UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13
of the Securities Exchange Act of 1934
For the Quarter ended Commission File 001-14793
SEPTEMBER 30, 2002
FIRST BANCORP.
(Exact name of Corporation as specified in its charter)
PUERTO RICO 66-0561882
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1519 PONCE DE LEON AVENUE, STOP 23
SANTURCE, PUERTO RICO 00908
(Address of principal office) (Zip Code)
Corporation's telephone number, including area code:
(787) 729-8200
Indicate by check mark whether the Corporation (1) has filed all reports
required by Section 13 of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Corporation was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No | |
Number of shares of the Corporation's Common Stock outstanding as of November
12, 2002
39,954,535
CONTENTS
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements:
Consolidated Statements of Financial Condition 3
Consolidated Statements of Income 4
Consolidated Statements of Cash Flows 5
Consolidated Statements of Changes in Stockholders' Equity 6
Consolidated Statements of Comprehensive Income 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 19
Item 3. Quantitative and Qualitative Disclosures About Market Risk 32
Item 4. Controls and Procedures 33
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 34
Item 2. Changes in Securities 34
Item 3. Defaults Upon Senior Securities 34
Item 4. Submission of Matters to a Vote of Security Holders 34
Item 5. Other Information 34
Item 6. Exhibits and Report on Form 8-K 34
SIGNATURES 35
CERTIFICATIONS 36
FORWARD LOOKING STATEMENTS. When used in this Form 10-Q or future filings by
First BanCorp. (First BanCorp or the "Corporation") with the Securities and
Exchange Commission, in the Corporation's press releases or other public or
shareholder communication, or in oral statements made with the approval of an
authorized executive officer, the words or phrases "would be", "will allow",
"intends to", "will likely result", "are expected to", "will continue", "is
anticipated", "estimated", "project", "believe", or similar expressions are
intended to identify "forward looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995.
The future results of the Corporation could be affected by subsequent
events and could differ materially from those expressed in forward-looking
statements. If future events and actual performance differ from the
Corporation's assumptions, the actual results could vary significantly from the
performance projected in the forward-looking statements.
The Corporation wishes to caution readers not to place undue reliance on
any such forward-looking statements, which speak only as of the date made, and
to advise readers that various factors, including regional and national
conditions, substantial changes in levels of market interest rates, credit and
other risks of lending and investment activities, competitive and regulatory
factors and legislative changes, could affect the Corporation's financial
performance and could cause the Corporation's actual results for future periods
to differ materially from those anticipated or projected. The Corporation does
not undertake, and specifically disclaims any obligation, to update any
forward-looking statements to reflect occurrences or unanticipated events or
circumstances after the date of such statements.
2
FIRST BANCORP
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
SEPTEMBER 30, 2002 DECEMBER 31, 2001
------------------ -----------------
ASSETS
Cash and due from banks $ 58,149,885 $ 59,898,550
--------------- ---------------
Money market instruments 65,976,473 34,564,568
--------------- ---------------
Investment securities available for sale, at market:
Securities pledged that can be repledged 2,519,391,644 2,988,828,088
Other investment securities 154,196,279 385,419,989
--------------- ---------------
Total investment securities available for sale 2,673,587,923 3,374,248,077
--------------- ---------------
Investment securities held to maturity, at cost:
Securities pledged that can be repledged 1,114,307,713 171,152,930
Other investment securities 151,345,652 113,142,662
--------------- ---------------
Total investment securities held to maturity 1,265,653,365 284,295,592
--------------- ---------------
Federal Home Loan Bank (FHLB) stock 35,629,500 22,890,600
--------------- ---------------
Loans net of allowance for loans losses of $107,974,279
(2001-$91,060,307) 4,834,558,995 4,213,089,836
Loans held for sale, at lower of cost or market 4,631,259 4,629,562
--------------- ---------------
Total loans 4,839,190,254 4,217,719,398
--------------- ---------------
Other real estate owned 1,676,804 1,455,577
Premises and equipment - net 78,104,488 76,155,620
Accrued interest receivable 33,346,733 37,630,883
Due from customers on acceptances 101,546 262,153
Other assets 136,755,501 88,396,770
--------------- ---------------
Total assets $ 9,188,172,472 $ 8,197,517,788
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Non-interest bearing deposits $ 233,285,321 $ 239,850,816
Interest bearing deposits 4,442,723,978 3,858,703,322
Federal funds purchased and securities
sold under agreements to repurchase 3,274,789,728 2,997,173,944
Advances from FHLB 323,000,000 343,700,000
Bank acceptances outstanding 101,546 262,153
Accounts payable and other liabilities 85,761,208 70,547,126
--------------- ---------------
8,359,661,781 7,510,237,361
--------------- ---------------
Subordinated notes 84,364,071 84,361,525
--------------- ---------------
Stockholders' equity:
Preferred stock, authorized 50,000,000 shares; issued and
outstanding 14,420,000 shares at $25.00 liquidation
value per share (2001 - 10,740,000) 360,500,000 268,500,000
--------------- ---------------
Common stock, $1.00 par value, authorized 250,000,000
shares; issued 44,875,435 shares, including
14,958,383 shares issued on September 30, 2002 from
a stock split (2001-29,852,552) 44,875,435 29,852,552
Less: Treasury stock, including 1,640,300 shares issued
on September 30, 2002 from a stock split (at par value) (4,920,900) (3,280,600)
--------------- ---------------
Common stock outstanding 39,954,535 26,571,952
--------------- ---------------
Additional paid-in capital 14,214,877
Capital reserve 60,000,000 60,000,000
Legal surplus 136,792,514 136,792,514
Retained earnings 150,573,275 103,132,913
Accumulated other comprehensive income, net of tax of
$1,224,568 (2001-$2,097,785) (3,673,704) (6,293,354)
--------------- ---------------
744,146,620 602,918,902
--------------- ---------------
Contingencies and commitments
--------------- ---------------
Total liabilities and stockholders' equity $ 9,188,172,472 $ 8,197,517,788
=============== ===============
The accompanying notes are an integral part of these statements.
3
FIRST BANCORP
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------------- ------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
------------- ------------- ------------- -------------
INTEREST INCOME:
Loans $ 87,434,587 $ 88,413,711 $255,723,899 $268,729,165
Investments 41,771,436 38,780,489 145,826,457 112,736,946
Dividends on FHLB stock 400,000 333,287 1,119,452 989,101
------------- ------------- ------------ ------------
Total interest income 129,606,023 127,527,487 402,669,808 382,455,212
------------- ------------- ------------ ------------
INTEREST EXPENSE:
Deposits 33,650,069 39,083,119 99,929,651 124,737,078
Short term borrowings 33,922,767 24,290,252 99,522,264 77,950,019
Long term borrowings 1,695,112 2,165,577 5,085,335 7,204,788
------------- ------------- ------------ ------------
Total interest expense 69,267,948 65,538,948 204,537,250 209,891,885
------------- ------------- ------------ ------------
Net interest income 60,338,075 61,988,539 198,132,558 172,563,327
------------- ------------- ------------ ------------
PROVISION FOR LOAN LOSSES 14,000,499 12,790,000 48,301,497 45,590,000
------------- ------------- ------------ ------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 46,337,576 49,198,539 149,831,061 126,973,327
------------- ------------- ------------ ------------
OTHER INCOME:
Other fees on loans 4,698,037 4,734,553 15,426,158 14,529,323
Service charges on deposit accounts 2,116,506 2,318,435 6,949,103 7,088,680
Mortgage banking activities 1,861,021 268,245 3,170,765 1,201,598
Gain on sale of investments, net 7,485,130 189,043 8,101,648 9,715,819
Derivatives loss (1,208,460) (3,461,982)
Other operating income 4,010,991 3,095,241 12,266,039 8,894,459
------------- ------------- ------------ ------------
Total other income 18,963,225 10,605,517 42,451,731 41,429,879
------------- ------------- ------------ ------------
OTHER OPERATING EXPENSES:
Employees' compensation and benefits 14,317,494 13,864,869 43,135,227 40,457,394
Occupancy and equipment 7,036,096 6,349,778 20,725,642 18,177,418
Business promotion 2,411,415 1,868,283 7,509,543 6,140,428
Taxes 1,770,308 1,633,873 5,057,027 4,333,477
Insurance 689,250 588,004 2,048,469 1,706,154
Other 6,443,238 5,704,020 17,888,477 19,230,721
------------- ------------- ------------ ------------
Total other operating expenses 32,667,801 30,008,827 96,364,385 90,045,592
------------- ------------- ------------ ------------
Income before income tax provision and
cumulative effect of accounting change 32,633,000 29,795,229 95,918,407 78,357,614
INCOME TAX PROVISION 5,276,102 6,775,771 15,932,937 15,365,662
------------- ------------- ------------ ------------
Income before cumulative effect of accounting change 27,356,898 23,019,458 79,985,470 62,991,952
CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAX (1,014,889)
------------- ------------- ------------ ------------
NET INCOME $ 27,356,898 $ 23,019,458 $ 79,985,470 $ 61,977,063
============= ============= ============ ============
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS $ 20,605,902 $ 17,932,261 $ 60,330,198 $ 50,552,366
============= ============= ============ ============
NET INCOME PER COMMON SHARE-BASIC:
Income before cumulative effect of accounting change $ 0.52 $ 0.45 $ 1.51 $ 1.29
Cumulative effect of accounting change (0.02)
------------- ------------- ------------ ------------
Earnings per common share-basic $ 0.52 $ 0.45 $ 1.51 $ 1.27
============= ============= ============ ============
NET INCOME PER COMMON SHARE-DILUTED:
Income before cumulative effect of accounting change $ 0.51 $ 0.45 $ 1.49 $ 1.28
Cumulative effect of accounting change (0.02)
------------- ------------- ------------ ------------
Earnings per common share-diluted $ 0.51 $ 0.45 $ 1.49 $ 1.26
============= ============= ============ ============
DIVIDENDS DECLARED PER COMMON SHARE $ 0.10 $ 0.09 $ 0.30 $ 0.26
============= ============= ============ ============
The accompanying notes are an integral part of these statements.
4
FIRST BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 2002 SEPTEMBER 30, 2001
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 79,985,470 $ 61,977,063
---------------- ---------------
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 8,246,455 7,106,171
Core deposit intangible amortization 689,446 689,446
Provision for loan losses 48,301,497 45,590,000
Deferred tax asset provision (8,904,206) (4,091,268)
Gain on sale of investments, net (8,101,648) (9,715,819)
Derivatives loss 3,461,982
Increase in taxes payable 3,505,114 9,801,322
Decrease (increase) in accrued interest receivable 4,284,150 (10,670,236)
Decrease (increase) in accrued interest payable (58,537) 3,159,277
Amortization of deferred net loan fees (760,531) 553,246
Net originations of loans held for sale (29,510,630) (1,964,941)
Decrease in other assets 18,925,153 14,962,963
Increase (decrease) in other liabilities 11,300,286 (5,025,891)
---------------- ---------------
Total adjustments 51,378,531 50,394,270
---------------- ---------------
Net cash provided by operating activities 131,364,001 112,371,333
---------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Principal collected on loans 670,222,045 653,641,510
Loans originated (786,729,648) (877,020,847)
Purchase of loans (544,115,855) (317,135,682)
Proceeds from sale of investments available for sale 1,681,236,889 813,656,020
Purchase of securities held to maturity (12,801,322,983) (180,699,992)
Purchase of securities available for sale (8,806,724,403) (8,656,408,851)
Principal repayments and maturities of securities held to maturity 11,819,965,210 74,529,997
Principal repayments of securities available for sale 7,834,557,915 6,981,593,770
Additions to premises and equipment (10,195,323) (11,359,989)
Purchase of FHLB stock (12,738,900) (4,354,100)
---------------- ---------------
Net cash used in investing activities (955,845,053) (1,523,558,164)
---------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 538,299,299 516,766,310
Net decrease in federal funds purchased and securities
sold under repurchase agreements 277,922,395 881,323,090
FHLB advances paid/taken (20,700,000) 227,000,000
Payments of notes payable (36,687,637)
Dividends (31,624,245) (21,805,442)
Exercise of stock options 1,340,843 1,355,211
Issuance of preferred stock 88,906,000 100,069,250
Treasury stock acquired (1,929,685)
---------------- ---------------
Net cash provided by financing activities 854,144,292 1,666,091,097
---------------- ---------------
Net increase in cash and cash equivalents 29,663,240 254,904,266
Cash and cash equivalents at beginning of period 94,463,118 65,392,939
---------------- ---------------
Cash and cash equivalents at end of period $ 124,126,358 $ 320,297,205
================ ===============
Cash and cash equivalents include:
Cash and due from banks $ 58,149,885 $ 177,247,390
Money market instruments 65,976,473 143,049,815
---------------- ---------------
$ 124,126,358 $ 320,297,205
================ ===============
The accompanying notes are an integral part of these statements.
5
FIRST BANCORP
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
ADDITIONAL
PREFERRED COMMON PAID-IN CAPITAL
STOCK STOCK CAPITAL RESERVE
------------ ------------ ------------ -----------
DECEMBER 31, 2000 $165,000,000 $ 26,424,152 $ 16,567,516 $50,000,000
Net income
Other comprehensive income
Issuance of preferred stock 103,500,000 (3,430,750)
Addition to legal surplus
Addition to capital reserve 10,000,000
Treasury stock acquired (86,200) (43,100)
Stock options exercised 234,000 1,121,211
Cash dividends:
Common stock
Preferred stock
------------ ------------ ------------ -----------
DECEMBER 31, 2001 268,500,000 26,571,952 14,214,877 60,000,000
Net income
Other comprehensive income
Issuance of preferred stock 92,000,000 (3,094,000)
Stock options exercised 64,500 1,276,343
Common stock split on
September 30, 2002 13,318,083 (12,397,220)
Cash dividends:
Common stock
Preferred stock
------------ ------------ ------------ -----------
SEPTEMBER 30, 2002 $360,500,000 $ 39,954,535 $ 0 $60,000,000
============ ============ ============ ===========
ACCUMULATED
OTHER
LEGAL RETAINED COMPREHENSIVE
SURPLUS EARNINGS INCOME (LOSS)
------------ ------------- --------------
DECEMBER 31, 2000 $126,792,514 $ 69,275,152 $(19,598,785)
Net income 86,001,444
Other comprehensive income 13,305,431
Issuance of preferred stock
Addition to legal surplus 10,000,000 (10,000,000)
Addition to capital reserve (10,000,000)
Treasury stock acquired (1,800,385)
Stock options exercised
Cash dividends:
Common stock (13,835,100)
Preferred stock (16,508,198)
------------ ------------- ------------
DECEMBER 31, 2001 136,792,514 103,132,913 (6,293,354)
Net income 79,985,470
Other comprehensive income 2,619,650
Issuance of preferred stock
Stock options exercised
Common stock split on
September 30, 2002 (920,863)
Cash dividends:
Common stock (11,968,970)
Preferred stock (19,655,275)
------------ ------------- ------------
SEPTEMBER 30, 2002 $136,792,514 $ 150,573,275 $ (3,673,704)
============ ============= ============
The accompanying notes are an integral part of these statements.
6
FIRST BANCORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------- -------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
------------- ------------- ------------- -------------
Net income $ 27,356,898 $ 23,019,458 $ 79,985,470 $ 61,977,063
------------ ------------ ------------ -------------
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses)
arising during the period net of
tax of $105,166 (2001-$12,801,558)
for the quarter and $2,968,058
(2001-$14,980,417) for the
nine-month period 315,498 38,404,674 8,904,174 44,941,252
Less: reclassification adjustment
for gains(losses) included in net
income period net of
tax of $1,871,282 (2001-$47,261)
for the quarter and $2,025,412
(2001-$2,428,955) for the
nine-month period (5,613,848) (141,782) (6,076,236) (7,286,864)
Cumulative effect of accounting change,
net of tax benefit of $331,500 994,500
------------ ------------ ------------ -------------
Unrealized gains (losses) on securities (5,298,350) 38,262,892 2,827,938 38,648,888
Unrealized loss on fair value hedge
attributable to credit risk, net of tax
of $267,692 for the quarter and
$69,429 for the nine-month period (803,076) (208,288)
------------ ------------- ------------ -------------
Total other comprehensive (loss) income (6,101,426) 38,262,892 2,619,650 38,648,888
------------ ------------ ------------ -------------
Comprehensive income $ 21,255,472 $ 61,282,350 $ 82,605,120 $ 100,625,951
============ ============ ============ =============
The accompanying notes are an integral part of these statements.
7
FIRST BANCORP
PART I - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 - NATURE OF BUSINESS
First BanCorp (the Corporation) is a financial holding company offering a
full range of financial services. First BanCorp is subject to the Federal Bank
Holding Company Act and to the regulations, supervision, and examination of the
Federal Reserve Board.
FirstBank Puerto Rico (FirstBank or the Bank), the Corporation's wholly
owned bank subsidiary, is a commercial bank chartered under the laws of the
Commonwealth of Puerto Rico. Its main office is located in San Juan, Puerto
Rico, and it has 43 full-service banking branches in Puerto Rico and eleven in
the U.S. and British Virgin Islands. It also has loan origination offices in
Puerto Rico focusing on consumer loans and residential mortgage loans. In
addition, through its wholly-owned subsidiaries, FirstBank operates other
offices in Puerto Rico specializing in small personal loans, finance leases and
vehicle rental. The Bank offers brokerage services in selected branches through
an alliance with a national brokerage house in Puerto Rico. The Bank is subject
to the supervision, examination and regulation of the Office of the Commissioner
of Financial Institutions of Puerto Rico and the Federal Deposit Insurance
Corporation (FDIC), which insures its deposits through the Savings Association
Insurance Fund (SAIF).
Effective August 2001, the Corporation entered into the insurance business
through a wholly owned subsidiary, FirstBank Insurance Agency. This subsidiary
is subject to the supervision, examination and regulation of the Office of the
Commissioner of Insurance of Puerto Rico.
On April 25, 2002, the Corporation filed a Report on Form 8-K disclosing
under item 5, a Definitive Agreement to acquire JPMorgan Chase's Eastern
Caribbean Region business in the U.S. Virgin Islands, British Virgin Islands and
Barbados. On October 16, 2002, the Corporation announced the closing of this
acquisition.
2 - ACCOUNTING POLICIES
The accounting and reporting policies of the Corporation and its
subsidiaries conform with accounting principles generally accepted in the United
States of America, and, as such, include amounts based on judgments, estimates
and assumptions made by Management that affect the reported amounts of assets
and liabilities and contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting periods. Actual results could differ from those estimates. The
accompanying unaudited financial statements have been prepared in accordance
with the instructions for Form 10-Q. Complete information regarding the
financial statements can be found in the notes to the financial statements for
the year ended December 31, 2001 contained in the annual report of the
Corporation. Certain amounts in the 2001 financial statements have been
reclassified to conform with the 2002 presentation.
In the opinion of Management, the accompanying unaudited consolidated
statements of financial condition and the related consolidated statements of
income, comprehensive income, cash flows, and changes in stockholders' equity
include all adjustments (consisting only of normal recurring accruals) necessary
for a fair statement of the Corporation's financial position at September 30,
2002, and the results of operations and the cash flows for the three and nine
months ended on September 30, 2002 and 2001. The results of operations for the
three and nine months ended on September 30, 2002, are not necessarily
indicative of the results to be expected for the entire year.
8
NEW ACCOUNTING PRONOUNCEMENTS
During 2002 the Financial Accounting Standards Board (FASB) issued the
following statement of financial accounting standards (SFAS):
SFAS No. 147, "Acquisitions of Certain Financial Institution"- In October
2002, the FASB issued SFAS No. 147, "Acquisitions of Certain Financial
Institutions". SFAS No. 147 removes financial acquisitions of financial
institutions from the scope of both SFAS No. 72, "Accounting for Certain
Acquisitions of Banking or Thrift Institutions", and FASB Interpretation No. 9,
"Applying APB Opinions No. 16 and 17, When a Savings and Loan Association or a
Similar Institution is Acquired in a Business Combination Accounted for by the
Purchase Method" and requires that those transactions be accounted for in
accordance with FASB Statements No. 141, "Business Combinations", and No.
142,"Goodwill and Other Intangible Assets". In addition, SFAS No. 147 amends
FASB Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets", to include in its scope long-term customer-relationship intangible
assets of financial institutions such as depositor- and borrower-relationship
intangible assets and credit cardholder intangible assets. SFAS No. 147's
transition provisions require affected institutions to reclassify their SFAS No.
72 goodwill as SFAS No. 142 goodwill as of the date the company initially
applied SFAS No. 142 in its entirety. The adoption of SFAS No. 147 will not have
a material impact on the Corporation's financial condition or results of
operations.
3 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Corporation adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", as amended, on January 1, 2001. Upon
adoption of SFAS No. 133, as amended, a loss of approximately $1.3 million was
recognized in the statement of income as a cumulative effect, as a result of
unamortized premium paid for interest rate caps of $1.5 million less an
estimated fair market value of $200,000.
At September 30, 2002, interest rate swap agreements with an aggregate
notional amount of $1.9 billion under which the Corporation agrees to pay
variable-rates of interest are considered to be a hedge against changes in the
fair value of the Corporation fixed-rate certificates of deposit. The interest
rate swap agreements are reflected at their fair value of $25.4 million in the
Corporation's consolidated statement of financial condition as a swap asset with
a corresponding increase in certificates of deposit by the same amount. The
hedge relationship is estimated to be 100 percent effective; therefore, there is
no impact on the statement of income nor on comprehensive income.
Interest rate swaps under which the Corporation agrees to pay fixed-rates
of interest are considered to be a hedge against changes in the fair value
attributable to market interest rates of fixed rate corporate bonds classified
as available for sale. Accordingly, the interest rate swap agreements and the
securities being hedged are reflected at fair value in the Corporation's
consolidated statement of financial condition. The hedge relationship is
estimated to be 100 percent effective; therefore, there is no impact on the
statement of income. Interest rate swaps with an aggregate notional principal
balance of $25 million had an unrealized loss of $1,537,811 at September 30,
2002 (an unrealized loss of $1,260,094 at December 31, 2001), attributable to
credit risk which was recorded in accumulated comprehensive income net of income
tax.
During the period ended on September 30, 2002, the Corporation sold certain
corporate bonds to which interest rate swap agreements with an aggregate
notional principal balance of $53.2 million were attributable. Therefore, these
swaps no longer qualify for hedge accounting, and an unrealized loss of $3.9
million was recorded to reflect changes in the fair value of these derivatives
as a derivative loss in the Other Income section of the statement of income.
9
On June 14, 2002, the Corporation wrote a covered call option. The
Corporation received a premium of $460,938 on this call option. Changes in the
fair value of the option were recorded in earnings while it was outstanding. On
July 15, 2002, the option was exercised and $100 million 6.5% GNMA mortgage
backed securities were delivered. The premium was recorded as derivative income
in the Other Income section of the statement of income.
4 - STOCKHOLDERS' EQUITY
COMMON STOCK
Authorized common stock shares at September 30, 2002 and December 31, 2001
were 250,000,000 with a par value of $1.00. On August 27, 2002, the Corporation
declared a three for two stock split on its 26,636,452 outstanding shares of
common stock at September 15, 2002. As a result, a total of 14,958,383
additional shares of common stock were issued on September 30, 2002, of which
1,640,300 shares were recorded as treasury stock. All per share amounts have
been adjusted for the effect of the stock split in the third quarter of 2002.
PREFERRED STOCK
The Corporation has 50,000,000 shares of authorized non-cumulative and
non-convertible preferred stock with a par value of $1, redeemable at the
Corporation's option subject to certain terms. This stock may be issued in
series and the shares of each series shall have such rights and preferences as
shall be fixed by the Board of Directors when authorizing the issuance of that
particular series. During the period ended on September 30, 2002, the
Corporation issued 3,680,000 shares of preferred stock (4,140,000 shares-2001;
3,000,000 shares-2000; 3,600,000 shares-1999). The liquidation value per share
is $25. Annual dividends of $1.8125 per share (issuance of 2002), of $1.85 per
share (issuance of 2001), of $2.0875 per share (issuance of 2000) and of
$1.78125 per share (issuance of 1999), are payable monthly, if declared by the
Board of Directors.
10
5 - EARNINGS PER COMMON SHARE
The calculations of earnings per common share for the three and nine months
ended on September 30, 2002 and 2001 are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
2002 2001 2002 2001
---- ---- ---- ----
(In thousands, except per share data)
Income before cumulative effect of accounting change
and dividend on preferred stock $ 27,357 $ 23,019 $ 79,985 $ 62,992
Dividend on preferred stock (6,751) (5,087) (19,655) (11,425)
-------- -------- -------- --------
Income before cumulative effect of accounting change 20,606 17,932 60,330 51,567
Cumulative effect of accounting change (1,015)
-------- -------- -------- --------
Net income available to common stockholders $ 20,606 $ 17,932 $ 60,330 $ 50,552
======== ======== ======== ========
Earnings per common share basic:
Weighted average common shares outstanding 39,930 39,891 39,884 39,848
======== ======== ======== ========
Income before cumulative effect of accounting change $ 0.52 $ 0.45 $ 1.51 $ 1.29
Cumulative effect of accounting change (0.02)
-------- -------- -------- --------
Earnings per common share basic $ 0.52 $ 0.45 $ 1.51 $ 1.27
======== ======== ======== ========
Earnings per common share diluted:
Weighted average common shares and share equivalents:
Average common shares outstanding 39,930 39,891 39,884 39,848
Common stock equivalents - Options 812 351 627 270
-------- -------- -------- --------
Total 40,742 40,242 40,511 40,118
======== ======== ======== ========
Income before cumulative effect of accounting change $ 0.51 $ 0.45 $ 1.49 $ 1.28
Cumulative effect of accounting change (0.02)
-------- -------- -------- --------
Earnings per common share diluted $ 0.51 $ 0.45 $ 1.49 $ 1.26
======== ======== ======== ========
The earnings per share for prior year's periods have been restated to
reflect the effect of the stock split in the third quarter of 2002. Stock
options outstanding under the Corporation's stock option plan for officers are
common stock equivalents and, therefore, considered in the computation of
earnings per common share diluted. Common stock equivalents were computed using
the treasury stock method. For the quarter ended on September 30, 2002, all
options outstanding during the period have been included in the computation of
outstanding shares. For the quarter ended on September 30, 2001, 10,500 stock
options were not included in the computation of outstanding shares because they
were antidilutive. For the nine-month period ended on September 30, 2001,
359,250 stock options were not included in the computation of outstanding shares
because they were antidilutive.
6 - INVESTMENT SECURITIES
The amortized cost, gross unrealized gains and losses, approximate market
value, weighted average yield and maturities of investment securities were as
follows:
11
INVESTMENT SECURITIES AVAILABLE FOR SALE
September 30, 2002
------------------------------------------------------------
Unrealized Weighted
Amortized ---------- Market average
cost gains (losses) value yield%
--------- ----- -------- ----- --------
(Dollars in thousands)
U.S. Treasury Securities:
Within 1 year
Obligations of other U.S.
Government Agencies:
Within 1 year $ 399,132 $ (112) $ 399,020 1.62
After 5 to 10 years 750 $ 14 764 5.60
After 10 years 15,278 471 15,749 7.69
Puerto Rico Government
Obligations:
After 5 to 10 years 4,982 185 5,167 6.27
After 10 years 5,621 310 5,931 6.30
---------- ------- -------- ----------
United States and
Puerto Rico Government
Obligations $ 425,763 $ 980 $ (112) $ 426,631 1.96
========== ======= ======== ==========
Mortgage backed securities:
FHLMC certificates:
Within 1 year
After 1 to 5 years $ 310 $ 13 $ 323 6.91
After 5 to 10 years 10,437 723 11,160 6.94
After 10 years 6,698 349 7,047 6.87
---------- ------- ----------
17,445 1,085 18,530 6.91
---------- ------- ----------
GNMA certificates:
After 5 to 10 years 3,807 144 3,951 6.41
After 10 years 1,109,421 23,840 1,133,261 5.88
---------- ------- ----------
1,113,228 23,984 1,137,212 5.88
---------- ------- ----------
FNMA certificates:
Within 1 year 46 46 6.27
After 1 to 5 years 15 15 7.75
After 5 to 10 years 712 47 759 7.70
After 10 years 918,983 4,401 923,384 5.09
---------- ------- ----------
919,756 4,448 924,204 5.09
---------- ------- ----------
Mortgage pass through
certificates:
After 10 years 1,332 41 1,373 7.25
---------- ------- ----------
Mortgage backed
securities $2,051,761 $29,558 $2,081,319 5.54
========== ======= ==========
Corporate bonds:
Within 1 year $ 8,794 $ 6 $ 8,800 7.41
After 1 to 5 years 86,581 1,133 $(18,722) 68,992 6.25
After 5 to 10 years 57,327 90 (4,004) 53,413 6.93
After 10 years
---------- ------- -------- ----------
Corporate bonds $ 152,702 $ 1,229 $(22,726) $ 131,205 6.57
========== ======= ======== ==========
Equity securities (without
contractual maturity) $ 46,723 $ 4,319 $(16,609) $ 34,433 1.25
========== ======= ======== ==========
Total Investments
Securities
Available for Sale $2,676,949 $36,086 $(39,447) $2,673,588 4.95
========== ======= ======== ==========
December 31, 2001
------------------------------------------------------------
Unrealized Weighted
Amortized ---------- Market average
cost gains (losses) value yield%
--------- ----- -------- ----- --------
(Dollars in thousands)
U.S. Treasury Securities:
Within 1 year $ 7,726 $ 30 $ 7,756 3.18
Obligations of other U.S.
Government Agencies:
Within 1 year 407,324 $ (32) 407,292 1.72
After 5 to 10 years 500 1 501 5.59
After 10 years 87,519 469 (1,805) 86,183 7.55
Puerto Rico Government
Obligations:
After 5 to 10 years 4,458 128 4,586 6.19
After 10 years 5,932 151 6,083 6.34
---------- -------- -------- ----------
United States and
Puerto Rico Government
Obligations $ 513,459 $ 779 $ (1,837) $ 512,401 2.83
========== ======== ======== ==========
Mortgage backed securities:
FHLMC certificates:
Within 1 year $ 8 $ 8 5.85
After 1 to 5 years 112 $ 4 116 7.63
After 5 to 10 years 13,211 576 13,787 7.29
After 10 years 8,030 172 $ (6) 8,196 6.95
---------- -------- -------- ----------
21,361 752 (6) 22,107 7.16
---------- -------- -------- ----------
GNMA certificates:
After 5 to 10 years 4,605 101 4,706 6.39
After 10 years 2,515,953 12,672 (6,539) 2,522,086 6.52
---------- -------- -------- ----------
2,520,558 12,773 (6,539) 2,526,792 6.52
---------- -------- -------- ----------
FNMA certificates:
Within 1 year
After 1 to 5 years 158 4 162 6.92
After 5 to 10 years 124 5 129 7.32
After 10 years 7,095 408 7,503 7.96
---------- -------- ----------
7,377 417 7,794 7.93
---------- -------- ----------
Mortgage pass through
certificates:
After 10 years 1,958 38 1,996 8.70
---------- -------- ----------
Mortgage backed
securities $2,551,254 $ 13,980 $ (6,545) $2,558,689 6.53
========== ======== ======== ==========
Corporate bonds:
Within 1 year $ 19,246 $ 410 $ 19,656 7.70
After 1 to 5 years 118,919 1,770 $ (2,899) 117,790 6.68
After 5 to 10 years 114,855 77 (1,906) 113,026 7.34
After 10 years 18,531 328 18,859 7.35
---------- -------- -------- ----------
Corporate bonds $ 271,551 $ 2,585 $ (4,805) $ 269,331 7.08
========== ======== ======== ==========
Equity securities (without
contractual maturity) $ 45,115 $ 4,901 $(16,189) $ 33,827 1.43
========== ======== ======== ==========
Total Investments Securities
Available for Sale $3,381,379 $ 22,245 $(29,376) $3,374,248 5.95
========== ======== ======== ==========
Maturities for mortgage backed securities are based upon contractual terms
assuming no repayments. The weighted average yield on investment securities held
for sale is based on amortized cost; therefore, it does not give effect to
changes in fair value.
12
The Corporation's bank subsidiary is restructuring its portfolio of
mortgage backed securities available for sale, in order to shorten its duration
and to enable a future reinvestment in the next two to four years, at expected
higher interest rates. As a result, during late June and early July of 2002,
approximately $1 billion of 30 year mortgage backed securities were sold. The
June sale derived a gain of $8 million and the July sale derived a gain of $6
million. The securities sold were substantially substituted with $900 million of
15 year mortgage backed securities which have a lower average life and yield,
and which value is less sensitive to increases in interest rates. The
substitution was not effective until August 19, 2002. For this reason, interest
income from investments decreased during the quarter. In addition, in late
September, the Corporation decided to sell its 7% GNMA portfolio to substitute
with lower coupons, with the intention of lowering the prepayment risk. Five
hundred million in 7% GNMA's were sold and settled on September 23 and the
remaining $463.6 million were sold and settled on October 23. The $500 million
sale derived a gain of $14.6 million and the $463.6 million sale derived a gain
of $11.5 million. The second round sale was substituted with a forward purchase
of $1 billion FNMA's 15 years, to be settled on November 19, 2002.
It is the Corporation's policy to invest in corporate bonds, which at the
time of the purchase, are of an investment grade quality. The total carrying
amount of the corporate bonds portfolio is $195.5 million, or 4.8% of total
investments of the Corporation as of September 30, 2002. During the second
quarter of 2002, two of the bonds in the FirstBank's portfolio were downgraded
to non-investment grade quality by credit rating agencies. These were, WorldCom
Corporation, $15.5 million outstanding at the time of the downgrade and Nortel
Networks Corporation, $23.5 million outstanding at the time of the downgrade.
Management's impairment analysis on these securities for the quarter ended on
June 30, 2002 concluded that an other-than-temporary impairment of approximately
$11.7 million had occurred in the case of the WorldCom Corporation bonds. The
estimated impairment amount of this security was recognized as a loss in the
statement of income in accordance with SFAS No. 115. In addition, Management
reclassified to non-accruing status the remaining carrying amount of $3.8
million as presented in the Non-performing Assets section of the Management
Discussion Analysis of this report.
At September 30, 2002 the Corporation's equity securities portfolio
carrying amount is $34.4 million, and its adjusted cost is $46.7 million. The
Corporation's current policy guidelines limit investments in equity securities
to $60 million, which is 1.5% of the Corporation's total investments as of
September 30, 2002. The Corporation invests in equity securities that have a
long-term appreciation prospects. During the nine months ended on September 30,
2002 the Corporation has recognized a loss of $16.4 million for
other-than-temporary impairment on equity securities, including $14 million in
the third quarter of 2002.
The impairment analysis on our fixed income investments is done placing
special emphasis on the analysis of the cash position of the company, its cash
and capital generation capacity, which could increase or diminish the company's
ability to repay its bond obligations. The Corporation has the intent and
ability to hold the fixed income securities to maturity or, at least, until the
decline in value is recovered. If Management believes, based on the analysis,
that the company will not be able to service its debt and pay its obligations on
a timely manner, then an impairment is recorded, usually at market value, if
such is a good representation of the true underlying value of the Corporation,
unless there is not enough volume or liquidity to determine that this is the
true value of the market. The equity securities impairment analyses are
performed and reviewed quarterly based on the latest financial information and
any supporting research report made by a major brokerage house. These analyses
are very subjective and based, among other things, on relevant financial data
such as capitalization, cash flow, liquidity, systematic risk, and debt
outstanding. Management also considers the industry trends, the historical
performance of the stock, as well as the Corporation's intent to hold the
security for an extent period. If Management believes there is a low probability
of achieving book value in a reasonable time frame, then an impairment will be
recorded usually at market value if such is a good representation of the
13
true underlying value of the Corporation unless there is not enough volume or
liquidity to determine that this is the true value of the market.
Management determined that except for the impairments on the bonds and
stocks mentioned above, there are no other-than-temporary impairments on the
rest of the bonds and equity securities portfolio. Management will continue its
ongoing monitoring of the Corporation's investment on individual corporate bonds
and equity securities to identify any other-than-temporary impairment in
accordance with SFAS No.115. Future other-than-temporary impairments may occur
that would need to be recognized as a loss.
For the nine-month period ended on September 30, 2002, proceeds from the
sale of securities amounted to $1,681 million (2001 - $813.7 million). The
Corporation recorded gross realized gains of $36.9 million (2001 - $10.5
million), and gross realized losses of $28.8 million (2001 - $822 thousands),
which included the above-mentioned other-than-temporary impairments.
INVESTMENT SECURITIES HELD TO MATURITY
September 30, 2002
--------------------------------------------------------------
Unrealized Weighted
Amortized ---------- Market average
cost gains (losses) value yield%
--------- ----- -------- ----- --------
(Dollars in thousands)
U.S. Treasury Securities:
Within 1 year $ 324 $ 324 1.67
Obligations of U.S.
Government Agencies:
Within 1 year 771,479 $ (133) 771,346 1.69
After 10 years 420,238 $3,277 (695) 422,820 7.78
Puerto Rico Government
Obligations:
After 1 to 5 years 5,000 50 5,050 5.00
After 10 years 4,285 463 4,748 6.50
---------- ------ ------- ----------
United States and Puerto
Rico Government
Obligations $1,201,326 $3,790 $ (828) $1,204,288 3.85
========== ====== ======= ==========
Corporate bonds:
After 1 to 5 years $ 64,327 $ 26 $ (388) $ 63,965 3.38
========== ====== ======= ==========
Total Investment Securities
Held to Maturity $1,265,653 $3,816 $(1,216) $1,268,253 3.83
========== ====== ======= ==========
December 31, 2001
---------------------------------------------------------
Unrealized Weighted
Amortized ---------- Market average
cost gains (losses) value yield%
--------- ----- -------- ----- --------
(Dollars in thousands)
U.S. Treasury Securities:
Within 1 year
Obligations of U.S.
Government Agencies:
Within 1 year
After 10 years $211,194 $ 3 $(6,466) $204,731 7.39
Puerto Rico Government
Obligations:
After 1 to 5 years 5,000 5,000 5.00
After 10 years 4,084 228 4,312 6.50
-------- ---- ------- --------
United States and Puerto
Rico Government
Obligations $220,278 $231 $(6,466) $214,043 7.32
======== ==== ======= ========
Corporate bonds:
After 1 to 5 years $ 64,018 $ (277) $ 63,741 3.49
======== ======= ========
Total Investment Securities
Held to Maturity $284,296 $231 $(6,743) $277,784 6.46
======== ==== ======= ========
Expected maturities of certain securities might differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties. At January 1, 2001, in connection
with the adoption of SFAS No. 133, the Corporation transferred a portfolio of
$207 million of GNMA certificates from held to maturity into the available for
sale category. The unrealized gain of $994,500, net of taxes, was reflected in
other comprehensive income as a cumulative effect of the change in accounting
principle. The $771.5 million in U.S. Government Agencies within one year are
due during the fourth quarter of 2002.
7 - INVESTMENT IN FHLB STOCK
At September 30, 2002 and December 31, 2001, there were investments in FHLB
stock with book value of $35,629,500 and $22,890,600, respectively. The
estimated market value of such investments is its redemption value.
14
8 - LOANS RECEIVABLE
The following is a detail of the loan portfolio:
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
(IN THOUSANDS)
Residential real estate loans:
Secured by first mortgages:
Conventional $ 1,290,723 $ 955,573
Insured by government agencies:
Federal Housing Administration and Veterans
Administration 35,699 25,211
Puerto Rico Housing Bank and Finance Agency 20,159 23,513
Secured by second mortgages 6,755 8,088
----------- -----------
1,353,336 1,012,385
Deferred net loan fees (4,534) (5,107)
----------- -----------
Residential real estate loans 1,348,802 1,007,278
----------- -----------
Commercial loans:
Construction loans 233,064 219,396
Commercial loans 1,354,255 1,238,173
Commercial mortgage 835,465 688,922
----------- -----------
Commercial loans 2,422,784 2,146,491
----------- -----------
Finance leases 140,665 127,935
----------- -----------
Consumer and other loans:
Personal 362,299 362,490
Personal lines of credit 10,446 11,216
Auto 505,491 502,902
Boat 48,999 39,570
Credit card 157,256 176,226
Home equity reserve loans 1,926 1,851
Unearned interest (56,135) (71,810)
----------- -----------
Consumer and other loans 1,030,282 1,022,445
----------- -----------
Loans receivable 4,942,533 4,304,149
Allowance for loan losses (107,974) (91,060)
----------- -----------
Loans receivable-net 4,834,559 4,213,089
Loans held for sale 4,631 4,630
----------- -----------
Total loans $ 4,839,190 $ 4,217,719
=========== ===========
9- IMPAIRED LOANS
At September 30, 2002, the Corporation had $24.9 million ($10.7 million at
December 31, 2001) in commercial and real estate loans over $1,000,000
considered impaired with an allowance of $5.5 million ($3.7 million at December
31, 2001), of which $5.0 million was established based on the fair value of the
collateral (2001-$2 million) and $538,000 was established based on the present
value of expected future cash flows (2001-$1.7 million). The allowance for
impaired loans is part of the allowance for loan losses. The average recorded
investment in impaired loans amounted to $19.1 million for the nine months ended
on September 30, 2002 (2001 - $11.9 million). Interest income in the amount of
approximately $720,000 and $268,200 was recognized on impaired loans for the
period ended on September 30, 2002 and 2001, respectively.
15
10 - SEGMENT INFORMATION
The Corporation has four reportable segments: Retail business, Treasury and
Investments, Commercial Corporate business and Other. Management determined the
reportable segments based on the internal reporting used to evaluate performance
and to assess where to allocate resources. Other factors such as the
Corporation's organizational chart, nature of the products, distribution
channels and the economic characteristics of the products were also considered
in the determination of the reportable segments.
The Retail business segment is composed of the Corporation's branches and
loan centers together with the retail products of deposits and consumer loans.
Consumer loans include loans such as personal, residential real estate, auto,
credit card and small loans. Finance leases are also included in Retail
business. The Commercial Corporate segment is composed of commercial loans
including commercial real estate and construction loans. The Treasury and
Investment segment is responsible for the Corporation investment portfolio and
treasury functions. The Other Income segment is mainly composed of insurance and
other commissions income.
The accounting policies of the segments are the same as those described in
Note 2 of the Corporation's financial statements for the year ended December 31,
2001 contained in the annual report of the Corporation.
The Corporation evaluates the performance of the segments based on net
interest income after the estimated provision for loan losses, other income and
direct operating expenses. The segments are also evaluated based on the average
volume of its earning assets less the allowance for loan losses.
The only intersegment transaction is the net transfer of funds between the
Treasury and Investment segment and the retail and commercial corporate
segments. The Treasury and Investment segment sells funds to the Retail and
Commercial Corporate segments to finance their lending activities and purchases
funds gathered by those segments. The interest rates charged or credited by
Investment and Treasury segment are based on market rates.
16
The following table presents information about the reportable segments (in
thousands):
TREASURY AND COMMERCIAL
RETAIL INVESTMENTS CORPORATE OTHER TOTAL
------ ----------- --------- ----- -----
FOR THE QUARTER ENDED SEPTEMBER 30, 2002:
Interest income $ 56,596 $ 42,171 $ 30,839 $ 129,606
Net (charge) credit for transfer of funds (11,812) 23,325 (11,513)
Interest expense (14,701) (54,567) (69,268)
Net interest income 30,083 10,929 19,326 60,338
Provision for loan losses (7,636) (6,365) (14,001)
Other income 9,875 6,456 1,654 $ 978 18,963
Direct operating expenses (17,304) (521) (1,406) (156) (19,387)
Segment income $ 15,018 $ 16,864 $ 13,209 $ 822 $ 45,913
Average earning assets $ 2,403,993 $ 3,712,785 $ 2,287,352 $ 8,404,130
FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2002:
Interest income $ 165,188 $ 146,945 $ 90,537 $ 402,670
Net (charge) credit for transfer of funds (35,583) 75,397 (39,814)
Interest expense (43,977) (160,560) (204,537)
Net interest income 85,628 61,782 50,723 198,133
Provision for loan losses (28,964) (19,337) (48,301)
Other income 29,307 5,147 3,737 $ 4,261 42,452
Direct operating expenses (52,371) (1,597) (4,182) (432) (58,582)
Segment income $ 33,600 $ 65,332 $ 30,941 $ 3,829 $ 133,702
Average earning assets $ 2,253,780 $ 3,669,010 $ 2,199,026 $ 8,121,816
TREASURY AND COMMERCIAL
RETAIL INVESTMENTS CORPORATE OTHER TOTAL
------ ----------- --------- ----- -----
FOR THE QUARTER ENDED SEPTEMBER 30, 2001:
Interest income $ 55,055 $ 39,114 $ 33,358 $ 127,527
Net (charge) credit for transfer of funds (6,727) 26,690 (19,963)
Interest expense (16,988) (48,550) (65,538)
Net interest income 31,340 17,254 13,395 61,989
Provision for loan losses (9,454) (3,336) (12,790)
Other income 8,468 356 1,101 $ 681 10,606
Direct operating expenses (16,731) (370) (1,230) (94) (18,425)
Segment income $ 13,623 $ 17,240 $ 9,930 $ 587 $ 41,380
Average earning assets $ 1,998,066 $ 2,550,249 $ 1,835,692 $ 6,384,007
FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2001:
Interest income $ 163,450 $ 113,726 $ 105,279 $ 382,455
Net (charge) credit for transfer of funds (11,774) 76,476 (64,702)
Interest expense (55,955) (153,937) (209,892)
Net interest income 95,721 36,265 40,577 172,563
Provision for loan losses (34,431) (11,159) (45,590)
Other income 26,399 10,215 3,114 $ 1,702 41,430
Direct operating expenses (49,681) (1,255) (3,785) (212) (54,933)
Segment income $ 38,008 $ 45,225 $ 28,747 $ 1,490 $ 113,470
Average earning assets $ 1,930,106 $ 2,383,722 $ 1,742,112 $ 6,055,940
17
The following table presents a reconciliation of the reportable segment
financial information to the consolidated totals (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
2002 2001 2002 2001
---- ---- ---- ----
Net income:
Total income for segments $ 45,913 $ 41,380 $ 133,702 $ 113,470
Other operating expenses (13,280) (11,585) (37,783) (35,112)
Income taxes (5,276) (6,776) (15,933) (15,366)
----------- ----------- ----------- -----------
Income before cumulative effect of
accounting change 27,357 23,019 79,986 62,992
Cumulative effect of accounting change (1,015)
----------- ----------- ----------- -----------
Total consolidated net income $ 27,357 $ 23,019 $ 79,986 $ 61,977
=========== =========== =========== ===========
Average assets:
Total average earning assets for segments $ 8,404,130 $ 6,384,007 $ 8,121,816 $ 6,055,940
Average non earning assets 313,294 324,810 315,402 326,255
----------- ----------- ----------- -----------
Total consolidated average assets $ 8,717,424 $ 6,708,817 $ 8,437,218 $ 6,382,195
=========== =========== =========== ===========
11 - INCOME TAX
The Puerto Rico Treasury Department is conducting an investigation of the
Bank's income tax returns for the years 1995, 1997, 1998 and 1999. Management
has prepared these tax returns in accordance with the Puerto Rico Internal
Revenue Code and its regulations. Therefore, Management believes that a
deficiency, if any, resulting from this investigation, will not have a material
effect on the Corporation's financial statements.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SELECTED FINANCIAL DATA
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ---------------------------
2002 2001 2002 2001
---- ---- ---- ----
CONDENSED INCOME STATEMENTS (IN THOUSANDS):
Interest income $ 129,606 $ 127,527 $ 402,670 $ 382,455
Interest expense 69,268 65,539 204,537 209,892
----------- ----------- ----------- -----------
Net interest income 60,338 61,988 198,133 172,563
Provision for loan losses 14,001 12,790 48,302 45,590
----------- ----------- ----------- -----------
Net interest income after provision
for loan losses 46,337 49,198 149,831 126,973
Other income 11,478 10,417 34,350 31,714
Gain on sale of investments, net 7,485 189 8,102 9,716
Other operating expense 32,667 30,009 96,364 90,045
----------- ----------- ----------- -----------
Income before income tax expense and cumulative
effect of accounting change 32,633 29,795 95,919 78,358
Income tax provision 5,276 6,776 15,933 15,366
----------- ----------- ----------- -----------
Income before cumulative effect of accounting change 27,357 23,019 79,986 62,992
Cumulative effect of accounting change (1,015)
----------- ----------- ----------- -----------
Net income $ 27,357 $ 23,019 $ 79,986 $ 61,977
=========== =========== =========== ===========
Net income available to common stockholders $ 20,606 $ 17,932 $ 60,330 $ 50,552
=========== =========== =========== ===========
PER COMMON SHARE RESULTS (DILUTED):
Income before cumulative effect of accounting change $ 0.51 $ 0.45 $ 1.49 $ 1.28
Cumulative effect of accounting change (0.02)
----------- ----------- ----------- -----------
Net income per common share $ 0.51 $ 0.45 $ 1.49 $ 1.26
=========== =========== =========== ===========
Cash dividends declared $ 0.10 $ 0.09 $ 0.30 $ 0.26
=========== =========== =========== ===========
SELECTED FINANCIAL RATIOS (IN PERCENT):
Average yield on earning assets (1) 6.37 8.29 7.09 8.70
Cost of interest bearing liabilities 3.59 4.46 3.69 5.03
Interest rate spread (1) 2.78 3.83 3.40 3.67
Net interest margin (1) 3.13 4.27 3.76 4.13
Net income to average total assets 1.26 1.37 1.26 1.29
Net income to average total equity 14.76 15.88 14.99 16.55
Net income to average common equity 21.65 22.80 22.21 22.49
Average equity to average total assets 8.50 8.64 8.43 7.82
Dividend payout ratio 19.40 19.28 19.84 20.53
Efficiency ratio (2) 41.19 41.34 40.05 42.08
SEPTEMBER 30, DECEMBER 31,
------------- ------------
2002 2001
---- ----
REGULATORY CAPITAL RATIOS (IN PERCENT):
Total capital to risk weighted assets 15.03 14.50
Tier 1 capital to risk weighted assets 12.84 12.16
Tier 1 capital to average assets 8.01 7.49
BALANCE SHEET DATA (IN THOUSANDS):
Loans and loans held for sale $4,947,164 $4,308,780
Allowance for loan losses 107,974 91,060
Investments 4,040,847 3,715,999
Total assets 9,188,172 8,197,518
Deposits 4,676,009 4,098,554
Borrowings 3,682,154 3,425,236
Total common equity 383,647 334,419
Total equity 744,147 602,919
Book value per common share $ 9.60 $ 8.39
Number of full service branches 54 48
Loan origination offices 42 43
(1) On a taxable equivalent basis.
(2) Other operating expenses to the sum of net interest income, other income
and gain on sale of investments, net.
19
RESULTS OF OPERATIONS
First BanCorp's results of operations depend primarily upon its net
interest income, which is the difference between the interest income earned on
its earning assets, including investment securities and loans, and the interest
expense on its interest bearing liabilities including deposits and borrowings.
The Corporation's results of operations also depend on the provision for loan
losses; other income, mainly service charges and fees on loans; operating
expenses, such as personnel, occupancy and other costs; gains on sales of
investments; and income taxes.
For the quarter ended on September 30, 2002, the Corporation recorded
earnings of $27,356,898 or $0.52 per common share (basic) and $0.51 per share
(diluted), a per share basis-diluted increase of 13.33% as compared to earnings
of $23,019,458 or $0.45 per common share (basic and diluted) for the third
quarter of 2001. Earnings for the nine months ended on September 30, 2002
amounted to $79,985,470 or $1.51 per common share (basic) and $1.49 per common
share (diluted), as compared to earnings of $61,977,063 or $1.27 per common
share (basic) and $1.26 per common share (diluted) for the same period of 2001.
On a per share basis-diluted, earnings for the nine months ended on September
30, 2002 increased by 18.25% as compared to earnings for the nine months ended
on September 30, 2001.
NET INTEREST INCOME
Net interest income for the three months ended on September 30, 2002
decreased by $1.7 million, as compared with the same quarter in 2001; or by $2.4
million on a taxable equivalent basis. Net interest income for the nine months
ended on September 30, 2002 increased by $25.6 million, as compared with the
same period in 2001; or by $41.3 million on a taxable equivalent basis. The
interest rate spread and net interest margin, on a taxable equivalent basis,
amounted to 2.78% and 3.13%, respectively, for the third quarter of 2002 as
compared to 3.83% and 4.27%, respectively, for the third quarter of 2001. The
interest rate spread and net interest margin on a taxable equivalent basis,
amounted to 3.40% and 3.76%, respectively, for the nine months ended on
September 30, 2002 as compared to 3.67% and 4.13%, respectively, for the nine
months ended on September 30, 2001.
Part I of the following table presents average volumes and rates on a
taxable equivalent basis and Part II describes the respective extent to which
changes in interest rates and changes in volume of interest-related assets and
liabilities have affected the Corporation's interest income and interest expense
during the periods indicated. For each category of earning assets and interest
bearing liabilities, information is provided on changes attributable to (i)
changes in volume (changes in volume multiplied by old rates), (ii) changes in
rate (changes in rate multiplied by old volumes). Rate-volume variances (changes
in rate multiplied by the changes in volume) have been allocated to the changes
in volume and changes in rate based upon their respective percentage of the
combined totals.
20
PART I
THREE MONTHS ENDED SEPTEMBER 30,
AVERAGE VOLUME INTEREST INCOME (1) / EXPENSE AVERAGE RATE (1)
---------------------------- ----------------------------- -----------------
2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
Earning assets:
Money market instruments $ 85,631 $ 91,172 $ 343 $ 767 1.59% 3.34%
Government obligations 1,603,265 646,289 15,644 9,081 3.87% 5.57%
Mortgage backed securities 1,754,525 1,579,849 28,982 30,620 6.55% 7.69%
FHLB stock 35,630 22,891 400 333 4.45% 5.77%
Corporate bonds 216,909 205,660 2,507 4,955 4.59% 9.56%
---------- ---------- -------- --------
Total investments 3,695,960 2,545,861 47,876 45,756 5.14% 7.13%
---------- ---------- -------- --------
Residential real estate loans 1,296,978 899,817 18,334 16,544 5.61% 7.29%
Construction 221,765 232,212 2,910 4,213 5.21% 7.20%
Commercial loans 2,117,907 1,623,402 28,044 29,392 5.25% 7.18%
Finance leases 139,473 130,080 3,678 3,687 10.46% 11.25%
Consumer loans 1,025,904 1,037,110 35,543 35,508 13.75% 13.58%
---------- ---------- -------- --------
Total loans (2) 4,802,027 3,922,621 88,509 89,344 7.31% 9.04%
---------- ---------- -------- --------
Total earning assets $8,497,987 $6,468,482 $136,385 $135,100 6.37% 8.29%
========== ========== ======== ========
Interest-bearing liabilities:
Deposits $4,440,916 $3,589,576 $ 33,650 $ 39,083 3.01% 4.32%
Other borrowed funds 2,883,648 1,945,957 31,552 22,889 4.34% 4.67%
FHLB advances 339,190 294,000 4,065 3,568 4.75% 4.81%
---------- ---------- -------- --------
Total interest-bearing liabilities $7,663,754 $5,829,533 $ 69,267 $ 65,540 3.59% 4.46%
========== ========== ======== ========
Net interest income $ 67,118 $ 69,560
======== ========
Interest rate spread 2.78% 3.83%
Net interest margin 3.13% 4.27%
NINE MONTHS ENDED SEPTEMBER 30,
AVERAGE VOLUME INTEREST INCOME (1) / EXPENSE AVERAGE RATE (1)
---------------------------- ----------------------------- -----------------
2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
Earning assets:
Money market instruments $ 62,620 $ 42,227 $ 804 $ 1,142 1.72% 3.62%
Government obligations 1,121,549 594,165 41,746 28,088 4.98% 6.32%
Mortgage backed securities 2,163,563 1,493,851 120,034 82,985 7.42% 7.43%
FHLB stock 31,617 21,487 1,119 989 4.73% 6.15%
Corporate bonds 275,740 233,076 12,782 15,519 6.20% 8.90%
---------- ---------- -------- --------
Total investments 3,655,089 2,384,806 176,485 128,723 6.46% 7.22%
---------- ---------- -------- --------
Residential real estate loans 1,155,906 827,474 52,447 48,596 6.07% 7.85%
Construction 215,562 222,710 8,623 13,887 5.35% 8.34%
Commercial loans 2,029,406 1,540,164 82,219 91,393 5.42% 7.93%
Finance leases 135,375 127,640 10,990 11,054 10.85% 11.58%
Consumer loans 1,022,101 1,039,191 104,688 105,865 13.69% 13.62%
---------- ---------- -------- --------
Total loans (2) 4,558,350 3,757,179 258,967 270,795 7.60% 9.64%
---------- ---------- -------- --------
Total earning assets $8,213,439 $6,141,985 $435,452 $399,518 7.09% 8.70%
========== ========== ======== ========
Interest-bearing liabilities:
Deposits $4,303,587 $3,386,550 $ 99,930 $124,737 3.10% 4.92%
Other borrowed funds 2,782,734 1,954,057 92,745 76,475 4.46% 5.23%
FHLB advances 330,299 235,054 11,862 8,680 4.80% 4.94%
---------- ---------- -------- --------
Total interest-bearing liabilities $7,416,620 $5,575,661 $204,537 $209,892 3.69% 5.03%
========== ========== ======== ========
Net interest income $230,915 $189,626
======== ========
Interest rate spread 3.40% 3.67%
Net interest margin 3.76% 4.13%
(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.
21
PART II
THREE MONTHS ENDED ON SEPTEMBER 30, NINE MONTHS ENDED ON SEPTEMBER 30,
2002 COMPARED TO 2001 2002 COMPARED TO 2001
-------------------------------------- ---------------------------------------
VARIANCE VARIANCE VARIANCE VARIANCE
DUE TO DUE TO TOTAL DUE TO DUE TO TOTAL
VOLUME RATE VARIANCE VOLUME RATE VARIANCE
-------- --------- -------- --------- -------- --------
(IN THOUSANDS)
Interest income on earning assets:
Money market instruments $ (44) $ (380) $ (424) $ 408 $ (746) $ (338)
Government obligations 11,326 (4,763) 6,563 22,324 (8,666) 13,658
Mortgage backed securities 3,103 (4,741) (1,638) 37,231 (182) 37,049
FHLB stock 163 (96) 67 414 (284) 130
Corporate bonds 130 (2,578) (2,448) 2,299 (5,036) (2,737)
-------- -------- ------- --------- -------- --------
Total investments 14,678 (12,558) 2,120 62,676 (14,914) 47,762
-------- -------- ------- --------- -------- --------
Consumer loans (392) 427 35 (1,644) 467 (1,177)
Real estate loans 6,413 (4,623) 1,790 17,137 (13,286) 3,851
Construction loans (150) (1,153) (1,303) (364) (4,900) (5,264)
Commercial loans 7,760 (9,108) (1,348) 24,827 (34,001) (9,174)
Finance leases 255 (264) (9) 651 (715) (64)
-------- -------- ------- --------- -------- --------
Total loans 13,886 (14,721) (835) 40,607 (52,435) (11,828)
-------- -------- ------- --------- -------- --------
Total interest income 28,564 (27,279) 1,285 103,283 (67,349) 35,934
-------- -------- ------- --------- -------- --------
Interest expense on interest bearing
liabilities:
Deposits 7,774 (13,207) (5,433) 27,645 (52,452) (24,807)
Other borrowed funds 10,594 (1,931) 8,663 30,086 (13,816) 16,270
FHLB advances 543 (46) 497 3,474 (292) 3,182
-------- -------- ------- --------- -------- --------
Total interest expense 18,911 (15,184) 3,727 61,205 (66,560) (5,355)
-------- -------- ------- --------- -------- --------
Change in net interest income $ 9,653 $(12,095) $(2,442) $ 42,078 $ (789) $ 41,289
======== ======== ======= ========= ======== ========
Total interest income includes tax equivalent adjustments based on the
Puerto Rico income tax rate of $6.8 million and $32.8 million for the three and
nine months ended on September 30, 2002, respectively, and of $7.6 million and
$17.1 million for the three and nine months ended on September 30, 2001,
respectively. The adjustments have been made on debt securities (primarily
United States and Puerto Rico government obligations) and on loans guaranteed by
United States and Puerto Rico government agencies. The computation considers the
interest expense disallowance as required by the Puerto Rico tax law.
INTEREST INCOME
Interest income increased by $2.1 million and $20.2 million for the three
and nine months ended on September 30, 2002, respectively, as compared to the
same periods for 2001. When adjusted to a taxable equivalent basis, interest
income increased by $1.3 million and $35.9 million for the three and nine months
ended on September 30, 2002, as compared to the same periods in 2001. The yield
on earning assets, on a taxable equivalent basis, amounted to 6.37% and 8.29%
for the three months ended on September 30, 2002 and 2001, respectively; and
7.09% and 8.70% for the nine months ended on September 30, 2002 and 2001,
respectively. The improvement in the interest income for the periods analyzed
was due to the increase in the average volume of earning assets, partially
offset by a lower yield due to lower market rates. However, interest income for
the third quarter of 2002, decreased by $6.7 million when compared to the second
quarter of 2002, and by $12.8 million when adjusted to a taxable equivalent
basis, because, as part of a restructuring of the securities portfolio, the
Corporation sold during late June and early July approximately $1 billion in
mortgage backed securities, which
22
were not substituted until August 19, 2002. The proceeds of the sales were
placed in lower yield agency discount notes, until the substitution was made.
The overall yield of the mortgage backed securities portfolio has decreased due
to the acceleration of the amortization of premiums on this portfolio, which has
resulted from the higher prepayments of the mortgage loans underlying the
mortgage backed securities (see page 13 for related information).
The average volume of earning assets increased by $2,030 million and $2,071
million for the three and nine months ended on September 30, 2002, respectively,
as compared to the same periods in 2001. The average volume of total investments
increased by $1,150 million and $1,270 million for the three and nine month
period ended on September 30, 2002 as compared with the same periods in 2001,
mostly concentrated in government obligations and mortgage backed securities.
The average volume of the loan portfolio increased by $880 million and $801
million for the three and nine months ended on September 30, 2002, respectively,
as compared with the same periods in 2001, mostly concentrated in residential
real estate and commercial loans.
INTEREST EXPENSE
Interest expense increased by $3.7 million and decreased by $5.4 million
for the three and nine months ended on September 30, 2002, respectively, as
compared with the amounts recorded in the same periods of 2001. The decrease in
the interest expense for the period ended on September 30, 2002 when compared
with the same period last year, was the result of a decrease in the cost of
interest bearing liabilities, due to lower market rates, causing a positive rate
variance of $15.2 million and $66.6 million, for the three and nine months
period ended September 30, 2002. This positive effect was partially offset with
an increase in the average volume of interest bearing liabilities generating a
negative volume variance of $18.9 million and $61.2 million, for the three and
nine months period ended September 30, 2002. The cost of interest bearing
liabilities decreased from 4.46% and 5.03% for the three and nine month periods
ended on September 30, 2001 to 3.59% and 3.69% for the three and nine month
periods ended on September 30, 2002.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
For the three and nine months ended on September 30, 2002, the Corporation
provided $14.0 million and $48.3 million for loan losses, as compared to $12.8
million and $45.6 million for the same periods of 2001. The provision for loan
losses recorded for such periods was necessary to maintain the allowance for
loan losses at a level that Management considers adequate to absorb probable
losses incurred in the portfolio. The Corporation establishes the allowance for
loan losses based on its asset classification report to cover the total amount
of any assets classified as a "loss," the probable loss exposure of other
classified assets, and a percentage of the assets not classified. The adequacy
of the allowance for loan losses is also based upon a number of additional
factors including historical loan loss experience, current economic conditions,
fair value of the underlying collateral, financial condition of the borrowers,
and, as such, includes amounts based on judgments and estimates made by
Management. Although Management believes that the allowance for loan losses is
adequate, factors beyond the Corporation's control, including factors affecting
the Puerto Rico economy, may contribute to delinquencies and defaults thus
necessitating additional reserves.
The allowance for loan losses on commercial and real estate loans over $1
million is determined based on the present value of expected future cash flows
or the fair value of the collateral, if the loan is collateral dependent.
23
The following table sets forth an analysis of the activity in the allowance
for loan losses during the periods indicated:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2002 2001 2002 2001
---- ---- ---- ----
(DOLLARS IN THOUSANDS)
Allowance for loan losses, beginning of period $ 104,150 $ 84,009 $ 91,060 $ 76,919
Provision for loan losses 14,001 12,790 48,301 45,590
--------- -------- --------- --------
Loans Charge-Offs:
Residential real estate (250) (77) (288) (184)
Commercial (1,007) (1,121) (3,273) (8,306)
Finance leases (602) (261) (1,704) (1,613)
Consumer (10,228) (10,887) (31,651) (31,512)
--------- -------- --------- --------
Total charge-offs (12,087) (12,346) (36,916) (41,615)
--------- -------- --------- --------
Recoveries of loans previously charged-off:
Residential real estate 12 12
Commercial 97 17 288 99
Finance leases 132 109 292 205
Consumer 1,669 1,691 4,937 5,072
--------- -------- --------- --------
Total recoveries 1,910 1,817 5,529 5,376
--------- -------- --------- --------
Net charge-offs (10,177) (10,529) (31,387) (36,239)
--------- -------- --------- --------
Allowance for loan losses, end of period $ 107,974 $ 86,270 $ 107,974 $ 86,270
========= ======== ========= ========
Allowance for loan losses to total loans 2.18% 2.16% 2.18% 2.16%
Net charge-offs annualized to average loans
outstanding during the period 0.85% 1.07% 0.92% 1.29%
OTHER INCOME
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2002 2001 2002 2001
-------- -------- ------- -------
(IN THOUSANDS)
Other fees on loans $ 4,698 $ 4,735 $15,426 $14,529
Service charges on deposit accounts 2,116 2,318 6,949 7,089
Mortgage banking activities 1,861 268 3,171 1,202
Rental income 602 595 1,730 1,691
Insurance income 618 306 1,614 306
Other commissions 204 98 974 900
Dividend on equity securities 179 167 507 500
Other operating income 2,408 1,930 7,441 5,497
-------- -------- ------- -------
Other income before gain on
investments and derivatives loss 12,686 10,417 37,812 31,714
-------- -------- ------- -------
Gain on sale of investments 21,563 189 36,602 9,716
Impairment on investments (14,078) (28,500)
-------- -------- ------- -------
Gain on sale of investments, net 7,485 189 8,102 9,716
-------- -------- ------- -------
Derivatives loss (1,208) (3,462)
-------- -------- ------- -------
Total $ 18,963 $ 10,606 $42,452 $41,430
======== ======== ======= =======
24
Other income primarily consists of fees on loans; service charges on
deposit accounts; commissions derived from various banking, securities and
insurance activities; net gains on sale of investments; and derivatives. Other
fees on loans consist mainly of credit card fees and late charges collected on
loans.
Service charges on deposit accounts represent an important and stable
source of other income for the Corporation.
Mortgage banking activities income reflects the servicing fees on
residential mortgage loans originated by the Corporation and subsequently
securitized or sold and gain on sales of loans.
The Corporation's subsidiary, First Leasing and Rental Corporation,
generates income on the rental of various types of motor vehicles.
Insurance income consists of commissions earned by the new subsidiary
FirstBank Insurance Agency, Inc.
Other commissions income is the result of an agreement with Goldman, Sachs
& Co. to participate in bond issues by the Government Development Bank of Puerto
Rico, and an agreement with a national brokerage house in Puerto Rico to offer
brokerage services in selected branches.
The other operating income category is composed of miscellaneous fees such
as check fees and rental of safe deposit boxes. Other operating income also
includes earned discounts on tax credits purchased and utilized against income
tax payments, and other fees generated on the portfolio of commercial loans.
The gain (loss) on investment securities reflects gains or losses as a
result of sales that are in consonance to the Corporation's investment policies
as well as impairments on securities held in the portfolio. During the period
ended on September 30, 2002 gains of $36.6 million on the sale of mortgage
backed securities, corporate bonds and equity securities were realized, as part
of the Bank's restructuring of the investment portfolio, as explained in Note 6
on the interim financial statements. In addition, during the period ended on
September 30, 2002 losses on the impairment of certain securities were realized
as explained in Note 6 on the interim financial statements.
The derivatives loss consists mainly of an unrealized loss of $3.9 million
due to the valuation to fair value of a portfolio of swaps that does not qualify
for hedge accounting in accordance with SFAS No. 133, as previously explained in
Note 3 on the interim financial statements.
25
OTHER OPERATING EXPENSES
The following table presents the detail of other operating expenses for
the periods indicated:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2002 2001 2002 2001
------- ------- ------- -------
(IN THOUSANDS)
Employees' compensation and benefits $14,317 $13,865 $43,135 $40,457
Occupancy and equipment 7,036 6,350 20,726 18,177
Business promotion 2,412 1,868 7,510 6,140
Taxes 1,770 1,634 5,057 4,333
Insurance 689 588 2,048 1,706
Net cost of operations and
disposition of other real estate owned 11 216 62 344
Professional fees 630 521 1,790 1,453
Servicing and processing fees 1,220 1,342 3,864 3,845
Communications 1,438 1,393 4,089 4,052
Supplies and printing 265 237 1,006 895
Other 2,880 1,995 7,077 8,644
------- ------- ------- -------
Total $32,668 $30,009 $96,364 $90,046
======= ======= ======= =======
Operating expenses increased to $32.7 million and $96.4 million for the
three and nine months ended on September 30, 2002, respectively, as compared to
$30.0 million and $90.0 million for the same periods in 2001. The increase in
operating expenses for 2002 is mainly the result of technology investments and
the general growth in the subsidiary Bank's operations.
Management's goal has been to make only expenditures that contribute
clearly and directly to increase the efficiency and profitability of the
Corporation. This control over other operating expenses has been an important
factor contributing to the improvement in earnings in recent years. The
Corporation's efficiency ratio, which is the ratio of other operating expenses
to the sum of net interest income, other income and gain on sale of investments,
net, was 40.05% for the nine months period ended September 30, 2002 as compared
to 42.08% for the same period last year.
For the nine-month period ended on September 30, 2002, other operating
expenses include a core deposit intangible amortization of $689,446. The
estimated aggregate amortization expense on this core deposit intangible asset
for each of the five succeeding fiscal years will amount to approximately
$919,260. This amortization expense will increase in the next quarter by the
amortization of the core deposit intangible resulting from the recent
acquisition of JP Morgan Chase's operations in the Virgin Islands.
PROVISION FOR INCOME TAX
The provision for income tax amounted to $15.9 million (or 16.6% of pretax
earnings) for the nine months ended on September 30, 2002 as compared to $15.4
million (or 19.6% of pretax earnings) for the same period in 2001. The
Corporation has maintained an effective tax rate lower than the statutory rate
of 39%, mainly by investing in obligations and loans exempt from federal and
Puerto Rico income taxes. The decrease in the effective tax rate for the period
ended on September 30, 2002 when compared with the same period last year is
mainly due to an increase in the portfolio of exempt investments.
26
FINANCIAL CONDITION
ASSETS
Total assets as of September 30, 2002 amounted to $9,188 million, an
increase of $990 million as compared to total assets as of December 31, 2001 of
$8,198 million. The increase was mainly the result of an increase of $638.4
million in total loans and $324.8 million in total investments and money market
instruments.
The composition of loans receivable:
SEPTEMBER 30, DECEMBER 31, INCREASE
2002 2001 (DECREASE)
------------- ------------ ----------
(DOLLARS IN THOUSANDS)
Residential real estate loans $1,353,433 $1,011,908 $341,525
---------- ---------- --------
Commercial real estate loans 835,465 688,922 146,543
Construction loans 233,064 219,396 13,668
Commercial loans 1,354,255 1,238,173 116,082
---------- ---------- --------
Total commercial 2,422,784 2,146,491 276,293
---------- ---------- --------
Finance leases 140,665 127,935 12,730
Consumer and other loans 1,030,282 1,022,445 7,837
---------- ---------- --------
Total $4,947,164 $4,308,779 $638,385
========== ========== ========
The fluctuation in the loans receivable category was the net result of
total loan origination and purchases of $1,360 million and repayments and other
adjustments of $722 million. The Corporation continued its strategy of
diversifying its loan portfolio composition through the origination of
commercial loans and residential real estate loans. This resulted in an increase
of $276.3 million in the commercial loan portfolio and of $341.5 million in
residential real estate loans. Finance leases, which are mostly composed of
loans to individuals to finance the acquisition of an auto, increased by $12.7
million. Consumer and other loans increased by $7.8 million as compared with the
same portfolio at December 31, 2001.
NON-PERFORMING ASSETS
Total non-performing assets are the sum of non-accruing loans, OREO's,
other repossessed properties and investment securities. Non-accruing loans are
loans as to which interest is no longer being recognized. When loans fall into
non-accruing status, all previously accrued and uncollected interest is charged
against interest income.
At September 30, 2002, total non-performing assets amounted to $93.6
million (1.02% of total assets) as compared to $79 million (0.96% of total
assets) at December 31, 2001 and $74 million (1.25% of total assets) at December
31, 2000. The Corporation's allowance for loan losses to non-performing loans
ratio was 130.0% at September 30, 2002 as compared to 124.7% and 113.6% at
December 31, 2001 and 2000, respectively. The increase in non-performing assets
when compared to the amount reported at December 31, 2001, is mainly due to a
$11.2 million construction loan fully secured by finished homes, where the
Corporation stops accruing interest due to a slowdown in the selling process of
the homes. At November 7, 2002, this loan has an outstanding balance of $10.4
million, and 50% of the houses have been either sold or optioned and in the
process of closing.
Past due loans are loans delinquent 90 days or more as to principal and/or
interest and still accruing interest.
27
The following table presents non-performing assets at the dates indicated:
SEPTEMBER 30, DECEMBER 31,
2002 2001 2000
--------- --------- ---------
(DOLLARS IN THOUSANDS)
Non-accruing loans:
Residential real estate $ 18,000 $18,540 $15,977
Commercial and commercial real estate 43,264 29,378 31,913
Finance leases 2,402 2,469 2,032
Consumer 19,373 22,611 17,794
-------- ------- -------
83,039 72,998 67,716
-------- ------- -------
Other real estate owned (OREO) 1,677 1,456 2,981
Other repossessed property 5,182 4,596 3,374
Investment securities 3,750
-------- ------- -------
Total non-performing assets $ 93,648 $79,050 $74,071
======== ======= =======
Past due loans $ 22,027 $27,497 $16,358
Non-performing assets to total assets 1.02% 0.96% 1.25%
Non-performing loans to total loans 1.68% 1.69% 1.94%
Allowance for loan losses $107,974 $91,060 $76,919
Allowance to total non-performing loans 130.03% 124.74% 113.59%
NON-ACCRUING LOANS
RESIDENTIAL REAL ESTATE LOANS - The Corporation classifies all residential
real estate loans delinquent 90 days or more in non-accruing status. Even though
these loans are in non-accruing status, Management considers based on the value
of the underlying collateral and the loan to value ratios, that no material
losses will be incurred in this portfolio. Management's understanding is based
on the historical experience of the Corporation. Non-accruing residential real
estate loans amounted to $18 million (1.33% of total residential real estate
loans) at September 30, 2002, as compared to $19 million (1.83% of total
residential real estate loans) and $16 million (2.14% of total residential real
estate loans) at December 31, 2001 and 2000, respectively.
COMMERCIAL LOANS - The Corporation places all commercial loans (including
commercial real estate and construction loans) 90 days delinquent as to
principal and interest in non-accruing status. The risk exposure of this
portfolio is diversified. Non-accruing commercial loans amounted to $43.3
million (1.79% of total commercial loans) at September 30, 2002 as compared to
$29 million (1.37% of total commercial loans) and $32 million (2.01% of total
commercial loans) at December 31, 2001 and 2000, respectively. At September 30,
2002, there were three non-accruing commercial loans of over $1 million, with
outstanding balances of $1.4 million, $1.2 million and $1.4 million,
respectively, and the above-mentioned non-accruing construction loan of $11.2
million.
FINANCE LEASES - Finance leases are classified as non-accruing status when
they are delinquent 90 days or more. Non-accruing finance leases amounted to
$2.4 million (1.71% of total finance leases) at September 30, 2002, as compared
to $2 million (1.93% of total finance leases) and $2 million (1.65% of total
finance leases) at December 31, 2001 and 2000, respectively.
CONSUMER LOANS - Consumer loans are classified as non-accruing when they
are delinquent 90 days in auto, boat and home equity reserve loans, 120 days in
personal loans (including small loans) and 180 days in credit cards and personal
lines of credit.
28
Non-accruing consumer loans amounted to $19.4 million (1.88% of the total
consumer loan portfolio) at September 30, 2002, $23 million (or 2.21% of the
total consumer loan portfolio) at December 31, 2001 and $18 million (or 1.71% of
the total consumer loan portfolio) at December 31, 2000.
OTHER REAL ESTATE OWNED (OREO)
OREO acquired in settlement of loans is carried at the lower of cost
(carrying value of the loan) or fair value less estimated cost to sell off the
real estate at the date of acquisition.
OTHER REPOSSESSED PROPERTY
The other repossessed property category includes repossessed boats and
autos acquired in settlement of loans. Repossessed boats are recorded at the
lower of cost or estimated fair value. Repossessed autos are recorded at the
principal balance of the loans less an estimated loss on the disposition.
INVESTMENT SECURITIES
This category presents the carrying amount of $3.8 million of the Bank's
investment in WorldCom Corporation bonds which was reclassified to non-accruing
status on June 30, 2002 as explained in Note 6 on the interim financial
statements.
PAST DUE LOANS
Past due loans are accruing commercial and consumer loans, which are
contractually delinquent 90 days or more. Past due commercial loans are current
as to interest but delinquent in the payment of principal. Past due consumer
loans include personal lines of credit and credit card loans delinquent 90 days
up to 179 days and personal loans (including small loans) delinquent 90 days up
to 119 days.
SOURCES OF FUNDS
As of September 30, 2002, total liabilities amounted to $8,444 million, an
increase of $849 million as compared to $7,595 million as of December 31, 2001.
The increase in total liabilities was mainly due to: (1) an increase in total
deposits of $577.5 million; (2) an increase in federal funds and securities sold
under agreements to repurchase of $277.6 million; (3) an increase in accounts
payable and other liabilities of $15.1 million; net of (4) a decrease in
advances from FHLB of $20.7 million.
The Corporation maintains unsecured standby lines of credit with other
banks. At September 30, 2002, the Corporation's total unused lines of credit
with these banks amounted to approximately $180,000,000 (2001 - $180,000,000).
At September 30, 2002, the Corporation has an available line of credit with the
FHLB guaranteed with excess collateral, in the amount of $128,017,076. At
September 30, 2002, the Corporation has available collateral that can be pledged
with the FHLB to obtain additional line of credit in the amount of $587,373,917.
CAPITAL
Total stockholders' equity as of September 30, 2002 amounted to $744
million, increasing by $141 million from the amount as of December 31, 2001. The
increase was mainly the result of earnings for the period ended on September 30,
2002 of $80 million, the issuance of 3,680,000 shares of preferred stock at $89
million, the issuance of 64,500 shares of common stock through the exercise of
stock options with proceeds of $1,340,843, the positive fluctuation in the
valuation of securities available for sale of $2.6 million, reduced by dividends
paid of $31.6 million.
29
The Corporation is subject to various regulatory capital requirements
imposed by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Corporation's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Corporation must meet specific capital guidelines that involve quantitative
measures of the Corporation's assets, liabilities, and certain off-balance sheet
items as calculated under regulatory accounting practices. The Corporation's
capital amounts and classification are also subject to qualitative judgment by
the regulators about components, risk weightings and other factors.
Capital standards established by regulations require the Corporation to
maintain minimum amounts and ratios of Tier 1 capital to total average assets
(leverage ratio) and ratios of Tier 1 and total capital to risk-weighted assets,
as defined in the regulations. The total amount of risk-weighted assets is
computed by applying risk weighting factors to the Corporation's assets, which
vary from 0% to 100% depending on the nature of the asset.
At September 30, 2002 and December 31, 2001, the most recent notification
from FDIC, categorized the Corporation as a well capitalized institution under
the regulatory framework for prompt corrective action. To be categorized as well
capitalized the Corporation must maintain minimum total risk based, Tier 1 risk
based and Tier 1 leverage ratios as set forth in the following table. Management
believes that there are no conditions or events since that date that have
changed that classification.
The Corporation's and its banking subsidiary's regulatory capital positions
were as follows:
REGULATORY REQUIREMENTS
---------------------------------------------
FOR CAPITAL
ACTUAL ADEQUACY PURPOSES TO BE WELL CAPITALIZED
-------------------- ------------------- ------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
At September 30, 2002
Total Capital (to Risk-Weighted Assets):
First BanCorp $813,415 15.03% $432,999 8% $541,249 10%
FirstBank 740,820 13.73% 431,576 8% 539,470 10%
Tier I Capital (to Risk-Weighted Assets):
First BanCorp $694,738 12.84% $216,499 4% $324,749 6%
FirstBank 622,362 11.54% 215,788 4% 323,682 6%
Tier I Capital (to Average Assets):
First BanCorp $694,738 8.01% $260,174 3% $433,623 5%
FirstBank 622,362 7.23% 258,300 3% 430,500 5%
At December 31, 2001
Total Capital (to Risk-Weighted Assets):
First BanCorp $678,679 14.50% $374,498 8% $468,123 10%
FirstBank 590,652 12.75% 370,472 8% 463,090 10%
Tier I Capital (to Risk-Weighted Assets):
First BanCorp $569,255 12.16% $187,249 4% $280,874 6%
FirstBank 481,850 10.41% 185,236 4% 277,854 6%
Tier I Capital (to Average Assets):
First BanCorp $569,255 7.49% $228,074 3% $380,124 5%
FirstBank 481,850 6.40% 225,738 3% 376,231 5%
30
DIVIDENDS
During the period ended September 30, 2002, the Corporation declared a
quarterly cash dividend of $0.10 per common share representing a 15% increase
over the quarterly cash dividend of $0.087 per common share declared for the
same period in 2001. Dividends per share were adjusted to retroactively consider
the common stock split declared on August 27, 2002. Total dividends declared per
common share for the period ended on September 30, 2002 amounted to $12.0
million for an annualized dividend payout ratio of 19.84% as compared to $10.4
million for the period ended September 30, 2001 (or a 20.53% dividend payout
ratio). Dividends declared on preferred stock amounted to $19.7 million for the
period ended on September 30, 2002 as compared to $11.4 million for the same
period last year.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
The following table presents a detail of the maturities of contractual debt
obligations and commitments to extend credit:
Total Less than 1 year 1-3 years 4-5 year After 5 years
----- ---------------- --------- -------- -------------
Contractual Obligations:
Federal funds purchased and
securities sold under agreements
to repurchase, excluding accrued
interest $3,264,097 $1,189,137 $156,500 $100,000 $1,818,460
Advances from FHLB 323,000 50,000 273,000
Subordinated Notes 84,364 84,364
---------- ---------- -------- -------- ----------
Total Contractual Cash Obligations $3,671,461 $1,189,137 $290,864 $100,000 $2,091,460
========== ========== ======== ======== ==========
Other Commitments:
Lines of Credit $ 322,179 $ 322,179
Standby Letters of Credit 27,526 27,526
Other Commercial Commitments 706,090 706,090
---------- ----------
Total Commercial Commitments $1,055,795 $1,055,795
========== ==========
The Corporation has obligations and commitments to make future payments
under contracts, such as debt, and under other commitments to extend credit.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Since
certain commitments are expected to expire without being drawn upon, the total
commitment amount does not necessarily represent future cash requirements. In
the case of credit cards and personal lines of credit, the Corporation can at
any time and without cause, cancel the unused credit facility.
The Corporation has obligations to make future payments under lease
agreements contracts. The maturities of the operational leases are included on
page 75 of the Corporation's annual report to security holders for the year
ended December 31, 2001.
CRITICAL ACCOUNTING POLICIES AND PRACTICES
The information required herein is incorporated by reference from page 43
of the annual report to security holders for the year ended December 31, 2001.
31
LIQUIDITY
Liquidity refers to the level of cash and eligible investments readily
available to meet loan and investment commitments, potential deposit outflows
and debt repayments. The Corporation's liquidity position and liquidity targets
are reviewed on a weekly basis by the Asset Liability Management and Investment
Committee (ALCO), using measures of liquidity developed by Management.
The Corporation's principal sources of short-term funds are loan
repayments, deposits, securities sold under agreements to repurchase, and lines
of credit with the FHLB and other financial institutions. The Investment
Committee reviews credit availability on a regular basis. In the past, the
Corporation has securitized and sold auto and mortgage loans as a supplementary
source of funding. Commercial paper had also provided additional funding. The
Corporation has obtained long-term funding through the issuance of notes and
long-term brokered certificates of deposit. The Corporation's principal uses of
funds are the origination of loans and investments, and the repayment of
maturing deposit accounts and borrowings.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 ALCO is composed of the following officers: the President and CEO, the
Senior Executive Vice President and Chief Financial Officer, the Senior
Executive Vice President and Chief Lending Officer, the Executive Vice President
of Mortgage Banking, the Senior Vice President of Investments and Treasury, and
the Economist. The ALCO meets on a weekly basis. The Economist also acts as
secretary, keeping minutes of all meetings. An Investment Committee for First
BanCorp also monitors the investment portfolio of the Holding Company, including
a stock portfolio which amounted to $34 million at September 30, 2002. This
Committee meets weekly and has the same membership as the ALCO Committee
described previously.
Committee meetings focus on, among other things, current and expected
conditions in world financial markets, competition and prevailing rates in the
local deposit market, reviews of liquidity, unrealized gains and losses in
securities, recent or proposed changes to the investment portfolio, alternative
funding sources and their costs, hedging and the possible purchase of
derivatives such as swaps and caps, and any tax or regulatory issues which may
be pertinent to these areas. The ALCO approves funding decisions in 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 overall strategy of Management for controlling interest rate risk has
been to fund variable rate mortgage loans and commercial loans primarily through
variable rate wholesale funding. Fixed rate loans and investments are funded
primarily through retail deposits and fixed rate wholesale funding. These
formulas are not rigid, so the matching between assets and liabilities may vary
from time to time. The significant decrease in market rates during 2002 has
placed the Corporation in an asset sensitive position, due to the acceleration
of prepayments on its higher rate, long term mortgage backed securities. Most of
these securities were financed with fixed rate, wholesale funding, as explained
above. For this reason the Corporation restructured its mortgage backed
securities portfolio during the second half of 2002. See related information on
page 13 of this report.
32
The Corporation uses simulations to measure the effects of changing interest
rates on net interest income. These measures are carried out over one and two
year time horizons, assuming gradual upward interest rate movements of 200 basis
points and downward movements of 150 basis points over a twelve month period.
Simulations are carried out in two ways:
(1) using a balance sheet which is assumed to be at the same levels existing
on the simulation date, adjusted for any major transactions shortly after
that 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 no growth balance sheet as of September 30, 2002, tax equivalent
net interest income for the next twelve months would increase by $18.9 million
(6.3%) under a rising rate scenario and would decrease by $8.2 million (2.8%)
under falling rates.
The growing balance sheet simulations as of September 30, 2002 indicate
that tax equivalent net interest income for the following twelve months would
rise by $14.9 million (4.5%) under a rising rate scenario and would decrease by
$5.5 million (1.7%) with falling rates.
These simulations assume gradual upward or downward movements of interest
rates over the first year, with the change totaling 200 basis points in an
upward direction and 150 basis points in a downward direction at the end of the
twelve-month period. The balance sheet is divided into groups of similar assets
and liabilities in order to simplify the process of carrying out these
projections. As interest rates rise or fall, these simulations incorporate
expected future lending rates, current and expected future funding sources and
cost, the possible exercise of options, changes in prepayment rates, and other
factors which may be important in determining the future growth of net interest
income. All computations are done on a tax equivalent basis, including the
effects of the changing cost of funds on the tax-exempt spreads of certain
investments. The projections are carried out for First BanCorp on a fully
consolidated basis.
These simulations are highly complex, and they use many simplifying
assumptions 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.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Within the 90 days prior to the filing date of this Quarterly Report on
Form 10-Q, the Corporation's Management, including the Chief Executive Officer
and the Chief Financial Officer, evaluated the effectiveness of the
Corporation's disclosure controls and procedures. Based upon that evaluation,
the Chief Executive Officer and Chief Financial Officer concluded that the
disclosure controls and procedures are effective.
CHANGES IN INTERNAL CONTROLS
There were no significant changes in the Corporation's internal controls or
in other factors that could significantly affect these controls subsequent to
the date the Chief Executive Officer and Chief Financial Officer completed their
evaluation.
33
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Corporation is a defendant in a number of legal proceedings arising out
of, and incidental to its business. Based on its review with counsel on the
development of these matters to date, Management is of the opinion that the
ultimate aggregate liability, if any, resulting from these pending proceedings
will not have a material adverse effect on the accompanying consolidated
financial statements.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K
Not applicable.
34
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Corporation has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized:
FIRST BANCORP.
Name of the Corporation
Date: November 13, 2002 By: /s/ Angel Alvarez-Perez, Esq.
-------------------------------
Angel Alvarez-Perez, Esq.
Chairman, President and Chief
Executive Officer
Date: November 13, 2002 By: /s/ Annie Astor-Carbonell
-------------------------------
Annie Astor-Carbonell
Senior Executive Vice President
and Chief Financial Officer
35
CERTIFICATIONS
I, Angel Alvarez-Perez, certify that:
1. I have reviewed this quarterly report on Form 10-Q of First BanCorp;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 13, 2002 By: /s/ Angel Alvarez-Perez, Esq.
--------------------------------
Angel Alvarez-Perez, Esq.
Chairman, President and
Chief Executive Officer
36
CERTIFICATIONS
I, Annie Astor-Carbonell, certify that:
1. I have reviewed this quarterly report on Form 10-Q of First BanCorp;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 13, 2002 By: /s/ Annie Astor-Carbonell
-------------------------------
Annie Astor-Carbonell
Senior Executive Vice President
and Chief Financial Officer
37