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, 1999 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) New York Stock Exchange
Title of Class Name of exchange on which registered
Preferred Stock ($25.00 liquidation
preference per share) New York Stock Exchange
Title of Class Name of exchange on which registered
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
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or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
State the aggregate market value of the voting common stock held by
nonaffiliates of the Corporation: $380,673,431 (based on the closing sales price
of $17.25 at March 21, 2000 for such shares). Number of shares of Common Stock
outstanding as of March 15, 2000:
27,310,652
Documents Incorporated by Reference
(1) Portions of the annual report to security holders for the fiscal year ended
December 31, 1999 are incorporated by reference in Part I, II and IV; and (2)
Portions of the definite proxy statement filed on March 21, 2000 are
incorporated by reference in Part III.
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FIRST BANCORP.
CONTENTS
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PART I
Item 1. Business ........................................................................ 4
Item 2. Properties ........................................................................ 18
Item 3. Legal Proceedings ................................................................... 18
Item 4. Submission of Matters to a Vote of
Security Holders ................................................................ 18
PART II
Item 5. Market for Corporation's Common Equity and
Related Stockholder Matters ..................................................... 19
Item 6. Selected Financial Data ............................................................. 20
Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations..................................20
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk.................................................................20
Item 8. Financial Statements and Supplementary Data ......................................... 20
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure............................................20
PART III
Item 10. Directors, Executive Officers and Control
Persons of the Corporation ..................................................... 21
Item 11. Executive Compensation ...............................................................21
Item 12. Security Ownership of Certain Beneficial
Owners and Management.............................................................21
Item 13. Certain Relationships and Related Transactions........................................21
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K ............................................................. 22
SIGNATURES .............................................................................................24
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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 1, 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.
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 $4.722 billion, total deposits of $2.565 billion and total
stockholders' equity of $294.9 million at December 31, 1999.
The Corporation's only subsidiary, FirstBank, conducts its business
through its main office located in San Juan, Puerto Rico, 45 full-service
branches in Puerto Rico and three branches in the U.S. Virgin Islands of St.
Thomas and St. Croix. The Bank also has four loan origination offices focusing
on mortgage loans, two loan origination offices focusing on personal loans and
credit cards, and two 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 27 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 all over the world. The Corporation was the
first in Puerto Rico to open on weekends and the first to offer in-store
branches to its clients. The Corporation was also the first banking institution
in Puerto Rico with a presence on the Internet. During 2000, First BanCorp. will
launch a new, interactive web site where clients will be able to perform all
types of banking transactions. The Corporation is committed to continue
providing the most efficient and cost effective banking services possible in
selected products niches.
The information under the caption "Achievements in 1999" on pages 10 to
12 and the information under Note 33 - Segment Information on pages 71 to 72 of
the Corporation's annual report to security holders for the year ended December
31, 1999 is incorporated herein by reference.
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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.
The Gramm-Leach-Bliley Act, signed into law on November 12, 1999,
revises and expands the existing provisions of the Bank Holding Company Act by
including a new section that permits a bank holding company to elect to become a
financial holding company to engage in a full range of financial activities. The
qualification requirements and the process for a bank holding company that
elects to be treated as a financial holding company requires that all the
subsidiary banks controlled by the bank holding company at the time of election
to become a financial holding company must be and remain at all times well
capitalized and well managed.
The Gramm-Leach-Bliley Act further requires that in the event that the
bank holding company elects to become a financial holding company, the election
must be made by filing a written declaration with the appropriate Federal
Reserve Bank and comply with the following: (i) state that the bank holding
company elects to become a financial holding company; (ii) provide the name and
head office address of bank holding company and each depository institution
controlled by the bank holding company; (iii) certify that all depository
institutions controlled by the bank holding company are well capitalized as of
the date the bank holding company files for the election; (iv) provide the
capital ratios for all relevant capital measures as of the close of the previous
quarter for each depository institution controlled by the bank holding company;
and (v) certify that all depository institutions controlled by the bank holding
company are well managed as of the date the bank holding company files the
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election. The bank holding company must have also achieved at least a rating of
satisfactory record of meeting community credit needs under the Community
Reinvestment Act during the institution's most recent examination.
The financial holding companies may engage, directly or indirectly, in
any activity that is determined to be (i) financial in nature, (ii) incidental
to such financial activity, or (iii) complementary to a financial activity and
does not pose a substantial risk to the safety and soundness of depository
institutions or the financial system generally. The Gramm-Leach-Bliley Act,
specifically provides that the following activities have been determined to be
"financial in nature": (a) Lending, trust and other banking activities; (b)
Insurance activities; (c) Financial or economic advice or services; (d) Pooled
investments; (e) Securities underwriting and dealing; (f) Existing bank holding
company domestic activities; (g) Existing bank holding company foreign
activities; and (h) Merchant banking activities.
In addition, the Gramm-Leach-Bliley Act specifically gives the Federal
Reserve Board the authority, by regulation or order, to expand the list of
"financial" or "incidental" activities, but requires consultation with the U.S.
Treasury, and gives the Federal Reserve Board authority to allow a financial
holding company to engage in any activity that is "complementary" to a financial
activity and does not "pose a substantial risk to the safety and soundness of
depository institutions or the financial system generally."
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.
At present, the principal source of funds for the Corporation is
earnings 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.
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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.
The Gramm-Leach-Bliley Act amended several provisions of section 23A
and 23B of the Federal Reserve Act. The amendments provide that financial
subsidiaries of banks are treated as affiliates for purposes of sections 23A and
23B of the Federal Reserve Act, but the amendment provides that (i) the 10%
capital limit on transactions between the bank and such financial subsidiary as
an affiliate is not applicable, and (ii) the investment by the bank in the
financial subsidiary does not include retained earnings in the financial
subsidiary. Certain anti-evasion provisions have been included that relate to
the relationship between any financial subsidiary of a bank and sister companies
of the bank: (1) any purchase of, or investment in, the securities of a
financial subsidiary by any affiliate of the parent bank is considered a
purchase or investment by the bank; or (2) if the Federal Reserve Board
determines that such treatment is necessary, any loan made by an affiliate of
the parent bank to the financial subsidiary is to be considered a loan made by
the parent bank.
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 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
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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, 1999,
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 goodwill and certain purchased mortgage servicing
rights. At December 31, 1999, the Bank exceeded each of its capital requirements
and was a well-capitalized institution as defined in the FDIC regulations.
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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 Puerto Rico, or by
bonds, not in default, of municipalities or instrumentalities of the
Commonwealth of Puerto Rico.
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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. Recent Regulations adopted by the Finance Board
deregulated the maximum finance charges on retail installment sales contracts,
and for credit card purchases. These regulations do not set a maximum rate for
charges on retail installment sales contracts and for credit card purchases and
set aside previous regulations which regulated these maximum finance charges.
Furthermore, there is no maximum rate set for installment sales contracts
involving motor vehicles, commercial, agricultural and industrial equipment,
commercial electric appliances and insurance premiums.
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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, 1999, Puerto
Rico had 17 banking institutions with a total of approximately $49 billion in
assets according to industry statistics published by the Commissioner. The
Corporation ranked third based on total assets at December 31, 1999. 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.
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FINANCIAL CONDITION
The Corporation's total assets at December 31, 1999 amounted to $4,721.6
million, $704.2 million over the $4,017.4 million at December 31, 1998.
The following table sets forth the maturity distribution of earning
assets at December 31, 1999:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999
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 $ 34,031 $ 1,186 $ 35,217
-------- ---------- ----------
Investment and
trading securities 283,037 $ 28,817 $ 2,454 1,439,595 $ 22,043 1,775,946
-------- --------- -------- ---------- --------- ----------
Loans:
Residential mortgage 12,555 53,080 1,508 400,639 5,781 473,563
Construction 706 773 130,589 132,068
Commercial and commercial
real estate 138,669 45,326 179,490 88,218 575,357 1,027,060
Lease financing 16,102 69,590 85,692
Consumer 393,214 599,479 34,292 1,026,985
-------- --------- -------- ----------- -------- -----------
Total Loans 561,246 767,475 181,771 523,149 711,727 2,745,368
-------- --------- -------- ---------- -------- -----------
Total $878,314 $796,292 $184,225 $1,963,930 $733,770 $4,556,531
======== ======== ======== ========== ======== ==========
</TABLE>
LENDING ACTIVITIES
At December 31, 1999 First BanCorp.'s lending activities include total
commercial loans of $1,159.1 million (42% of total loans), total consumer loans
of $1,112.7 million (41% of total loans), and total residential mortgage loans
of $473.6 million (17% of total loans). The Corporation's portfolio of
commercial loans is composed in its majority of asset based financing and
commercial mortgage loans. Total commercial loans include $371.6 million in
commercial real estate loans and $132.1 million in construction loans. . The
consumer loan portfolio consists principally of auto loans, personal loans and
credit cards. Finance leases of $85.7 million, which are included in the total
amount of consumer loans, are mostly composed of loans to individuals to finance
the acquisition of an auto.
12
<PAGE>
The following table sets forth the composition of First BanCorp.'s
total loan at the dates indicated.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
1999 1998 1997 1996 1995
------------ ------------ ------------ -------------- ------------
(In thousands)
Residential real estate loans:
Secured by first mortgages:
Conventional $395,885 $237,561 $223,098 $224,253 $231,744
Insured by government agencies:
Federal Housing Administration
and Veterans Administration 6,543 8,185 10,176 9,282 12,418
Puerto Rico Housing Corporation
and Finance Agency 32,928 38,516 44,073 50,016 55,325
Secured by second mortgages 5,706 4,956 14,171 14,375 23,208
----------- -------- -------- ----------- ---------
441,062 289,218 291,518 297,926 322,695
Deferred net loan fees (5,293) (6,848) (9,138) (8,531) (8,461)
---------- -------- -------- ------------ -----------
Residential real estate loans 435,769 282,370 282,380 289,395 314,234
--------- ------- ------- ---------- ----------
Commercial loans:
Construction, land acquisition and
land improvements 288,302 161,498 15,400 12,407 12,088
Undisbursed portion of loans
in process (156,234) (98,535) (6,121) (2,198) (2,855)
--------- --------- -------- ---------- ---------
Construction loans 132,068 62,963 9,279 10,209 9,233
Commercial loans 655,417 368,549 235,571 174,770 156,369
Commercial mortgage 371,643 332,219 306,734 256,227 210,645
------------- ---------- --------- ----------- -----------
Commercial loans 1,159,128 763,731 551,584 441,206 376,247
----------- ---------- --------- ---------- -----------
Finance leases 85,692 52,214 42,500 58,481 32,965
------------- ----------- ---------- ----------- -----------
Consumer and other loans:
Personal 435,752 472,588 676,965 749,732 619,549
Auto 532,242 512,116 512,938 510,083 329,296
Boat 37,018 32,209 29,145 29,458 30,168
Credit card 168,045 125,956 116,734 109,259 79,164
Home equity reserve 2,657 3,385 4,282 5,828 6,811
Other 106 128 148 651 795
Unearned finance interest (148,836) (145,284) (267,599) (305,870) (238,146)
---------- ----------- ------------ ---------- -----------
Consumer and other loans 1,026,985 1,001,098 1,072,613 1,099,141 827,636
---------- ---------- ----------- ---------- -----------
Loans receivable 2,707,574 2,099,413 1,949,077 1,888,223 1,551,083
Loans held for sale 37,794 20,642 10,225 7,851 5,523
------------ ----------- ----------- ------------ -----------
Total loans 2,745,368 2,120,054 1,959,302 1,896,074 1,556,606
---------- --------- ----------- --------- ----------
Allowance for loan losses (71,784) (67,854) (57,712) (55,254) (55,009)
------------ ---------- ----------- ----------- ----------
Total loans-net $2,673,584 $2,052,200 $1,901,590 $1,840,821 $1,501,597
========== ========== ========== ========== ==========
</TABLE>
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,
1999.
13
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
December 31, 1999
Weighted
(In thousands) average rate
Residential real estate loans $ 473,563 8.94%
-------------
Construction loans 132,068 8.88%
--------------
Commercial and commercial real estate loans 1,027,060 8.15%
-------------
Finance leases 85,692 12.41%
---------------
Consumer and other loans
Auto 430,798 12.65%
Personal 391,330 16.79%
Credit card 168,045 17.95%
Boat 34,049 10.47%
Home equity reserve loans 2,657 12.88%
Other 106 8.15%
----------------
Total consumer and other loans 1,026,985 15.02%
-------------
Total $ 2,745,368 11.02%
===========
</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,
------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands)
Beginning balance $2,052,200 $1,901,590 $1,840,821 $1,501,597 $1,463,860
---------- ---------- ---------- ---------- ----------
Residential real estate loans originated 216,713 93,552 133,047 98,379 91,739
Commercial loans originated(1) 623,590 307,009 124,121 79,308 82,944
Finance leases originated 51,618 34,427 684 47,975 37,967
Consumer loans originated 515,348 371,333 569,620 823,884 663,056
----------- ----------- ---------- ---------- ---------
Total loans originated 1,407,269 806,321 827,472 1,049,546 875,706
Sales of loans (1,267) (1,250) (360,428)
Repayments and securitization
of loans into mortgage backed securities (719,964) (559,727) (665,175) (654,450) (436,616)
Other decreases(2) (64,654) (95,984) (100,278) (55,872) (40,925)
------------ ------------- ------------ ------------- -----------
Net increase 621,384 150,610 60,769 339,224 37,737
------------ ------------ ------------- ------------ ----------
Ending balance $2,673,584 $2,052,200 $1,901,590 $1,840,821 $1,501,597
========== ========== ========== ========== ==========
Percentage increase 30.28% 7.92% 3.30% 22.59% 2.58%
(1) Includes commercial real estate and construction loans.
(2) Includes the change in the allowance for loan losses and cancellation
of loans due to the repossession of the collateral.
</TABLE>
14
<PAGE>
INVESTMENT ACTIVITIES
The Corporation's investments are 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 - Sales, Distribution
and Mortgage Banking, the Senior Vice President - Treasury and Investments, and
the Corporation's Economist. Significant investment transactions are reported to
the ALCO.
The Corporation's investment policy is designed primarily to provide a
portfolio of high credit quality while seeking high levels of net interest
income within acceptable limits of interest rate risk, credit risk, capital 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, U.S. and Puerto Rico
obligations, stocks and other investments. 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 branch banking 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.
15
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Weighted average
rates at
December 31, December 31,
1999 1999 1998 1997
(Dollars in thousands)
Non-interest bearing checking accounts $ 211,896 $ 173,104 $ 140,099
Saving accounts 2.93% 447,946 416,424 403,129
Interest bearing checking accounts 3.39% 162,601 130,883 121,452
Certificate accounts 5.60% 1,742,978 1,054,634 929,955
----------- ----------- ------------
Total $2,565,422 $1,775,045 $1,594,635
========== ========== ==========
Weighted average rate on interest
bearing deposits 4.94%
Total deposits as a percentage of
total assets 54.33% 44.18% 47.92%
</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, 1999.
(In thousands)
Three months or less $ 439,795
Over three months to six months 237,927
Over six months to one year 246,672
Over one year 358,689
----------
Total $1,283,083
==========
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,
---------------------- -----------------------------------
1999 1999 1998 1997
---- ------ ----- ----
(Dollars in thousands)
Borrowings:
Federal funds purchased and
securities sold under
agreements to repurchase 5.38% $1,447,732 $1,620,630 $ 965,869
FHLB-N.Y. advances 5.96% 50,000 2,600 29,000
Notes payable 5.59% 55,500 118,100 132,350
Other short-term borrowings 6.20% 152,484 86,595 231,505
Subordinated notes 7.72% 93,594 99,496 99,423
------------- ------------ -------------
Total 5.60% $1,799,310 $1,927,421 $1,458,147
========== ========== ==========
Total borrowed funds as a percentage
of total assets 38.11% 47.98% 43.82%
16
<PAGE>
Weighted average interest rate during the period:
Securities sold under agreements to repurchase 5.07% 5.07% 5.08%
Other short-term borrowings 6.29% 6.39% 6.10%
</TABLE>
CAPITAL
At December 31, 1999, total stockholders' equity for the Corporation
amounted to $294.9 million, an increase of $24.5 million as compared to $270.4
million at December 31, 1998.
Employees
At December 31, 1999 the Corporation employed 1,680 persons. None of
its employees are represented by a collective bargaining group. The Corporation
considers its employees' relations to be good.
17
<PAGE>
Item 2. Properties
At December 31, 1999 First BanCorp. owned three main offices premises,
13 branch and office premises, four loan centers and an auto lot. All these
premises are located in Puerto Rico. In addition, at December 31, 1999, the
Corporation leased in Puerto Rico 32 branch premises, 31 loan and office centers
and seven other facilities. The Corporation leased three 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
73 of the annual report to security holders for the year ended December 31, 1999
(see Exhibit 13 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 1999.
18
<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 32
of the annual report to security holders for the year ended December 31, 1999.
b) Holders
The information required herein is incorporated by reference from page 32
of the annual report to security holders for
the year ended December 31, 1999.
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 $0.06 per share for each quarter of
1997, $0.075 per share for each quarter of 1998 and $0.09 per share for each
quarter of 1999.
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.
19
<PAGE>
Item 6. Selected Financial Data
The information required herein is incorporated by reference from page 17
of the annual report to security holders for the year ended December 31, 1999.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information required herein is incorporated by reference from page 18
through 32 of the annual report to security holders for the year ended December
31, 1999.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information required herein is incorporated by reference from page 33
of the annual report to security holders for the year ended December 31, 1999.
Item 8. Financial Statements and Supplementary Data
The information required herein is incorporated by reference from page 35
through 75 of the annual report to security holders for the year ended December
31, 1999.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
20
<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 21, 2000.
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 21,
2000.
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 21, 2000.
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 21, 2000.
21
<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, 1999 and
1998.
Consolidated Statements of Income for Each of the Three Years in the Period
Ended December 31, 1999.
Consolidated Statements of Changes in Stockholders' Equity for Each of the
Three Years in the Period Ended December 31, 1999.
Consolidated Statements of Comprehensive Income for each of the Three Years
in the Period Ended December 31, 1999.
Consolidated Statements of Cash Flows for Each of the Three Years in the
Period Ended December 31, 1999.
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,
1999.
(c) See Index to Exhibits on page 23 for the exhibits filed as a part of
this Form 10-K.
(d) Financial data schedules
Schedules are omitted because they are not applicable.
22
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Index to Exhibits
- - ---------------------------------- ---------------------------------------------------------- ------------------------------
No. Exhibit Page No.
- - ---------------------------------- ---------------------------------------------------------- ------------------------------
- - ---------------------------------- ---------------------------------------------------------- ------------------------------
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 (2)
- - ---------------------------------- ---------------------------------------------------------- ------------------------------
- - ---------------------------------- ---------------------------------------------------------- ------------------------------
10.2 FirstBank's 1997 Stock Option Plan (2)
- - ---------------------------------- ---------------------------------------------------------- ------------------------------
- - ---------------------------------- ---------------------------------------------------------- ------------------------------
10.3 Employment Agreements (2)
- - ---------------------------------- ---------------------------------------------------------- ------------------------------
- - ---------------------------------- ---------------------------------------------------------- ------------------------------
11.0 Statement Report to Shareholders for fiscal year ended (3)
December 31, 1999.
- - ---------------------------------- ---------------------------------------------------------- ------------------------------
- - ---------------------------------- ---------------------------------------------------------- ------------------------------
13.0 Annual Report to shareholders for fiscal year ended -
December 31, 1999.
- - ---------------------------------- ---------------------------------------------------------- ------------------------------
- - ---------------------------------- ---------------------------------------------------------- ------------------------------
21.0 List of subsidiaries (direct and indirect) (2)
- - ---------------------------------- ---------------------------------------------------------- ------------------------------
- - ---------------------------------- ---------------------------------------------------------- ------------------------------
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) Incorporated by reference from the Form 10-K for the year ended December
31, 1998 filed by the Corporation on March 26, 1999.
(3) Information is included on page 52 of the Corporation's annual report
to security holders and is incorporated by reference herein (See Exhibit 13.0).
</TABLE>
23
<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.
By: /s/ Angel Alvarez-Perez Date: 03/28/00
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: 03/28/00
Angel Alvarez-Perez,
Chairman
President and Chief Executive Officer
/s/ Annie Astor de Carbonell Date: 03/28/00
Annie Astor de Carbonell, Director
Senior Executive Vice President and
Chief Financial Officer
/s/ Jose Julian Alvarez Date: 03/28/00
Jose Julian Alvarez, Director
/s/ Rafael Bouet Date: 03/28/00
Rafael Bouet, Director
/s/ Jorge Diaz Date: 03/28/00
Jorge Diaz, Director
24
<PAGE>
/s/ Francisco D. Fernandez Date: 03/28/00
Francisco D. Fernandez, Director
/s/ Armando Lopez Date: 03/28/00
Armando Lopez, Director
/s/ German Malaret, Date: 03/28/00
German Malaret, Director
/s/ Hector M. Nevares Date: 03/28/00
Hector M. Nevares, Director
/s/ Antonio Pavia Villamil Date: 03/28/00
Antonio Pavia Villamil, Director
/s/ Jose Teixidor Date: 03/28/00
Jose Teixidor, Director
/s/ Angel L. Umpierre Date: 03/28/00
Angel L. Umpierre, Director
/s/ Luis M. Beauchamp Date: 03/28/00
Luis M. Beauchamp,
Senior Executive Vice President and
Chief Lending Officer
/s/ Laura Villarino Tur Date: 03/28/00
Laura Villarino Tur,
Senior Vice President and
Controller
<PAGE>
Annual Report 1999
[PHOTO]
Technology and Innovation:
our Challenge toward the New Century
[LOGO] FIRST BANCORP
<PAGE>
Table of Content
Financial Highlights 2
Business Profile 5
President's Letter 7
Achievements in 1999 10
Puerto Rico Economy 13
Board of Directors 14
Officers 15
Financial Review 17
Stockholder's Information 76
1
<PAGE>
<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) 1999 1998
Operating Results:
Net interest income $185,733 $166,168
Provision for loan losses 47,960 76,000
Other income 32,862 58,240
Other operating expenses 101,272 91,798
Income tax provision 7,288 4,798
Net income 62,075 51,812
Per common share:
Net income - basic 2.00 1.75
Net income - diluted 1.98 1.74
Weighted Average Shares:
Basic 28,941 29,586
Diluted 29,199 29,858
At Year End:
Assets $4,721,568 $4,017,352
Loans 2,745,368 2,120,054
Allowance for loan losses 71,784 67,854
Investments 1,811,164 1,800,489
Deposits 2,565,422 1,775,045
Borrowings 1,803,729 1,930,488
Capital 294,902 270,368
</TABLE>
2
<PAGE>
[GRAPHS]
3
<PAGE>
(P.R. GEOGRAPHIC MAP)
Branches - 48 Offices
Aguada 1
San Sebastian 1
Arecibo 1
Manati 1
Vega Baja 1
Dorado 1
Bayamon 5
Guaynabo 1
San Juan 12
Carolina 5
Humacao 1
Caguas 4
Aguas Buenas 1
Cidra 1
Guayama 1
Cayey 1
Barranquitas 1
Ponce 2
Yauco 1
Cabo Rojo 1
Mayaguez 2
Saint Thomas 2
Saint Croix 1
Money Express - 27 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
Barranquitas 1
Utuado 1
Yauco 1
Mayaguez 1
First Leasing & Rentals - 6 Offices
Isabela 1
Bayamon 1
San Juan 3
Caguas 1
Auto Loan Center - 2 Offices
Caguas 1
Mayaguez 1
Loan Center - 2 Offices
Aguadilla 1
Fajardo 1
Mortgage Loan Center - 4 Offices
Manati 1
San Juan 2
Carolina 1
Total 89 Offices
4
<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 $4.722 billion as of
December 31, 1999. The Corporation 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 business.
The Corporation has a $1.2 billion portfolio of commercial loans, commercial
mortgages, construction loans and other related commercial products. Its
commercial clients include businesses of all sizes covering a wide range of
economic activities. First BanCorp has a $474 million portfolio of residential
mortgages. The institution has $1.1 billion in consumer loans, concentrated in
auto loans and leases, personal loans and credit cards. Its $1.8 billion
investment portfolio consists mostly of U.S. government securities and mortgage
backed securities. Through a strategic alliance with Paine Webber, the
Corporation offers full brokerage services in selected branches. Approximately
1,700 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 was renamed "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 48 full service branches including three offices in the U.S. Virgin
Islands. The Corporation also has two auto loan centers, two personal loan
centers and four mortgage loan centers in Puerto Rico. A second tier subsidiary,
Money Express, operates 27 offices dedicated to small loans throughout Puerto
Rico. First BanCorp also has a second tier subsidiary known as First Leasing and
Rental Corp., which rents and leases motor vehicles from its six offices in
Puerto Rico.
[PHOTO]
(First BanCorp interactive web site)
5
<PAGE>
First BanCorp has distinguished itself by providing innovative marketing
strategies and novel products to attract clients. Besides its main branches and
specialized lending offices, the Corporation has offered a telephone information
service called "Telebanco" since 1983. This was the first telebanking service
offered in Puerto Rico. First BanCorp clients have access to an extensive ATM
network all over the world. The Corporation was 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 banking institution in Puerto Rico with a presence on the
internet. During 2000, First BanCorp will launch a new, interactive web site
where clients will be able to perform all types of banking transactions.
First BanCorp and its subsidiaries are subject to supervision, examination and
regulation of the Federal Reserve Board, the Federal Deposit Insurance
Corporation and the Commissioner of Financial Institutions of Puerto Rico.
First BanCorp is committed to provide the most efficient and cost effective
banking services possible. Management's goal is to be the premier financial
institution in financial products and services in Puerto Rico. First BanCorp's
Management will work constantly to exceed the expectations of our stockholders,
clients and employees.
[PHOTO]
(First BanCorp interactive web site)
[PHOTO]
(First BanCorp interactive web site)
6
<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 1999, another record year. In 1999 First BanCorp
earned $62.1 million, representing $2.00 per share (basic) or $1.98 per share
(diluted). These earnings compared favorably with 1998, when the Corporation
earned $51.8 million, which came to $1.75 per share (basic) or $1.74 per share
(diluted). Net income increased 19.8 percent and diluted earnings per share rose
13.8 percent in 1999. These achievements continue our record of consistent
earnings growth.
During 1999 we concentrated on investing in new technology and diversifying our
services. The pace of change in First BanCorp accelerated with a series of
targeted purchases and strategic alliances that laid the foundation for future
growth.
Growth and Diversification
Last year we worked hard to increase commercial and construction lending. In
consumer lending the Corporation continued to improve the quality of the
portfolio through improved underwriting processes.
At midyear we acquired the Puerto Rico operations of Royal Bank of Canada. This
acquisition added $90 million of high quality commercial loans, while giving us
a well-located branch facility in the Hato Rey financial district. In August we
acquired the $42 million private label credit card business of Western Auto in
Puerto Rico. This acquisition substantially increased our important credit card
business.
The largest acquisition occurred at year-end. We acquired four branches from
Citibank's Caribbean operations. One of these branches in St. Thomas will
strengthen our existing business in the U.S. Virgin Islands. The three Puerto
Rico branches will add to our business in San Juan, Ponce and Mayaguez. This
acquisition included $83 million in retail deposits.
Aside from all these acquisitions, we have moved quickly to take advantage of
the Gramm-Leach-Bliley Act, passed by Congress in November 1999. This
legislation removed the barriers separating the banking, insurance and brokerage
industries. We expect the Puerto Rico legislature will quickly enact legislation
to harmonize local and Federal banking laws in this area. We have recruited an
Executive Vice President with many years of experience in local securities
markets to oversee our entry into brokerage and investment banking business.
Through an agreement with Goldman, Sachs & Co., First BanCorp now participates
in bond issues by the
7
<PAGE>
Government of Puerto Rico. The Corporation has also arranged a strategic
alliance with Paine Webber of Puerto Rico, the largest brokerage firm in the
Island with thirty five years of local experience. Early in the year 2000 Paine
Webber opened offices in eleven of our branches. This arrangement gives the
Corporation's clients the widest range of investment advice, brokerage services,
and money management experience available in Puerto Rico, while our officers are
also available to sell our products and services to Paine Webber's 32,000
clients in Puerto Rico.
New Investments in Technology, Facilities and Training
First BanCorp has been investing heavily in technology, particularly in the area
of commercial banking services. During the first half of 2000 we are upgrading
the computer systems in our branches. These changes will allow greater
efficiency, while helping our employees develop and strengthen relationships
with our clients. Also internet banking will be available by the midyear 2000.
First BanCorp will provide an internet service while maintaining all existing
banking services available to our clients. For this reason we are continuing our
plans to expand First BanCorp's branch network. During 1999 we added three new
branches while acquiring five more from other institutions. We plan to open more
branches this year.
Our employees are the key to our success. We have reorganized our sales and
distribution system, adding a newly recruited Senior Vice President with vast
experience in marketing and sales to help make our branches more sales-oriented.
In addition, the larger branches in the metropolitan area have two managers: one
for regular clients and the other for commercial relationships. We have
recruited a Senior Vice President with a long track record in commercial lending
to administer this middle market strategy.
We have completely restructured our branch-based deposits, introducing a new
product which pays bonuses for clients with multiple relationships. We have
created a corporate professional image by providing uniforms to all our branch
employees and offered extended branch hours. To facilitate these changes we are
expanding employee training in all areas of the Corporation.
We have planned and coordinated these changes under a special project designed
to simplify operations while making our services more efficient, responsive and
convenient. We named the project "The Next Fifty" because we launched it in
1998, the Corporation's 50th anniversary year, as a way to initiate our second
fifty years of growth. Forty five employees participated full time in the
project, generating more than 500 ideas for improvement. We expect "The Next
Fifty" to add $12 million in annualized earnings through cost reductions and
revenue enhancements. We are reinvesting most of these earnings in new
technology. "The Next Fifty" will continue through into 2001.
[PHOTO]
(First BanCorp interactive web site)
8
<PAGE>
We expect these initiatives to favor continued low operating costs. During the
past year our efficiency ratio averaged 46.6%, almost the same as the 46.5% of
1998.
Enhancing Shareholder Value
Our efforts have paid off in strong earnings growth for 1999, with a return on
equity of 21.06%, compared with 20.54% in 1998. Our stock price has not
reflected these strong results during 1999. Nevertheless, investors who held
First BanCorp stock over the ten year period from year-end 1989 to year-end 1999
received a cumulative total return of 1,661%, for an average annual growth rate
of 33.2% on their investment.
The Corporation began a stock repurchase program four years ago. During 1999 we
repurchased 1,452,000 shares. This brought total activity over the course of our
share repurchase program to 3,115,450 shares, adjusted for splits, representing
a total investment of $54.3 million. In addition, officers and directors of
First BanCorp own approximately 19 percent of its shares. This shows their
confidence in First BanCorp's future and their commitment to keep its
fundamentals sound.
During 1999 the magazine U.S. Banker mentioned First BanCorp's outstanding
performance in its annual survey of America's 100 largest banks. During 1998
First BanCorp ranked fourth among all U.S. banks in cost control and in return
on equity First BanCorp ranked tenth. We are confident that in the course of
time our stock price will reflect this outstanding performance.
As First BanCorp embarks on another year of growth and service to the Puerto
Rican 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 we
will continue to provide outstanding service to our clients, while benefiting
employees and stockholders in the years to come.
/s/ Angel Alvarez-Perez
Chairman
President
Chief Executive Officer
[PHOTO]
(First BanCorp interactive web site-
First Miles Credit Card)
9
<PAGE>
[PHOTO]
(First BanCorp interactive web site)
Achievements in 1999
Record profits made 1999 a very successful year for First BanCorp. The company
made exceptional progress. Besides making heavy investments in new computer
systems, improving employee training and expanding commercial and construction
loans, the Corporation launched several important strategic alliances.
Profits continued their healthy growth as First BanCorp earned $62.1 million,
which comes to $2.00 per share (basic) or $1.98 per share (diluted). In 1998 the
Corporation earned $51.8 million, the equivalent of $1.75 (basic) or $1.74
(diluted) in per share terms. Net income increased by 19.8%, or 13.8% per share
on a diluted basis. Net interest income, the main source of the Corporation's
earnings, grew by $19.5 million from $166.2 million in 1998 to $185.7 million in
1999. Gains on sale of investments contributed $1.4 million to net income in
1999, while in 1998 these sales contributed $26.8 million.
First BanCorp's assets grew by $705 million during 1999, ending the year at
$4.722 billion. Loans increased by $625 million for the year, mainly from
commercial loans growth of approximately $400 million. The Corporation
successfully issued $90 million in preferred stock in April 1999.
First BanCorp made three important acquisitions last year. At midyear FirstBank,
the Corporation's banking subsidiary, acquired the Puerto Rico operations of
Royal Bank of Canada. This purchase included a $90 million portfolio of high
quality commercial loans and an attractive branch in the Hato Rey financial
district. In August, the Bank acquired the credit card business of Western Auto,
the largest auto parts retailer in Puerto Rico with 38 stores. This transaction
brought FirstBank a $42 million credit card portfolio distributed among roughly
100,000 clients.
At year-end FirstBank also acquired four offices from Citibank. One of these
branches is located in St. Thomas, U.S. Virgin Islands, and the other three are
located in Puerto Rico. Besides the facilities and deposits, the Bank acquired
approximately $30 million in loans as a part of this transaction.
An Expanding Role for a Growing Branch Network
During 1999 deposits grew from $1.775 billion to $2.565 billion, an increase of
$790 million. Management worked intensively to lay the groundwork for future
deposit growth by expanding the branch network and improving its products.
Besides purchasing the five branches mentioned above, the Corporation also
opened three new branches during the year. The Corporation plans to open more
branches during the year 2000. As the Corporation moves increasingly toward
relationship banking, Management is placing loan centers in selected branches to
increase originations of mortgages and commercial loans.
Management restructured the Corporation's deposit products, introducing an
innovative new product called the "Bonus Account". This account rewards clients
who have multiple relationships
10
<PAGE>
with FirstBank (e.g. a checking account, a mortgage and an auto loan). At
the same time, Management is holding back or eliminating some older products
which are less popular than they were in past years. These changes will
complement the development of the branch network.
Management is also opening specialized offices in selected branches. Four
branches now have mortgage loan centers, which will provide financing for new
homes in the San Juan metropolitan area. In addition, several branches now
include a commercial loan officer, aside from the traditional branch manager.
Early in the year 2000 First BanCorp began offering brokerage services in
selected branches through a new alliance with Paine Webber. This arrangement
will give the Corporation's clients the broadest range of brokerage and
financial management services available in Puerto Rico. Previously First BanCorp
formed an alliance with Goldman Sachs to participate in the underwriting of
Puerto Rico government securities. During the year 2000, the Corporation will
begin offering internet services for those clients who like the convenience of
banking from their homes along with the security of having branch officers
available.
Improvements in Efficiency
In 1998 Management began a comprehensive re-design plan to streamline all
corporate operations. The Corporation named the project "The Next Fifty" because
Management launched it in the Corporation's 50th anniversary year as a way to
initiate the second fifty years of growth. Management has invested most of the
savings from this project in new technology. Largely because of this program
First BanCorp was able to maintain an efficiency ratio of only 46.6% during
1999, almost equal to the 46.5% in 1998. Overall operating expenses were held to
only $101.3 million for 1999 compared with $91.8 million in the previous year.
Management achieved this in spite of significant increases in the size of the
branch network and heavy investments in new computer systems. First BanCorp's
efficiency ratio compares very favorably with that of other commercial banks
throughout the U.S.
Improvements in the Balance Sheet
Contributing to higher profits in 1999 was a significant improvement in asset
quality. Two years ago Management substantially improved its system of
underwriting consumer loans, introduced tighter underwriting procedures and
improved the Corporation's computer systems. As a result, the quality of the
loan portfolio has improved. During 1999 First BanCorp provided $48 million for
loan losses as compared with $76 million in 1998. This represents a reduction of
37 percent.
Loan quality has improved according to other measures as well. On December 31,
1999 non-performing loans totaled $53.8 million, compared to $57.0 million on
the same date in 1998 and $52.9 million on a smaller portfolio at the end of
1997. By the end of 1999, the ratio of non-performing loans to total loans had
fallen to 1.96%, compared with 2.69% at the end of 1998 and
[PHOTO]
(First BanCorp interactive web site)
11
<PAGE>
2.70% at year-end 1997. The reserve coverage ratio (allowance for loan
losses as a percentage of non-performing loans) reached 133.3% by the end of
1999, well above its earlier levels of 119.1% at year-end 1998 and 109.0% at the
end of 1997. Management is committed to continuing these improvements in loan
quality in coming years.
During the early part of 1999 Management strengthened the capital structure of
First BanCorp by issuing $90 million in preferred stock. This transaction will
help the Corporation to maintain a solid capital structure. Although assets grew
substantially during 1999, the Corporation's capital ratios remained strong. The
core capital ratio was 7.5% and the risk based capital ratio was 16.2% as of
December 31, 1999.
Increasing Shareholder Value
The financial results continue a trend of earnings growth that has produced
excellent value for shareholders. First BanCorp's return on average equity was
21.06% in 1999, while average asset yield was 1.49%. Dividends increased in
1999, and reached a payout ratio of 17.96% compared with 17.12% in 1998. During
1999 the Corporation repurchased 1,452,000 common shares.
While the stock price has not reflected these strong results during 1999,
investors who held First BanCorp stock over the ten year period from year-end
1989 to year-end 1999 received a cumulative total return of 1,661%. This is
equivalent to an average annual growth rate of 33.2% on the original investment.
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 quality reputation with
clients will all contribute to future earnings growth. Management will continue
its efforts to improve First BanCorp's excellent performance in 2000 and in the
years to come.
[PHOTO]
(First BanCorp interactive web site- Telepago FirstBank)
12
<PAGE>
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 over 4% in the 1999 fiscal year. Private economists are
forecasting 2% to 3% real growth in the fiscal year 2000. 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. The Island uses U.S. currency and forms a part
of the U.S. financial system. Federal courts enforce U.S. laws in Puerto Rico.
Since Puerto Rico falls within the U.S. for purposes of customs and migration,
there is full mobility of funds, people and goods between Puerto Rico and the
U.S. mainland. Puerto Rico banks are subject to the same Federal laws,
regulations and supervision as other financial institutions in the rest of the
U.S. The Federal Deposit Insurance Corporation insures the deposits of Puerto
Rico chartered commercial banks, including FirstBank, the banking subsidiary of
First BanCorp.
Puerto Rico made a rapid transition from poverty in the immediate postwar period
to prosperity today. Throughout this process the Island has attracted industry
using tax 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
optimistic about Puerto Rico's economic future.
[PHOTO]
(First BanCorp interactive web site-
Internet Banking and Bonus Account)
13
<PAGE>
Board of Directors
[PHOTO]
Angel Alvarez-Perez, Esq.
Chairman
[PHOTO]
Annie Astor de Carbonell, C.P.A.
[PHOTO]
Angel L. Umpierre, C.P.A.
[PHOTO]
Jose Teixidor
[PHOTO]
German E. Malaret, M.D.
[PHOTO]
Antonio Pavia Villamil, M.D.
[PHOTO]
Francisco D. Fernandez, Eng.
[PHOTO]
Rafael Bouet, Eng.
[PHOTO]
Armando Lopez Ortiz, Eng.
[PHOTO]
Hector M. Nevares, Esq.
[PHOTO]
Jose Julian Alvarez
[PHOTO]
Jorge Diaz
14
<PAGE>
FIRST BANCORP OFFICERS
PRESIDENT
Angel Alvarez-Perez
Chief Executive Officer
Chairman
SENIOR EXECUTIVE VICE PRESIDENTS
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Annie Astor de Carbonell Luis M. Beauchamp
Chief Financial Officer Chief Lending Officer
Wholesale Banking
EXECUTIVE VICE PRESIDENTS
Aurelio Aleman Fernando L. Batlle Francisco Cortes
Consumer Banking Sales & Distribution, Mortgage Banking Administrative Services
Ricardo Ramos Randolfo Rivera
First Securities Corporate Banking
[PHOTO]
Standing from left to right: Aida Garcia, Francisco Cortes, Aurelio Aleman,
Randolfo Rivera, Fernando L. Batlle, Luis Cabrera, Josianne M. Rosello
Seated from left to right: Luis Beauchamp, Angel Alvarez-Perez, Annie Astor
de Carbonell
Not present: Miguel Mejias, Ricardo Ramos, Laura Villarino
SENIOR VICE PRESIDENTS
Miguel Babilonia Luis Cabrera Eva Candelario
Consumer Credit Policy & Portfolio Treasury & Investments Corporate Business Development
Management
Jose Cerame Aida M. Garcia Michael Garcia
Middle Market & Community Banking Human Resources Consumer Collection
Fernando Iglesias Roger Lay Miguel Mejias
Special Loans & Credit Administration Internal Auditing Information Systems
John Ortiz Haydee Rivera Julio Rivera
Consumer Lending, Sales & Services Branch Banking Operations Construction Lending
Josianne M. Rosello Demetrio Santiago Hector Santiago
Marketing & Public Relations Auto Wholesale Business Auto Business
Denise Segarra Laura Villarino
Sales & Distribution Controller
VICE PRESIDENTS
William Alvarez Jose H. Aponte
Indirect Business Development Commercial Mortgage Beverly Bachetti
Private Banking
Juan E. Barnes Ana Colon David Gonzalez
Branch Manager Centralized Accounting Corporate Business Development
Nelson Gonzalez Eric Lopez Marcelo Lopez
Corporate Business Development Corporate Banking Regional Sales Manager
Juanita Marrero Ivan Martinez Jose Negron
Mortgage Banking Project Manager Auto Asset & Disposition
Luis Orengo Eduardo Ortiz Osvaldo Padilla
Commercial Loans Auto Wholesale Corporate Business
Reynaldo Padilla Miguel Pimentel Carlos Power
Auto Finance Corporate Business Development Next Fifty Project
Rolando Quevedo Jorge Rendon Migdalia Rivera
Legal Counsel Operational Support Community Banking
Sandra Rivera Belinda Rodriguez Jose L. Rodriguez
Auto Collection Consumer Sales Information Systems
Elizabeth Sanchez Roberto Sanchez Miguel Santin
Marine Financing Credit Risk Corporate Banking
Carmen Torres Raphael Torres
Capacity Planning Manager Regional Sales Manager
</TABLE>
15
<PAGE>
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
Chief Executive Officer
Aurelio Aleman
President and Chief Operating
Officer
William Velez
Vice President and General
Manager
[PHOTO]
(First BanCorp interactive web site-
P.R Geographical Map)
16
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
SELECTED FINANCIAL DATA
Year ended December 31, 1999 1998 1997 1996 1995
(In thousands except for per share results)
Condensed Income Statements:
Total interest income $369,063 $321,298 $285,160 $256,523 $208,488
Total interest expense 183,330 155,130 130,429 113,027 96,838
Net interest income 185,733 166,168 154,731 143,496 111,650
Provision for loan losses 47,961 76,000 55,676 31,582 30,894
Other income 32,862 58,240 39,866 29,614 48,268
Other operating expenses 101,272 91,798 83,268 82,498 65,628
Unusual item - SAIF assessment 9,115
Income before income tax provision 69,363 56,610 55,653 49,915 63,396
Provision for income tax 7,288 4,798 8,125 12,281 14,295
Net income 62,075 51,812 47,528 37,634 49,101
Per Common Share Results (1):
Net income per common share - diluted $1.98 $1.74 $1.58 $1.22 $1.58
Cash dividends declared $0.36 $0.30 $0.24 $0.20 $0.08
Average shares outstanding 28,941 29,586 30,036 30,794 30,592
Average shares-diluted 29,199 29,858 30,204 30,952 31,118
Balance Sheet Data:
Loans and loans held for sale $2,745,368 $2,120,054 $1,959,301 $1,896,074 $1,556,606
Allowance for possible loan losses 71,784 67,854 57,712 55,254 55,009
Investments 1,811,164 1,800,489 1,276,900 830,980 785,747
Total assets 4,721,568 4,017,352 3,327,436 2,822,147 2,432,816
Deposits 2,565,422 1,775,045 1,594,635 1,703,926 1,518,367
Borrowings 1,803,729 1,930,488 1,458,148 884,741 698,097
Total capital 294,902 270,368 236,379 191,142 171,202
Book value per common share, end of year (1) 7.30 9.17 7.93 6.32 5.51
Regulatory Capital Ratios (In Percent):
Total capital to risk weighted assets 16.16 17.39 17.26 15.25 16.17
Tier 1 capital to risk weighted assets 11.64 11.55 11.07 9.32 9.93
Tier 1 capital to average assets 7.47 6.59 7.44 6.65 6.82
Selected Financial Ratios (In Percent):
Net income to average total assets 1.49 1.48 1.63 1.48 2.22
Interest rate spread (2) 4.29 4.76 5.30 5.46 5.07
Net interest income to average earning assets (2) 4.85 5.27 5.83 6.03 5.59
Yield on average earning assets (2) 9.29 9.83 10.45 10.63 10.12
Cost on average interest bearing liabilities 5.00 5.07 5.15 5.17 5.05
Net income to average total equity 21.06 20.54 22.30 20.49 33.19
Net income to average common equity 24.68 20.54 22.30 20.49 33.19
Average total equity to average total assets 7.07 7.22 7.32 7.23 6.68
Dividend payout ratio 17.96 17.12 15.14 16.32 5.06
Efficiency ratio (3) 46.62 46.46 45.45 49.03 47.96
Offices:
Number of full service branches 48 40 36 36 36
Loan origination offices 41 45 44 47 43
</TABLE>
(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).
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FINANCIAL REVIEW SUMMARY
For the year 1999, First BanCorp (the Corporation) recorded earnings of
$62,074,949 or $2.00 per common share (basic) and $1.98 per common share
(diluted), compared to $51,812,387 or $1.75 per common share (basic) and $1.74
per common share (diluted) for 1998, and $47,527,552 or $1.58 per common share
(basic and diluted) for 1997.
The Corporation's earnings are attributed to the net interest income
earned on the growing portfolio of earning assets, improvements in asset quality
resulting in a lower provision for loan losses, and controls over operating
expenses. For 1999 as compared to 1998, net income increased by $10,262,562 or
$0.24 per common share (diluted), and for 1998 as compared to 1997, by
$4,284,835 or $0.16 per common share (diluted).
Return on average assets was 1.49% for 1999, 1.48% for 1998 and 1.63% for
1997. Return on average equity was 21.06% for 1999, 20.54% for 1998 and 22.30%
for 1997.
RESULTS OF OPERATIONS
The Corporation's results of operations depend primarily on its net
interest income, which is the difference between the interest income earned on
interest earning assets, including investment securities and loans, and the
interest expense paid on interest bearing liabilities, including deposits and
borrowings. Also, the results of operations depend on the provision for loan
losses, operating expenses (such as personnel, occupancy and other costs), other
income (mainly service charges and fees on loans), and gains on sale of
investments.
Net Interest Income
Net interest income increased to $185.7 million for 1999 from $166.2
million in 1998 and $154.7 million in 1997. This improvement results from 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 of $721.2 million for 1999 as compared to 1998 and of $582.7
million for 1998 as compared to 1997. Interest bearing liabilities increased by
$606 million for 1999 as compared to 1998 and by $528 million for 1998 as
compared to 1997.
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.
18
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Part I Average volume Interest income (1) / expense Average rate (1)
Year ended December 31, 1999 1998 1997 1999 1998 1997 1999 1998 1997
(Dollars in thousands)
- - ------------------------------------------------------------------------------------------------------------------------------------
Earning Assets:
Deposits at banks and other
short-term investments $ 27,344 $ 40,766 $ 67,969 $ 450 $ 2,028 $ 3,708 1.65% 4.97% 5.45%
Government obligations 415,742 319,777 404,517 24,997 19,984 26,949 6.01% 6.25% 6.66%
Mortgage backed securities 1,294,195 1,032,632 428,804 92,157 77,463 34,942 7.12% 7.50% 8.15%
Other investment 18,646 1,150 519 1,598 186 21 8.57% 16.14% 4.24%
FHLB stock 16,170 10,252 10,150 1,101 743 670 6.81% 7.25% 6.60%
----------- ----------- ----------- -------- ---------------------
Total investments 1,772,097 1,404,577 911,959 120,303 100,404 66,290 6.79% 7.15% 7.27%
--------- ----------- ---------- ------- -------- --------
Consumer loans (2) 1,013,782 1,032,704 1,090,991 138,130 139,309 147,100 13.63% 13.49% 13.48%
Residential real estate loans (2) 327,700 290,564 283,799 30,754 30,807 29,485 9.38% 10.60% 10.39%
Construction loans (2) 94,940 19,169 10,488 9,216 1,852 1,004 9.71% 9.66% 9.57%
Commercial loans (2) 847,917 613,697 473,093 75,879 56,239 44,770 8.95% 9.16% 9.46%
Finance leases (2) 68,577 43,108 50,823 9,080 6,022 6,220 13.24% 13.97% 12.24%
---------- ------------ ----------- ---------- -------------------
Total loans 2,352,916 1,999,242 1,909,194 263,059 234,229 228,579 11.18% 11.72% 11.97%
----------- ----------- ----------- --------- -------- ---------
Total earning assets $4,125,013 $3,403,819 $2,821,153 $383,362 $334,633 $294,869 9.29% 9.83% 10.45%
========== ========== ========== ======== ======== ========
Interest Bearing Liabilities:
Interest bearing checking
accounts $ 140,690 $ 123,847 $ 116,852 $ 4,931 $ 4,487 $ 4,167 3.50% 3.62% 3.57%
Savings accounts 413,662 398,249 400,998 12,381 11,717 12,155 2.99% 2.94% 3.03%
Certificate accounts 1,373,263 972,433 985,124 73,177 54,214 55,827 5.33% 5.58% 5.67%
--------- ---------- ---------- ------ ------ ------
Interest bearing deposits 1,927,615 1,494,529 1,502,974 90,489 70,418 72,149 4.69% 4.71% 4.80%
Other borrowed funds 1,728,913 1,559,892 1,012,757 92,370 84,460 57,418 5.34% 5.41% 5.67%
FHLB advances 8,451 4,515 15,157 471 252 864 5.57% 5.58% 5.70%
------------ ---------- ---------- -----------------------------
Total interest bearing
liabilities $3,664,979 $3,058,936 $2,530,888 $183,330 $155,130 $130,431 5.00% 5.07% 5.15%
========== ========== ========== ======== ======== ========
Net interest income (1) $200,032 $179,503 $164,438
======== ======== ========
Interest rate spread (1) 4.29% 4.76% 5.30%
Net interest margin (1) 4.85% 5.27% 5.83%
</TABLE>
(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.
19
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Part II 1999 compared to 1998 1998 compared to 1997
Increase (decrease) Increase (decrease)
Due to: Due to:
Volume Rate Total Volume Rate Total
(In thousands)
Earning assets:
Deposits at banks and other
short-term investments $ (521) $(1,057) $(1,578) $(1,377) $ (303) $ (1,680)
Government obligations 5,884 (871) 5,013 (5,375) (1,589) (6,964)
Mortgage backed securities 19,123 (4,429) 14,694 47,250 (4,729) 42,521
Other investment 2,143 (731) 1,412 50 114 164
FHLB stock 416 (58) 358 7 66 73
-------- -------- --------- ---------- -------- ----------
Total investments 27,045 (7,146) 19,899 40,555 (6,441) 34,114
------ ------- -------- ------- ------ -------
Consumer loans (2,565) 1,386 (1,179) (7,861) 70 (7,791)
Residential real estate loans 3,711 (3,765) (54) 711 612 1,323
Construction loans 7,355 9 7,364 839 9 848
Commercial loans 21,212 (1,572) 19,640 13,096 (1,628) 11,468
Finance leases 3,465 (406) 3,059 (1,011) 811 (200)
------- ------- ------- ------ ------ --------
Total loans 33,178 (4,348) 28,830 5,774 (126) 5,648
------ ------ ------ ------- ----- --------
Total interest income 60,223 (11,494) 48,729 46,329 (6,567) 39,762
------ ------- ------- ------ ------- -------
Interest bearing liabilities:
Deposits 20,368 (297) 20,071 (403) (1,327) (1,730)
Other borrowed funds 9,091 (1,181) 7,910 30,323 (3,282) 27,041
FHLB advances 219 0 219 (594) (18) (612)
--------- ----------- -------- -------- -------- ---------
Total interest expense 29,678 (1,478) 28,200 29,326 (4,627) 24,699
-------- -------- ------ -------- ------- --------
Change in net interest income $30,545 $(10,016) $20,529 $17,003 $(1,940) $15,063
======= ======== ======= ======= ======= =======
</TABLE>
Total interest income includes tax equivalent adjustments of $14.3
million, $13.3 million and $9.7 million for 1999, 1998, and 1997, respectively.
On a tax equivalent basis, net interest income increased to $200 million for
1999 from $179.5 million for 1998, and $164.4 million for 1997. The interest
rate spread and net interest margin amounted to 4.29% and 4.85%, respectively,
for 1999, as compared to 4.76% and 5.27%, respectively, for 1998 and to 5.30%
and 5.83%, respectively, for 1997. The reduction in the interest rate spread and
net interest margin for 1999 is mainly due to the increase of $367.5 million in
the average volume of total investments when compared to the average volume
recorded for 1998. These investments have a lower spread than loans without
considering the effects of credit risk. In addition, there was a reduction of
$18.9 million in the average volume of consumer loans, which provide the highest
spread, but have the highest credit risk in the portfolio.
1999 compared to 1998
On a tax equivalent basis interest income increased by $48.6 million
for 1999 as compared to 1998. On a tax equivalent basis the yield on earning
assets was 9.29% for 1999 as compared to 9.83% for 1998. The increase in
interest income results from the growth in the average of interest earning
assets of $721.2 million in 1999.
For the loan portfolio, the growth in 1999 of $234.2 million in the average
volume of commercial loans (including commercial real estate loans) represented
an increase of $21.2 million in income due to volume, partially offset by a
reduction of $1.6 million in interest income due to rate. The average portfolio
of construction loans increased by $75.8 million for 1999, representing a
positive volume variance of $7.4 million. The average portfolio of residential
mortgage loans increased by $37.1 million for 1999, representing a
20
<PAGE>
positive volume variance of $3.7 million. The average finance lease portfolio
(mostly composed of consumer loans) increased by $25.5 million in 1999,
representing a positive volume variance of $3.5 million. The decrease of $18.9
million in the average volume of consumer loans in 1999 caused a negative
variance in interest income due to volume of $2.6 million. The increase in the
commercial real estate, construction and commercial loans portfolio resulted
from the Corporation's strategy to diversify its asset base, which was
concentrated in consumer loans. The consumer loan portfolio decreased as a
result of the tighter underwriting policies implemented during 1997.
For the investment portfolio, the average volume of mortgage backed
securities increased by $261.6 million in 1999. The tax equivalent yield on
mortgage backed securities was 7.12% in 1999 and 7.50% in 1998. The portfolio of
mortgage backed securities contributed $19.1 million in interest income due to
volume net of $4.4 million decrease in interest income due to rate. The average
volume of government obligations increased by $96 million for 1999 as compared
to 1998, causing a total increase in interest income of $5 million.
Interest expense increased by $28.2 million for 1999 as compared to
1998. This was the result of the increase in the average volume of interest
bearing liabilities of $606 million for 1999 as compared to 1998 with a volume
variance of $29.7 million. However, the negative variance was partially offset
by a decrease in the cost of interest bearing liabilities from 5.07% for 1998 to
5.00% for 1999 causing a positive rate variance of $1.5 million for 1999 as
compared to 1998.
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 interest
earning assets of $582.7 million.
For the investment portfolio, the average volume of mortgage backed
securities increased by $603.8 million in 1998. 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 a $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, resulting in a total decrease in interest income of $7
million.
For the loan portfolio, the growth in the average volume of commercial
loans (including commercial real estate loans) of $140.6 million in 1998
represented an increase of $13.1 million in income due to volume, partially
offset by a reduction of $1.6 million in interest income due to rate. In 1998
the average volume of residential real estate and construction loans increased
by $6.8 million and $8.7 million, respectively, representing an increase in
interest income of $1.3 million and $.8 million, respectively. The decrease of
$58.3 million in the average volume of consumer loans caused a negative variance
in interest income due to volume of $7.9 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 tighter
underwriting policies implemented during 1997.
Interest expense increased by $24.7 million for 1998 as compared to
1997. This results from the increase in the average volume of interest bearing
liabilities of $528 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.
21
<PAGE>
Provision for Loan Losses
During 1999, the Corporation provided $48 million for loan losses, a
significant decrease compared to $76 million in 1998 and $55.7 million in 1997.
The provision for loan losses recorded in 1999 reflects the improvements in the
credit quality of the loan portfolio. Net charge offs for 1999 amounted to $44
million, a significant reduction compared to net charge offs for 1998 of $65.9
million and of $53.2 million for 1997. Net charge offs to average loans
outstanding has significantly improved to 1.87% as compared to 3.29% and 2.79%
for 1998 and 1997, respectively.
The allowance activity for 1999, and previous four years was as
follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1999 1998 1997 1996 1995
(Dollars in thousands)
Allowance for loan losses, beginning of period $67,854 $57,712 $55,254 $55,009 $37,413
Provision for loan losses 47,960 76,000 55,675 31,582 30,894
------- -------- ------- -------- --------
Loans charged off:
Commercial real estate (51) (168) (284) (492) (403)
Commercial (774) (712) (597) (781) (3,299)
Finance leases (793) (3,438) (1,399) (161)
Consumer (52,047) (67,906) (57,311) (33,295) (10,821)
Recoveries and other adjustments 9,634 6,366 6,374 3,392 1,225
-------- --------- --------- --------- --------
Net charge offs (44,031) (65,858) (53,217) (31,337) (13,298)
-------- -------- -------- -------- -------
Allowance for loan losses, end of period $71,784 $67,854 $57,712 $55,254 $55,009
======= ======= ======= ======= =======
Allowance for loan losses to year end total
loans and loans held for sale 2.61% 3.20% 2.95% 2.91% 3.53%
Net charge offs to average loans
outstanding during the period 1.87% 3.29% 2.79% 1.80% .93%
</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, 1999 1998 1997
(In thousands)
Other fees on loans $ 12,887 $11,158 $10,899
Service charges on deposit accounts 8,540 7,844 7,363
Fees on loans serviced for others 864 1,617 2,670
Rental income 2,610 2,292 1,935
Other operating income 6,592 5,137 4,866
-------- ------- -------
Other income before gain on
sale of investments and trading 31,493 28,048 27,733
Gain on sale of investments 1,377 26,827 11,388
Trading (loss) income (8) 3,365 745
------------ --------- ----------
Total $32,862 $58,240 $39,866
======= ======= =======
</TABLE>
22
<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 fees on loans consist mainly of credit card fees and late charges
collected on loans. The increase in this source of income to $12.9 million in
1999 from $11.2 million in 1998 and $10.9 million in 1997 was due to fees
generated on the increased portfolio of commercial loans.
Service charges on deposit accounts represent an important and stable
source of other income for the Corporation. This source of income increased to
$8.5 million in 1999 from $7.8 million in 1998 and $7.4 million in 1997.
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. The
decrease in this account is due to the continued repayment of the auto loan
portfolio.
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 approximately $2 million in the past three
years.
The other operating income category is composed of various types of
service fee such as check fees and rental of safe deposit boxes. Other operating
income also includes earned discounts on tax credits purchased and utilized
against income tax payments.
Gains on sale of investment securities amounted to $1.4 million in
1999, $26.8 million in 1998 and $11.4 million in 1997. These gains reflect
market opportunities that arose and that are in consonance to the Corporation's
investment policies.
Other Operating Expense
Other operating expenses amounted to $101.3 million for 1999 as compared to
$91.8 million for 1998 and $83.3 million for 1997. The following table presents
the components of other operating expenses.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1999 1998 1997
(In thousands)
Salaries and benefits $ 48,546 $43,185 $38,644
Occupancy and equipment 20,137 18,155 16,101
Deposit insurance premium 1,096 971 1,040
Other taxes and insurance 5,683 5,607 5,536
Professional and service fees 6,672 5,820 4,883
Business promotion 5,896 5,922 4,993
Communications 4,667 4,330 4,364
Real estate owned operations (303) 42 (21)
Amortization of debt issue costs 612 691 788
Expense of rental equipment 1,478 1,226 1,184
Other 6,789 5,849 5,756
---------- --------- --------
Total $101,273 $91,798 $83,268
======== ======= =======
</TABLE>
23
<PAGE>
Management's goal has been to make expenditures that directly
contribute to increase the efficiency and profitability of the Corporation. This
control over other operating expenses has been an important factor contributing
to the increase in earnings in recent years. In 1999, the Corporation started
the implementation of a cost restructuring project, which has transformed the
operations and processes toward a more cost efficient institution. The savings
generated by this effort have been invested mainly in new technology. The
Corporation's efficiency ratio, which is the ratio of other operating expenses
to the sum of net interest income and other recurring income, was 46.62% for
1999 as compared to 46.46% and 45.45% for 1998 and 1997, respectively.
The increase in operating expenses for 1999 is mainly the result of the
investments made in new technology, the expansion of the Corporation's branch
network, the acquisition of new business and branches and the staffing of the
commercial lending business to support the growth in the portfolio. During 1999
the Corporation opened a new full-service branch and two in-store branches. In
July of 1999, the Corporation acquired the Royal Bank's operations in Puerto
Rico including its full service branch in the financial district of Hato Rey. In
August of 1999, the Corporation acquired the credit card portfolio of Western
Auto. In December of 1999, the Corporation acquired four branches from CitiBank.
To emphasize the commercial lending area, the Corporation recruited new officers
for the origination of loans to the middle market throughout selected branches.
The salary and benefits category was also 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 the result of the
enhancement of hardware and software through system conversions, which have
enabled the Corporation to offer new products, and improve customer service and
portfolio servicing. 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 1999 is
primarily attributed to the credit card processing and assessment fees resulting
from the increase in the credit card portfolio and the increase in the number of
accounts managed due to the acquisition of the Western Auto portfolio. The
increase in credit card fee income exceeded the related processing costs.
Business promotion costs amounted to $5.9 million for 1999 as compared
to $5.9 million in 1998, and $5 million for 1997. Business promotion expenses
have been incurred to increase loan and deposit volumes. In addition, in 1999
the Corporation launched a distinct publicity campaign to promote its new "Bonus
account" and a corporate image.
Income Tax Expense
The provision for income tax amounted to $7.3 million (or 11% of
pre-tax earnings) for 1999 as compared to $4.8 million (or 8% of pre-tax
earnings) in 1998, and $8.1 million (or 15% of pre-tax earnings) in 1997. 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. For additional information relating to taxes, see Note
28 of the Corporation's financial statements "Income Taxes."
24
<PAGE>
FINANCIAL CONDITION
The following table presents an average balance sheet as of the dates
indicated:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
December 31, 1999 1998 1997
(In thousands)
Assets
Interest earning assets:
Deposits at banks and other
short-term investments $ 27,344 $ 40,766 $ 67,969
Government obligations 415,742 319,777 404,517
Mortgage backed securities 1,294,195 1,032,632 428,804
Other investment 18,646 1,150 519
FHLB stock 16,170 10,252 10,150
---------- ------------ -----------
Total investments 1,772,097 1,404,577 911,959
--------- ----------- ----------
Consumer loans 1,013,782 1,032,704 1,090,991
Residential real estate loans 327,700 290,564 283,799
Construction loans 94,940 19,169 10,488
Commercial loans 847,917 613,697 473,093
Finance leases 68,577 43,108 50,823
------------ ------------ -------------
Total loans 2,352,916 1,999,242 1,909,194
----------- ----------- -----------
Total interest earning assets (1) 4,125,013 3,403,819 2,821,153
Total non-interest earning assets 47,768 89,717 91,355
------------- ------------- -------------
Total assets $4,172,781 $3,493,536 $2,912,508
========== ========== ==========
Liabilities and stockholders' equity
Interest bearing liabilities:
Interest bearing checking
accounts $ 140,690 $ 123,847 $ 116,852
Savings accounts 413,662 398,249 400,998
Certificate accounts 1,373,263 972,433 985,124
--------- ----------- ----------
Interest bearing deposits 1,927,615 1,494,529 1,502,974
Other borrowed funds 1,728,913 1,559,892 1,012,757
FHLB advances 8,451 4,515 15,157
------------ ------------- --------
Total interest bearing liabilities 3,664,979 3,058,936 2,530,888
Total non-interest bearing liabilities 212,993 182,369 168,515
----------- ------------ ------------
Total liabilities 3,877,972 3,241,305 2,699,403
Stockholders' equity 294,809 252,231 213,105
------------ ------------ ------------
Total liabilities and stockholders' equity $4,172,781 $3,493,536 $2,912,508
========== ========== ==========
</TABLE>
(1) Net of the allowance for loan losses and the valuation on investments
securities available for sale.
25
<PAGE>
Assets
The Corporation's total assets at December 31, 1999 amounted to $4,722
million, $704 million over the $4,017 million at December 31, 1998. The increase
in total assets results primarily from the growth in total loans receivable (net
of the allowance for loan losses) of $621 million.
The following table presents the composition of the loan portfolio 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, 1999 Total 1998 Total 1997 Total 1996 Total 1995 Total
(Dollars in thousands)
Residential real
estate loans $ 473,563 17 $ 303,011 14 $ 292,604 15 $ 297,246 16 $ 319,758 21
---------- -- ---------- -- ---------- -- ---------- -- ---------- --
Commercial real
estate loans 371,643 14 332,219 16 306,734 15 256,227 14 210,645 13
Construction loans 132,068 5 62,963 3 9,279 1 10,209 1 9,233 1
Commercial loans 655,417 24 368,549 17 235,571 12 174,770 9 156,369 10
----------- -- ---------- -- ----------- -- ----------- --- ----------- --
Total commercial 1,159,128 43 763,731 36 551,584 28 441,206 24 376,247 24
---------- -- ----------- -- ----------- -- ----------- -- ----------- --
Finance leases 85,692 3 52,214 3 42,500 2 58,481 3 32,965 2
Consumer loans 1,026,985 37 1,001,098 47 1,072,613 55 1,099,141 57 827,636 53
---------- ---- ----------- ---- ----------- --- ----------- ---- ----------- ----
Total $2,745,368 100 $2,120,054 100 $1,959,301 100 $1,896,074 100 $1,556,606 100
========== === ========== === ========== === ========== === ========== ===
</TABLE>
During 1999 the Corporation continued its strategy of diversifying its
loan portfolio composition through the origination and purchase of commercial
loans. This resulted in a significant increase of $395.4 million in the
commercial loan portfolio. This increase includes approximately $90 million in
commercial loans purchased from Royal Bank of Puerto Rico. Residential real
estate loans increased in 1999 by $170.6 million as a result of new resources
added to this line of business. Finance leases, which are mostly composed of
loans to individuals to finance the acquisition of an auto, increased by $33.5
million. Consumer loans increased by $25.9 million in 1999 as a result of the
acquisition of a $42 million credit card portfolio from Western Auto, offset by
a decrease in the rest of the portfolio of $16.1 million.
26
<PAGE>
The Corporation's investment portfolio at December 31, 1999 amounted to
$1,811 million, in line with the investment portfolio of $1,801 million at
December 31, 1998.
The composition and tax equivalent weighted average interest rates of the
Corporation's earning assets at December 31, 1999 were as follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Amount Weighted
(In thousands) Average Rate
Money market instruments $ 35,217 4.64%
Government obligations 437,705 6.74%
Mortgage backed securities 1,223,873 7.20%
FHLB of N.Y. stock 17,827 6.81%
Other investment 96,541 7.33%
--------------
Total investments 1,811,163 7.04%
------------
Consumer loans 1,026,985 15.02%
Residential real estate loans 473,563 8.94%
Construction loans 132,068 8.88%
Commercial and commercial real estate loans 1,027,060 8.15%
Finance leases 85,692 12.41%
----------------
Total loans(1) 2,745,368 11.02%
--------------
Total earning assets $ 4,556,531 9.44%
=============
</TABLE>
(1) Excludes the reserve for loan losses. Generally, non-accruing loans were
included in this analysis as if they were accruing interest.
27
<PAGE>
Non-performing Assets
Total non-performing assets are the sum of non-accruing loans, OREO's
and other repossessed properties. Non-accruing loans are loans as to which
interest is no longer being recognized. When loans fall into non-accruing
status, all previously accrued and uncollected interest is charged against
interest income.
At December 31, 1999, total non-performing assets amounted to $57
million (1.22% of total assets) as compared to $63 million (1.57% of total
assets) at December 31, 1998 and $63 million (1.89% of total assets) at December
31, 1997. The Corporation's reserve to non-performing loans was 133.4% at
December 31, 1999 as compared to 119.1% and 109.0% at December 31, 1998 and
1997, respectively.
Past due loans are loans delinquent 90 days or more as to principal
and/or interest, and still accruing interest.
The following table presents non-performing assets at the dates
indicated. The presentation of non-performing assets was changed for 1999 and
previous four years to exclude past due and still accruing loans to conform it
to the industry practice.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
December 31, 1999 1998 1997 1996 1995
(Dollars in
thousands)
Non-accruing loans:
Residential real estate $ 8,633 $ 9,151 $ 6,963 $ 8,814 $ 9,309
Commercial and commercial real estate 17,975 19,355 16,869 11,568 18,979
Finance leases 2,482 1,716 4,560 5,125 297
Consumer 24,726 26,736 24,547 25,655 26,085
-------- -------- -------- -------- --------
53,816 56,958 52,939 51,162 54,670
-------- -------- -------- -------- --------
Other real estate owned (OREO) 517 3,642 1,132 1,696 2,991
Other repossessed property 3,112 2,277 8,702 7,566 3,132
--------- ---------- --------- --------- ---------
Total non-performing assets $57,445 $62,877 $62,773 $60,424 $60,793
======= ======= ======= ======= =======
Past due loans $13,781 $15,110 $11,544 $ 9,752 $ 5,544
Non-performing assets to total assets 1.22% 1.57% 1.89% 2.14% 2.50%
Non-performing loans to total loans 1.96% 2.69% 2.70% 2.70% 3.51%
Allowance for loan losses $71,784 $67,854 $57,712 $55,254 $55,009
Allowance to total non-performing loans 133.39% 119.13% 109.02% 108.00% 100.62%
</TABLE>
28
<PAGE>
Non-accruing Loans
Residential Real Estate Loans - The Corporation classifies all real
estate loans delinquent 90 days or more in non-accruing status. Even though
these loans are in non-accruing status, Management considers based on the value
of the underlying collateral and the loan to value ratios, that no material
losses will be incurred in this portfolio. Management's understanding is based
on the historical experience of the Corporation. Non-accruing real estate loans
amounted to $8.6 million (1.82% of total residential real estate loans) at
December 31, 1999, as compared to $9.2 million (3.02% of total residential real
estate loans) and $7 million (2.38% of total residential real estate loans) at
December 31, 1998 and 1997, respectively.
Commercial Loans - The Corporation places all commercial loans
(including commercial real estate and construction loans) 90 days delinquent as
to principal and interest in non-accruing status. The risk exposure of this
portfolio is diversified. Non-accruing commercial loans amounted to $18.0
million (1.55% of total commercial loans) at December 31, 1999 as compared to
$19.4 million (2.53% of total commercial loans) and $16.9 million (3.06% of
total commercial loans) at December 31, 1998 and 1997, respectively. At December
31, 1999, there was only one non-accruing commercial loan of over $1 million,
which is a $2.6 million loan, partially secured by inventory, accounts
receivable and real estate collateral.
Finance Leases - Finance leases are classified as non-accruing when
they are delinquent 90 days or more. Non-accruing finance leases amounted to
$2.5 million (2.90% of total finance leases) at December 31, 1999, compared to
$1.7 million (3.29% of total finance leases) at December 31, 1998, and $4.6
million (10.73% of total finance leases) at December 31, 1997.
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 $24.7 million (2.41% of the
total consumer loan portfolio) at December 31, 1999, $26.7 million (or 2.67% of
the total consumer loan portfolio) at December 31, 1998 and $24.5 million (or
2.29% of the total consumer loan portfolio) at December 31, 1997. The decrease
in the ratio and amount of non-accruing loans was the result of the improvement
on the credit quality of the portfolio. This improvement resulted in a decrease
in charge off of consumer loans to $52 million in 1999 from $67.9 million in
1998, and $57.3 million in 1997.
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.
Repossessed Property
The Repossessed Property category includes repossessed boats and autos
acquired in settlement of loans. Repossessed boats are recorded at the lower of
cost or estimated fair value. Repossessed autos are recorded at the principal
balance of the loans less an estimated loss on the disposition of certain units.
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.
29
<PAGE>
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 $2,565 million at December 31, 1999, as compared
to $1,775 million and $1,595 million at December 31, 1998 and 1997,
respectively.
The following table presents the composition of total deposits.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
December 31, 1999 1998 1997
(Dollars in thousands)
Savings accounts $ 447,946 $ 416,424 $ 403,129
Interest bearing checking accounts 162,601 130,883 121,452
Certificates of deposit 1,742,978 1,054,634 929,955
---------- ----------- ------------
Interest bearing deposits 2,353,525 1,601,941 1,454,536
Non-interest bearing deposits 211,896 173,104 140,099
------------ ------------ -----------
Total $2,565,421 $1,775,045 $1,594,635
========== ========== ==========
Weighted average rate during the
period on interest bearing deposit 4.69% 4.71% 4.80%
Interest bearing deposits:
Average balance outstanding $1,927,614 $1,494,529 $1,502,975
Non-interest bearing deposits:
Average balance outstanding 179,478 145,357 127,256
</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 $751.6 million at December
31, 1999 when compared to December 31, 1998. This fluctuation was mainly due to:
(1) an increase in branch-based deposits of $206.7 million; (2) an increase of
$560 million in brokered certificates of deposits; net of (3) a decrease of $10
million in certificates issued to corporations operating under Internal Revenue
Code Section 936; and (4) a decrease of $5.0 million in certificates issued to
the agencies of the Government of Puerto Rico.
Non-interest bearing deposits increased by $38.8 million in 1999. The
increase in total branch based deposits includes the deposits of the five
branches acquired from other financial institutions.
Borrowings
At December 31, 1999 total borrowings amounted to $1,804 million as
compared to $1,931 million and $1,458 million at December 31, 1998 and 1997,
respectively. The following table presents the composition of borrowings.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
December 31, 1999 1998 1997
(Dollars in thousands)
Federal funds purchased and securities
sold under agreements to repurchase $1,452,151 $1,623,698 $ 965,869
Other short term borrowings 152,484 86,595 231,505
Advances from FHLB 50,000 2,600 29,000
Notes payable 55,500 118,100 132,350
Subordinated notes 93,594 99,496 99,423
------------- ------------ -------------
Total $1,803,729 $1,930,489 $1,458,147
========== ========== ==========
Weighted average rate during the period 5.34% 5.41% 5.67%
</TABLE>
30
<PAGE>
The Corporation uses federal funds purchased, repurchase agreements,
advances from FHLB and notes payable as additional funding sources. The
borrowings of the Corporation consist primarily of federal funds purchased and
securities sold under agreements to repurchase (repurchase agreements) which at
December 31, 1999 amounted to $1,452.2 million or 81% of total borrowings.
Repurchase agreements had a total weighted average cost of 5.07%, during the
year ended December 31, 1999. For more information on borrowings please refer to
Notes 20 through 24 of the Corporation's financial statements.
The composition and weighted average interest rates of interest bearing
liabilities at December 31, 1999, were as follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Amount Weighted
(In thousands) Average rate
Interest bearing deposits $2,353,525 4.94%
Borrowed funds 1,803,729 5.60%
</TABLE>
Capital
During 1999, the Corporation increased its total capital from $270.4
million at December 31, 1998 to $294.9 million at December 31, 1999. Total
capital increased by $24.5 million due to earnings of $62.1 million, the
issuance of 3,600,000 shares of preferred stock at $86.9 million, the issuance
of 13,000 shares of common stock through the exercise of stock options at a cost
of $176,313, reduced by the repurchased shares of common stock at a total cost
of $32.5 million, an unrealized loss on investment securities available for sale
of $77.4 million and cash dividends of $14.7 million.
The Corporation's objective is to maintain a solid capital position
above the "well capitalized" classification under the federal banking
regulations. The Corporation continues to exceed the well capitalized
guidelines. To be in a "well capitalized" position, an institution should have:
(i) a leverage ratio of 5% or greater; (ii) a total risk based capital ratio of
10% or greater; and (iii) a Tier 1 risk-based capital ratio of 6% or greater. At
December 31, 1999 the Corporation had a leverage ratio of 7.47%; a total risk
based capital ratio of 16.16%; and a Tier 1 risk-based capital ratio of 11.64%.
Dividends
In 1999, 1998 and 1997 the Corporation declared four quarterly cash
dividends of $0.09, $0.075 and $0.06 per common share, respectively, for an
annual dividend of $0.36, $0.30 and $0.24, respectively. Total cash dividends
paid on common shares amounted to $10.4 million for 1999 (or a 17.96% dividend
payout ratio), $8.9 million for 1998 (or a 17.12% dividend payout ratio) and
$7.2 million for 1997 (or a 15.14% dividend payout ratio). Dividends declared on
preferred stock amounted to $4.3 million in 1999.
Year 2000
The transition to the year 2000 occurred as expected without any
significant problems on the Corporation's computer systems or any other date
sensitive operating equipment. The expenses incurred to comply with the year
2000 date change amounted to approximately $1.4 million for the year 1999 and
$650,000 for the year 1998.
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.
31
<PAGE>
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 1999. Management considers
that the ranges of the GAP ratio achieved during 1999 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 Asset Liability Management and 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, 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.
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, 1999, there were 641 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
1999:
December $22.81 $19.25
September 24.75 19.75
June 28.50 22.00
March 30.38 22.69
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
32
<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 also 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
quarterly basis the ALCO performs a comprehensive asset/liability review,
examining the measures of interest rate risk described below together with other
matters such as liquidity and capital.
The Corporation uses simulations to measure the effects of changing
interest rates on net interest income. These measures are carried out 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 growth patterns 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, 1999 and 1998 would be $203.3 million
and $207.1 million, respectively, under flat rates, $183.5 million and $185.4
million, respectively, under rising rates, and $222.3 million and $211.0
million, respectively, under falling rates. Assuming a growing balance sheet,
tax equivalent net interest income for 1999 would be $213.5 million under flat
rates (1998 - $209.1 million), $192.9 million under rising rates (1998 - $188.3
million) and $228.4 million under falling rates (1998 - $212.5 million). 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. The projections are carried out for
First BanCorp on a fully consolidated basis.
These simulations are highly complex, and they use many simplifying
assumptions which are intended to reflect the general behavior of the
Corporation over the period in question, but there can be no assurance that
actual events will parallel these assumptions in all cases. For this reason, the
results of these simulations are only approximations of the true sensitivity of
net interest income to changes in market interest rates.
33
<PAGE>
34
<PAGE>
PricewaterhouseCoopers
PricewaterhouseCoopers LLP
PO Box 363566
San Juan PR 00936-3566
Telephone (787) 754-9090
Report of Independent Accountants
To the Board of Directors and Stockholders of First BanCorp:
In our opinion, the accompanying consolidated statements of financial condition
and the related consolidated statements of income, comprehensive income, changes
in stockholders' equity, and cash flows present fairly, in all material
respects, the financial position of First BanCorp and its subsidiaries at
December 31, 1999 and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999 in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
February 25, 2000
CERTIFIED PUBLIC ACCOUNTANTS
(OF PUERTO RICO)
License No. 216 Expires Dec. 1, 2001
Stamp 1603154 of the P.R. Society of
Certified Public Accountants has been
affixed to the file copy of this report
35
<PAGE>
36
<PAGE>
FIRST BANCORP
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
December 31,
1999 1998
Assets
Cash and due from banks $ 58,267,929 $ 39,416,097
--------------- --------------
Money market instruments 35,217,064 525,669
---------------- --------------
Investment securities available for sale, at market:
United States and Puerto Rico Government obligations 340,356,015 268,611,106
Mortgage backed securities 1,017,176,782 1,492,538,909
Other investments 96,541,374 1,620,000
----------------- --------------
Total investment securities available for sale 1,454,074,171 1,762,770,015
--------------- --------------
Investment securities held to maturity, at cost:
United States and Puerto Rico Government obligations 97,349,381 26,921,836
Mortgage backed securities 206,696,658
---------------- ----------------
Total investment securities held to maturity 304,046,039 26,921,836
---------------- -----------------
Federal Home Loan Bank (FHLB) stock 17,826,500 10,270,600
----------------- -----------------
Loans held for sale 37,794,078 20,641,628
Loans receivable 2,707,574,019 2,099,412,756
--------------- ---------------
Total loans 2,745,368,097 2,120,054,384
Allowance for loan losses (71,784,237) (67,854,066)
----------------- ----------------
Total loans - net 2,673,583,860 2,052,200,318
--------------- ---------------
Other real estate owned 517,405 3,642,525
Premises and equipment - net 61,947,817 51,537,192
Accrued interest receivable 17,917,526 10,738,072
Due from customers on acceptances 2,738,176 2,392,338
Other assets 95,431,678 56,937,413
----------------- -----------------
Total assets $4,721,568,165 $4,017,352,075
============== ==============
Liabilities and Stockholders' Equity
Liabilities:
Non-interest bearing deposits $ 211,896,459 $ 173,103,709
Interest bearing deposits 2,353,525,177 1,601,941,185
Federal funds purchased and securities
sold under agreements to repurchase 1,452,151,222 1,623,697,988
Other short-term borrowings 152,484,084 86,594,710
Advances from FHLB 50,000,000 2,600,000
Notes payable 55,500,000 118,100,000
Bank acceptances outstanding 2,738,176 2,392,338
Accounts payable and other liabilities 54,776,718 39,058,247
---------------- -----------------
4,333,071,836 3,647,488,177
--------------- -----------------
Subordinated notes 93,594,080 99,495,830
---------------- -----------------
Stockholders' equity:
Preferred Stock, authorized 50,000,000 shares: issued and
outstanding 3,600,000 shares at $25.00 liquidation value
per share 90,000,000
---------------- ----------------
Common stock, $1.00 par value, authorized 250,000,000 shares;
issued 29,612,552 shares 29,612,552 29,599,552
Less: Treasury Stock (at par value) (1,552,000) (100,000)
-------------- --------------
Common stock outstanding 28,060,552 29,499,552
-------------- -------------
Additional paid-in capital 19,863,466 23,575,936
Capital reserve 40,000,000 30,000,000
Legal surplus 126,792,514 53,454,469
Retained earnings 58,834,676 125,088,180
Accumulated other comprehensive income - unrealized gain (loss)
on securities available for sale, net of tax (68,648,959) 8,749,931
---------------- ---------------
294,902,249 270,368,068
---------------- ---------------
Contingencies and commitments --------------- ---------------
Total liabilities and stockholders' equity $4,721,568,165 $4,017,352,075
============== ==============
The accompanying notes are an integral part of these statements.
</TABLE>
37
<PAGE>
FIRST BANCORP
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Year ended December 31,
1999 1998 1997
--------------- -------------- ------------
Interest income:
Loans $260,741,177 $231,513,730 $225,524,452
Investment securities 106,770,856 88,312,096 55,310,691
Short-term investments 450,248 729,417 3,654,806
Dividends on FHLB stock 1,100,823 743,161 670,156
------------- ---------------- ----------------
Total interest income 369,063,104 321,298,404 285,160,105
----------- ------------- -------------
Interest expense:
Deposits 90,489,121 70,418,359 72,147,084
Short-term borrowings 79,455,499 69,494,151 39,460,518
Notes payable 12,914,538 14,965,751 17,958,092
Advances from FHLB 470,590 251,707 863,599
------------- ---------------- --------------
Total interest expense 183,329,748 155,129,968 130,429,293
----------- ------------- -----------
Net interest income 185,733,356 166,168,436 154,730,812
Provision for loan losses 47,960,500 76,000,000 55,675,500
------------ ------------- ------------
Net interest income after provision for loan losses 137,772,856 90,168,436 99,055,312
----------- ------------- ------------
Other income:
Other fees on loans 12,886,541 11,157,852 10,898,586
Service charges on deposit accounts 8,540,291 7,843,837 7,363,369
Trading (loss) income (7,946) 3,364,843 744,789
Fees on loans serviced for others 864,278 1,617,292 2,669,673
Gain on sale of investments 1,376,672 26,827,417 11,388,137
Rental income 2,609,657 2,291,814 1,935,169
Other operating income 6,592,940 5,136,795 4,865,788
------------ ------------- -------------
Total other income 32,862,433 58,239,850 39,865,511
------------ ------------ ------------
Other operating expenses:
Employees' compensation and benefits 48,545,839 43,185,324 38,644,042
Occupancy and equipment 20,137,354 18,154,663 16,101,054
Taxes and insurance 6,778,354 6,577,894 6,575,896
Net (gain) cost of operations and disposition of
other real estate owned (303,359) 42,359 (21,128)
Amortization of debt issuance costs 612,404 691,411 787,745
Other 25,501,303 23,146,048 21,180,662
------------ ------------ -----------
Total other operating expenses 101,271,895 91,797,699 83,268,271
----------- ------------ ------------
Income before income tax provision 69,363,394 56,610,587 55,652,552
Income tax provision 7,288,445 4,798,200 8,125,000
------------- ------------- ------------
Net income $62,074,949 $ 51,812,387 $47,527,552
=========== ============ ===========
Earnings per common share - basic $2.00 $1.75 $1.58
Earnings per common share - diluted $1.98 $1.74 $1.58
The accompanying notes are an integral part of these statements.
</TABLE>
38
<PAGE>
FIRST BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Year ended December 31,
1999 1998 1997
Cash flows from (for) operating activities:
Net income $ 62,074,949 $ 51,812,387 $ 47,527,552
-------------- ----------------- ---------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 7,645,035 7,827,866 7,281,936
Provision for loan losses 47,960,500 76,000,000 55,675,500
Increase in taxes payable 2,345,647 3,454,049 1,464,869
Increase in deferred tax asset (6,702,849) (11,454,033) (1,765,992)
(Increase) decrease in accrued interest receivable (7,179,454) 2,297,862 (3,843,610)
Increase (decrease) in accrued interest payable 10,056,988 1,072,485 (2,371,552)
Amortization of deferred loan fees (costs) (680,735) 881,411 (30,868)
Net gain on sale of investments securities (1,376,673) (26,827,417) (11,388,137)
Originations of loans held for sale (18,222,990) (9,086,622) (7,668,575)
Proceeds from sale of loans 1,266,787 1,249,543
Decrease in other assets 12,950,921 20,776,413 48,813,231
Increase (decrease) in other liabilities 5,012,929 1,718,242 (3,157,333)
------------------ ------------------ -----------------
Total adjustments 53,076,106 66,660,256 84,259,012
----------------- ----------------- ----------------
Net cash provided by operating activities 115,151,055 118,472,643 131,786,564
----------------- ----------------- ----------------
Cash flows from (for) investing activities:
Principal collected on loans 719,964,127 559,726,839 661,129,038
Loans originated (1,270,442,873) (797,256,751) (819,802,988)
Purchase of loans (118,603,000) (1,330,497)
Sales of investment securities 9,630,866 302,128,585 118,004,497
Purchase of securities held-to-maturity (277,624,203) (18,837,919)
Purchases of securities available-for-sale (6,069,805,410) (6,899,653,771) (8,185,668,960)
Principal repayments and maturities of securities held-to-maturity 500,000 34,782,596 27,591,758
Principal repayments of securities available-for-sale 6,267,048,544 6,061,838,410 7,518,487,101
Additions to premises and equipment (18,055,660) (10,917,891) (6,739,859)
Purchase of FHLB stock (7,555,900) (120,300)
------------------- ---------------- --------------
Net cash used by investing activities (764,943,509) (750,802,780) (705,837,332)
------------------ ------------- ---------------
Cash flows from (for) financing activities:
Net increase (decrease) in deposits 790,376,740 180,410,210 (109,290,923)
Net increase (decrease) in federal funds purchased and
securities sold under repurchase agreements (172,898,023) 654,760,505 381,012,600
Net increase (decrease) in other short-term borrowings 65,889,375 (144,910,185) 231,504,896
FHLB-N.Y. advances taken/paid 47,400,000 (26,400,000) 14,900,000
Payments of notes payable (68,501,750) (14,177,660) (54,010,993)
Decrease (increase) in debt securities issuance cost 1,211,219 (1,049,270) 957,972
Dividends (14,657,799) (8,870,832) (7,197,417)
Repurchase of common stock (3,656,420) (6,899,822)
Issuance of preferred stock 86,850,217
Treasury stock acquired (32,510,611) (2,211,250)
Exercise of stock options 176,313 196,501 382,249
--------------------- ---------------------------------------
Net cash provided by financing activities 703,335,681 634,091,599 451,358,562
------------------ --------------------------------
Net increase (decrease) in cash and cash equivalents 53,543,227 1,761,462 (122,692,206)
Cash and cash equivalents at beginning of year 39,941,766 38,180,304 160,872,510
-------------------- -------------------------------------
Cash and cash equivalents at end of year $ 93,484,993 $ 39,941,766$ 38,180,304
=================== ===================================
Cash and cash equivalents include:
Cash and due from banks $ 58,267,929 $ 39,416,097 $ 37,666,068
Money market instruments 35,217,064 525,669 514,236
------------------- ---------------- -----------------
$ 93,484,993 $ 39,941,766 $ 38,180,304
=================== ================ =================
The accompanying notes are integral part of these statements.
</TABLE>
39
<PAGE>
FIRST BANCORP
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Unrealized
gain (loss)on
Additional securities
Preferred Common paid-in Capital Legal Retained available
stock stock capital reserve surplus earnings for sale
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-common stock (7,197,417)
------------ ----------- ---------- ---------- ---------- ---------- ----------
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-common stock (8,870,832)
Common stock split
on May 29, 1998 14,796,526 (14,796,526)
--------------- ------------ ----------- ----------- ---------- ----------- ---------
December 31, 1998 29,499,552 23,575,936 30,000,000 53,454,469 125,088,180 8,749,931
Net income 62,074,949
Change in valuation of
securities available for sale (77,398,890)
Issuance of preferred stock 90,000,000 (3,149,783)
Addition to legal surplus 73,338,045 (73,338,045)
Addition to capital reserve 10,000,000 (10,000,000)
Treasury stock (1,452,000) (726,000) (30,332,611)
Stock options exercised 13,000 163,313
Cash dividends:
Common stock (10,382,797)
Preferred stock __________ __________ __________ __________ __________ (4,275,000) _________
-------------
December 31, 1999 $90,000,000 $28,060,552 $19,863,466 $40,000,000 $126,792,514 $ 58,834,676 $(68,648,959)
=========== =========== =========== =========== ============ ============ =============
The accompanying notes are an integral part of these statements.
</TABLE>
40
<PAGE>
FIRST BANCORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Year ended December 31,
1999 1998 1997
------------ ------------ ------------
Net income $62,074,949 $51,812,387 $47,527,552
----------- ----------- -----------
Other comprehensive income net of tax:
Unrealized (losses) gains on securities:
Unrealized holding (losses) gains
arising during the period (76,501,672) 8,102,283 12,081,362
Less: reclassification adjustment
for gains included in net income 897,218 11,383,796 657,037
------------- ----------- -------------
Total other comprehensive (loss) income (77,398,890) (3,281,513) 11,424,325
----------- ------------- -----------
Comprehensive (loss) income $(15,323,941) $48,530,874 $58,951,877
============ =========== ===========
The accompanying notes are an integral part of these statements.
</TABLE>
41
<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. 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 45 full service banking branches in Puerto Rico
and three in the U.S. Virgin Islands. It also has loan origination offices in
Puerto Rico focusing on consumer loans and residential mortgage loans. In
addition, through its wholly owned subsidiaries, FirstBank operates other
offices in Puerto Rico specializing in small personal loans, finance leases and
vehicle rental. The Bank is subject to the supervision, examination and
regulation of the Office of the Commissioner of Financial Institutions of Puerto
Rico and the Federal Deposit Insurance Corporation (FDIC), which insures its
deposits through the Savings Association Insurance Fund (SAIF).
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 and
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates. Following is a description of
the more significant accounting policies followed by the Corporation:
Principles of consolidation
The consolidated financial statements include the accounts of the
Corporation and its subsidiaries, all 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, amounts due from banks and money market instruments.
42
<PAGE>
Segments of the Corporation and related information
Operating segments are components of the Corporation about which
separate financial information is available based on which Management makes
operating decisions and assesses performance.
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. The Corporation monitors the market value of the underlying
securities as compared to the related receivable, including accrued interest,
and requests additional collateral where deemed appropriate.
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 unrealized gains and losses reported in
earnings.
Available for sale - Securities not classified as trading or
as held to maturity. These securities are carried at fair value, with
unrealized holding gains and losses net of estimated tax effect,
excluded from earnings and reported in other comprehensive income as a
separate component of stockholders' equity.
Premiums and discounts are amortized as an adjustment to interest
income over the life of the related securities using a method that approximates
the interest method. Realized gains or losses on securities are reported in
earnings. When computing realized gains or losses, the cost of securities is
determined on the specific identification method.
43
<PAGE>
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
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.
44
<PAGE>
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 without exceeding 40 years.
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.
Intangible assets
Intangible assets consist of core deposits values which are amortized
using straight line method over ten years.
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. 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.
45
<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
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 1998 and 1997 financial statements have been
reclassified to conform with the 1999 presentation.
46
<PAGE>
Accounting for derivative instruments and hedging activities
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133 "Accounting for
Derivative Instruments and Hedging Activities." This statement establishes
accounting and reporting standards for derivative instruments, including
derivative instruments that are embedded in other contracts, and for hedging
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.
On July 7, 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133". SFAS No. 137 delays the effective date of SFAS No. 133. SFAS
No. 133 would be effective for all fiscal quarters of all fiscal years beginning
after June 15, 2000. 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.
Note 3 - Stockholders' Equity
Common stock
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, 10,000 and 13,000 shares of common stock were issued during 1998 and
1999 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 $0.24 per
share in 1997, of $0.30 per share in 1998, and of $0.36 per share in 1999.
47
<PAGE>
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 1,452,000 shares of common stock at a cost of $32,510,611 during 1999,
317,600 shares of common stock at a cost of $5,867,674 during 1998, and 495,650
shares of common stock at a cost of $6,899,822 during 1997. The number of shares
were adjusted to recognize the May 1998 stock split. From the total amount of
stocks repurchased, 1,552,000 shares were held as treasury stock at December 31,
1999 (1998 - 100,000 shares) and were available for general corporate purposes.
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.
Preferred stock
The Corporation has 50,000,000 shares of authorized non-cumulative and
non-convertible 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. On April 30, 1999, the Corporation issued 3,600,000
shares of preferred stock. The liquidation value per share is $25. Annual
dividends of $1.78125 per share, are payable monthly, if declared by the board
of directors. 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.
48
<PAGE>
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.
49
<PAGE>
Capital standards established by regulations require the Corporation to
0maintain 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, 1999 and 1998, the Corporation exceeded the
requirements for an adequately capitalized institution.
At December 31, 1999 and 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 and its banking subsidiary's regulatory capital
positions were as follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Regulatory requirements
For capital
Actual adequacy purposes To be well capitalized
Amount Ratio Amount Ratio Amount Ratio
At December 31, 1999 (Dollars in thousands)
Total Capital (to Risk-Weighted Assets):
First BanCorp $468,261 16.16% $231,758 8% $289,697 10%
FirstBank 409,173 14.26% 229,608 8% 287,010 10%
Tier I Capital (to Risk-Weighted Assets):
First BanCorp $337,284 11.64% $115,879 4% $173,818 6%
FirstBank 279,383 9.73% 114,804 4% 172,206 6%
Tier I Capital (to Average Assets):
First BanCorp $337,284 7.47% $135,473 3% $225,789 5%
FirstBank 279,383 6.26% 133,953 3% 223,255 5%
Regulatory requirements
For capital
Actual adequacy purposes To be well capitalized
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% $114,204 3% $190,340 5%
FirstBank 244,989 6.44% 114,204 3% 190,340 5%
</TABLE>
50
<PAGE>
Note 5 - Stock Option Plan
The Corporation has a stock option plan covering certain employees. The
options granted under the plan cannot exceed 20% of the number of common shares
outstanding. Each option provides for the purchase of one share of common stock
at a price not less than the fair market value of the stock on the date the
option is granted. 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 per Option
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 296,000 24.85
Exercised (13,500) 14.56
-------
At December 31, 1998 756,500 16.16
Granted 223,000 19.99
Exercised (13,000) 13.56
---------
At December 31, 1999 966,500 17.07
=========
</TABLE>
The options outstanding at December 31, 1999 have an original
expiration term of ten years and all of them are exercisable. The exercise price
of the options outstanding at December 31, 1999 ranges from $5.79 to $28.38 and
the weighted average remaining contractual life is approximately eight years.
Following is additional information concerning the stock options
outstanding at December 31, 1999. 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 Price Contractual
Options per Option Maturity
234,000 $ 5.79 November 2004
213,500 15.63 November 2007
60,000 19.19 February 2008
7,000 28.38 April 2008
40,000 27.09 May 2008
12,000 26.56 June 2008
177,000 26.00 November 2008
2,000 25.94 February 2009
3,500 26.44 April 2009
15,000 22.56 August 2009
202,500 19.63 November 2009
-------
966,500
=======
</TABLE>
51
<PAGE>
Note 6 - Earnings Per Common Share
The calculations of earnings per common share for the years ended December
31, 1999, 1998 and 1997 follow (in thousands,except per share data):
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Year ended December 31,
1999 1998 1997
Net Income $62,075 $51,812 $47,528
Less: Preferred stock dividend (4,275)
--------- -------- -------
Net income-attributable to common stockholders $57,800 $51,812 $47,528
======= ======= =======
Earnings per common share-basic:
Net income - available to common stockholders $57,800 $51,812 $47,528
------- ------- -------
Weighted average common shares outstanding 28,941 29,586 30,036
-------- ------- -------
Earnings per common share-basic $ 2.00 $ 1.75 $ 1.58
========= ======== ========
Earnings per common share-diluted:
Net income - available to common stockholders $57,800 $51,812 $47,528
------- ------- -------
Weighted average common shares and share equivalents:
Average common shares outstanding 28,941 29,586 30,036
Common stock equivalents - Options 258 272 168
-------- --------- -----------
Total 29,199 29,858 30,204
------ ------- --------
Earnings per common share-diluted $ 1.98 $ 1.74 $ 1.58
======== ========= =========
</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: 1999 1998 1997
- - ----------------------------------- ---------- --------- --------
Net income-available to common stockholders $56,341 $48,592 $46,354
Earnings per common share-basic $1.95 $1.64 $1.55
Earnings per common share-diluted $1.93 $1.63 $1.54
</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 1999, 1998 and 1997 was estimated
using the following assumptions: weighted dividend growth of 22.38% (1999) and
21.97% (1998); expected life of 10 years; weighted expected volatility of 29.46%
(1999), 36.08% (1998), and 29.8% (1997), and weighted risk-free interest rate of
6.04% (1999), 5.10% (1998) and 5.76% (1997). The weighted estimated fair value
of the options granted was $6.54 (1999), $10.95 (1998) and $4.89 (1997) per
option.
Note 7 - Cash and Due from Banks
The Corporation is required by law to maintain average reserve
balances. The amount of those reserve average balances was approximately
$40,975,700 at December 31, 1999 (1998 - $34,867,200).
52
<PAGE>
Note 8 - Securities Purchased Under Agreements To Resell
At December 31, 1999 and 1998, there were no securities purchased under
agreements to resell. The maximum aggregate balance outstanding at any month-end
during 1999 was approximately $17,421,000 (1998 - $209,232,000). The average
aggregate balance during 1999 was $1,577,504 (1998 - $15,009,052). 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 - Investment Securities Held For Trading
At December 31, 1999 and 1998, there were no securities held for
trading purposes or options on such securities.
All trading instruments are subject to market risk, the risk that
future changes in market conditions, such as fluctuations in market prices or
interest rates, may make an instrument less valuable or more onerous. The
instruments are accounted for at market value, and their changes are reported
directly in earnings. The Corporation may write options on trading securities as
part of its trading activities. Also the Corporation may enter in securities
sold not yet purchased transactions for trading purposes. These transactions are
carried at market value. Net gains and losses resulting from these transactions
are recorded in the trading income or loss account.
The net loss from the sale of trading securities amounted to $7,946 for
the year ended December 31, 1999 (a gain of $3,364,843 for 1998 and a gain of
$744,789 for 1997), and were included in earnings as trading income.
Note 10 - Investment Securities Held To Maturity
The amortized cost, unrealized gains and losses, approximate market
value, taxable equivalent weighted average yield and maturities of investment
securities held to maturity at December 31, 1999 and 1998 were as follows
(dollars in thousands):
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
December 31, 1999 December 31, 1998
------------------------------------------------ ----------------------------------------------
Weighted Weighted
Amortized Unrealized Market average Amortized Unrealized Market average
cost gains (losses) value yield% cost gains (losses) value yield%
Obligations of U.S.
Government Agencies:
Within 1 year $ 500 $(2) $ 498 3.37
After 5 to 10 years $10,000 $ (166) $9,834 8.34
After 10 years 83,756 (9,255) 74,501 9.15 23,051 $569 23,620 10.20
Puerto Rico Government
Obligations:
After 10 years 3,593 $57 3,650 7.46 3,371 204 3,575 7.41
--------- --- ------- --------- --------- ------ ----- --------
Total $97,349 $57 $(9,421) $87,985 9.00 $26,922 $ 773 $(2) $27,693 9.73
======= === ======= ======= ======= ===== === =======
Mortgage backed securities:
Government National
Mortgage Association
(GNMA) certificates
After 10 years $206,697 $(7,851) $198,845 8.18
======== ======= ========
</TABLE>
Expected maturities of mortgage backed securities and certain other
securities might differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
53
<PAGE>
Note 11 -Investment Securities Held For Sale
The amortized cost, gross unrealized gains and losses, approximate
market value, taxable equivalent weighted average yield and maturities of
investment securities held for sale at December 31, 1999 and 1998 were as
follows (dollars in thousands):
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
December 31, 1999 December 31, 1998
------------------------------------------------ ----------------------------------------------
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 $39,577 $(4,302) $35,275 4.90
After 10 years 67,468 (9,621) 57,847 5.84
Obligations of other U.S.
Government Agencies:
Within 1 year 219,065 $53 (58) 219,060 6.11 $240,040 $51 $240,091 5.00
After 10 years 27,457 (5,127) 22,330 8.36 25,619 $(159) 25,460 8.32
Puerto Rico Government
Obligations:
After 10 years 5,880 ___ (36) 5,844 8.00 2,964 96 ____ 3,060 7.18
----------- ----- ---------- ----------- ------ ----------
Total $359,447 $53 $(19,144) $340,356 6.13 $268,623 $147 $(159) $268,611 5.35
======== === ======== ======== ======== ==== ===== ========
Mortgage backed securities- Federal Home Loan Mortgage Corporation (FHLMC)
certificates:
Within 1 year $ 4,564 $ 19 $ 4,583 7.84
After 1 to 5 years $ 997 $ (25) $ 972 8.07 1,001 9 1,010 8.14
After 5 to 10 years 9,905 (255) 9,650 7.02 10,169 149 10,318 7.68
After 10 years 22,872 $11 (155) 22,728 7.26 32,363 802 33,166 9.07
------ --- ---- ------ -------- ------ -------- ----------
33,774 11 (435) 33,350 7.21 48,097 979 49,077 8.64
------ ---- ---- ------ ----------- ------- ------- ---------
Government National
Mortgage Association
(GNMA) certificates:
After 5 to 10 years 3,674 (46) 3,628 6.39
After 10 years 1,039,069 1,410 (76,054) 964,425 6.95 1,411,369 9,936 $(357)1,420,947 6.91
--------- ----- ------- ------- --------- ----- ----- ---------
1,042,743 1,410 (76,100) 968,053 6.95 1,411,369 9,936 (357)1,420,947 6.91
--------- ----- ------ ------- --------- ----- ------ ---------
Federal National
Mortgage Association
(FNMA) certificates:
Within 1 year 157 1 158 8.23
After 1 to 5 years 644 (7) 637 8.75 2,691 30 2,721 8.40
After 5 to 10 years 188 (6) 182 8.08 274 11 285 10.28
After 10 years 11,109 299 (46) 11,362 10.34 14,299 605 (10) 14,894 10.35
-------- ----- ----- -------- -------- ----- ----- ----------
11,941 299 (59) 12,181 10.22 17,421 647 (10) 18,058 10.02
-------- ----- ----- -------- -------- ----- ----- ----------
Mortgage pass through
certificates:
After 10 years 2,463 757 3,220 11.70 2,764 767 3,530 9.33
--------- ----- ------- -------- ---------- ----- --------------------
Real Estate Mortgage
Interest Conduit:
Within 1 year 361 12 373 17.33
After 1 to 5 years 865 62 927 11.63
---------- ------ -------- ---------- ---------- ------- ------ ----------
Total $1,091,282 $2,489 $(76,594) $1,017,177 7.01 $1,480,516 $12,391 $(367) $1,492,539 7.02
========== ====== ======== ========== ========== ======= ===== ==========
Other investment:
Within 1 year $ 67,359 $1,914 $69,273 6.73
After 1 to 5 years 14,750 $ (88) 14,662 8.91
After 5 to 10 years 11,779 (162) 11,617 8.69 $ 1,964 $(344) $1,620 15.76
After 10 years 990 990 8.38
----------- ------ ----- -------- ------ ----- ------ ------
Total $ 94,878 $1,914 $(250) $96,542 7.33 $1,964 $(344) $1,620 15.76
============ ====== ===== ======= ====== ===== ======
</TABLE>
54
<PAGE>
Maturities for mortgage backed securities are based upon contractual
terms assuming no repayments. The weighted average yield on investment
securities held for sale is based on amortized cost, therefore it does not give
effect to changes in fair value.
At December 31, 1999, the net unrealized loss of $68,648,959 (1998 -
net unrealized gain of $8,749,931) on securities available for sale after the
estimated income tax of $22,882,986 (1998 - $2,916,644) was reported as a
separate component of stockholders' equity. For 1999 the change in the net
unrealized holding gain on the available for sale securities amounted to a loss
of $103,198,520 (1998 - a loss of $4,375,351) before estimated income taxes.
For 1999, proceeds from the sale of securities amounted to $9.6 million
(1998 - $302.1 million, 1997 - $118.0 million) resulting in a realized gain of
$1.4 million (1998 - $26.8 million, 1997 -$11.4 million). No losses were
recognized on those sales.
Note 12 - Federal Home Loan Bank (FHLB) Stock
At December 31, 1999 and 1998, there were investments in FHLB stock
with book value of $17,826,500 and $10,270,600, 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,
1999 1998 1997
Mortgage-backed securities:
Taxable $ 4,137 $ 5,230 $ 6,239
Exempt 77,900 63,131 24,481
-------- -------- --------
$ 82,037 $68,361 $30,720
======== ======= =======
Other investment securities:
Taxable $ 1,528 $ 801 $ 1,372
Exempt 24,758 20,621 27,544
------- -------- --------
$26,286 $21,422 $28,916
======= ======= =======
</TABLE>
55
<PAGE>
Note 14 - Loans Receivable
The following is a detail of the loan portfolio:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
December 31, December 31,
1999 1998
Residential real estate loans:
Secured by first mortgages:
Conventional $ 395,884,613 $ 237,560,711
Insured by government agencies:
Federal Housing Administration and Veterans
Administration 6,543,487 8,185,232
Puerto Rico Housing Bank and Finance Agency 32,928,102 38,515,744
Secured by second mortgages 5,706,225 4,956,196
-------------- ---------------
441,062,427 289,217,883
Deferred loan and commitment fees - net (5,293,370) ( 6,848,311)
-------------- ---------------
Residential real estate loans 435,769,057 282,369,572
------------- -------------
Construction, land acquisition and land improvements 288,301,904 161,498,219
Undisbursed portion of loans in process (156,233,791) (98,535,025)
-------------- --------------
Construction loans 132,068,113 62,963,194
--------------- --------------
Commercial loans:
Commercial loans 655,417,037 368,548,532
Commercial mortgage 371,642,698 332,219,186
-------------- --------------
Commercial loans 1,027,059,735 700,767,718
------------- --------------
Finance leases 85,692,482 52,214,184
--------------- --------------
Consumer and other loans:
Personal 422,722,624 463,052,946
Personal lines of credit 13,029,258 9,535,354
Auto 532,242,160 512,116,471
Boat 37,018,313 32,208,879
Credit card 168,045,087 125,955,592
Home equity reserve loans 2,656,713 3,385,220
Unearned interest (148,835,815) (145,284,440)
--------------- ---------------
1,026,878,340 1,000,970,022
Other 106,292 128,066
------------------ ------------------
Consumer and other loans 1,026,984,632 1,001,098,088
-------------- --------------
Loans receivable 2,707,574,019 2,099,412,756
Loans held for sale 37,794,078 20,641,628
---------------- -----------------
Total loans 2,745,368,097 2,120,054,384
Allowance for loan losses (71,784,237) (67,854,066)
----------------- -----------------
Total loans-net $2,673,583,860 $2,052,200,318
============== ==============
</TABLE>
The Corporation's primary lending area is Puerto Rico. At December 31, 1999
and 1998 there is no significant concentration of credit risk in any specific
industry on the loan portfolio.
At December 31, 1999, loans in which the accrual of interest income had
been discontinued amounted to $53,816,000 (1998 - $56,958,000; 1997 -
$52,939,000). If these loans had been accruing interest, the additional interest
income realized would have been approximately $4,544,000 (1998 - $4,970,000;
1997 - $5,246,000). There are no material commitments to lend additional funds
to borrowers whose loans were in non-accruing status at these dates.
At December 31, 1999 and 1998 mortgage loans held for sale amounted to
$37,794,078 and $20,641,628, respectively. All mortgage loans originated and
sold during 1999 and 1998 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.
56
<PAGE>
At December 31, 1999, the Corporation was servicing mortgage loans
owned by others aggregating approximately $134,348,000 (1998 - $147,439,000;
1997 - $168,416,000). 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). During 1999 the auto loans
securitized were paid off.
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 mortgage loans pledged as
collateral amounted to $157,612,921 and $222,732,275 at December 31, 1999 and
1998, respectively. A portfolio of personal loans was assigned as collateral for
short-term borrowings as explained in Note 21 - "Other Short-Term Borrowings."
The personal loans pledged as collateral amounted to $186,417,700 and
$220,443,511 at December 31, 1999 and 1998, respectively.
Note 15 - Allowance for Loan Losses
The changes in the allowance for loan losses were as follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Year ended December 31,
1999 1998 1997
Balance at beginning of period $67,854,066 $57,711,927 $55,253,546
Provision charged to income 47,960,500 76,000,000 55,675,500
Losses charged against the allowance (53,664,742) (72,223,389) (59,590,916)
Recoveries credited to the allowance 9,047,548 6,033,922 6,373,797
Other adjustments 586,865 331,606
-------------- -------------- -----------
Balance at end of period $71,784,237 $67,854,066 $57,711,927
=========== =========== ===========
</TABLE>
At December 31, 1999, $4.4 million ($14.3 million at December 31,
1998) in commercial and real estate loans over $1,000,000 was considered
impaired with an allowance of $1.3 million ($3.8 million at December 31, 1998).
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, 1999 and 1998. The average recorded investment in impaired loans
amounted to $9.4 million for 1999 (1998 - $10.8 million). Interest income in the
amount of approximately $428,470 was recognized on impaired loans for 1999 (1998
- - - approximately $736,000). 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
New loans 2,105,812
Payments (541,851)
--------------
Balance at December 31, 1999 $23,092,785
===========
</TABLE>
57
<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,
1999 1998
-------------- -------------
Land $ 6,853,249 $ 5,825,249
Buildings and improvements 33,433,031 30,976,673
Leasehold improvements 14,222,676 10,807,734
Furniture and equipment 50,531,481 41,330,835
---------- -----------
105,040,437 88,940,491
Accumulated depreciation (48,232,875) (42,167,391)
----------- -----------
56,807,562 46,773,100
Projects in progress 5,140,255 4,764,092
------------ -------------
Total premises and equipment - net $61,947,817 $51,537,192
=========== ===========
</TABLE>
Note 18 - Other Assets
Following is a detail of other assets:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
December 31,
1999 1998
----------- -----------
Deferred tax asset $54,645,143 $22,142,665
Accounts receivable 8,202,865 10,023,555
Prepaid expenses 9,243,210 10,219,939
Revenue earning vehicles 5,679,920 4,465,609
Other repossessed property 2,709,258 2,276,766
Insurance claims 1,618,037 1,778,133
Other 13,333,245 6,030,746
----------- ------------
Total $95,431,678 $56,937,413
=========== ===========
</TABLE>
Note 19 - Deposits and Related Interest
Deposits and related interest consist of the following:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
December 31,
1999 1998
--------------------- --------------
Type of account and interest rate at:
Savings accounts - 2.75% to 4.00%
(1998 - 2.75% to 4.00%) $ 447,945,723 $ 416,423,889
Interest bearing checking accounts -
2.75% to 4.50% (1998 - 2.90% to 4.50%) 162,601,169 130,883,438
Non-interest bearing checking accounts 211,896,459 173,103,709
Certificate accounts - 3.80% to 8.00%
(1998 - 3.80% to 7.15%) 1,742,978,285 1,054,633,858
-------------- ---------------
$2,565,421,636 $1,775,044,894
============== ==============
</TABLE>
58
<PAGE>
The weighted average interest rate on total deposits at December 31,
1999 and 1998 was 4.94% and 4.57%, respectively.
At December 31, 1999, the aggregate amount of demand deposits that were
reclassified as loan amounted to $6,939,685 (1998 - $8,180,802).
The following table presents a summary of certificates of deposits with
remaining term of more than one year at December 31, 1999 (in thousands):
Total
Over one year to two years $75,329
Over two years to three years 58,647
Over three years to four years 94,766
Over four years to five years 50,702
Over five years 153,346
--------
Total $432,790
========
At December 31, 1999 time deposits in denominations of $100,000 or
higher amounted to $1,283,083,091 (1998 - $667,373,511) including brokered
certificates of deposit of $843,217,222 (1998 - $283,249,222) at a weighted
average rate of 5.84% (1998 - 5.63%).
At December 31, 1999, certificates of deposits aggregating $49,000,000
(1998 - $59,000,000) were guaranteed by irrevocable standby letters of credit
issued by the Federal Home Loan Bank of New York and other banks. At December
31, 1999 specific mortgage loans with a carrying value of $71,165,714 (1998 -
$137,483,494) and estimated market value of $58,992,705 (1998 - $141,951,708)
and securities with a book value of $5,401,047 (1998 - $6,877,563) and
approximate market value of $5,351,690 (1998 - $7,041,301) were pledged to the
Federal Home Loan Bank of New York as part of the agreements covering the
letters of credit.
At December 31, 1999, deposit accounts issued to government agencies
with a carrying value of $62,378,476 (1998 - $67,306,284) were collateralized by
securities with a carrying value of $78,782,695 (1998 - $70,892,236) and
estimated market value of $75,677,459 (1998 - $72,177,444) and specific mortgage
loans with a carrying value of $3,947,207 (1998 - $4,838,781) and estimated
market value of $3,758,925 (1998 - $5,684,600).
A table showing interest expense on deposits follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Year ended December 31,
1999 1998 1997
Savings $12,380,515 $11,716,764 $12,155,192
Interest bearing checking accounts 4,931,452 4,486,582 4,167,371
Certificates 73,177,154 54,215,013 55,824,521
------------ ------------ -----------
Total $90,489,121 $70,418,359 $72,147,084
=========== =========== ===========
</TABLE>
59
<PAGE>
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:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
December 31,
1999 1998
Federal funds purchased, interest -------------- ----------------
rate (1998 - 5.32%) $ 15,000,000
Repurchase agreements, interest
ranging from 4.50% to 6.35%
(1998 - 4.65% to 5.80%) $1,447,732,029 1,605,630,051
-------------- ---------------
1,447,732,029 1,620,630,051
Accrued interest payable 4,419,193 3,067,937
----------------- ------------------
Total $1,452,151,222 $1,623,697,988
============== ==============
Federal funds purchased and repurchase agreements mature as follows:
December 31,
1999 1998
-------------- ---------------
Federal funds purchased:
One to thirty days $ 15,000,000
--------------
Repurchase agreements:
One to thirty days $1,229,448,029 1,158,520,676
Over thirty to ninety days 8,450,000 247,109,375
Over ninety days 209,834,000 200,000,000
---------------- ----------------
1,447,732,029 1,605,630,051
--------------- ---------------
Total $1,447,732,029 $1,620,630,051
============== ==============
</TABLE>
60
<PAGE>
The following securities were sold under agreements to repurchase:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
December 31, 1999
Amortized Approximate Weighted
cost 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 $ 325,528,692 $ 296,719,958 $ 303,107,211 5.77%
Mortgage backed securities 1,233,633,232 1,151,012,071 1,150,557,955 6.16%
--------------- --------------- ---------------
Total $1,559,161,924 $1,447,732,029 $1,453,665,166
============== ============== ==============
Accrued interest receivable $ 3,152,900
=================
December 31, 1998
Amortized Approximate Weighted
cost 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
===============
</TABLE>
The weighted average interest rates of federal funds purchased and
repurchase agreements at December 31, 1999 and 1998 was 5.38% and 5.03%,
respectively.
At December 31, 1999, 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 1999 was $1,631,913,357 (1998 -
$1,648,513,898). The average balance during 1999 was approximately
$1,441,486,000 (1998 - $1,225,726,000).
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, 1999 borrowings through
this arrangement amounted to $152,484,084 (1998 - $86,594,710). 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, 1999 was 36 days (1998 - 21 days).
The weighted average interest rate of these borrowings at December 31,
1999 and 1998 was 6.20% and 6.38%, respectively. The maximum aggregate balance
outstanding at any month-end was approximately $152,484,084 (1998 -
$224,780,000). The average aggregate balance outstanding during the year was
approximately $97,373,301 (1998 - $111,236,888).
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, 1999 amounted to
$186,417,700 (1998 - $220,443,511).
61
<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 1999 1998
-------- ------------- ---------------- --------------
February 3, 2000 5.86% $20,000,000
February 28, 2000 6.03% 30,000,000
January 4, 1999 5.13% __________ $2,600,000
----------
Total $50,000,000 $2,600,000
=========== ==========
</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, 1999, specific mortgage loans with an
estimated market value of $56,303,500 (1998 - $3,155,152) were pledged to the
FHLB-N.Y. as part of the Collateral Agreement. The carrying value of such loans
at December 31, 1999 amounted to $55,000,000 (1998 - $2,860,000).
Note 23 - Notes Payable
Following is a detail of notes payable outstanding:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
December 31, 1999 December 31,
Issue date (footnote) Maturity Interest rate 1999 1998
- - --------------------- -------- ------------- ------------ --------------
February 11, 1994 (b) 1999 5.44% $ 2,100,000
May 13, 1994 (b) 1999 6.19% 10,000,000
May 26, 1994 (b) 1999 6.09% 5,000,000
September 7, 1994 (a) 1999 4.33% 15,500,000
September 29, 1994 (a) 1999 6.40% 30,000,000
September 12, 1996 (b) 2001 5.82% $10,000,000 10,000,000
September 20, 1996 (b) 2001 5.61% 20,500,000 20,500,000
September 20, 1996 (a) 2001 5.49% 25,000,000 25,000,000
------------ --------------
Total $55,500,000 $118,100,000
=========== ============
</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.
62
<PAGE>
At December 31, 1999, specific mortgage loans with a book value of
$27,500,000 (1998 - $77,550,000) and an estimated market value of
$28,459,750 (1998 - $88,887,810) 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, 1999 amounted
to $30,152,980 (1998 - $46,162,955) and $29,793,954 (1998 -
$45,328,289), 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, 1999 the outstanding balance net of the unamortized
discount and notes repurchased in 1999 was $93,594,080 (1998 - $99,495,830).
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, 1999, the Bank has transferred to capital
reserves from the retained earnings account $40,000,000, 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, 1999, the Corporation's total unused lines of credit with
these banks amounted to approximately $123,500,000 (1998 - $69,500,000). At
December 31, 1999, the Corporation has an available line of credit with the FHLB
guaranteed with excess collateral, in the amount of $2,812,126 (1998 -
$20,808,133).
Note 26 - 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%
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 $625,375, $575,000 and
$540,000 during 1999, 1998 and 1997, respectively, to the Plan.
63
<PAGE>
Note 27 - Other Expenses
A detail of other expenses follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Year ended December 31,
1999 1998 1997
-------------- --------------- --------------
Professional and service fees $6,672,254 $ 5,819,978 $ 4,883,088
Advertising and business promotion 5,896,265 5,922,039 4,993,392
Communications 4,666,698 4,330,023 4,363,802
Revenue earning equipment 1,478,492 1,225,689 1,183,557
Supplies and printing 1,361,374 1,314,131 1,128,672
Other 5,426,220 4,534,188 4,628,151
------------- ------------ -------------
Total $25,501,303 $23,146,048 $21,180,662
=========== =========== ===========
</TABLE>
Note 28 - 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,
1999 1998 1997
Current $13,991 $17,845 $16,364
Deferred (6,703) (13,047) (8,239)
-------- ------ ---------
Total $ 7,288 $ 4,798 $ 8,125
======== ======= ========
</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,
1999 1998 1997
% of % of % of
pre-tax pre-tax pre-tax
Amount income Amount income Amount income
Computed income tax at statutory rate $27,052 39 $22,078 39 $21,705 39
Benefit of net exempt income (13,959) (20) (22,078) (39) (13,137) (24)
Other-net (5,805) (8) 4,798 8 (443)
-------- --- --------- --- --------- ---
Total income tax provision $ 7,288 11 $ 4,798 8 $ 8,125 15
======== == ======== === ======== ==
</TABLE>
64
<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,
1999 1998
Deferred tax asset:
Adjustment to charge-off method $27,995 $25,460
Unrealized loss on available for sale securities 22,883
Other 4,114 1,232
-------- ---------
Deferred tax asset $54,992 $26,692
======= =======
Deferred tax liability:
Unrealized gain on available for sale securities $(2,917)
Other $ (347) (1,633)
------- -------
Deferred tax liability $ (347) $(4,550)
======= =======
</TABLE>
Due to the above temporary differences, a net deferred tax asset resulted
amounting to $54.6 million at December 31, 1999 (1998 - $22.1 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 29 - Commitments
At December 31, 1999 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, 1999, the obligation under various leases was
follows:
Year Amount
---- -----------
2000 $3,012,850
2001 2,403,792
2002 1,964,048
2003 1,176,557
2004 and later years 4,631,265
-----------
Total $13,188,512
===========
Rental expense included in occupancy and equipment expense was
$3,390,786 in 1999 (1998 - $3,158,156; 1997 - $2,933,798).
65
<PAGE>
Note 30 - Fair Value of Financial Instruments
The information about the estimated fair values of financial
instruments as required by generally accepted accounting principles, is
presented hereunder including some items not recognized in the statement of
financial condition. The disclosure requirements 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, 1999 and 1998
follows (in thousands):
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
December 31,
1999 1998
Estimated Carrying Estimated Carrying
fair value value fair value value
Assets:
Money market instruments $ 35,217 $ 35,217 $ 526 $ 526
Investment securities 1,740,905 1,758,120 1,790,463 1,789,692
FHLB stock 17,827 17,827 10,271 10,271
Loans receivable - net 2,753,597 2,673,584 2,146,003 2,052,200
Liabilities:
Deposits 2,554,429 2,565,422 1,776,811 1,775,045
Federal funds, securities sold
under agreements to repurchase
and other short-term borrowings 1,604,635 1,604,635 1,710,293 1,710,293
Advances from FHLB 50,000 50,000 2,600 2,600
Debt security borrowings 145,994 149,094 231,923 217,596
</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.
Investment securities
The fair values of investment securities are the market values based on
quoted market prices and dealer quotes.
FHLB stock
Investments in FHLB stock are valued at their redemption values.
66
<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, 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 broker certificate of
deposit 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 due to its
short time to maturity.
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 broker CD 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.
67
<PAGE>
Note 31 - Supplemental Cash Flow Information
Supplemental cash flow information follows (in thousands):
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Year ended December 31,
---------------------------------------------------
1999 1998 1997
-------------- ---------------- ----------
Cash paid for:
Interest $173,273 $153,645 $132,801
Income tax 6,271 1,494 1,089
Non cash investing and financing activities:
Mortgage loans exchanged for mortgage
backed securities 4,046
Additions to other real estate owned 639 2,975 541
</TABLE>
Note 32 - Financial Instruments With Off-Balance Sheet Risk, Commitments to
Extend Credit and Standby Letters of Credit
The following table presents a detail of commitments to extend credit and
standby letters of credit (in thousands):
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
December 31,
1999 1998
---- ----
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit:
To originate loans $465,902 $245,257
Unused credit card lines 253,463 132,867
Unused personal lines of credit 10,362 10,536
Commercial lines of credit 244,135 96,874
Commercial letters of credit 12,345 19,101
Standby letters of credit 13,754 1,575
</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. 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.
68
<PAGE>
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, 1999 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):
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Notional amount
Pay-fixed swaps:
Balance at December 31, 1997, 1998 and 1999 $ 50,000
=========
Receive-fixed swaps:
Balance at December 31, 1997 $80,000
Expired contracts 40,000
-------
Balance at December 31, 1998 40,000
Expired contracts 40,000
New contracts 185,000
---------
Balance at December 31, 1999 $185,000
========
</TABLE>
Pay-fixed swaps at December 31, 1999, have a fixed weighted average
rate payment of 6.48% (1998 - 5.41%) and a floating weighted average rate
receiving of 6.07% (1998 - 6.48%). Receive-fixed swaps at December 31, 1999,
have a floating weighted average rate payment of 6.09% (1998 - 5.13%) and a
fixed weighted average rate receiving of 7.05% (1998 - 7.15%). 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, 1999
the Corporation had total net receivable of $1,286,445 (1998 - $876,949) related
to the swap transactions. The Corporation controls the credit risk of its
interest rate swap agreements through approvals, limits, and monitoring
procedures. The Corporation does not anticipate non-performance by the
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
69
<PAGE>
swaps at December 31, 1999 was approximately $6.6 million and $6.7 million,
respectively (1998 - $1.8 million and $1.9 million, respectively). The period to
maturity of the swaps at December 31, 1999 ranged from five months through
fifteen years (1998 - from one year and four months through eight years and two
months).
At December 31, 1999, the estimated fair value to liquidate the
Corporation's interest rate swaps was approximately $192,000 (1998 -
$2,760,000).
Options
From time to time the Corporation may enter into put and call options
with the intention of enhancing the yield of its investment portfolio. The
aggregate amount permitted to be outstanding under this program is limited by
resolution of the Board of Directors. During 1999 and 1998 there was no activity
under the program.
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, 1999
(dollars in thousands):
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Cap agreements notional amount Cap Rate Current 90 day LIBOR Maturity
- - ------------------------------ -------- -------------------- -----------
$50,000 6.00% 6.00% March 27, 2000
200,000 6.50% 6.00% June 4, 2000
200,000 6.50% 6.00% October 2, 2000
</TABLE>
70
<PAGE>
Note 33 - 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. Certain small commercial loans originated by the branches are included in
the Retail business. 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.
71
<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, 1999:
Interest income $186,224 $108,332 $74,508 $369,064
Net (charge) credit for transfer of funds (4,018) 48,737 (44,719)
Interest expense (58,665) (124,665) (183,330)
Net interest income 123,541 32,404 29,789 185,734
Provision for loan losses (46,802) (1,159) (47,961)
Segment income 76,739 32,404 28,630 137,773
Average earning assets 1,462,311 1,726,719 815,569 4,004,599
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
</TABLE>
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,
1999 1998 1997
Interest income
Total interest income for segments $369,064 $320,535 $284,270
Interest income credited to expense accounts _______ 763 890
------------ ------------
Total consolidated interest income $369,064 $321,298 $285,160
======== ======== ========
Net income:
Total income for segments $137,773 $89,405 $98,166
Other income 32,862 58,240 39,866
Operating expenses (101,272) (91,035) (82,379)
Income taxes (7,288) (4,798) (8,125)
---------- -------- ---------
Total consolidated net income $ 62,075 $51,812 $47,528
======== ======= =======
Average assets:
Total average earning assets for segments $4,004,599 $3,345,206 $2,768,866
Average non earning assets 168,182 148,331 143,643
----------- ------------ ------------
Total consolidated average assets $4,172,781 $3,493,537 $2,912,509
========== ========== ==========
</TABLE>
72
<PAGE>
Note 34 - 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 35 - Selected Quarterly Financial Data (Unaudited)
Financial data showing results of the 1999 and 1998 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>
1999
March 31 June 30 Sept. 30 Dec. 31
------------ -------------- --------------- -----------
Interest income $87,142,829 $87,255,568 $94,475,146 $100,189,561
Net interest income 44,597,465 46,340,663 46,789,092 48,006,136
Provision for loan losses 13,800,000 12,949,500 11,016,500 10,194,500
Net income 14,141,215 15,393,514 16,208,146 16,332,074
Earnings per common share-basic $0.48 $0.49 $0.50 $0.52
Earnings per common share-diluted $0.48 $0.49 $0.50 $0.51
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
</TABLE>
Note 36 - First BanCorp (Holding Company Only) Financial Information
The following condensed financial information presents the financial
position of the Holding Company only at December 31, 1999 and 1998 and the
results of its operations and its cash flows for the period ended on December
31, 1999 and from October 1st, 1998 through December 31, 1998.
73
<PAGE>
Statements of Financial Condition
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
December 31, 1999 December 31, 1998
Assets:
Cash and due from depository institutions $ 13,159,737 $ 5,702,362
-------------
Money market instruments 1,777,750
--------------
Investment securities available for sale, at market value:
United States Government obligations 24,890,139
Other investments 21,291,774
-------------
Total investment securities available for sale 46,181,913
------------
Investment in FirstBank Puerto Rico, at equity 235,637,500 264,447,053
Other assets 348,337 218,653
-------------- ----------------
Total assets $297,105,237 $270,368,068
============ ============
Liabilities & Stockholders' Equity:
Other borrowings $ 865,360
Accounts payable and other liabilities 1,337,628
-------------
Total liabilities 2,202,988
Stockholders' equity 294,902,249 $270,368,068
----------- ------------
Contingencies and commitments ___________ ___________
Total liabilities and stockholders' equity $297,105,237 $270,368,068
============ ============
</TABLE>
Statements of Income
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Period from
Year ended October 1, 1998 through
December 31, 1999 December 31, 1998
----------------- -----------------
Income:
Interest income on investment securities $ 1,536,930
Interest income on other investments 1,140,656
Dividend from subsidiary 10,000,000 $10,359,843
Other income 61,161 _________
-------------
12,738,747 10,359,843
Expenses:
Other operating expenses 242,178 15,110
----------- ------------
Income before income taxes and equity in
undistributed earnings of subsidiary 12,496,569 10,344,733
Income taxes 374,245
Equity in undistributed earnings of subsidiary 49,952,625 3,341,632
------------ -------------
Net income 62,074,949 13,686,365
Other comprehensive (loss) income, net of tax (77,398,890) 8,749,931
------------- ------------
Comprehensive (loss) income $(15,323,941) $22,436,296
============ ===========
The principal source of income for the Holding Company consists of
earnings from FirstBank.
</TABLE>
74
<PAGE>
Statement of Cash Flows
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Period from
Year ended October 1, 1998 through
December 31, 1999 December 31, 1998
----------------- -----------------
Cash flows from operating activities:
Net income $62,074,949 $13,686,365
----------- -----------
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed earnings of subsidiary (49,952,625) (3,341,632)
Net increase in other assets (129,686) (218,654)
Net increase in other liabilities 883,201 _________
-------------
Total adjustments (49,199,110) (3,560,286)
----------- -----------
Net cash provided by operating activities 12,875,839 10,126,079
------------ ----------
Cash flows from investing activities:
Purchases of securities available for sale (44,364,194)
-----------
Net cash used by investing activities (44,364,194)
-----------
Cash flows from financing activities:
Proceeds from other borrowings 865,360
Proceeds from issuance on preferred stock 86,850,217
Exercise of stock options 176,313
Cash dividends paid (14,657,799) (2,212,467)
Treasury stock acquired (32,510,611) (2,211,250)
----------- -----------
Net cash provided by financing activities 40,723,480 (4,423,717)
------------ -----------
Net increase in cash 9,235,125 5,702,362
Cash and cash equivalents the beginning of period 5,702,362 _________
------------
Cash and cash equivalents at the end of period $14,937,487 $5,702,362
=========== ==========
Cash and cash equivalents include:
Cash and due from banks $13,159,737 $5,702,362
Money market instruments 1,777,750 _________
-------------
$14,937,487 $5,702,362
=========== ==========
</TABLE>
75
<PAGE>
Stockholders' Information
Independent Certified Public Accountants
PricewaterhouseCoopers LLP
Annual Meeting:
The annual meeting of stockholders will be held on April 27, 2000, 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
76
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 58,267,929
<INT-BEARING-DEPOSITS> 35,217,064
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,454,074,171
<INVESTMENTS-CARRYING> 304,046,039
<INVESTMENTS-MARKET> 286,830,718
<LOANS> 2,745,368,097
<ALLOWANCE> (71,784,237)
<TOTAL-ASSETS> 4,721,568,165
<DEPOSITS> 2,565,421,636
<SHORT-TERM> 1,654,635,306
<LIABILITIES-OTHER> 57,514,894
<LONG-TERM> 149,094,080
0
90,000,000
<COMMON> 28,060,552
<OTHER-SE> 176,841,697
<TOTAL-LIABILITIES-AND-EQUITY> 4,721,568,165
<INTEREST-LOAN> 260,741,177
<INTEREST-INVEST> 107,221,104
<INTEREST-OTHER> 1,100,823
<INTEREST-TOTAL> 369,063,104
<INTEREST-DEPOSIT> 90,489,121
<INTEREST-EXPENSE> 183,329,748
<INTEREST-INCOME-NET> 185,733,356
<LOAN-LOSSES> 47,960,500
<SECURITIES-GAINS> 1,376,672
<EXPENSE-OTHER> 101,271,895
<INCOME-PRETAX> 69,363,394
<INCOME-PRE-EXTRAORDINARY> 69,363,394
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 62,074,949
<EPS-BASIC> 2.00
<EPS-DILUTED> 1.98
<YIELD-ACTUAL> 4.85
<LOANS-NON> 53,816,000
<LOANS-PAST> 13,781,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 67,854,066
<CHARGE-OFFS> 53,664,742
<RECOVERIES> 9,634,413
<ALLOWANCE-CLOSE> 71,784,237
<ALLOWANCE-DOMESTIC> 71,784,237
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
