UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the Quarter ended Commission File No. 001-14793
MARCH 31, 2003
FIRST BANCORP.
--------------
(Exact name of registrant 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)
Registrant's telephone number, including area code:
(787) 729-8200
Indicate by check mark whether the registrant (1) has filed all reports required
by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]
Number of shares of the registrant's common stock outstanding as of May 9, 2003
40,005,535
CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Unaudited Consolidated Statements of Financial Condition 3
Unaudited Consolidated Statements of Income 4
Unaudited Consolidated Statements of Cash Flows 5
Unaudited Consolidated Statements of Changes in Stockholders' Equity 6
Unaudited 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 20
Item 3. Quantitative and Qualitative Disclosures About Market Risk 34
Item 4. Controls and Procedures 35
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 36
Item 2. Changes in Securities 36
Item 3. Defaults Upon Senior Securities 36
Item 4. Submission of Matters to a Vote of Security Holders 36
Item 5. Other Information 37
Item 6. Exhibits and Report on Form 8-K 37
SIGNATURES 38
CERTIFICATIONS 39
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)
MARCH 31, 2003 DECEMBER 31, 2002
--------------- -----------------
ASSETS
Cash and due from banks $ 76,752,220 $ 108,305,943
--------------- -----------------
Money market instruments, including $602,642,186
(2002-$222,992,538) pledged that can be repledged 715,782,557 273,659,553
--------------- -----------------
Investment securities available for sale, at market:
Securities pledged that can be repledged 1,495,478,031 2,379,786,252
Other investment securities 286,159,478 336,987,292
--------------- -----------------
Total investment securities available for sale 1,781,637,509 2,716,773,544
--------------- -----------------
Investment securities held to maturity, at cost:
Securities pledged that can be repledged 424,948,681 541,047,654
Other investment securities 117,235,410 161,558,730
--------------- -----------------
Total investment securities held to maturity 542,184,091 702,606,384
--------------- -----------------
Federal Home Loan Bank (FHLB) stock 35,629,500 35,629,500
--------------- -----------------
Loans, net of allowance for loan losses of $117,887,069
(2002 - $111,911,470) 5,807,656,384 5,515,185,610
Loans held for sale, at lower of cost or market 7,226,728 10,753,585
--------------- -----------------
Total loans 5,814,883,112 5,525,939,195
--------------- -----------------
Other real estate owned 2,587,669 2,938,249
Premises and equipment, net 83,318,567 87,595,569
Accrued interest receivable 34,365,322 39,282,010
Due from customers on acceptances 223,242 304,346
Receivable from unsettled investment trades 522,338,194
Other assets 157,642,895 150,818,003
--------------- -----------------
Total assets $ 9,767,344,878 $ 9,643,852,296
=============== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Non-interest bearing deposits $ 460,443,624 $ 447,076,347
Interest bearing deposits 4,866,327,313 5,035,841,381
Federal funds purchased and securities
sold under agreements to repurchase 2,788,463,332 2,793,539,832
Advances from FHLB 623,000,000 373,000,000
Bank acceptances outstanding 223,242 304,346
Accounts payable and other liabilities 116,637,500 112,851,285
--------------- -----------------
8,855,095,011 8,762,613,191
--------------- -----------------
Subordinated notes 82,815,938 82,815,105
---------------- -----------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, authorized 50,000,000 shares; issued and
outstanding 14,420,000 shares at $25 liquidation
value per share 360,500,000 360,500,000
--------------- -----------------
Common stock, $1 par value, authorized 250,000,000
shares; issued 44,876,185 shares (2002-44,875,435) 44,876,185 44,875,435
Less: Treasury stock (at par value) (4,920,900) (4,920,900)
--------------- -----------------
Common stock outstanding 39,955,285 39,954,535
--------------- -----------------
Additional paid-in capital 9,062
Capital reserve 70,000,000 70,000,000
Legal surplus 149,345,178 149,345,178
Retained earnings 170,525,339 145,243,124
Accumulated other comprehensive income, net of tax of
$1,107,773 (2002-$11,127,054) 39,099,065 33,381,163
--------------- -----------------
829,433,929 798,424,000
--------------- -----------------
Total liabilities and stockholders' equity $ 9,767,344,878 $ 9,643,852,296
=============== =================
The accompanying notes are an integral part of these statements.
3
FIRST BANCORP
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED
------------------------------------
MARCH 31, MARCH 31,
2003 2002
--------------- -----------------
INTEREST INCOME:
Loans $ 93,955,135 $ 83,494,479
Investments 38,462,347 52,968,096
Dividends on FHLB stock 501,117 253,288
--------------- -----------------
Total interest income 132,918,599 136,715,863
--------------- -----------------
INTEREST EXPENSE:
Deposits 28,939,717 32,543,519
Short term borrowings 29,878,164 33,206,014
Long term borrowings 1,663,972 1,695,111
--------------- -----------------
Total interest expense 60,481,853 67,444,644
--------------- -----------------
Net interest income 72,436,746 69,271,219
--------------- -----------------
PROVISION FOR LOAN LOSSES 16,563,900 19,800,499
--------------- -----------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 55,872,846 49,470,720
--------------- -----------------
OTHER INCOME:
Service charges on deposit accounts 2,575,017 2,478,104
Other fees on loans 5,005,783 5,262,695
Mortgage banking activities 358,687 481,504
Net gain on sales of investments 13,686,347 827,847
Derivative income 563,807
Other operating income 3,982,238 3,440,620
--------------- -----------------
Total other income 26,171,879 12,490,770
--------------- -----------------
OTHER OPERATING EXPENSES:
Employees' compensation and benefits 18,210,082 14,379,985
Occupancy and equipment 8,883,836 6,827,228
Business promotion 2,716,601 2,642,857
Taxes, other than income taxes 1,747,916 1,642,830
Insurance 937,175 637,565
Other 6,974,851 5,718,153
--------------- -----------------
Total other operating expenses 39,470,461 31,848,618
--------------- -----------------
INCOME BEFORE INCOME TAX PROVISION 42,574,264 30,112,872
INCOME TAX PROVISION 6,145,968 4,463,354
--------------- -----------------
NET INCOME $ 36,428,296 $ 25,649,518
=============== =================
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS $ 29,677,297 $ 19,496,241
=============== =================
NET INCOME PER COMMON SHARE BASIC $ 0.74 $ 0.49
=============== =================
NET INCOME PER COMMON SHARE DILUTED $ 0.73 $ 0.49
=============== =================
DIVIDENDS DECLARED PER COMMON SHARE $ 0.11 $ 0.10
=============== =================
The accompanying notes are an integral part of these statements.
4
FIRST BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 2003 MARCH 31, 2002
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 36,428,296 $ 25,649,518
--------------- ---------------
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 3,819,828 3,032,400
Core deposit intangible amortization 599,155 229,815
Provision for loan losses 16,563,900 19,800,499
Deferred income tax asset benefit (4,568,672) (4,711,069)
Gain on sale of investments, net (13,686,347) (827,847)
Derivative income (563,807)
Gain on sale of loans (331,581) (413,906)
Increase in accrued income tax payable 9,383,174 7,990,998
Decrease (increase) in accrued interest receivable 3,197,260 (391,124)
Increase (decrease) in accrued interest payable 1,440,747 (234,342)
Amortization of deferred net loan cost (fees) 150,781 (380,201)
Net originations of loans held for sale (7,226,728) 1,000,660
Decrease in other assets 12,977,470 5,001,640
(Decrease) increase in other liabilities (10,280,946) 5,290,678
--------------- ---------------
Total adjustments 11,474,234 35,388,201
--------------- ---------------
Net cash provided by operating activities 47,902,530 61,037,719
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Principal collected on loans 337,135,371 229,770,953
Loans originated (366,521,191) (242,950,493)
Purchase of loans (286,548,000) (108,164,420)
Proceeds from sale of loans 10,858,809 13,244,012
Proceeds from sale of investments securities 211,352,910 32,339,811
Purchase of securities held to maturity (3,687,503,431) (1,272,889,767)
Purchase of securities available for sale (55,846,602) (6,697,672,750)
Principal repayments and maturities of securities held to maturity 3,848,025,728 765,561,640
Principal repayments of securities available for sale 279,190,004 6,945,918,714
Sales (additions) to premises and equipment - net 457,174 (2,733,751)
Purchase of FHLB stock (12,738,900)
--------------- ---------------
Net cash provided in investing activities 290,600,772 (350,314,951)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in deposits (162,213,480) 409,076,537
Net decrease in federal funds purchased and securities
sold under repurchase agreements (4,584,272) (188,170,358)
FHLB advances paid/taken 250,000,000 (20,700,000)
Dividends (11,146,081) (10,139,071)
Exercise of stock options 9,812
Issuance of preferred stock 88,906,000
--------------- ---------------
Net cash provided by financing activities 72,065,979 278,973,108
--------------- ---------------
Net increase (decrease) in cash and cash equivalents 410,569,281 (10,304,124)
Cash and cash equivalents at beginning of period 381,965,496 94,463,118
--------------- ---------------
Cash and cash equivalents at end of period $ 792,534,777 $ 84,158,994
=============== ===============
Cash and cash equivalents include:
Cash and due from banks $ 76,752,220 $ 51,150,620
Money market instruments 715,782,557 33,008,374
--------------- ---------------
$ 792,534,777 $ 84,158,994
=============== ===============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 59,041,106 $ 67,678,987
The accompanying notes are an integral part of these statements.
5
FIRST BANCORP
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
ACCUMULATED
ADDITIONAL OTHER
PREFERRED COMMON PAID-IN CAPITAL LEGAL RETAINED COMPREHENSIVE
STOCK STOCK CAPITAL RESERVE SURPLUS EARNINGS INCOME (LOSS)
------------ ----------- ----------- ----------- ------------ ------------ -------------
DECEMBER 31, 2001 $268,500,000 $26,571,952 $14,214,877 $60,000,000 $136,792,514 $103,132,913 $ (6,293,354)
Net income 107,956,351
Other comprehensive income 39,674,517
Issuance of preferred stock 92,000,000 (3,094,000)
Addition to legal surplus 12,552,664 (12,552,664)
Addition to capital reserve 10,000,000 (10,000,000)
Stock options exercised 64,500 1,276,343
Common stock split on
September 30, 2002 13,318,083 (12,397,220) (920,863)
Cash dividends:
Common stock (15,966,339)
Preferred stock (26,406,274)
------------ ----------- ----------- ----------- ------------ ------------ -------------
DECEMBER 31, 2002 $360,500,000 $39,954,535 $ - $70,000,000 $149,345,178 $145,243,124 $ 33,381,163
============ =========== =========== =========== ============ ============ =============
Net income 36,428,296
Other comprehensive income 5,717,902
Stock options exercised 750 9,062
Cash dividends:
Common stock (4,395,082)
Preferred stock (6,750,999)
------------ ----------- ----------- ----------- ------------ ------------ -------------
MARCH 31, 2003 $360,500,000 $39,955,285 $ 9,062 $70,000,000 $149,345,178 $170,525,339 $ 39,099,065
============ =========== =========== =========== ============ ============ =============
The accompanying notes are an integral part of these statements.
6
FIRST BANCORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
THREE MONTHS ENDED
-----------------------------
MARCH 31, MARCH 31,
2003 2002
------------ ------------
Net income $ 36,428,296 $ 25,649,518
------------ ------------
Other comprehensive income, net of tax:
Unrealized gain (losses) on securities:
Unrealized holding gains (losses)
arising during the period 9,477,765 (18,485,749)
Less: Reclassification adjustment
for gains included in net income (13,686,347) (827,847)
Unrealized (loss) gain on fair value hedge of
available for-sale security
attributable to credit risk (92,797) 1,159,385
Income tax benefit related to items of other
comprehensive income 10,019,281 4,538,553
------------ ------------
Other comprehensive income (loss) 5,717,902 (13,615,658)
------------ ------------
Comprehensive income $ 42,146,198 $ 12,033,860
============ ============
The accompanying notes are an integral part of these statements.
7
FIRST BANCORP
PART I - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 - BASIS OF PRESENTATION AND SIGNIFICANT 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 ("GAAP").
The accompanying unaudited financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
("SEC"). In the opinion of Management, the accompanying unaudited consolidated
statements of financial condition and the related consolidated statements of
income, cash flows, changes in stockholders' equity and comprehensive income
include all adjustments (consisting only of normal recurring accruals) necessary
for a fair statement of the Corporation's financial position at March 31, 2003,
and the results of operations and the cash flows for the three month period
ended on March 31, 2003 and 2002. All significant intercompany balances and
transactions have been eliminated in consolidation. Certain amounts in the 2002
financial statements have been reclassified to conform with the 2003
presentation. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with GAAP have been condensed or
omitted pursuant to such SEC rules and regulations. Management believes that the
disclosures made are adequate to make the information presented not misleading.
The results of operations for the three-month period ended on March 31,
2003, are not necessarily indicative of the results to be expected for the
entire year. For further information refer to the Consolidated Financial
Statements and footnotes thereto for the year ended December 31, 2002, included
in the Corporation's Annual Report on Form 10-K.
NATURE OF BUSINESS
First BanCorp (the Corporation) is a financial holding company offering
a full range of financial services. First BanCorp also offers insurance services
through its wholly-owned insurance subsidiary, the FirstBank Insurance Agency.
The Corporation is subject to the Federal Bank Holding Company Act and its
insurance subsidiary is subject to the supervision, examination and regulation
of the Commissioner of Insurance of Puerto Rico.
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 11 in the
U.S. and British Virgin Islands. It has 11 loan origination offices in Puerto
Rico focusing on consumer loans and residential mortgage loans. The Bank,
through wholly-owned subsidiaries, operates 33 offices in Puerto Rico
specializing in small personal loans, finance leases, and vehicle rental, one
office that sells insurance in the U.S. Virgin Islands, and two offices in the
U.S. Virgin Islands and Barbados specializing in foreign sales corporation
management. 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). The Virgin Islands operations of FirstBank are regulated
by the Virgin Islands Banking Board (for the USVI) and by the British Virgin
Islands Financial Services Commission (for the BVI).
8
CRITICAL ACCOUNTING POLICIES AND PRACTICES
The accounting and reporting policies of the Corporation and its
subsidiaries conform with accounting principles generally accepted in the United
States of America. The reported amounts are based on judgments, estimates and
assumptions made by Management that affect the recorded assets and liabilities
and contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates, if different assumptions or
conditions prevail. The Corporation believes that of its significant accounting
policies, the following involve a higher degree of judgment:
INVESTMENTS
The Corporation classifies its investments in debt and equity
securities into held to maturity and available for sale securities. Available
for sale securities are carried at fair value, with unrealized holding gains and
losses, net of deferred tax effects, reported in other comprehensive income as a
separate component of stockholders' equity. The fair values of these securities
were calculated based on quoted market prices and dealer quotes. Changes in the
assumptions used in calculating the fair values could affect the reported
valuations.
EVALUATION FOR OTHER-THAN-TEMPORARY IMPAIRMENTS ON AVAILABLE FOR SALE
AND HELD TO MATURITY SECURITIES
The Corporation evaluates its investment securities for impairment. An
impairment charge in the Consolidated Statements of Income is recognized when
the decline in the fair value of investments below their cost basis is judged to
be other-than-temporary. The Corporation considers various factors in
determining whether it should recognize an impairment charge, including, but not
limited to the length of time and extent to which the fair value has been less
than its cost basis, and the Corporation's intent and ability to hold the
investment for a period of time sufficient to allow for any anticipated recovery
in market value. For debt securities, the Corporation also considers, among
other factors, the investees repayment ability on its bond obligations and its
cash and capital generation ability.
ALLOWANCE FOR LOAN LOSSES
The Corporation maintains the allowance for loan losses at a level that
Management considers adequate to absorb losses inherent in the loan portfolio.
The adequacy of the allowance for loan losses is reviewed on a quarterly basis
as part of the continuing evaluation of the quality of the assets. Groups of
small balance, homogeneous loans are collectively evaluated for impairment. The
portfolios of consumer loans, auto loans and finance leases are considered
homogeneous and are evaluated collectively for impairment. In determining
probable losses for each category of homogeneous pools of loans, Management uses
historical information about loan losses over several periods of time that
reflect varying economic conditions and adjusts such historical data based on
the current conditions, considering information and trends on charge-offs,
non-accrual loans and delinquencies. The Corporation measures impairment
individually for those commercial and real estate loans with a principal balance
exceeding $1 million. An allowance is established based on the present value of
expected future cash flows or the fair value of the collateral, if the loan is
collateral dependent. Accordingly, the measurement of impairment for loans
evaluated individually involves assumptions by Management as to the amount and
timing of cash flows to be recovered and of appropriate discount rates. When the
loans are collateral dependent, Management generally obtains an independent
appraisal. Those appraisals also involve estimates of future cash flows and
appropriate discount rates or adjustments to comparable properties in
determining fair values.
9
The Corporation's primary lending area is Puerto Rico. The
Corporation's subsidiary Bank also lends in the Eastern Caribbean Region market.
At March 31, 2003, there is no significant concentration of credit risk in any
specific industry.
INCOME TAXES
The Corporation is routinely subject to examinations from governmental
taxing authorities. Such examinations may result in challenges to the tax return
treatment applied by the Corporation to specific transactions. Management
believes that the assumptions and judgment used to record tax-related assets or
liabilities have been appropriate. Should tax laws change or the tax authorities
determine that Management's assumptions were inappropriate; the result could
have a material effect on the Corporation's results of operations.
NEW ACCOUNTING PRONOUNCEMENTS
During 2003 the Financial Accounting Standards Board (FASB) issued the
following financial accounting pronouncements:
FASB Interpretation (FIN) No. 46 - On January 2003, the FASB issued FIN
No. 46, "Consolidation of Variable Interest Entities, an interpretation of ARB
51". This interpretation provides guidance on the identification of entities for
which control is achieved through means other than through voting rights and how
to determine when and which entities should be consolidated. The application of
this interpretation is required in all financial statements initially issued
after January 31, 2003. The adoption of FIN No. 46 did not have any impact in
the Corporation's financial condition or results of operations.
Statement of Financial Accounting Standards (SFAS) No. 149 - On April
30, 2003 the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities", which amends and clarifies financial
accounting and reporting for derivative instruments, including certain
derivatives instruments embedded in other contracts and for hedging activities
under FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities". This Statement is effective for contracts entered into or modified
after June 30, 2003. The Corporation will evaluate the effect of this statement
on its financial condition and results of operations.
2 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
INTEREST RATE RISK MANAGEMENT
The operations of the Corporation are subject to interest rate
fluctuations to the extent that interest-earning assets and interest-bearing
liabilities mature or reprice at different times or in different amounts. As
part of the interest rate risk management, the Corporation has entered into a
series of interest rate swap agreements. Under the interest rate swaps, the
Corporation agrees with other parties to exchange, at specified intervals, the
difference between fixed-rate and floating-rate interest amounts calculated by
reference to an agreed notional principal amount. Net interest settlements on
interest rate swaps are recorded as an adjustment to interest expense on deposit
accounts or interest income on investment accounts.
At March 31, 2003, interest rate swap agreements with an aggregate
notional amount of $1.8 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 brokered certificates of deposit. The
interest rate swap agreements are reflected at their fair value in the
Corporation's consolidated statement of financial condition. These interest rate
swap agreements had a gross unrealized gain of $22,704,817 and gross unrealized
loss of $6,839,364, at March 31, 2003 (December 31, 2002-a gross unrealized gain
of $27,021,907 and a gross
10
unrealized loss of $3,698,445), which are included in the Other Assets and Other
Liabilities categories, respectively. The corresponding net gain of $15,865,453
(December 31, 2002-$23,323,462) is included in certificates of deposit balance.
The hedge relationship is estimated to be 100 percent effective; therefore,
there is no impact on the statements 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 $1,610,065 at March 31, 2003
(an unrealized loss of $1,517,268 at December 31, 2002); attributable to credit
risk which was recorded in accumulated other comprehensive income net of income
tax.
The Corporation has interest rate swaps with an aggregate notional
principal balance of $53.2 million that do not qualify for hedge accounting. An
unrealized gain of $563,807 was recorded to reflect changes in the fair value of
these derivatives in the Other Income section of the consolidated statement of
income as "Derivative income". As of March 31, 2003, the fair value of these
swaps amounted to a loss of $3,959,118.
3 - STOCKHOLDERS' EQUITY
COMMON STOCK
Authorized common shares at March 31, 2003 and December 31, 2002 were
250,000,000 with a par value of $1. At March 31, 2003, the Corporation had
39,955,285 shares issued and outstanding of common stock (December 31,
2002-39,954,535).
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. The Corporation issued 3,680,000 shares of preferred stock in
2002; 4,140,000 shares in 2001; 3,000,000 shares in 2000; and 3,600,000 shares
in 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.
11
4 - EARNINGS PER COMMON SHARE
The calculations of earnings per common share for the three-month
periods ended on March 31, 2003 and 2002 are as follows:
THREE MONTHS ENDED
MARCH 31,
2003 2002
---- ----
(In thousands, except per share data)
Net income $ 36,428 $ 25,650
Dividends on preferred stock (6,751) (6,154)
----------- ----------
Net income available to common stockholders $ 29,677 $ 19,496
=========== ==========
EARNINGS PER COMMON SHARE BASIC:
Weighted average common shares outstanding 39,955 39,858
=========== ==========
Earnings per common share basic $ 0.74 $ 0.49
=========== ==========
EARNINGS PER COMMON SHARE DILUTED:
Weighted average common shares and share equivalents:
Average common shares outstanding 39,955 39,858
Common stock equivalents - Options 773 420
----------- ----------
Total 40,728 40,278
=========== ==========
Earnings per common share diluted $ 0.73 $ 0.49
=========== ==========
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 March 31,
2003, 380,000 stock options were not included in the computation of outstanding
shares because they were antidilutive. For the quarter ended on March 31, 2002,
all options outstanding during the period were included in the computation of
outstanding shares.
The Corporation accounts for the plan under the recognition and
measurement principles of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", and related Interpretations. No
stock based employee compensation cost is reflected in net income, as all
options granted under the stock option plan had an exercise price equal to the
market value of the underlying common stock on the date of the grant.
During the three-month periods ended on March 31, 2003 and March 31,
2002, the Corporation granted 360,000 and 522,750 options, respectively, to buy
shares of the Corporation's common stock. Each option granted has an exercise
price of $25.63 and $18.69, respectively, which equaled the quoted market price
of the stock at the grant date, therefore, no compensation cost was recognized
on the options granted.
The table below illustrates the effect on net income and earnings per
share if the Corporation had applied the fair value recognition provisions of
Financial Accounting Standards Board (FASB) Statement No. 123, "Accounting for
Stock Based Compensation", to stock-based employee compensation granted during
the first quarter of 2003 and 2002.
12
THREE MONTHS ENDED MARCH 31,
-------------------------------------
2003 2002
------------ -----------
(In thousands, except per share data)
Pro forma information:
Employees' compensation and benefits $ 21,069 $ 16,435
Net income available to common stockholders $ 26,818 $ 17,442
Earnings per common share basic $ 0.67 $ 0.44
Earnings per common share diluted $ 0.66 $ 0.43
Management uses the Black-Scholes option pricing model for the computation of
the estimated fair value of each option granted to buy shares of the
Corporation's common stock. The fair value of each option granted during the
first quarters of 2003 and 2002 was estimated using the following assumptions:
dividend yield of 1.72% (2002-2.98%); expected life of 3.29 years (2002- 3.29
years); expected volatility of 46.05% (2002- 31.23%); and risk-free interest
rate of 2.092% (2002-3.72%). The estimated fair value of the options granted was
$7.94 (2002- $3.93) per option.
5 - INVESTMENT SECURITIES
The amortized cost, gross unrealized gains and losses, approximate
market value, weighted average yield and final maturities of investment
securities available for sale and investment securities held to maturity at
March 31, 2003 and December 31, 2002 were as follows:
13
INVESTMENT SECURITIES AVAILABLE FOR SALE
March 31, 2003
-----------------------------------------------------
Gross
Unrealized Weighted
Amortized ------------------ Market average
cost gains losses value yield%
---------- -------- -------- ---------- --------
(Dollars in thousands)
Obligations of U.S.
Government Agencies:
After 1 to 5 years $ 500 $ 500 3.86
After 5 to 10 years 750 $ 10 760 5.60
After 10 years 10,988 118 11,106 7.76
Puerto Rico Government
Obligations:
After 5 to 10 years 5,074 381 5,453 6.28
After 10 years 5,679 389 6,070 6.30
---------- -------- -------- ----------
United States and
Puerto Rico Government
Obligations $ 22,991 $ 898 $ 23,889 6.92
========== ======== ======== ==========
Mortgage Backed Securities:
FHLMC certificates:
Within 1 year $ 1 $ 1 2.40
After 1 to 5 years 1,039 $ 60 1,099 6.72
After 5 to 10 years 7,824 561 8,385 7.35
After 10 years 5,788 341 6,129 6.86
---------- -------- -------- ----------
14,652 962 15,614 7.11
---------- -------- -------- ----------
GNMA certificates:
After 5 to 10 years 3,199 152 3,351 6.37
After 10 years 342,494 7,592 350,086 5.09
---------- -------- -------- ----------
345,693 7,744 353,437 5.10
---------- -------- -------- ----------
FNMA certificates:
Within 1 year 16 16 5.92
After 1 to 5 years 4 4 7.65
After 5 to 10 years 695 45 740 7.67
After 10 years 1,178,659 26,179 1,204,838 4.89
---------- -------- -------- ----------
1,179,374 26,224 1,205,598 4.89
---------- -------- -------- ----------
Mortgage pass through
certificates:
After 10 years 1,007 36 1,043 7.23
---------- -------- -------- ----------
Mortgage Backed
Securities $1,540,726 $ 34,966 $1,575,692 4.96
========== ======== ======== ==========
Corporate Bonds:
Within 1 year $ 982 $ 33 $ 1,015 7.84
After 1 to 5 years 85,820 1,719 $ 1,281 86,258 7.05
After 5 to 10 years 56,486 803 1,576 55,713 7.15
---------- -------- -------- ----------
Corporate bonds $ 143,288 $ 2,555 $ 2,857 $ 142,986 7.10
========== ======== ======== ==========
Equity securities (without
contractual maturity) $ 32,817 $ 8,990 $ 2,736 $ 39,071 2.07
========== ======== ======== ==========
Total Investment Securities
Available for Sale $1,739,822 $ 47,409 $ 5,593 $1,781,638 5.11
========== ======== ======== ==========
December 31, 2002
-----------------------------------------------------
Gross
Unrealized Weighted
Amortized ------------------ Market average
cost gains losses value yield%
---------- -------- -------- ---------- --------
(Dollars in thousands)
Obligations of U.S.
Government Agencies:
After 1 to 5 years $ 500 $ 3 $ 503 3.87
After 5 to 10 years 750 17 767 5.60
After 10 years 15,568 480 16,048 7.69
Puerto Rico Government
Obligations:
After 5 to 10 years 4,999 375 5,374 6.27
After 10 years 5,679 401 6,080 6.30
---------- -------- ------- ----------
United States and
Puerto Rico Government
Obligations $ 27,496 $ 1,276 $ 28,772 7.02
========== ======== ======= ==========
Mortgage Backed Securities:
FHLMC certificates:
Within 1 year
After 1 to 5 years $ 1,458 $ 82 $ 1,540 6.47
After 5 to 10 years 8,211 613 8,824 7.42
After 10 years 6,347 358 6,705 6.86
---------- -------- ------- ----------
16,016 1,053 17,069 7.11
---------- -------- ------- ----------
GNMA certificates:
After 5 to 10 years 3,608 170 3,778 6.41
After 10 years 524,278 9,439 533,717 5.11
---------- -------- ------- ----------
527,886 9,609 537,495 5.12
---------- -------- ------- ----------
FNMA certificates:
Within 1 year 29 29 6.33
After 1 to 5 years 5 5 7.68
After 5 to 10 years 764 53 817 7.66
After 10 years 1,916,460 39,523 1,955,983 4.93
---------- -------- ------- ----------
1,917,258 39,576 1,956,834 4.93
---------- -------- ------- ----------
Mortgage pass through
certificates:
After 10 years 1,175 32 1,207 7.23
---------- -------- ------- ----------
Mortgage Backed
Securities $2,462,335 $ 50,270 $2,512,605 4.99
========== ======== ======= ==========
Corporate Bonds:
Within 1 year $ 979 $ 36 $ 1,015 7.87
After 1 to 5 years 85,711 1,244 $10,865 76,090 6.16
After 5 to 10 years 57,276 445 1,084 56,637 6.94
---------- -------- ------- ----------
Corporate bonds $ 143,966 $ 1,725 $11,949 $ 133,742 6.48
========== ======== ======= ==========
Equity securities (without
contractual maturity) $ 36,951 $ 10,006 $ 5,302 $ 41,655 1.72
========== ======== ======= ==========
Total Investment Securities
Available for Sale $2,670,748 $ 63,277 $17,251 $2,716,774 5.04
========== ======== ======= ==========
14
Maturities for mortgage-backed securities are based upon contractual
terms assuming no repayments. The weighted average yield on investment
securities held for sale is based on amortized cost; therefore, it does not give
effect to changes in fair value.
The net unrealized gains or losses on available for sale securities are
presented as part of accumulated other comprehensive income.
During the quarter ended March 31, 2003, the Corporation reduced its
deferred tax liability on the unrealized gains on available for sale securities
to reflect current Puerto Rico tax statues, which provide for tax exemption on
the gain on sale of investments held by the Corporation's international banking
divisions. This tax benefit is reflected in Other Comprehensive Income.
During the quarter ended March 31, 2003, the Corporation's bank
subsidiary sold $700 million of its 15 year 5.5% coupon and 30 year 6.5%
mortgage backed securities portfolio, to take advantage of a market opportunity,
which arose when the 10-year treasury notes rate reached 3.56%. These sales
derived a gain of approximately $16.2 million. Approximately $522 million from
these sales settled on April 21, 2003 and as such are presented as a Receivable
from unsettled investment trades on the Consolidated Statement of Financial
Condition as of March 31, 2003. Given the present interest rate scenario,
prepayments on mortgage backed securities and repayments on callable securities
have accelerated when compared to recent historical experience. A substantial
amount of the proceeds from both the aforementioned sales and accelerated
prepayments of mortgage backed securities are maintained in money market
instruments, awaiting an opportunity to reenter the longer-term investment
market. Therefore, interest income on investment securities will decrease during
the waiting period to reenter the longer-term investment market, assuming no
significant change on current interest rate outlook.
Management's impairment analyses on its investment securities during
the first quarter ended March 31, 2003, concluded that other-than-temporary
impairments of approximately $3.2 million and $739,000 had occurred on one of
the securities in the equity securities portfolio and on one of the bonds in the
corporate bonds portfolio, respectively. An impairment charge for these
other-than-temporary impairments has been recognized in the Consolidated
Statement of Income. Management has determined that except for these
impairments, there are no other-than-temporary impairments on the rest of the
bonds and equity securities portfolio.
Total proceeds from the sale of securities during the three-month
period ended March 31, 2003 amounted to $733.7 million (2002-$31.5 million). The
Corporation realized gross gains of $17.7 million (2002-$1.1 million), and gross
realized losses of $4.0 million (2002-$250,000), which are mainly composed of
the above mentioned other-than-temporary impairments.
15
INVESTMENT SECURITIES HELD TO MATURITY
March 31, 2003 December 31, 2002
--------------------------------------------------- ------------------------------------------------
Gross Weighted Gross
Unrealized Unrealized Weighted
Amortized ----------------- Market average Amortized --------------- Market average
cost gains losses value yield% cost gains losses value yield%
--------- ------- -------- --------- ------ --------- ------- ------ --------- --------
(Dollars in thousands)
U.S. Treasury Securities:
Due within 1 year $ 1,323 $ 1 $ 1,322 1.15
Obligations of other U.S.
Government Agencies:
Due within 1 year 6,995 3 6,992 1.21
After 10 years 380,865 2,237 4,817 378,285 6.79 $ 628,820 $ 3,307 $ 59 $ 632,068 7.85
Puerto Rico Government
Obligations:
After 1 to 5 years 5,000 113 5,113 5.00 5,000 113 5,113 5.00
After 10 years 4,424 583 5,007 6.50 4,354 586 4,940 6.50
--------- ------- -------- --------- --------- ------- ------ ---------
United States and Puerto
Rico Government obligations $ 398,607 $ 2,933 $ 4,821 $ 396,719 6.58 $ 638,174 $ 4,006 $ 59 $ 642,121 7.82
========= ======= ======== ========= ========= ======= ====== =========
Mortgage backed securities:
FHLMC certificates:
After 5 to 10 years $ 44,337 $ 102 $ 44,439 3.71
FNMA certificates:
After 5 to 10 years 34,706 353 35,059 3.85
--------- ------- -------- ---------
Mortgage backed securities $ 79,043 $ 455 $ $ 79,498 3.77
========= ======= ======== =========
Corporate bonds:
Due within 1 year 44,841 241 44,600 2.88 $ 25,000 $ 25,000 3.05
After 1 to 5 years 19,693 196 19,498 2.84 39,432 $ 609 38,823 2.95
--------- ------- -------- --------- --------- ------- ------ ---------
Corporate bonds $ 64,534 $ 437 $ 64,098 2.87 $ 64,432 $ 609 $ 63,823 2.98
========= ======= ======== ========= ========= ======= ====== =========
Total Investment Securities
Held to Maturity $ 542,184 $ 3,388 $ 5,258 $ 540,315 5.78 $ 702,606 $ 4,006 $ 668 $ 705,944 7.38
========= ======= ======== ========= ========= ======= ====== =========
Expected maturities of investments might differ from contractual
maturities because they may be subject to prepayments and/or call options. Rates
in the Corporate bonds are floating.
6 - INVESTMENT IN FHLB STOCK
At March 31, 2003 and December 31, 2002, there were investments in FHLB
stock with book value of $35,629,500. The estimated market value of such
investments is its redemption value.
16
7 - LOANS RECEIVABLE
The following is a detail of the loan portfolio:
March 31, December 31,
2003 2002
---------- -----------
(In thousands)
Residential real estate loans:
Secured by first mortgages:
Conventional $2,000,780 $ 1,778,046
Insured by government agencies:
Federal Housing Administration and Veterans Administration 45,626 41,805
Puerto Rico Housing Bank and Finance Agency 18,098 19,060
Secured by second mortgages 7,048 7,650
---------- -----------
2,071,552 1,846,561
Deferred net loan fees (3,182) (3,247)
---------- -----------
Residential real estate loans 2,068,370 1,843,314
---------- -----------
Commercial loans:
Construction 308,161 259,053
Commercial 1,443,668 1,418,792
Commercial mortgage 788,519 813,513
---------- -----------
Commercial loans 2,540,348 2,491,358
---------- -----------
Finance leases 148,374 143,412
---------- -----------
Consumer and other loans:
Personal 408,040 413,931
Personal lines of credit 10,808 10,401
Auto 588,152 565,478
Boat 55,739 53,017
Credit card 160,334 164,172
Home equity reserve loans 4,456 4,566
Unearned interest (59,078) (62,553)
---------- -----------
Consumer and other loans 1,168,451 1,149,012
---------- -----------
Loans receivable 5,925,543 5,627,096
Allowance for loan losses (117,887) (111,911)
---------- -----------
Loans receivable, net 5,807,656 5,515,185
Loans held for sale 7,227 10,754
---------- -----------
Total loans $5,814,883 $ 5,525,939
========== ===========
8- IMPAIRED LOANS
At March 31, 2003, the Corporation had $28 million ($27 million at
December 31, 2002) in commercial and real estate loans over $1 million
considered impaired with an allowance of $6.1 million ($5.9 million at December
31, 2002), which was established based on fair value of the collateral. The
allowance for impaired loans is part of the allowance for loan losses. The
average recorded investment in impaired loans amounted to
17
$27.5 million for the three-month period ended on March 31, 2003 (2002 - $18.9
million). Interest income in the amount of approximately $44,000 and $103,000
was recognized on impaired loans for the period ended on March 31, 2003 and
2002, respectively.
9 - SEGMENT INFORMATION
The Corporation has four reportable segments: Retail, 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 the
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, 2002 contained in the annual report of the Corporation on Form
10-K.
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 other 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.
18
The following table presents information about the reportable segments
(in thousands):
TREASURY AND COMMERCIAL
RETAIL INVESTMENTS CORPORATE OTHER TOTAL
----------- ------------ ----------- ----------- -----------
FOR THE THREE MONTHS ENDED MARCH 31, 2003:
Interest income $ 65,848 $ 38,963 $ 28,108 $ 132,919
Net (charge) credit for transfer of funds (9,472) 18,539 (9,067)
Interest expense (13,119) (47,363) (60,482)
Net interest income 43,257 10,139 19,041 72,437
Provision for loan losses (8,335) (8,229) (16,564)
Other income 8,627 14,445 1,711 $ 1,389 26,172
Direct operating expenses (19,808) (616) (1,910) (506) (22,839)
Segment income 23,741 23,968 10,613 $ 883 59,205
Average earning assets $ 3,174,489 $ 3,328,581 $ 2,440,228 $ 8,943,298
FOR THE THREE MONTHS ENDED MARCH 31, 2002:
Interest income $ 53,750 $ 53,221 $ 29,745 $ 136,716
Net (charge) credit for transfer of funds (11,089) 25,072 (13,983)
Interest expense (14,716) (52,729) (67,445)
Net interest income 27,945 25,564 15,762 69,271
Provision for loan losses (12,945) (6,855) (19,800)
Other income 9,453 986 979 $ 1,071 12,490
Direct operating expenses (16,895) (549) (1,417) (118) (18,979)
Segment income 7,558 26,001 8,469 $ 953 42,982
Average earning assets $ 2,125,998 $ 3,723,122 $ 2,127,754 $ 7,976,874
The following table presents a reconciliation of the reportable segment
financial information to the consolidated totals (in thousands):
THREE MONTHS ENDED
MARCH 31,
--------------------------------
2003 2002
---------- ---------
Net income:
Total income for segments $ 59,205 $ 42,982
Other operating expenses (16,631) (12,869)
Income taxes (6,146) (4,463)
---------- ----=-----
Total consolidated net income $ 36,428 $ 25,650
========== ==========
Average assets:
Total average earning assets for segments $8,943,298 $7,976,874
Average non earning assets 418,478 319,132
---------- ----------
Total consolidated average assets $9,361,776 $8,296,006
========== ==========
10 - 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.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SELECTED FINANCIAL DATA
THREE MONTHS ENDED
MARCH 31,
---------------------
2003 2002
-------- --------
CONDENSED INCOME STATEMENTS (IN THOUSANDS):
Interest income $132,919 $136,716
Interest expense 60,482 67,445
-------- --------
Net interest income 72,437 69,271
Provision for loan losses 16,564 19,800
-------- --------
Net interest income after provision
for loan losses 55,873 49,471
Other income 12,486 11,663
Gain on sale of investments, net 13,686 828
Other operating expense 39,471 31,849
-------- --------
Income before income tax expense 42,574 30,113
Income tax provision 6,146 4,463
-------- --------
Net income $ 36,428 $ 25,650
======== ========
Net income available to common stockholders $ 29,677 $ 19,496
======== ========
PER COMMON SHARE RESULTS (BASIC AND DILUTED):
Net income per common share-basic $ 0.74 $ 0.49
Net income per common share-diluted $ 0.73 $ 0.49
Cash dividends declared $ 0.11 $ 0.10
SELECTED FINANCIAL RATIOS (IN PERCENT):
Average yield on earning assets (1) 6.40 7.54
Cost of interest bearing liabilities 3.07 3.74
Interest rate spread (1) 3.33 3.80
Net interest margin (1) 3.68 4.15
Net income to average total assets 1.56 1.24
Net income to average total equity 17.92 15.17
Net income to average common equity 26.24 22.31
Average equity to average total assets 8.68 8.15
Dividend payout ratio 14.81 20.44
Efficiency ratio (2) 40.03 38.95
MARCH 31, DECEMBER 31,
---------- ------------
2003 2002
---------- ------------
REGULATORY CAPITAL RATIOS (IN PERCENT):
Total capital to risk weighted assets 13.80 13.75
Tier 1 capital to risk weighted assets 11.95 11.90
Tier 1 capital to average assets 7.87 7.35
BALANCE SHEET DATA (IN THOUSANDS):
Loans and loans held for sale $5,932,770 $5,637,850
Allowance for loan losses 117,887 111,911
Investments 3,075,234 3,728,669
Total assets 9,767,345 9,643,852
Deposits 5,326,771 5,482,918
Borrowings 3,494,279 3,249,355
Total common equity 468,934 437,924
Total equity 829,434 798,424
Book value per common share $ 11.74 $ 10.96
OFFICES:
Number of full service branches 54 54
Loan origination offices 44 44
(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.
20
RESULTS OF OPERATIONS
This discussion and analysis relates to the accompanying consolidated
interim unaudited financial statements of First BanCorp (the Corporation) and
should be read in conjunction with the interim unaudited financial statements
and the notes thereto. Information in the notes referred to in this discussion
and analysis is hereby incorporated by reference herein. The use of terms such
as "see", "refer to", "included in" or "explained in" shall be deemed to
incorporate by reference into this discussion and analysis the information to
which reference is made.
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 March 31, 2003, the Corporation recorded
earnings of $36,428,296 or $0.74 per common share (basic) and $0.73 per share
(diluted), a per share basis-diluted increase of 48.98% as compared to earnings
of $25,649,518 or $0.49 per common share (basic and diluted) for the first
quarter of 2002.
NET INTEREST INCOME
Net interest income for the three-month period ended on March 31, 2003
increased by approximately $3.2 million, as compared with the same quarter in
2002; a decrease of approximately $750,000 on a taxable equivalent basis. The
decrease on a tax equivalent basis is mainly attributed to a decrease in
interest rate spread on exempt securities. The interest rate spread and net
interest margin, on a taxable equivalent basis, amounted to 3.33% and 3.68%,
respectively, for the first quarter of 2003 as compared to 3.80% and 4.15%,
respectively, for the first quarter of 2002.
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.
21
PART I THREE MONTHS ENDED MARCH 31,
AVERAGE VOLUME INTEREST INCOME (1) / EXPENSE AVERAGE RATE (1)
----------------------------- ----------------------------- ----------------
2003 2002 2003 2002 2003 2002
---- ---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
Earning assets:
Money market instruments $ 130,351 $ 44,469 $ 455 $ 200 1.42% 1.82%
Government obligations 581,991 837,021 11,604 11,546 8.09% 5.59%
Mortgage backed securities 2,325,128 2,459,453 32,785 47,377 5.72% 7.81%
FHLB stock 35,630 23,457 501 253 5.70% 4.37%
Corporate bonds 208,446 340,950 2,434 5,984 4.74% 7.12%
------------ ------------- ---------- ----------
Total investments 3,281,546 3,705,350 47,779 65,360 5.90% 7.15%
------------ ------------- ---------- ----------
Residential real estate loans 1,930,364 1,033,069 25,165 16,558 5.29% 6.50%
Construction loans 283,534 212,774 3,390 2,888 4.85% 5.51%
Commercial loans 2,211,147 1,952,038 24,743 26,917 4.54% 5.59%
Finance leases 144,549 131,501 3,691 3,655 10.36% 11.27%
Consumer loans 1,161,315 1,023,155 37,383 34,487 13.05% 13.67%
------------ ------------- ---------- ----------
Total loans (2) 5,730,909 4,352,537 94,372 84,505 6.68% 7.87%
------------ ------------- ---------- ----------
Total earning assets $ 9,012,455 $ 8,057,887 $ 142,151 $ 149,865 6.40% 7.54%
============ ============= ========== ==========
Interest-bearing liabilities:
Deposits $ 4,865,350 $ 4,095,233 $ 28,940 $ 32,544 2.41% 3.22%
Other borrowed funds 2,597,254 2,888,810 27,088 30,998 4.23% 4.35%
FHLB advances 517,237 325,869 4,454 3,903 3.49% 4.86%
------------ ------------- ---------- ----------
Total interest-bearing liabilities $ 7,979,841 $ 7,309,912 $ 60,482 $ 67,445 3.07% 3.74%
============ ============= ========== ==========
Net interest income $ 81,669 $ 82,420
========== ==========
Interest rate spread 3.33% 3.80%
Net interest margin 3.68% 4.15%
(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 of 39%) 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.
22
PART II THREE MONTHS ENDED ON MARCH 31,
2003 COMPARED TO 2002
----------------------------------
VARIANCE VARIANCE
DUE TO DUE TO TOTAL
VOLUME RATE VARIANCE
--------- --------- --------
(IN THOUSANDS)
Interest income on earning assets:
Money market instruments $ 346 $ (91) $ 255
Government obligations (4,362) 4,420 58
Mortgage backed securities (2,470) (12,121) (14,591)
FHLB stock 156 92 248
Corporate bonds (1,907) (1,643) (3,550)
--------- --------- ---------
Total investments (8,237) (9,343) (17,580)
--------- --------- ---------
Consumer loans 4,596 (1,701) 2,895
Real estate loans 13,161 (4,554) 8,607
Construction loans 913 (411) 502
Commercial loans 3,296 (5,470) (2,174)
Finance leases 353 (317) 36
--------- --------- ---------
Total loans 22,319 (12,453) 9,866
--------- --------- ---------
Total interest income 14,082 (21,796) (7,714)
--------- --------- ---------
Interest expense on interest bearing liabilities:
Deposits 5,450 (9,054) (3,604)
Other borrowed funds (3,060) (850) (3,910)
FHLB advances 1,994 (1,443) 551
--------- --------- ---------
Total interest expense 4,384 (11,347) (6,963)
--------- --------- ---------
Change in net interest income $ 9,698 $ (10,449) $ (751)
========= ========= =========
Total interest income includes tax equivalent adjustments based on the
Puerto Rico income tax rate of $9.2 million for the three-month period ended on
March 31, 2003, and of $13.1 million for the three-month period ended on March
31, 2002. The adjustments have been made on debt securities (primarily United
States and Puerto Rico government obligations), mortgage backed securities 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 decreased by $3.8 million for the three-month period
ended on March 31, 2003, as compared to the same period for 2002. When adjusted
to a taxable equivalent basis, interest income decreased by $7.7 million for the
three-month period ended on March 31, 2003, as compared to the same period in
2002. The yield on earning assets, on a taxable equivalent basis, amounted to
6.40% and 7.54% for the three-month periods ended on March 31, 2003 and 2002,
respectively. The decrease in the interest income for the periods analyzed is
mainly attributed to lower yields given lower market rates, partially offset by
volume increases.
The average volume of earning assets increased by $954.6 million for
the three-month period ended on March 31, 2003, as compared to the same period
in 2002. The average volume of the loan portfolio increased by $1,378 million
for the three month period ended on March 31, 2003, as compared with the same
period in 2002, mostly concentrated in residential real estate and commercial
loans. The average volume of total investments
23
decreased by approximately $424 million for the three-month period ended on
March 31, 2003 as compared with the same period in 2002. Refer to Note 5 for
further discussion on main reasons for decreases in average investments and
impact on interest income.
INTEREST EXPENSE
Interest expense decreased by $7.0 million for the three-month period
ended on March 31, 2003, as compared with the amount recorded in the same period
of 2002. The decrease in the interest expense for the period ended on March 31,
2003 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 $11.3 million, for the three month period ended
March 31, 2003. This positive effect was partially offset with an increase in
the average volume of interest bearing liabilities generating a negative volume
variance of $4.4 million, for the three month period ended March 31, 2003. The
cost of interest bearing liabilities decreased from 3.74% for the three-month
period ended on March 31, 2002 to 3.07% for the three-month period ended March
31, 2003. This decrease in lower average cost of funds results from the impact
of the Federal Reserve Board interest rate cuts during recent years, the latest
being the November 2002 cut.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
For the three-month period ended on March 31, 2003, the Corporation
provided $16.6 million for loan losses, as compared to $19.8 million for the
same period in 2002. 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 and Eastern
Caribbean Region 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.
24
The following table sets forth an analysis of the activity in the
allowance for loan losses during the periods indicated:
THREE MONTHS ENDED
MARCH 31,
----------------------
2003 2002
--------- ---------
(IN THOUSANDS)
Allowance for loan losses, beginning of period $ 111,911 $ 91,060
Provision for loan losses 16,564 19,801
--------- ---------
Loans Charge-Offs:
Residential real estate (159) (36)
Commercial (2,088) (846)
Finance leases (644) (733)
Consumer (9,512) (11,605)
--------- ---------
Total charge-offs (12,403) (13,220)
--------- ---------
Recoveries of loans previously charged-off:
Commercial 80 11
Finance leases 95 70
Consumer 1,640 1,745
--------- ---------
Total recoveries 1,815 1,826
--------- ---------
Net charge-offs (10,588) (11,394)
--------- ---------
Allowance for loan losses, end of period $ 117,887 $ 99,467
========= =========
Allowance for loan losses to total loans 1.99% 2.26%
Net charge-offs annualized to average loans
outstanding during the period 0.74% 1.05%
OTHER INCOME
THREE MONTHS ENDED
MARCH 31,
----------------------
2003 2002
--------- ---------
(IN THOUSANDS)
Other fees on loans $ 5,006 $ 5,263
Service charges on deposit accounts 2,575 2,478
Mortgage banking activities 359 482
Rental income 485 551
Insurance income 1,007 426
Other commissions 185 437
Dividends on equity securities 195 158
Other operating income 2,110 1,868
--------- ---------
Other income before net gain on sale of
investments and impairment,
and derivative income 11,922 11,663
Net gain on sale of investments,
and impairment 13,686 828
Derivative income 564
--------- ---------
Total $ 26,172 $ 12,491
========= =========
25
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 includes monthly fee on deposit
accounts and fees on returned and paid check charges, which represent an
important and stable source of other income for the Corporation.
Mortgage banking activities income includes gain on sale of loans and
the servicing fees on residential mortgage loans originated by the Corporation
and subsequently securitized or sold.
The Corporation's subsidiary, First Leasing and Rental Corporation,
generates income on the rental of various types of motor vehicles.
Insurance income mainly consists of commissions earned by the
Corporation's subsidiary FirstBank Insurance Agency, Inc., which started
operations in May 2001.
Other commissions income is the result of 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 net gain on the sale of 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 quarter ended March 31, 2003, gains of approximately $17.7 million
were realized on the sale of mortgage backed securities and equity securities.
These gains include approximately $16.2 million realized from the sale of
approximately $700 million of 5.5%, 15-year FNMA securities and 6.5%, 30-year
GNMA securities. As explained in Note 5 to the interim unaudited financial
statements, the Corporation took advantage of a market opportunity which arose
when the 10-year treasury notes rates reached 3.56%. In addition, during the
quarter ended March 31, 2003, losses on the other-than-temporary impairment of
certain securities were recognized, as explained in the Corporation's interim
unaudited financial statements (Refer to Note 5).
As explained in Note 3 to the accompanying unaudited financial
statements for the period ended March 31, 2003, the derivative income consists
of an unrealized gain of approximately $564,000 due to the adjustment to fair
value of a portfolio of swaps that does not qualify for hedge accounting.
26
OTHER OPERATING EXPENSES
The following table presents the detail of other operating expenses for
the periods indicated:
THREE MONTHS ENDED
MARCH 31,
----------------------
2003 2002
--------- ---------
(IN THOUSANDS)
Employees' compensation and benefits $ 18,210 $ 14,380
Occupancy and equipment 8,884 6,827
Business promotion 2,717 2,643
Taxes 1,748 1,643
Insurance 937 638
Net (gain) cost of operations and
disposition of other real estate owned (14) 121
Professional fees 754 740
Servicing and processing fees 1,493 1,285
Communications 1,748 1,299
Supplies and printing 463 284
Other 2,530 1,989
--------- ---------
Total $ 39,470 $ 31,849
========= =========
Operating expenses increased to $39.5 million for the three month
period ended on March 31, 2003, as compared to $31.8 million for the same period
in 2002. The increase in operating expenses for 2003 is mainly the result of
general growth in the Bank's operations, including the acquisition of JP Morgan
Chase's Eastern Caribbean Region business, which represented $6.0 million of the
increase.
Management's goal is to limit expenditures to those that directly
contribute to increase the efficiency, service quality 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 40.03% for the three month period ended March 31, 2003 as compared to
38.95% for the same period last year.
For the three-month period ended on March 31, 2003, other operating
expenses include a core deposit intangible amortization of approximately of
$600,000 as compared to approximately $230,000 for the same period last year.
The estimated aggregate amortization expense on this core deposit intangible
asset for each of the five succeeding fiscal years will amount to approximately
$2,400,000.
PROVISION FOR INCOME TAX
The provision for income tax amounted to $6.1 million (or 14.4% of
pretax earnings) for the three-month period ended on March 31, 2003 as compared
to $4.5 million (or 14.8% of pretax earnings) for the same period in 2002.
The Corporation has maintained an effective tax rate lower than the
statutory rate of 39% mainly by investing in government obligations and mortgage
backed securities exempt from U. S. and Puerto Rico income tax combined with
gains on sale of investments held by the international banking division of the
Corporation
27
and the Bank. These divisions were created under the International Banking
Entity Act of P. R., which provides for total P.R. tax exemption on its interest
income, other income and gain on sale of investments. The decrease in the
effective tax rate is mainly due to an increase in the portfolio of exempt
investments and investments held in the Corporation's international banking
divisions.
FINANCIAL CONDITION
ASSETS
Total assets as of March 31, 2003 amounted to $9,767 million, an
increase of $123 million as compared to total assets as of December 31, 2002 of
$9,644 million. The increase was mainly the result of an increase of
approximately $295 million in total loans and partially offset by a decrease of
approximately $131 million in total investments including unsettled investments
trades and money market instruments.
The composition of loans receivable:
MARCH 31, DECEMBER 31, INCREASE
2003 2002 (DECREASE)
----------- ----------- ----------
(IN THOUSANDS)
Residential real estate loans $ 2,075,597 $ 1,854,068 $ 221,529
----------- ----------- ---------
Commercial real estate loans 788,519 813,513 (24,994)
Construction loans 308,161 259,053 49,108
Commercial loans 1,443,668 1,418,792 24,876
----------- ----------- ---------
Total commercial 2,540,348 2,491,358 48,990
----------- ----------- ---------
Finance leases 148,374 143,412 4,962
Consumer and other loans 1,168,451 1,149,012 19,439
----------- ----------- ---------
Total $ 5,932,770 $ 5,637,850 $ 294,920
=========== =========== =========
The fluctuation in the loans receivable category was the net result of
total loan origination and purchases of $653 million and repayments and other
adjustments of $358 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 $49 million in the commercial loan portfolio and of $222 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 $5
million. Consumer and other loans increased by $19.4 million as compared to
December 31, 2002.
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 March 31, 2003, total non-performing assets amounted to $99.8
million (1.02% of total assets) as compared to $105 million (1.09% of total
assets) at December 31, 2002 and $79 million (0.96% of total assets) at December
31, 2001. The Corporation's allowance for loan losses to non-performing loans
ratio was 134.35% at March 31, 2003 as compared to 121.95% and 124.74% at
December 31, 2002 and 2001, respectively.
28
Past due loans are loans delinquent 90 days or more as to principal
and/or interest and still accruing interest.
Non-performing loans as of March 31, 2003 were $87.7 million (1.48% of
total loans), as compared to $91.8 million (1.63% of total loans) and $73
million (1.69%) as of December 31, 2002 and December 31, 2001, respectively.
Non-performing loans when compared to the most recent previous quarter ended
December 31, 2002, decreased both in dollar amount and as a percentage of the
portfolios. The increase in dollar amount, when compared to the December 31,
2001 figure, is composed mostly of secured real estate loans and is due to:
general growth of the portfolios, the acquisition of JP Morgan Chase's Eastern
Caribbean Region operations and a residential finished homes loan project, which
was included in non-accrual during September 2002 with an $11.2 million balance.
More than 75% of the project houses have been either sold or optioned and are in
the process of closing.
The following table presents non-performing assets at the dates indicated:
MARCH 31, DECEMBER 31,
2003 2002 2001
--------- --------- --------
(IN THOUSANDS)
Non-accruing loans:
Residential real estate $ 19,659 $ 23,018 $ 18,540
Commercial and commercial real estate 50,219 47,705 29,378
Finance leases 2,214 2,049 2,469
Consumer 15,651 18,993 22,611
--------- --------- --------
87,743 91,765 72,998
--------- --------- --------
Other real estate owned (OREO) 2,588 2,938 1,456
Other repossessed property 5,670 6,222 4,596
Investment securities 3,750 3,750
--------- --------- --------
Total non-performing assets $ 99,751 $ 104,675 $ 79,050
========= ========= ========
Past due loans $ 25,185 $ 24,435 $ 27,497
Non-performing assets to total assets 1.02% 1.09% 0.96%
Non-performing loans to total loans 1.48% 1.63% 1.69%
Allowance for loan losses $ 117,887 $ 111,911 $ 91,060
Allowance to total non-performing loans 134.35% 121.95% 124.74%
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 $20 million (0.95% of total
residential real estate loans) at March 31, 2003, as compared to $23 million
(1.24% of total residential real estate loans) and $19 million (1.83% of total
residential real estate loans) at December 31, 2002 and 2001, 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 $50 million
(1.98% of total commercial loans) at March 31, 2003 as compared to $48 million
(1.91% of total commercial loans) and $29 million (1.37% of total commercial
loans) at December 31, 2002 and 2001, respectively. At March 31, 2003, there
were five non-accruing commercial loans over $1 million, for a total of $20.2
million including the above mentioned residential finished homes project. This
construction loan had an outstanding balance of $6.8 million at March 31, 2003.
29
FINANCE LEASES - Finance leases are classified as non-accruing status
when they are delinquent 90 days or more. Non-accruing finance leases amounted
to $2.2 million (1.49% of total finance leases) at March 31, 2003, as compared
to $2 million (1.43% of total finance leases) and $2.5 million (1.93% of total
finance leases) at December 31, 2002 and 2001, respectively.
CONSUMER LOANS - Consumer loans are classified as non-accruing when
they are delinquent 90 days in auto, boat and home equity reserve loans, 120
days in personal loans (including small loans) and 180 days in credit cards and
personal lines of credit.
Non-accruing consumer loans amounted to $15.7 million (1.34% of the
total consumer loan portfolio) at March 31, 2003, as compared to $19 million (or
1.65% of the total consumer loan portfolio) and $23 million (or 2.21% of the
total consumer loan portfolio) at December 31, 2002 and December 31, 2001,
respectively.
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 investment securities reclassified to
non-accruing status.
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 March 31, 2003, total liabilities amounted to $8,855 million, an
increase of $92 million as compared to $8,763 million as of December 31, 2002.
The net increase in total liabilities was mainly due to: (1) an increase of
approximately $250 million in advances from FHLB; (2) an increase of
approximately $4 million in accounts payable and other liabilities; (3) net of a
decrease in federal funds purchased and securities sold under agreements to
repurchase of $5 million and (4) a decrease of $156 million in total deposits
which is mainly attributed to a decrease in brokered certificates of deposit.
The Corporation maintains unsecured standby lines of credit with other
banks. At March 31, 2003 the Corporation's total unused lines of credit with
these banks amounted to approximately $67,000,000. At March 31, 2003, the
Corporation had an available line of credit with the FHLB guaranteed with excess
collateral, in the amount of $4,929,601. At March 31, 2003, the Corporation had
available collateral that can be pledged with the FHLB to obtain additional line
of credit in the amount of $459,198,504.
30
CAPITAL
Total stockholders' equity as of March 31, 2003 amounted to $829
million, increasing by $31 million from the amount as of December 31, 2002. The
increase was mainly the result of earnings for the period ended on March 31,
2003 of $36 million, the issuance of 750 shares of common stock through the
exercise of stock options, the positive fluctuation in the valuation of
securities available for sale of $5.7 million, reduced by dividends paid of
$11.1 million.
The Corporation is subject to various regulatory capital requirements
imposed by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Corporation's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Corporation must meet specific capital guidelines that involve quantitative
measures of the Corporation's assets, liabilities, and certain off-balance sheet
items as calculated under regulatory accounting practices. The Corporation's
capital amounts and classification are also subject to qualitative judgment by
the regulators about components, risk weightings and other factors.
Capital standards established by regulations require the Corporation to
maintain minimum amounts and ratios of Tier 1 capital to total average assets
(leverage ratio) and ratios of Tier 1 and total capital to risk-weighted assets,
as defined in the regulations. The total amount of risk-weighted assets is
computed by applying risk-weighting factors to the Corporation's assets, which
vary from 0% to 100% depending on the nature of the asset.
At March 31, 2003 and December 31, 2002, 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.
31
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 March 31, 2003
Total Capital (to Risk-Weighted Assets):
First BanCorp $ 841,217 13.80% $ 487,713 8% $ 609,641 10%
FirstBank 764,781 12.59% 485,932 8% 607,415 10%
Tier I Capital (to Risk-Weighted Assets):
First BanCorp $ 728,664 11.95% $ 243,857 4% $ 365,785 6%
FirstBank 655,317 10.79% 242,966 4% 364,449 6%
Tier I Capital (to Average Assets):
First BanCorp $ 728,664 7.87% $ 277,813 3% $ 463,022 5%
FirstBank 655,317 7.12% 276,050 3% 460,084 5%
At December 31, 2002
Total Capital (to Risk-Weighted Assets):
First BanCorp $ 816,946 13.75% $ 475,155 8% $ 593,944 10%
FirstBank 739,996 12.50% 473,617 8% 592,022 10%
Tier I Capital (to Risk-Weighted Assets):
First BanCorp $ 707,083 11.90% $ 237,578 4% $ 356,366 6%
FirstBank 632,487 10.68% 236,809 4% 355,213 6%
Tier I Capital (to Average Assets):
First BanCorp $ 707,083 7.35% $ 288,628 3% $ 481,046 5%
FirstBank 632,487 6.62% 286,801 3% 478,002 5%
DIVIDENDS
During the period ended March 31, 2003, the Corporation declared a
quarterly cash dividend of $0.11 per common share representing a 10% increase
over the quarterly cash dividend of $0.10 per common share declared for the same
period in 2002. Total dividends declared per common share for the period ended
on March 31, 2003 amounted to $4.4 million for an annualized dividend payout
ratio of 14.81% as compared to $4.0 million for the period ended March 31, 2002
(or a 20.44% dividend payout ratio). Dividends declared on preferred stock
amounted to $6.8 million for the period ended on March 31, 2003 as compared to
$6.2 million for the same period last year.
32
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
The following table presents a detail of the maturities of contractual
debt obligations and commitments to extend credit:
Total Less than 1 year 1-3 years 4-5 year After 5 years
----- ---------------- --------- -------- -------------
Contractual Obligations:
Federal funds purchased and
securities sold under agreements
to repurchase, excluding accrued
interest $ 2,788,463 $ 713,503 $ 156,500 $100,000 $ 1,818,460
Advances from FHLB 623,000 300,000 50,000 273,000
Subordinated Notes 82,816 82,816
----------- ----------- --------- -------- -----------
Total Contractual Cash Obligations $ 3,494,279 $ 1,013,503 $ 289,316 $100,000 $ 2,091,460
=========== =========== ========= ======== ===========
Other Commitments:
Lines of Credit $ 330,915 $ 330,915
Standby Letters of Credit 62,370 62,370
Other Commercial Commitments 616,426 616,426
----------- -----------
Total Commercial Commitments $ 1,009,711 $ 1,009,711
=========== ===========
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 74 of the Corporation's annual report to security holders for the year
ended December 31, 2002.
LIQUIDITY
Liquidity refers to the level of cash and eligible investments to meet loan and
investment commitments, potential deposit outflows and debt repayments. The
Asset Liability Management and Investment Committee, using measures of liquidity
developed by Management, reviews the Corporation's liquidity position on a
weekly basis.
The principal sources of short-term funds are loan repayments,
deposits, securities sold under agreements to repurchase, and lines of credit
with the FHLB and other financial institutions. The Investment Committee reviews
credit availability on a regular basis. In the past, the Corporation has
securitized and sold auto and mortgage loans as supplementary sources of
funding. Commercial paper had also provided additional funding. The Corporation
has obtained long-term funding through the issuance of notes and long-term
institutional certificates of deposit. The Corporation's principal uses of funds
are the origination of loans and the repayment of maturing deposit accounts and
borrowings.
A large portion of the Corporation's funding represents retail brokered
certificates of deposit. In the event that the Corporation falls under the
ratios of a well-capitalized institution, it faces the risk of not being able to
replace this source of funding. It is Management's belief that this possibility
is remote.
33
The Corporation's liquidity plan contemplates alternative sources of
funding that could provide significant amounts of funding at reasonable cost.
The alternative sources of funding include, among others, FHLB advances, lines
of credits from other banks, sale of commercial loans participations,
securitization of auto loans and commercial paper.
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 day-to-day management of interest rate risk, as well as liquidity
management and other related matters, is assigned to the Asset Liability
Management and Investment Committee of FirstBank (ALCO). The ALCO is composed of
the following officers: President and CEO, the Senior Executive Vice President
and Chief Financial Officer, the Executive Vice President for Retail and
Mortgage Banking, the Senior Vice President of Treasury and Investments 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 had a book value of $39 million at March 31, 2003. 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 light of the
Corporation's overall growth strategies and objectives. On a quarterly basis the
ALCO performs a comprehensive asset/liability review, examining the measures of
interest rate risk described below together with other matters such as liquidity
and capital.
The Corporation uses simulations to measure the effects of changing
interest rates on net interest income. These measures are carried out over a
one-year time horizon, assuming gradual upward and downward interest rate
movements of 200 basis points (a downward movement of 100 basis points was used
as of March 31, 2003 because initial rates were very low). 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, and assuming investment repayments are
reinvested in short term instruments
(2) using a balance sheet which has growth patterns and strategies similar
to those which have occurred in the recent past, and assuming
investment repayments are reinvested in mortgage backed securities
These simulations assume gradual upward or downward movements of
interest rates over the year of projection, with the change totaling 200 basis
points at the end of the twelve-month period in most cases (a downward movement
of 100 basis points was used for the March 31, 2003 simulations). 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.
34
These simulations are highly complex, and they use many simplifying
assumptions that 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 fact, investment and lending decisions taken
during the actual simulation period, or unexpected changes in market conditions,
which were not known at the time the simulations were prepared, can change the
actual results significantly. For this reason, the results of these simulations
are only approximations of the sensitivity of net interest income to changes in
market interest rates.
Assuming a no growth balance sheet with investment repayments in short
term assets, as of March 31, 2003, tax equivalent net interest income projected
for the next twelve month period would rise by $43.4 million (17.0%) under a
rising rate scenario and would decrease by $17.7 million (6.9%) under falling
rates.
The same simulations were also carried out assuming that the
Corporation would grow and investment portfolio repayments would be reinvested
in mortgage-backed securities. As of March 31, 2003 the growing balance sheet
simulations indicate that tax equivalent net interest income projected for the
next twelve months, would rise by $48.9 million (18.1%) under a rising rate
scenario and would decrease by $13.5 million (5.0%) with falling rates.
In both the flat and growing balance sheet scenarios net interest
income is more sensitive to rate changes (in the same direction) than it was in
the December 31, 2002 projections. This difference occurs mainly because of a
Management decision to sell $700 million of mortgage-backed securities and
invest the proceeds in short term investments, with no corresponding changes in
liabilities.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing of this Quarterly Report
on Form 10-Q, an evaluation was carried out under the supervision and with the
participation of First BanCorp Management, including its Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of
our disclosure controls and procedures (as defined in Rule 13a-14 (c) under the
Securities Exchange Act of 1934). Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the design and
operation of these disclosure controls and procedures were effective. No
significant changes were made in our internal controls or in other factors that
could significantly affect these controls subsequent to the date of their
evaluation.
35
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
On April 29, 2003 First BanCorp held its annual meeting of
stockholders. The number of shares present in person and/or by proxy at such
meeting was 36,662,567 representing 91.76% of the 39,955,285 shares of common
stock issued and outstanding on March 18, 2003. March 18, 2003 was the record
date for the determination of the stockholders entitled to vote at the meeting.
The following was voted upon at the Annual Meeting of Stockholders:
(a) The election of the following directors:
For Withheld
---------- ---------
Jose Julian Alvarez 34,516,851 2,145,716
Jose Teixidor 36,355,043 307,524
Richard Reiss-Huyke 34,605,446 2,057,121
The following are the directors whose terms of office continue:
Angel Alvarez-Perez
Juan Acosta Reboyras
Annie Astor-Carbonell
Jose L. Ferrer Canals
Rafael Bouet-Souffront
Jorge L. Diaz
(b) Ratification of the appointment of PricewaterhouseCoopers as
the Corporation's Independent Accountants for fiscal year
2003.
36
The appointment of PricewaterhouseCoopers was ratified as follows:
For 34,656,819
Against 1,987,610
Abstain 18,138
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K
A-EXHIBITS
99.1 -Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes Oxley Act of 2002.
99.2 - Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
B-REPORT ON FORM 8-K
On April 17, 2003, the Corporation filed a Form 8-K announcing its
unaudited results of operations for the quarter ended March 31, 2003.
37
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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.
Registrant
Date: May 15, 2003 By: /S/ ANGEL ALVAREZ-PEREZ
---------------------------------
Angel Alvarez-Perez, Esq.
Chairman, President and Chief
Executive Officer
Date: May 15, 2003 By: /S/ ANNIE ASTOR-CARBONELL
-----------------------------------
Annie Astor-Carbonell
Senior Executive Vice President
and Chief Financial Officer
38
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: May 15, 2003 By: /S/ ANGEL ALVAREZ-PEREZ
-------------------------------
Angel Alvarez-Perez, Esq.
Chairman, President and
Chief Executive Officer
39
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: May 15, 2003 By: /S/ ANNIE ASTOR-CARBONELL
-----------------------------------
Annie Astor-Carbonell
Senior Executive Vice President
and Chief Financial Officer
40