Annual Report
Balanced Diversification
for Successful Performance
[LOGO] First BanCorp
[PHOTO] Yagrumo Leaf
Table of Content
Financial Highlights 2
Offices 4
Business Profile 5
President's Letter 7
Achievements in 2000 12
The Puerto Rico Economy 15
Board of Directors 16
Officers 18
Financial Review 21
Stockholders' Information 77
The Yagrumo leaf featured in the 2000 Annual Report, symbolizes our beleif
in conservation of natural resources and our commitment to customers' banking
needs. We have made a commitment to promote the enviromental quality of Puerto
Rico by suporting the Puerto Rico Conservation Trust
The Yagrumo tree grows abundantly, as our commitment to serve customers.
The flexibility of its wood is a symbol of our capability to adapt to changing
needs. Its umbrella-like leaves represent our diversification of services. Its
capacity to bloom and give fruit year round, is a symbol of innovation and
constant evolution. The harmony of its leaves, shows our determination to offer
the best quality, personal service.
At First BanCorp we beleive in keeping a perfect balance with our mission
as a leading financial institution and the well-being of the community.
1
F i n a n c i a l H i g h l i g h t s
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In Thousands (Except for per share results) 2000 1999
Operating Results:
Net interest income $190,773 $185,733
Provision for loan losses 45,718 47,960
Other income 50,032 32,862
Other operating expenses 113,050 101,272
Income tax provision 14,761 7,288
Net income 67,276 62,075
Per common share:
Net income - basic 2.22 2.00
Net income - diluted 2.21 1.98
Weighted Average Common Shares:
Basic 26,943 28,941
Diluted 27,145 29,199
[GRAPHS]
2
2000 1999
At Year End:
Assets $5,919,657 $4,721,568
Loans 3,498,198 2,745,368
Allowance for loan losses 76,919 71,784
Investments 2,233,216 1,811,164
Deposits 3,345,984 2,565,422
Borrowings 2,069,484 1,803,729
Capital 434,461 294,902
[GRAPHS]
3
Offices (P.R. GEOGRAPHIC MAP)
Branches - 48 Offices
Aguada 1
San Sebastian 1
Arecibo 1
Manati 1
Dorado 1
Bayamon 5
Guaynabo 1
San Juan 12
Carolina 5
Humacao 1
Caguas 4
Aguas Buenas 1
Cidra 1
Guayama 1
Cayey 1
Barranquitas 1
Ponce 2
Yauco 1
Cabo Rojo 1
Mayaguez 2
Saint Thomas 3
Saint Croix 1
Money Express - 26 Offices
Aguadilla 1
Isabela 1
San Sebastian 1
Arecibo 1
Manati 1
Vega Baja 1
Toa Baja 1
Bayamon 3
San Juan 3
Carolina 1
Rio Grande 1
Fajardo 1
Humacao 1
Caguas 1
Guayama 1
Cayey 1
Ponce 1
Barranquitas 1
Utuado 1
Yauco 1
Mayaguez 1
Caguas 1
First Leasing & Rental Corp - 6 Offices
Isabela 1
Bayamon 1
San Juan 2
Caguas 1
Guaynabo 1
Auto Loan Center - 1 Office
Mayaguez 1
Loan Center - 1 Office
Fajardo 1
Mortgage Loan Center - 4 Offices
Manati 1
San Juan 2
Carolina 1
Total 86 Offices
4
Business Profile
[PHOTO]
Yagrumo Leaf
First BanCorp (the Corporation), incorporated in Puerto Rico, is the
holding company for FirstBank (the Bank), the second largest locally owned
commercial bank in Puerto Rico. First BanCorp, a Financial Holding Company which
operates primarily in the Puerto Rico banking market, had total assets of $5.9
billion as of December 31, 2000. First BanCorp. The Corporation offers a wide
selection of financial services to a growing number of consumer and commercial
customers. Commercial loans, consumer loans, mortgage loans and investment
operations are the most important areas of its business.
The Corporation has a $1.6 billion portfolio of commercial loans,
commercial mortgages, construction loans and other related commercial products.
Its commercial clients include businesses of all sizes covering a wide range of
economic activities. First BanCorp has a $747 million portfolio of residential
mortgages. The institution also has $1.2 billion in consumer loans, concentrated
in auto loans and leases, personal loans and credit cards. Its $2.2 billion
investment portfolio consists mostly of U.S. government securities and mortgage
backed securities. Through a strategic alliance with Paine Webber, First BanCorp
offers brokerage services in its largest branches. Approximately 1,650
professionals and a sophisticated computer system support the business
activities of the Corporation.
First chartered in 1948, First BanCorp was the first savings bank
established in Puerto Rico, under the name of "First Federal Savings and Loan
Association". It has been a stockholder owned institution since 1987. In
October, 1994, it became a Puerto Rico chartered commercial bank and assumed the
name of "FirstBank". Effective October 1, 1998, the Bank reorganized, making
FirstBank a subsidiary of the holding company First BanCorp.
First BanCorp, which is a well-capitalized institution under federal
standards, operates 48 full service branches including four offices in the U.S.
Virgin Islands. The Corporation also has one auto loan center, one personal loan
center and four mortgage loan centers in Puerto Rico. A second tier subsidiary
of First BanCorp, Money Express, operates 26 small loan offices through
5
out Puerto Rico. First BanCorp also has a second tier subsidiary known as
First Leasing and Rental Corp. which rents and leases motor vehicles from its
six offices in Puerto Rico.
First BanCorp has distinguished itself by providing innovative
marketing strategies and novel products to attract clients. Besides its main
branches and specialized lending offices, the Corporation has offered a
telephone information service called "Telebanco" since 1983. This was the first
telebanking service offered in Puerto Rico. First BanCorp clients have access to
an extensive ATM network covering the U.S. Virgin Islands, the U.S. mainland and
the rest of the world. The Corporation was also the first in Puerto Rico to open
on weekends and the first to offer in-store branches to its clients. First
BanCorp was also the first banking institution in Puerto Rico with a presence on
the internet. The Corporation offers a wide menu of internet banking services to
its clients.
First BanCorp and its subsidiaries are subject to supervision,
examination and regulation by the Federal Reserve Board, the Federal Deposit
Insurance Corporation and the Commissioner of Financial Institutions of Puerto
Rico.
First BanCorp is committed to providing the most efficient and cost
effective banking services possible. Management's goal is to be the premier
financial institution in Puerto Rico and a leader in financial products and
services. First BanCorp's Management work constantly to exceed the expectations
of its stockholders, clients and employees.
6
President's Letter
[PHOTO]
Angel Alvarez-Perez, President
To our stockholders:
On behalf of the Board of Directors and staff of First BanCorp I am
pleased to submit our annual report for 2000, another record year. In 2000,
First BanCorp earned $67.3 million, representing $2.22 per common share (basic)
and $2.21 per common share (diluted). These earnings compare favorably with
1999, when the Corporation earned $62.1 million, which came to $2.00 per common
share (basic) or $1.98 per common share (diluted). Net income increased 8.4% and
diluted earnings per share rose 11.6% in 2000. These achievements continued our
record of consistent earnings growth.
7
Growth and Diversification
Profits grew in spite of high interest rates during 2000. The growth of
the loan portfolio, strict controls over operating costs, and increases in other
income all helped to make this performance possible.
Our business grew substantially in 2000. Total assets increased 25%
from $4.7 billion at the end of 1999 to $5.9 billion on December 31, 2000. Loans
grew by $753 million. Much of this growth took place in commercial, construction
and commercial mortgage lending, which expanded by $431 million. Residential
mortgage loans also grew $27 million. This pattern of growth provides additional
diversification in the loan portfolio, which used to be concentrated in consumer
lending. Consumer loans and leases were 57% of the loan portfolio at the end of
1997, compared with 33% at December 31, 2000. We are maintaining high
underwriting standards in all lending areas.
To support future growth, First BanCorp issued $75 million of
additional preferred stock during 2000. This issuance brings total preferred
stock to $165 million, allowing the Corporation to maintain strong capital
ratios as it continues growing.
During the past year our efficiency ratio averaged 46.95%, almost the
same as the very favorable 46.33% of 1999. Other income increased by $17.2
million, of which $6.5 million were gains on the sale of investments. The
remaining $10.7 million represented additional services provided by the
Corporation including investment banking services, services to commercial
clients, and others. We expect fee income to grow as we increase the
sophistication of the services offered while delivering them to a growing base
of clients.
Improving Service to Corporate Clients
During 1999, we took several steps to expand commercial lending,
including the recruitment of senior executives from major money center banks
with local experience and established relationships. In mid-1999 the Corporation
acquired the Puerto Rico operations of the Royal Bank of Canada. This
transaction gave us a seasoned portfolio of commercial loans and an established
branch in Hato Rey, the commercial and financial center of the Island.
In 2000 we built on these achievements, expanding the commercial
portfolio and improving corporate services. The Corporation offers an extensive
menu of services to corporate clients. We provide international letters of
credit, a VISA corporate credit card offer, direct deposit of payroll, service
point of sale transactions, and a selection of cash management accounts.
Achieving this level of service has required continual investments in new and
more sophisticated technology. We are committed to providing state of the art
services to all of our corporate customers.
Remaking Retail Operations
We continue remaking the Corporation's retail operations. The
Corporation relocated three branches during 2000, mainly to shopping malls. The
strategy has been to make our facilities more accessible by adding parking
space, drive through lanes and extending branch operating hours. In 2001 the
Corporation will relocate one office while opening a new branch in Guaynabo, an
upper middle class suburb of San Juan.
8
In 1999 the Corporation introduced two innovative deposit accounts
which reward clients for transactions such as loans and ATM transactions. During
2000 the Corporation promoted this account, and these deposits reached $77.9
million by year end.
We are also inaugurating an internet banking system so that our clients
can do their banking from home. Customers who want personal attention can take
advantage of our extensive telephone services or visit one of our 48 branch
offices.
During 2000 the Corporation began upgrading the software and
communications tools which record routine transactions in our branches and link
them to the central offices. Similar upgrades have also been done for our call
centers. As part of this process we carried out a thorough analysis of branch
work flow and procedures. When this process is completed at the end of 2001 we
will have a state of the art communications and data processing system for our
branches. These changes should significantly increase the efficiency of our
tellers.
We have also made a commitment to promote the environmental quality of
Puerto Rico by supporting the Puerto Rico Conservation Trust. As part of this
program we launched a new savings account for children which includes membership
in the Conservation Trust. We also added an affinity card which allows
cardholders to contribute to the Conservation Trust by using their cards.
[PHOTO]
Yagrumo Leaf
The Corporation has placed commercial and mortgage loan desks in
certain key branch offices. Many of our clients have also taken advantage of a
business arrangement in which Paine Webber places brokers in certain branches.
At the end of 2000 these brokerage accounts totaled $34 million. Paine Webber
currently maintains offices in 12 FirstBank branches.
Laying the Groundwork for Diversification
In September First BanCorp purchased First Virgin Islands Savings and Loan
Corp, a $56 million bank in St. Thomas. This acquisition builds on last year's
purchase of a Citibank branch in the same area, giving the Bank four branches in
the U.S. Virgin Islands.
In investment banking, First BanCorp reached an agreement last year
with Goldman, Sachs & Co. to participate in issuance of bonds by the Government
Development Bank of Puerto Rico. During 2000 the Corporation participated in six
transactions totaling $3.8 billion, including the first issuance of municipal
bonds through the internet.
9
During 2000 First BanCorp reorganized as a Financial Holding Company.
This change will allow us to enter new lines of business. We expect to open an
insurance agency in Puerto Rico during 2001. This change is part of our long
term strategy to diversify sources of revenue.
Enhancing Shareholder Value
These efforts have paid off in strong earnings growth for
2000, with a return on equity of 21.22%, compared with 21.06% in 1999. The
return on common equity was 27.83%, well above the 24.68% of 1999. The stock
price has reflected these strong results, and our shareholders experienced a
total return of 16.35% on their investment during 2000. Investors who held First
BanCorp stock over the ten year period from year-end 1990 to year-end 2000
received a cumulative total return of 2,970%, for an average annual growth rate
of 40.82% on their investment.
The Corporation began a stock repurchase program five years ago. During
2000 First BanCorp repurchased 1,642,400 shares, bringing total activity over
the course of the program to 4,757,850 shares, adjusted for splits, for a total
investment of $84.4 million. In addition, officers and directors of First
BanCorp own approximately 21 percent of its shares. This shows our confidence in
First BanCorp's future and our commitment to keep its fundamentals sound.
As First BanCorp begins another year of growth and service, we are
confident that the Corporation is stronger and better positioned than ever. We
have a truly outstanding group of employees, officers and directors. I am
confident that we can meet the challenges ahead, and that we will continue to
provide outstanding service to our clients, while benefiting employees and
stockholders in the years to come.
/s/ Angel Alvarez-Perez
Angel Alvarez-Perez
Chairman
President
Chief Executive Officer
10
[PHOTO]
Yagrumo Leaf
11
Achievements in 2000
Record profits made 2000 a successful year for First BanCorp. Total
assets grew 25% to $5.9 billion. In September the Corporation purchased First
Virgin Islands Federal Savings Bank, a $56 million institution in St. Thomas,
U.S. Virgin Islands. The Corporation acquired $44 million in loans, $38 million
in deposits and one branch office from this transaction. First BanCorp also
introduced internet banking to supplement its 48 branch offices.
Profits continued their growth as First BanCorp earned $67.3 million,
which comes to $2.22 per common share (basic) or $2.21 per common share
(diluted). In 1999 the Corporation earned $62.1 million, the equivalent of $2.00
(basic) or $1.98 (diluted) per common share. Net income increased by 8.4% in
2000, or 11.6% per share on a diluted basis. Net interest income grew by $5.0
million. Gains on sale of investments and trading added $8.3 million to net
income in 2000.
First BanCorp's loans increased by $753 million for the year, of which
$431 million were commercial and construction loans. The investment portfolio
grew by $422 million. First BanCorp was able to maintain an efficiency ratio of
only 46.95% during 2000, almost the same as the 46.33% in 1999.
During 2000 deposits grew from $2.565 billion to $3.346 billion, an
increase of $781 million. Management worked intensively to improve the branch
network and upgrade its data processing systems. Management has been placing
commercial loan desks, mortgage officers and brokers in certain key branch
offices. The Corporation also began offering internet services for those clients
who like the convenience of banking from their homes.
12
Diversifying Income
Management has been taking steps to diversify the Corporation's
revenues by moving toward fee based activities in some areas. In 2000 First
BanCorp began offering brokerage services in selected branches through a new
alliance with Paine Webber. This arrangement gives the Corporation's clients the
broadest range of brokerage and financial management services available in
Puerto Rico. By year-end accounts managed under this program had reached $34
million in 12 branches.
Early in 2000 Management entered an agreement with Goldman, Sachs & Co.
to participate in bond issues by the Government Development Bank of Puerto Rico.
During 2000 the Corporation participated in six transactions totaling $3.8
billion.
Finally, First BanCorp reorganized as a financial holding company in
2000, opening the way for the Corporation to enter new lines of business
permitted by the Gramm Leach Bliley Act. Early in 2001 Management expects to
open an insurance agency in Puerto Rico.
Improvements in the Balance Sheet
Contributing to higher profits in 2000 was a significant improvement in
asset quality. Three years ago Management substantially improved its system of
underwriting consumer loans, introduced tighter approval procedures and improved
the Corporation's computer systems. The quality of the loan portfolio has
improved substantially as a result. Loan write-offs net of recoveries amounted
to $42.0 million in 2000, as compared to $44.6 million in 1999 and $66.2 million
in 1998. The provision for loan losses has followed a similar trend, from $76.0
million in 1998 to $48.0 million in 1999 followed by $45.7 million in 2000.
These reductions took place even as the overall loan portfolio was growing from
$2.1 billion at the end of 1998 to $3.5 billion at the end of 2000.
On December 31, 2000 nonperforming loans totaled $67.7 million,
compared to $53.8 million on the same date in 1999 and $57.0 million at the end
of 1998. The increase in 2000 was basically due to one large commercial loan
combined with nonperforming loans in the portfolio of First Virgin Islands
Federal Savings, which First BanCorp acquired in September. At the end of 2000
the ratio of non-performing loans to total loans had fallen to 1.94%, compared
with 1.96% at the end of 1999 and 2.69% at year-end 1998.
Loan loss reserves have increased from $67.9 million at the end of 1998
to $71.8 million at year-end 1999 and $76.9 million on December 31, 2000. The
reserve coverage ratio (allowance for loan losses as a percentage of
non-performing loans) has remained above 100%. It was 119.1% at the end of 1998,
133.4% at year-end 1999 and 113.6% at the end of 2000. Management is committed
to continuing improvements in loan quality in coming years.
During the fourth quarter of 2000 Management also strengthened the
capital structure of First BanCorp by issuing $75 million in preferred stock.
This transaction brings total preferred stock to $165 million, helping the
Corporation to maintain a solid and conservative capital structure.
13
Although assets grew substantially during 2000 the Corporation's capital
ratios remained strong. The core capital ratio was 7.28% and the risk based
capital ratio was 14.43% as of December 31, 2000.
Increasing Shareholder Value
The financial results reported here continue a trend of earnings growth
that has produced excellent value for shareholders. First BanCorp's return on
average equity was 21.22% in 2000, while the return on average assets was 1.28%.
The return on common equity was 27.83%. Dividends were increased in 2000, but
the payout ratio remained at a conservative 19.72% compared with 17.96% in 1999.
During 2000 the Corporation repurchased 1,642,400 common shares.
First BanCorp shareholders experienced a total return of 16.35% on
their investment during 2000. Investors who held First BanCorp stock over the
ten year period from year-end 1990 to year-end 2000 received a cumulative total
return of 2,970%. This is equivalent to an average annual growth rate of 40.82%
on the original investment.
Management is optimistic about the future of First BanCorp. The range
of services it offers, its effective network of offices and branches
supplemented by new sales methods, its dedicated staff and its reputation with
clients will all contribute to future earnings growth. Management will continue
its efforts to improve First BanCorp's excellent performance in 2001 and in the
years to come.
[PHOTO]
Yagrumo Leaf
14
The Puerto Rico Economy
The Island of Puerto Rico is a U.S. Commonwealth with a population of
3.8 million, located in the Caribbean approximately 1,600 miles southeast of New
York. Puerto Rico has been enjoying solid economic growth over most of the
1990's. Real GNP grew by 3.1% in the 2000 fiscal year. Economists are
forecasting a slowdown during 2001 in line with mainland growth trends. The
Puerto Rico Planning Board projects real GNP growth in the range of 2.1% to 2.6%
for this fiscal year.
Puerto Rico's economic performance is a natural result of its integration
with the U.S. economy. Puerto Ricans are U.S. citizens and serve in the United
States armed forces, and the Island has several large U.S. military bases. The
Island uses U.S. currency and forms part of the U.S. financial system. Federal
courts enforce U.S. laws here. Since Puerto Rico falls within the U.S. for
purposes of customs and migration, there is full mobility of funds, people and
goods between Puerto Rico and the U.S. mainland. Puerto Rico banks are subject
to the same Federal laws, regulations and supervision as other financial
institutions in the rest of the U.S. The Federal Deposit Insurance Corporation
insures the deposits of Puerto Rico chartered commercial banks, including
FirstBank, the banking subsidiary of First BanCorp.
Puerto Rico made a rapid transition from poverty in the immediate
postwar period to prosperity today. Throughout this process the Island has
attracted industry using tax exemption. Many multinational corporations have
substantial operations here. During 1996 Congress repealed Section 936 of the
Internal Revenue Code, which provided Federal tax exemption for companies
operating in Puerto Rico. However, Congress also provided a ten-year grandfather
clause for companies already operating here. Because Puerto Rico has a fiscal
system independent from that of the U.S., it can fashion local tax incentives to
attract or retain businesses.
Puerto Rico is becoming somewhat less dependent on manufacturing than
it was in the early postwar period. Manufacturing attracted by tax exemption is
still an important part of the Island's economy. Nevertheless, Puerto Rico has
been diversifying its economic base to include tourism, business services and
transportation. As part of these changes the Island has been receiving U.S.
private investment in diverse areas such as hotels, financial services and large
retail stores. During the past year a slowdown in manufacturing growth was
balanced by strong construction activity, both private and public. Management is
optimistic about Puerto Rico's economic future.
15
Board of Directors
[PHOTO}
From left to right: Angel Alvarez-Perez, Esq., Chairman
and German E. Malaret, M.D.
[PHOTO]
From left to right: Annie Astor-Carbonell, C.P.A.,
Angel L. Umpierre, C.P.A. and Jose Teixidor
16
[PHOTO]
From left to right: Antonio Pavia Villamil, M.D.
Francisco D. Fernandez, Eng. and Rafael Bouet, Eng.
[PHOTO]
From left to right: Jorge L. Diaz Irizarry, Hector M. Nevares, Esq.
and Jose Julian Alvarez
17
First BanCorp Officers
[PHOTO] From left to right: Josianne M. Rosello,
Randolfo Rivera, Luis Cabrera, Miguel Mejias and Aida Garcia
PRESIDENT
Angel Alvarez-Perez
Chief Executive Officer
SENIOR EXECUTIVE VICE PRESIDENTS
Annie Astor-Carbonell Luis M. Beauchamp
Chief Financial Officer Chief Lending Officer
EXECUTIVE VICE PRESIDENTS
Aurelio Aleman Fernando L. Batlle
Retail Banking Branch Banking, Mortgages
Ricardo N.Ramos Randolfo Rivera
First Securities Corporate Services
SENIOR VICE PRESIDENTS
Miguel Babilonia Luis Cabrera Eva Candelario
Credit Policy & Portfolio Management Treasury & Investments Corporate Business Development
Jim Crites Aida M. Garcia Michael Garcia
Sales and Distribution Human Resources Consumer Collection
Virgin Islands
Fernando Iglesias Roger Lay Miguel Mejias
Special Loans & Credit Administration Internal Audit Information Systems
John Ortiz Haydee Rivera Julio Rivera
Remote Banking Branch Banking Operations Construction Lending
Carmen Rocafort
Structure Financing
Josianne M. Rosello Demetrio Santiago Hector Santiago
Marketing & Public Relations Auto Wholesale Business Auto Business
Denisse Segarra Laura Villarino
Sales & Distribution Controller
18
[PHOTO] From left to right: Ricardo N.Ramos, Annie Astor-Carbonell, Aurelio
Aleman, Angel Alvarez-Perez, Laura Villarino, Luis M. Beauchamp and Fernando
L. Batlle
VICE PRESIDENTS
William Alvarez Jose H. Aponte
Area Business Commercial Mortgage
Beverly Bachetti Ana Colon Lenitzia Delgado
Private Banking Centralized Accounting Corporate Services
David Gonzalez Wanda Cooper
Corporate Business Development Customer Care Center
Nelson Gonzalez Eric Lopez Marcelo Lopez
Structure Financing Corporate Banking Regional Sales Manager
Juanita Marrero Ivan Martinez Jose Negron
First Mortgage Project Manager Auto Asset & Disposition
Luis Orengo Eduardo Ortiz Maria Cristina Oruna
Commercial Loans Auto Wholesale Customer Relationship Management
Osvaldo Padilla
Corporate Business
Reynaldo Padilla Miguel Pimentel
Auto Finance Corporate Business Development
Dionisio Ramirez Jorge Rendon Migdalia Rivera
Construction Loans Operational Support Community Banking
Sandra Rivera Belinda Rodriguez Jose L. Rodriguez
Auto Collection Remote Sales Information Systems
Elizabeth Sanchez Roberto Sanchez Ramon Santiago
Marine Financing Credit Risk Asset Based Unit
Miguel Santin Carmen Szendrey
Corporate Banking Legal Counsel
Carmen Torres Raphael Torres
Senior Sales Manager Regional Sales Manager
19
SUBSIDIARIES
FIRST FEDERAL FINANCE CORPORATION
DBA MONEY EXPRESS "LA FINANCIERA"
Angel Alvarez-Perez
Chief Executive Officer
Aurelio Aleman
President and Chief Operating
Officer
Carlos Power
Vice President and General Manager
FIRST LEASING AND RENTAL CORPORATION
Angel Alvarez-Perez, Esq.
Chief Executive Officer
Aurelio Aleman
President and Chief Operating
Officer
Agustin Davila
General Manager
20
[PHOTO]
Yagrumo Leaf
21
SELECTED FINANCIAL DATA
Year ended December 31, 2000 1999 1998 1997
(In thousands except for per share results)
Condensed Income Statements:
Total interest income $463,388 $369,063 $321,298 $285,160
Total interest expense 272,615 183,330 155,130 130,429
Net interest income 190,773 185,733 166,168 154,731
Provision for loan losses 45,719 47,961 76,000 55,676
Other income 50,032 32,862 58,240 39,866
Other operating expenses 113,049 101,271 91,798 83,268
Unusual item - SAIF assessment
Income before income tax provision, extraordinary item
and cumulative effect of accounting change 82,037 69,363 56,610 55,653
Provision for income tax 14,761 7,288 4,798 8,125
Income before extraordinary item and
cumulative effect of accounting change 67,276 62,075 51,812 47,528
Extraordinary item
Cumulative effect of accounting change
Net income 67,276 62,075 51,812 47,528
Per Common Share Results (1):
Income before extraordinary item and
cumulative effect of accounting change $2.21 $1.98 $1.74 $1.58
Extraordinary item
Cumulative effect of accounting change
Net income per common share - diluted $2.21 $1.98 $1.74 $1.58
Cash dividends declared $0.44 $0.36 $0.30 $0.24
Average shares outstanding 26,943 28,941 29,586 30,036
Average shares outstanding - diluted 27,145 29,199 29,858 30,204
Balance Sheet Data:
Loans and loans held for sale $3,498,198 $2,745,368 $2,120,054 $1,959,301
Allowance for possible loan losses 76,919 71,784 67,854 57,712
Investments 2,233,216 1,811,164 1,800,489 1,276,900
Total assets 5,919,657 4,721,568 4,017,352 3,327,436
Deposits 3,345,984 2,565,422 1,775,045 1,594,635
Borrowings 2,069,484 1,803,729 1,930,488 1,458,148
Total common equity 269,461 204,902 270,368 236,379
Total equity 434,461 294,902 270,368 236,379
Book value per common share, end of year 10.20 7.30 9.17 7.93
Regulatory Capital Ratios (In Percent):
Total capital to risk weighted assets 14.43 16.16 17.39 17.26
Tier 1 capital to risk weighted assets 11.23 11.64 11.55 11.07
Tier 1 capital to average assets 7.28 7.47 6.59 7.44
Selected Financial Ratios (In Percent):
Net income to average total assets 1.28 1.49 1.48 1.63
Interest rate spread (2) 3.38 4.29 4.76 5.30
Net interest income to average earning assets (2) 3.91 4.85 5.27 5.83
Yield on average earning assets (2) 9.21 9.29 9.83 10.45
Cost on average interest bearing liabilities 5.83 5.00 5.07 5.15
Net income to average total equity 21.22 21.06 20.54 22.30
Net income to average common equity 27.81 24.68 20.54 22.30
Average total equity to average total assets 6.05 7.07 7.22 7.32
Dividend payout ratio 19.72 17.96 17.12 15.14
Efficiency ratio (3) 46.95 46.33 40.91 42.79
Offices:
Number of full service branches 48 48 40 36
Loan origination offices 38 41 45 44
(1) Amounts presented were recalculated, when applicable, to retroactively
consider the effect of common stock splits.
(2) Ratios for 1993 and thereafter
were computed on a taxable equivalent basis.
(3) Other operating expenses to the
sum of net interest income and other income.
22
1996 1995 1994 1993 1992 1991
$256,523 $208,488 $180,309 $159,433 $158,993 $171,789
113,027 96,838 76,674 72,413 85,986 109,942
143,496 111,650 103,635 87,020 73,007 61,847
31,582 30,894 17,674 18,669 13,596 16,444
29,614 48,268 18,169 17,123 13,563 18,895
82,498 65,628 60,760 56,994 54,745 51,423
9,115
49,915 63,396 43,370 28,480 18,229 12,875
12,281 14,295 12,385 6,525 2,879 1,420
37,634 49,101 30,985 21,955 15,350 11,455
(429) (870) (1,400)
6,840
37,634 49,101 30,556 28,795 14,480 10,055
$1.22 $1.58 $1.01 $0.63 $0.37 $0.26
(0.02) (0.02) (0.04)
0.21
$1.22 $1.58 $0.99 $0.84 $0.35 $0.22
$0.20 $0.08 N/A N/A N/A N/A
30,794 30,592 29,977 29,322 28,584 28,584
30,952 31,118 30,859 32,946 34,065 33,237
$1,896,074 $1,556,606 $1,501,273 $1,237,928 $1,182,409 $1,264,380
55,254 55,009 37,413 30,453 30,474 29,001
830,980 785,747 595,555 603,373 636,781 564,431
2,822,147 2,432,816 2,174,692 1,913,902 1,888,754 1,898,399
1,703,926 1,518,367 1,493,445 1,398,247 1,359,448 1,396,066
884,741 698,097 536,278 399,442 413,403 405,885
191,142 171,202 120,015 92,785 50,194 38,410
191,142 171,202 120,015 92,785 88,622 74,146
6.32 5.51 3.99 3.14 1.75 1.35
15.25 16.17 9.76 9.05 9.32 7.08
9.32 9.93 8.50 7.79 8.06 5.75
6.65 6.82 5.74 4.70 4.60 3.74
1.48 2.22 1.53 1.53 .78 .53
5.46 5.07 5.23 4.73 3.66 3.19
6.03 5.59 5.65 5.10 4.04 3.39
10.63 10.12 9.63 9.10 8.80 9.41
5.17 5.05 4.40 4.37 5.14 6.22
20.49 33.19 29.07 30.36 17.70 14.38
20.49 33.19 29.07 39.68 26.37 20.20
7.23 6.68 5.27 5.05 4.38 3.67
16.32 5.06 N/A N/A N/A N/A
47.66 41.04 49.88 54.73 63.24 63.69
36 36 32 33 33 33
47 43 23 9 4 1
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FINANCIAL REVIEW SUMMARY
For the year 2000, First BanCorp (the Corporation) recorded earnings of
$67,275,609 or $2.22 per common share (basic) and $2.21 per common share
(diluted), compared to $62,074,949 or $2.00 per common share (basic) and $1.98
per common share (diluted) for 1999, and $51,812,387 or $1.75 per common share
(basic) and $1.74 per common share (diluted) for 1998.
The increase in the Corporation's earnings are attributed to the net
interest income earned on the growing portfolio of earning assets, other
operating income, improvements in asset quality resulting in a lower provision
for loan losses, and controls over operating expenses. For 2000 as compared to
1999, net income increased by $5,200,660 or $0.23 per common share (diluted),
and for 1999 as compared to 1998, by $10,262,562 or $0.24 per common share
(diluted).
Return on average assets was 1.28% for 2000, 1.49% for 1999 and 1.48%
for 1998. Return on average equity was 21.22% for 2000, 21.06% for 1999 and
20.54% for 1998. Return on average common equity was 27.81% for 2000, 24.68% for
1999 and 20.54% for 1998.
RESULTS OF OPERATIONS
The Corporation's results of operations depend primarily on its net
interest income, which is the difference between the interest income earned on
interest earning assets, including investment securities and loans, and the
interest expense paid on interest bearing liabilities, including deposits and
borrowings. Also, the results of operations depend on the provision for loan
losses, operating expenses (such as personnel, occupancy and other costs), other
income (mainly service charges and fees on loans), and gains on sale of
investments.
Net Interest Income
Net interest income increased to $191 million for 2000 from $186
million in 1999 and $166 million in 1998. This improvement results from the
continuous increase in the average volume of interest earning assets net of an
increase in the average volume of interest bearing liabilities to fund those
assets. This is reflected in an increase in the average volume of interest
earning assets of $1,023 million for 2000 as compared to 1999 and of $721
million for 1999 as compared to 1998. Interest bearing liabilities increased by
$1,007 million for 2000 as compared to 1999 and by $606 million for 1999 as
compared to 1998.
The following table includes a detailed analysis of net interest
income. Part I presents average volumes and rates on a tax equivalent basis and
Part II presents the extent to which changes in interest rates and changes in
volume of interest related assets and liabilities have affected the
Corporation's net interest income. For each category of earning assets and
interest bearing liabilities, information is provided on changes attributable to
changes in volume (changes in volume multiplied by old rates), and changes in
rate (changes in rate multiplied by old volumes). Rate-volume variances (changes
in rate multiplied by changes in volume) have been allocated to the changes in
volume and changes in rate based upon their respective percentage of the
combined totals.
24
Part I Average volume Interest income (1) / expense Average rate (1)
Year ended December 31, 2000 1999 1998 2000 1999 1998 2000 1999 1998
(Dollars in thousands)
- -----------------------------------------------------------------------------------------------------------------------------------
Earning Assets:
Deposits at banks and other
short-term investments $ 9,293 $ 27,344 $ 40,766 $ 527 $ 450 $ 2,028 5.67% 1.65% 4.97%
Government obligations 528,903 415,742 319,777 36,043 24,997 19,984 6.81% 6.01% 6.25%
Mortgage backed securities 1,457,044 1,294,195 1,032,632 100,415 92,157 77,463 6.89% 7.12% 7.50%
Other investment 51,508 18,646 1,150 4,366 1,598 186 8.48% 8.57% 16.14%
FHLB stock 18,008 16,170 10,252 1,249 1,101 743 6.94% 6.81% 7.25%
----------- ---------------------- --------- -------- -----------
Total investments 2,064,756 1,772,097 1,404,577 142,600 120,303 100,404 6.91% 6.79% 7.15%
--------- --------- ----------- ------- ------- --------
Consumer loans 1,026,044 1,013,782 1,032,704 140,635 138,130 139,309 13.71% 13.63% 13.49%
Residential real estate loans 573,866 327,700 290,564 49,115 30,754 30,807 8.56% 9.38% 10.60%
Construction loans 169,257 94,940 19,169 18,251 9,216 1,852 10.78% 9.71% 9.66%
Commercial loans 1,210,783 847,917 613,697 110,808 75,879 56,239 9.15% 8.95% 9.16%
Finance leases 103,114 68,577 43,108 12,499 9,080 6,022 12.12% 13.24% 13.97%
------------ ---------- ----------- -------------------- ---------
Total loans (2) 3,083,064 2,352,916 1,999,242 331,308 263,059 234,229 10.75% 11.18% 11.72%
----------- ----------- ----------- --------- --------- --------
Total earning assets $5,147,820 $4,125,013 $3,403,819 $473,908 $383,362 $334,633 9.21% 9.29% 9.83%
========== ========== ========== ======== ======== ========
Interest Bearing Liabilities:
Interest bearing checking
accounts $ 162,456 $ 140,690 $ 123,847 $ 5,546 $ 4,931 $ 4,487 3.41% 3.50% 3.62%
Savings accounts 433,937 413,662 398,249 12,792 12,381 11,717 2.94% 2.99% 2.94%
Certificate accounts 2,173,244 1,373,263 972,433 134,945 73,177 54,214 6.20% 5.33% 5.58%
------------ --------- ----------- -------- ------ ------
Interest bearing deposits 2,769,637 1,927,615 1,494,529 153,283 90,489 70,418 5.53% 4.69% 4.71%
Other borrowed funds 1,851,524 1,728,913 1,559,892 116,130 92,370 84,460 6.27% 5.34% 5.41%
FHLB advances 51,053 8,451 4,515 3,201 471 252 6.27% 5.57% 5.58%
-------------------------------------------------------------------------
Total interest bearing
liabilities $ 4,672,214 $3,664,979 $3,058,936 $272,614 $183,330 $155,130 5.83% 5.00% 5.07%
============ ========== ========== ======== ======== ========
Net interest income $201,294 $200,032 $179,503
======== ======== ========
Interest rate spread 3.38% 4.29% 4.76%
Net interest margin 3.91% 4.85% 5.27%
(1) On a tax equivalent basis. The tax equivalent yield was computed dividing
the interest rate spread on exempt assets by (1- statutory tax rate) and adding
to it the cost of interest bearing liabilities. When adjusted to a tax
equivalent basis, yields on taxable and exempt assets are comparative.
(2) Non-accruing loans are included in the average balances.
25
Part II 2000 compared to 1999 1999 compared to 1998
Increase (decrease) Increase (decrease)
Due to: Due to:
Volume Rate Total Volume Rate Total
(In thousands)
----------------------------------------------------------------------
Earning assets:
Deposits at banks and other
short-term investments $ (661) $ 738 $ 77 $ (521) $(1,057) $(1,578)
Government obligations 7,413 3,633 11,046 5,884 (871) 5,013
Mortgage backed securities 11,410 (3,152) 8,258 19,123 (4,429) 14,694
Other investment 2,742 26 2,768 2,143 (731) 1,412
FHLB stock 128 20 148 416 (58) 358
-------- -------- ------- -------- -------- ----------
Total investments 21,032 1,265 22,297 27,045 (7,146) 19,899
------ ------- ------ ------ ------- --------
Consumer loans 1,678 827 2,505 (2,565) 1,386 (1,179)
Residential real estate loans 22,086 (3,724) 18,362 3,711 (3,765) (54)
Construction loans 7,915 1,120 9,035 7,355 9 7,364
Commercial loans 33,172 1,757 34,929 21,212 (1,572) 19,640
Finance leases 4,380 (961) 3,419 3,465 (406) 3,059
-------- ------- -------- ------- ------- -------
Total loans 69,231 (981) 68,250 33,178 (4,348) 28,830
------- ------- ------- ------ ------ ------
Total interest income 90,263 284 90,547 60,223 (11,494) 48,729
------- ------- ------- ------ ------- -------
Interest bearing liabilities:
Deposits 44,546 18,248 62,794 20,368 (297) 20,071
Other borrowed funds 6,881 16,879 23,760 9,091 (1,181) 7,910
FHLB advances 2,664 66 2,730 219 0 219
--------- ------------ -------- -------------------- --------
Total interest expense 54,091 35,193 89,284 29,678 (1,478) 28,200
-------- --------- ------- -------- -------- ------
Change in net interest income $36,172 $(34,909) $ 1,263 $30,545 $(10,016) $20,529
======= ======== ======= ======= ======== =======
Total interest income includes tax equivalent adjustments of $11
million, $14 million and $13 million for 2000, 1999, and 1998, respectively. On
a tax equivalent basis, net interest income increased to $201 million for 2000
from $200 million for 1999, and $180 million for 1998. The interest rate spread
and net interest margin amounted to 3.38% and 3.91%, respectively, for 2000, as
compared to 4.29% and 4.85%, respectively, for 1999 and to 4.76% and 5.27%,
respectively, for 1998. The reduction in the interest rate spread and net
interest margin for 2000 is mainly due to the increase in the average volume of
lower yielding investments, commercial loans and residential real estate loans
when compared to the average volume of higher yielding consumer loans. In
addition, the interest rate spread and margin were also affected by the higher
interest rates on funding costs, which prevailed throughout the year.
2000 compared to 1999
On a tax equivalent basis interest income increased by $91 million for
2000 as compared to 1999. On a tax equivalent basis the yield on earning assets
was 9.21% for 2000 as compared to 9.29% for 1999. The increase in interest
income results from the growth in the average volume of interest earning assets
of $1,023 million in 2000.
For the loan portfolio, the growth in 2000 of $363 million in the
average volume of commercial loans (including commercial real estate loans)
represented an increase of $33 million in interest income due to volume, and an
increase of $2 million in interest income due to rate. The average portfolio of
construction loans increased by $74 million for 2000, representing a positive
volume variance of $8 million and a positive rate variance of $1 million. The
average portfolio of residential mortgage loans increased by $246 million for
2000, representing a positive volume variance of $22 million. The average
finance lease
26
portfolio (mostly composed of consumer loans) increased by $35 million in
2000, representing a positive volume variance of $4 million. The increase of $12
million in the average volume of consumer loans in 2000, represented a positive
variance in interest income due to volume of $2 million. The increase in the
commercial real estate, construction and commercial loans portfolio resulted
from the Corporation's strategy to diversify its asset base, which was
concentrated in higher risk consumer loans.
For the investment portfolio, the average volume of mortgage backed
securities increased by $163 million in 2000. The tax equivalent yield on
mortgage backed securities was 6.89% in 2000 and 7.12% in 1999. The portfolio of
mortgage backed securities contributed $11 million in interest income due to
volume net of $3 million decrease in interest income due to rate. The average
volume of government obligations increased by $113 million for 2000 as compared
to 1999, causing a total increase in interest income of $11 million.
Interest expense increased by $89 million for 2000 as compared to 1999.
This was the result of the increase in the average volume of interest bearing
liabilities of $1,007 million for 2000 as compared to 1999 which generated a
volume variance of $54 million, together with an increase in the cost of
interest bearing liabilities from 5.00% for 1999 to 5.83% for 2000 which caused
a rate variance of $35 million for 2000 as compared to 1999.
1999 compared to 1998
On a tax equivalent basis interest income increased by $49 million for
1999 as compared to 1998. On a tax equivalent basis the yield on earning assets
was 9.29% for 1999 as compared to 9.83% for 1998. The increase in interest
income results from the growth in the average of interest earning assets of $721
million in 1999.
For the loan portfolio, the growth in 1999 of $234 million in the
average volume of commercial loans (including commercial real estate loans)
represented an increase of $21 million in income due to volume, partially offset
by a reduction of $2 million in interest income due to rate. The average
portfolio of construction loans increased by $76 million for 1999, representing
a positive volume variance of $7 million. The average portfolio of residential
mortgage loans increased by $37 million for 1999, representing a positive volume
variance of $4 million. The average finance lease portfolio (mostly composed of
consumer loans) increased by $26 million in 1999, representing a positive volume
variance of $4 million. The decrease of $19 million in the average volume of
consumer loans in 1999 caused a negative variance in interest income due to
volume of $3 million. The increase in the commercial real estate, construction
and commercial loans portfolio resulted from the Corporation's strategy to
diversify its asset base, which was concentrated in consumer loans. The consumer
loan portfolio decreased as a result of the tighter underwriting policies
implemented during 1997.
For the investment portfolio, the average volume of mortgage backed
securities increased by $262 million in 1999. The tax equivalent yield on
mortgage backed securities was 7.12% in 1999 and 7.50% in 1998. The portfolio of
mortgage backed securities contributed $19 million in interest income due to
volume net of $4 million decrease in interest income due to rate. The average
volume of government obligations increased by $96 million for 1999 as compared
to 1998, causing a total increase in interest income of $5 million.
Interest expense increased by $28 million for 1999 as compared to 1998.
This was the result of the increase in the average volume of interest bearing
liabilities of $606 million for 1999 as compared to 1998 with a volume variance
of $30 million. However, the increase in volume was partially offset by a
decrease in the cost of interest bearing liabilities from 5.07% for 1998 to
5.00% for 1999 causing a positive rate variance of $2 million for 1999 as
compared to 1998.
27
Provision for Loan Losses
During 2000, the Corporation provided $46 million for loan losses, as
compared to $48 million in 1999 and $76 million in 1998. The provision for loan
losses recorded in 2000 reflects the decrease in net charge-offs due to
improvements in the credit quality of the loan portfolio. The reserve allocated
to consumer loans has decreased as a result of the decrease in the loss ratio.
Net charge offs for 2000 amounted to $42 million, as compared to net charge offs
for 1999 of $45 million and of $66 million for 1998. Net charge offs to average
loans outstanding has improved to 1.36% as compared to 1.90% and 3.31% for 1999
and 1998, respectively.
The allowance activity for 2000, and previous four years was as
follows:
Year ended December 31, 2000 1999 1998 1997 1996
(Dollars in thousands)
- ----------------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses, beginning of period $71,784 $67,854 $57,712 $55,254 $55,009
Provision for loan losses 45,719 47,960 76,000 55,675 31,582
-------- ------- -------- ------- --------
Loans charged off:
Commercial (3,463) (825) (880) (881) (1,273)
Finance leases (2,145) (793) (3,438) (1,399) (161)
Consumer (46,223) (52,047) (67,906) (57,311) (33,295)
Recoveries 9,807 9,048 6,034 6,374 3,292
-------- -------- -------- --------- ---------
Net charge offs (42,024) (44,617) (66,190) (53,217) (31,437)
------- ------- ------- -------- --------
Other adjustments 1,440 587 332 _______ 100
-------- ---------- ---------- ----------
Allowance for loan losses, end of period $76,919 $71,784 $67,854 $57,712 $55,254
======= ======= ======= ======= =======
Allowance for loan losses to year end total
loans and loans held for sale 2.20% 2.61% 3.20% 2.95% 2.91%
Net charge offs to average loans
outstanding during the period 1.36% 1.90% 3.31% 2.79% 1.80%
The Corporation maintains the allowance for loan losses at a level that
Management considers adequate to absorb losses inherent in the loan portfolio.
The adequacy of the allowance for loan losses is reviewed on a quarterly basis
as part of the continuing evaluation of the quality of the assets. This
evaluation is based upon a number of factors, including the followings:
historical loan loss experience, projected loan losses, loan portfolio
composition, current economic conditions, fair value of the underlying
collateral, financial condition of the borrowers, and, as such, includes amounts
based on judgments and estimates made by Management.
28
Other Income
The following table presents the composition of other income.
Year ended December 31, 2000 1999 1998
(In thousands)
- -------------------------------------------------------------------------------------------------------
Other fees on loans $19,913 $ 12,887 $11,158
Service charges on deposit accounts 8,898 8,540 7,844
Fees on loans serviced for others 524 864 1,617
Rental income 2,434 2,610 2,292
Other commissions 1,340
Other operating income 8,654 6,592 5,137
-------- -------- -------
Other income before gain on
sale of investments and trading 41,763 31,493 28,048
Gain on sale of investments 7,850 1,377 26,827
Trading income(loss) 419 (8) 3,365
---------- ------------ ---------
Total $50,032 $32,862 $58,240
======= ======= =======
Other income primarily consists of service charges on deposit accounts,
fees on loans, servicing income, commissions derived from various banking
activities, the results of trading activities and gains on sale of investments.
Other fees on loans consist mainly of credit card fees and late charges
collected on loans. The increase in this source of income to $20 million in 2000
from $13 million in 1999 and $11 million in 1998 was mainly due to fees
generated on the increased portfolio of loans, and to the elimination on the
prohibition of certain credit card fees in Puerto Rico.
Service charges on deposit accounts represent an important and stable
source of other income for the Corporation, amounting to $9 million for 2000 and
1999, and to $8 million for 1998.
Fees on loans serviced for others primarily reflect the servicing fees
on residential mortgage loans originated by the Corporation and subsequently
securitized. The decrease in this account is due to the total repayment in 1999
of the auto loan portfolio securitized in 1995.
The Corporation's second tier subsidiary, First Leasing and Rental
Corporation, generates income on the rental of various types of motor vehicles.
This source of income has averaged approximately $2 million in the past three
years.
In 2000 the Corporation earned $1 million in other commissions as a
result of the agreement with Goldman, Sachs & Co., to participate in bond issues
by the Government Development Bank of Puerto Rico.
The other operating income category is composed of various types of service
fee such as check fees and rental of safe deposit boxes. Other operating income
also includes earned discounts on tax credits purchased and utilized against
income tax payments, and other fees generated on the increased portfolio of
commercial loans.
Gains on sale of investment securities amounted to $8 million in 2000,
$1 million in 1999 and $27 million in 1998. These gains reflect market
opportunities that arose and that are in consonance to the Corporation's
investment policies.
29
Other Operating Expense
Other operating expenses amounted to $113 million for 2000 as compared
to $101 million for 1999 and $92 million for 1998. The following table presents
the components of other operating expenses.
Year ended December 31, 2000 1999 1998
(In thousands)
- ---------------------------------------------------------------------------------------------------------
Salaries and benefits $ 50,014 $ 48,546 $43,185
Occupancy and equipment 22,792 20,137 18,155
Deposit insurance premium 547 1,096 971
Other taxes and insurance 6,355 5,683 5,607
Professional and service fees 8,740 6,672 5,820
Business promotion 8,468 5,896 5,922
Communications 5,573 4,667 4,330
Real estate owned operations 79 (303) 42
Amortization of debt issue costs 320 612 691
Expense of rental equipment 1,525 1,478 1,226
Other 8,637 6,789 5,849
----------- ---------- --------- -
Total $113,050 $101,273 $91,798
======== ======== =======
Management's goal has been to make expenditures that directly
contribute to increase the efficiency and profitability of the Corporation. This
control over other operating expenses has been an important factor contributing
to the increase in earnings in recent years. The Corporation's efficiency ratio,
which is the ratio of other operating expenses to the sum of net interest income
and other income, was 46.95% for 2000 as compared to 46.33% and 40.91% for 1999
and 1998, respectively.
The increase in operating expenses for 2000 is mainly the result of the
investments made in new technology and infrastructure to provide the latest in
delivery channels for its commercial and consumer lending business. In addition,
the increase in operating expenses during 2000 was affected by the acquisition
in July of 1999 of the Royal Bank's operations in Puerto Rico, and the
acquisition of four branches of CitiBank in December of 1999. During 2000 the
Corporation relocated three branches mainly to shopping malls making the
facilities more accessible to its customers. In September of 2000, the
Corporation purchased First Virgin Island Federal Savings Bank (FVI), adding a
fourth branch in the U.S. Virgin Islands.
In addition to the above-mentioned acquisitions, the salary and
benefits category was also affected by annual increases in salary and fringe
benefits. The occupancy and equipment category consists of expenses associated
with premises, office and computer equipment, and other automated banking
equipment. The increase in the past three years results also from the
enhancement of hardware and software through system conversions, which have
enabled the Corporation to offer new products, and improve customer service and
portfolio servicing.
The increase in the professional and service fee category for 2000 is
primarily attributed to the credit card processing and assessment fees resulting
from the increase in the credit card portfolio and the increase in the number of
accounts managed, including the effect of the acquisition of the Western Auto
portfolio in 1999.
Business promotion costs amounted to $8 million for 2000 as compared to
$6 million in 1999 and 1998. Business promotion expenses have been incurred to
increase loan and deposit volumes. During 2000, the Corporation promoted the
innovative deposit account, the "Bonus Account", launched in 1999.
30
Income Tax Expense
The provision for income tax amounted to $15 million (or 18% of pre-tax
earnings) for 2000 as compared to $7 million (or 11% of pre-tax earnings) in
1999, and $5 million (or 8% of pre-tax earnings) in 1998. The increase in the
effective tax rate results from a higher growth in the commercial and
residential estate line of business, which are fully taxable, when compared with
the increase in exempt investment securities. In addition, the total increase in
other operating income is fully taxable. However, the Corporation has maintained
an effective tax rate lower than the statutory rate of 39% mainly by investing
in obligations and loans exempt from federal and Puerto Rico income tax. For
additional information relating to taxes, see Note 28 of the Corporation's
financial statements - "Income Taxes."
31
FINANCIAL CONDITION
The following table presents an average balance sheet for the following
years:
December 31, 2000 1999 1998
(In thousands)
Assets
Interest earning assets:
Deposits at banks and other
short-term investments $ 9,293 $ 27,344 $ 40,766
Government obligations 528,903 415,742 319,777
Mortgage backed securities 1,457,044 1,294,195 1,032,632
Other investment 51,508 18,646 1,150
FHLB stock 18,008 16,170 10,252
------------ ---------- ------------
Total investments 2,064,756 1,772,097 1,404,577
---------- --------- -----------
Commercial loans 1,210,783 847,917 613,697
Consumer loans 1,026,044 1,013,782 1,032,704
Residential real estate loans 573,866 327,700 290,564
Construction loans 169,257 94,940 19,169
Finance leases 103,114 68,577 43,108
------------ ------------ ------------
Total loans 3,083,064 2,352,916 1,999,242
----------- ----------- -----------
Total interest earning assets 5,147,820 4,125,013 3,403,819
Total non-interest earning assets (1) 91,556 47,768 89,717
------------- ------------- -------------
Total assets $5,239,376 $4,172,781 $3,493,536
========== ========== ==========
Liabilities and stockholders' equity
Interest bearing liabilities:
Interest bearing checking accounts $ 162,456 $ 140,690 $ 123,847
Savings accounts 433,937 413,662 398,249
Certificate accounts 2,173,244 1,373,263 972,433
----------- --------- -----------
Interest bearing deposits 2,769,637 1,927,615 1,494,529
Other borrowed funds 1,851,524 1,728,913 1,559,892
FHLB advances 51,053 8,451 4,515
------------ ------------ -------------
Total interest bearing liabilities 4,672,214 3,664,979 3,058,936
Total non-interest bearing liabilities 250,135 212,993 182,369
----------- ----------- ------------
Total liabilities 4,922,349 3,877,972 3,241,305
Stockholders' equity 317,027 294,809 252,231
------------ ------------ ------------
Total liabilities and stockholders' equity $5,239,376 $4,172,781 $3,493,536
========== ========== ==========
(1) Net of the allowance for loan losses and the valuation on investments
securities available for sale.
32
Assets
The Corporation's total assets at December 31, 2000 amounted to $5,920
million, $1,198 million over the $4,722 million at December 31, 1999.
The following table presents the composition of the loan portfolio at year-end for each of the last five years.
% of % of % of % of % of
December 31, 2000 Total 1999 Total 1998 Total 1997 Total 1996 Total
(Dollars in thousands)
- -----------------------------------------------------------------------------------------------------------------------------------
Residential real
estate loans $ 746,792 21 $ 473,563 17 $ 303,011 14 $ 292,604 15 $ 297,246 16
---------- --- ---------- -- ---------- -- ---------- -- ---------- --
Commercial real
estate loans 438,321 13 371,643 14 332,219 16 306,734 15 256,227 14
Construction loans 203,955 6 132,068 5 62,963 3 9,279 1 10,209 1
Commercial loans 947,709 27 655,417 24 368,549 17 235,571 12 174,770 9
----------- --- ----------- -- ---------- -- ----------- -- ----------- ---
Total commercial 1,589,985 46 1,159,128 43 763,731 36 551,584 28 441,206 24
---------- --- ---------- -- ----------- -- ----------- -- ----------- --
Finance leases 122,883 3 85,692 3 52,214 3 42,500 2 58,481 3
Consumer loans 1,038,538 30 1,026,985 37 1,001,098 47 1,072,613 55 1,099,141 57
----------- ---- ---------- ---- ----------- ---- ----------- --- ----------- ----
Total $3,498,198 100 $2,745,368 100 $2,120,054 100 $1,959,301 100 $1,896,074 100
========== === ========== === ========== === ========== === ========== ===
Total loans receivable increased by $753 million in 2000 when compared
with 1999. During 2000 the Corporation continued its strategy of diversifying
its loan portfolio composition through the origination and purchase of
commercial loans and residential real estate loans. This resulted in a
significant increase of $431 million in the commercial loan portfolio and of
$273 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 $37 million. Consumer loans increased by $12 million in 2000. The
allowance for loan losses amounted to $77 million at December 31, 2000 as
compared to $72 million at December 31, 1999.
The Corporation's investment portfolio at December 31, 2000 amounted to
$2,233 million, an increase of $422 million when compared with the investment
portfolio of $1,811 million at December 31, 1999.
As a result of the merger with FVI, the Corporation acquired total
assets of $56 million, including $46 million on loans receivable and $8 million
on investments.
The composition and tax equivalent weighted average interest rates of
the Corporation's earning assets at December 31, 2000 were as follows:
33
Amount Weighted
(In thousands) Average Rate
Money market instruments $ 2,020 6.35%
Government obligations 595,274 7.24%
Mortgage backed securities 1,530,795 6.84%
FHLB of N.Y. stock 18,537 7.32%
Other investment 86,590 5.45%
------------
Total investments 2,233,216 6.90%
----------
Consumer loans 1,038,538 13.59%
Residential real estate loans 746,792 8.69%
Construction loans 203,955 10.32%
Commercial and commercial real estate loans 1,386,030 9.33%
Finance leases 122,883 11.79%
------------
Total loans(1) 3,498,198 10.61%
-----------
Total earning assets $5,731,414 9.16%
==========
(1) Excludes the reserve for loan losses. Generally, non-accruing loans were
included in this analysis as if they were accruing interest.
Non-performing Assets
Total non-performing assets are the sum of non-accruing loans, OREO's
and other repossessed properties. Non-accruing loans are loans as to which
interest is no longer being recognized. When loans fall into non-accruing
status, all previously accrued and uncollected interest is charged against
interest income.
At December 31, 2000, total non-performing assets amounted to $74
million (1.25% of total assets) as compared to $57 million (1.22% of total
assets) at December 31, 1999 and $63 million (1.57% of total assets) at December
31, 1998. The Corporation's reserve to non-performing loans was 113.6% at
December 31, 2000 as compared to 133.4% and 119.1% at December 31, 1999 and
1998, respectively.
The increase of $17 million in non-performing assets as of December 31,
2000 when compared to December 31, 1999 was mostly due to one large commercial
loan and to the addition of non-performing loans of FVI, acquired during the
third quarter of 2000.
34
The following table presents non-performing assets at the dates
indicated.
December 31, 2000 1999 1998 1997 1996
(Dollars in thousands)
- --------------------------------------------------------------------------------------------------------
Non-accruing loans:
Residential real estate $15,977 $ 8,633 $ 9,151 $ 6,963 $ 8,814
Commercial and commercial real estate 31,913 17,975 19,355 16,869 11,568
Finance leases 2,032 2,482 1,716 4,560 5,125
Consumer 17,794 24,726 26,736 24,547 25,655
-------- -------- -------- -------- --------
67,716 53,816 56,958 52,939 51,162
-------- -------- -------- -------- --------
Other real estate owned (OREO) 2,981 517 3,642 1,132 1,696
Other repossessed property 3,374 3,112 2,277 8,702 7,566
--------- --------- ---------- --------- ---------
Total non-performing assets $74,071 $57,445 $62,877 $62,773 $60,424
======= ======= ======= ======= =======
Past due loans $16,358 $13,781 $15,110 $11,544 $ 9,752
Non-performing assets to total assets 1.25% 1.22% 1.57% 1.89% 2.14%
Non-performing loans to total loans 1.94% 1.96% 2.69% 2.70% 2.70%
Allowance for loan losses $76,919 $71,784 $67,854 $57,712 $55,254
Allowance to total non-performing loans 113.59% 133.39% 119.13% 109.02% 108.00%
Non-accruing Loans
Residential Real Estate Loans - The Corporation classifies all real estate
loans delinquent 90 days or more in non-accruing status. Even though these loans
are in non-accruing status, Management considers based on the value of the
underlying collateral and the loan to value ratios, that no material losses will
be incurred in this portfolio. Management's estimate is based on the historical
experience of the Corporation. Non-accruing real estate loans amounted to $16
million (2.14% of total residential real estate loans) at December 31, 2000, as
compared to $9 million (1.82% of total residential real estate loans) and $9
million (3.02% of total residential real estate loans) at December 31, 1999 and
1998, respectively. The increase for year 2000 is due to the portfolio acquired
from FVI.
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 $32 million
(2.30% of total commercial loans) at December 31, 2000 as compared to $18
million (1.55% of total commercial loans) and $19 million (2.53% of total
commercial loans) at December 31, 1999 and 1998, respectively. At December 31,
2000, there was only one non-accruing commercial loan of over $1 million, which
is a $10 million loan.
Finance Leases - Finance leases are classified as non-accruing when
they are delinquent 90 days or more. Non-accruing finance leases amounted to $2
million (1.65% of total finance leases) at December 31, 2000, compared to $3
million (2.90% of total finance leases) at December 31, 1999, and $2 million
(3.29% of total finance leases) at December 31, 1998.
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 $18 million (1.71% of the total
consumer loan portfolio) at December 31, 2000, $25 million (or 2.41% of the
total consumer loan portfolio) at December 31, 1999 and $27 million (or 2.67% of
the total consumer loan portfolio) at December 31, 1998. The decrease in the
ratio and amount of non-accruing loans was the result of the improvement on the
credit quality of the portfolio. This improvement resulted in a decrease in
charge off of consumer loans to $46 million in 2000 from $52 million in 1999,
and $68 million in 1998.
35
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. The increase for year 2000 is due to
OREOs acquired from FVI.
Repossessed Property
The Repossessed Property category includes repossessed boats and autos
acquired in settlement of loans. Repossessed boats are recorded at the lower of
cost or estimated fair value. Repossessed autos are recorded at the principal
balance of the loans less an estimated loss on the disposition of certain units.
Past Due Loans
Past due loans are accruing commercial and consumer loans, which are
contractually delinquent 90 days or more. Past due commercial loans are current
as to interest but delinquent in the payment of principal. Past due consumer
loans include personal lines of credit and credit card loans delinquent 90 days
up to 179 days and personal loans (including small loans) delinquent 90 days up
to 119 days.
Sources of Funds
The Corporation's principal funding sources are branch-based deposits,
retail brokered deposits, institutional deposit, federal funds purchased,
securities sold under agreements to repurchase, and notes.
Deposits
Total deposits amounted to $3,346 million at December 31, 2000, as
compared to $2,565 million and $1,775 million at December 31, 1999 and 1998,
respectively.
The following table presents the composition of total deposits.
December 31, 2000 1999 1998
(Dollars in thousands)
- ---------------------------------------------------------------------------------------------------------------
Savings accounts $ 430,298 $ 447,946 $ 416,424
Interest bearing checking accounts 170,631 162,601 130,883
Certificates of deposit 2,512,891 1,742,978 1,054,634
----------- ---------- -----------
Interest bearing deposits 3,113,820 2,353,525 1,601,941
Non-interest bearing deposits 232,164 211,896 173,104
------------ ------------ ------------
Total $3,345,984 $2,565,421 $1,775,045
========== ========== ==========
Weighted average rate during the
period on interest bearing deposit 5.53% 4.69% 4.71%
Interest bearing deposits:
Average balance outstanding $2,769,637 $1,927,614 $1,494,529
Non-interest bearing deposits:
Average balance outstanding 213,728 179,478 145,357
Total deposits are composed of branch-based deposits, institutional
deposits and brokered deposits. Institutional deposits include certificates
issued to agencies of the Government of Puerto Rico.
Total interest bearing deposits increased by $760 million at December
31, 2000 when compared to December 31, 1999. This fluctuation was mainly due to:
(1) an increase in branch-based deposits of $114 million; (2) an increase of
$656 million in brokered certificates of deposits; (3) an increase of $39
million in certificates issued to the agencies of the Government of Puerto Rico;
net of (4) a decrease of $49 million in certificates issued to corporations
operating under Section 936 of the Internal Revenue Code. Non-interest bearing
deposits increased by $20 million in 2000.
36
Borrowings
At December 31, 2000 total borrowings amounted to $2,069 million as
compared to $1,804 million and $1,931 million at December 31, 1999 and 1998,
respectively. The following table presents the composition of borrowings.
December 31, 2000 1999 1998
(Dollars in thousands)
- -----------------------------------------------------------------------------------------------------------------------------------
Federal funds purchased and securities
sold under agreements to repurchase $1,856,436 $1,452,151 $1,623,698
Other short term borrowings 152,484 86,595
Advances from FHLB 67,000 50,000 2,600
Notes payable 55,500 55,500 118,100
Subordinated notes 90,548 93,594 99,496
------------- ------------- ------------
Total $2,069,484 $1,803,729 $1,930,489
========== ========== ==========
Weighted average rate during the period 6.27% 5.34% 5.41%
The Corporation uses federal funds purchased, repurchase agreements,
advances from FHLB and notes payable as additional funding sources. The
borrowings of the Corporation consist primarily of federal funds purchased and
securities sold under agreements to repurchase (repurchase agreements) which at
December 31, 2000 amounted to $1,856 million or 90% of total borrowings.
Repurchase agreements had a total weighted average cost of 6.23% during the
year ended December 31, 2000. For more information on borrowings please refer to
Notes 20 through 24 of the Corporation's financial statements.
The composition and weighted average interest rates of interest bearing liabilities at December 31, 2000, were as follows:
Amount Weighted
(In thousands) Average rate
Interest bearing deposits $3,113,820 5.83%
Borrowed funds 2,069,484 6.39%
-----------
$5,183,304 6.05%
===========
Capital
During 2000, the Corporation increased its total capital from $295
million at December 31, 1999 to $435 million at December 31, 2000. Total capital
increased by $140 million due to earnings of $67 million, the issuance of
3,000,000 shares of preferred stock at $72 million, the issuance of 6,000 shares
of common stock through the exercise of stock options at a cost of $93,750, a
positive fluctuation in the valuation of securities available for sale of $49
million, reduced by the repurchased shares of common stock at a total cost of
$30 million, and cash dividends of $19 million.
The Corporation's objective is to maintain a solid capital position
above the "well capitalized" classification under the federal banking
regulations. The Corporation continues to exceed the well capitalized
guidelines. To be in a "well capitalized" position, an institution should have:
(i) a leverage ratio of 5% or greater; (ii) a total risk based capital ratio of
10% or greater; and (iii) a Tier 1 risk-based capital ratio of 6% or greater. At
December 31, 2000 the Corporation had a leverage ratio of 7.28%; a total risk
based capital ratio of 14.43%; and a Tier 1 risk-based capital ratio of 11.23%.
37
Dividends
In 2000, 1999 and 1998 the Corporation declared four quarterly cash
dividends of $0.11, $0.09 and $0.075 per common share, respectively, for an
annual dividend of $0.44, $0.36 and $0.30, respectively. Total cash dividends
paid on common shares amounted to $12 million for 2000 (or a 19.72% dividend
payout ratio), $10 million for 1999 (or a 17.96% dividend payout ratio) and $9
million for 1998 (or a 17.12% dividend payout ratio). Dividends declared on
preferred stock amounted to $7 million in 2000 and $4 million in 1999.
Asset/Liability Management
The Corporation has a formal system of interest rate risk management.
Management recognizes that it may sometimes be necessary to forego earning
opportunities in order to maintain a stable stream of net interest income as
interest rates rise and fall.
Management monitors the Corporation's interest rate risk position
primarily through computer simulations of the effect of rising and falling
interest rates on net interest income. Two sets of simulations are carried out,
both of which cover a two year time horizon: one assuming a flat balance sheet
with a constant asset/liability mix and another assuming a balance sheet which
grows according to expected loan originations and funding. These simulations
also incorporate expected changes in prepayment rates as interest rates rise or
fall, repricing characteristics of variable rate assets and liabilities, current
and expected lending rates, funding sources and costs. Other factors, which may
be potentially important in determining the future growth of net interest income
(i.e. planned securitizations and liquidity requirements), are considered in
these simulations.
Management also uses one year GAP analysis as a secondary technique for
evaluating interest rate risk. The Corporation's one year GAP fluctuated between
a negative 5% and a negative 30% of assets during 2000. Management considers
that the ranges of the GAP ratio achieved during 2000 are adequate, considering
the Corporation's net interest margin and capital ratios.
The Corporation's interest rate risk position is measured on a
quarterly basis and is evaluated by the Asset Liability Management and
Investment Committee. This Committee is in charge, among other things, of
informing Management as to the current levels of interest rate risk and, when
necessary, managing the repricing of the Corporation's assets, liabilities and
off balance sheet contracts to maintain that risk at reasonable and prudent
levels.
Liquidity
Liquidity refers to the level of cash and eligible investments to meet
loan and investment commitments, potential deposit outflows and debt repayments.
The Asset Liability Management and Investment Committee, using measures of
liquidity developed by Management, reviews the Corporation's liquidity position
and liquidity targets on a weekly basis.
The principal sources of short-term funds are loan repayments,
deposits, securities sold under agreements to repurchase, and lines of credit
with the FHLB and other financial institutions. The Investment Committee reviews
credit availability on a regular basis. In 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.
Impact of Inflation and Changing Prices
The financial statements and related data presented herein have been
prepared in conformity with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars without considering changes in the relative purchasing power
of money over time due to inflation.
38
Unlike most industrial companies, substantially all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a greater impact on a financial institution's performance
than the effects of general levels of inflation. Interest rate movements are not
necessarily correlated with changes in the prices of goods and services.
Market Prices and Stock Data
The Corporation's common stock is traded in the New York Stock Exchange
(NYSE) under the symbol FBP. On December 31, 2000, there were 717 holders of
record of the Corporation's common stock.
The following table sets forth the high and low prices of the
Corporation's common stock for the periods indicated as reported by the NYSE.
Common stock prices were adjusted to give retroactive effect to the stock split
declared in May 1998.
Quarter ended High Low
2000:
December $24.69 $20.50
September 24.50 18.00
June 18.75 16.69
March 21.00 16.25
1999:
December $22.81 $19.25
September 24.75 19.75
June 28.50 22.00
March 30.38 22.69
1998:
December $30.50 $21.38
September 29.50 23.63
June 29.63 22.72
March 23.88 16.50
39
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
First BanCorp manages its asset/liability position in order to limit
the effects of changes in interest rates on net interest income, subject to
other goals of Management and within guidelines set forth by the Board of
Directors.
The day-to-day management of interest rate risk, as well as liquidity
management and other related matters, is assigned to the Asset Liability
Management and Investment Committee (ALCO). The ALCO is composed of the
following officers: President and CEO, the Executive Vice Presidents, the Senior
Vice President of Investments, and the Economist. The ALCO meets on a weekly
basis. The Economist also acts as secretary, keeping minutes of all meetings.
Committee meetings focus on, among other things, current and expected
conditions in world financial markets, competition and prevailing rates in the
local deposit market, reviews of liquidity, unrealized gains and losses in
securities, recent or proposed changes to the investment portfolio, alternative
funding sources and their costs, hedging and the possible purchase of
derivatives such as swaps and caps, and any tax or regulatory issues which may
be pertinent to these areas. The ALCO approves funding decisions in the light of
the Corporation's overall growth strategies and objectives. On a quarterly basis
the ALCO performs a comprehensive asset/liability review, examining the measures
of interest rate risk described below together with other matters such as
liquidity and capital.
The Corporation uses simulations to measure the effects of changing
interest rates on net interest income. These measures are carried out in two
ways, assuming upward and downward interest rate movements of 200 basis points:
(1) using a balance sheet which is assumed to be flat at the levels existing on
the simulation date, and (2) using a balance sheet which has growth patterns and
strategies similar to those which have occurred in the recent past.
Assuming a flat balance sheet, tax equivalent net interest income for
2001 would be $238 million under flat rates (2000 - $203 million), $218 million
under rising rates (2000 - $184 million), and $242 million under falling rates
(2000 - $222 million). Assuming a growing balance sheet, tax equivalent net
interest income for 2001 would be $255 million under flat rates (2000 - $214
million), $231 million under rising rates (2000 - $193 million) and $271 million
under falling rates (2000 - $228 million). These simulations do not necessarily
represent what actual results would be, since interest rate risk management is
dynamic, and can be adjusted depending on the Committee's interest rate outlook.
These simulations assume gradual upward or downward movements of
interest rates over one year, with the change totaling 200 basis points at the
end of the twelve month period. The balance sheet is divided into groups of
similar assets and liabilities in order to simplify the process of carrying out
these projections. As interest rates rise or fall, these simulations incorporate
expected future lending rates, current and expected future funding sources and
cost, the possible exercise of options, liquidity requirements, and other
factors which may be important in determining the future growth of net interest
income. Only interest and fee income is included in these projections; profits
on the sale of assets are excluded. All computations are done on a tax
equivalent basis, including the effects of the changing cost of funds on the
tax-exempt spreads of certain investments. The projections are carried out for
First BanCorp on a fully consolidated basis.
These simulations are highly complex, and they use many simplifying
assumptions which are intended to reflect the general behavior of the
Corporation over the period in question, but there can be no assurance that
actual events will parallel these assumptions in all cases. For this reason, the
results of these simulations are only approximations of the true sensitivity of
net interest income to changes in market interest rates.
40
Report of Independent Accountants
To the Board of Directors and Stockholders of First BanCorp:
In our opinion, the accompanying consolidated statements of financial condition
and the related consolidated statements of income, comprehensive income, changes
in stockholders' equity, and cash flows present fairly, in all material
respects, the financial position of First BanCorp and its subsidiaries at
December 31, 2000 and 1999, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2000 in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
February 23, 2001
CERTIFIED PUBLIC ACCOUNTANTS
(OF PUERTO RICO)
License No. 216 Expires Dec. 1, 2001
Stamp 1685006 of the P. R. Society of
Certified Public Accountants has been
affixed to the file copy of this report
41
FIRST BANCORP
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31,
2000 1999
-------------------------------------
Assets
Cash and due from banks $ 63,372,591 $ 58,267,929
----------------- ---------------
Money market instruments 2,020,348 35,217,064
------------------- ----------------
Investment securities available for sale, at market:
Securities pledged that can be repledged 1,621,457,451 1,206,162,230
Other investment securities 280,205,723 247,911,941
------------------ -----------------
Total investment securities available for sale 1,901,663,174 1,454,074,171
---------------- ---------------
Investment securities held to maturity, at cost:
Securities pledged that can be repledged 268,432,581 263,898,324
Other investment securities 42,562,921 40,147,715
----------------- ----------------
Total investment securities held to maturity 310,995,502 304,046,039
----------------- ----------------
Federal Home Loan Bank (FHLB) stock 18,536,500 17,826,500
------------------ -----------------
Loans held for sale 37,794,078
Loans receivable 3,498,198,207 2,707,574,019
---------------- ---------------
Total loans 3,498,198,207 2,745,368,097
Allowance for loan losses (76,918,973) (71,784,237)
----------------- -----------------
Total loans - net 3,421,279,234 2,673,583,860
--------------- ---------------
Other real estate owned 2,981,472 517,405
Premises and equipment - net 72,087,346 61,947,817
Accrued interest receivable 27,969,551 17,917,526
Due from customers on acceptances 2,177,043 2,738,176
Other assets 96,573,820 95,431,678
----------------- -----------------
Total assets $5,919,656,581 $4,721,568,165
============== ==============
Liabilities and Stockholders' Equity
Liabilities:
Non-interest bearing deposits $ 232,164,469 $ 211,896,459
Interest bearing deposits 3,113,819,927 2,353,525,177
Federal funds purchased and securities
sold under agreements to repurchase 1,856,436,127 1,452,151,222
Other short-term borrowings 152,484,084
Advances from FHLB 67,000,000 50,000,000
Notes payable 55,500,000 55,500,000
Bank acceptances outstanding 2,177,043 2,738,176
Accounts payable and other liabilities 67,550,152 54,776,718
----------------- ----------------
5,394,647,718 4,333,071,836
----------------- ----------------
Subordinated notes 90,548,314 93,594,080
----------------- ----------------
Stockholders' equity:
Preferred stock, authorized 50,000,000 shares: issued and
outstanding 6,600,000 shares (1999 - 3,600,000 shares)
at $25.00 liquidation value per share 165,000,000 90,000,000
----------------- ----------------
Common stock, $1.00 par value, authorized 250,000,000 shares;
issued 29,618,552 shares (1999 - 29,612,552 shares) 29,618,552 29,612,552
Less: Treasury stock (at par value) (3,194,400) (1,552,000)
------------------ -----------------
Common stock outstanding 26,424,152 28,060,552
------------------ ----------------
Additional paid-in capital 16,567,516 19,863,466
Capital reserve 50,000,000 40,000,000
Legal surplus 126,792,514 126,792,514
Retained earnings 69,275,152 58,834,676
Accumulated other comprehensive income - unrealized loss
on securities available for sale, net of tax (19,598,785) (68,648,959)
----------------- -----------------
434,460,549 294,902,249
----------------- -----------------
Contingencies and commitments _____________ _____________
Total liabilities and stockholders' equity $ 5,919,656,581 $ 4,721,568,165
================ ================
The accompanying notes are an integral part of these statements.
42
FIRST BANCORP
CONSOLIDATED STATEMENTS OF INCOME
Year ended December 31,
2000 1999 1998
----------------------------------------------------------------
Interest income:
Loans $329,007,974 $260,741,177 $231,513,730
Investment securities 132,603,596 106,770,856 88,312,096
Short-term investments 527,155 450,248 729,417
Dividends on FHLB stock 1,248,755 1,100,823 743,161
------------- ------------- ----------------
Total interest income 463,387,480 369,063,104 321,298,404
----------- ----------- -------------
Interest expense:
Deposits 153,283,358 90,489,121 70,418,359
Short-term borrowings 105,326,693 79,455,499 69,494,151
Notes payable 10,803,634 12,914,538 14,965,751
Advances from FHLB 3,200,940 470,590 251,707
------------- ------------- ----------------
Total interest expense 272,614,625 183,329,748 155,129,968
----------- ----------- -------------
Net interest income 190,772,855 185,733,356 166,168,436
Provision for loan losses 45,718,500 47,960,500 76,000,000
------------ ------------ -------------
Net interest income after provision for loan losses 145,054,355 137,772,856 90,168,436
----------- ----------- -------------
Other income:
Other fees on loans 19,913,340 12,886,541 11,157,852
Service charges on deposit accounts 8,898,170 8,540,291 7,843,837
Trading income (loss) 419,367 (7,946) 3,364,843
Fees on loans serviced for others 523,903 864,278 1,617,292
Gain on sale of investments 7,850,472 1,376,672 26,827,417
Rental income 2,433,664 2,609,657 2,291,814
Other operating income 9,993,144 6,592,940 5,136,795
------------ ------------ -------------
Total other income 50,032,060 32,862,433 58,239,850
------------ ------------ ------------
Other operating expenses:
Employees' compensation and benefits 50,014,110 48,545,839 43,185,324
Occupancy and equipment 22,791,863 20,137,354 18,154,663
Taxes and insurance 6,901,732 6,778,354 6,577,894
Net cost (gain) of operations and disposition of
other real estate owned 78,509 (303,359) 42,359
Amortization of debt issuance costs 319,899 612,404 691,411
Other 32,943,391 25,501,303 23,146,048
------------ ------------ ------------
Total other operating expenses 113,049,504 101,271,895 91,797,699
----------- ----------- ------------
Income before income tax provision 82,036,911 69,363,394 56,610,587
Income tax provision 14,761,302 7,288,445 4,798,200
------------ ------------- -------------
Net income $67,275,609 $62,074,949 $ 51,812,387
=========== =========== ============
Earnings per common share - basic $2.22 $2.00 $1.75
Earnings per common share - diluted $2.21 $1.98 $1.74
The accompanying notes are an integral part of these statements.
43
FIRST BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
1999 1998 1997
Cash flows from (for) operating activities:
Net income $ 67,275,609 $ 62,074,949 $ 51,812,387
-------------- -------------- -----------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 9,014,068 7,645,035 7,827,866
Provision for loan losses 45,718,500 47,960,500 76,000,000
Amortization of deferred loan (fees) costs (144,768) (680,735) 881,411
Net gain on sale of investments securities (7,850,472) (1,376,673) (26,827,417)
Originations of loans held for sale (18,222,990) (9,086,622)
Proceeds from sale of loans 1,266,787
(Decrease) increase taxes payable (19,474,679) 2,345,647 3,454,049
Increase in deferred tax asset (3,917,506) (6,702,849) (11,454,033)
(Increase) decrease in accrued interest receivable (10,052,025) (7,179,454) 2,297,862
Increase in accrued interest payable 11,677,924 10,056,988 1,072,485
Decrease in other assets 5,084,972 12,950,921 20,776,413
Increase in other liabilities 20,740,407 5,012,929 1,718,242
------------------ ------------------ ------------------
Total adjustments 50,796,421 53,076,106 66,660,256
------------------ ----------------- -----------------
Net cash provided by operating activities 118,072,030 115,151,055 118,472,643
----------------- ----------------- -----------------
Cash flows from (for) investing activities:
Principal collected on loans 646,581,300 719,964,127 559,726,839
Loans originated (1,222,590,263) (1,270,442,873) (797,256,751)
Purchase of loans (238,055,000) (118,603,000) (1,330,497)
Sales of investment securities 58,452,236 9,630,866 302,128,585
Purchase of securities held-to-maturity (6,949,462) (277,624,203)
Purchase of securities available-for-sale (5,125,184,351) (6,069,805,410) (6,899,653,771)
Principal repayments and maturities of securities held-to-maturity 500,000 34,782,596
Principal repayments of securities available-for-sale 4,692,427,578 6,267,048,544 6,061,838,410
Additions to premises and equipment (19,153,597) (18,055,660) (10,917,891)
Purchase of FHLB stock (710,000) (7,555,900) (120,300)
------------------- ------------------- ----------------
Net cash used in investing activities (1,215,181,559) (764,943,509) (750,802,780)
--------------- ------------------ -------------
Cash flows from (for) financing activities:
Net increase in deposits 780,562,759 790,376,740 180,410,210
Net increase (decrease) in federal funds purchased and
securities sold under repurchase agreements 403,553,556 (172,898,023) 654,760,505
Net (decrease) increase in other short-term borrowings (152,484,084) 65,889,375 (144,910,185)
FHLB advances taken (paid) 17,000,000 47,400,000 (26,400,000)
Payments of notes payable (3,045,766) (68,501,750) (14,177,660)
Decrease (increase) in debt securities issuance cost 198,493 1,211,219 (1,049,270)
Dividends (19,212,141) (14,657,799) (8,870,832)
Repurchase of common stock (3,656,420)
Issuance of preferred stock 72,437,500 86,850,217
Treasury stock acquired (30,086,592) (32,510,611) (2,211,250)
Exercise of stock options 93,750 176,313 196,501
--------------------------------------- -----------------
Net cash provided by financing activities 1,069,017,475 703,335,681 634,091,599
------------- ------------------ -------------
Net (decrease) increase in cash and cash equivalents (28,092,054) 53,543,227 1,761,462
Cash and cash equivalents at beginning of year 93,484,993 39,941,766 38,180,304
---------------------------------- -----------------
Cash and cash equivalents at end of year $ 65,392,939 $ 93,484,993 $ 39,941,766
============= =================== ================
Cash and cash equivalents include:
Cash and due from banks $ 63,372,591 $ 58,267,929 $ 39,416,097
Money market instruments 2,020,348 35,217,064 525,669
--------------- ---------------------------------------
$ 65,392,939 $ 93,484,993 $ 39,941,766
============= =================== ================
The accompanying notes are integral part of these statements.
44
FIRST BANCORP
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Unrealized
gain (loss)on
Additional securities
Preferred Common paid-in Capital Legal Retained available
stock stock capital reserve surplus earnings for sale
December 31, 1997 $14,901,826 $38,453,561 $20,000,000 $53,454,469 $97,537,900 $12,031,444
Net income 51,812,387
Change in valuation of
securities available for sale (3,281,513)
Addition to capital reserve 10,000,000 (10,000,000)
Repurchase of common stock (108,800) (217,600) (3,330,025)
Treasury stock acquired (100,000) (50,000) (2,061,250)
Stock options exercised 10,000 186,501
Cash dividends-common stock (8,870,832)
Common stock split
on May 29, 1998 14,796,526 (14,796,526) __________ __________ ___________ __________
----------------- ------------ -----------
December 31, 1998 29,499,552 23,575,936 30,000,000 53,454,469 125,088,180 8,749,931
Net income 62,074,949
Change in valuation of
securities available for sale (77,398,890)
Issuance of preferred stock $90,000,000 (3,149,783)
Addition to legal surplus 73,338,045 (73,338,045)
Addition to capital reserve 10,000,000 (10,000,000)
Treasury stock acquired (1,452,000) (726,000) (30,332,611)
Stock options exercised 13,000 163,313
Cash dividends:
Common stock (10,382,797)
Preferred stock __________ __________ __________ __________ __________ (4,275,000) _________
-------------
December 31, 1999 90,000,000 28,060,552 19,863,466 40,000,000 126,792,514 58,834,676 (68,648,959)
Net income 67,275,609
Change in valuation of
securities available for sale 49,050,174
Issuance of preferred stock 75,000,000 (2,562,500)
Addition to capital reserve 10,000,000 (10,000,000)
Treasury stock acquired (1,642,400) (821,200) (27,622,992)
Stock options exercised 6,000 87,750
Cash dividends:
Common stock (11,804,599)
Preferred stock ___________ __________ __________ __________ ___________ (7,407,542) __________
-------------
December 31, 2000 $165,000,000 $26,424,152 $16,567,516 $50,000,000 $126,792,514 $69,275,152 $(19,598,785)
============ =========== =========== =========== ============ =========== ============
The accompanying notes are an integral part of these statements.
45
FIRST BANCORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year ended December 31,
2000 1999 1998
-------------- ---------------- -----------------
Net income $67,275,609 $62,074,949 $51,812,387
----------- ----------- -----------
Other comprehensive income net of tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses)
arising during the period 54,938,028 (76,366,386) 16,839,050
Less: reclassification adjustment
for gains included in net income 5,887,854 1,032,504 20,120,563
-------------- ------------- -----------
Total other comprehensive income (loss) 49,050,174 (77,398,890) (3,281,513)
------------- ----------- -------------
Comprehensive income (loss) $116,325,783 $(15,323,941) $48,530,874
============ ============ ===========
The accompanying notes are an integral part of these statements.
46
FIRST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Nature of Business
First BanCorp (the Corporation) was incorporated on October 1st, 1998
under the laws of the Commonwealth of Puerto Rico to serve as the financial
holding company for FirstBank Puerto Rico (FirstBank or the Bank). As a result
of this reorganization, each of the Bank's outstanding shares of common stock
was converted into one share of common stock of the new bank holding company.
First BanCorp is subject to the Federal Bank Holding Company Act and to the
regulations, supervision, and examination of the Federal Reserve Board.
FirstBank, the Corporation's subsidiary, is a commercial bank chartered
under the laws of the Commonwealth of Puerto Rico. Its main office is located in
San Juan, Puerto Rico, and has 44 full-service banking branches in Puerto Rico
and four in the U.S. Virgin Islands. It also has loan origination offices in
Puerto Rico focusing on consumer loans and residential mortgage loans. In
addition, through its wholly-owned subsidiaries, FirstBank operates other
offices in Puerto Rico specializing in small personal loans, finance leases and
vehicle rental. The Bank is subject to the supervision, examination and
regulation of the Office of the Commissioner of Financial Institutions of Puerto
Rico and the Federal Deposit Insurance Corporation (FDIC), which insures its
deposits through the Savings Association Insurance Fund (SAIF).
Note 2 - Summary of Significant Accounting Policies
The accounting and reporting policies of the Corporation and its
subsidiaries conform with generally accepted accounting principles, and, as
such, include amounts based on judgments, estimates and assumptions made by
Management that affect the reported amounts of assets and liabilities and
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates. Following is a description of
the more significant accounting policies followed by the Corporation:
Principles of consolidation
The consolidated financial statements include the accounts of the
Corporation and its subsidiaries, all of which are wholly-owned. All significant
intercompany balances and transactions have been eliminated in consolidation.
Statement of cash flows
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from banks and short-term money market instruments
with maturities of 90 days or less.
Securities purchased under agreements to resell
The Corporation purchases securities under agreements to resell the
same securities. The counterparties to these agreements retain control over the
securities sold to the Corporation, accordingly, the amounts advanced under
these agreements represent short-term loans and are reflected as assets in the
statements of financial condition. The Corporation monitors the market value of
the underlying securities as compared to the related receivable, including
accrued interest, and requests additional collateral where deemed appropriate.
It is the Corporation's policy to take possession of the underlying security.
Investment securities
The Corporation classifies its investments in debt and equity
securities into one of three categories:
47
Held to maturity - Securities which the entity has the
positive intent and ability to hold to maturity. These securities are
carried at amortized cost.
Trading - Securities that are bought and held principally for
the purpose of selling them in the near term. These securities are
carried at fair value, with unrealized gains and losses reported in
earnings.
Available for sale - Securities not classified as trading or
as held to maturity. These securities are carried at fair value, with
unrealized holding gains and losses, net of deferred tax effects,
reported in other comprehensive income as a separate component of
stockholders' equity.
Premiums and discounts are amortized as an adjustment to interest
income over the life of the related securities using a method that approximates
the interest method. Realized gains or losses on securities are reported in
earnings. When computing realized gains or losses, the cost of securities is
determined on the specific identification method.
Loans and allowance for loan losses
Loans are stated at their outstanding balance less unearned interest
and net deferred loan origination fees and costs. Unearned interest on
installment loans (i.e., personal and auto) is recognized as income under a
method which approximates the interest method.
The Corporation measures impairment individually for those commercial
loans with a principal balance exceeding $1 million, and for delinquent
residential real estate loans. An allowance is established when the collateral
value of an impaired loan is lower than the carrying value of the loan. 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.
Loans on which the recognition of interest income has been discontinued
are designated as non-accruing. When loans are placed on non-accruing status,
any accrued but uncollected interest income is reversed and charged against
interest income. Consumer loans are classified as non-accruing when they are
delinquent: 90 days or more for auto, boat and home equity reserve loans, 120
days or more for personal loans, and 180 days or more for credit cards and
personal lines of credit. Commercial and mortgage loans are classified as
non-accruing when they are delinquent 90 days or more. This policy is also
applied to all impaired loans.
The Corporation provides for estimated losses on mortgage, commercial
and consumer loans upon an evaluation of the risk characteristics of said loans,
loss experience, economic conditions and other pertinent factors. Loan losses
are charged and recoveries are credited to the allowance for loan losses.
Loan fees and costs
Loan fees and costs incurred in the origination of loans are deferred
and amortized using the interest method or under a method that approximates the
interest method over the life of the loans as an adjustment to interest income.
When a loan is paid off or sold, any unamortized net deferred fee (cost) is
credited (charged) to income.
Other real estate owned
Other real estate owned, acquired in settlement of loans, is recorded
at the lower of cost (carrying value of the loan) or fair value minus estimated
cost to sell the real estate. Gains or losses resulting from the sale of these
properties and losses recognized on the periodic reevaluations of these
properties are credited or charged to net cost (gain) of operations and
disposition of other real estate owned. The cost of maintaining and operating
these properties is expensed as incurred.
48
Premises and equipment
Premises and equipment are carried at cost less accumulated
depreciation. Depreciation is provided on the straight-line method over the
estimated useful lives of the individual assets. Depreciation of leasehold
improvements is computed on the straight-line method over the terms of the
leases or estimated useful lives of the improvements, whichever is shorter.
Costs of maintenance and repairs which do not improve or extend the life of the
respective assets are expensed as incurred. Costs of renewals and betterments
are capitalized. When assets are sold or disposed of, their cost and related
accumulated depreciation are removed from the accounts and any gain or loss is
reflected in earnings.
Securities sold under agreements to repurchase
The Corporation sells securities under agreements to repurchase the
same or similar securities. Generally, similar securities are securities from
the same issuer, with identical form and type, similar maturity, identical
contractual interest rates, similar assets as collateral and the same aggregate
unpaid principal amount. The Corporation retains control over the securities
sold under these agreements, accordingly, these agreements are considered
financing transactions and the securities underlying the agreements remain in
the asset accounts. The counterparty to certain agreements may have the right to
repledge the collateral by contract or custom. Such assets are presented
separately in the statements of financial condition as securities pledged to
creditors that can be repledged.
Accounting for income taxes
Deferred taxes arise because certain transactions affect the
determination of taxable income for financial reporting purposes in periods
different from the period in which the transactions affect taxable income.
Deferred taxes have been recorded based upon the Puerto Rico enacted tax rates.
Current tax expense has been provided based upon the estimated tax liability to
be incurred for tax return purposes.
Amortization of debt issuance costs
Costs related to the issuance of debt are amortized under a method which
approximates the interest method.
Treasury stock
The Corporation accounts for treasury stock at par value. Under this
method, the treasury stock account is increased by the par value of each share
of common stock reacquired. Any excess paid per share over the par value is
debited to additional paid-in capital for the amount per share that it was
originally credited. Any remaining excess is charged to retained earnings.
Stock option plan
The cost associated with stock option plan under which certain
employees receive options to buy shares of stock of the Corporation must be
recognized either by the fair value method or the intrinsic value method. The
Corporation uses the intrinsic value method of accounting. Under the intrinsic
value method, compensation cost is the excess, if any, of the quoted market
price of the stock at grant date or other measurement date over the amount an
employee must pay to acquire the stock. If material, entities using the
intrinsic value method on awards granted to employees must make pro forma
disclosures of net income and earnings per share, as if the fair value method of
accounting had been applied. Under the fair value method, compensation cost is
measured at the grant date based on the fair value of the award and is
recognized over the service period, which is usually the vesting period.
Earnings per common share
Earnings per share-basic is calculated by dividing income available to
common stockholders by the weighted average number of outstanding common shares.
The computation of earnings per share-diluted is similar to the computation of
earnings per share-basic except
49
that the weighted average common shares are increased to include the number
of additional common shares that would have been outstanding if the dilutive
potential common shares had been issued. Stock options outstanding under the
Corporation's stock option plan are considered in the earnings per share-diluted
by application of the treasury stock method, which assumes that proceeds for the
exercise of options are used to repurchase common stock in the open market. Any
stock splits or stock dividends are retroactively recognized in all periods
presented in financial statements.
Comprehensive income
Comprehensive income includes net income and several other items that
current accounting standards require to be recognized outside of net income,
primarily the unrealized gain (loss) on securities available for sale, net of
tax.
Accounting for derivative instruments and hedging activities
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement establishes
accounting and reporting standards for derivative instruments, including
derivative instruments that are embedded in other contracts, and for hedging
activities. In June 2000, the Board issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities", which amends SFAS No.
133. The provisions of these statements must be adopted on January 1, 2001.
SFAS No. 133, as amended, standardizes accounting for derivative
instruments by requiring the recognition of all derivatives (both assets and
liabilities) in the statement of financial position at fair value. Under SFAS
No. 133, changes in the fair value of derivative instruments are accounted for
as current income or other comprehensive income, depending on their intended use
and designation. For transactions that qualify for hedge accounting, SFAS No.
133 provides for a matching of the timing of gain or loss recognition on the
hedging instrument with the recognition in earnings of (a) the changes in the
fair value of the hedged asset, liability, or a firm commitment that are
attributable to the hedged risk or (b) the effect of the exposure to the
variability of cash flows from the hedged asset, liability, or forecasted
transaction. Note 32 to the financial statements provides additional details of
the adoption of SFAS No. 133.
Transfer and servicing of financial assets and extinguishment of
liabilities
The FASB recently issued SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, a replacement
of SFAS No. 125." SFAS No. 140 revises the standards for accounting for security
transactions and other transfers of financial assets and collateral and requires
certain disclosures, but it carries over most of SFAS No. 125's provisions
without reconsideration. SFAS No. 140 is generally effective for transactions
occurring after March 31, 2001. However, the provisions with respect to
recognition and reclassification of collateral and for disclosures relating to
securitization transactions and collateral are required for fiscal years ending
after December 15, 2000. Management understands that the adoption of SFAS No.
140 will not have a material effect, if any, on the Corporation's financial
position or results of operations.
Note 3 - Stockholders' Equity
Common stock
On April 30, 1998, the Corporation declared a two for one stock split
on its then outstanding 14,796,526 shares of common stock. As a result, a total
of 14,796,526 additional shares of common stock were issued on May 29, 1998. In
addition, 13,000 and 6,000 shares of common stock were issued during 1999 and
2000 as part of the exercise of stock options under the Corporation's stock
option plan.
The Corporation declared cash dividends on its common stock of $0.44
per share in 2000, of $0.36 per share in 1999, and of $0.30 per share in 1998.
50
Stock repurchase plan and treasury stock
In 1996 a stock repurchase program was established (the 1996 Program)
where the Corporation is authorized to repurchase in the open market, and retire
from circulation or hold as treasury stock, up to ten percent of the 31,083,502
issued and outstanding shares of common stock at the time the program was
approved by the stockholders. In 1997 an additional stock repurchase program was
established whereby the Corporation may repurchase in the open market shares of
common stock, which amount represents 10% of the issued and outstanding shares
after all shares authorized under the 1996 Program have been repurchased. Under
these programs, the Corporation repurchased a total of 1,642,400 shares of
common stock at a cost of $30,086,590 during 2000, 1,452,000 shares of common
stock at a cost of $32,510,611 during 1999, and 317,600 shares of common stock
at a cost of $5,867,674 during 1998. The number of shares were adjusted to
recognize the May 1998 stock split. From the total amount of common stock
repurchased, 3,194,400 shares were held as treasury stock at December 31, 2000
(1999 - 1,552,000 shares) and were available for general corporate purposes.
Preferred stock
The Corporation has 50,000,000 shares of authorized non-cumulative and
non-convertible preferred stock with a par value of $1, redeemable at the
Corporation's option subject to certain terms. This stock may be issued in
series and the shares of each series shall have such rights and preferences as
shall be fixed by the Board of Directors when authorizing the issuance of that
particular series. During 2000, the Corporation issued 3,000,000 shares of
preferred stock (3,600,000 shares-1999). The liquidation value per share is $25.
Annual dividends 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.
Capital reserve
The capital reserve account was established to comply with certain
regulatory requirements of the Office of the Commissioner of Financial
Institutions of Puerto Rico related to the issuance of subordinated notes by
FirstBank in 1995. An amount equal to 10% of the principal of the notes is set
aside each year from retained earnings until the reserve equals the total
principal amount. At the notes repayment date the balance in capital reserve is
to be transferred to the legal surplus account or retained earnings after the
approval of the Commissioner of Financial Institutions of Puerto Rico.
Legal surplus
The Banking Act of the Commonwealth of Puerto Rico requires that a
minimum of 10% of FirstBank's net income for the year be transferred to legal
surplus, until such surplus equals the total of paid in capital on common and
preferred stock. Amounts transferred to the legal surplus account from the
retained earnings account are not available for distribution to the
stockholders.
Dividend restrictions
The Corporation is subject to certain restrictions generally imposed on
Puerto Rico corporations (i.e., that dividends may be paid out only from the
Corporation's net assets in excess of capital or in the absence of such excess,
from the Corporation's net earnings for such fiscal year and/or the preceding
fiscal year). The Federal Reserve Board has also issued a policy statement that
provides that bank holding companies should generally pay dividends only out of
current operating earnings.
Note 4 - Regulatory Capital Requirements
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,
51
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 December 31, 2000 and 1999, the Corporation was a well capitalized
institution under the regulatory framework for prompt corrective action. To be
categorized as well capitalized the Corporation must maintain minimum total risk
based, Tier 1 risk based and Tier 1 leverage ratios as set forth in the
following table. Management believes that there are no conditions or events
since that date that have changed that classification.
The Corporation's and its banking subsidiary's regulatory capital
positions were as follows:
Regulatory requirements
------------------------------------------------
For capital To be well
Actual adequacy purposes capitalized
--------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
At December 31, 2000 (Dollars in thousands) Total Capital (to Risk-Weighted
Assets):
First BanCorp $536,402 14.43% $297,280 8% $371,600 10%
FirstBank 469,774 12.76% 294,516 8% 368,145 10%
Tier I Capital (to Risk-Weighted Assets):
First BanCorp $417,203 11.23% $148,640 4% $222,960 6%
FirstBank 351,001 9.53% 147,258 4% 220,887 6%
Tier I Capital (to Average Assets):
First BanCorp $417,203 7.28% $172,042 3% $286,736 5%
FirstBank 351,001 6.18% 170,307 3% 283,846 5%
At December 31, 1999
Total Capital (to Risk-Weighted Assets):
First BanCorp $468,261 16.16% $231,758 8% $289,697 10%
FirstBank 409,173 14.26% 229,608 8% 287,010 10%
Tier I Capital (to Risk-Weighted Assets):
First BanCorp $337,284 11.64% $115,879 4% $173,818 6%
FirstBank 279,383 9.73% 114,804 4% 172,206 6%
Tier I Capital (to Average Assets):
First BanCorp $337,284 7.47% $135,473 3% $225,789 5%
FirstBank 279,383 6.26% 133,953 3% 223,255 5%
52
Note 5 - Stock Option Plan
The Corporation has a stock option plan covering certain employees. The
options granted under the plan cannot exceed 20% of the number of common shares
outstanding. Each option provides for the purchase of one share of common stock
at a price not less than the fair market value of the stock on the date the
option is granted. Stock options are fully vested upon issuance. The maximum
term to exercise the options is ten years. The stock option plan provides for a
proportionate adjustment in the exercise price and the number of shares that can
be purchased in the event of a stock dividend, stock split, reclassification of
stock, merger or reorganization and certain other issuance and distributions.
Following is a summary of the activity related to stock options, as
adjusted retroactively for the May 1998 stock split:
Number Weighted Average
of Options Exercise Price per Option
At December 31, 1997 474,000 $10.68
Granted 296,000 $24.85
Exercised (13,500) $14.56
-------
At December 31, 1998 756,500 $16.16
Granted 223,000 $19.99
Exercised (13,000) $13.56
---------
At December 31, 1999 966,500 $17.07
Granted 318,000 $22.31
Exercised (6,000) $15.63
Canceled (2,000) $26.00
-----------
At December 31, 2000 1,276,500 $18.37
=========
The options outstanding at December 31, 2000 have an original
expiration term of ten years and all of them are exercisable. The exercise price
of the options outstanding at December 31, 2000 ranges from $5.79 to $28.38 and
the weighted average remaining contractual life is approximately seven years.
Following is additional information concerning the stock options
outstanding at December 31, 2000. The data included herein have been adjusted to
reflect the May 1998 stock split.
Number of Exercise Price Contractual
Options per Option Maturity
--------- ------------ -------------------
234,000 $ 5.79 November 2004
207,500 $15.63 November 2007
60,000 $19.19 February 2008
7,000 $28.38 April 2008
40,000 $27.09 May 2008
12,000 $26.56 June 2008
175,000 $26.00 November 2008
2,000 $25.94 February 2009
3,500 $26.44 April 2009
15,000 $22.56 August 2009
202,500 $19.63 November 2009
318,000 $22.31 December 2010
----------
1,276,500
==========
53
Note 6 - Earnings Per Common Share
The calculations of earnings per common share for the years ended December 31, 2000, 1999 and 1998 follow:
Year ended December 31,
--------------------------------------
2000 1999 1998
------ ------ ----
(In thousands, except per share data)
Net income $67,276 $62,075 $51,812
Less: Preferred stock dividend (7,408) (4,275) ______
--------- ---------
Net income-attributable to common stockholders $59,868 $57,800 $51,812
======= ======= =======
Earnings per common share-basic:
- -------------------------------
Net income - available to common stockholders $59,868 $57,800 $51,812
------- ------- -------
Weighted average common shares outstanding 26,943 28,941 29,586
-------- -------- -------
Earnings per common share-basic $ 2.22 $ 2.00 $ 1.75
======== ========= ========
Earnings per common share-diluted:
- ---------------------------------
Net income - available to common stockholders $59,868 $57,800 $51,812
------- ------- -------
Weighted average common shares and share equivalents:
Average common shares outstanding 26,943 28,941 29,586
Common stock equivalents - Options 202 258 272
--------- -------- ---------
Total 27,145 29,199 29,858
------- ------ -------
Earnings per common share-diluted $ 2.21 $ 1.98 $ 1.74
======== ======== =========
Had compensation cost for the stock options granted been determined
based on the fair value at the grant date (as a result of the requirement
explained in Note 2 - Stock option plan), the Corporation's net income and
earnings per common share would have been reduced to the pro forma amounts
indicated, as follow:
Year ended December 31,
----------------------------------------
Pro forma earnings per common share: 2000 1999 1998
- ----------------------------------- ---------- --------- ----------
(In thousands, except per share data)
Net income-available to common stockholders $58,119 $56,341 $48,592
Earnings per common share-basic $2.16 $1.95 $1.64
Earnings per common share-diluted $2.14 $1.93 $1.63
Management uses the binomial model for the computation of the fair
value of each option granted to buy shares of the Corporation's common stock.
The fair value of each option granted during 2000, 1999 and 1998 was estimated
using the following assumptions: weighted dividend growth of 0% (2000), 22.38%
(1999) and 21.97% (1998); expected life of 3.11 years (2000) and 10 years (1999
and 1998); weighted expected volatility of 31.74% (2000), 29.46% (1999), and
36.08% (1998), and weighted risk-free interest rate of 5.36% (2000), 6.04%
(1999) and 5.10% (1998). The weighted estimated fair value of the options
granted was $5.50 (2000), $6.54 (1999) and $10.95 (1998) per option.
Note 7 - Cash and Due from Banks
The Corporation is required by law to maintain minimum average reserve
balances. The amount of those reserve average balances was approximately
$45,107,600 at December 31, 2000 (1999 - $40,975,700).
54
Note 8 - Securities Purchased Under Agreements To Resell
At December 31, 2000 and 1999, there were no securities purchased under
agreements to resell. The maximum aggregate balance outstanding at any month-end
during 2000 was approximately $10,425,000 (1999 - $17,421,000). The average
aggregate balance during 2000 was $882,992 (1999 - $1,577,504).
Note 9 - Investment Securities Held For Trading
At December 31, 2000 and 1999, there were no securities held for
trading purposes or options on such securities.
All trading instruments are subject to market risk, the risk that
future changes in market conditions, such as fluctuations in market prices or
interest rates, may make an instrument less valuable or more onerous. The
instruments are accounted for at market value, and their changes are reported
directly in earnings. The Corporation may write options on trading securities as
part of its trading activities. Also the Corporation may enter in transactions
of securities sold not yet purchased for trading purposes. These transactions
are carried at market value. Net gains and losses resulting from these
transactions are recorded in the trading income or loss account.
The net gain from the sale of trading securities amounted to $419,367
for the year ended December 31, 2000 (a loss of $7,946 for 1999 and a gain of
$3,364,843 for 1998), and were included in earnings as trading income.
Note 10 - Investment Securities Held To Maturity
The amortized cost, gross unrealized gains and losses, approximate
market value, weighted average yield and maturities of investment securities
held to maturity at December 31, 2000 and 1999 were as follows:
December 31, 2000 December 31, 1999
------------------------------------------------ ----------------------------------------------------
Weighted Weighted
Amortized Unrealized Market average Amortized Unrealized Market average
cost gains(losses) value yield% cost gains(losses) value yield%
-------------- ---------- -------- ------- ------- ------------ -------- --------
(Dollars in thousands)
Obligations of U.S.
Government Agencies:
After 1 to 5 years $ 10,000 $(12) $ 9,988 7.04
After 5 to 10 years $10,000 $ (166) $9,834 7.04
After 10 years 90,176 $1,340 (5,119) 86,397 7.53 83,756 (9,255) 74,501 7.53
Puerto Rico Government
Obligations:
After 10 years 3,831 (56) 3,775 6.50 3,593 $57 3,650 6.50
----------- ----- ---------- ----------- --------- --- ------- ---------
Total $104,007 $1,340 $(5,187) $100,160 7.44 $97,349 $57 $(9,421) $87,985 7.44
======== ====== ======= ======== ======= === ======= =======
Mortgage backed securities:
Government National
Mortgage Association
(GNMA) certificates
After 10 years $206,989 $1,326 $208,315 6.94 $206,697 $(7,851) $198,845 6.94
======== ====== ======== ======== ======= ========
Expected maturities of mortgage backed securities and certain other
securities might differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
Note 11 -Investment Securities Held For Sale
The amortized cost, gross unrealized gains and losses, approximate
market value, weighted average yield and maturities of investment securities
held for sale at December 31, 2000 and 1999 were as follows:
55
December 31, 2000 December 31, 1999
------------------------------------------------ ----------------------------------------------
Weighted Weighted
Amortized Unrealized Market average Amortized Unrealized Market average
cost gains (losses) value yield% cost gains (losses) value yield%
Obligations of U.S.
U.S. Treasury Securities: (Dollars in thousands)
Within 1 year $ 499 $ 2 $ 501 6.04
After 1 to 5 years 2,630 33 2,663 6.49
After 5 to 10 years 39,624 $(718) 38,906 4.89 $39,577 $(4,302) $35,275 4.90
After 10 years 67,555 (455) 67,100 5.50 67,468 (9,621) 57,847 5.51
Obligations of other U.S.
Government Agencies:
Within 1 year 240,341 46 240,387 6.76 219,065 $53 (58) 219,060 5.68
After 1 to 5 years 31,705 144 31,849 7.86
After 5 to 10 years 29,988 217 30,205 7.81
After 10 years 53,593 322 (3,302) 50,613 7.66 27,457 (5,127) 22,330 7.05
Puerto Rico Government
Obligations:
After 1 to 5 years 20,000 20,000 7.41
After 5 to 10 years 429 (11) 418 6.65
After 10 years 8,840 39 (254) 8,625 6.51 5,880 (36) 5,844 6.83
----------- ------ --------- ----------- ----------- --------- --------
Total $495,204 $803 $(4,740) $491,267 6.69 $359,447 $53 $(19,144) $340,356 5.69
======== ==== ======= ======== ======== === ========= ========
Mortgage backed securities:
Federal Home Loan Mortgage Corporation
(FHLMC) certificates:
After 1 to 5 years $ 834 $ 6 $ 840 7.02 $ 997 $ (25) $ 972 6.87
After 5 to 10 years 8,088 27 8,115 6.22 9,905 (255) 9,650 6.23
After 10 years 18,829 282 19,111 7.00 22,872 $11 (155) 22,728 6.38
--------- ----- -------- -------- --- ---- ------
27,751 315 28,066 6.77 33,774 11 (435) 33,350 6.35
--------- ----- -------- ------- ---- ---- ------
Government National
Mortgage Association
(GNMA) certificates:
After 5 to 10 years 4,484 (81) 4,403 6.22 3,674 (46) 3,628 5.85
After 10 years 1,291,460 593 (13,229) 1,278,824 6.50 1,039,069 1,410 (76,054) 964,425 6.19
---------- ----- --------- -------- --------- ----- ------- -------
1,295,944 593 (13,310) 1,283,227 6.50 1,042,743 1,410 (76,100) 968,053 6.19
---------- ----- --------- --------- --------- ----- ------- -------
Federal National
Mortgage Association
(FNMA) certificates:
After 1 to 5 years 375 2 377 7.29 644 (7) 637 7.29
After 5 to 10 years 125 1 126 6.84 188 (6) 182 6.88
After 10 years 9,402 270 (14) 9,658 8.16 11,109 299 (46) 11,362 8.26
------------ ----- ------- ---------- -------- ----- ----- --------
9,902 273 (14) 10,161 8.11 11,941 299 (59) 12,181 8.19
------------ ----- ------- --------- -------- ----- ----- --------
Mortgage pass through
certificates:
After 10 years 2,286 66 2,352 8.96 2,463 757 3,220 9.09
------------ ----- ----------- --------- ----- --------
Real Estate Mortgage
Interest Conduit:
Within 1 year ---------- ------ -------- ---------- 361 12 373 12.52
----------- ------- ----------
Total $1,335,883 $1,247 $(13,324) $1,323,806 6.52 $1,091,282 $2,489 $(76,594) $1,017,177 6.23
========== ====== ======== ========== ========== ======= ======= ==========
Other investments:
Within 1 year $ 55,559 $ 84 $(10,407) $ 45,235 3.83 $ 67,359 $1,914 $69,273 6.03
After 1 to 5 years 27,416 295 (105) 27,606 7.97 14,750 $ (88) 14,662 7.76
After 5 to 10 years 10,522 76 10,598 7.21 11,779 (162) 11,617 7.25
After 10 years 3,211 (60) 3,151 6.31 990 990 7.06
-------------- ----- --------------------- ----- --------- ------ ------ -------
Total $ 96,708 $ 455 $(10,572) $ 86,590 5.45 $ 94,878 $1,914 $(250) $96,542 6.46
=================== ======== =========== ========= ====== ====== =======
56
Maturities for mortgage backed securities are based upon contractual
terms assuming no repayments. The weighted average yield on investment
securities held for sale is based on amortized cost, therefore it does not give
effect to changes in fair value.
At December 31, 2000, the net unrealized loss of $19,598,785 (1999 -
net unrealized loss of $68,648,959) on securities available for sale, net of the
deferred income tax of $6,532,928 (1999 - $22,882,986), was reported in
accumulated other comprehensive income. For 2000, the change in the net
unrealized holding gain on the available for sale securities amounted to
$65,400,232 (1999 - a loss of $103,198,520) before deferred income taxes.
For 2000, proceeds from the sale of securities amounted to $58.5
million (1999 - $9.6 million, 1998 - $302.1 million) resulting in a realized
gain of $7.9 million (1999 - $1.4 million, 1998 -$26.8 million). No losses were
recognized on those sales.
Note 12 - Federal Home Loan Bank (FHLB) Stock
At December 31, 2000 and 1999, there were investments in FHLB stock
with book value of $18,536,500 and $17,826,500, respectively. The estimated
market value of such investments is its redemption value.
Note 13 - Interest and Dividend on Investments
A detail of interest and dividend income on investments follows:
Year ended December 31,
- ----------------------------------------------------------------------------------------------------------------
2000 1999 1998
----------- --------- ----------
(In thousands)
Mortgage-backed securities:
Taxable $ 3,325 $ 4,137 $ 5,230
Exempt 91,416 77,900 63,131
-------- -------- --------
$94,741 $ 82,037 $68,361
======= ======== =======
Other investment securities:
Taxable $ 1,577 $ 1,528 $ 801
Exempt 38,060 24,758 20,621
-------- ------- --------
$39,637 $26,286 $21,422
======= ======= =======
57
Note 14 - Loans Receivable
The following is a detail of the loan portfolio:
December 31,
2000 1999
------------------ ---------------------
(In thousands)
Residential real estate loans:
Secured by first mortgages:
Conventional $ 695,344 $ 395,885
Insured by government agencies:
Federal Housing Administration and Veterans
Administration 20,004 6,543
Puerto Rico Housing Bank and Finance Agency 28,037 32,928
Secured by second mortgages 8,964 5,706
------------- ----------
752,349 441,062
Deferred loan and commitment fees - net (5,557) (5,293)
------------ ----------
Residential real estate loans 746,792 435,769
---------- ---------
Construction, land acquisition and land improvements 484,986 288,302
Undisbursed portion of loans in process (281,031) (156,234)
----------- ----------
Construction loans 203,955 132,068
----------- -----------
Commercial loans:
Commercial loans 947,709 655,417
Commercial mortgage 438,321 371,643
---------- ----------
Commercial loans 1,386,030 1,027,060
--------- ---------
Finance leases 122,883 85,693
--------- ----------
Consumer and other loans:
Personal 388,696 422,723
Personal lines of credit 12,852 13,029
Auto 530,534 532,242
Boat 33,954 37,018
Credit card 174,797 168,045
Home equity reserve loans 2,134 2,657
Other 106
Unearned interest (104,429) (148,836)
------------ -----------
Consumer and other loans 1,038,538 1,026,984
----------- ----------
Loans receivable 3,498,198 2,707,574
Loans held for sale _________ 37,794
------------
Total loans 3,498,198 2,745,368
Allowance for loan losses (76,919) (71,784)
------------ -------------
Total loans-net $3,421,279 $2,673,584
========== ==========
The Corporation's primary lending area is Puerto Rico. At December 31,
2000 and 1999 there is no significant concentration of credit risk in any
specific industry on the loan portfolio.
At December 31, 2000, loans in which the accrual of interest income had
been discontinued amounted to $67,716,000 (1999 - $53,816,000; 1998 -
$56,958,000). If these loans had been accruing interest, the additional interest
income realized would have been approximately $5,937,000 (1999 - $4,544,000;
1998 - $4,970,000). There are no material commitments to lend additional funds
to borrowers whose loans were in non-accruing status at these dates.
58
At December 31, 1999 mortgage loans held for sale amounted to
$37,794,078. All mortgage loans originated and sold during 1999 were sold based
on pre-established commitments or at market values, which in both situations
were equal or exceeded the carrying value of the loans. During 2000 loans held
for sale were reclassified to loans receivable since the Corporation does not
intend to sell those loans.
At December 31, 2000, the Corporation was servicing mortgage loans
owned by others aggregating approximately $144,805,000 (1999 - $134,348,000;
1998 - $147,439,000).
Various loans secured by first mortgages were assigned as collateral
for term notes, certificates of deposit, advances from the Federal Home Loan
Bank, and unused lines of credit. The mortgage loans pledged as collateral
amounted to $104,739,882 and $157,612,921 at December 31, 2000 and 1999,
respectively. At December 31, 1999 a portfolio of personal loans was assigned as
collateral for short-term borrowings as explained in Note 21 - "Other Short-Term
Borrowings." The personal loans pledged as collateral amounted to $186,417,700.
Note 15 - Allowance for Loan Losses
The changes in the allowance for loan losses were as follows:
Year ended December 31,
-------------------------------------------------------
2000 1999 1998
--------------- ---------------- ------------------
(In thousands)
Balance at beginning of period $71,784 $67,854 $57,712
Provision charged to income 45,719 47,961 76,000
Losses charged against the allowance (51,831) (53,665) (72,223)
Recoveries credited to the allowance 9,807 9,048 6,034
Other adjustments 1,440 586 331
--------- ---------- -----------
Balance at end of period $76,919 $71,784 $67,854
======= ======= =======
At December 31, 2000, $13.1 million ($4.4 million at December 31,
1999) in commercial and real estate loans over $1,000,000 was considered
impaired with an allowance of $7.8 million ($1.3 million at December 31, 1999).
There were no consumer loans over $1,000,000 considered impaired at December 31,
2000 and 1999. The average recorded investment in impaired loans amounted to
$8.8 million for 2000 (1999 - $9.4 million). Interest income in the amount of
approximately $227,000 was recognized on impaired loans in 2000 (1999 -
approximately $428,000; 1998 - approximately $736,000).
Note 16 - Related Party Transactions
The Corporation granted loans to its directors, executive officers and to
certain related individuals or entities in the ordinary course of business. The
movement and balance of these loans were as follows:
Amount
------------
(In thousands)
Balance at December 31, 1998 $21,529
New loans 2,106
Payments (542)
--------
Balance at December 31, 1999 23,093
New loans 279
Payments (3,198)
--------
Balance at December 31, 2000 $20,174
========
59
Note 17 - Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation
as follows:
Useful life December 31,
--------------------------------------
in years 2000 1999
------------- -------------- ---------------
(In thousands)
Land $ 7,378 $ 6,853
Buildings and improvements 10-40 35,038 33,433
Leasehold improvements 1-15 12,344 14,223
Furniture and equipment 3-10 55,654 50,532
-------- --------
110,414 105,041
Accumulated depreciation (52,086) (48,233)
-------- -------
58,328 56,808
Projects in progress 13,759 5,140
-------- ---------
Total premises and equipment - net $72,087 $61,948
======= =======
Note 18 - Other Assets
Following is a detail of other assets:
December 31,
----------------------------------------
2000 1999
---------------- --------------
(In thousands)
Deferred tax asset $42,651 $54,645
Accounts receivable 9,531 8,203
Prepaid expenses 9,293 9,243
Revenue earning vehicles 6,572 5,680
Other 28,527 17,661
-------- -------
Total $96,574 $95,432
======= =======
Note 19 - Deposits and Related Interest
Deposits and related interest consist of the following:
December 31,
------------------------------------------
2000 1999
------------- ----------- -
(In thousands)
Type of account and interest rate at:
-
Savings accounts - 2.75% to 4.00% $ 430,298 $ 447,946
Interest bearing checking accounts -
2.75% to 4.50% 170,631 162,601
Non-interest bearing checking accounts 232,164 211,897
Certificate accounts - 4.15% to 7.60%
(1999 - 3.80% to 8.00%) 2,512,891 1,742,978
----------- ----------
$3,345,984 $2,565,422
========== ==========
The weighted average interest rate on total deposits at December 31,
2000 and 1999 was 5.83% and 4.94%, respectively.
60
At December 31, 2000, the aggregate amount of overdraft in demand
deposits that were reclassified as loan amounted to $4,106,412 (1999 -
$6,939,685).
The following table presents a summary of certificates of deposits with
remaining term of more than one year at December 31, 2000:
Total
-----------
(In thousands)
Over one year to two years $ 97,119
Over two years to three years 200,837
Over three years to four years 105,620
Over four years to five years 206,544
Over five years 767,966
------------
Total $1,378,086
==========
At December 31, 2000 certificates of deposit (CD's) in denominations of
$100,000 or higher amounted to $1,995,730,680 (1999 - $1,283,083,091) including
brokered certificates of deposit of $1,499,104,222 (1999 - $843,217,222) at a
weighted average rate of 6.60% (1999 - 5.84%).
At December 31, 2000, there were no certificates of deposit guaranteed
by irrevocable standby letters of credits issued by the Federal Home Loan Bank.
At December 31, 1999, certificates of deposit aggregating $49,000,000 were
guaranteed by irrevocable standby letters of credit issued by the Federal Home
Loan Bank and other banks. At December 31, 1999 certain mortgage loans with a
carrying value of $71,165,714 and estimated market value of $58,992,705 and
securities with a book value of $5,401,047 and approximate market value of
$5,351,690 were pledged to the Federal Home Loan Bank as part of the agreements
covering the letters of credit.
At December 31, 2000, deposit accounts issued to government agencies
with a carrying value of $101,661,753 (1999 - $62,378,476) were collateralized
by securities with a carrying value of $106,917,690 (1999 - $78,782,695) and
estimated market value of $104,868,113 (1999 - $75,677,459) and specific
mortgage loans with a carrying value of $3,539,882 (1999 - $3,947,207) and
estimated market value of $3,882,189 (1999 - $3,758,925).
A table showing interest expense on deposits follows:
Year ended December 31,
----------------------------------------------------
2000 1999 1998
--------------- --------------- ----------------
(In thousands)
Savings $ 12,792 $12,381 $11,717
Interest bearing checking accounts 5,546 4,931 4,487
Certificates 134,945 73,177 54,214
--------- -------- --------
Total $153,283 $90,489 $70,418
======== ======= =======
61
Note 20 - Federal Funds Purchased and Securities Sold Under Agreements to Repurchase
Federal funds purchased and securities sold under agreements to repurchase
(repurchase agreements) consist of the following:
December 31,
-----------------------------------------------
2000 1999
------------------- ------------------
(In thousands)
Repurchase agreements, interest
ranging from 4.97% to 6.63%
(1999 - 4.50% to 6.35%) $1,851,286 $1,447,732
Accrued interest payable 5,150 4,419
-------------- -------------
Total $1,856,436 $1,452,151
========== ==========
Federal funds purchased and repurchase agreements mature as follows:
December 31,
-----------------------------------------------
2000 1999
------------------- ----------------
(In thousands)
Repurchase agreements:
One to thirty days $1,368,944 $1,229,448
Over thirty to ninety days 8,450
Over ninety days 482,342 209,834
----------- ------------
Total $1,851,286 $1,447,732
========== ==========
62
The following securities were sold under agreements to repurchase:
December 31, 2000
Amortized Approximate Weighted
cost of market value average
underlying Balance of of underlying interest
securities borrowing securities rate
Underlying securities (In thousands)
U.S. Treasury Securities and
obligations of other U.S.
Government Agencies $ 406,106 $ 395,027 $ 400,253 6.53%
Mortgage backed securities 1,497,102 1,456,259 1,485,816 6.35%
--------- ----------- -----------
Total $1,903,208 $1,851,286 $1,886,069
========== ========== ==========
Accrued interest receivable $ 4,124
=============
December 31, 1999
-------------------------------------------------------------------------------
Amortized Approximate Weighted
cost of market value average
underlying Balance of of underlying interest
Underlying securities securities borrowing securities rate
--------------------- ----------------- ---------- ---------------- -----------
(In thousands)
U.S. Treasury Securities and
obligations of other U.S.
Government Agencies $ 325,529 $ 296,720 $ 303,107 5.77%
Mortgage backed securities 1,233,633 1,151,012 1,150,558 6.16%
----------- ----------- -----------
Total $1,559,162 $1,447,732 $1,453,665
========== ========== ==========
Accrued interest receivable $ 3,153
=============
The weighted average interest rates of federal funds purchased and
repurchase agreements at December 31, 2000 and 1999 was 6.32% and 5.38%,
respectively.
At December 31, 2000, the securities underlying such agreements were
delivered to, and are being held by the dealers with which the repurchase
agreements were transacted, except for transactions where the Corporation has
agreed to repurchase similar but not identical securities. The maximum aggregate
balance outstanding at any month-end during 2000 was $1,851,285,585 (1999 -
$1,631,913,357). The average balance during 2000 was approximately
$1,687,880,000 (1999 - $1,441,486,000).
Note 21 - Other Short-Term Borrowings
On March 31, 1997, the Corporation entered into a $250,000,000
financing arrangement administered by Credit Suisse First Boston to be renewed
annually within a term of three years. During the first quarter of 2000, the
Corporation paid off the outstanding balance of these borrowings and canceled
the financial arrangement. At December 31, 1999, borrowings through this
arrangement amounted to $152,484,084.
The weighted average maturity at December 31, 1999 was 36 days. The
weighted average interest rate of these borrowings at December 31, 1999 was
6.20%. The maximum aggregate balance outstanding at any month-end was
approximately $152,484,084. The average aggregate balance outstanding during the
year was approximately $97,373,301. The aggregate book value of the loans
pledged as collateral at December 31, 1999 amounted to $186,417,700.
63
Note 22 - Advances From The Federal Home Loan Bank (FHLB)
Following is a detail of the advances from the FHLB:
December 31,
----------------------------------------
Maturity Interest rate 2000 1999
-------- ------------- ---------------- ----------------
(In thousands)
January 2, 2001 6.35% $ 1,000
January 5, 2001 6.41% 16,000
August 16, 2005 6.30% 50,000
February 3, 2000 5.86% $20,000
February 28, 2000 6.03% 30,000
------- --------
$67,000 $50,000
======= =======
Advances are received from the FHLB under an Advances, Collateral Pledge
and Security Agreement (the Collateral Agreement). Under the Collateral
Agreement, the Corporation is required to maintain a minimum amount of
qualifying mortgage collateral with a market value at least 110% of the
outstanding advances. At December 31, 2000, specific mortgage loans with an
estimated market value of $76,485,860 (1999 - $56,303,500) were pledged to the
FHLB as part of the Collateral Agreement. The carrying value of such loans at
December 31, 2000 amounted to $73,700,000 (1999 - $55,000,000).
Note 23 - Notes Payable
Following is a detail of notes payable outstanding:
December 31, 2000 December 31,
----------------- ------------------------------------
Issue date (footnote) Maturity Interest rate 2000 1999
- --------------------- -------- ------------- ------------ ----------------
(In thousands)
September 12, 1996 (b) 2001 6.12% $10,000 $10,000
September 20, 1996 (b) 2001 6.23% 20,500 20,500
September 20, 1996 (a) 2001 6.10% 25,000 25,000
-------- --------
Total $55,500 $55,500
======= =======
Footnotes:
a. These notes have the benefit of a firm commitment issued by the FHLB
whereby it will make advances to pay the principal and interest on the notes as
they become due if the Corporation fails to do so. The Corporation is required
to maintain as collateral with the FHLB securities having an aggregate market
value, determined monthly, equal to 110% of the aggregate outstanding principal
amount of the notes plus interest. The collateral securities may consist of a
combination of all or some of the following: (i) home mortgage loans owned by
the Corporation and secured by first mortgages on real properties in Puerto
Rico; (ii) obligations of, or guaranteed by, the United States Government or
certain agencies; (iii) fully-modified pass-through mortgage backed certificates
guaranteed by GNMA; (iv) mortgage participation certificates issued by FHLMC;
(v) guaranteed mortgage pass-through certificates issued by FNMA; and (vi)
certain certificates of deposit issued by banks approved by the FHLB.
At December 31, 2000, specific mortgage loans with a book value of
$27,500,000 (1999 - $27,500,000) and an estimated market value of $29,683,500
(1999 - $28,459,750) were pledged to the FHLB as part of the agreement covering
the above mentioned firm commitment. The estimated market value was computed
based on parameters given by the Federal Home Loan Bank.
64
b. The Corporation is required to maintain with the holder of these notes,
cash or securities with a market value of at least 105% of the aggregate amount
of the notes. The aggregate estimated market value and carrying value of the
eligible collateral at December 31, 2000 amounted to $28,354,135 (1999 -
$30,152,980) and $28,254,750 (1999 - $29,793,954), respectively.
Note 24 - Subordinated Notes
On December 20, 1995, the Corporation issued 7.63% subordinated capital
notes in the amount of $100,000,000 maturing in 2005. The notes were issued at a
discount. At December 31, 2000 the outstanding balance net of the unamortized
discount and notes repurchased was $90,548,314 (1999 - $93,594,080). Interest on
the notes is payable semiannually and at maturity. The notes represent unsecured
obligations of the Corporation ranking subordinate in right of payment to all
existing and future senior debt including the claims of depositors and other
general creditors. The notes may not be redeemed prior to their maturity. At
December 31, 2000, the Corporation has transferred to capital reserves from the
retained earnings account $50,000,000, as a result of the requirement explained
in Note 3 - "Stockholders' Equity."
Note 25 - Unused Lines Of Credit
The Corporation maintains unsecured standby lines of credit with other
banks. At December 31, 2000, the Corporation's total unused lines of credit with
these banks amounted to approximately $133,500,000 (1999 - $123,500,000). At
December 31, 2000, the Corporation has an available line of credit with the FHLB
guaranteed with excess collateral, in the amount of $66,841,562 (1999 -
$2,812,126).
Note 26 - Employees' Benefit Plan
FirstBank has a defined contribution retirement plan (the Plan)
qualified under the provisions of the Puerto Rico Internal Revenue Code Section
1165(e). All employees (excluding the Bank's subsidiaries) are eligible to
participate in the Plan after one year of service. Under the provisions of the
Plan, the Bank contributes a quarter of the first 4% of each participant's
compensation. Participants are permitted to contribute up to 10% of their annual
compensation, limited to $8,000 per year. Additional contributions to the Plan
are voluntarily made by the Bank as determined by its Board of Directors. The
Bank made a total contribution of $699,060, $625,375 and $575,000 during 2000,
1999 and 1998, respectively, to the Plan.
Note 27 - Other Expenses
A detail of other expenses follows:
Year ended December 31,
-----------------------------------------------------------
2000 1999 1998
-------------- --------------- ----------------
(In thousands)
Professional and service fees $ 8,740 $ 6,672 $ 5,820
Advertising and business promotion 8,468 5,896 5,922
Communications 5,573 4,667 4,330
Revenue earning equipment 1,525 1,479 1,226
Supplies and printing 1,214 1,361 1,314
Other 7,423 5,426 4,534
--------- --------- --------
Total $32,943 $25,501 $23,146
======= ======= =======
Note 28 - Income Taxes
The Corporation is subject to Puerto Rico income tax on its income from
all sources. For United States income tax purposes, the Corporation is treated
as a foreign corporation. Accordingly, it is generally subject to United States
income tax only on its income from
65
sources within the United States or income effectively connected with the
conduct of a trade or business within the United States. Any United States
income tax paid by the Corporation is creditable, within certain conditions and
limitations, as a foreign tax credit against its Puerto Rico tax liability.
The provision for income taxes was as follows:
Year ended December 31,
2000 1999 1998
----------------------------------------------
(In thousands)
Current $19,117 $13,991 $17,845
Deferred (4,356) (6,703) (13,047)
-------- -------- ------
Total $14,761 $ 7,288 $ 4,798
======= ======== =======
Income tax expense applicable to income before provision for income tax
differs from the amount computed by applying the Puerto Rico statutory rate of
39% as follows:
Year ended December 31,
-------------------------------------------------------------------------------
2000 1999 1998
% of % of % of
pre-tax pre-tax pre-tax
Amount income Amount income Amount income
---------- ------- ----------- ------- ------- -------
(Dollars in thousands)
Computed income tax at statutory rate $31,994 39 $27,052 39 $22,078 39
Benefit of net exempt income (12,707) (15) (13,959) (20) (22,078) (39)
Other-net (4,526) (6) (5,805) (8) 4,798 8
--------- --- -------- --- --------- ----
Total income tax provision $14,761 18 $ 7,288 11 $ 4,798 8
======= === ======== == ======== ===
The components of the deferred tax asset and liability were as follows:
December 31,
------------------------------
2000 1999
-------- ----------
(In thousands)
Deferred tax asset:
Allowance for loan losses $29,998 $27,995
Unrealized loss on available for sale securities 6,533 22,883
Other 6,445 4,114
--------- --------
Deferred tax asset $42,976 $54,992
======= =======
Deferred tax liability $ (325) $ (347)
======== =======
Due to the above temporary differences, a net deferred tax asset resulted
amounting to $42.7 million at December 31, 2000 (1999 - $54.6 million). The
primary timing difference was the effect of future deductions under the
charge-offs method for deducting loan losses. No valuation allowance was
considered necessary.
The tax effect of the unrealized holding gain or loss for securities
available for sale was computed based on a 25% capital gain tax rate, and is
included in accumulated other comprehensive income as a part of stockholders'
equity.
66
Note 29 - Commitments
At December 31, 2000 certain premises are leased with terms expiring
through the year 2011. The Corporation has the option to renew or extend certain
leases from two to ten years beyond the original term. Some of these leases
require the payment of insurance, increases in property taxes and other
incidental costs. At December 31, 2000, the obligation under various leases
follows:
Year Amount
---- -----------
(In thousands)
2001 $ 4,322,520
2002 3,840,526
2003 2,832,795
2004 2,237,197
2005 1,176,828
2006 and later years 4,472,947
-------------
Total $18,882,813
===========
Rental expense included in occupancy and equipment expense was
$4,042,069 in 2000 (1999 - $3,390,786; 1998 - $3,158,156).
Note 30 - Fair Value of Financial Instruments
The information about the estimated fair values of financial instruments as
required by generally accepted accounting principles, is presented hereunder
including some items not recognized in the statement of financial condition. The
disclosure requirements exclude certain financial instruments and all non
financial instruments. Accordingly, the aggregate fair value amounts presented
do not represent Management's estimate of the underlying value of the
Corporation. A summary table of estimated fair values and carrying values of
financial instruments at December 31, 2000 and 1999 follows:
December 31,
---------------------------------------------------------------------
2000 1999
Estimated Carrying Estimated Carrying
fair value value fair value value
--------------- ------------ -------------- --------------
(In thousands)
Assets:
Money market instruments $ 2,020 $ 2,020 $ 35,217 $ 35,217
Investment securities 2,210,138 2,212,659 1,740,905 1,758,120
FHLB stock 18,537 18,537 17,827 17,827
Loans receivable, including loans
held for sale - net 3,396,324 3,421,279 2,753,597 2,673,584
Liabilities:
Deposits 3,351,069 3,345,984 2,554,429 2,565,422
Federal funds, securities sold
under agreements to repurchase
and other short-term borrowings 1,857,651 1,856,436 1,604,635 1,604,635
Advances from FHLB 68,607 67,000 50,000 50,000
Notes payable and subordinated notes 144,853 146,048 145,994 149,094
The estimated fair values were based on judgments regarding current and
future economic conditions. The estimates are subjective in nature and involve
uncertainties and matters of significant judgment and, therefore, cannot be
determined with precision. Changes in the underlying assumptions used in
calculating the fair values could significantly affect the results. In addition,
the fair value estimates are based on outstanding balances
67
without attempting to estimate the value of anticipated future business.
Therefore, the estimated fair values may materially differ from the values that
could actually be realized on a sale.
The estimated fair values were calculated using certain facts and
assumptions which vary depending on the specific financial instrument, as
follows:
Money market instruments
The carrying amounts of money market instruments are reasonable
estimates of their fair values.
Investment securities
The fair values of investment securities are the market values based on
quoted market prices and dealer quotes.
FHLB stock
Investments in FHLB stock are valued at their redemption values.
Loans receivable, including loans held for sale - net
The fair value of all loans was estimated by the discounted present values
of loans with similar financial characteristics. Loans were classified by type
such as commercial, residential mortgage, credit card and automobile. These
asset categories were further segmented into fixed and adjustable rate
categories and by accruing and non-accruing groups. Performing floating rate
loans were valued at book if they reprice at least once every three months. The
fair value of fixed rate performing loans was calculated by discounting expected
cash flows through the estimated maturity date. Recent prepayment experience was
assumed to continue for mortgage loans, credit cards, auto loans and personal
loans. Other loans assumed little or no prepayment. Prepayment estimates were
based on the Corporation's historical data for similar loans. Discount rates
were based on the Treasury Yield Curve at the date of the analysis, with an
offset which reflects the risk and other costs inherent in the loan category. In
certain cases, where recent experience was available regarding the sale of
loans, this information was also incorporated into the fair value estimates.
Non-accruing loans covered by a specific loan loss allowance were
viewed as immediate losses and were valued at zero. Other non-accruing loans
were arbitrarily assumed to be repaid after one year. Presumably this would
occur either because loan is repaid, collateral has been sold to satisfy the
loan or because general reserves are applied to it. The value of non-accruing
loans not covered by specific reserves was discounted for one year at the going
rate for similar new loans.
Deposits
The estimated fair values of demand deposits and savings accounts,
which are the deposits with no defined maturities, equal the amount payable on
demand at the reporting date. For deposits with stated maturities, but that
reprice at least quarterly, the fair values are also estimated to be the amount
payable at the reporting date.
The fair values of fixed rate deposits with stated maturities, are
based on the present value of the future cash flows expected to be paid on
deposits. The cash flows are based on contractual maturities; no early
repayments are assumed. Discount rates are based on the LIBOR yield curve. The
estimated fair values of total deposits exclude the fair value of core deposits
intangible, which represent the value of the customer relationship measured by
the values of demand deposits and savings deposits that bear a low or zero rate
of interest and do not fluctuate in response to changes in interest rates.
68
All swaps currently held by the Corporation form part of structured
broker CD's. In these instruments a fixed rate CD is matched with a swap of the
same rate and maturity, thereby converting the fixed rate broker CD to a
floating rate instrument which reprices quarterly based on a fixed differential
to three month LIBOR. For purposes of fair value analysis, these structured
broker CD's are therefore valued at book.
Federal funds, securities sold under agreements to repurchase and other
short-term borrowings
Federal funds purchased, repurchase agreements and other short-term
borrowings are mostly borrowed funds, which reprice at least quarterly, and
their outstanding balances are estimated to be their fair values. Where longer
commitments are involved, fair values are estimated in the same way as fixed
terms deposits.
Advances from FHLB
The fair value of advances approximates their book value due to its
short time to maturity.
Notes payable and subordinated notes
The fair value of notes payable and subordinated notes with fixed
maturities was determined using discounted cash flow analysis over the full term
of the borrowings. The cash flows assumed no early repayment of the borrowings.
Discount rates were based on the LIBOR yield curve. Variable rate debt
securities reprice at intervals of three months or less, therefore, their
outstanding balances are estimated to be their fair values.
Note 31 - Supplemental Cash Flow Information
Supplemental cash flow information follows:
Year ended December 31,
--------------------------------------------------
2000 1999 1998
-------------- ---------------- ------------
(In thousands)
Cash paid for:
Interest $260,937 $173,273 $153,645
Income tax 30,477 6,271 1,494
Non cash investing and financing activities:
Additions to other real estate owned 3,121 639 2,975
Note 32 - Financial Instruments With Off-Balance Sheet Risk, Commitments to
Extend Credit and Standby Letters of Credit
The following table presents a detail of commitments to extend credit and standby letters of credit:
December 31,
--------------------------
2000 1999
---- ----
Financial instruments whose contract (In thousands) amounts represent credit
risk:
Commitments to extend credit:
To originate loans $281,030 $465,902
Unused credit card lines 267,104 253,463
Unused personal lines of credit 14,467 10,362
Commercial lines of credit 331,785 244,135
Commercial letters of credit 12,387 12,345
Standby letters of credit 22,914 13,754
69
The Corporation's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument on commitments to
extend credit and standby letters of credit is represented by the contractual
amount of those instruments. Management uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
These commitments generally expire within one year. Since certain commitments
are expected to expire without being drawn upon, the total commitment amount
does not necessarily represent future cash requirements. In the case of credit
cards and personal lines of credit, the Corporation can at any time and without
cause, cancel the unused credit facility. The amount of collateral, obtained if
deemed necessary by the Corporation upon extension of credit, is based on
Management's credit evaluation of the borrower. Rates charged on the loans that
are finally disbursed is the rate being offered at the time the loans are
closed, therefore, no fee is charged on these commitments. The fee is the amount
which is used as the estimate of the fair value of commitments.
In general, commercial and standby letters of credit are issued to
facilitate foreign and domestic trade transactions. Normally, commercial and
standby letters of credit are short-term commitments used to finance commercial
contracts for the shipment of goods. The collateral for these letters of credit
include cash or available commercial lines of credit. The fair value of
commercial and standby letters of credit is based on the fees currently charged
for such agreements, which at December 31, 2000 is not significant.
Interest rate risk management
The operations of the Corporation are subject to interest rate
fluctuations to the extent that interest-earning assets and interest-bearing
liabilities mature or reprice at different times or in different amounts. As
part of the interest rate risk management, the Corporation has entered into a
series of interest rate swap agreements. Under the interest rate swaps, the
Corporation agrees with other parties to exchange, at specified intervals, the
difference between fixed-rate and floating-rate interest amounts calculated by
reference to an agreed notional principal amount. Net interest settlements on
interest rate swaps are recorded as an adjustment to interest expense on deposit
accounts.
The following table indicates the types of swaps used:
Notional amount
---------------
(In thousands)
Pay-fixed swaps:
Balance at December 31, 1998 and 1999 $ 50,000
Expired contracts 50,000
-----------
Balance at December 31, 2000 $ 0
===============
Receive-fixed swaps:
Balance at December 31, 1998 $ 40,000
Expired contracts 40,000
New contracts 185,000
-----------
Balance at December 31, 1999 185,000
Expired contracts 25,000
New contracts 991,000
------------
Balance at December 31, 2000 $1,151,000
==========
At December 31, 2000, there are no pay-fixed swaps outstanding agreements.
Pay-fixed swaps at December 31, 1999 had a fixed weighted average rate payment
of 6.48% and a
70
floating weighted average rate receiving of 6.07%. Receive-fixed swaps at
December 31, 2000, have a floating weighted average rate payment of 6.64% (1999
- - 6.09%) and a fixed weighted average rate receiving of 7.54% (1999 - 7.05%).
Floating rates are based on a 90% to 100% of the average of the last three
months LIBOR rate.
For swap transactions, the amounts potentially subject to credit loss
are the net streams of payments under the agreements and not the notional
principal amounts used to express the volume of the swaps. At December 31, 2000,
the Corporation had total net receivable of $5,527,697 (1999 - $1,286,445)
related to the swap transactions. The Corporation controls the credit risk of
its interest rate swap agreements through approvals, limits, and monitoring
procedures. The Corporation does not anticipate non-performance by the
counterparties. As part of the swap transactions, the Corporation is required to
pledge collateral in the form of deposits in banks or securities. The book value
and aggregate market value of securities pledged as collateral for interest rate
swaps at December 31, 2000 was approximately $15.8 million and $15.9 million,
respectively (1999 - $6.6 million and $6.7 million, respectively). The period to
maturity of the swaps at December 31, 2000 ranged from one year through fifteen
years (1999 - from five months through fifteen years).
At December 31, 2000, the estimated fair value to liquidate the
Corporation's interest rate swaps was approximately $49,621,508 (1999 -
$192,000).
The adoption of SFAS No. 133, effective January 1, 2001 as discussed in
Note 2, will result in a grossing up of the statement of financial condition to
reflect the swap and the certificates of deposit at fair value. Since the swaps
are use to convert the cost of the certificates of deposit from fixed to
variable, with a hedge relationship, which is estimated to be 100 percent
effective, there will be no impact on the statement of income nor on
comprehensive income, considering that the gain or loss on the swap agreements
will completely offset the loss or gain on the certificates of deposit. On
January 1, 2001, a swap asset of $49.6 million will be recognized with a
corresponding increase in certificates of deposit by the same amount.
Interest rate protection agreements (Caps)
The Corporation also issues interest rate protection agreements (Caps)
to limit its exposure to rising interest rates on its deposits. Under these
agreements, the Corporation pays an up front premium or fee for the right to
receive cash flow payments in excess of the predetermined cap rate; thus,
effectively capping its interest rate cost for the duration of the agreement.
The following table indicates the agreements outstanding at December 31, 2000
(dollars in thousands):
Cap agreements notional amount Cap Rate Current 90 day LIBOR Maturity
- ------------------------------ -------- -------------------- ------------------
$100,000 7.50% 6.40% August 17, 2002
100,000 7.50% 6.40% August 17, 2002
200,000 7.25% 6.40% August 17, 2002
200,000 7.00% 6.40% August 17, 2002
Until December 31, 2000 the Corporation followed the provisions of SFAS No.
80 to account for its caps. The premium is amortized as an adjustment to
interest expense on borrowings. Under SFAS No. 80, the amortization of premium
in 2000, 1999, and 1998 amounted to approximately $352,000, $252,000, and
$147,000, respectively.
In accordance with SFAS No. 133, Management designated these caps as
cash-flow hedges. For a qualifying cash flow hedge, an interest rate cap will be
carried on the statement of financial condition at fair value with the time
value change reflected through the current statement of income. Any intrinsic
value will be reflected through comprehensive income
71
and will be reflected in future statements of income when payments are
received from the counter party. On January 1, 2001 a loss of approximately $1.3
million will be recognized in the statement of income as a cumulative effect of
the adoption of SFAS No. 133, as a result of unamortized premium paid for caps
of $1.5 million less an estimated fair market value of $200,000.
Note 33 - Segment Information
The Corporation has three reportable segments: Retail business,
Treasury and Investments, and Commercial Corporate business. Management
determined the reportable segments based on the internal reporting used to
evaluate performance and to assess where to allocate resources. Other factors
such as the Corporation's organizational chart, nature of the products,
distribution channels and the economic characteristics of the products were also
considered in the determination of the reportable segments.
The Retail business segment is composed of the Corporation's branches
and loan centers together with the retail products of deposits and consumer
loans. Certain small commercial loans originated by the branches are included in
the Retail business. Consumer loans include loans such as personal, residential
real estate, auto, credit card and small loans. Finance leases are also included
in Retail business. The Commercial Corporate segment is composed of commercial
loans and corporate services such as letters of credit and cash management. The
Treasury and Investment segment is responsible for the Corporation investment
portfolio and treasury functions.
The accounting policies of the segments are the same as those
described in Note 2 - "Summary of Significant Accounting Policies."
The Corporation evaluates the performance of the segments based on net
interest income after the estimated provision for loan losses. The segments are
also evaluated based on the average volume of its earning assets less the
allowance for loan losses.
The only intersegment transaction is the net transfer of funds between
the segments and the Treasury and Investment segment. The Treasury and
Investment segment sells funds to the Retail and Commercial Corporate segments
to finance their lending activities and purchases funds gathered by those
segments. The interest rates charged or credited by Investment and Treasury is
based on market rates.
72
The following table presents information about the reportable
segments:
Treasury and Commercial
Retail Investments Corporate Total
--------------------------------------------------------------
(In thousands)
For the year ended December 31, 2000:
Interest income $222,950 $134,328 $106,110 $463,388
Net (charge) credit for transfer of funds (12,582) 85,013 (72,431)
Interest expense (74,093) (198,522) (272,615)
Net interest income 136,275 20,819 33,679 190,773
Provision for loan losses (28,084) (17,635) (45,719)
Segment income 108,191 20,819 16,044 145,054
Average earning assets $1,893,699 $1,985,580 $1,110,608 $4,989,887
For the year ended December 31, 1999:
Interest income $186,224 $108,332 $74,508 $369,064
Net (charge) credit for transfer of funds (4,018) 48,737 (44,719)
Interest expense (58,665) (124,665) (183,330)
Net interest income 123,541 32,404 29,789 185,734
Provision for loan losses (46,802) (1,159) (47,961)
Segment income 76,739 32,404 28,630 137,773
Average earning assets $1,462,311 $1,726,719 $815,569 $4,004,599
For the year ended December 31, 1998:
Interest income $ 178,251 $ 89,785 $ 52,499 $ 320,535
Net (charge) credit for transfer of funds 7,683 20,698 (28,381)
Interest expense (60,003) (95,127) (155,130)
Net interest income 125,931 15,356 24,118 165,405
Provision for loan losses (74,837) (1,163) (76,000)
Segment income 51,094 15,356 22,955 89,405
Average earning assets $1,364,803 $1,418,791 $561,612 $3,345,206
73
The following table presents a reconciliation of the reportable segment financial information to the consolidated totals:
Year ended December 31,
------------------------------------------
2000 1999 1998
------------------------------------------
(In thousands)
Interest income:
Total interest income for segments $463,388 $369,064 $320,535
Interest income credited to expense accounts _______ _______ 763
------------
Total consolidated interest income $463,388 $369,064 $321,298
======== ======== ========
Net income:
Total income for segments $145,054 $137,773 $89,405
Other income 50,032 32,862 58,240
Operating expenses (113,050) (101,272) (91,035)
Income taxes (14,761) (7,288) (4,798)
---------- ---------- --------
Total consolidated net income $ 67,275 $ 62,075 $51,812
========= ======== =======
Average assets:
Total average earning assets for segments $4,989,887 $4,004,599 $3,345,206
Average non earning assets 249,489 168,182 148,331
------------ ----------- ------------
Total consolidated average assets $5,239,376 $4,172,781 $3,493,537
========== ========== ==========
Note 34 - Litigation
The Corporation is a defendant in a number of legal proceedings
arising in the normal course of business. Management believes, based on the
opinion of legal counsel, that the final disposition of these matters will not
have a material adverse effect on the Corporation's financial position or
results of operations.
Note 35 - Selected Quarterly Financial Data (Unaudited)
Financial data showing results of the 2000 and 1999 quarters is
presented below. These results are unaudited. In the opinion of Management, all
adjustments necessary for a fair presentation have been included:
2000
------------------------------------------------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
------------ -------------- --------------- --------------
(In thousands, except for per share results)
Interest income $105,181 $112,447 $120,384 $125,375
Net interest income 48,320 48,337 47,038 47,078
Provision for loan losses 12,020 11,158 11,566 10,975
Net income 16,351 16,477 16,699 17,748
Earnings per common share-basic $0.53 $0.55 $0.56 $0.57
Earnings per common share-diluted $0.53 $0.55 $0.56 $0.57
1999
------------------------------------------------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
------------ -------------- --------------- --------------
(In thousands, except for per share results)
Interest income $87,143 $87,256 $94,475 $100,190
Net interest income 44,597 46,341 46,789 48,006
Provision for loan losses 13,800 12,950 11,017 10,195
Net income 14,141 15,394 16,208 16,332
Earnings per common share-basic $0.48 $0.49 $0.50 $0.52
Earnings per common share-diluted $0.48 $0.49 $0.50 $0.51
74
Note 36 - First BanCorp (Holding Company Only) Financial Information
The following condensed financial information presents the financial
position of the Holding Company only at December 31, 2000 and 1999 and the
results of its operations and its cash flows for the years ended on December 31,
2000 and 1999 and the period from October 1st, 1998 through December 31, 1998.
Statements of Financial Condition
December 31, 2000 December 31, 1999
----------------- -----------------
(In thousands)
Assets:
Cash and due from depository institutions $ 17,026 $ 13,160
--------- --------
Money market instruments 300 1,778
------------ ----------
Investment securities available for sale, at market value:
United States Government obligations 18,951 24,890
Other investments 27,347 21,292
--------- --------
Total investment securities available for sale 46,298 46,182
--------- --------
Investment in FirstBank Puerto Rico, at equity 368,338 235,637
Other assets 2,856 348
---------- ----------
Total assets $434,818 $297,105
======== ========
Liabilities and Stockholders' Equity:
Other borrowings $ 865
Accounts payable and other liabilities $ 357 1,338
---------- ---------
Total liabilities 357 2,203
----------- ---------
Stockholders' equity 434,461 294,902
-------- -------
Contingencies and commitments _______ _______
Total liabilities and stockholders' equity $434,818 $297,105
======== ========
Statements of Income
Period from
Year ended December 31, October 1, 1998 through
2000 1999 December 31, 1998
---- ---- -----------------
(In thousands)
Income:
Interest income on investment securities $ 776 $ 1,537
Interest income on other investments 289 1,141
Dividend from subsidiary 24,000 10,000 $10,360
Other income 8,251 61 ______
---------- ------------
33,316 12,739 10,360
--------- --------- -------
Expenses:
Interest expense 25
Other operating expenses 487 243 15
---------- ---------- --------
512 243 15
---------- ---------- --------
Income before income taxes and equity in
undistributed earnings of subsidiary 32,804 12,496 10,345
Income taxes 209 374
Equity in undistributed earnings of subsidiary 34,681 49,953 3,342
--------- -------- ---------
Net income 67,276 62,075 13,687
Other comprehensive income (loss), net of tax 49,050 (77,399) 8,750
--------- --------- --------
Comprehensive income (loss) $116,326 $(15,324) $22,437
======== ======== =======
The principal source of income for the Holding Company consists of the
earnings of FirstBank.
75
Statement of Cash Flows
Period from
Year ended December 31, October 1, 1998 through
2000 1999 December 31, 1998
---- ---- -----------------
(In thousands)
Cash flows from operating activities:
Net income $67,276 $62,075 $13,686
------- ------- -------
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed earnings of subsidiary (34,403) (49,953) (3,341)
Net gain on sale of investments securities (7,134)
Net decrease (increase) in other assets 120 (130) (219)
Net (decrease) increase in other liabilities (527) 883 ______
---------- ---------
Total adjustments (41,944) (49,200) (3,560)
-------- ------- -------
Net cash provided by operating activities 25,332 12,875 10,126
-------- -------- ------
Cash flows from investing activities:
Capital contribution to subsidiary (40,000)
Purchases of securities available for sale (5,311) (44,361)
----------- --------
Net cash used in investing activities (45,311) (44,361)
---------- ---------
Cash flows from financing activities:
Net (decrease) increase in other borrowings (865) 865
Proceeds from issuance on preferred stock 72,438 86,850
Exercise of stock options 94 176
Cash dividends paid (19,212) (14,658) (2,213)
Treasury stock acquired (30,087) (32,511) (2,211)
--------- ------- -------
Net cash provided by financing activities 22,368 40,722 (4,424)
-------- -------- -------
Net increase in cash 2,389 9,236 5,702
Cash and cash equivalents at the beginning of period 14,937 5,702 _____
-------- --------
Cash and cash equivalents at the end of period $17,326 $14,938 $5,702
======= ======= ======
Cash and cash equivalents include:
Cash and due from banks $17,026 $13,160 $5,702
Money market instruments 300 1,778 _____
---------- ---------
$17,326 $14,938 $5,702
======= ======= ======
76
Stockholders' Information
Independent Certified Public Accountants
PricewaterhouseCoopers LLP
Annual Meeting:
The annual meeting of stockholders will be held on April 26, 2001, at 2:00 p.m.,
at the main office of the Corporation located at 1519 Ponce de Leon Avenue,
Santurce, Puerto Rico.
Telephone (787) 729-8200
Internet http://www.firstbankpr.com
Additional Information and Form 10-K:
Additional financial information about First BanCorp may be requested to Mrs.
Laura Villarino, Senior Vice President and Controller, PO Box 9146, Santurce,
Puerto Rico 00908. Copies of First BanCorp's Form 10-K filed with the SEC will
be provided to stockholders upon written request to Mrs. Laura Villarino at the
same mailing address.
Transfer Agent and Registrar:
The Bank of New York, 101 Barclay Street 12W, New York, NY 10286
General Counsels:
Fiddler, Gonzalez & Rodriguez, LLP
Latimer, Biaggi, Rachid & Godreau
Melendez Perez, Moran & Santiago
77