's ability to maintain
its production of auto loans. As a result of this strategy, the commercial loan
portfolio grew by $142.7 million in 1998. 1997 ended with an increase of $44.8
million as compared to the commercial loan portfolio at the end of 1996, and
1996 with an increase of $43.9 million as compared to 1995. The Corporation has
been able to increase its percentage of commercial loans to total loans to 20%.
As to real estate loans, the increase in the portfolio of $89.6 million
was composed of the following increases: (1) $19.6 million in real estate
commercial loans; (2) $15.3 million in residential real estate loans; and (3)
$54.7 million in construction loans. The growth in the real estate commercial
loan portfolio is consistent with the strategy of emphasizing commercial loans.
Real estate commercial loans grew by $50.5 million in 1997 and by $45.6 million
in 1996.
Average earning assets for 1998 amounted to $3,403.8 million, an
increase of $582.7 million when compared to total average earning assets of
$2,821.1 million for 1997. The composition and tax equivalent weighted average
interest rates of the Corporation's earning assets at December 31, 1998 were as
follows:
32
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Amount Weighted
(In thousands) Average Rate
Money market instruments $ 526 3.40%
Government obligations 295,533 5.74%
Mortgage backed securities 1,492,539 7.02%
FHLB of N.Y. stock 10,271 7.00%
Other investment 1,620 15.76%
--------------
Total investments 1,800,489 6.82%
-----------
Consumer loans 1,001,098 14.76%
Real estate loans 698,193 9.54%
Commercial loans 420,763 9.03%
-----------
Total loans(1) 2,120,054 11.91%
-----------
Total earning assets $3,920,543 9.57%
==========
(1) Excludes the reserve for loan losses. Generally, non-accruing loans were
included in this analysis as if they were accruing interest.
</TABLE>
Non-performing Assets
Total non-performing assets are the sum of non-accruing loans, past due
loans, OREO's and other repossessed properties. Past due loans are loans
delinquent 90 days or more as to principal and/or interest, and still accruing
interest. Non-accruing loans are loans as to which interest is no longer being
recognized. When loans fall into non-accruing status, all previously accrued and
uncollected interest is charged against interest income.
At December 31, 1998, total non-performing assets amounted to $78.0
million (1.94% of total assets) as compared to $74.3 million (2.23% of total
assets) at December 31, 1997 and $70.2 million (2.49% of total assets) at
December 31, 1996. The Bank's reserve to non-performing loans ratio was 94.2% at
December 31, 1998 as compared to 89.5% and 90.71% at December 31, 1997 and 1996,
respectively.
The following table presents non-performing assets at the dates
indicated:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
December 31, 1998 1997 1996 1995 1994
(Dollars in thousands)
Past due loans $ 15,110 $ 11,544 $ 9,752 $ 5,544 $ 4,859
-------- -------- -------- ------- -------
Non-accruing loans:
Real estate 17,399 12,249 12,795 14,106 18,422
Commercial 12,823 16,143 12,712 14,479 10,295
Consumer 26,736 24,547 25,655 26,085 13,993
-------- -------- -------- -------- --------
56,958 52,939 51,162 54,670 42,710
-------- -------- -------- -------- --------
Non-performing loans 72,068 64,483 60,914 60,214 47,569
--------- -------- -------- -------- --------
Other real estate owned (OREO) 3,642 1,132 1,696 2,991 12,383
Other repossessed property 2,277 8,702 7,566 3,132 1,619
---------- --------- --------- --------- --------
Total non-performing assets $77,987 $74,317 $70,176 $66,337 $61,571
======= ======= ======= ======= =======
Non-performing assets to total assets 1.94% 2.23% 2.49% 2.73% 2.83%
Non-performing loans to total loans 3.40% 3.29% 3.21% 3.87% 3.17%
Allowance for loan losses $67,854 $57,712 $55,254 $55,009 $37,413
Allowance to total non-performing loans 94.15% 89.50% 90.71% 91.36% 78.65%
</TABLE>
33
<PAGE>
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.
Non-accruing Loans
Real Estate Loans - The Corporation classifies all real estate loans
delinquent 90 days or more in non-accruing status. Even though these loans are
in non-accruing status, Management considers based on the value of the
underlying collateral and the loan to value ratios, that no material losses will
be incurred in this portfolio. Management's understanding is based on the
historical experience of the Corporation. Non-accruing real estate loans
amounted to $17.4 million (2.49% of total real estate loans) at December 31,
1998, as compared to $12.2 million (2.01% of total real estate loans) and $12.8
million (2.27% of total real estate loans) at December 31, 1997 and 1996,
respectively.
Non-accruing real estate loans at December 31, 1998 were composed of
$9.2 million in low risk residential mortgage loans and $8.2 million in
commercial real estate loans. No construction loans were on non-accruing status
at December 31,1998. There was only one real estate loan over $500,000 in
non-accruing status. This loan was a $1.0 million mortgage secured by an income
producing property, which has an estimated fair value that exceeds the principal
balance of the loan.
Commercial Loans - The Corporation places all commercial loans 90 days
delinquent as to principal and interest in non-accruing status. The risk
exposure of this portfolio is diversified and a portion of the portfolio is
collateralized by liens on real property. Non-accruing commercial loans amounted
to $12.8 million (3.05% of total commercial loans) at December 31, 1998 as
compared to $16.1 million (5.81% of total commercial loans) and $12.7 million
(5.45% of total commercial loans) at December 31, 1997 and 1996, respectively.
At December 31, 1998, non-accruing commercial loans of over $500,000 were: (1) a
$3.6 million loan secured by senior lien on receivables and junior liens on real
estate; and (2) a $1.9 million loan partially secured by inventory and accounts
receivable.
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 $26.7 million (2.67% of the
total consumer loan portfolio) at December 31, 1998, $24.5 million (or 2.29% of
the total consumer loan portfolio) at December 31, 1997 and $25.7 million (or
2.33% of the total consumer loan portfolio) at December 31, 1996. The ratio of
non-accruing consumer loans to total consumer loans is the result of the level
of delinquencies and write offs, mainly due to the overall level of bankruptcies
in Puerto Rico. During 1998 and 1997 the delinquencies and bankruptcies
increased and, as a result, the amount of net charge offs increased to $62.5
million from $51.9 million in 1997 and $30.9 million in 1996 (see Provision for
Loan Losses section).
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. Therefore, the Corporation does not
expect to incur significant losses on the disposition of OREO's at December 31,
1998.
Repossessed Property
The Repossessed Property category includes repossessed boats and autos
acquired in settlement of loans. Repossessed boats are recorded at the lower of
cost or estimated fair value. For 1997 and 1996, repossessed autos were recorded
at the principal balance of the loans. For 1998, repossessed autos were recorded
at the principal balance of the loans less an estimated loss on the disposition
of the units in accordance with the new write off policy implemented in late
1998 ( see Provision for Loan Losses section).
Sources of Funds
The Corporation's principal funding sources are branch-based deposits,
institutional deposits, federal funds purchased, securities sold under
agreements to repurchase, and notes.
Deposits
Total deposits amounted to $1,775.0 million at December 31, 1998, as
compared to $1,594.6 million and $1,703.9 million at December 31, 1997 and 1996,
respectively.
34
<PAGE>
The following table presents the composition of total deposits.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
At December 31, 1998 1997 1996
(Dollars in thousands)
Savings accounts $ 416,424 $ 403,129 $ 412,511
Interest bearing checking accounts 130,883 121,452 115,899
Certificates of deposit 1,054,634 929,955 1,039,809
----------- ----------- ----------
Interest bearing deposits 1,601,941 1,454,536 1,568,219
Non-interest bearing deposits 173,104 140,099 135,707
------------ ----------- -----------
Total $1,775,045 $1,594,635 $1,703,926
========== ========== ==========
Weighted average rate during the
period on interest bearing deposit 4.71% 4.80% 4.92%
</TABLE>
Total deposits are composed of branch-based deposits and institutional
deposits. Institutional deposits include brokered certificates of deposits and
certificates issued to agencies of the Government of Puerto Rico.
Total interest bearing deposits increased by $147.4 million at December
31, 1998 when compared to December 31, 1997. This fluctuation was mainly due to:
(1) an increase in branch-based deposits of $63.2 million; (2) an increase of
$58.2 million in brokered certificates of deposits; and (3) an increase of $31.0
million in certificates issued to the agencies of the Government of Puerto Rico.
The increase of $33.0 million in non interest bearing deposits was
mainly due to the increase in commercial demand deposit accounts resulting from
the growth in the commercial lending business.
Borrowings
At December 31, 1998 total borrowings amounted to $1,930.5 million as
compared to $1,458.1 million and $884.7 million at December 31, 1997 and 1996,
respectively. The increase in total borrowings was used to fund the increase in
total interest earning assets. The following table presents the composition of
borrowings.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
At December 31, 1998 1997 1996
(Dollars in thousands)
Advances from FHLB $ 2,600 $ 29,000 $ 14,100
Federal funds purchased and securities
sold under agreements to repurchase 1,623,698 965,869 584,857
Other short term borrowings 86,595 231,505
Notes payable 118,100 132,350 186,433
Subordinated notes 99,496 99,423 99,351
------------ ------------- ----------
Total $1,930,489 $1,458,147 $884,741
========== ========== ========
Weighted average rate during the period 5.41% 5.67% 5.65%
</TABLE>
35
<PAGE>
The Corporation uses advances from FHLB, federal funds purchased,
repurchase agreements and notes payable as additional funding sources. In March
1997, the Corporation obtained $250.0 million in short term borrowings under a
three year commercial paper asset backed program, collateralized with the
personal loan portfolio. In December 1995, FirstBank sold $100 million in ten
year subordinated notes with a yield of 7.63%.
The borrowings of the Corporation consist primarily of federal funds
purchased and securities sold under agreements to repurchase (repurchase
agreements) which at December 31, 1998 amounted to $1,623.7 million or 84% of
total borrowings. Repurchase agreements had a total weighted average cost of
5.08%, during the year ended December 31, 1998.
The composition and weighted average interest rates of interest bearing
liabilities at December 31, 1998, were as follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Amount Weighted
(In thousands) Average rate
Interest bearing deposits $1,601,941 4.57%
Borrowed funds 1,930,489 5.27%
----------
$3,532,430 4.95%
==========
</TABLE>
Average interest bearing liabilities amounted to $3,058.9 million in
1998 as compared to $2,530.9 million in 1997. During the year the cost was 4.71%
for interest bearing deposits, and 5.41% for borrowed funds.
Capital
During 1998, the Corporation increased its total capital, composed
solely of common equity, mainly through retained earnings. Total capital
increased from $236.4 million at December 31, 1997 to $270.4 million at December
31, 1998. Total capital increased by $34.0 million due to earnings of $51.8
million, reduced by the repurchased shares of common stock at a total cost of
$5.9 million, a decrease in the unrealized gain on investment securities
available for sale of $3.3 million and cash dividends of $8.9 million.
The Corporation is a "well capitalized" institution, the highest
ranking available under the capital standards set by the federal banking
agencies. 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, 1998 the Corporation had a leverage ratio of 6.59%; a total risk
based capital ratio of 17.39%; and a Tier 1 risk-based capital ratio of 11.55%.
Dividends
In 1998, the Corporation declared four quarterly cash dividends of
$0.075 per common share for an annual dividend of $0.30. In 1997, the
Corporation declared four quarterly cash dividends of $0.06 per common share for
an annual dividend of $0.24. In 1996, the Corporation declared four quarterly
cash dividends of $0.05 per common share for an annual dividend of $0.20. Total
cash dividends paid amounted to $8.9 million for 1998 (or a 17.12% dividend
payout ratio), $7.2 million for 1997 (or a 15.14% dividend payout ratio) and
$6.1 million for 1996 (or a 16.32% dividend payout ratio).
Year 2000
The year 2000 issue concerns the inability of information systems to
properly recognize and process date-sensitive information beyond January 1,
2000. The Corporation recognizes the need to ensure that its operations will not
be adversely impacted by Year 2000 problem and has established a plan to address
Year 2000 risks.
The Corporation continues its program of improving its information
systems through the systematic wholesale replacement of certain hardware and
software. Since October 1996, it has been the practice to install new systems
that are already year 2000 enabled. Therefore, there are no additional costs
associated with changes or modifications to accommodate the year 2000 issue on
these new systems. All the related costs associated with the replacement of
these systems are recorded as assets and amortized.
Any year 2000 expenditure is expensed as incurred.
Based on the Corporation's final action plan addressing the Year 2000
issue, Management estimates that the expenses required to modify existing
computer systems enabling them for the year 2000 will be between $1.5 million
and $2.0 million for 1998 and 1999. Accordingly, the amounts to be expensed will
not have a significant impact on the Corporation's financial position or results
of operations. For 1998, a total of $650,000 in expenses was related to the year
2000 effort. No expenses were incurred during 1997.
36
<PAGE>
The year 2000 action plan uses clearly articulated program criteria
that is being implemented by the Corporation for compliance. Management named a
Project Team, responsible for the plan implementation. The plan guides the
planning and execution of all activities related to: (1) information and
computerized systems, including related hardware and software; (2) non
information systems (i.e., environmental, communication and security equipment);
(3) credit customers; and (4) service providers who participate in the project
testing. The Corporation completed the assessment phase on these project risk
areas.
Management has substantially completed the renovation phase of the
information and computerized systems risk area composed of: business
applications, data center hardware, operating systems software and end-user and
desktop computing.
Unit test and validation of the mission critical applications is in
process and was substantially completed at December 31, 1998. Integration test
and validation of all information systems should be completed by March 31, 1999.
The identification and documentation of the Year 2000 contingency plan
for the Corporation's mission critical functions should be substantially
completed by March 31, 1999 and completed by June 30, 1999.
Asset/Liability Management
The Corporation has a formal system of interest rate risk management.
Management recognizes that it may sometimes be necessary to forego earning
opportunities in order to maintain a stable stream of net interest income as
interest rates rise and fall.
Management monitors the Corporation's interest rate risk position
primarily through computer simulations of the effect of rising and falling
interest rates on net interest income. Two sets of simulations are carried out,
both of which cover a two year time horizon: one assuming a flat balance sheet
with a constant asset/liability mix and another assuming a balance sheet which
grows according to expected loan originations and funding. These simulations
also incorporate expected changes in prepayment rates as interest rates rise or
fall, repricing characteristics of variable rate assets and liabilities, current
and expected lending rates, funding sources and costs. Other factors, which may
be potentially important in determining the future growth of net interest income
(i.e. planned securitizations and liquidity requirements), are considered in
these simulations.
Management also uses one year GAP analysis as a secondary technique for
evaluating interest rate risk. The Corporation's one year GAP fluctuated between
a negative 2% and a negative 27% of assets during 1998. Management considers
that the ranges of the GAP ratio achieved during 1998 are adequate, considering
the Corporation's net interest margin and capital ratios.
The Corporation's interest rate risk position is measured on a
quarterly basis and is evaluated by the Asset Liability Management and
Investment Committee. This Committee is in charge, among other things, of
informing Management as to the current levels of interest rate risk and, when
necessary, managing the repricing of the Corporation's assets, liabilities and
off balance sheet contracts to maintain that risk at reasonable and prudent
levels.
Liquidity
Liquidity refers to the level of cash and eligible investments to meet
loan and investment commitments, potential deposit outflows and debt repayments.
The Investment Committee, using measures of liquidity developed by Management
reviews the Corporation's liquidity position and liquidity targets on a weekly
basis.
The principal sources of short-term funds are loan repayments,
deposits, securities sold under agreements to repurchase, a commercial paper
conduit collateralized by personal loans, and lines of credit with the FHLB and
other financial institutions. The Investment Committee reviews credit
availability on a regular basis. In addition, the Corporation has securitized
and sold auto and mortgage loans as supplementary sources of funding. Commercial
paper has 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.
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.
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.
37
<PAGE>
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, 1998, there were 673 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.
Common stock prices were adjusted to give retroactive effect to the stock split
declared in May 1998.
Quarter ended High Low
1998:
December $30.50 $21.38
September 29.50 23.63
June 29.63 22.72
March 23.88 16.50
1997:
December $18.82 $15.13
September 17.75 12.53
June 13.63 11.69
March 14.38 12.50
1996:
December $14.19 $11.13
September 11.57 10.00
June 12.07 10.07
March 12.13 10.32
38
<PAGE>
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 (ALCO). The ALCO is composed of the
following officers: President and CEO, Senior Executive Vice President/Chief
Financial Officer, Senior Executive Vice President/Chief Lending Officer,
Executive Vice President and President of Money Express, Senior Vice
President/Investments, and the Economist. The ALCO meets on a weekly basis. The
Economist acts as secretary, keeping minutes of all meetings.
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 pricing and funding decisions in
the light of the Corporation's overall growth strategies and objectives. On a
semi annual 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 in two
ways, assuming upward and downward interest rate movements of 200 basis points:
(1) using a balance sheet which is assumed to be flat at the levels
existing on the simulation date, and
(2) using a balance sheet which has growthpatterns and strategies similar
to those which have occurred in the recent past.
Assuming a flat balance sheet, tax equivalent net interest income for
the twelve months following December 31, 1998 would be $207.1 million under flat
rates, $185.4 million under rising rates, and $211.0 million under falling
rates. Assuming a growing balance sheet, tax equivalent net interest income for
the same one year period would be $209.1 million under flat rates, $188.3
million under rising rates and $212.5 million under falling rates. These
simulations do not represent what actual results would be, since interest rate
risk management is dynamic, and can be adjusted depending on the committee's
interest rate outlook.
These simulations assume gradual upward or downward movements of
interest rates over one year, 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, liquidity requirements, and other
factors which may be important in determining the future growth of net interest
income. Only interest and fee income is included in these projections; profits
on the sale of assets are excluded. 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.
These simulations are highly complex, and they use many simplifying
assumptions which are intended to reflect the general behavior of the
Corporation over the period in question, but there can be no assurance that
actual events will parallel these assumptions in all cases. For this reason, the
results of these simulations are only approximations of the true sensitivity of
net interest income to changes in market interest rates.
39
<PAGE>
Report of Independent
Accountants and Consolidated
Financial Statements
PricewaterhouseCoopers
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, of changes in
stockholders' equity, of comprehensive income, and of cash flows present fairly,
in all material respects, the financial position of First BanCorp and its
subsidiaries at December 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years ended December 31, 1998, in
conformity with generally accepted accounting principles. 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
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurane 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,
asssessing 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 the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
CERTIFIED PUBLIC ACCOUNTANTS
(OF PUERTO RICO)
License No. 216 Expires Dec., 1 2001
Stamp 1537438 of the P.R. Society of
Certified Public Accountants has been
affixed to the file copy of this report
February 12, 1999
<PAGE>
FIRST BANCORP
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
<C>
December 31, 1998 1997
Assets
Cash and due from depository institutions $ 39,416,097 $ 37,666,068
-------------- -----------------
Money market instruments -
Deposits at interest with banks 525,669 514,236
------------------- --------------------
Debt securities available for sale, at market:
United States and Puerto Rico Government obligations 268,611,106 448,092,442
Mortgage backed securities 1,492,538,909 758,886,800
Other investment 1,620,000
------------------- ------------------
Total debt securities available for sale 1,762,770,015 1,206,979,242
---------------- ----------------
Debt securities held to maturity, at cost -
United States and Puerto Rico Government obligations 26,921,836 59,256,360
----------------- ------------------
Federal Home Loan Bank (FHLB) stock 10,270,600 10,150,300
----------------- ----------------
Loans held for sale 20,641,628 10,224,509
Loans receivable 2,099,412,756 1,949,076,978
--------------- --------------
Total loans 2,120,054,384 1,959,301,487
Allowance for loan losses (67,854,066) (57,711,927)
---------------- ----------------
Total loans - net 2,052,200,318 1,901,589,560
--------------- ---------------
Other real estate owned 3,642,525 1,131,808
Premises and equipment - net 51,537,192 48,447,167
Accrued interest receivable 10,738,072 13,035,934
Due from customers on acceptances 2,392,338 353,587
Other assets 56,937,413 48,311,296
----------------- -----------------
Total assets $4,017,352,075 $3,327,435,558
============== ==============
Liabilities and Stockholders' Equity
Liabilities:
Non-interest bearing deposits $ 173,103,709 $ 140,099,305
Interest bearing deposits 1,601,941,185 1,454,535,378
Federal funds purchased and securities
sold under agreements to repurchase 1,623,697,988 969,303,381
Other short-term borrowings 86,594,710 231,504,896
Advances from FHLB 2,600,000 29,000,000
Notes payable 118,100,000 132,350,000
Bank acceptances outstanding 2,392,338 353,587
Accounts payable and other liabilities 39,058,247 34,486,321
----------------- -----------------
3,647,488,177 2,991,632,868
Subordinated notes 99,495,830 99,423,490
----------------- -----------------
Stockholders' equity:
Common stock, $1.00 par value, authorized 250,000,000 shares; issued
29,599,552 shares (including 14,796,526 shares issued
on May 29, 1998 as a stock split) (1997 - 14,901,826) 29,599,552 14,901,826
Less: Treasury Stock (100,000 shares at par) 100,000
----------------- ---------------
Common stock outstanding 29,499,552 14,901,826
Additional paid-in capital 23,575,936 38,453,561
Capital reserve 30,000,000 20,000,000
Legal surplus 53,454,469 53,454,469
Retained earnings 125,088,180 97,537,900
Accumulated other comprehensive income - unrealized gain
on securities available for sale, net of tax 8,749,931 12,031,444
------------------ -----------------
270,368,068 236,379,200
---------------- ----------------
Contingencies and commitments
Total liabilities and stockholders' equity $4,017,352,075 $3,327,435,558
============== ==============
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
FIRST BANCORP
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Year ended December 31,
1998 1997 1996
--------------- ------------- -------------
Interest income:
Loans $231,513,730 $225,524,452 $213,744,790
Debt securities 88,312,096 55,310,691 40,180,410
Short-term investments 729,417 3,654,806 1,842,204
Dividends on FHLB stock 743,161 670,156 755,485
-------------- ------------- ------------
Total interest income 321,298,404 285,160,105 256,522,889
------------- ------------- -----------
Interest expense:
Deposits 70,418,359 72,147,084 70,963,853
Short-term borrowings 69,494,151 39,460,518 23,319,871
Notes payable 14,965,751 17,958,092 17,289,034
Advances from FHLB 251,707 863,599 1,454,547
---------------- -------------- -------------
Total interest expense 155,129,968 130,429,293 113,027,305
------------- ----------- -----------
Net interest income 166,168,436 154,730,812 143,495,584
Provision for loan losses 76,000,000 55,675,500 31,582,401
------------- ------------ ------------
Net interest income after provision for loan losses 90,168,436 99,055,312 111,913,183
------------- ------------ -----------
Other income:
Other fees on loans 11,157,852 10,898,586 10,651,284
Service charges on deposit accounts 7,843,837 7,363,369 6,184,113
Trading income (loss) 3,364,843 744,789 (1,354,773)
Fees on loans serviced for others 1,617,292 2,669,673 3,993,007
Gain on sale of investments 26,827,417 11,388,137 4,856,568
Rental income 2,291,814 1,935,169 2,356,358
Other operating income - net 5,136,795 4,865,788 2,927,920
------------- ------------- -------------
Total other income 58,239,850 39,865,511 29,614,477
------------ ------------ ----------
Other operating expenses:
Employees' compensation and benefits 43,185,324 38,644,042 37,358,733
Occupancy and equipment 18,154,663 16,101,054 14,931,955
Taxes and insurance 6,577,894 6,575,896 7,093,764
Net cost (gain) of operations and disposition of
other real estate owned 42,359 (21,128) 218,522
Amortization of debt issuance costs 691,411 787,745 873,420
Other 23,146,048 21,180,662 22,021,236
------------ ----------- ------------
Total other operating expenses 91,797,699 83,268,271 82,497,630
------------ ------------ ------------
Income before unusual item and income tax provision 56,610,587 55,652,552 59,030,030
Unusual item - SAIF assessment 9,115,000
------------------ ------------------ ------------
Income before income tax provision 56,610,587 55,652,552 49,915,030
Income tax provision 4,798,200 8,125,000 12,281,239
------------- ------------ ------------
Net income $ 51,812,387 $47,527,552 $37,633,791
============ =========== ===========
Earnings per common share - basic $1.75 $1.58 $1.22
Earnings per common share - diluted $1.74 $1.58 $1.22
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
FIRST BANCORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
<C>
Year ended December 31,
1998 1997 1996
------------------ ------------------ ----------
Net income $51,812,387 $47,527,552 $37,633,791
----------- ------------- -----------
Other comprehensive income net of tax:
Unrealized gain (losses) on securities:
Unrealized holding gains (losses)
arising during the period (14,665,309) 12,081,362 (3,585,742)
Less: reclassification adjustment
for gains included in net income (11,383,796) 657,037 (1,074,566)
------------ ------------- -------------
Total other comprehensive income (3,281,513) 11,424,325 (2,511,176)
------------- ----------- -------------
Comprehensive income $48,530,874 $58,951,877 $35,122,615
=========== =========== ===========
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
FIRST BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Year ended December 31,
1998 1997 1996
Cash flows from (for) operating activities:
Net income $ 51,812,387 $ 47,527,552 $ 37,633,791
----------------- --------------- --------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 7,827,866 7,281,936 6,156,487
Provision for loan losses 76,000,000 55,675,500 31,582,401
Increase in taxes payable 3,454,049 1,464,869 1,539,279
Increase in deferred tax asset (11,454,033) (1,765,992) (7,625,000)
Decrease (increase) in accrued interest receivable 2,297,862 (3,843,610) 3,582,598
Increase (decrease) in accrued interest payable 1,072,485 (2,371,552) 4,527,433
Amortization of deferred loan fees 881,411 (30,868) 950
Net gain on sale of investments securities (26,827,417) (11,388,137) (4,856,568)
Originations of loans held for sale (9,086,622) (7,668,575) (8,455,567)
Proceeds from sale of loans 1,249,543
Decrease (increase) in other assets (2,194,128) 3,294,965 (734,092)
Increase (decrease) in other liabilities 1,718,243 (3,157,333) 3,058,474
------------------- ------------------ -----------------
Total adjustments 43,689,716 38,740,746 28,776,395
------------------- ---------------- ----------------
Net cash provided by operating activities 95,502,103 86,268,298 66,410,186
-------------------- --------------- ----------------
Cash flows from (for) investing activities:
Principal collected on loans 559,726,839 661,129,038 648,321,626
Loans originated (798,487,248) (819,802,988) (1,041,089,883)
Sales of investment securities and deposits at interest with banks 302,128,585 118,004,497 208,657,726
Maturities of investment securities and deposits at interest with banks 6,096,509,572 7,546,078,859 4,744,671,620
Purchases of investment securities and deposits at interest with banks (6,899,653,771) (8,079,336,836) (4,999,351,451)
Additions to premises and equipment (10,917,891) (6,739,859) (16,183,784)
Proceeds from sale of other real estate owned 463,867 1,105,200 4,780,000
Proceeds from sale of auto repossessions 22,506,674 44,413,066 19,932,726
Redemption of FHLB stock (120,300) 2,297,100
---------------- ------------------------ ----------------
Net cash used by investing activities (727,843,673) (535,149,023) (427,964,320)
------------- ---------------- --------------
Cash flows from (for) financing activities:
Proceeds from issuance of certificates of deposit and savings accounts 1,213,776,011 894,793,781 977,210,993
Payments for maturing certificates of deposit
and withdrawals of saving accounts (1,029,607,935) (961,330,999) (740,699,072)
Interest credited to deposits (53,226,355) (53,567,387) (45,258,544)
Proceeds from federal funds purchased and
securities sold under repurchase agreements 16,408,940,022 14,057,501,079 8,180,227,456
Payments/Maturities of federal funds purchased
and securities sold under repurchase agreements (15,754,179,517) (13,676,488,479) (8,016,755,718)
Net increase (decrease) in other short-term borrowings (144,910,185) 231,504,896
FHLB-N.Y. advances taken 2,600,000 29,000,000 14,100,000
Principal payments on FHLB-N.Y. advances (29,000,000) (14,100,000) ( 29,500,000)
Payments of notes payable (14,177,660) (54,010,993) (16,927,316)
Proceeds from notes payable 55,500,000
Decrease (increase) in debt securities issuance cost (1,049,270) 957,972 327,813
Net increase (decrease) in demand deposit accounts 49,468,489 10,813,682 (3,184,250)
Dividends (8,870,832) (7,197,417) (6,140,400)
Repurchase of common stock (3,656,420) (6,899,822) (9,042,230)
Treasury stock acquired (2,211,250)
Exercise of stock options 196,501 382,249
------------------ ------------ ---------------
Net cash provided by financing activities 634,091,599 451,358,562 359,858,732
------------- ------------------- ---------------
Net increase (decrease) in cash and cash equivalents 1,750,029 2,477,837 (1,695,402)
Cash and cash equivalents at beginning of year 37,666,068 35,188,231 36,883,633
------------------------------------- ----------------
Cash and cash equivalents at end of year $ 39,416,097 $ 37,666,068 $ 35,188,231
================ =================== ===============
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
35
FIRST BANCORP
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Unrealized
gain on
Common Additional securities
stock paid-in Capital Legal Retained available
outstanding capital reserve surplus earnings for sale
Balance at December 31, 1995 $15,541,751 $39,450,162 $45,343,616 $67,748,506 $3,118,295
Net income 37,633,791
Change in valuation of
securities available for sale (2,511,176)
Addition to legal surplus 3,763,379 (3,763,379)
Addition to capital reserve $10,000,000 (10,000,000)
Repurchase of common stock (425,100) (850,200) (7,766,930)
Cash dividends __________ __________ __________ __________ (6,140,402) __________
-------------
Balance at December 31, 1996 15,116,651 38,599,962 10,000,000 49,106,995 77,711,586 607,119
Net income 47,527,552
Change in valuation of
securities available for sale 11,424,325
Addition to legal surplus 4,347,474 (4,347,474)
Addition to capital reserve 10,000,000 (10,000,000)
Repurchase of common stock (247,825) (495,650) (6,156,347)
Stock option exercised 33,000 349,249
Cash dividends (7,197,417)
---------- ---------- ----------- ----------- ---------- -----------
Balance at December 31, 1997 14,901,826 38,453,561 20,000,000 53,454,469 97,537,900 12,031,444
Net income 51,812,387
Change in valuation of
securities available for sale (3,281,513)
Addition to capital reserve 10,000,000 (10,000,000)
Repurchase of common stock (108,800) (217,600) (3,330,024)
Treasury stock (100,000) (50,000) (2,061,250)
Stock option exercised 10,000 186,501
Cash dividends (8,870,832)
Common stock split
on May 29, 1998 14,796,526(14,796,526) __________ __________ ___________ __________
-----------------------
Balance at December 31, 1998 $29,499,552 $23,575,936 $30,000,000 $53,454,469 $125,088,180 $ 8,749,931
=========== =========== =========== =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
FIRST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Nature of Business
First BanCorp (the Corporation) was incorporated on October 1st, 1998
under the laws of the Commonwealth of Puerto Rico to serve as the bank holding
company for FirstBank Puerto Rico (FirstBank or the Bank). As a result of this
reorganization each of the Bank's outstanding shares of common stock was
converted into one share of common stock of the new bank holding company. This
reorganization was carried out pursuant to an Agreement and Plan of Merger by
and between the Corporation and the Bank. First BanCorp is subject to the
Federal Bank Holding Company Act and to the regulations, supervision, and
examination of the Federal Reserve Board.
FirstBank, the Corporation's 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 has 38 full service banking branches in Puerto Rico
and two in the U.S. Virgin Islands. It also has loan origination offices in
Puerto Rico focusing on consumer 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 is subject to
the supervision, examination and regulation by 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).
Note 2 - Summary of Significant 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 at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual result 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 of which are wholly owned. All significant
intercompany balances and transactions have been eliminated in consolidation.
Statement of cash flows
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand and amounts due from depository institutions.
Segments of an enterprise and related information
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 131 "Disclosures about
Segments of an Enterprise and Related Information." This statement changes the
way public companies report information about segments of their business in
their financial statements and requires them to report selected segment
information in the reports issued to shareholders. It also requires entity-wide
disclosures about the products and services an entity provides, activities in
different geographic areas, and reliance on major customers.
The segments are determined based on the way that Management organizes the
segments within the entity for making operating decisions and assessing
performance. Management implemented SFAS No. 131 for all the periods presented.
The implementation affected only the disclosures given in the notes to the
financial statements.
Securities purchased under agreements to resell
The Corporation enters into purchases of securities under agreements to
resell the same securities. Amounts advanced under these agreements represent
short-term loans and are reflected as assets in the statements of financial
condition.
Investment securities
The Corporation classifies its investments in debt and equity
securities into one of three categories:
Held to maturity - Securities for 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 holding 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 estimated tax effect,
excluded from earnings and reported in other comprehensive income as a
separate component of stockholders' equity.
<PAGE>
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.
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.
The Corporation provides for estimated losses on mortgage, commercial
and consumer loans 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.
Loan origination fees and costs
Loan origination 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) balance is credited (charged) to income.
Other real estate owned - acquired in settlement of loans
Other real estate owned, acquired in settlement of loans, is carried at
the lower of cost (carrying value of the loan) or fair value minus estimated
cost to sell of the real estate at the date of acquisition. Subsequent to
foreclosure, 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 enters into sales of 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. Amounts advanced under these agreements are
accounted as short-term borrowings and the securities underlying the agreements
remain in the asset accounts.
Amortization of debt issuance costs
Costs related to the issuance of debt are amortized under a method
which approximates the interest method.
Treasury stock
The Corporation accounts for treasury stock at par value. Under this
method, the treasury stock account is increased by the par value of each share
of common stock reacquired. Any excess paid per share over the par 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.
<PAGE>
Stock option plan
The cost associated with stock option plan under which certain
employees receive options to buy shares of stock of the Corporation must be
recognized either by the fair value based method or the intrinsic value based
method. The Corporation uses the intrinsic value based method of accounting.
Under the intrinsic value based method, compensation cost is the excess, if any,
of the quoted market price of the stock at grant date or other measurement date
over the amount an employee must pay to acquire the stock. If material, entities
using the intrinsic value based method on awards granted to employees must make
pro forma disclosures of net income and earnings per share, as if the fair value
based method of accounting had been applied. Under the fair value based method,
compensation cost is measured at the grant date based on the value of the award
and is recognized over the service period, which is usually the vesting period.
Earnings per common share
Earnings per share-basic is calculated by dividing income available to
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. Any
stock splits or stock dividends are retroactively recognized in all periods
presented in financial statements.
Reporting comprehensive income
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive
Income." This statement establishes standards for reporting and displaying
comprehensive income and its components in the financial statements.
Comprehensive income includes net income and several other items that current
accounting standards require to be recognized outside of net income. This
statement was implemented in 1998 and affected only financial statements'
presentation. Reclassification of financial statements for earlier periods was
presented for comparative purposes.
Reclassifications
Certain amounts in the 1997 and 1996 financial statements have been
reclassified to conform with the 1998 classifications.
Accounting for derivative instruments and hedging activities
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments, including derivative instruments
that are embedded in other contracts, and for hedging activities. SFAS No. 133
standardizes accounting for derivative instruments, including those embedded in
other contracts, by requiring the recognition of all derivatives (both assets
and liabilities) in the statement of financial position at fair value. In
accordance with SFAS No. 133, changes in the fair value of derivative
instruments are generally accounted for as current income or other comprehensive
income, depending on their designation.
SFAS No. 133 generally provides for the matching of the timing of gain
or loss recognition on the hedging instruments with the recognition of either
the changes in the fair value of the hedged asset or liability, or the earnings
effect of the hedged forecasted transaction.
SFAS No. 133 is effective for fiscal periods beginning after June 15,
1999. Based on current volumes, Management expects that the adoption of SFAS No.
133 will not have a significant impact on the Corporation's financial position
and results of operations.
<PAGE>
Note 3 - Stockholders' Equity
Common stock
Authorized common stock shares at December 31, 1998 were 250,000,000
(1997 - 200,000,000), with a par value of $1.00.
On April 30, 1998, the Corporation declared a two for one stock split
on its then outstanding 14,796,526 shares of common stock. As a result, a total
of 14,796,526 additional shares of common stock were issued on May 29, 1998. In
addition, 33,000 and 10,000 shares of common stock were issued during 1997 and
1998 as part of the exercise of stock options under the Corporation's stock
option plan.
The Corporation declared a cash dividend on its common stock of $0.20 per
share in 1996, of $0.24 per share in 1997, and of $0.30 per share in 1998.
Stock repurchase plan and treasury stock
In 1996 a stock repurchase program was established (the 1996 Program)
where the Corporation is authorized to repurchase in the open market, and retire
from circulation or hold as treasury stock, up to ten percent of the 31,083,502
issued and outstanding shares of common stock at the time the program was
approved by the stockholders. Under this program the Corporation repurchased a
total of 317,600 shares of common stock at a cost of $5,867,674 during 1998,
495,650 shares of common stock at a cost of $6,899,822 during 1997, and 850,200
shares of common stock at a cost of $9,042,230 during 1996. The number of shares
were adjusted to recognize the May 1998 stock split.
In 1997 an additional stock repurchase program was established whereby
the Corporation may repurchase in the open market shares of common stock, which
amount represents 10% of the issued and outstanding shares after all shares
authorized under the 1996 Program have been repurchased.
As permitted by the new bank holding company structure, at December 31,
1998, 100,000 shares were held as treasury stock and were available for general
corporate purposes.
Preferred stock
The Corporation has 50,000,000 shares (1997 - 20,000,000) of authorized
preferred stock with a par value of $1. 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. At December 31, 1998, no shares of preferred stock were outstanding.
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 FirstBank
that a minimum of 10% of the net income for the year be transferred to legal
surplus, until such surplus equals the total of paid in capital on common and
preferred stock. Amounts transferred to the legal surplus account from the
retained earnings account are not available for distribution to the
stockholders.
Dividend restrictions
The Corporation is subject to certain restrictions generally imposed on
Puerto Rico corporations (i.e., that dividends may be paid out only from the
Corporation's net assets in excess of capital or in the absence of such excess,
from the Corporation's net earnings for such fiscal year and/or the preceding
fiscal year). The Federal Reserve Board has also issued a policy statement that
provides that bank holding companies should generally pay dividends only out of
current operating earnings.
Note 4 - Regulatory Capital Requirement
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.
<PAGE>
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 December 31, 1998 and 1997, the Corporation exceeded the
requirements for an adequately capitalized institution.
At December 31, 1998, the Corporation also was 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 that
have changed that classification.
The Corporation's regulatory capital position was as follows (dollars
in thousands):
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
For Capital To Be Well
Adequacy Purposes Capitalized
Amount Ratio Amount Ratio
At December 31, 1998:
Total capital to risk weighted assets:
Actual $377,939 17.39% $377,939 17.39%
Requirement 173,835 8.00% 217,294 10.00%
--------- ------- -------- ------
Excess $204,104 9.39% $160,645 7.39%
======== ======= ======== ======
Tier 1 capital to risk weighted assets:
Actual $250,910 11.55% $250,910 11.55%
Requirement 86,917 4.00% 130,376 6.00%
---------- ------- --------- ------
Excess $163,993 7.55% $120,534 5.55%
======== ======= ======== ======
Tier 1 capital to average assets:
Actual $250,910 6.59% $250,910 6.59%
Requirement 152,272 4.00% 190,340 5.00%
--------- ----- -------- -----
Excess $ 98,638 2.59% $ 60,570 1.59%
========= ===== ======== =====
At December 31, 1997:
Total capital to risk weighted assets:
Actual $348,359 17.26% $348,359 17.26%
Requirement 161,452 8.00% 201,816 10.00%
--------- ------- --------- ------
Excess $186,907 9.26% $146,543 7.26%
======== ======= ======== =======
Tier 1 capital to risk weighted assets:
Actual $223,481 11.07% $223,481 11.07%
Requirement 80,726 4.00% 121,089 6.00%
---------- ------- --------- -------
Excess $142,755 7.07% $102,392 5.07%
======== ======= ======== =======
Tier 1 capital to average assets:
Actual $223,481 7.44% $223,481 7.44%
Requirement 120,101 4.00% 150,126 5.00%
--------- ----- --------- -----
Excess $103,380 3.44% $ 73,355 2.44%
======== ===== ========= =====
</TABLE>
At December 31, 1998, the Bank's regulatory capital ratios, which
exceeded the requirements for an adequately and well capitalized institution,
were as follows: (1) total risk based of 17.12%; (2) Tier 1 risk based of 11.28%
and; (3) Tier 1 leverage ratio of 6.44%. Management believes that there are no
conditions or events that have changed that classification.
<PAGE>
Note 5 - Stock Option Plan
The Corporation has a stock option plan covering certain employees. The
plan covers a number of options not to 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. 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.
Following is a summary of the activity related to stock options as
adjusted retroactively for the May 1998 stock split:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Number Weighted Average
of Options Exercise Price of Option
At December 31, 1995 305,714 $ 5.72
Granted 20,000 12.69
--------
At December 31, 1996 325,714 6.15
Granted 240,000 15.45
Exercised (66,000) 5.79
Expired or canceled (25,714) 10.20
--------
At December 31, 1997 474,000 10.68
Granted 294,000 24.83
Exercised (13,500) 14.56
-------
At December 31, 1998 754,500 16.13
=======
</TABLE>
During 1998 the Corporation granted 294,000 options to buy common stock
shares with a weighted exercise price of $24.83 per option. The option prices
equal the quoted market price of the stock on the grant date, therefore no
compensation cost was recognized on the options granted.
The options outstanding at December 31, 1998 have an original
expiration term of ten years and all of them are exercisable. The exercise price
of the options outstanding at December 31, 1998 ranges from $5.79 to $28.38 and
the weighted average remaining contractual life is eight years and three months.
Following is additional information concerning the stock options
outstanding at December 31, 1998. The data included herein have been adjusted to
reflect the May 1998 stock split.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Number of Exercise Contractual
Options Price Maturity
234,000 $ 5.79 November 2004
13,000 13.56 January 2007
213,500 15.63 November 2007
60,000 19.19 February 2008
7,000 28.38 April 2008
40,000 27.09 May 2008
10,000 26.56 June 2008
177,000 26.00 November 2008
-------
754,500
</TABLE>
<PAGE>
Note 6 - Earnings Per Common Share
The calculations of earnings per common share for the years ended December
31, 1998, 1997 and 1996 follow (in thousands, except per share data):
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Year ended December 31,
Earnings per common share-basic: 1998 1997 1996
- - ------------------------------- ------ ------ ----
Net income - available to common stockholders $51,812 $47,528 $37,634
------- ------- -------
Weighted average common shares outstanding 29,586 30,036 30,794
------- ------- -------
Earnings per common share-basic $ 1.75 $ 1.58 $ 1.22
======== ======== ========
Earnings per common share-diluted:
Net income - available to common stockholders $51,812 $47,528 $37,634
------- ------- -------
Weighted average common shares and share equivalents:
Average common shares outstanding 29,586 30,036 30,794
Common stock equivalents - Options 272 168 158
--------- ----------- ---------
Total 29,858 30,204 30,952
------- -------- -------
Earnings per common share-diluted $ 1.74 $ 1.58 $ 1.22
========= ========= ========
</TABLE>
Had compensation cost for the stock options granted been determined
based on the fair value at the grant date (as a result of the requirement
explained in Note 2 - Stock option plan), the Corporation's net income and
earnings per common share would have been reduced to the pro forma amounts
indicated, as follow (in thousands, except per share data):
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Year ended December 31,
Pro forma earnings per common share: 1998 1997 1996
- - ----------------------------------- ---------- --------- ------
Net income $48,592 $46,354 $37,634
Earnings per common share-basic $1.64 $1.55 $1.22
Earnings per common share-diluted $1.63 $1.54 $1.22
</TABLE>
Management uses the binomial model for the computation of the fair
value of each option granted to buy shares of the Corporation's common stock.
The fair value of each option granted during 1998 and 1997 was estimated using
the following assumptions: weighted dividend growth of 21.97% (1998); expected
life of 10 years; weighted expected volatility of 36.08% (1998) and 29.8% (1997)
and weighted risk-free interest rate of 5.10% (1998) and 5.76% (1997). The
weighted estimated fair value of the options granted was $10.95 (1998) and $4.89
(1997) per option. The options granted during 1996 were not considered in the
1996 pro forma earnings per share since their effect in the computation was
immaterial.
<PAGE>
Note 7 - Cash and Due from Banks
The Corporation is required by law to maintain average reserve
balances. The amount of those reserve balances was approximately $34,867,200 at
December 31, 1998 (1997 - $25,095,400).
Note 8 - Securities Purchased Under Agreements To Resell
At December 31, 1998 and 1997, there were no securities purchased under
agreements to resell. The maximum aggregate balance outstanding at any month-end
during 1998 was approximately $209,232,000 (1997 - $552,969,000). The average
aggregate balance during 1998 was $15,009,052 (1997 - $66,401,236). The
securities underlying these agreements are kept under the Corporation's control
or held by the dealers through which the agreements were transacted. These
securities are not recorded as assets of the Corporation.
Note 9 - Debt Securities Held For Trading
At December 31, 1998 and 1997, 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. These options 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 $3,365,000 for
the year ended December 31, 1998 (a gain of $745,000 for 1997 and a loss of
$1,355,000 for 1996), and were included in earnings as trading income.
Note 10 - Debt Securities Held To Maturity
The amortized cost, unrealized gains and losses, approximate market
value, taxable equivalent weighted average yield and maturities of debt
securities held to maturity at December 31, 1998 and 1997 were as follows
(dollars in thousands):
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
December 31, 1998 December 31, 1997
------------------------------------------------ ----------------------------------------
Weighted Weighted
Amortized Unrealized Market average Amortized Unrealized Market average
cost gains(losses) value yield% cost gains(losses) value yield%
Obligations of other U.S.
Government Agencies:
Within 1 year $ 500 $ (2) $ 498 3.37 $10,704 $ (64) $10,640 4.45
After 1 to 5 years 500 (12) 488 3.99
After 10 years 23,051 $569 23,620 10.20 33,890 $412 34,302 9.53
Puerto Rico Government
Obligations:
Within 1 year 11,000 11,000 2.94
After 10 years 3,371 204 3,575 7.41 3,162 (32) 3,130 7.36
--------- ------------- -------- -------- -------- ------ --------
Total $26,922 $ 773 $ (2) $27,693 9.73 $59,256 $412 $(108) $59,560 7.23
======= ===== ==== ======= ======= ==== ===== =======
</TABLE>
During 1998, certain debt securities held to maturity were called by
the issuers.
<PAGE>
Note 11 - Debt Securities Held For Sale
The amortized cost, gross unrealized gains and losses, approximate
market value, taxable equivalent weighted average yield and maturities of debt
securities held for sale at December 31, 1998 and 1997 were as follows (dollars
in thousands):
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
December 31, 1998 December 31, 1997
------------------------------------------------ ----------------------------------------
Weighted Weighted
Amortized Unrealized Market average Amortized Unrealized Market average
cost gains(losses) value yield% cost gains (losses) value yield%
---------------------------------------------------------------------------------------------
U.S. Treasury Securities:
After 5 to 10 years $251,092 $5,197 $256,289 7.61
Obligations of other U.S.
Government Agencies:
Within 1 year $240,040 $51 $240,091 5.00 188,852 $(34) 188,818 5.72
After 10 years 25,619 $(159) 25,460 8.32
Puerto Rico Government
Obligations:
After 10 years 2,964 96 3,060 7.18 2,963 22 2,985 7.15
----------- -------------------------- ---------- -------- ------ ---------
Total $268,623 $147 $(159) $268,611 5.35 $442,907 $5,219 $(34) $448,092 6.82
======== ==== ===== ======== ======== ====== ==== ========
Mortgage backed securities- Federal Home Loan Mortgage Corporation (FHLMC)
certificates:
Within 1 year $ 4,564 $ 19 $ 4,583 7.84 $12,046 $(67) $11,979 6.76
After 1 to 5 years 1,001 9 1,010 8.14 7,361 $ 46 7,407 7.82
After 5 to 10 years 10,169 149 10,318 7.68 4,902 63 4,965 8.23
After 10 years 32,363 802 33,166 9.07 48,374 882 49,256 8.71
----------- -------------- ---------- ------- ----- ------- -------
48,098 979 49,077 8.64 72,684 991 (67) 73,608 8.26
----------- -------------- ---------- ------- ------ ----- -------
Government National
Mortgage Association
(GNMA) certificates:
After 10 years 1,411,369 9,936 $(357) 1,420,947 6.91 643,839 8,261 (183) 651,917 8.00
--------- ----- ----- --------- ------- -------- ------ -------
Federal National
Mortgage Association
(FNMA) certificates:
Within 1 year 157 1 158 8.23
After 1 to 5 years 2,691 30 2,721 8.40 3,501 37 3,538 8.31
After 5 to 10 years 274 11 285 10.28 1,452 22 1,474 8.89
After 10 years 14,299 605 (10) 14,894 10.35 18,011 843 18,854 10.36
-------- ----- ----- ---------- -------- --------- -------- --------
17,422 646 (10) 18,058 10.02 22,964 902 23,866 9.95
-------- ----- ----- ---------- -------- -------- ------ -------
Mortgage pass through
certificates:
After 5 to 10 years 2,627 (20) 2,608 6.54
After 10 years 2,764 767 3,530 9.33 3,049 924 3,973 9.48
---------- ------------------------- --------- --------- -------- ---------
2,764 767 3,530 9.33 5,676 924 (20) 6,581 8.12
---------- ------------------------- --------- --------- ------ ---------
Real Estate Mortgage
Interest Conduit:
After 1 to 5 years 865 62 927 11.63 2,867 48 2,915 11.30
------------- ------------- -------------- ------------------------------------------
Total $1,480,516 $12,390 $(367) $1,492,539 7.02 $748,031 $11,126 $(270) $758,887 8.10
========== ======= ===== ========== ======== ======= ===== ========
Other Investment:
After 5 to 10 years $1,964 $(344) $1,620 15.76
====== ===== ======
</TABLE>
<PAGE>
Maturities for mortgage backed securities are based upon contractual
terms assuming no repayments. The weighted average yield on debt securities held
for sale is based on amortized cost, therefore it does not give effect to
changes in fair value.
At December 31, 1998, the net unrealized gain of $8,749,931 (1997 -
$12,031,444) on securities available for sale after the estimated income tax of
$2,916,644 (1997 - $4,010,476) was reported as a separate component of
stockholders' equity. For 1998 the change in the net unrealized holding gain on
the available for sale securities amounted to a loss of $4,375,351 (1997 - a
gain of $15,232,433) before estimated income taxes.
For 1998, proceeds from the sale of securities amounted to $302.1
million (1997 - $118.0 million, 1996 - $208.7 million) resulting in a realized
gain of $26.8 million (1997 - $11.4 million, 1996 -$4.9 million). No losses were
recognized on those sales.
Note 12 - Federal Home Loan Bank (FHLB) Stock
At December 31, 1998 and 1997, there were investments in FHLB stock
with book value and estimated market value of $10,270,600 and $10,150,300,
respectively. The estimated market value of such investments is its redemption
value.
Note 13 - Interest and Dividend on Investments
A detail of interest and dividend income on investments follows (in
thousands):
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Year ended December 31,
1998 1997 1996
Mortgage-backed securities:
Taxable $ 5,230 $ 6,239 $13,343
Exempt 63,131 24,481 4,194
-------- -------- ---------
$68,361 $30,720 $17,537
======= ======= =======
Other investment securities:
Taxable $ 801 $ 1,372 $ 2,788
Exempt 20,621 27,544 22,453
-------- -------- --------
$21,422 $28,916 $25,241
======= ======= =======
</TABLE>
<PAGE>
Note 14 - Loans Receivable
The following is a detail of the loan portfolio:
<TABLE>
<S> <C>
December 31,
1998 1997
Real estate loans:
Secured by first mortgages:
Residential $237,560,711 $223,097,793
Commercial 326,341,768 306,733,946
Construction, land acquisition and land improvements 162,474,127 15,399,778
Insured by government agencies:
Federal Housing Administration and Veterans
Administration 8,185,232 10,176,044
Puerto Rico Housing Bank and Finance Agency 38,515,744 44,072,871
Secured by second mortgages 13,255,512 14,171,031
------------ --------------
786,333,094 613,651,463
Undisbursed portion of loans in process (98,535,025) (6,120,583)
Deferred loan and commitment fees - net (10,246,116) (9,138,124)
------------- ---------------
Real estate loans 677,551,953 598,392,756
------------ -------------
Commercial loans:
Commercial loans 368,548,532 235,570,531
Finance leases 52,214,183 42,500,399
------------- --------------
Commercial loans 420,762,715 278,070,930
------------- -------------
Consumer and other loans:
Personal 463,052,946 666,003,133
Personal lines of credit 9,535,354 10,961,902
Auto 512,116,471 512,937,974
Boat 32,208,879 29,144,971
Credit card 125,955,592 116,734,201
Home equity reserve loans 3,385,220 4,282,064
Unearned interest (145,284,440) (267,598,801)
--------------- ----------------
1,000,970,022 1,072,465,444
Agency for International Development 128,066 147,848
------------------ -------------------
Consumer and other loans 1,001,098,088 1,072,613,292
-------------- ---------------
Loans receivable 2,099,412,756 1,949,076,978
Loans held for sale 20,641,628 10,224,509
----------------- -----------------
Total loans 2,120,054,384 1,959,301,487
Allowance for loan losses (67,854,066) (57,711,927)
----------------- ----------------
Total loans-net $2,052,200,318 $1,901,589,560
============== ==============
</TABLE>
The Corporation's primary lending area is Puerto Rico. At December 31, 1998
and 1997 there is no significant concentration of credit risk in any specific
industry on the loan portfolio.
At December 31, 1998, loans in which the accrual of interest income had
been discontinued amounted to $56,958,000 (1997 - $52,939,000; 1996 -
$51,162,000). If these loans had been accruing interest, the additional interest
income realized would have been approximately $4,970,000 (1997 - $5,246,000;
1996 - $3,879,000). There are no material commitments to lend additional funds
to borrowers whose loans were in non-accruing status at these dates.
<PAGE>
At December 31, 1998 and 1997 mortgage loans held for sale amounted to
$20,641,628 and $10,224,509, respectively. All mortgage loans originated and
sold during 1998 and 1997 were sold based on pre-established commitments or at
market values, which in both situations were equal or exceeded the carrying
value of the loans.
At December 31, 1998, the Corporation was servicing mortgage loans
owned by others aggregating approximately $147,439,000 (1997 - $168,416,000;
1996 - $186,781,000). As a result of the securitization of auto loans, at
December 31, 1998 the Corporation was servicing auto loans aggregating
approximately $19,567,000 (1997 - $59,049,000; 1996 - $121,775,000).
Various loans secured by first mortgages were assigned as collateral
for term notes, certificates of deposit, advances from the Federal Home Loan
Bank of New York, and unused lines of credit. The total of loans pledged as
collateral amounted to $222,732,275 and $308,003,080 at December 31, 1998 and
1997, respectively. A portfolio of personal loans was assigned as collateral for
short-term borrowings as explained in Note 21 - "Other Short-Term Borrowings."
The total of loans pledged as collateral amounted to $220,443,511 and
$288,024,128 at December 31, 1998 and 1997, respectively.
Note 15 - Allowance for Loan Losses
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
The changes in the allowance for loan losses were as follows:
Year ended December 31,
1998 1997 1996
Balance at beginning of period $57,711,927 $55,253,546 $55,008,754
Provision charged to income 76,000,000 55,675,500 31,582,401
Losses charged against the allowance (72,223,389) (59,590,916) (34,729,651)
Recoveries credited to the allowance 6,033,922 6,373,797 3,291,857
Other adjustments 331,606 100,185
-------------- ------------------- -------------
Balance at end of period $67,854,066 $57,711,927 $55,253,546
=========== =========== ===========
</TABLE>
At December 31, 1998, $14.3 million ($7.2 million at December 31, 1997)
in commercial and real estate loans over $1,000,000 was considered impaired with
an allowance of $3.8 million ($3.6 million at December 31, 1997). As of both
periods, no increases in the provision for loan losses were necessary, since the
allowance provided already covered the estimated impairment. There were no
consumer loans over $1,000,000 considered impaired at December 31, 1998 and
1997. The average recorded investment in impaired loans amounted to $10.8
million for 1998 (1997 - $6.4 million). Interest income in the amount of
approximately $736,000 was recognized on impaired loans for 1998. No interest
income was recognized in 1997 on the portfolio of impaired loans during the
period they were impaired.
Note 16 - 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:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Amount
Balance at December 31, 1997 $ 8,902,326
New loans 21,006,257
Payments (8,379,759)
------------
Balance at December 31, 1998 $21,528,824
===========
</TABLE>
<PAGE>
Note 17 - Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation as
follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
December 31,
1998 1997
-------------- ---------
Land $ 5,825,249 $ 5,825,249
Buildings and improvements 30,976,673 30,536,536
Leasehold improvements 10,807,734 10,095,690
Furniture and equipment 41,330,835 38,507,052
----------- -----------
88,940,491 84,964,527
Accumulated depreciation (42,167,391) (39,052,917)
----------- -----------
46,773,100 45,911,610
Projects in progress 4,764,092 2,535,557
------------- ------------
Total premises and equipment - net $51,537,192 $48,447,167
=========== ===========
Note 18 - Other Assets
Following is a detail of other assets:
December 31,
1998 1997
Deferred income taxes $22,142,665 $ 9,594,795
Accounts receivable 10,023,555 7,840,930
Prepaid expenses 10,219,939 8,466,690
Revenue earning vehicles 4,465,609 3,673,464
Other repossessed property 2,276,766 8,702,146
Insurance claims 1,778,133 2,003,426
Other 6,030,746 8,029,845
------------ -------------
Total $56,937,413 $48,311,296
=========== ===========
Note 19 - Deposits and Related Interest
Deposits and related interest consist of the following:
December 31,
------------------------------------
1998 1997
--------------------- --------------
Type of account and interest rate at:
Savings accounts - 2.75% to 4.00%
(1997 - 2.75% to 4.00%) $ 416,423,887 $ 403,128,424
Interest bearing checking accounts -
2.90% to 4.50% (1997 - 2.90% to 5.00%) 130,883,439 121,452,204
Non-interest bearing checking accounts 173,103,709 140,099,305
Certificate accounts - 3.80% to 7.15%
(1997 - 4.00% to 8.00%) 1,054,633,858 929,954,750
--------------- ----------------
$1,775,044,893 $1,594,634,683
============== ==============
</TABLE>
<PAGE>
The weighted average interest rate on total deposits at December 31,
1998 and 1997 was 4.57% and 4.70%, respectively.
The following table presents a summary of certificates of deposits with
remaining term of more than one year at December 31, 1998 (in thousands):
Total
Over one year to two years $136,776
Over two years to three years 44,432
Over three years to four years 39,059
Over four years to five years 84,627
Over five years 42,650
--------
Total $347,544
========
At December 31, 1998 time deposits in denominations of $100,000 or
higher amounted to $667,373,511 (1997 - $559,625,405) including brokered
certificates of deposit of $283,249,222 (1997 - $225,018,000) at a weighted
average rate of 5.63% (1997 - 6.03%).
At December 31, 1998, certificates of deposits aggregating $59,000,000
(1997 - $64,000,000) were guaranteed by irrevocable standby letters of credit
issued by the Federal Home Loan Bank of New York and other banks. At December
31, 1998 specific mortgage loans with a carrying value of $137,483,494 (1997 -
$139,635,855) and estimated market value of $141,951,708 (1997 - $148,530,700)
and securities with a book value of $6,877,563 (1997 - $9,239,236) and
approximate market value of $7,041,301 (1997 - $9,519,152) were pledged to the
Federal Home Loan Bank of New York as part of the agreements covering the
letters of credit.
At December 31, 1998, deposit accounts issued to government agencies
with a carrying value of $67,306,284 (1997 - $37,757,061) were collateralized by
securities with a carrying value of $70,892,236 (1997 - $48,737,539) and
estimated market value of $72,177,444 (1997 - $49,384,763) and specific mortgage
loans with a carrying value of $4,838,781 (1997 - $5,498,532) and estimated
market value of $5,684,600 (1997 - $6,322,913).
A table showing interest expense on deposits follows:
<TABLE>
<S> <C>
Year ended December 31,
1998 1997 1996
Savings $11,716,764 $12,155,192 $12,376,620
Interest bearing checking accounts 4,486,582 4,167,371 4,264,731
Certificates 54,215,013 55,824,521 54,322,502
------------ ----------- ------------
Total $70,418,359 $72,147,084 $70,963,853
=========== =========== ===========
Note 20 - 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:
December 31,
1998 1997
Federal funds purchased, interest
rate 5.32% (1997 - 7.33%) $ 15,000,000 $ 53,400,000
Repurchase agreements, interest
ranging from 4.65% to 5.80%
(1997 - 3.50% to 5.34%) 1,605,630,051 912,469,546
--------------- -------------
1,620,630,051 965,869,546
Accrued interest payable 3,067,937 3,433,835
------------------ ---------------
Total $1,623,697,988 $969,303,381
============== ============
Federal funds purchased and repurchase agreements mature as follows:
December 31,
1998 1997
Federal funds purchased:
One to thirty days $ 15,000,000 $ 53,400,000
-------------- ------------
Repurchase agreements:
One to thirty days 1,158,520,676 681,469,546
Over thirty to ninety days 247,109,375 31,000,000
Over ninety days 200,000,000 200,000,000
---------------- -------------
1,605,630,051 912,469,546
--------------- -------------
Total $1,620,630,051 $965,869,546
============== ============
</TABLE>
<PAGE>
The following securities were sold under agreements to repurchase:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
December 31, 1998
Book Approximate Weighted
value of market value average
underlying Balance of of underlying interest
Underlying securities securities borrowing securities rate
U.S. Treasury Securities and
obligations of other U.S.
Government Agencies $ 216,073,870 $ 214,716,114 $ 216,111,108 5.13%
Mortgage backed securities 1,393,322,895 1,390,913,937 1,403,729,265 6.08%
--------------- --------------- ---------------
Total $1,609,396,765 $1,605,630,051 $1,619,840,373
============== ============== ==============
Accrued interest receivable $ 4,321,371
=================
December 31, 1997
Book Approximate Weighted
value of market value average
underlying Balance of of underlying interest
Underlying securities securities borrowing securities rate
U.S. Treasury Securities and
obligations of other U.S.
Government Agencies $392,557,900 $404,869,203 $397,473,320 6.02%
Mortgage backed securities 518,205,340 507,600,343 522,328,823 6.74%
------------- ------------- -------------
Total $910,763,240 $912,469,546 $919,802,143
============ ============ ============
Accrued interest receivable $ 7,479,125
==============
</TABLE>
The weighted average interest rates of federal funds purchased and
repurchase agreements at December 31, 1998 and 1997 was 5.03% and 5.13%,
respectively.
At December 31, 1998, 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. The maximum aggregate
balance outstanding at any month-end during 1998 was $1,648,513,898 (1997 -
$965,869,546). The average balance during 1998 was approximately $1,225,726,000
(1997 - $565,095,000).
Note 21 - Other Short-Term Borrowings
On March 31, 1997, the Corporation entered into a $250,000,000
financing arrangement administered by Credit Suisse First Boston to be renewed
annually within a term of three years. At December 31, 1998 borrowings through
this arrangement amounted to $86,594,710 (1997 - $231,504,896), with an
available line of $95,254,992 under the financing arrangement. Interest periods
under the financing agreement cannot exceed 100 days. The rate of interest for
this type of financing, in which advances may be repaid or reborrowed at the
option of the Corporation, is equivalent to A-1+/P-1 rated commercial paper. The
weighted average maturity at December 31, 1998 was 21 days (1997 - eight days).
The weighted average interest rate of these borrowings at December 31,
1998 and 1997 was 6.38% and 6.23%, respectively. The maximum aggregate balance
outstanding at any month-end was approximately $224,780,000 (1997 -
$250,000,000). The average aggregate balance outstanding during the year was
approximately $111,236,888 (1997 - $176,656,943).
Under this arrangement, the Corporation is required to maintain
eligible collateral consisting of personal loans owned by the Corporation to
secure this borrowing. The Corporation has to maintain at all times the
aggregate outstanding balance of the borrowing at a maximum of 85% of the
aggregate book value of the personal loans placed as collateral. The aggregate
book value of the loans pledged as collateral at December 31, 1998 amounted to
$220,443,511 (1997 - $288,024,128).
<PAGE>
Note 22 - Advances From The Federal Home Loan Bank of New York (FHLB-N.Y.)
Following is a detail of the advances from the FHLB-NY:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
December 31,
Maturity Interest rate 1998 1997
-------- ------------- --------------- ----------
January 4, 1999 5.13% $2,600,000
January 2, 1998 7.12% $29,000,000
--------------- -----------
Total $2,600,000 $29,000,000
========== ===========
</TABLE>
Advances are received from the FHLB-N.Y. 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, 1998, specific mortgage loans with an
estimated market value of $3,155,152 (1997 - $35,539,790) were pledged to the
FHLB-N.Y. as part of the Collateral Agreement. The carrying value of such loans
at December 31, 1998 amounted to $2,860,000 (1997 - $31,900,000).
Note 23 - Notes Payable
Following is a detail of notes payable outstanding:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
December 31, 1998 December 31,
Issue date (footnote) Maturity Interest rate 1998 1997
- - --------------------- -------- ------------- ------------ ----------
Notes payable:
May 31, 1990 (a) 1998 8.37% $ 3,000,000
January 29, 1993 (b) 1998 4.95% 5,000,000
February 8, 1993 (b) 1998 4.95% 1,250,000
April 15, 1993 (b) 1998 4.57% 5,000,000
February 11, 1994 (b) 1999 5.44% $ 2,100,000 2,100,000
May 13, 1994 (b) 1999 6.19% 5,000,000 5,000,000
May 13, 1994 (b) 1999 6.19% 5,000,000 5,000,000
May 26, 1994 (b) 1999 6.09% 5,000,000 5,000,000
September 7, 1994 (a) 1999 4.33% 15,500,000 15,500,000
September 29, 1994 (a) 1999 6.40% 30,000,000 30,000,000
September 12, 1996 (b) 2001 4.87% 10,000,000 10,000,000
September 20, 1996 (b) 2001 4.88% 20,500,000 20,500,000
September 20, 1996 (a) 2001 4.77% 25,000,000 25,000,000
-------------- --------------
Total $118,100,000 $132,350,000
============ ============
</TABLE>
Footnotes:
a. These notes have the benefit of a firm commitment issued by the
FHLB-N.Y. whereby it will make advances to pay the principal and interest on the
notes as they become due if the Corporation fails to do so. The Corporation is
required to maintain as collateral with the FHLB-N.Y. securities having an
aggregate market value, determined monthly, equal to 110% of the aggregate
outstanding principal amount of the notes plus interest. The collateral
securities may consist of a combination of all or some of the following: (i)
home mortgage loans owned by the Corporation and secured by first mortgages on
real properties in Puerto Rico; (ii) obligations of, or guaranteed by, the
United States Government or certain agencies; (iii) fully-modified pass-through
mortgage backed certificates guaranteed by GNMA; (iv) mortgage participation
certificates issued by FHLMC; (v) guaranteed mortgage pass-through certificates
issued by FNMA; and (vi) certain certificates of deposit issued by banks
approved by the FHLB-N.Y.
<PAGE>
At December 31, 1998, specific mortgage loans with a book value of
$77,550,000 (1997 - $80,850,000) and an estimated market value of
$88,887,810 (1997 - $91,789,005) were pledged to the FHLB-N.Y. as part
of the agreement covering the above mentioned firm commitment. The
estimated market value was computed based on parameters given by the
Federal Home Loan Bank.
b. The Corporation is required to maintain with the holder of these notes,
cash or securities with a market value of at least 105% of the
aggregate amount of the notes. The aggregate estimated market value and
carrying value of the eligible collateral at December 31, 1998 amounted
to $46,162,955 (1997 - $59,456,354) and $45,328,289 (1997 -
$54,069,211), respectively.
Note 24 - Subordinated Notes
On December 20, 1995, the Bank 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, 1998 the outstanding balance net of the unamortized
discount was $99,495,830 (1997 - $99,423,490). Interest on the notes is payable
semiannually and at maturity. The notes represent unsecured obligations of the
Bank 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, 1998, the Bank has
transferred to capital reserves from the retained earnings account $30,000,000,
as a result of the requirement explained in Note 3 - "Stockholders' Equity."
Note 25 - Unused Lines Of Credit
The Corporation maintains unsecured standby lines of credit with other
banks. At December 31, 1998, the Corporation's total unused lines of credit with
these banks amounted to approximately $69,500,000 (1997 - $25,100,000). At
December 31, 1998, the Corporation has an available line of credit with the FHLB
guaranteed with excess collateral, in the amount of $20,808,133 (1997 -
$1,470,265). In addition, the Corporation had at December 31, 1998 an available
line of $95,254,992 under the financing arrangement explained in Note 21 -
"Other Short-Term Borrowings."
Note 26 - Other Expenses
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
A detail of other expenses follows:
Year ended December 31,
1998 1997 1996
Professional and service fees $ 5,819,978 $ 4,883,088 $ 4,956,210
Advertising and business promotion 5,922,039 4,993,392 5,879,478
Communications 4,330,023 4,363,802 4,789,451
Revenue earning equipment 1,225,689 1,183,557 1,113,125
Supplies and printing 1,314,131 1,128,672 1,694,046
Other 4,534,188 4,628,151 3,588,927
------------ ------------- -------------
Total $23,146,048 $21,180,662 $22,021,237
=========== =========== ===========
</TABLE>
Note 27 - Employees' Benefit Plan
FirstBank has a defined contribution retirement plan (the Plan)
qualified under the provisions of the Puerto Rico Internal Revenue Code Section
1165(e). All employees (excluding the Bank's subsidiaries) are eligible to
participate in the Plan after one year of service. Under the provisions of the
Plan, the Bank is required to make a contribution of a quarter of the first 4%
(1997 - 4% and 1996 - 1%) of each participant's compensation. Participants are
permitted to contribute up to 10% of their annual compensation, limited to
$8,000 per year. Additional contributions to the Plan are voluntarily made by
the Bank as determined by its Board of Directors. The Bank made a total
contribution of $575,000, $540,000 and $450,000 during 1998, 1997 and 1996,
respectively, to the Plan.
<PAGE>
Note 28 - Unusual Item
In September 1996, the Bank recorded a one time special SAIF assessment
of $9.1 million with an estimated income tax benefit of $2.4 million. This
special assessment was required by the Deposit Insurance Funds Act of 1996 to
capitalize the SAIF.
Note 29 - 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 (in thousands):
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Year ended December 31,
1998 1997 1996
Current $17,845 $16,364 $18,500
Deferred (13,047) (8,239) (6,219)
------- --------- ---------
Total $ 4,798 $ 8,125 $12,281
======== ======== =======
</TABLE>
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 (dollars in thousands):
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Year ended December 31,
1998 1997 1996
% of % of % of
pre-tax pre-tax pre-tax
Amount income Amount income Amount income
Computed income tax at statutory rate $22,078 39 $21,705 39 $19,467 39
Benefit of net exempt income (22,078) (39) (13,137) (24) (7,611) (15)
Other-net 4,798 8 (443) 425 1
--------- --- --------- --- --------- ---
Total income tax provision $ 4,798 8 $ 8,125 15 $12,281 25
======== === ======== == ======= ===
</TABLE>
<PAGE>
Accounting for income taxes
Deferred taxes arise because certain transactions affect the
determination of taxable income for financial reporting purposes in periods
different from the period in which the transactions affect taxable income for
tax return purposes. Deferred taxes have been recorded based upon the Puerto
Rico enacted tax rate of 39%. Current tax expense has been provided based upon
the estimated tax liability to be incurred for tax return purposes.
The components of the deferred tax asset and liability were as follows
(in thousands):
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
December 31,
1998 1997
Deferred tax asset:
Adjustment to charge-off method $25,460 $ 12,768
Other 1,232 3,305
--------- ---------
Gross deferred tax asset $26,692 $16,073
======= =======
Deferred tax liability:
Unrealized gain on available for sale securities $(2,917) $(4,010)
Other (1,633) (2,468)
------- -------
Gross deferred tax liability $(4,550) $(6,478)
======= =======
</TABLE>
Due to the above temporary differences, a net deferred tax asset
resulted amounting to $22.1 million at December 31, 1998 (1997 - $9.6 million).
The primary timing difference was the effect of future deductions under the
charge-offs method for deducting bad debt losses. No valuation allowance was
considered necessary.
The tax effect of the unrealized holding gain or loss for securities
available for sale is included as a part of stockholders' equity in other
comprehensive income.
Note 30 - Commitments
At December 31, 1998 certain premises are leased with terms expiring
through the year 2011. 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, 1998, the obligation under various leases was
follows:
Year Amount
---- --------
1999 $ 2,607,737
2000 1,794,633
2001 1,272,775
2002 1,096,813
2003 and later years 5,161,246
------------
Total $11,933,204
===========
Rental expense included in occupancy and equipment expense was
$3,158,156 in 1998 (1997 - $2,933,798; 1996 - $2,894,698).
<PAGE>
Note 31 - Fair Value of Financial Instruments
The information about the estimated fair values of financial
instruments as required by SFAS No. 107, is presented hereunder including some
items not recognized in the statement of financial condition. The disclosure
requirements of SFAS No. 107 exclude certain financial instruments and all non
financial instruments. Accordingly, the aggregate fair value amounts presented
do not represent Management's estimation of the underlying value of the
Corporation. A summary table of estimated fair values and carrying values of
financial instruments at December 31, 1998 and 1997 follows (in thousands):
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
December 31,
1998 1997
Estimated Carrying Estimated Carrying
fair value value fair value value
Assets:
Money market instruments $ 526 $ 526 $ 514 $ 514
Debt securities 1,790,463 1,789,692 1,266,539 1,266,236
FHLB stock 10,271 10,271 10,150 10,150
Loans receivable - net 2,146,003 2,052,200 2,009,447 1,901,590
Liabilities:
Deposits 1,776,811 1,775,045 1,593,688 1,594,635
Federal funds, securities sold
under agreements to repurchase
and other short-term borrowings 1,710,293 1,710,293 1,200,808 1,200,808
Advances from FHLB 2,600 2,600 29,000 29,000
Debt security borrowings 231,923 217,596 233,425 231,773
</TABLE>
The estimated fair values were based on judgments regarding current and
future economic conditions. The estimates 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:
Money market instruments
The carrying amounts of money market instruments are reasonable
estimates of their fair values.
Debt securities
The fair values of debt securities are the market values based on
quoted market prices and dealer quotes. The fair value of debt securities
available for sale equals their carrying value since they are marked-to-market
for accounting purposes with unrealized gains and losses, net of deferred tax,
reported as a separate component of stockholders' equity.
Other investment
The fair value of other investments securities represents the market
value of the securities in which the funds are invested.
FHLB stock
Investments in FHLB stock are valued at their redemption values.
<PAGE>
Loans receivable - net
The fair value of all loans was estimated by discounting loans with
similar financial characteristics. Loans were classified by type such as
commercial, conventional 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. 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, credit cards, 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
offset which reflects the risk and other costs inherent in the loan category. In
certain cases, where recent experience was available regarding the sale of
loans, this information was also incorporated into the fair value estimates.
Non-accruing loans covered by a specific loan loss reserve 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 value of non-accruing loans not
covered by specific reserves was discounted for one year at the going rate for
new loans.
Deposits
The estimated fair values of demand deposits and savings accounts,
which are the deposits with no defined maturities, are the amount payable on
demand at the reporting date. For deposits with stated maturities, but that
reprice at least quarterly, the fair values are estimated to be the amount
payable at the reporting date.
The fair values of fixed rate deposits with stated maturities, are
based on the discounted 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 wholesale certificate of
deposit yield curve and 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.
Federal funds, securities sold under agreements to repurchase and other
short-term borrowings
Federal funds purchased, repurchase agreements and other short-term
borrowings are commitments to borrow funds which reprice at least quarterly.
Therefore, their outstanding balances are estimated to be their fair values.
Advances from FHLB
The fair value of advances was determined using book value, since they
have terms of less than three months. Therefore, their outstanding balances are
estimated to be their fair values.
Debt security borrowings
The fair value of debt security borrowings 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. Variable rate debt
securities reprice at intervals of three months or less, therefore, their
outstanding balances are estimated to be their fair values.
Note 32 - Supplemental Cash Flow Information
Supplemental cash flow information follows (in thousands):
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Year ended December 31,
------------------------------------
1998 1997 1996
-------------- ---------------- ----------
Cash paid for:
Interest $153,645 $132,801 $108,500
Income tax 1,494 1,089 9,461
Non cash investing and financing activities:
Mortgage loans exchanged for mortgage
backed securities 4,046 6,128
Additions to other real estate owned 2,975 541 3,485
</TABLE>
<PAGE>
Note 33 - Financial Instruments With Off-Balance Sheet Risk, Commitments to
Extend Credit and Standby Letters of Credit
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
The following table presents a detail of commitments to extend credit and standby letters of credit (in thousands):
December 31,
1998 1997
---- ----
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit:
To originate loans $245,257 $103,214
Unused credit card lines 132,867 103,842
Unused personal lines of credit 10,536 11,021
Commercial lines of credit 96,874 64,584
Commercial letters of credit 19,101 22,966
Standby letters of credit 1,575 4,660
</TABLE>
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. Commitments to originate
loans are mainly for mortgage loans at auction rates of the insuring agencies at
the time the loans are closed. 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, 1998 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.
The following table indicates the types of swaps used (in thousands):
Notional amount
Pay-fixed swaps:
Balance at December 31, 1996 $220,000
Expired contracts in 1996 170,000
---------
Balance at December 31, 1997 and 1998 $ 50,000
=========
Receive-fixed swaps:
Balance at December 31, 1996 $65,000
Expired contracts 25,000
New contracts 40,000
--------
Balance at December 31, 1997 80,000
Expired contracts 40,000
-------
Balance at December 31, 1998 $40,000
=======
<PAGE>
Pay-fixed swaps at December 31, 1998, have a fixed weighted average
rate payment of 5.41% (1997 - 6.48%) and a floating weighted average rate
receiving of 6.48% (1997 - 5.88%). Receive-fixed swaps at December 31, 1998,
have a floating weighted average rate payment of 5.13% (1997 - 5.68%) and a
fixed weighted average rate receiving of 7.15% (1997 - 7.12%). Floating rates
are based on an 85% to 100% of the average of the last three months LIBOR rate.
For swap transactions, the amounts potentially subject to credit loss
are the net streams of payments under the agreements and not the notional
principal amounts used to express the volume of the swaps. At December 31, 1998
the Corporation had total assets of $876,949 (1997 - $956,530) 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 counterparties. As part
of the swap transactions, the Corporation is required to pledge collateral in
the form of deposits in banks or securities. The book value and aggregate market
value of securities pledged as collateral for interest rate swaps at December
31, 1998 was approximately $1.8 million and $1.9 million, respectively (1997 -
$2.69 million and $2.73 million, respectively). The period to maturity of the
swaps at December 31, 1998 ranged from one year and four months through eight
years and two months (1997 - from two years and five months through nine years
and three months).
At December 31, 1998, the estimated fair value to liquidate the
Corporation's interest rate swaps was approximately $2,760,000 (1997 -
$4,013,500).
Yield enhancement program
The Corporation writes put and call options with the intention of
enhancing the yield of its investment portfolio (Yield Enhancement Program). The
Corporation acquires and manages a portfolio of assets consisting of Treasury
notes. The aggregate amount permitted to be outstanding under this program
cannot exceed $120 million. Future changes to this limitation may be made by
resolution of the Board of Directors. The Corporation does not write uncovered
calls (i.e., calls on securities which are not in the portfolio when the call is
written) under this program.
The Corporation writes covered call options on securities maintained
in the portfolio, and put options on securities eligible for inclusion in the
portfolio. The Corporation will only write put options on securities that the
Corporation has the intention and ability to own. When put options are
exercised, the related securities enter the pool. The purchase price of the
securities is reduced by the amount of the option premium received. Call options
are subsequently written on the assets in the pool, and the pool is reduced in
size if the call options are exercised. The Corporation receives a premium on
these call options, thereby increasing the net price received when the
securities are sold. Premiums from expired call options are applied to reduce
the book value of the corresponding securities; those from expired put options
are recorded as income.
During 1998, no premiums were received under this program (1997 -
$685,938; 1996 - $1,579,686). At December 31, 1998 no options were outstanding
under this program. The options either expired or were exercised, and premiums
were either recorded as other income or applied to the price of the security
purchased or sold.
The risks in the Yield Enhancement Program stem from the possibility
of large, unforeseen adverse market movements while the options are in effect.
If the market falls sharply after the Corporation sells a put option, the
Corporation may be forced to purchase a security at a price above that which
could have been obtained by buying in the open market at expiration, even after
adjusting the yield for the option premium received. In this case, the
Corporation would be unable to take advantage of unexpectedly lower market
prices. Similarly, if the market rises sharply and suddenly after the
Corporation sells a call option, it may be forced to sell the security at a
price below the market, even after adjusting for the option premium. In this
case, the Corporation will fail to participate fully in the market rally with
respect to this particular transaction.
Management considers that the risks inherent in this program are
controlled, prudent, and moderate compared to the opportunities for enhancing
the income stream of the Corporation through option premiums.
Forward contracts
Forward contracts are commitments for future purchase of a specific
quantity of debt securities for purposes other than trading at a price specified
at the beginning of the contract and at a specified rate with delivery and
settlement at a specified future date. The market risk relates to economic
losses due to adverse changes in the fair value of the contract related to price
and liquidity. At December 31, 1998 the Corporation had no forward contracts. At
December 31, 1997, the Corporation had a commitment to purchase mortgage backed
securities (GNMA's) in the amount of $300 million, which was exercised in
January 1998.
Interest Rate Protection Agreements (Caps)
The Corporation also issues interest rate protection agreements (Caps)
to limit its exposure to rising interest rates on its deposits. Under these
agreements, the Corporation pays an up front premium or fee for the right to
receive cash flow payments in excess of the predetermined cap rate; thus,
effectively capping its interest rate cost for the duration of the agreement.
The premium is amortized as an adjustment to interest expense on deposits. The
following table indicates the agreements outstanding at December 31, 1998
(dollars in thousands):
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Cap agreements notional amount Cap Rate Current 90 day LIBOR Maturity
- - ------------------------------ -------- -------------------- -----------
$ 50,000 6.00% 5.065% March 27, 2000
200,000 6.50% 5.065% June 4, 2000
</TABLE>
Note 34 - Segment Information
In 1998, the Corporation implemented SFAS No. 131 "Disclosures about
Segments of an Enterprise and Related 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 and
corporate services such as letters of credit and cash management. The Treasury
and Investment segment is responsible for the Corporation investment portfolio
and treasury functions.
The accounting policies of the segments are the same as those described in
Note 2 - "Summary of Significant Accounting Policies."
The Corporation evaluates the performance of the segments based on net
interest income after the estimated provision for loan losses. The 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 segments and the Treasury and Investment segment. 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 charge or credit by Investment and Treasury is
based on market rates.
<PAGE>
The following table presents information about the reportable segments
(in thousands):
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Treasury and Commercial
Retail Investments Corporate Total
For the year ended December 31, 1998:
Interest income $ 178,251 $ 89,785 $ 52,499 $ 320,535
Net (charge) credit for transfer of funds 7,683 20,698 (28,381)
Interest expense (60,003) (95,127) (155,130)
Net interest income 125,931 15,356 24,118 165,405
Provision for loan losses (74,837) (1,163) (76,000)
Segment income 51,094 15,356 22,955 89,405
Average earning assets 1,364,803 1,418,791 561,612 3,345,206
For the year ended December 31, 1997:
Interest income $ 184,761 $ 59,263 $ 40,246 $ 284,270
Net (charge) credit for transfer of funds (4,396) 27,534 (23,138)
Interest expense (58,553) (71,876) (130,429)
Net interest income 121,812 14,921 17,108 153,841
Provision for loan losses (52,343) (3,332) (55,675)
Segment income 69,469 14,921 13,776 98,166
Average earning assets 1,443,982 909,457 415,427 2,768,866
For the year ended December 31, 1996:
Interest income $ 177,354 $ 42,773 $ 35,666 $ 255,793
Net (charge) credit for transfer of funds (1,310) 20,088 (18,778)
Interest expense (52,156) (60,871) (113,027)
Net interest income 123,888 1,990 16,888 142,766
Provision for loan losses (31,038) (544) (31,582)
Segment income 92,850 1,990 16,344 111,184
Average earning assets 1,337,197 714,753 354,296 2,406,246
</TABLE>
<PAGE>
The following table presents a reconciliation of the reportable
segment financial information to the consolidated totals (in thousands):
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Year ended December 31,
1998 1997 1996
Interest income :
Total interest income for segments $320,535 $284,270 $255,793
Interest income credited to expense accounts 763 890 730
------------ ------------ ------------
Total consolidated interest income $321,298 $285,160 $256,523
======== ======== ========
Net income:
Total income for segments $89,405 $98,166 $111,184
Other income 58,240 39,866 29,614
Operating expenses (91,035) (82,379) (90,883)
Income taxes (4,798) (8,125) (12,281)
-------- --------- ---------
Total consolidated net income $51,812 $47,528 $37,634
======= ======= ========
Average assets:
Total average earning assets for segments $3,345,206 $2,768,866 $2,406,246
Average non earning assets 148,331 143,643 133,421
------------ ------------ ------------
Total consolidated average assets $3,493,537 $2,912,509 $2,539,667
========== ========== ==========
</TABLE>
Note 35 - 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 36 - Selected Quarterly Financial Data (Unaudited)
Financial data showing results of the 1998 and 1997 quarters is
presented below. These results are unaudited. In the opinion of Management, all
adjustments necessary for a fair presentation have been included:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
1998
March 31 June 30 Sept. 30 Dec. 31
------------ -------------- --------------- -----------
Interest income $77,397,641 $77,731,354 $79,846,911 $86,322,498
Net interest income 40,607,988 41,193,889 39,812,331 44,554,228
Provision for loan losses 21,738,000 13,929,000 21,420,000 18,913,000
Net income 12,360,681 12,700,723 13,064,618 13,686,365
Earnings per common share-basic $0.42 $0.43 $0.44 $0.46
Earnings per common share-diluted $0.42 $0.43 $0.43 $0.46
1997
March 31 June 30 Sept. 30 Dec. 31
------------ -------------- --------------- -----------
Interest income $70,227,271 $72,237,188 $69,877,982 $72,817,664
Net interest income 38,277,561 38,864,060 38,230,170 39,359,021
Provision for loan losses 10,025,500 13,575,000 17,962,500 14,112,500
Net income 11,645,214 11,815,757 11,920,926 12,145,655
Earnings per common share-basic $0.39 $0.39 $0.40 $0.40
Earnings per common share-diluted $0.39 $0.39 $0.40 $0.40
</TABLE>
<PAGE>
Note 37 - First BanCorp (Holding Company Only) Financial Information:
The following condensed financial information presents the financial
position of the Holding Company only at December 31, 1998 and the results of its
operations and its cash flows for the period from October 1st , 1998 through
December 31, 1998.
Statement of Financial Condition
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
December 31, 1998
Assets
Cash and due from depository institutions $ 5,702,362
Investment in FirstBank Puerto Rico, at equity 264,447,053
Other assets 218,653
----------------
Total assets $270,368,068
----------------
Liabilities & Stockholders' Equity
Borrowings -
Accounts payable and other liabilities -
Stockholders' equity $270,368,068
----------------
Total liabilities and stockholders' equity $270,368,068
----------------
Statement of Income
Period from October 1, 1998
through December 31, 1998
Income:
Dividend from subsidiary $ 10,359,843
Expenses:
Operating expenses 15,110
Income before income taxes and equity in
undistributed earnings of subsidiary 10,344,733
Equity in undistributed earnings of subsidiary 3,341,632
-------------
Net income $13,686,365
===========
</TABLE>
<PAGE>
Statement of Cash Flows
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Period from October 1, 1998
through December 31, 1998
Cash flows from operating activities:
Net income $13,686,365
-----------
Adjustments to reconcile net income to net
Cash provided by operating activities:
Equity in undistributed earnings of subsidiary (3,341,632)
Net increase in other assets (218,654)
------------
Total adjustments (3,560,286)
-----------
Net cash provided by operating activities 10,126,079
-----------
Cash flows from financing activities:
Cash dividends paid (2,212,467)
Treasury stock acquired (2,211,250)
-----------
Net cash provided by financing activities (4,423,717)
-----------
Net increase in cash 5,702,362
Cash at the beginning of period
Cash at the end of period $ 5,702,362
============
</TABLE>
The principal source of income for the Holding Company consists of
dividends from FirstBank.
<PAGE>
Stockholders' Information
Independent Certified Public Accountants
PricewaterhouseCoopers LLP
Annual Meeting:
The annual meeting of stockholders will be held on April 27, 1999, at 2:00 p.m.,
at the main office of the Corporation located at 1519 Ponce de Leon Avenue,
Santurce, Puerto Rico.
Telephone (787) 729-8200
Internet http://www.1bankpr.com
Additional Information and Form 10-K:
Additional financial information about First BanCorp may be requested to Mrs.
Laura Villarino, Senior Vice President and Controller, PO Box 9146, Santurce,
Puerto Rico 00908. Copies of First BanCorp's Form 10K filed with the SEC, will
be provided to stockholders upon written request to Mrs. Laura Villarino at the
same mailing address.
Transfer Agent and Registrar:
The Bank of New York, 101 Barclay Street 12W, New York, NY 10286
General Counsels:
Fiddler, Gonzalez & Rodriguez, LLP
Latimer, Biaggi, Rachid & Godreau
Melendez Perez, Moran & Santiago
<PAGE>
<PAGE>
List of Subsidiaries
(Direct and Indirect)
Direct
1. FirstBank Puerto Rico
Indirect
1. First Leasing and Rental Corporation
2. First Federal Finance Corp. D/B/A Money Express "La Financiera"
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> year
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> DEC-31-1998
<CASH> 39,416,097
<INT-BEARING-DEPOSITS> 525,669
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,762,770,015
<INVESTMENTS-CARRYING> 26,921,836
<INVESTMENTS-MARKET> 27,692,500
<LOANS> 2,120,054,384
<ALLOWANCE> 67,854,066
<TOTAL-ASSETS> 4,017,352,075
<DEPOSITS> 1,775,044,894
<SHORT-TERM> 1,712,892,698
<LIABILITIES-OTHER> 41,450,585
<LONG-TERM> 217,595,830
0
0
<COMMON> 29,599,552
<OTHER-SE> 240,768,516
<TOTAL-LIABILITIES-AND-EQUITY> 4,017,352,075
<INTEREST-LOAN> 231,513,730
<INTEREST-INVEST> 89,041,513
<INTEREST-OTHER> 743,161
<INTEREST-TOTAL> 321,298,404
<INTEREST-DEPOSIT> 70,418,359
<INTEREST-EXPENSE> 155,129,960
<INTEREST-INCOME-NET> 166,168,436
<LOAN-LOSSES> 76,000,000
<SECURITIES-GAINS> 26,827,417
<EXPENSE-OTHER> 91,797,699
<INCOME-PRETAX> 56,610,587
<INCOME-PRE-EXTRAORDINARY> 56,610,587
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 51,812,387
<EPS-PRIMARY> 1.75
<EPS-DILUTED> 1.74
<YIELD-ACTUAL> 5.27
<LOANS-NON> 56,958,000
<LOANS-PAST> 15,110,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 57,711,927
<CHARGE-OFFS> 72,223,389
<RECOVERIES> 6,365,528
<ALLOWANCE-CLOSE> 67,854,066
<ALLOWANCE-DOMESTIC> 67,854,066
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
