Constant evolution and solid performance
Annual Report 1998
[LOGO] 1First BanCorp
1
What started out as a small community bank in the heart of Santurce, has become
one of the leading financial institutions in the Island and the second largest
locally owned financial services company in Puerto Rico.
In 1948 First Federal Savings & Loan Association began operations in Puerto
Rico. From its early days, the institution was committed to Puerto Rico's growth
and quality of life. In 1987, the institution became a savings bank, and in
1994, a commercial bank under the laws of Puerto Rico. In 1998, it was
reorganized as a bank holding company under the name of First BanCorp.
The first 50 years have been marked by constant innovation and the creation of
top quality services with one primary goal in mind: promoting the development in
Puerto Rico.
New technology, new branches and new products are part of First BanCorp's plan
to provide outstanding service to our customers while benefiting employees and
stockholders.
While the future brings on new challenges and opportunities, we reafirm our
commitment to quality services and products to our customers. A community that
has seen us grow and has been part of this growth. Because without them, there
would be no future, and success would not have been possible. Their loyalty is
our motivation for the next 50 years to come.
[LOGO] 1First BanCorp 50 Anniversary
2
Financial Highlights 3
Business Profile 7
President's Letter 9
1998: The Year in Review 12
The Puerto Rico Economy 16
Board of Directors 17
Officers 18
Financial Review 21
Stockholders' Information 72
3
F i n a n c i a l H i g h l i g h t s
- - ------------------------------------------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------------------------------------------
In Thousands (Except for per share results) 1998 1997 Percentage
Increase
- - ------------------------------------------------------------------------------------------------------------------------------------
(Decrease)
- - ------------------------------------------------------------------------------------------------------------------------------------
Operating Results:
Net interest income $166,168 $154,731 7.39
Provision for loan losses 76,000 55,676 36.50
Other income 58,240 39,866 46.09
Other operating expenses 91,798 83,268 10.24
Income tax provision 4,798 8,125 (40.95)
Net income 51,812 47,528 9.01
Weighted average shares-basic* 29,586 30,036 (1.50)
Weighted average shares-diluted* 29,858 30,204 (1.15)
Per common share:
Net income - basic 1.75 1.58 10.76
Net income - diluted 1.74 1.58 10.13
At Year End:
Assets $4,017,352 $3,327,436 20.73
Loans 2,120,054 1,959,301 8.20
Allowance for loan losses 67,854 57,712 17.57
Investments 1,800,489 1,276,900 41.00
Deposits 1,775,045 1,594,635 11.31
Borrowings 1,930,488 1,461,582 32.08
Capital 270,368 236,379 14.38
* Retroactively adjusted for the 100% stock split distributed in 1998.
4
[GRAPHS]
5
Performance of First BanCorp's Common Stock
[GRAPH]
6
(P.R. GEOGRAPHIC MAP)
Branches - 40 Offices
Aguada 1
San Sebastian 1
Arecibo 1
Manati 1
Vega Baja 1
Dorado 1
Bayamon 4
Guaynabo 1
San Juan 10
Carolina 3
Humacao 1
Caguas 4
Aguas Buenas 1
Cidra 1
Guayama 1
Cayey 1
Barranquitas 1
Ponce 1
Yauco 1
Cabo Rojo 1
Mayaguez 1
Saint Thomas 1
Saint Croix 1
Money Express - 26 Offices
Aguada 1
Aguadilla 1
Isabela 1
San Sebastian 1
Arecibo 1
Manati 1
Vega Baja 1
Toa Baja 1
Bayamon 3
San Juan 3
Carolina 1
Rio Grande 1
Fajardo 1
Humacao 1
Yabucoa 1
Caguas 1
Guayama 1
Cayey 1
Ponce 1
Utuado 1
Yauco 1
Mayaguez 1
First Leasing & Rentals - 6 Offices
Isabela 1
Bayamon 1
San Juan 3
Caguas 1
Auto Loan Center - 4 Offices
Bayamon 1
San Juan 1
Caguas 1
Mayaguez 1
Loan Center - 9 Offices
Aguadilla 1
Moca 1
Barceloneta 1
Fajardo 1
Las Piedras 1
Juana Diaz 1
Utuado 1
San German 1
Mayaguez 1
Total 85 Offices
7
Business Profile
First BanCorp ("the Corporation"), incorporated in Puerto Rico, is the holding
company for FirstBank ("the Bank"), the second largest locally owned Commercial
Bank in Puerto Rico. First BanCorp had total assets of $4.017 billion as of
December 31, 1998. First BanCorp operates primarily in the Puerto Rico banking
market, offering a wide selection of financial services to a growing number of
consumer and commercial customers. Commercial loans, consumer loans, mortgage
loans and investment securities are the most important areas of its business.
The Corporation has a $747 million portfolio of commercial loans, commercial
mortgages and other related commercial products. Its commercial clients include
a wide range of small and medium sized businesses and professional practices.
First BanCorp also has a $1.0 billion consumer loan portfolio, which is
concentrated in auto loans, personal loans and credit cards. Its $1.80 billion
investment portfolio consists mostly of U.S. government securities and mortgage
backed securities. In addition, First BanCorp has $372 million in residential
mortgage and construction loans. Fifteen years ago these mortgage loans were the
Corporation's principal line of business, but Management has moved to diversify
First BanCorp's operations in recent years. Approximately 1,750 full time
professionals and a sophisticated computer system support the business
activities of the Corporation.
First chartered in 1948, First BanCorp was the first savings bank established in
Puerto Rico, under the name of "First Federal Savings Bank". It has been a
stockholder owned institution since 1987. In October, 1994 it became a Puerto
Rico chartered commercial bank and assumed the name of "FirstBank". Effective
October 1, 1998 the Bank reorganized, making FirstBank a subsidiary of the
holding company First BanCorp.
First BanCorp, which is a well-capitalized institution under federal standards,
operates 40 full service branches including two offices in the U.S. Virgin
Islands. The Corporation also has 13 loan centers in Puerto Rico. A second tier
subsidiary of First BanCorp, Money Express, operates 26 small loan offices
throughout Puerto Rico. First BanCorp also includes a second tier subsidiary
known as First Leasing, which rents and leases motor vehicles from its six
offices in Puerto Rico.
First BanCorp has distinguished itself by providing innovative marketing
strategies and novel products to attract clients. Besides its main branches and
specialized lending offices, the Corporation has offered a
8
telephone information service called "Telebanco" since 1983. This was the
first telebanking service offered in Puerto Rico. First BanCorp clients have
access to an extensive ATM network with access to the U.S. Virgin Islands, the
U.S. mainland and all over the world. First BanCorp was the first institution in
Puerto Rico to accept loan applications by FAX. First BanCorp was also the first
banking institution in Puerto Rico with a presence on the Internet. Clients can
now submit applications for some loans by way of the Corporation's web site. The
Corporation was also the first in Puerto Rico to open on weekends and the first
to offer in-store branches to its clients. First BanCorp was the first financial
institution in the world to offer an indexed CD whose interest is based on the
average appreciation of the Dow Jones Industrial Average and whose principal is
insured by the Federal Deposit Insurance Corporation ("FDIC").
First BanCorp and its subsidiaries are subject to supervision, examination and
regulation by the Federal Reserve Board, the Office of the Commissioner of
Financial Institutions of Puerto Rico and the FDIC.
First BanCorp is committed to continue providing the most efficient and cost
effective banking services possible in selected product niches. Management's
long term goal is to transform First BanCorp into a conservatively managed,
diversified financial institution that will deliver superior financial
performance in the years to come.
9
President's Letter
[PHOTO]
Angel Alvarez-Perez
Chairman, President
and Chief Financial Officer
To our stockholders:
On behalf of the Board of Directors and staff of First BanCorp I am pleased to
submit our annual report for 1998, our fiftieth anniversary year. First BanCorp
earned $51.8 million or $1.74 per share in 1998. This represents a 10.1 percent
increase in earnings per share. The Corporation earned $47.5 million or $1.58
per share in 1997. During 1998 we also surpassed $4 billion in assets and $2
billion in loans. These achievements continue a record of consistent growth that
goes back to 1991.
Our institution converted to a bank holding company, First BanCorp, during 1998.
This reorganization will increase our agility in a changing regulatory
environment and give us the flexibility to take advantage of new business
opportunities.
We achieved these outstanding results in a difficult environment, with stronger
local competition due to continuing mergers in the local market. Bankruptcies
have also continued their uptrend on the Island. Although the growth of
bankruptcies has moderated in recent months, it has affected the entire Puerto
Rico financial services industry. As outgoing President of the Puerto Rico
Bankers' Association, I have had a unique opportunity to observe the broad
implications of this trend. Under my leadership the industry developed an
advertising campaign to educate consumers and steer them toward alternative ways
of dealing with financial problems.
Strengthening Management and Operations
Management has been working intensively to strengthen First BanCorp here in
Puerto Rico. We are placing greater emphasis on commercial lending, while adding
experienced managers and strengthening our technological base.
To begin with, we have enhanced our management team by bringing in senior
executives with extensive experience in consumer, mortgage and commercial
lending. We have also re-initiated active lending programs in construction
lending and auto leasing, led by talented and experienced executives whom we
have recently recruited. Over the next few years we expect
10
our strengthened management team to improve efficiency and contribute new
ideas that will help us to increase our market share.
Second, we have made important additions to our branch network, opening four new
offices. Two of these new branches are modern, full service offices in local
shopping centers. The other two are in-store branches in principal towns away
from the San Juan metropolitan area. This makes a total of forty branches,
including two in the U.S. Virgin Islands.
Third, First BanCorp introduced new and innovative products during 1998. We were
the first financial institution in the world to offer an indexed CD whose
interest is based on the average appreciation of the Dow Jones Industrial
Average and whose principal is FDIC insured. This account allows depositors to
earn an equity market return on their bank deposits. We also introduced our
"First Class" auto loan program, which provides personalized service and
accelerated loan processing for participating dealers and their clients.
Finally, the Corporation inaugurated a new mortgage product that allows selected
clients to finance 105% of the assessed value of their property. Although
similar offerings are available on the U.S. mainland, no other bank in Puerto
Rico offers a similar product.
Fourth, we have changed our public relations and advertising strategy,
undertaking a focused marketing campaign of high quality. The Corporation has
also adopted a new, streamlined logo to symbolize the new First BanCorp.
Fifth, Management has continued to dedicate many hours of time to maintaining
strict cost controls. While First BanCorp has been outstanding in maintaining
low costs, as shown by our efficiency ratio of 46.5% in 1998, Management has
been examining ways to carry cost control even further. We have been
systematically analyzing all important functions of the Corporation, with the
objective of becoming more efficient and improving customer service.
Sixth, we have continued to invest in new technology, as we have been doing for
the past several years. During 1998 we installed a more powerful mainframe
computer, significantly improved our web site and finished converting all major
mainframe applications to more modern software. Our management recognizes the
importance of the technological revolution that has been changing the face of
the financial services industry. We will continue to take full advantage of
these new technologies.
11
Seventh, the Information Technology area made substantial progress on our long
range plan to eliminate the year 2000 problem. Since Management began dealing
with this issue in 1996, we have dedicated countless staff resources to
resolving it. The Corporation has upgraded all critical systems to new platforms
that are year 2000 compliant, and is testing all systems in house. We will be
fully tested by March 1999. The total expenditure for year 2000 compliance will
range between $1.5 million and $2.0 million, excluding the cost of converting to
new systems which are year 2000.
Enhancing Shareholder Value
Our past efforts have paid off in strong earnings growth and stock appreciation,
which have benefited our shareholders. The total return to First BanCorp
shareholders in 1998 was 79.4%, including dividends of 30 cents per share after
adjustment for a two for one stock split. Investors who held First BanCorp stock
over the seven year period from year-end 1991 to year-end 1998 received a total
return of 3,398 percent, for an average annual growth rate of 66.1 percent on
their investment.
Puerto Rico government policy has contributed to the performance of our stock.
To stimulate the formation of a local capital market, the Puerto Rico government
has allowed local IRA holders to invest limited amounts in stocks of local
companies since 1997. This change in policy has broadened the market for stocks
of all Puerto Rican companies, including First BanCorp.
The Corporation began a stock repurchase program three years ago. During 1998 we
repurchased 317,600 shares. This brought total activity over the three years of
our share repurchase program to 1,663,450 shares, adjusted for splits,
representing a total investment of $21.8 million. In addition, officers and
directors of First BanCorp owned approximately 19 percent of its shares on
December 31, 1998. This shows their confidence in First BanCorp's future and
their commitment to keep its fundamentals sound.
As First BanCorp embarks on another half century of growth and service to the
Puerto Rico community, we are confident that our Corporation is stronger and
better positioned than ever. We have a truly outstanding group of employees,
officers and directors. I am confident that we can meet the challenges ahead,
and that First BanCorp will continue to provide outstanding service to its
clients, while benefiting employees and stockholders in the years to come.
Angel Alvarez-Perez
Chairman
President
Chief Executive Officer
12
1998: The Year in Review
During 1998 First BanCorp exceeded $4 billion in total assets and $2 billion in
total loans for the first time. Loans grew by 8.2%, from $1.959 billion to
$2.120 billion. At the same time, the investment portfolio was expanding even
more rapidly from $1.277 billion to $1.800 billion. Deposits grew 11.3% from
$1.595 billion to $1.775 billion.
First BanCorp earned $51.8 million or $1.74 per share in 1998, as compared to
$47.5 million or $1.58 per share in 1997. Net income increased by 9%, or 10.1%
on a per share basis. Net interest income, the main source of earnings, grew
7.4% from $154.7 million last year to $166.2 million in 1998. Other income also
increased by $18.3 million, from $39.9 million in 1997 to $58.2 million in 1998.
This growth was mostly due to increases in trading income and gains on the sale
of investments. Due to strong earnings, shareholder equity rose by $34 million,
from $236.4 million at the end of 1997 to $270.4 million at December 31, 1998.
Management has achieved these gains in a highly competitive market in which
rising bankruptcies have been notable. This trend has affected the entire
financial services industry in Puerto Rico. In response, Management has
maintained tight underwriting standards while improving loan tracking and
collections systems. Also, the rate of increase in bankruptcies has declined in
the last few months of 1998.
Analysis of Key Financial Ratios
High spreads in the loan portfolio combined with strict cost controls have been
important features of First BanCorp's strategy in recent years. Last year these
factors, combined with a strong increase in trading and investment income,
helped the Corporation combine above-average returns on assets and capital with
a healthy growth in earnings. At the same time, the Corporation was able to show
a strong increase in reserves although loan losses grew during the year.
The results of these high spreads and cost controls are evident in the financial
ratios. The return on average assets was 1.48% in 1998, compared with the
annualized average of 1.15% for all FDIC insured financial institutions through
September 30. Similarly, First BanCorp's return on equity was 20.54% as compared
with a similar FDIC average of 13.31%. In 1998 the Corporation had a net
interest margin of 5.27% on a tax equivalent basis. At the same time Management
held the efficiency ratio at 46.5% in 1998 in spite of investments in new
information technology and new branches. The Corporation remains committed to
tight cost controls in the future.
Ample spreads allowed Management to maintain profitability even while the
provision for loan losses was expanding by $20.3 million from $55.7 million in
1997 to $76.0
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million in 1998. This, in turn, allowed to increase loan loss reserves by
$10.1 million, from $57.7 million at the end of 1997 to $67.8 million at
December 31, 1998. Although non-performing loans rose from 3.29% to 3.40% of
total loans during 1998 the increase in reserves more than compensated for the
rise in delinquencies. The reserve coverage ratio, which consists of total loan
loss reserves as a percentage of non-performing loans, rose from 89.5 percent at
the end of 1997 to 94.2 percent at December 31, 1998. Management's target is to
raise the reserve coverage ratio to 100%. The tightening in underwriting
standards that has been in effect for the past two years should bear fruit in
the future as loan losses return to normal levels.
Growth in Major Lending Areas
First BanCorp has achieved a strong position in several key lending areas in
Puerto Rico. The Corporation's loan portfolio has been expanding and
diversifying as Puerto Rico has grown and become more sophisticated. Here is an
outline of major developments in the lending area during 1998.
Commercial Loans
In recent years, a significant portion of the growth of this portfolio had come
from commercial mortgages. However, growth in that area was relatively limited
in 1998, as the portfolio grew by $19.6 million, from $306.7 million to $326.3
million. First BanCorp has made mortgage loans for businesses as diverse as
office buildings, restaurants with national franchises, professional offices and
shopping centers.
A major goal of the Corporation in 1998 was to expand commercial lending in
other areas besides mortgages. Management achieved this goal, expanding
commercial lending by $142.7 million from $278.1 million to $420.8 million. The
Corporation recruited experienced personnel to support this effort.
First BanCorp directs part of its commercial lending to small and medium sized
businesses, many of which are locally owned and managed. The Corporation is a
certified U.S. Small Business Administration ("SBA") lender, allowing rapid
processing of loans under this Federal program. First BanCorp also offers
commercial loans guaranteed by the local Economic Development Bank.
14
Commercial lending executives are flexible in meeting the individualized needs
of each client, and they try to develop a mutually productive relationship. This
approach requires the continuous development of new methods and services as the
sophistication and diversity of Puerto Rico's business sector grows.
Residential Mortgage Loans
First BanCorp was active in the residential mortgage market during 1998.
Management introduced a new mortgage product that allows clients to finance 105%
of the assessed value of their property. This allows clients to take advantage
of generally rising property values on the Island. No other bank in Puerto Rico
offers this product. Because land is limited in Puerto Rico, property values
have risen steadily during the postwar period.
First BanCorp has also renewed its construction loan department, bringing in a
new executive with considerable experience in this area. Thanks to the financing
of new housing developments in the San Juan metropolitan area, construction
loans grew by $54.6 million from $9.3 million to $63.9 million during 1998. As
these projects are completed the Corporation will have the opportunity to obtain
part of the permanent financing. Management expects to be more active in
construction and mortgage financing than it has in the recent past.
Consumer Loans
The consumer loan portfolio declined by $71.5 million during 1998 as tighter
underwriting standards slowed new originations. Still, Management sees
considerable future potential in this area.
In auto loans First BanCorp introduced a new, personalized program for auto
dealers and their clients. This service, known as "First Class", assigns special
representatives to participating dealers so that they can process loans rapidly
by sending applications electronically to the main office. Clients will be able
to choose among three alternatives: a conventional auto loan, a loan with
reduced payments and a residual, or a lease. A distinctive "First Class" logo
identifies participating dealers.
First BanCorp's credit card portfolio grew by $9.3 million from $116.7 million
at the end of 1997 to $126.0 million as of last December 31. The Corporation
offers special cards with Texaco and the Puerto Rico Telephone Co., as well as a
collateralized card for clients who need to establish a credit record or who
cannot obtain access to credit through other channels. Under the "First Miles"
program, cardholders can obtain free airline travel as they use their credit
cards.
15
First BanCorp also operates Money Express, a small loan subsidiary of FirstBank
with 26 offices throughout Puerto Rico. Management plans to expand the
activities of Money Express during the coming year. First Leasing, another
subsidiary of FirstBank, offers vehicle rental and leasing services.
First BanCorp's growing selection of consumer products reflects the needs and
demands of Puerto Rico's growing middle class. Management hopes to continue
expanding the variety and sophistication of consumer loans in the years to come.
Increasing Shareholder Value
The financial results reported here are part of a continuing trend of earnings
growth that has produced excellent value for shareholders. Return on average
equity was 20.54% in 1998. First BanCorp shareholders received a total return of
79.4% in 1998, and a cumulative increase in shareholder value of 3,398 percent
from year-end 1991 to year-end 1998. Although dividends were increased in 1998,
the dividend payout ratio remained low at 17.12% compared with 15.14% in 1997.
During 1998 the Corporation repurchased 317,600 common shares.
Management is optimistic about the future of First BanCorp. The range of
services it offers, its effective network of offices and branches supplemented
by new sales methods, its dedicated staff and its reputation with clients will
all contribute to future earnings growth. Management will continue its efforts
to improve First BanCorp's excellent performance in 1999 and in the years to
come.
16
The Puerto Rico Economy
The island of Puerto Rico is a U.S. Commonwealth with a population of 3.8
million, located in the Caribbean approximately 1,600 miles southeast of New
York. Puerto Rico has been enjoying solid economic growth over most of the
1990's. Real GNP grew by 3.1% in fiscal 1998. Private economists are forecasting
2% to 3% real growth in the 1999 fiscal year. Management expects recent growth
patterns on the Island to continue, with some slowdown during the coming fiscal
year.
Puerto Rico's economic performance is a natural result of its increasing
integration into the U.S. economy. Puerto Ricans are U.S. citizens and serve in
the United States armed forces, and the Island has several large U.S. military
bases. The Island uses U.S. currency and forms a part of the U.S. financial
system. Federal courts enforce U.S. laws here. Since Puerto Rico falls within
the U.S. for purposes of customs and migration, there is full mobility of funds,
people and goods between Puerto Rico and the U.S. mainland. Puerto Rico banks
are subject to the same Federal laws, regulations and supervision as other
financial institutions in the rest of the U.S. The Federal Deposit Insurance
Corporation insures the deposits of Puerto Rico chartered commercial banks,
including FirstBank, the banking subsidiary of First BanCorp.
Puerto Rico has made a rapid transition from poverty in the immediate postwar
period to prosperity today. Throughout this process the Island has attracted
industry using tax exemption. Many multinational corporations have substantial
operations here. During 1996 Congress repealed Section 936 of the Internal
Revenue Code, which provided Federal tax exemption for companies operating in
Puerto Rico. However, Congress also provided a ten year grandfather clause for
companies already operating here. Because Puerto Rico has a fiscal system
independent from that of the U.S., it can fashion local tax incentives to
attract or retain industry. A new law broadening and strengthening local tax
incentives went into effect on January 1, 1998.
Puerto Rico is becoming somewhat less dependent on manufacturing than it was in
the early postwar period. Manufacturing attracted by tax exemption is still an
important part of the island's economy. Nevertheless, Puerto Rico has been
diversifying its economic base to include tourism, business services and
transportation. As part of these changes the Island has been receiving U.S.
private investment in diverse areas such as hotels, financial services and large
retail stores. During the past year a slowdown in manufacturing growth was
balanced by strong construction activity, both private and public. Management is
very optimistic about Puerto Rico's economic future.
17
Board of Directors
[PHOTO]
Angel Alvarez-Perez, Esq.
Chairman of First BanCorp
German Malaret, M.D.
Chairman of FirstBank
[PHOTO]
Annie Astor de Carbonell, C.P.A.
Angel L. Umpierre, C.P.A.
Jose Texidor
[PHOTO]
Antonio Pavia Villamil, M.D.
Francisco D. Fernandez, Eng.
Rafael Bouet, Eng.
[PHOTO]
Armando Lopez Ortiz, Eng.
Hector M. Nevares, Esq.
Jose Julian Alvarez
18
FIRST BANCORP OFFICERS
[PHOTO]
Standing from left to right: Aida Garcia, Francisco Cortes, Aurelio
Aleman, Randolfo Rivera, Fernando L. Batlle, Luis Cabrera, Josianne M. Rossello
Seated from left to right: Luis Beauchamp, Angel Alvarez-Perez, Annie Astor de
Carbonell
PRESIDENT
Angel Alvarez-Perez
President and Chief
Executive Officer
SENIOR EXECUTIVE
VICE PRESIDENTS
Annie Astor de Carbonell
Chief Financial Officer
Luis M. Beauchamp
Chief Lending Officer
EXECUTIVE
VICE PRESIDENTS
Aurelio Aleman
Retail Banking
Fernando L. Batlle
Branch Banking
Mortgages &
Money Express
Francisco Cortes
Administrative Services
& Information Systems
Rodolfo Rivera
Corporate Services
SENIOR VICE
PRESIDENT
Nicolas Badillo
Data Center
Luis Cabrera
Treasury & Investments
Eva Candelario
Corporate Business
Development
Antonio Escriba
Secretary of the Board
Aida M. Garcia
Human Resources
Michael Garcia
Consumer Collection
Fernando Iglesias
Special Loans &
Credit Administration
Roger Lay
Internal Auditing
John Ortiz
Remote Banking
Haydee Rivera
Branch Banking
Operations
Julio Rivera
Construction Lending
Jose H. Rodriguez
Branch banking
Administration
Josianne M. Rosello
Marketing & Public
Relations
Demetrio Santiago
Auto Wholesale
Business
Laura Villarino
Controller
19
VICE PRESIDENTS
William Alvarez
Area Business
Jose H. Aponte
Commercial Mortgage
Miguel Babilonia
Consumer Portfolio
Management
Juan E. Barnes
Branch Manager
Ana Colon
Centralized Accounting
Ada Davila
Branch Manager
Elizabeth de la Cruz
Mortgage Operations
Roberto Girald
Construction Lending
David Gonzalez
Corporate Business
Development
Daisy Gonzalez
Operational Accounting
Nelson Gonzalez
Corporate Business Development
Marcelo Lopez
Branch Banking
Administration
District Manager
Juanita Marrero
First Mortgage
Ivan Martinez
Project Manager
Miguel Mejias
System Development
Jose Negron
Floor Plan
Jaime Noble
First Leasing
Luis Orengo
Commercial Loans
Osvaldo Padilla
Corporate Business
Reynaldo Padilla
Auto Finance
Miguel Pimentel
Corporate Business
Development
Carlos Power
Auto Operations
Rolando Quevedo, Esq.
Legal Counsel
Jorge Rendon
Operational Support
Migdalia Rivera
Community Banking
Sandra Rivera
Auto Collection
Belinda Rodriguez
Remote Sales
Jose L. Rodriguez
Special Projects
Year 2000
Luis Rodriguez
Special Projects
Elizabeth Sanchez
Marine Financing
Roberto Sanchez
Marine Financing
Roberto Sanchez
Credit Risk
Carmen Torres
Branch Banking
Administration
District Manager
Raphael Torres
Branch Banking
Administration
District Manager
20
SUBSIDIARIES
FIRST FEDERAL FINANCE CORPORATION
DBA MONEY EXPRESS "LA FINANCIERA"
Angel Alvarez-Perez
Chief Executive Officer
Fernando L. Batlle
President and Chief
Operating Officer
Orlando Velez
Vice President and
Operations Manager
FIRST LEASING AND RENTAL CORPORATION
Angel Alvarez-Perez, Esq.
Chief Executive Officer
Aurelio Aleman
President and Chief
Operating Officer
Jaime Noble
Vice President and
Manager Leasing Operation
William Velez
Vice President and
Manager Daily Rental Operation
21
SELECTED FINANCIAL DATA
Years ended December 31, 1998 1997 1996 1995 1994
(Dollars in thousands except for per share results)
Condensed Income Statements:
Total interest income $321,298 $285,160 $256,523 $208,488 $180,309
Total interest expense 155,130 130,429 113,027 96,838 76,674
Net interest income 166,168 154,731 143,496 111,650 103,635
Provision for loan losses 76,000 55,676 31,582 30,894 17,674
Other income 58,240 39,866 29,614 48,268 18,169
Other operating expenses 91,798 83,268 82,498 65,628 60,760
Unusual item - SAIF assessment 9,115
Income before income tax provision and
extraordinary item 56,610 55,653 49,915 63,396 43,370
Provision for income tax 4,798 8,125 12,281 14,295 12,385
Income before extraordinary item 51,812 47,528 37,634 49,101 30,985
Extraordinary item (429)
Net income 51,812 47,528 37,634 49,101 30,556
Per Common Share Results - Diluted (1):
Income before extraordinary item $1.74 $1.58 $1.22 $1.58 $1.01
Extraordinary item (.02)
Net income per common share $1.74 $1.58 $1.22 $1.58 $0.99
Cash dividends declared $0.30 $0.24 $0.20 $0.08
Average shares outstanding 29,586 30,036 30,794 30,592 29,977
Average shares diluted 29,858 30,204 30,952 31,118 30,859
Balance Sheet Data:
Loans and loans held for sale (net of
unearned interest) $2,120,054 $1,959,301 $1,896,074 $1,556,606 $1,501,273
Allowance for possible loan losses 67,854 57,712 55,254 55,009 37,413
Investments 1,800,489 1,276,900 830,980 785,747 595,555
Total assets 4,017,352 3,327,436 2,822,147 2,432,816 2,174,692
Deposits 1,775,045 1,594,635 1,703,926 1,518,367 1,493,445
Borrowings 1,930,488 1,458,148 884,741 698,097 536,278
Total capital (100% common equity) 270,368 236,379 191,142 171,202 120,015
Book value per common share, end of year (1) 9.17 7.93 6.32 5.51 3.99
Regulatory Capital Ratios (In Percent):
Total capital to risk weighted assets 17.39 17.26 15.25 16.17 9.76
Tier 1 capital to risk weighted assets 11.55 11.07 9.32 9.93 8.50
Tier 1 capital to average assets 6.59 7.44 6.65 6.82 5.74
Selected Financial Ratios (In Percent):
Net income to average total assets 1.48 1.63 1.48 2.22 1.53
Interest rate spread (2) 4.76 5.30 5.46 5.07 5.23
Net interest income to average earning assets (2) 5.27 5.83 6.03 5.59 5.65
Net yield on average earning assets (2) 9.83 10.45 10.63 10.12 9.63
Net cost on average interest bearing liabilities 5.07 5.15 5.17 5.05 4.40
Net income to average total equity 20.54 22.30 20.49 33.19 29.07
Average total equity to average total assets 7.22 7.32 7.23 6.68 5.27
Dividend payout ratio 17.12 15.14 16.32 5.06 N/A
Efficiency ratio (3) 46.46 45.45 47.66 47.71 49.88
Offices:
Number of full service branches 40 36 36 36 32
Loan origination offices 45 44 47 43 23
(1) Amounts presented were recalculated, when applicable, to retroactively
consider the effect of common stock splits. (2) Ratios were computed on a
taxable equivalent basis. (3) Other operating expenses to the sum of net
interest income and other income (excluding gain on sale of investments in 1998,
1997 and 1995, and gain on sale of subsidiary in 1995).
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FINANCIAL REVIEW SUMMARY
For the year 1998, First BanCorp (the Corporation) recorded earnings of
$51,812,386 or $1.74 per common share as compared to $47,527,552 or $1.58 per
common share for 1997 and $37,633,791 or $1.22 per common share for 1996. First
BanCorp is the bank holding company for FirstBank (or the Bank).
Earnings for the year 1996 included a one time Savings Association
Insurance Fund (SAIF) industry wide deposit insurance assessment of $6,715,000
(net of tax) or $.22 per share. Excluding this unusual item, operational
amounted to $44,348,791 or $1.44 per share. All per share figures are presented
on a diluted basis.
The Corporation's continuous increase in net interest income and other
income and tight control over operating expenses net of the provision for loan
losses, have resulted in the sustained growth in net income. For 1998 as
compared to 1997, net income increased by $4,284,834 or $.16 per common share,
and for 1997 as compared to 1996, by $3,178,761 or $0.14 per common share,
excluding for 1996 the one time SAIF insurance assessment.
Return on average assets was 1.48% for 1998, 1.63% for 1997 and 1.48%
for 1996. Return on average common equity was 20.54% for 1998, 22.30% for 1997
and 20.49% for 1996. The decrease in the return on average assets and average
common equity for 1998 as compared to 1997 was due to the increase in total
assets and common equity, respectively.
RESULTS OF OPERATIONS
First BanCorp's results of operations depend primarily on its net
interest income, which is the difference between the interest income earned on
interest earning assets, including investment securities and loans, and the
interest expense paid on interest bearing liabilities, including deposits and
borrowings. The Corporation's results of operations also depend on the provision
for loan losses, operating expenses (such as personnel, occupancy and other
costs), on other income (mainly service charges and fees on loans), and on gains
on sale of investments.
Net Interest Income
The main component of the Corporation's results of operations is net
interest income. Net interest income is the difference between interest earned
on loans and investment securities (interest earning assets) and the interest
expense on deposits and borrowings (interest bearing liabilities). Net interest
income is the result of the spread between the yield of interest earning assets
and the cost of interest bearing liabilities, and the volume of such assets and
liabilities.
Net interest income increased to $166.2 million for 1998 from $154.7
million in 1997 and $143.5 million in 1996. The improvement was the result of
the continuous increase in the average volume of interest earning assets
together with a higher available capital and non-interest bearing liabilities to
fund those assets. This is reflected in an increase in the average volume of
interest earning assets by $582.7 million for 1998 as compared to 1997 and by
$361.8 million for 1997 as compared to 1996. Interest bearing liabilities
increased by $528.0 million for 1998 as compared to 1997 and by $345.2 million
for 1997 as compared to 1996.
23
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.
Part I Average volume Interest income (1) / expense Average rate (1)
Year ended December 31, 1998 1997 1996 1998 1997 1996 1998 1997 1996
- - -------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Earning Assets:
Deposits at banks and other
short-term investments $ 40,766 $ 67,969$ 36,883 $ 2,028 $ 3,708 $ 1,959 4.97% 5.45% 5.31%
Government obligations 319,777 404,517 405,221 19,984 26,949 23,242 6.25% 6.66% 5.74%
Mortgage backed securities 1,032,632 428,804 255,926 77,463 34,942 18,142 7.50% 8.15% 7.09%
Other investment 1,150 519 3,920 186 22 190 16.14% 4.24% 4.85%
FHLB stock 10,252 10,150 11,701 743 670 756 7.25% 6.60% 6.46%
------------ ----------- ------------------------------ --------
Total investments 1,404,577 911,959 713,651 100,404 66,290 44,289 7.15% 7.27% 6.21%
----------- ---------- -------- -------- -------- ------
Consumer loans (2) 1,032,704 1,090,991 985,554 139,309 147,100 139,732 13.49% 13.48% 14.18%
Real estate loans (2) 642,112 567,446 552,385 63,789 56,985 55,894 9.93% 10.04% 10.12%
Commercial loans (2) 324,426 250,757 207,745 31,131 24,494 21,490 9.60% 9.77% 10.34%
------------ ----------- ----------- ------------------ ---------
Total loans 1,999,242 1,909,194 1,745,684 234,229 228,579 217,116 11.72% 11.97% 12.44%
----------- ----------- ---------- --------- --------- --------
Total earning assets $3,403,820 $2,821,153 $2,459,334 $334,633 $294,869 $261,405 9.83% 10.45% 10.63%
========== ========== ========== ======== ======== ========
Interest Bearing Liabilities:
Deposits $1,494,530 $1,502,975 $1,441,612 $70,418 $72,148 $ 70,964 4.71% 4.80% 4.92%
Other borrowed funds 1,559,892 1,012,757 718,407 84,460 57,419 40,608 5.41% 5.67% 5.65%
FHLB advances 4,515 15,157 25,637 252 864 1,455 5.58% 5.70% 5.68%
Total interest bearing
liabilities $3,058,937 $2,530,889 $2,185,656 $155,130 $130,431 $113,027 5.07% 5.15% 5.17%
========== ========== ========== ======== ======== ========
Net interest income $179,503 $164,438 $148,379
======== ======== ========
Interest rate spread 4.76% 5.30% 5.46%
Net interest margin 5.27% 5.83% 6.03%
(1) On a tax equivalent basis. The tax equivalent yield was computed dividing
the interest rate spread on exempt assets by (1- statutory tax rate) and adding
to it the cost of interest bearing liabilities. When adjusted to a tax
equivalent basis, yields on taxable and exempt assets are comparative. (2)
Non-accruing loans are included in the average balances.
26
Part II 1998 compared to 1997 1997 compared to 1996
Increase (decrease) Increase (decrease)
Due to: Due to:
Volume Rate Total Volume Rate Total
Earning assets: In thousands
Deposits at banks and other
short-term investments $(1,377) $(303) $ (1,680) $ 1,694 $ 54 $ 1,748
Government obligations (5,375) (1,589) (6,964) (44) 3,751 3,707
Mortgage backed securities 47,250 (4,729) 42,521 13,755 3,044 16,799
Other investment 50 114 164 (147) (21) (168)
FHLB stock 7 66 73 (101) 15 (86)
---------- -------- ---------- -------- --------- ---------
Total investments 40,555 (6,441) 34,114 15,157 6,843 22,000
------- ------ ------- ------- -------- -------
Consumer loans (7,861) 70 (7,791) 14,583 (7,215) 7,368
Real estate loans 7,458 (654) 6,804 1,518 (427) 1,091
Commercial loans 7,133 (496) 6,637 4,325 (1,321) 3,004
------- -------- -------- -------- -------- --------
Total loans 6,730 (1,080) 5,650 20,426 (8,963) 11,463
------- ------- -------- ------- -------- -------
Total interest income 47,285 (7,521) 39,764 35,583 (2,120) 33,463
------ ------- ------- ------- -------- -------
Interest bearing liabilities:
Deposits (403) (1,327) (1,730) 2,984 (1,800) 1,184
Borrowed funds 30,323 (3,282) 27,041 16,688 123 16,811
FHLB advances (594) (18) (612) (596) 5 (591)
------- -------- --------- --------- ----------- ---------
Total interest expense 29,326 (4,627) 24,699 19,076 (1,672) 17,404
-------- ------- -------- -------- -------- --------
Change in net interest income $17,959 $(2,894) $15,065 $16,507 $ (448) $16,059
======= ======= ======= ======= ======== =======
Total interest income includes tax equivalent adjustments of $13.3 million,
$9.7 million and $4.9 million for 1998, 1997, and 1996, respectively.
On a tax equivalent basis, net interest income increased to $179.5
million for 1998 from $164.4 million for 1997, and $148.4 million for 1996. The
interest rate spread and net interest margin amounted to 4.76% and 5.27%,
respectively, for 1998, as compared to 5.30% and 5.83%, respectively, for 1997
and to 5.46% and 6.03%, respectively, for 1996.
The reduction in the interest rate spread and net interest margin for
1998 is mainly due to the increase of $492.6 million in the average volume of
total investments when compared to the average volume recorded for 1997. These
investments have a lower spread than loans but without the credit risk. In
addition, there was a reduction of $58.3 million in the average volume of
consumer loans, which are the assets with the highest spread but, also the
highest credit risk in the portfolio.
1998 compared to 1997
On a tax equivalent basis interest income increased by $39.8 million
for 1998 as compared to 1997. On a tax equivalent basis the yield on earning
assets was 9.83% for 1998 as compared to 10.45% for 1997. The improvement in
interest income was due to the increase in the average volume of investments of
$492.6 million, of real estate (mostly commercial real estate loans) and
commercial loans of $74.7 million and $73.7 million, respectively, net of a
decrease in consumer loans of $58.3 million. The increase in the commercial real
estate and commercial loans portfolio was the result of the Corporation's
strategy of diversifying its asset base, which was concentrated in consumer
loans. The consumer loan portfolio decreased as a result of the tightening
implemented early in 1997 of the underwriting standards for the origination of
these loans.
For the investment portfolio, the average volume of mortgage backed
securities increased in 1998 by $603.8 million. The tax equivalent yield on
mortgage backed securities was 7.50% in 1998 and 8.15% in 1997. The portfolio of
mortgage backed securities contributed $47.3 million in interest income due to
volume net of $4.7 million decrease in interest income due to rate. The average
volume of government obligations decreased by $84.7 million for 1998 as compared
to 1997, causing a total decrease in interest income of $7.0 million.
27
For the loan portfolio, the growth in the average volume of commercial
loans represented an increase of $7.1 million in income due to volume, partially
offset by a reduction of $.5 million in interest income due to rate. The
reduction due to rate was mainly caused by various decreases in the prime rate
from 8.50% effective for 1997 through September 29, 1998 to 7.75% effective on
November 18, 1998. The average portfolio of mortgage loans increased for 1998,
representing a positive volume variance of $7.5 million. This increase was
mostly achieved in commercial real estate loans. The decrease in the average
volume of consumer loans caused a negative variance in interest income due to
volume of $7.9 million.
Interest expense increased by $24.7 million for 1998 as compared to
1997. This was the result of the increase in the average volume of interest
bearing liabilities of $528.0 million for 1998 as compared to 1997 with a volume
variance of $29.3 million. However, interest expense was affected by a decrease
of eight basis points in the cost of interest bearing liabilities from 5.15% for
1997 to 5.07% for 1998 causing a positive rate variance of $4.6 million for 1998
as compared to 1997.
1997 compared to 1996
On a tax equivalent basis interest income increased by $33.5 million
for 1997 as compared to 1996. On a tax equivalent basis the yield on earning
assets was 10.45% for 1997 as compared to 10.63% for 1996. The improvement in
interest income was primarily due to the increase in the average volume of
investments of $198.3 million and to an increase in the average volume of
consumer and commercial loans of $105.4 million and $43.0 million, respectively.
For the investment portfolio, the average volume of mortgage backed
securities increased in 1997 by $172.9 million. The tax equivalent yield on
mortgage backed securities increased from 7.09% for 1996 to 8.15% for 1997. The
portfolio of mortgage backed securities contributed $13.8 million in interest
income due to volume and $3.0 million in interest income due to yield
improvement. Interest income from investments was also positively affected by
the improvement in the tax equivalent yield of government obligations from 5.74%
in 1996 to 6.66% in 1997, representing an increase of $3.8 million in interest
income due to rate. To a lesser extent, investment income was positively
affected by an increase of $31.1 million in the average volume of short term
investments.
For the loan portfolio, the increase in the average volume of consumer
loans represented a growth of $14.6 million in interest income, which was
partially offset by a reduction of $7.2 million in interest income due to rate.
The yield on consumer loans decreased from 14.18% in 1996 to 13.48% in 1997 as a
result of the increase in non-accruing loans written off in 1997, and the
tightening of underwriting standards in the origination of consumer loans. Early
in 1997, stricter underwriting standards were implemented in response to the
industry wide increase in delinquencies and bankruptcies. As the credit quality
of the customers improves, the yield charged to the loans is lower, causing a
decrease in the average yield of the consumer loan portfolio.
The growth in the average volume of commercial loans represented an
increase of $4.3 million in income due to volume, partially offset by a
reduction of $1.3 million in interest income due to rate. The growth in the
commercial loan portfolio responded to the strategy of emphasizing commercial
loans to diversify the loan portfolio, which has been concentrated in consumer
loans. The average portfolio of mortgage loans increased for 1997, representing
a positive volume variance of $1.5 million. This increase was mostly recorded in
commercial real estate loans. The negative variance due to rate was mostly due
to loans that were placed in non accruing status. The prime rate was at 8.50%
for 1997 and 1996.
Interest expense increased by $17.4 million for 1997 as compared to
1996. The increase was the result of the increase in the average volume of
interest bearing liabilities of $345.2 million for 1997 as compared to 1996 with
an additional cost of $19.1 million. However, interest expense was positively
affected by a decrease of two basis points in the cost of interest bearing
liabilities from 5.17% for 1996 to 5.15% for 1997. This reduction was entirely
due to a decrease in the cost of interest bearing deposits from 4.92% in 1996 to
4.80% in 1997.
Provision for Loan Losses
During 1998, the Corporation provided $76.0 million for loan losses, a
significant increase as compared to $55.7 million in 1997 and $31.6 million in
1996.
The increased provision for loan losses recorded in 1998 was necessary
to cover net charge offs of $65.9 million, and to increase by $10.1 million the
allowance for loan losses at December 31, 1998 as compared to December 31, 1997.
This level of net charge offs resulted mainly from the increase in the level of
delinquencies and bankruptcies experienced in Puerto Rico during 1998. In
addition, net charge offs for 1998 included $8.9 million in loans written off as
a result of changes in the write off policy to a more conservative one. During
the first quarter of 1998 the Corporation changed its write off policy to
include personal unsecured loans in bankruptcy status and more than 30 days
delinquent. These loans were previously written off according to the general
regulatory guidance for unsecured personal loans which were 120 days delinquent.
As a result of this change, $4.5 million loans were written off during the first
quarter. During the fourth quarter of 1998 the Corporation changed the timing to
record the estimated partial write offs of certain auto loans and repossessed
units. This change resulted in an additional write off of $4.4 million of
previously reserved losses. Net charge offs for 1997 and 1996 amounted to $53.2
million and $31.3 million, respectively.
28
The allowance activity for 1998, and prior two years was as follows:
Year ended December 31,
1998 1997 1996 1995 1994
(Dollars in thousands)
Allowance for loan losses, beginning of period $57,712 $55,254 $55,009 $37,413 $30,453
Provision for loan losses 76,000 55,675 31,582 30,894 17,674
-------- ------- -------- -------- -------
Loans charged off:
Real estate (168) (284) (492) (403) (839)
Commercial (4,150) (1,996) (942) (3,299) (4,329)
Consumer (67,906) (57,311) (33,295) (10,821) (6,753)
Recoveries and other adjustments 6,366 6,374 3,392 1,225 1,207
--------- --------- --------- -------- --------
Net charge offs (65,858) (53,217) (31,337) (13,298) (10,714)
-------- -------- -------- ------- -------
Allowance for loan losses, end of period $67,854 $57,712 $55,254 $55,009 $37,413
======= ======= ======= ======= =======
Allowance for loan losses to year end total
loans and loans held for sale 3.20% 2.95% 2.91% 3.53% 2.49%
Net charge offs to average loans
outstanding during the period 3.29% 2.79% 1.80% .93% .79%
The Corporation maintains the allowance for loan losses at a level that
Management considers adequate to absorb losses inherent in the loan portfolio.
The adequacy of the allowance for loan losses is reviewed on a quarterly basis
as part of the continuing evaluation of the quality of the assets. This
evaluation is based upon a number of factors, including the followings:
historical loan loss experience, projected loan losses, loan portfolio
composition, current economic conditions, fair value of the underlying
collateral, financial condition of the borrowers, and, as such, includes amounts
based on judgments and estimates made by Management.
Other Income
The following table presents the composition of other income.
Year ended December 31, 1998 1997 1996
(In thousands)
Other fees on loans $11,158 $10,899 $10,651
Service charges on deposit accounts 7,844 7,363 6,184
Fees on loans serviced for others 1,617 2,670 3,993
Rental income 2,292 1,935 2,356
Other operating income 5,137 4,866 2,928
------- ------- -------
Other income before gain on
sale of investments and trading 28,048 27,733 26,112
Gain on sale of investments 26,827 11,388 4,857
Trading income (loss) 3,365 745 (1,355)
--------- ---------- --------
Total $58,240 $39,866 $29,614
======= ======= =======
29
Other income primarily consists of service charges on deposit accounts,
fees on loans, servicing income, commissions derived from various banking
activities, the results of trading activities and gains on sale of investments.
Other income before gains on the sale of investments and trading
activities increased to $28.0 million in 1998 from $27.7 million in 1997 and
$26.1 million in 1996. These variances were mainly due to fees and charges on
deposit and loan accounts and other fees on miscellaneous banking services,
partially offset by a decrease in fees on loans serviced for others.
Service charges on deposit accounts represent an important and stable
source of other income for the Corporation. This source of income increased to
$7.8 million in 1998 from $7.4 million in 1997 and $6.2 million in 1996.
Other fees on loans consist mainly of credit card fees and late charges
collected on loans. The increase in this source of income to $11.2 million in
1998 from $10.9 million in 1997 and $10.7 million in 1996 was due to fees
generated on the increased portfolio of commercial loans.
Fees on loans serviced for others primarily reflect the servicing fees
for the auto loan securitizations closed in 1995. It also includes servicing
fees on residential mortgage loans originated and subsequently securitized. Due
to the repayment of the auto loan portfolio securitized in 1995, the related
servicing income decreased from 1996 to 1998.
The Corporation's second tier subsidiary, First Leasing and Rental
Corporation, generates income on the rental of various types of motor vehicles.
This source of income has averaged $2.0 million in the past three years.
The other operating income category is composed of miscellaneous fees
such as check fees and rental of safe deposit boxes. For 1998 and 1997, other
operating income also includes earned discounts on tax credits purchased and
utilized against income tax payments.
The Corporation recorded $26.8 million in 1998, $11.4 million in 1997
and $4.9 million in 1996 from gains on sale of investment securities. These
sales of investments were realized as market opportunities arose and in response
to the Corporation's investment policies.
Other Operating Expenses
Other operating expenses amounted to $91.8 million for 1998 as compared to
$83.3 million for 1997 and $82.5 million for 1996. The following table presents
the components of other operating expenses.
Year ended December 31, 1998 1997 1996
(In thousands)
Salaries and benefits $43,185 $38,644 $37,359
Occupancy and equipment 18,155 16,101 14,932
Deposit insurance premium 971 1,040 2,431
Other taxes and insurance 5,607 5,536 4,663
Professional and service fees 5,820 4,883 4,956
Business promotion 5,922 4,993 5,880
Communications 4,330 4,364 4,789
Real estate owned operations 42 (21) 219
Amortization of debt issue costs 691 788 873
Expense of rental equipment 1,226 1,184 1,113
Other 5,849 5,756 5,283
--------- -------- ---------
Total $91,798 $83,268 $82,498
======= ======= =======
30
Management's goal has been to make only expenditures that contribute
clearly and directly to increasing the efficiency and profitability of the
Corporation. This control over other operating expenses has been an important
factor contributing to the improvement in earnings in recent years. The best
measure of the success of this program is the efficiency ratio, which is the
ratio of other operating expenses to the sum of net interest income and other
recurring income. The Corporation's efficiency ratio was 46.46% for 1998 as
compared to 45.45% and 47.66% for 1997 and 1996, respectively.
For 1998 as compared to 1997, salary increases, incentive compensation
and increases in fringe benefits affected the salaries and benefits category for
all employees. Additional employees were hired to staff two full service
branches and two in-store branches that opened in 1998, to strengthen the
commercial lending business, the support areas of consumer lending such as
credit and collection, and other support areas of the Corporation. For 1997 as
compared to 1996, salaries and benefits were mainly affected by increases in
salary and fringe benefits.
The occupancy and equipment category consists of expenses associated
with premises, office and computer equipment, and other automated banking
equipment. The increase in the past three years was mainly affected by
enhancements of hardware and software through system conversions, which have
enabled the Corporation to offer new products, and to improve customer service
and portfolio servicing. For 1998, the increase was also due to the expansion of
the branch network mentioned above. Expenses related to the year 2000 issue also
affected this category (see Year 2000 section).
The increase in the professional and service fee category for 1998 was
mainly due to credit card processing and assessment fees related to the increase
in the portfolio and in the number of accounts. The increase in credit card
related fee income exceeded the related processing costs.
Business promotion costs amounted to $5.9 million for 1998 as compared
to $5.0 million in 1997, and $5.9 million for 1996. Business promotion expense
has been incurred to obtain the loan and deposit volumes achieved during those
years.
In 1998 and 1997, communications expense decreased as compared to 1996,
due to an improvement in the telephone and data line network.
Unusual Item
In 1996, FirstBank recorded the one time industry wide SAIF deposit
insurance special assessment as provided by the Omnibus Spending bill signed by
the President of the United States on September 30, 1996, in order to
recapitalize the SAIF. The Bank's assessment was $9.1 million, which represented
a net after tax expenditure of $6.7 million. On October 31, 1994, the Bank,
formerly a savings institution, converted its charter to a commercial bank, but
stayed in the SAIF because legal restrictions prevented the Bank from switching
to the Bank Insurance Fund.
Income Tax Expense
The provision for income tax amounted to $4.8 million (or 8% of pre-tax
earnings) for 1998 as compared to $8.1 million (or 15% of pre-tax earnings) in
1997, and $12.3 million (or 25% of pre-tax earnings) in 1996. The Corporation
has maintained an effective tax rate lower than the statutory rate of 39% mainly
by investing in obligations and loans exempt from federal and Puerto Rico income
tax. Also the current income tax expense was reduced by the increase in loans
written off. For additional information relating to taxes, see Note 29 of the
Corporation's financial statements - "Income Taxes."
FINANCIAL CONDITION
Assets
The Corporation's total assets at December 31, 1998 amounted to
$4,017.4 million, $690.0 million over the $3,327.4 million at December 31, 1997.
The increase in total assets was mainly the result of an increase in total
investments of $523.6 million plus an increase of $150.6 million in loans
receivable (net of the allowance for loan losses) and loans held for sale.
The investment portfolio grew from $1,276.9 million at December 31,
1997 to $1,800.5 million at December 31, 1998. This resulted from the strategy
of purchasing $733.7 million in additional mortgage backed securities,
increasing the portfolio of mortgage backed securities to $1,492.5 million. The
portfolio of mortgage backed securities yielded 7.50% in 1998 as compared to
8.15% in 1997. Government obligations decreased by $211.8 million. Government
obligations yielded 6.25% in 1998 compared to 6.66% in 1997. The shift to
mortgage backed securities was due to the higher yield on these investments as
compared to government obligations.
31
The increase in loans receivable of $150.6 million was composed of an
increase in commercial loans of $142.7 million and $89.6 million in real estate
loans, net of an increase in the allowance for loan losses of $10.1 million and
a decrease in consumer loans of $71.6 million.
The following table presents the composition of the loan portfolio
(including loans held for sale) at year-end for each of the last five years.
% of % of % of % of % of
December 31, 1998 Total 1997 Total 1996 Total 1995 Total 1994 Total
(Dollars in thousands)
Real estate loans:
Residential $ 307,912 15 $ 292,604 15 $ 297,246 16 $ 319,758 21 $ 406,653 28
Commercial 326,342 16 306,734 16 256,227 14 210,645 14 175,415 12
Construction and land 63,939 3 9,279 1 10,209 1 9,233 1 13,812 1
---------- ---- ------------ --- ----------- --- ---------- --- ----------- ---
698,193 34 608,617 32 563,682 31 539,636 36 595,880 41
Commercial loans 420,763 20 278,071 15 233,251 12 189,334 13 126,842 9
Consumer loans 1,001,098 49 1,072,613 56 1,099,141 60 827,636 55 778,551 53
--------- ---- ----------- --- ----------- ---- --------- ---- ---------- ----
Total 2,120,054 103 1,959,301 103 1,896,074 103 1,556,606 104 1,501,273 103
Allowance for
loan losses (67,854) (3) (57,712) (3) (55,254) (3) (55,009) (4) (37,413) (3)
----------- ---- ------------ ---- ----------- ---- ------------ --- ----------- ---
Net loans $2,052,200 100 $1,901,589 100 $1,840,820 100 $1,501,597 100 $1,463,860 100
========== === ========== === ========== === ========== === ========== ===
Early in 1997, the Corporation tightened its underwriting standards for
the origination of consumer loans because of the industry wide higher trend in
delinquencies and bankruptcies. This resulted in a decrease in the consumer loan
portfolio from $1,072.6 million at December 31, 1997 to $1,001.1 million at
December 31, 1998.
During 1998, the Corporation continued emphasizing the origination of
commercial loans as a strategy to diversify the loan portfolio, which is
concentrated in consumer loans. Most of the commercial loans originated are
asset based loans. The portfolio of commercial loans includes also floor plan
financing to dealers, which has enhanced the Corporation's ability to maintain
its production of auto loans. As a result of this strategy, the commercial loan
portfolio grew by $142.7 million in 1998. 1997 ended with an increase of $44.8
million as compared to the commercial loan portfolio at the end of 1996, and
1996 with an increase of $43.9 million as compared to 1995. The Corporation has
been able to increase its percentage of commercial loans to total loans to 20%.
As to real estate loans, the increase in the portfolio of $89.6 million
was composed of the following increases: (1) $19.6 million in real estate
commercial loans; (2) $15.3 million in residential real estate loans; and (3)
$54.7 million in construction loans. The growth in the real estate commercial
loan portfolio is consistent with the strategy of emphasizing commercial loans.
Real estate commercial loans grew by $50.5 million in 1997 and by $45.6 million
in 1996.
Average earning assets for 1998 amounted to $3,403.8 million, an
increase of $582.7 million when compared to total average earning assets of
$2,821.1 million for 1997. The composition and tax equivalent weighted average
interest rates of the Corporation's earning assets at December 31, 1998 were as
follows:
32
Amount Weighted
(In thousands) Average Rate
Money market instruments $ 526 3.40%
Government obligations 295,533 5.74%
Mortgage backed securities 1,492,539 7.02%
FHLB of N.Y. stock 10,271 7.00%
Other investment 1,620 15.76%
--------------
Total investments 1,800,489 6.82%
-----------
Consumer loans 1,001,098 14.76%
Real estate loans 698,193 9.54%
Commercial loans 420,763 9.03%
-----------
Total loans(1) 2,120,054 11.91%
-----------
Total earning assets $3,920,543 9.57%
==========
(1) Excludes the reserve for loan losses. Generally, non-accruing loans were
included in this analysis as if they were accruing interest.
Non-performing Assets
Total non-performing assets are the sum of non-accruing loans, past due
loans, OREO's and other repossessed properties. Past due loans are loans
delinquent 90 days or more as to principal and/or interest, and still accruing
interest. Non-accruing loans are loans as to which interest is no longer being
recognized. When loans fall into non-accruing status, all previously accrued and
uncollected interest is charged against interest income.
At December 31, 1998, total non-performing assets amounted to $78.0
million (1.94% of total assets) as compared to $74.3 million (2.23% of total
assets) at December 31, 1997 and $70.2 million (2.49% of total assets) at
December 31, 1996. The Bank's reserve to non-performing loans ratio was 94.2% at
December 31, 1998 as compared to 89.5% and 90.71% at December 31, 1997 and 1996,
respectively.
The following table presents non-performing assets at the dates
indicated:
December 31, 1998 1997 1996 1995 1994
(Dollars in thousands)
Past due loans $ 15,110 $ 11,544 $ 9,752 $ 5,544 $ 4,859
-------- -------- -------- ------- -------
Non-accruing loans:
Real estate 17,399 12,249 12,795 14,106 18,422
Commercial 12,823 16,143 12,712 14,479 10,295
Consumer 26,736 24,547 25,655 26,085 13,993
-------- -------- -------- -------- --------
56,958 52,939 51,162 54,670 42,710
-------- -------- -------- -------- --------
Non-performing loans 72,068 64,483 60,914 60,214 47,569
--------- -------- -------- -------- --------
Other real estate owned (OREO) 3,642 1,132 1,696 2,991 12,383
Other repossessed property 2,277 8,702 7,566 3,132 1,619
---------- --------- --------- --------- --------
Total non-performing assets $77,987 $74,317 $70,176 $66,337 $61,571
======= ======= ======= ======= =======
Non-performing assets to total assets 1.94% 2.23% 2.49% 2.73% 2.83%
Non-performing loans to total loans 3.40% 3.29% 3.21% 3.87% 3.17%
Allowance for loan losses $67,854 $57,712 $55,254 $55,009 $37,413
Allowance to total non-performing loans 94.15% 89.50% 90.71% 91.36% 78.65%
33
Past Due Loans
Past due loans are accruing commercial and consumer loans, which are
contractually delinquent 90 days or more. Past due commercial loans are current
as to interest but delinquent in the payment of principal. Past due consumer
loans include personal lines of credit and credit card loans delinquent 90 days
up to 179 days and personal loans (including small loans) delinquent 90 days up
to 119 days.
Non-accruing Loans
Real Estate Loans - The Corporation classifies all real estate loans
delinquent 90 days or more in non-accruing status. Even though these loans are
in non-accruing status, Management considers based on the value of the
underlying collateral and the loan to value ratios, that no material losses will
be incurred in this portfolio. Management's understanding is based on the
historical experience of the Corporation. Non-accruing real estate loans
amounted to $17.4 million (2.49% of total real estate loans) at December 31,
1998, as compared to $12.2 million (2.01% of total real estate loans) and $12.8
million (2.27% of total real estate loans) at December 31, 1997 and 1996,
respectively.
Non-accruing real estate loans at December 31, 1998 were composed of
$9.2 million in low risk residential mortgage loans and $8.2 million in
commercial real estate loans. No construction loans were on non-accruing status
at December 31,1998. There was only one real estate loan over $500,000 in
non-accruing status. This loan was a $1.0 million mortgage secured by an income
producing property, which has an estimated fair value that exceeds the principal
balance of the loan.
Commercial Loans - The Corporation places all commercial loans 90 days
delinquent as to principal and interest in non-accruing status. The risk
exposure of this portfolio is diversified and a portion of the portfolio is
collateralized by liens on real property. Non-accruing commercial loans amounted
to $12.8 million (3.05% of total commercial loans) at December 31, 1998 as
compared to $16.1 million (5.81% of total commercial loans) and $12.7 million
(5.45% of total commercial loans) at December 31, 1997 and 1996, respectively.
At December 31, 1998, non-accruing commercial loans of over $500,000 were: (1) a
$3.6 million loan secured by senior lien on receivables and junior liens on real
estate; and (2) a $1.9 million loan partially secured by inventory and accounts
receivable.
Consumer Loans - Consumer loans are classified as non-accruing when
they are delinquent 90 days in auto, boat and home equity reserve loans, 120
days in personal loans (including small loans) and 180 days in credit cards and
personal lines of credit.
Non-accruing consumer loans amounted to $26.7 million (2.67% of the
total consumer loan portfolio) at December 31, 1998, $24.5 million (or 2.29% of
the total consumer loan portfolio) at December 31, 1997 and $25.7 million (or
2.33% of the total consumer loan portfolio) at December 31, 1996. The ratio of
non-accruing consumer loans to total consumer loans is the result of the level
of delinquencies and write offs, mainly due to the overall level of bankruptcies
in Puerto Rico. During 1998 and 1997 the delinquencies and bankruptcies
increased and, as a result, the amount of net charge offs increased to $62.5
million from $51.9 million in 1997 and $30.9 million in 1996 (see Provision for
Loan Losses section).
Other Real Estate Owned (OREO)
OREO acquired in settlement of loans is carried at the lower of cost
(carrying value of the loan) or fair value less estimated cost to sell off the
real estate at the date of acquisition. Therefore, the Corporation does not
expect to incur significant losses on the disposition of OREO's at December 31,
1998.
Repossessed Property
The Repossessed Property category includes repossessed boats and autos
acquired in settlement of loans. Repossessed boats are recorded at the lower of
cost or estimated fair value. For 1997 and 1996, repossessed autos were recorded
at the principal balance of the loans. For 1998, repossessed autos were recorded
at the principal balance of the loans less an estimated loss on the disposition
of the units in accordance with the new write off policy implemented in late
1998 ( see Provision for Loan Losses section).
Sources of Funds
The Corporation's principal funding sources are branch-based deposits,
institutional deposits, federal funds purchased, securities sold under
agreements to repurchase, and notes.
Deposits
Total deposits amounted to $1,775.0 million at December 31, 1998, as
compared to $1,594.6 million and $1,703.9 million at December 31, 1997 and 1996,
respectively.
34
The following table presents the composition of total deposits.
At December 31, 1998 1997 1996
(Dollars in thousands)
Savings accounts $ 416,424 $ 403,129 $ 412,511
Interest bearing checking accounts 130,883 121,452 115,899
Certificates of deposit 1,054,634 929,955 1,039,809
----------- ----------- ----------
Interest bearing deposits 1,601,941 1,454,536 1,568,219
Non-interest bearing deposits 173,104 140,099 135,707
------------ ----------- -----------
Total $1,775,045 $1,594,635 $1,703,926
========== ========== ==========
Weighted average rate during the
period on interest bearing deposit 4.71% 4.80% 4.92%
Total deposits are composed of branch-based deposits and institutional
deposits. Institutional deposits include brokered certificates of deposits and
certificates issued to agencies of the Government of Puerto Rico.
Total interest bearing deposits increased by $147.4 million at December
31, 1998 when compared to December 31, 1997. This fluctuation was mainly due to:
(1) an increase in branch-based deposits of $63.2 million; (2) an increase of
$58.2 million in brokered certificates of deposits; and (3) an increase of $31.0
million in certificates issued to the agencies of the Government of Puerto Rico.
The increase of $33.0 million in non interest bearing deposits was
mainly due to the increase in commercial demand deposit accounts resulting from
the growth in the commercial lending business.
Borrowings
At December 31, 1998 total borrowings amounted to $1,930.5 million as
compared to $1,458.1 million and $884.7 million at December 31, 1997 and 1996,
respectively. The increase in total borrowings was used to fund the increase in
total interest earning assets. The following table presents the composition of
borrowings.
At December 31, 1998 1997 1996
(Dollars in thousands)
Advances from FHLB $ 2,600 $ 29,000 $ 14,100
Federal funds purchased and securities
sold under agreements to repurchase 1,623,698 965,869 584,857
Other short term borrowings 86,595 231,505
Notes payable 118,100 132,350 186,433
Subordinated notes 99,496 99,423 99,351
------------ ------------- ----------
Total $1,930,489 $1,458,147 $884,741
========== ========== ========
Weighted average rate during the period 5.41% 5.67% 5.65%
35
The Corporation uses advances from FHLB, federal funds purchased,
repurchase agreements and notes payable as additional funding sources. In March
1997, the Corporation obtained $250.0 million in short term borrowings under a
three year commercial paper asset backed program, collateralized with the
personal loan portfolio. In December 1995, FirstBank sold $100 million in ten
year subordinated notes with a yield of 7.63%.
The borrowings of the Corporation consist primarily of federal funds
purchased and securities sold under agreements to repurchase (repurchase
agreements) which at December 31, 1998 amounted to $1,623.7 million or 84% of
total borrowings. Repurchase agreements had a total weighted average cost of
5.08%, during the year ended December 31, 1998.
The composition and weighted average interest rates of interest bearing
liabilities at December 31, 1998, were as follows:
Amount Weighted
(In thousands) Average rate
Interest bearing deposits $1,601,941 4.57%
Borrowed funds 1,930,489 5.27%
----------
$3,532,430 4.95%
==========
Average interest bearing liabilities amounted to $3,058.9 million in
1998 as compared to $2,530.9 million in 1997. During the year the cost was 4.71%
for interest bearing deposits, and 5.41% for borrowed funds.
Capital
During 1998, the Corporation increased its total capital, composed
solely of common equity, mainly through retained earnings. Total capital
increased from $236.4 million at December 31, 1997 to $270.4 million at December
31, 1998. Total capital increased by $34.0 million due to earnings of $51.8
million, reduced by the repurchased shares of common stock at a total cost of
$5.9 million, a decrease in the unrealized gain on investment securities
available for sale of $3.3 million and cash dividends of $8.9 million.
The Corporation is a "well capitalized" institution, the highest
ranking available under the capital standards set by the federal banking
agencies. To be in a "well capitalized" position, an institution should have:
(i) a leverage ratio of 5% or greater; (ii) a total risk based capital ratio of
10% or greater; and (iii) a Tier 1 risk-based capital ratio of 6% or greater. At
December 31, 1998 the Corporation had a leverage ratio of 6.59%; a total risk
based capital ratio of 17.39%; and a Tier 1 risk-based capital ratio of 11.55%.
Dividends
In 1998, the Corporation declared four quarterly cash dividends of
$0.075 per common share for an annual dividend of $0.30. In 1997, the
Corporation declared four quarterly cash dividends of $0.06 per common share for
an annual dividend of $0.24. In 1996, the Corporation declared four quarterly
cash dividends of $0.05 per common share for an annual dividend of $0.20. Total
cash dividends paid amounted to $8.9 million for 1998 (or a 17.12% dividend
payout ratio), $7.2 million for 1997 (or a 15.14% dividend payout ratio) and
$6.1 million for 1996 (or a 16.32% dividend payout ratio).
Year 2000
The year 2000 issue concerns the inability of information systems to
properly recognize and process date-sensitive information beyond January 1,
2000. The Corporation recognizes the need to ensure that its operations will not
be adversely impacted by Year 2000 problem and has established a plan to address
Year 2000 risks.
The Corporation continues its program of improving its information
systems through the systematic wholesale replacement of certain hardware and
software. Since October 1996, it has been the practice to install new systems
that are already year 2000 enabled. Therefore, there are no additional costs
associated with changes or modifications to accommodate the year 2000 issue on
these new systems. All the related costs associated with the replacement of
these systems are recorded as assets and amortized.
Any year 2000 expenditure is expensed as incurred.
Based on the Corporation's final action plan addressing the Year 2000
issue, Management estimates that the expenses required to modify existing
computer systems enabling them for the year 2000 will be between $1.5 million
and $2.0 million for 1998 and 1999. Accordingly, the amounts to be expensed will
not have a significant impact on the Corporation's financial position or results
of operations. For 1998, a total of $650,000 in expenses was related to the year
2000 effort. No expenses were incurred during 1997.
36
The year 2000 action plan uses clearly articulated program criteria
that is being implemented by the Corporation for compliance. Management named a
Project Team, responsible for the plan implementation. The plan guides the
planning and execution of all activities related to: (1) information and
computerized systems, including related hardware and software; (2) non
information systems (i.e., environmental, communication and security equipment);
(3) credit customers; and (4) service providers who participate in the project
testing. The Corporation completed the assessment phase on these project risk
areas.
Management has substantially completed the renovation phase of the
information and computerized systems risk area composed of: business
applications, data center hardware, operating systems software and end-user and
desktop computing.
Unit test and validation of the mission critical applications is in
process and was substantially completed at December 31, 1998. Integration test
and validation of all information systems should be completed by March 31, 1999.
The identification and documentation of the Year 2000 contingency plan
for the Corporation's mission critical functions should be substantially
completed by March 31, 1999 and completed by June 30, 1999.
Asset/Liability Management
The Corporation has a formal system of interest rate risk management.
Management recognizes that it may sometimes be necessary to forego earning
opportunities in order to maintain a stable stream of net interest income as
interest rates rise and fall.
Management monitors the Corporation's interest rate risk position
primarily through computer simulations of the effect of rising and falling
interest rates on net interest income. Two sets of simulations are carried out,
both of which cover a two year time horizon: one assuming a flat balance sheet
with a constant asset/liability mix and another assuming a balance sheet which
grows according to expected loan originations and funding. These simulations
also incorporate expected changes in prepayment rates as interest rates rise or
fall, repricing characteristics of variable rate assets and liabilities, current
and expected lending rates, funding sources and costs. Other factors, which may
be potentially important in determining the future growth of net interest income
(i.e. planned securitizations and liquidity requirements), are considered in
these simulations.
Management also uses one year GAP analysis as a secondary technique for
evaluating interest rate risk. The Corporation's one year GAP fluctuated between
a negative 2% and a negative 27% of assets during 1998. Management considers
that the ranges of the GAP ratio achieved during 1998 are adequate, considering
the Corporation's net interest margin and capital ratios.
The Corporation's interest rate risk position is measured on a
quarterly basis and is evaluated by the Asset Liability Management and
Investment Committee. This Committee is in charge, among other things, of
informing Management as to the current levels of interest rate risk and, when
necessary, managing the repricing of the Corporation's assets, liabilities and
off balance sheet contracts to maintain that risk at reasonable and prudent
levels.
Liquidity
Liquidity refers to the level of cash and eligible investments to meet
loan and investment commitments, potential deposit outflows and debt repayments.
The Investment Committee, using measures of liquidity developed by Management
reviews the Corporation's liquidity position and liquidity targets on a weekly
basis.
The principal sources of short-term funds are loan repayments,
deposits, securities sold under agreements to repurchase, a commercial paper
conduit collateralized by personal loans, and lines of credit with the FHLB and
other financial institutions. The Investment Committee reviews credit
availability on a regular basis. In addition, the Corporation has securitized
and sold auto and mortgage loans as supplementary sources of funding. Commercial
paper has also provided additional funding. The Corporation has obtained
long-term funding through the issuance of notes and long-term institutional
certificates of deposit. The Corporation's principal uses of funds are the
origination of loans and the repayment of maturing deposit accounts and
borrowings.
Impact of Inflation and Changing Prices
The financial statements and related data presented herein have been
prepared in conformity with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars without considering changes in the relative purchasing power
of money over time due to inflation.
Unlike most industrial companies, substantially all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a greater impact on a financial institution's performance
than the effects of general levels of inflation. Interest rate movements are not
necessarily correlated with changes in the prices of goods and services.
37
Market Prices and Stock Data
The Corporation's common stock is traded in the New York Stock Exchange
(NYSE) under the symbol FBP. On December 31, 1998, there were 673 holders of
record of the Corporation's common stock.
The following table sets forth the high and low prices of the
Corporation's common stock for the periods indicated as reported by the NYSE.
Common stock prices were adjusted to give retroactive effect to the stock split
declared in May 1998.
Quarter ended High Low
1998:
December $30.50 $21.38
September 29.50 23.63
June 29.63 22.72
March 23.88 16.50
1997:
December $18.82 $15.13
September 17.75 12.53
June 13.63 11.69
March 14.38 12.50
1996:
December $14.19 $11.13
September 11.57 10.00
June 12.07 10.07
March 12.13 10.32
38
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
First BanCorp manages its asset/liability position in order to limit
the effects of changes in interest rates on net interest income, subject to
other goals of Management and within guidelines set forth by the Board of
Directors.
The day-to-day management of interest rate risk, as well as liquidity
management and other related matters, is assigned to the Asset Liability
Management and Investment Committee (ALCO). The ALCO is composed of the
following officers: President and CEO, Senior Executive Vice President/Chief
Financial Officer, Senior Executive Vice President/Chief Lending Officer,
Executive Vice President and President of Money Express, Senior Vice
President/Investments, and the Economist. The ALCO meets on a weekly basis. The
Economist acts as secretary, keeping minutes of all meetings.
Committee meetings focus on, among other things, current and expected
conditions in world financial markets, competition and prevailing rates in the
local deposit market, reviews of liquidity, unrealized gains and losses in
securities, recent or proposed changes to the investment portfolio, alternative
funding sources and their costs, hedging and the possible purchase of
derivatives such as swaps and caps, and any tax or regulatory issues which may
be pertinent to these areas. The ALCO approves pricing and funding decisions in
the light of the Corporation's overall growth strategies and objectives. On a
semi annual basis the ALCO performs a comprehensive asset/liability review,
examining the measures of interest rate risk described below together with other
matters such as liquidity and capital.
The Corporation uses simulations to measure the effects of changing
interest rates on net interest income. These measures are carried out in two
ways, assuming upward and downward interest rate movements of 200 basis points:
(1) using a balance sheet which is assumed to be flat at the levels
existing on the simulation date, and
(2) using a balance sheet which has growthpatterns and strategies similar
to those which have occurred in the recent past.
Assuming a flat balance sheet, tax equivalent net interest income for
the twelve months following December 31, 1998 would be $207.1 million under flat
rates, $185.4 million under rising rates, and $211.0 million under falling
rates. Assuming a growing balance sheet, tax equivalent net interest income for
the same one year period would be $209.1 million under flat rates, $188.3
million under rising rates and $212.5 million under falling rates. These
simulations do not represent what actual results would be, since interest rate
risk management is dynamic, and can be adjusted depending on the committee's
interest rate outlook.
These simulations assume gradual upward or downward movements of
interest rates over one year, with the change totaling 200 basis points at the
end of the twelve month period. The balance sheet is divided into groups of
similar assets and liabilities in order to simplify the process of carrying out
these projections. As interest rates rise or fall these simulations incorporate
expected future lending rates, current and expected future funding sources and
cost, the possible exercise of options, liquidity requirements, and other
factors which may be important in determining the future growth of net interest
income. Only interest and fee income is included in these projections; profits
on the sale of assets are excluded. All computations are done on a tax
equivalent basis, including the effects of the changing cost of funds on the
tax-exempt spreads of certain investments.
These simulations are highly complex, and they use many simplifying
assumptions which are intended to reflect the general behavior of the
Corporation over the period in question, but there can be no assurance that
actual events will parallel these assumptions in all cases. For this reason, the
results of these simulations are only approximations of the true sensitivity of
net interest income to changes in market interest rates.
39
Report of Independent
Accountants and Consolidated
Financial Statements
PricewaterhouseCoopers
Report of Independent Accountants
To the Board of Directors
and Stockholders
of First BanCorp
In our opinion, the accompanying consolidated statements of financial
condition and the related consolidated statements of income, of changes in
stockholders' equity, of comprehensive income, and of cash flows present fairly,
in all material respects, the financial position of First BanCorp and its
subsidiaries at December 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years ended December 31, 1998, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurane about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
asssessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
CERTIFIED PUBLIC ACCOUNTANTS
(OF PUERTO RICO)
License No. 216 Expires Dec., 1 2001
Stamp 1537438 of the P.R. Society of
Certified Public Accountants has been
affixed to the file copy of this report
February 12, 1999
FIRST BANCORP
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 1998 1997
Assets
Cash and due from depository institutions $ 39,416,097 $ 37,666,068
-------------- -----------------
Money market instruments -
Deposits at interest with banks 525,669 514,236
------------------- --------------------
Debt securities available for sale, at market:
United States and Puerto Rico Government obligations 268,611,106 448,092,442
Mortgage backed securities 1,492,538,909 758,886,800
Other investment 1,620,000
------------------- ------------------
Total debt securities available for sale 1,762,770,015 1,206,979,242
---------------- ----------------
Debt securities held to maturity, at cost -
United States and Puerto Rico Government obligations 26,921,836 59,256,360
----------------- ------------------
Federal Home Loan Bank (FHLB) stock 10,270,600 10,150,300
----------------- ----------------
Loans held for sale 20,641,628 10,224,509
Loans receivable 2,099,412,756 1,949,076,978
--------------- --------------
Total loans 2,120,054,384 1,959,301,487
Allowance for loan losses (67,854,066) (57,711,927)
---------------- ----------------
Total loans - net 2,052,200,318 1,901,589,560
--------------- ---------------
Other real estate owned 3,642,525 1,131,808
Premises and equipment - net 51,537,192 48,447,167
Accrued interest receivable 10,738,072 13,035,934
Due from customers on acceptances 2,392,338 353,587
Other assets 56,937,413 48,311,296
----------------- -----------------
Total assets $4,017,352,075 $3,327,435,558
============== ==============
Liabilities and Stockholders' Equity
Liabilities:
Non-interest bearing deposits $ 173,103,709 $ 140,099,305
Interest bearing deposits 1,601,941,185 1,454,535,378
Federal funds purchased and securities
sold under agreements to repurchase 1,623,697,988 969,303,381
Other short-term borrowings 86,594,710 231,504,896
Advances from FHLB 2,600,000 29,000,000
Notes payable 118,100,000 132,350,000
Bank acceptances outstanding 2,392,338 353,587
Accounts payable and other liabilities 39,058,247 34,486,321
----------------- -----------------
3,647,488,177 2,991,632,868
Subordinated notes 99,495,830 99,423,490
----------------- -----------------
Stockholders' equity:
Common stock, $1.00 par value, authorized 250,000,000 shares; issued
29,599,552 shares (including 14,796,526 shares issued
on May 29, 1998 as a stock split) (1997 - 14,901,826) 29,599,552 14,901,826
Less: Treasury Stock (100,000 shares at par) 100,000
----------------- ---------------
Common stock outstanding 29,499,552 14,901,826
Additional paid-in capital 23,575,936 38,453,561
Capital reserve 30,000,000 20,000,000
Legal surplus 53,454,469 53,454,469
Retained earnings 125,088,180 97,537,900
Accumulated other comprehensive income - unrealized gain
on securities available for sale, net of tax 8,749,931 12,031,444
------------------ -----------------
270,368,068 236,379,200
---------------- ----------------
Contingencies and commitments
Total liabilities and stockholders' equity $4,017,352,075 $3,327,435,558
============== ==============
The accompanying notes are an integral part of these statements.
FIRST BANCORP
CONSOLIDATED STATEMENTS OF INCOME
Year ended December 31,
1998 1997 1996
--------------- ------------- -------------
Interest income:
Loans $231,513,730 $225,524,452 $213,744,790
Debt securities 88,312,096 55,310,691 40,180,410
Short-term investments 729,417 3,654,806 1,842,204
Dividends on FHLB stock 743,161 670,156 755,485
-------------- ------------- ------------
Total interest income 321,298,404 285,160,105 256,522,889
------------- ------------- -----------
Interest expense:
Deposits 70,418,359 72,147,084 70,963,853
Short-term borrowings 69,494,151 39,460,518 23,319,871
Notes payable 14,965,751 17,958,092 17,289,034
Advances from FHLB 251,707 863,599 1,454,547
---------------- -------------- -------------
Total interest expense 155,129,968 130,429,293 113,027,305
------------- ----------- -----------
Net interest income 166,168,436 154,730,812 143,495,584
Provision for loan losses 76,000,000 55,675,500 31,582,401
------------- ------------ ------------
Net interest income after provision for loan losses 90,168,436 99,055,312 111,913,183
------------- ------------ -----------
Other income:
Other fees on loans 11,157,852 10,898,586 10,651,284
Service charges on deposit accounts 7,843,837 7,363,369 6,184,113
Trading income (loss) 3,364,843 744,789 (1,354,773)
Fees on loans serviced for others 1,617,292 2,669,673 3,993,007
Gain on sale of investments 26,827,417 11,388,137 4,856,568
Rental income 2,291,814 1,935,169 2,356,358
Other operating income - net 5,136,795 4,865,788 2,927,920
------------- ------------- -------------
Total other income 58,239,850 39,865,511 29,614,477
------------ ------------ ----------
Other operating expenses:
Employees' compensation and benefits 43,185,324 38,644,042 37,358,733
Occupancy and equipment 18,154,663 16,101,054 14,931,955
Taxes and insurance 6,577,894 6,575,896 7,093,764
Net cost (gain) of operations and disposition of
other real estate owned 42,359 (21,128) 218,522
Amortization of debt issuance costs 691,411 787,745 873,420
Other 23,146,048 21,180,662 22,021,236
------------ ----------- ------------
Total other operating expenses 91,797,699 83,268,271 82,497,630
------------ ------------ ------------
Income before unusual item and income tax provision 56,610,587 55,652,552 59,030,030
Unusual item - SAIF assessment 9,115,000
------------------ ------------------ ------------
Income before income tax provision 56,610,587 55,652,552 49,915,030
Income tax provision 4,798,200 8,125,000 12,281,239
------------- ------------ ------------
Net income $ 51,812,387 $47,527,552 $37,633,791
============ =========== ===========
Earnings per common share - basic $1.75 $1.58 $1.22
Earnings per common share - diluted $1.74 $1.58 $1.22
The accompanying notes are an integral part of these statements.
FIRST BANCORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year ended December 31,
1998 1997 1996
------------------ ------------------ ----------
Net income $51,812,387 $47,527,552 $37,633,791
----------- ------------- -----------
Other comprehensive income net of tax:
Unrealized gain (losses) on securities:
Unrealized holding gains (losses)
arising during the period (14,665,309) 12,081,362 (3,585,742)
Less: reclassification adjustment
for gains included in net income (11,383,796) 657,037 (1,074,566)
------------ ------------- -------------
Total other comprehensive income (3,281,513) 11,424,325 (2,511,176)
------------- ----------- -------------
Comprehensive income $48,530,874 $58,951,877 $35,122,615
=========== =========== ===========
The accompanying notes are an integral part of these statements.
FIRST BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
1998 1997 1996
Cash flows from (for) operating activities:
Net income $ 51,812,387 $ 47,527,552 $ 37,633,791
----------------- --------------- --------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 7,827,866 7,281,936 6,156,487
Provision for loan losses 76,000,000 55,675,500 31,582,401
Increase in taxes payable 3,454,049 1,464,869 1,539,279
Increase in deferred tax asset (11,454,033) (1,765,992) (7,625,000)
Decrease (increase) in accrued interest receivable 2,297,862 (3,843,610) 3,582,598
Increase (decrease) in accrued interest payable 1,072,485 (2,371,552) 4,527,433
Amortization of deferred loan fees 881,411 (30,868) 950
Net gain on sale of investments securities (26,827,417) (11,388,137) (4,856,568)
Originations of loans held for sale (9,086,622) (7,668,575) (8,455,567)
Proceeds from sale of loans 1,249,543
Decrease (increase) in other assets (2,194,128) 3,294,965 (734,092)
Increase (decrease) in other liabilities 1,718,243 (3,157,333) 3,058,474
------------------- ------------------ -----------------
Total adjustments 43,689,716 38,740,746 28,776,395
------------------- ---------------- ----------------
Net cash provided by operating activities 95,502,103 86,268,298 66,410,186
-------------------- --------------- ----------------
Cash flows from (for) investing activities:
Principal collected on loans 559,726,839 661,129,038 648,321,626
Loans originated (798,487,248) (819,802,988) (1,041,089,883)
Sales of investment securities and deposits at interest with banks 302,128,585 118,004,497 208,657,726
Maturities of investment securities and deposits at interest with banks 6,096,509,572 7,546,078,859 4,744,671,620
Purchases of investment securities and deposits at interest with banks (6,899,653,771) (8,079,336,836) (4,999,351,451)
Additions to premises and equipment (10,917,891) (6,739,859) (16,183,784)
Proceeds from sale of other real estate owned 463,867 1,105,200 4,780,000
Proceeds from sale of auto repossessions 22,506,674 44,413,066 19,932,726
Redemption of FHLB stock (120,300) 2,297,100
---------------- ------------------------ ----------------
Net cash used by investing activities (727,843,673) (535,149,023) (427,964,320)
------------- ---------------- --------------
Cash flows from (for) financing activities:
Proceeds from issuance of certificates of deposit and savings accounts 1,213,776,011 894,793,781 977,210,993
Payments for maturing certificates of deposit
and withdrawals of saving accounts (1,029,607,935) (961,330,999) (740,699,072)
Interest credited to deposits (53,226,355) (53,567,387) (45,258,544)
Proceeds from federal funds purchased and
securities sold under repurchase agreements 16,408,940,022 14,057,501,079 8,180,227,456
Payments/Maturities of federal funds purchased
and securities sold under repurchase agreements (15,754,179,517) (13,676,488,479) (8,016,755,718)
Net increase (decrease) in other short-term borrowings (144,910,185) 231,504,896
FHLB-N.Y. advances taken 2,600,000 29,000,000 14,100,000
Principal payments on FHLB-N.Y. advances (29,000,000) (14,100,000) ( 29,500,000)
Payments of notes payable (14,177,660) (54,010,993) (16,927,316)
Proceeds from notes payable 55,500,000
Decrease (increase) in debt securities issuance cost (1,049,270) 957,972 327,813
Net increase (decrease) in demand deposit accounts 49,468,489 10,813,682 (3,184,250)
Dividends (8,870,832) (7,197,417) (6,140,400)
Repurchase of common stock (3,656,420) (6,899,822) (9,042,230)
Treasury stock acquired (2,211,250)
Exercise of stock options 196,501 382,249
------------------ ------------ ---------------
Net cash provided by financing activities 634,091,599 451,358,562 359,858,732
------------- ------------------- ---------------
Net increase (decrease) in cash and cash equivalents 1,750,029 2,477,837 (1,695,402)
Cash and cash equivalents at beginning of year 37,666,068 35,188,231 36,883,633
------------------------------------- ----------------
Cash and cash equivalents at end of year $ 39,416,097 $ 37,666,068 $ 35,188,231
================ =================== ===============
The accompanying notes are an integral part of these statements.
35
FIRST BANCORP
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Unrealized
gain on
Common Additional securities
stock paid-in Capital Legal Retained available
outstanding capital reserve surplus earnings for sale
Balance at December 31, 1995 $15,541,751 $39,450,162 $45,343,616 $67,748,506 $3,118,295
Net income 37,633,791
Change in valuation of
securities available for sale (2,511,176)
Addition to legal surplus 3,763,379 (3,763,379)
Addition to capital reserve $10,000,000 (10,000,000)
Repurchase of common stock (425,100) (850,200) (7,766,930)
Cash dividends __________ __________ __________ __________ (6,140,402) __________
-------------
Balance at December 31, 1996 15,116,651 38,599,962 10,000,000 49,106,995 77,711,586 607,119
Net income 47,527,552
Change in valuation of
securities available for sale 11,424,325
Addition to legal surplus 4,347,474 (4,347,474)
Addition to capital reserve 10,000,000 (10,000,000)
Repurchase of common stock (247,825) (495,650) (6,156,347)
Stock option exercised 33,000 349,249
Cash dividends (7,197,417)
---------- ---------- ----------- ----------- ---------- -----------
Balance at December 31, 1997 14,901,826 38,453,561 20,000,000 53,454,469 97,537,900 12,031,444
Net income 51,812,387
Change in valuation of
securities available for sale (3,281,513)
Addition to capital reserve 10,000,000 (10,000,000)
Repurchase of common stock (108,800) (217,600) (3,330,024)
Treasury stock (100,000) (50,000) (2,061,250)
Stock option exercised 10,000 186,501
Cash dividends (8,870,832)
Common stock split
on May 29, 1998 14,796,526(14,796,526) __________ __________ ___________ __________
-----------------------
Balance at December 31, 1998 $29,499,552 $23,575,936 $30,000,000 $53,454,469 $125,088,180 $ 8,749,931
=========== =========== =========== =========== ============ ===========
The accompanying notes are an integral part of these statements.
FIRST BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Nature of Business
First BanCorp (the Corporation) was incorporated on October 1st, 1998
under the laws of the Commonwealth of Puerto Rico to serve as the bank holding
company for FirstBank Puerto Rico (FirstBank or the Bank). As a result of this
reorganization each of the Bank's outstanding shares of common stock was
converted into one share of common stock of the new bank holding company. This
reorganization was carried out pursuant to an Agreement and Plan of Merger by
and between the Corporation and the Bank. First BanCorp is subject to the
Federal Bank Holding Company Act and to the regulations, supervision, and
examination of the Federal Reserve Board.
FirstBank, the Corporation's subsidiary, is a commercial bank chartered
under the laws of the Commonwealth of Puerto Rico. Its main office is located in
San Juan, Puerto Rico, and has 38 full service banking branches in Puerto Rico
and two in the U.S. Virgin Islands. It also has loan origination offices in
Puerto Rico focusing on consumer loans. In addition, through its wholly owned
subsidiaries, FirstBank operates other offices in Puerto Rico specializing in
small personal loans, finance leases and vehicle rental. The Bank is subject to
the supervision, examination and regulation by the Office of the Commissioner of
Financial Institutions of Puerto Rico and the Federal Deposit Insurance
Corporation (FDIC), which insures its deposits through the Savings Association
Insurance Fund (SAIF).
Note 2 - Summary of Significant Accounting Policies
The accounting and reporting policies of the Corporation and its
subsidiaries conform with generally accepted accounting principles, and, as
such, include amounts based on judgments, estimates and assumptions made by
Management that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual result could differ from those
estimates. Following is a description of the more significant accounting
policies followed by the Corporation:
Principles of consolidation
The consolidated financial statements include the accounts of the
Corporation and its subsidiaries, all of which are wholly owned. All significant
intercompany balances and transactions have been eliminated in consolidation.
Statement of cash flows
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand and amounts due from depository institutions.
Segments of an enterprise and related information
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 131 "Disclosures about
Segments of an Enterprise and Related Information." This statement changes the
way public companies report information about segments of their business in
their financial statements and requires them to report selected segment
information in the reports issued to shareholders. It also requires entity-wide
disclosures about the products and services an entity provides, activities in
different geographic areas, and reliance on major customers.
The segments are determined based on the way that Management organizes the
segments within the entity for making operating decisions and assessing
performance. Management implemented SFAS No. 131 for all the periods presented.
The implementation affected only the disclosures given in the notes to the
financial statements.
Securities purchased under agreements to resell
The Corporation enters into purchases of securities under agreements to
resell the same securities. Amounts advanced under these agreements represent
short-term loans and are reflected as assets in the statements of financial
condition.
Investment securities
The Corporation classifies its investments in debt and equity
securities into one of three categories:
Held to maturity - Securities for which the entity has the
positive intent and ability to hold to maturity. These securities are
carried at amortized cost.
Trading - Securities that are bought and held principally for
the purpose of selling them in the near term. These securities are
carried at fair value, with holding gains and losses reported in
earnings.
Available for sale - Securities not classified as trading or
as held to maturity. These securities are carried at fair value, with
unrealized holding gains and losses net of estimated tax effect,
excluded from earnings and reported in other comprehensive income as a
separate component of stockholders' equity.
Premiums and discounts are amortized as an adjustment to interest
income over the life of the related securities using a method that approximates
the interest method. Realized gains or losses on securities are reported in
earnings. When computing realized gains or losses, the cost of securities is
determined on the specific identification method.
Loans and allowance for loan losses
Loans are stated at their outstanding balance less unearned interest
and net deferred loan origination fees and costs. Unearned interest on
installment loans (i.e., personal and auto) is recognized as income under a
method which approximates the interest method.
Loans on which the recognition of interest income has been discontinued
are designated as non-accruing. When loans are placed on non-accruing status,
any accrued but uncollected interest income is reversed and charged against
interest income.
Consumer loans are classified as non-accruing when they are delinquent:
90 days or more for auto, boat and home equity reserve loans, 120 days or more
for personal loans, and 180 days or more for credit cards and personal lines of
credit. Commercial and mortgage loans are classified as non-accruing when they
are delinquent 90 days or more. This policy is also applied to all impaired
loans.
The Corporation provides for estimated losses on mortgage, commercial
and consumer loans upon an evaluation of the risk characteristics of said loans,
loss experience, economic conditions and other pertinent factors. Loan losses
are charged and recoveries are credited to the allowance for loan losses.
Loan origination fees and costs
Loan origination fees and costs incurred in the origination of loans
are deferred and amortized using the interest method or under a method that
approximates the interest method over the life of the loans as an adjustment to
interest income. When a loan is paid off or sold, any unamortized net deferred
fee (cost) balance is credited (charged) to income.
Other real estate owned - acquired in settlement of loans
Other real estate owned, acquired in settlement of loans, is carried at
the lower of cost (carrying value of the loan) or fair value minus estimated
cost to sell of the real estate at the date of acquisition. Subsequent to
foreclosure, gains or losses resulting from the sale of these properties and
losses recognized on the periodic reevaluations of these properties are credited
or charged to net cost (gain) of operations and disposition of other real estate
owned. The cost of maintaining and operating these properties is expensed as
incurred.
Premises and equipment
Premises and equipment are carried at cost less accumulated
depreciation. Depreciation is provided on the straight-line method over the
estimated useful lives of the individual assets. Depreciation of leasehold
improvements is computed on the straight-line method over the terms of the
leases or estimated useful lives of the improvements, whichever is shorter.
Costs of maintenance and repairs which do not improve or extend the life of the
respective assets are expensed as incurred. Costs of renewals and betterments
are capitalized. When assets are sold or disposed of, their cost and related
accumulated depreciation are removed from the accounts and any gain or loss is
reflected in earnings.
Securities sold under agreements to repurchase
The Corporation enters into sales of securities under agreements to
repurchase the same or similar securities. Generally, similar securities are
securities from the same issuer, with identical form and type, similar maturity,
identical contractual interest rates, similar assets as collateral and the same
aggregate unpaid principal amount. Amounts advanced under these agreements are
accounted as short-term borrowings and the securities underlying the agreements
remain in the asset accounts.
Amortization of debt issuance costs
Costs related to the issuance of debt are amortized under a method
which approximates the interest method.
Treasury stock
The Corporation accounts for treasury stock at par value. Under this
method, the treasury stock account is increased by the par value of each share
of common stock reacquired. Any excess paid per share over the par value is
debited to additional paid-in capital for the amount per share that it was
originally credited. Any remaining excess is charged to retained earnings.
Stock option plan
The cost associated with stock option plan under which certain
employees receive options to buy shares of stock of the Corporation must be
recognized either by the fair value based method or the intrinsic value based
method. The Corporation uses the intrinsic value based method of accounting.
Under the intrinsic value based method, compensation cost is the excess, if any,
of the quoted market price of the stock at grant date or other measurement date
over the amount an employee must pay to acquire the stock. If material, entities
using the intrinsic value based method on awards granted to employees must make
pro forma disclosures of net income and earnings per share, as if the fair value
based method of accounting had been applied. Under the fair value based method,
compensation cost is measured at the grant date based on the value of the award
and is recognized over the service period, which is usually the vesting period.
Earnings per common share
Earnings per share-basic is calculated by dividing income available to
common stockholders by the weighted average number of outstanding common shares.
The computation of earnings per share-diluted is similar to the computation of
earnings per share-basic except that the weighted average common shares are
increased to include the number of additional common shares that would have been
outstanding if the dilutive potential common shares had been issued. Stock
options outstanding under the Corporation's stock option plan are considered in
the earnings per share-diluted by application of the treasury stock method. Any
stock splits or stock dividends are retroactively recognized in all periods
presented in financial statements.
Reporting comprehensive income
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive
Income." This statement establishes standards for reporting and displaying
comprehensive income and its components in the financial statements.
Comprehensive income includes net income and several other items that current
accounting standards require to be recognized outside of net income. This
statement was implemented in 1998 and affected only financial statements'
presentation. Reclassification of financial statements for earlier periods was
presented for comparative purposes.
Reclassifications
Certain amounts in the 1997 and 1996 financial statements have been
reclassified to conform with the 1998 classifications.
Accounting for derivative instruments and hedging activities
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments, including derivative instruments
that are embedded in other contracts, and for hedging activities. SFAS No. 133
standardizes accounting for derivative instruments, including those embedded in
other contracts, by requiring the recognition of all derivatives (both assets
and liabilities) in the statement of financial position at fair value. In
accordance with SFAS No. 133, changes in the fair value of derivative
instruments are generally accounted for as current income or other comprehensive
income, depending on their designation.
SFAS No. 133 generally provides for the matching of the timing of gain
or loss recognition on the hedging instruments with the recognition of either
the changes in the fair value of the hedged asset or liability, or the earnings
effect of the hedged forecasted transaction.
SFAS No. 133 is effective for fiscal periods beginning after June 15,
1999. Based on current volumes, Management expects that the adoption of SFAS No.
133 will not have a significant impact on the Corporation's financial position
and results of operations.
Note 3 - Stockholders' Equity
Common stock
Authorized common stock shares at December 31, 1998 were 250,000,000
(1997 - 200,000,000), with a par value of $1.00.
On April 30, 1998, the Corporation declared a two for one stock split
on its then outstanding 14,796,526 shares of common stock. As a result, a total
of 14,796,526 additional shares of common stock were issued on May 29, 1998. In
addition, 33,000 and 10,000 shares of common stock were issued during 1997 and
1998 as part of the exercise of stock options under the Corporation's stock
option plan.
The Corporation declared a cash dividend on its common stock of $0.20 per
share in 1996, of $0.24 per share in 1997, and of $0.30 per share in 1998.
Stock repurchase plan and treasury stock
In 1996 a stock repurchase program was established (the 1996 Program)
where the Corporation is authorized to repurchase in the open market, and retire
from circulation or hold as treasury stock, up to ten percent of the 31,083,502
issued and outstanding shares of common stock at the time the program was
approved by the stockholders. Under this program the Corporation repurchased a
total of 317,600 shares of common stock at a cost of $5,867,674 during 1998,
495,650 shares of common stock at a cost of $6,899,822 during 1997, and 850,200
shares of common stock at a cost of $9,042,230 during 1996. The number of shares
were adjusted to recognize the May 1998 stock split.
In 1997 an additional stock repurchase program was established whereby
the Corporation may repurchase in the open market shares of common stock, which
amount represents 10% of the issued and outstanding shares after all shares
authorized under the 1996 Program have been repurchased.
As permitted by the new bank holding company structure, at December 31,
1998, 100,000 shares were held as treasury stock and were available for general
corporate purposes.
Preferred stock
The Corporation has 50,000,000 shares (1997 - 20,000,000) of authorized
preferred stock with a par value of $1. This stock may be issued in series and
the shares of each series shall have such rights and preferences as shall be
fixed by the Board of Directors when authorizing the issuance of that particular
series. At December 31, 1998, no shares of preferred stock were outstanding.
Capital reserve
The capital reserve account was established to comply with certain
regulatory requirements of the Office of the Commissioner of Financial
Institutions of Puerto Rico related to the issuance of subordinated notes by
FirstBank in 1995. An amount equal to 10% of the principal of the notes is set
aside each year from retained earnings until the reserve equals the total
principal amount. At the notes repayment date the balance in capital reserve is
to be transferred to the legal surplus account or retained earnings after the
approval of the Commissioner of Financial Institutions of Puerto Rico.
Legal surplus
The Banking Act of the Commonwealth of Puerto Rico requires FirstBank
that a minimum of 10% of the net income for the year be transferred to legal
surplus, until such surplus equals the total of paid in capital on common and
preferred stock. Amounts transferred to the legal surplus account from the
retained earnings account are not available for distribution to the
stockholders.
Dividend restrictions
The Corporation is subject to certain restrictions generally imposed on
Puerto Rico corporations (i.e., that dividends may be paid out only from the
Corporation's net assets in excess of capital or in the absence of such excess,
from the Corporation's net earnings for such fiscal year and/or the preceding
fiscal year). The Federal Reserve Board has also issued a policy statement that
provides that bank holding companies should generally pay dividends only out of
current operating earnings.
Note 4 - Regulatory Capital Requirement
The Corporation is subject to various regulatory capital requirements
imposed by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Corporation's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Corporation must meet specific capital guidelines that involve quantitative
measures of the Corporation's assets, liabilities, and certain off-balance sheet
items as calculated under regulatory accounting practices. The Corporation's
capital amounts and classification are also subject to qualitative judgment by
the regulators about components, risk weightings and other factors.
Capital standards established by regulations require the Corporation to
maintain minimum amounts and ratios of Tier 1 capital to total average assets
(leverage ratio) and ratios of Tier 1 and total capital to risk-weighted assets,
as defined in the regulations. The total amount of risk-weighted assets is
computed by applying risk weighting factors to the Corporation's assets, which
vary from 0% to 100% depending on the nature of the asset.
At December 31, 1998 and 1997, the Corporation exceeded the
requirements for an adequately capitalized institution.
At December 31, 1998, the Corporation also was a well capitalized
institution under the regulatory framework for prompt corrective action. To be
categorized as well capitalized the Corporation must maintain minimum total risk
based, Tier 1 risk based and Tier 1 leverage ratios as set forth in the
following table. Management believes that there are no conditions or events that
have changed that classification.
The Corporation's regulatory capital position was as follows (dollars
in thousands):
For Capital To Be Well
Adequacy Purposes Capitalized
Amount Ratio Amount Ratio
At December 31, 1998:
Total capital to risk weighted assets:
Actual $377,939 17.39% $377,939 17.39%
Requirement 173,835 8.00% 217,294 10.00%
--------- ------- -------- ------
Excess $204,104 9.39% $160,645 7.39%
======== ======= ======== ======
Tier 1 capital to risk weighted assets:
Actual $250,910 11.55% $250,910 11.55%
Requirement 86,917 4.00% 130,376 6.00%
---------- ------- --------- ------
Excess $163,993 7.55% $120,534 5.55%
======== ======= ======== ======
Tier 1 capital to average assets:
Actual $250,910 6.59% $250,910 6.59%
Requirement 152,272 4.00% 190,340 5.00%
--------- ----- -------- -----
Excess $ 98,638 2.59% $ 60,570 1.59%
========= ===== ======== =====
At December 31, 1997:
Total capital to risk weighted assets:
Actual $348,359 17.26% $348,359 17.26%
Requirement 161,452 8.00% 201,816 10.00%
--------- ------- --------- ------
Excess $186,907 9.26% $146,543 7.26%
======== ======= ======== =======
Tier 1 capital to risk weighted assets:
Actual $223,481 11.07% $223,481 11.07%
Requirement 80,726 4.00% 121,089 6.00%
---------- ------- --------- -------
Excess $142,755 7.07% $102,392 5.07%
======== ======= ======== =======
Tier 1 capital to average assets:
Actual $223,481 7.44% $223,481 7.44%
Requirement 120,101 4.00% 150,126 5.00%
--------- ----- --------- -----
Excess $103,380 3.44% $ 73,355 2.44%
======== ===== ========= =====
At December 31, 1998, the Bank's regulatory capital ratios, which
exceeded the requirements for an adequately and well capitalized institution,
were as follows: (1) total risk based of 17.12%; (2) Tier 1 risk based of 11.28%
and; (3) Tier 1 leverage ratio of 6.44%. Management believes that there are no
conditions or events that have changed that classification.
Note 5 - Stock Option Plan
The Corporation has a stock option plan covering certain employees. The
plan covers a number of options not to exceed 20% of the number of common shares
outstanding. Each option provides for the purchase of one share of common stock
at a price not less than the fair market value of the stock on the date the
option is granted. The maximum term to exercise the options is ten years. The
stock option plan provides for a proportionate adjustment in the exercise price
and the number of shares that can be purchased in the event of a stock dividend,
stock split, reclassification of stock, merger or reorganization and certain
other issuance and distributions.
Following is a summary of the activity related to stock options as
adjusted retroactively for the May 1998 stock split:
Number Weighted Average
of Options Exercise Price of Option
At December 31, 1995 305,714 $ 5.72
Granted 20,000 12.69
--------
At December 31, 1996 325,714 6.15
Granted 240,000 15.45
Exercised (66,000) 5.79
Expired or canceled (25,714) 10.20
--------
At December 31, 1997 474,000 10.68
Granted 294,000 24.83
Exercised (13,500) 14.56
-------
At December 31, 1998 754,500 16.13
=======
During 1998 the Corporation granted 294,000 options to buy common stock
shares with a weighted exercise price of $24.83 per option. The option prices
equal the quoted market price of the stock on the grant date, therefore no
compensation cost was recognized on the options granted.
The options outstanding at December 31, 1998 have an original
expiration term of ten years and all of them are exercisable. The exercise price
of the options outstanding at December 31, 1998 ranges from $5.79 to $28.38 and
the weighted average remaining contractual life is eight years and three months.
Following is additional information concerning the stock options
outstanding at December 31, 1998. The data included herein have been adjusted to
reflect the May 1998 stock split.
Number of Exercise Contractual
Options Price Maturity
234,000 $ 5.79 November 2004
13,000 13.56 January 2007
213,500 15.63 November 2007
60,000 19.19 February 2008
7,000 28.38 April 2008
40,000 27.09 May 2008
10,000 26.56 June 2008
177,000 26.00 November 2008
-------
754,500
Note 6 - Earnings Per Common Share
The calculations of earnings per common share for the years ended December
31, 1998, 1997 and 1996 follow (in thousands, except per share data):
Year ended December 31,
Earnings per common share-basic: 1998 1997 1996
- - ------------------------------- ------ ------ ----
Net income - available to common stockholders $51,812 $47,528 $37,634
------- ------- -------
Weighted average common shares outstanding 29,586 30,036 30,794
------- ------- -------
Earnings per common share-basic $ 1.75 $ 1.58 $ 1.22
======== ======== ========
Earnings per common share-diluted:
Net income - available to common stockholders $51,812 $47,528 $37,634
------- ------- -------
Weighted average common shares and share equivalents:
Average common shares outstanding 29,586 30,036 30,794
Common stock equivalents - Options 272 168 158
--------- ----------- ---------
Total 29,858 30,204 30,952
------- -------- -------
Earnings per common share-diluted $ 1.74 $ 1.58 $ 1.22
========= ========= ========
Had compensation cost for the stock options granted been determined
based on the fair value at the grant date (as a result of the requirement
explained in Note 2 - Stock option plan), the Corporation's net income and
earnings per common share would have been reduced to the pro forma amounts
indicated, as follow (in thousands, except per share data):
Year ended December 31,
Pro forma earnings per common share: 1998 1997 1996
- - ----------------------------------- ---------- --------- ------
Net income $48,592 $46,354 $37,634
Earnings per common share-basic $1.64 $1.55 $1.22
Earnings per common share-diluted $1.63 $1.54 $1.22
Management uses the binomial model for the computation of the fair
value of each option granted to buy shares of the Corporation's common stock.
The fair value of each option granted during 1998 and 1997 was estimated using
the following assumptions: weighted dividend growth of 21.97% (1998); expected
life of 10 years; weighted expected volatility of 36.08% (1998) and 29.8% (1997)
and weighted risk-free interest rate of 5.10% (1998) and 5.76% (1997). The
weighted estimated fair value of the options granted was $10.95 (1998) and $4.89
(1997) per option. The options granted during 1996 were not considered in the
1996 pro forma earnings per share since their effect in the computation was
immaterial.
Note 7 - Cash and Due from Banks
The Corporation is required by law to maintain average reserve
balances. The amount of those reserve balances was approximately $34,867,200 at
December 31, 1998 (1997 - $25,095,400).
Note 8 - Securities Purchased Under Agreements To Resell
At December 31, 1998 and 1997, there were no securities purchased under
agreements to resell. The maximum aggregate balance outstanding at any month-end
during 1998 was approximately $209,232,000 (1997 - $552,969,000). The average
aggregate balance during 1998 was $15,009,052 (1997 - $66,401,236). The
securities underlying these agreements are kept under the Corporation's control
or held by the dealers through which the agreements were transacted. These
securities are not recorded as assets of the Corporation.
Note 9 - Debt Securities Held For Trading
At December 31, 1998 and 1997, there were no securities held for
trading purposes or options on such securities.
All trading instruments are subject to market risk, the risk that
future changes in market conditions, such as fluctuations in market prices or
interest rates, may make an instrument less valuable or more onerous. The
instruments are accounted for at market value, and their changes are reported
directly in earnings.
The Corporation may write options on trading securities as part of its
trading activities. These options are carried at market value. Net gains and
losses resulting from these transactions are recorded in the trading income or
loss account.
The net gain from the sale of trading securities amounted to $3,365,000 for
the year ended December 31, 1998 (a gain of $745,000 for 1997 and a loss of
$1,355,000 for 1996), and were included in earnings as trading income.
Note 10 - Debt Securities Held To Maturity
The amortized cost, unrealized gains and losses, approximate market
value, taxable equivalent weighted average yield and maturities of debt
securities held to maturity at December 31, 1998 and 1997 were as follows
(dollars in thousands):
December 31, 1998 December 31, 1997
------------------------------------------------ ----------------------------------------
Weighted Weighted
Amortized Unrealized Market average Amortized Unrealized Market average
cost gains(losses) value yield% cost gains(losses) value yield%
Obligations of other U.S.
Government Agencies:
Within 1 year $ 500 $ (2) $ 498 3.37 $10,704 $ (64) $10,640 4.45
After 1 to 5 years 500 (12) 488 3.99
After 10 years 23,051 $569 23,620 10.20 33,890 $412 34,302 9.53
Puerto Rico Government
Obligations:
Within 1 year 11,000 11,000 2.94
After 10 years 3,371 204 3,575 7.41 3,162 (32) 3,130 7.36
--------- ------------- -------- -------- -------- ------ --------
Total $26,922 $ 773 $ (2) $27,693 9.73 $59,256 $412 $(108) $59,560 7.23
======= ===== ==== ======= ======= ==== ===== =======
During 1998, certain debt securities held to maturity were called by
the issuers.
Note 11 - Debt Securities Held For Sale
The amortized cost, gross unrealized gains and losses, approximate
market value, taxable equivalent weighted average yield and maturities of debt
securities held for sale at December 31, 1998 and 1997 were as follows (dollars
in thousands):
December 31, 1998 December 31, 1997
------------------------------------------------ ----------------------------------------
Weighted Weighted
Amortized Unrealized Market average Amortized Unrealized Market average
cost gains(losses) value yield% cost gains (losses) value yield%
---------------------------------------------------------------------------------------------
U.S. Treasury Securities:
After 5 to 10 years $251,092 $5,197 $256,289 7.61
Obligations of other U.S.
Government Agencies:
Within 1 year $240,040 $51 $240,091 5.00 188,852 $(34) 188,818 5.72
After 10 years 25,619 $(159) 25,460 8.32
Puerto Rico Government
Obligations:
After 10 years 2,964 96 3,060 7.18 2,963 22 2,985 7.15
----------- -------------------------- ---------- -------- ------ ---------
Total $268,623 $147 $(159) $268,611 5.35 $442,907 $5,219 $(34) $448,092 6.82
======== ==== ===== ======== ======== ====== ==== ========
Mortgage backed securities- Federal Home Loan Mortgage Corporation (FHLMC)
certificates:
Within 1 year $ 4,564 $ 19 $ 4,583 7.84 $12,046 $(67) $11,979 6.76
After 1 to 5 years 1,001 9 1,010 8.14 7,361 $ 46 7,407 7.82
After 5 to 10 years 10,169 149 10,318 7.68 4,902 63 4,965 8.23
After 10 years 32,363 802 33,166 9.07 48,374 882 49,256 8.71
----------- -------------- ---------- ------- ----- ------- -------
48,098 979 49,077 8.64 72,684 991 (67) 73,608 8.26
----------- -------------- ---------- ------- ------ ----- -------
Government National
Mortgage Association
(GNMA) certificates:
After 10 years 1,411,369 9,936 $(357) 1,420,947 6.91 643,839 8,261 (183) 651,917 8.00
--------- ----- ----- --------- ------- -------- ------ -------
Federal National
Mortgage Association
(FNMA) certificates:
Within 1 year 157 1 158 8.23
After 1 to 5 years 2,691 30 2,721 8.40 3,501 37 3,538 8.31
After 5 to 10 years 274 11 285 10.28 1,452 22 1,474 8.89
After 10 years 14,299 605 (10) 14,894 10.35 18,011 843 18,854 10.36
-------- ----- ----- ---------- -------- --------- -------- --------
17,422 646 (10) 18,058 10.02 22,964 902 23,866 9.95
-------- ----- ----- ---------- -------- -------- ------ -------
Mortgage pass through
certificates:
After 5 to 10 years 2,627 (20) 2,608 6.54
After 10 years 2,764 767 3,530 9.33 3,049 924 3,973 9.48
---------- ------------------------- --------- --------- -------- ---------
2,764 767 3,530 9.33 5,676 924 (20) 6,581 8.12
---------- ------------------------- --------- --------- ------ ---------
Real Estate Mortgage
Interest Conduit:
After 1 to 5 years 865 62 927 11.63 2,867 48 2,915 11.30
------------- ------------- -------------- ------------------------------------------
Total $1,480,516 $12,390 $(367) $1,492,539 7.02 $748,031 $11,126 $(270) $758,887 8.10
========== ======= ===== ========== ======== ======= ===== ========
Other Investment:
After 5 to 10 years $1,964 $(344) $1,620 15.76
====== ===== ======
Maturities for mortgage backed securities are based upon contractual
terms assuming no repayments. The weighted average yield on debt securities held
for sale is based on amortized cost, therefore it does not give effect to
changes in fair value.
At December 31, 1998, the net unrealized gain of $8,749,931 (1997 -
$12,031,444) on securities available for sale after the estimated income tax of
$2,916,644 (1997 - $4,010,476) was reported as a separate component of
stockholders' equity. For 1998 the change in the net unrealized holding gain on
the available for sale securities amounted to a loss of $4,375,351 (1997 - a
gain of $15,232,433) before estimated income taxes.
For 1998, proceeds from the sale of securities amounted to $302.1
million (1997 - $118.0 million, 1996 - $208.7 million) resulting in a realized
gain of $26.8 million (1997 - $11.4 million, 1996 -$4.9 million). No losses were
recognized on those sales.
Note 12 - Federal Home Loan Bank (FHLB) Stock
At December 31, 1998 and 1997, there were investments in FHLB stock
with book value and estimated market value of $10,270,600 and $10,150,300,
respectively. The estimated market value of such investments is its redemption
value.
Note 13 - Interest and Dividend on Investments
A detail of interest and dividend income on investments follows (in
thousands):
Year ended December 31,
1998 1997 1996
Mortgage-backed securities:
Taxable $ 5,230 $ 6,239 $13,343
Exempt 63,131 24,481 4,194
-------- -------- ---------
$68,361 $30,720 $17,537
======= ======= =======
Other investment securities:
Taxable $ 801 $ 1,372 $ 2,788
Exempt 20,621 27,544 22,453
-------- -------- --------
$21,422 $28,916 $25,241
======= ======= =======
Note 14 - Loans Receivable
The following is a detail of the loan portfolio:
December 31,
1998 1997
Real estate loans:
Secured by first mortgages:
Residential $237,560,711 $223,097,793
Commercial 326,341,768 306,733,946
Construction, land acquisition and land improvements 162,474,127 15,399,778
Insured by government agencies:
Federal Housing Administration and Veterans
Administration 8,185,232 10,176,044
Puerto Rico Housing Bank and Finance Agency 38,515,744 44,072,871
Secured by second mortgages 13,255,512 14,171,031
------------ --------------
786,333,094 613,651,463
Undisbursed portion of loans in process (98,535,025) (6,120,583)
Deferred loan and commitment fees - net (10,246,116) (9,138,124)
------------- ---------------
Real estate loans 677,551,953 598,392,756
------------ -------------
Commercial loans:
Commercial loans 368,548,532 235,570,531
Finance leases 52,214,183 42,500,399
------------- --------------
Commercial loans 420,762,715 278,070,930
------------- -------------
Consumer and other loans:
Personal 463,052,946 666,003,133
Personal lines of credit 9,535,354 10,961,902
Auto 512,116,471 512,937,974
Boat 32,208,879 29,144,971
Credit card 125,955,592 116,734,201
Home equity reserve loans 3,385,220 4,282,064
Unearned interest (145,284,440) (267,598,801)
--------------- ----------------
1,000,970,022 1,072,465,444
Agency for International Development 128,066 147,848
------------------ -------------------
Consumer and other loans 1,001,098,088 1,072,613,292
-------------- ---------------
Loans receivable 2,099,412,756 1,949,076,978
Loans held for sale 20,641,628 10,224,509
----------------- -----------------
Total loans 2,120,054,384 1,959,301,487
Allowance for loan losses (67,854,066) (57,711,927)
----------------- ----------------
Total loans-net $2,052,200,318 $1,901,589,560
============== ==============
The Corporation's primary lending area is Puerto Rico. At December 31, 1998
and 1997 there is no significant concentration of credit risk in any specific
industry on the loan portfolio.
At December 31, 1998, loans in which the accrual of interest income had
been discontinued amounted to $56,958,000 (1997 - $52,939,000; 1996 -
$51,162,000). If these loans had been accruing interest, the additional interest
income realized would have been approximately $4,970,000 (1997 - $5,246,000;
1996 - $3,879,000). There are no material commitments to lend additional funds
to borrowers whose loans were in non-accruing status at these dates.
At December 31, 1998 and 1997 mortgage loans held for sale amounted to
$20,641,628 and $10,224,509, respectively. All mortgage loans originated and
sold during 1998 and 1997 were sold based on pre-established commitments or at
market values, which in both situations were equal or exceeded the carrying
value of the loans.
At December 31, 1998, the Corporation was servicing mortgage loans
owned by others aggregating approximately $147,439,000 (1997 - $168,416,000;
1996 - $186,781,000). As a result of the securitization of auto loans, at
December 31, 1998 the Corporation was servicing auto loans aggregating
approximately $19,567,000 (1997 - $59,049,000; 1996 - $121,775,000).
Various loans secured by first mortgages were assigned as collateral
for term notes, certificates of deposit, advances from the Federal Home Loan
Bank of New York, and unused lines of credit. The total of loans pledged as
collateral amounted to $222,732,275 and $308,003,080 at December 31, 1998 and
1997, respectively. A portfolio of personal loans was assigned as collateral for
short-term borrowings as explained in Note 21 - "Other Short-Term Borrowings."
The total of loans pledged as collateral amounted to $220,443,511 and
$288,024,128 at December 31, 1998 and 1997, respectively.
Note 15 - Allowance for Loan Losses
The changes in the allowance for loan losses were as follows:
Year ended December 31,
1998 1997 1996
Balance at beginning of period $57,711,927 $55,253,546 $55,008,754
Provision charged to income 76,000,000 55,675,500 31,582,401
Losses charged against the allowance (72,223,389) (59,590,916) (34,729,651)
Recoveries credited to the allowance 6,033,922 6,373,797 3,291,857
Other adjustments 331,606 100,185
-------------- ------------------- -------------
Balance at end of period $67,854,066 $57,711,927 $55,253,546
=========== =========== ===========
At December 31, 1998, $14.3 million ($7.2 million at December 31, 1997)
in commercial and real estate loans over $1,000,000 was considered impaired with
an allowance of $3.8 million ($3.6 million at December 31, 1997). As of both
periods, no increases in the provision for loan losses were necessary, since the
allowance provided already covered the estimated impairment. There were no
consumer loans over $1,000,000 considered impaired at December 31, 1998 and
1997. The average recorded investment in impaired loans amounted to $10.8
million for 1998 (1997 - $6.4 million). Interest income in the amount of
approximately $736,000 was recognized on impaired loans for 1998. No interest
income was recognized in 1997 on the portfolio of impaired loans during the
period they were impaired.
Note 16 - Related Party Transactions
The Corporation granted loans to its directors, executive officers and to
certain related individuals or entities in the ordinary course of business. The
movement and balance of these loans were as follows:
Amount
Balance at December 31, 1997 $ 8,902,326
New loans 21,006,257
Payments (8,379,759)
------------
Balance at December 31, 1998 $21,528,824
===========
Note 17 - Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation as
follows:
December 31,
1998 1997
-------------- ---------
Land $ 5,825,249 $ 5,825,249
Buildings and improvements 30,976,673 30,536,536
Leasehold improvements 10,807,734 10,095,690
Furniture and equipment 41,330,835 38,507,052
----------- -----------
88,940,491 84,964,527
Accumulated depreciation (42,167,391) (39,052,917)
----------- -----------
46,773,100 45,911,610
Projects in progress 4,764,092 2,535,557
------------- ------------
Total premises and equipment - net $51,537,192 $48,447,167
=========== ===========
Note 18 - Other Assets
Following is a detail of other assets:
December 31,
1998 1997
Deferred income taxes $22,142,665 $ 9,594,795
Accounts receivable 10,023,555 7,840,930
Prepaid expenses 10,219,939 8,466,690
Revenue earning vehicles 4,465,609 3,673,464
Other repossessed property 2,276,766 8,702,146
Insurance claims 1,778,133 2,003,426
Other 6,030,746 8,029,845
------------ -------------
Total $56,937,413 $48,311,296
=========== ===========
Note 19 - Deposits and Related Interest
Deposits and related interest consist of the following:
December 31,
------------------------------------
1998 1997
--------------------- --------------
Type of account and interest rate at:
Savings accounts - 2.75% to 4.00%
(1997 - 2.75% to 4.00%) $ 416,423,887 $ 403,128,424
Interest bearing checking accounts -
2.90% to 4.50% (1997 - 2.90% to 5.00%) 130,883,439 121,452,204
Non-interest bearing checking accounts 173,103,709 140,099,305
Certificate accounts - 3.80% to 7.15%
(1997 - 4.00% to 8.00%) 1,054,633,858 929,954,750
--------------- ----------------
$1,775,044,893 $1,594,634,683
============== ==============
The weighted average interest rate on total deposits at December 31,
1998 and 1997 was 4.57% and 4.70%, respectively.
The following table presents a summary of certificates of deposits with
remaining term of more than one year at December 31, 1998 (in thousands):
Total
Over one year to two years $136,776
Over two years to three years 44,432
Over three years to four years 39,059
Over four years to five years 84,627
Over five years 42,650
--------
Total $347,544
========
At December 31, 1998 time deposits in denominations of $100,000 or
higher amounted to $667,373,511 (1997 - $559,625,405) including brokered
certificates of deposit of $283,249,222 (1997 - $225,018,000) at a weighted
average rate of 5.63% (1997 - 6.03%).
At December 31, 1998, certificates of deposits aggregating $59,000,000
(1997 - $64,000,000) were guaranteed by irrevocable standby letters of credit
issued by the Federal Home Loan Bank of New York and other banks. At December
31, 1998 specific mortgage loans with a carrying value of $137,483,494 (1997 -
$139,635,855) and estimated market value of $141,951,708 (1997 - $148,530,700)
and securities with a book value of $6,877,563 (1997 - $9,239,236) and
approximate market value of $7,041,301 (1997 - $9,519,152) were pledged to the
Federal Home Loan Bank of New York as part of the agreements covering the
letters of credit.
At December 31, 1998, deposit accounts issued to government agencies
with a carrying value of $67,306,284 (1997 - $37,757,061) were collateralized by
securities with a carrying value of $70,892,236 (1997 - $48,737,539) and
estimated market value of $72,177,444 (1997 - $49,384,763) and specific mortgage
loans with a carrying value of $4,838,781 (1997 - $5,498,532) and estimated
market value of $5,684,600 (1997 - $6,322,913).
A table showing interest expense on deposits follows:
Year ended December 31,
1998 1997 1996
Savings $11,716,764 $12,155,192 $12,376,620
Interest bearing checking accounts 4,486,582 4,167,371 4,264,731
Certificates 54,215,013 55,824,521 54,322,502
------------ ----------- ------------
Total $70,418,359 $72,147,084 $70,963,853
=========== =========== ===========
Note 20 - Federal Funds Purchased and Securities Sold Under Agreements to Repurchase
Federal funds purchased and securities sold under agreements to
repurchase (repurchase agreements) consist of the following:
December 31,
1998 1997
Federal funds purchased, interest
rate 5.32% (1997 - 7.33%) $ 15,000,000 $ 53,400,000
Repurchase agreements, interest
ranging from 4.65% to 5.80%
(1997 - 3.50% to 5.34%) 1,605,630,051 912,469,546
--------------- -------------
1,620,630,051 965,869,546
Accrued interest payable 3,067,937 3,433,835
------------------ ---------------
Total $1,623,697,988 $969,303,381
============== ============
Federal funds purchased and repurchase agreements mature as follows:
December 31,
1998 1997
Federal funds purchased:
One to thirty days $ 15,000,000 $ 53,400,000
-------------- ------------
Repurchase agreements:
One to thirty days 1,158,520,676 681,469,546
Over thirty to ninety days 247,109,375 31,000,000
Over ninety days 200,000,000 200,000,000
---------------- -------------
1,605,630,051 912,469,546
--------------- -------------
Total $1,620,630,051 $965,869,546
============== ============
The following securities were sold under agreements to repurchase:
December 31, 1998
Book Approximate Weighted
value of market value average
underlying Balance of of underlying interest
Underlying securities securities borrowing securities rate
U.S. Treasury Securities and
obligations of other U.S.
Government Agencies $ 216,073,870 $ 214,716,114 $ 216,111,108 5.13%
Mortgage backed securities 1,393,322,895 1,390,913,937 1,403,729,265 6.08%
--------------- --------------- ---------------
Total $1,609,396,765 $1,605,630,051 $1,619,840,373
============== ============== ==============
Accrued interest receivable $ 4,321,371
=================
December 31, 1997
Book Approximate Weighted
value of market value average
underlying Balance of of underlying interest
Underlying securities securities borrowing securities rate
U.S. Treasury Securities and
obligations of other U.S.
Government Agencies $392,557,900 $404,869,203 $397,473,320 6.02%
Mortgage backed securities 518,205,340 507,600,343 522,328,823 6.74%
------------- ------------- -------------
Total $910,763,240 $912,469,546 $919,802,143
============ ============ ============
Accrued interest receivable $ 7,479,125
==============
The weighted average interest rates of federal funds purchased and
repurchase agreements at December 31, 1998 and 1997 was 5.03% and 5.13%,
respectively.
At December 31, 1998, the securities underlying such agreements were
delivered to, and are being held by the dealers with which the repurchase
agreements were transacted, except for transactions where the Corporation has
agreed to repurchase similar but not identical securities. The maximum aggregate
balance outstanding at any month-end during 1998 was $1,648,513,898 (1997 -
$965,869,546). The average balance during 1998 was approximately $1,225,726,000
(1997 - $565,095,000).
Note 21 - Other Short-Term Borrowings
On March 31, 1997, the Corporation entered into a $250,000,000
financing arrangement administered by Credit Suisse First Boston to be renewed
annually within a term of three years. At December 31, 1998 borrowings through
this arrangement amounted to $86,594,710 (1997 - $231,504,896), with an
available line of $95,254,992 under the financing arrangement. Interest periods
under the financing agreement cannot exceed 100 days. The rate of interest for
this type of financing, in which advances may be repaid or reborrowed at the
option of the Corporation, is equivalent to A-1+/P-1 rated commercial paper. The
weighted average maturity at December 31, 1998 was 21 days (1997 - eight days).
The weighted average interest rate of these borrowings at December 31,
1998 and 1997 was 6.38% and 6.23%, respectively. The maximum aggregate balance
outstanding at any month-end was approximately $224,780,000 (1997 -
$250,000,000). The average aggregate balance outstanding during the year was
approximately $111,236,888 (1997 - $176,656,943).
Under this arrangement, the Corporation is required to maintain
eligible collateral consisting of personal loans owned by the Corporation to
secure this borrowing. The Corporation has to maintain at all times the
aggregate outstanding balance of the borrowing at a maximum of 85% of the
aggregate book value of the personal loans placed as collateral. The aggregate
book value of the loans pledged as collateral at December 31, 1998 amounted to
$220,443,511 (1997 - $288,024,128).
Note 22 - Advances From The Federal Home Loan Bank of New York (FHLB-N.Y.)
Following is a detail of the advances from the FHLB-NY:
December 31,
Maturity Interest rate 1998 1997
-------- ------------- --------------- ----------
January 4, 1999 5.13% $2,600,000
January 2, 1998 7.12% $29,000,000
--------------- -----------
Total $2,600,000 $29,000,000
========== ===========
Advances are received from the FHLB-N.Y. under an Advances, Collateral
Pledge and Security Agreement (the Collateral Agreement). Under the Collateral
Agreement, the Corporation is required to maintain a minimum amount of
qualifying mortgage collateral with a market value at least 110% of the
outstanding advances. At December 31, 1998, specific mortgage loans with an
estimated market value of $3,155,152 (1997 - $35,539,790) were pledged to the
FHLB-N.Y. as part of the Collateral Agreement. The carrying value of such loans
at December 31, 1998 amounted to $2,860,000 (1997 - $31,900,000).
Note 23 - Notes Payable
Following is a detail of notes payable outstanding:
December 31, 1998 December 31,
Issue date (footnote) Maturity Interest rate 1998 1997
- - --------------------- -------- ------------- ------------ ----------
Notes payable:
May 31, 1990 (a) 1998 8.37% $ 3,000,000
January 29, 1993 (b) 1998 4.95% 5,000,000
February 8, 1993 (b) 1998 4.95% 1,250,000
April 15, 1993 (b) 1998 4.57% 5,000,000
February 11, 1994 (b) 1999 5.44% $ 2,100,000 2,100,000
May 13, 1994 (b) 1999 6.19% 5,000,000 5,000,000
May 13, 1994 (b) 1999 6.19% 5,000,000 5,000,000
May 26, 1994 (b) 1999 6.09% 5,000,000 5,000,000
September 7, 1994 (a) 1999 4.33% 15,500,000 15,500,000
September 29, 1994 (a) 1999 6.40% 30,000,000 30,000,000
September 12, 1996 (b) 2001 4.87% 10,000,000 10,000,000
September 20, 1996 (b) 2001 4.88% 20,500,000 20,500,000
September 20, 1996 (a) 2001 4.77% 25,000,000 25,000,000
-------------- --------------
Total $118,100,000 $132,350,000
============ ============
Footnotes:
a. These notes have the benefit of a firm commitment issued by the
FHLB-N.Y. whereby it will make advances to pay the principal and interest on the
notes as they become due if the Corporation fails to do so. The Corporation is
required to maintain as collateral with the FHLB-N.Y. securities having an
aggregate market value, determined monthly, equal to 110% of the aggregate
outstanding principal amount of the notes plus interest. The collateral
securities may consist of a combination of all or some of the following: (i)
home mortgage loans owned by the Corporation and secured by first mortgages on
real properties in Puerto Rico; (ii) obligations of, or guaranteed by, the
United States Government or certain agencies; (iii) fully-modified pass-through
mortgage backed certificates guaranteed by GNMA; (iv) mortgage participation
certificates issued by FHLMC; (v) guaranteed mortgage pass-through certificates
issued by FNMA; and (vi) certain certificates of deposit issued by banks
approved by the FHLB-N.Y.
At December 31, 1998, specific mortgage loans with a book value of
$77,550,000 (1997 - $80,850,000) and an estimated market value of
$88,887,810 (1997 - $91,789,005) were pledged to the FHLB-N.Y. as part
of the agreement covering the above mentioned firm commitment. The
estimated market value was computed based on parameters given by the
Federal Home Loan Bank.
b. The Corporation is required to maintain with the holder of these notes,
cash or securities with a market value of at least 105% of the
aggregate amount of the notes. The aggregate estimated market value and
carrying value of the eligible collateral at December 31, 1998 amounted
to $46,162,955 (1997 - $59,456,354) and $45,328,289 (1997 -
$54,069,211), respectively.
Note 24 - Subordinated Notes
On December 20, 1995, the Bank issued 7.63% subordinated capital notes
in the amount of $100,000,000 maturing in 2005. The notes were issued at a
discount. At December 31, 1998 the outstanding balance net of the unamortized
discount was $99,495,830 (1997 - $99,423,490). Interest on the notes is payable
semiannually and at maturity. The notes represent unsecured obligations of the
Bank ranking subordinate in right of payment to all existing and future senior
debt including the claims of depositors and other general creditors. The notes
may not be redeemed prior to their maturity. At December 31, 1998, the Bank has
transferred to capital reserves from the retained earnings account $30,000,000,
as a result of the requirement explained in Note 3 - "Stockholders' Equity."
Note 25 - Unused Lines Of Credit
The Corporation maintains unsecured standby lines of credit with other
banks. At December 31, 1998, the Corporation's total unused lines of credit with
these banks amounted to approximately $69,500,000 (1997 - $25,100,000). At
December 31, 1998, the Corporation has an available line of credit with the FHLB
guaranteed with excess collateral, in the amount of $20,808,133 (1997 -
$1,470,265). In addition, the Corporation had at December 31, 1998 an available
line of $95,254,992 under the financing arrangement explained in Note 21 -
"Other Short-Term Borrowings."
Note 26 - Other Expenses
A detail of other expenses follows:
Year ended December 31,
1998 1997 1996
Professional and service fees $ 5,819,978 $ 4,883,088 $ 4,956,210
Advertising and business promotion 5,922,039 4,993,392 5,879,478
Communications 4,330,023 4,363,802 4,789,451
Revenue earning equipment 1,225,689 1,183,557 1,113,125
Supplies and printing 1,314,131 1,128,672 1,694,046
Other 4,534,188 4,628,151 3,588,927
------------ ------------- -------------
Total $23,146,048 $21,180,662 $22,021,237
=========== =========== ===========
Note 27 - Employees' Benefit Plan
FirstBank has a defined contribution retirement plan (the Plan)
qualified under the provisions of the Puerto Rico Internal Revenue Code Section
1165(e). All employees (excluding the Bank's subsidiaries) are eligible to
participate in the Plan after one year of service. Under the provisions of the
Plan, the Bank is required to make a contribution of a quarter of the first 4%
(1997 - 4% and 1996 - 1%) of each participant's compensation. Participants are
permitted to contribute up to 10% of their annual compensation, limited to
$8,000 per year. Additional contributions to the Plan are voluntarily made by
the Bank as determined by its Board of Directors. The Bank made a total
contribution of $575,000, $540,000 and $450,000 during 1998, 1997 and 1996,
respectively, to the Plan.
Note 28 - Unusual Item
In September 1996, the Bank recorded a one time special SAIF assessment
of $9.1 million with an estimated income tax benefit of $2.4 million. This
special assessment was required by the Deposit Insurance Funds Act of 1996 to
capitalize the SAIF.
Note 29 - Income Taxes
The Corporation is subject to Puerto Rico income tax on its income from
all sources. For United States income tax purposes, the Corporation is treated
as a foreign corporation. Accordingly, it is generally subject to United States
income tax only on its income from sources within the United States or income
effectively connected with the conduct of a trade or business within the United
States. Any United States income tax paid by the Corporation is creditable,
within certain conditions and limitations, as a foreign tax credit against its
Puerto Rico tax liability.
The provision for income taxes was as follows (in thousands):
Year ended December 31,
1998 1997 1996
Current $17,845 $16,364 $18,500
Deferred (13,047) (8,239) (6,219)
------- --------- ---------
Total $ 4,798 $ 8,125 $12,281
======== ======== =======
Income tax expense applicable to income before provision for income tax
differs from the amount computed by applying the Puerto Rico statutory rate of
39% as follows (dollars in thousands):
Year ended December 31,
1998 1997 1996
% of % of % of
pre-tax pre-tax pre-tax
Amount income Amount income Amount income
Computed income tax at statutory rate $22,078 39 $21,705 39 $19,467 39
Benefit of net exempt income (22,078) (39) (13,137) (24) (7,611) (15)
Other-net 4,798 8 (443) 425 1
--------- --- --------- --- --------- ---
Total income tax provision $ 4,798 8 $ 8,125 15 $12,281 25
======== === ======== == ======= ===
Accounting for income taxes
Deferred taxes arise because certain transactions affect the
determination of taxable income for financial reporting purposes in periods
different from the period in which the transactions affect taxable income for
tax return purposes. Deferred taxes have been recorded based upon the Puerto
Rico enacted tax rate of 39%. Current tax expense has been provided based upon
the estimated tax liability to be incurred for tax return purposes.
The components of the deferred tax asset and liability were as follows
(in thousands):
December 31,
1998 1997
Deferred tax asset:
Adjustment to charge-off method $25,460 $ 12,768
Other 1,232 3,305
--------- ---------
Gross deferred tax asset $26,692 $16,073
======= =======
Deferred tax liability:
Unrealized gain on available for sale securities $(2,917) $(4,010)
Other (1,633) (2,468)
------- -------
Gross deferred tax liability $(4,550) $(6,478)
======= =======
Due to the above temporary differences, a net deferred tax asset
resulted amounting to $22.1 million at December 31, 1998 (1997 - $9.6 million).
The primary timing difference was the effect of future deductions under the
charge-offs method for deducting bad debt losses. No valuation allowance was
considered necessary.
The tax effect of the unrealized holding gain or loss for securities
available for sale is included as a part of stockholders' equity in other
comprehensive income.
Note 30 - Commitments
At December 31, 1998 certain premises are leased with terms expiring
through the year 2011. The Corporation has the option to renew or extend certain
leases from two to ten years beyond the original term. Some of these leases
require the payment of insurance, increases in property taxes and other
incidental costs. At December 31, 1998, the obligation under various leases was
follows:
Year Amount
---- --------
1999 $ 2,607,737
2000 1,794,633
2001 1,272,775
2002 1,096,813
2003 and later years 5,161,246
------------
Total $11,933,204
===========
Rental expense included in occupancy and equipment expense was
$3,158,156 in 1998 (1997 - $2,933,798; 1996 - $2,894,698).
Note 31 - Fair Value of Financial Instruments
The information about the estimated fair values of financial
instruments as required by SFAS No. 107, is presented hereunder including some
items not recognized in the statement of financial condition. The disclosure
requirements of SFAS No. 107 exclude certain financial instruments and all non
financial instruments. Accordingly, the aggregate fair value amounts presented
do not represent Management's estimation of the underlying value of the
Corporation. A summary table of estimated fair values and carrying values of
financial instruments at December 31, 1998 and 1997 follows (in thousands):
December 31,
1998 1997
Estimated Carrying Estimated Carrying
fair value value fair value value
Assets:
Money market instruments $ 526 $ 526 $ 514 $ 514
Debt securities 1,790,463 1,789,692 1,266,539 1,266,236
FHLB stock 10,271 10,271 10,150 10,150
Loans receivable - net 2,146,003 2,052,200 2,009,447 1,901,590
Liabilities:
Deposits 1,776,811 1,775,045 1,593,688 1,594,635
Federal funds, securities sold
under agreements to repurchase
and other short-term borrowings 1,710,293 1,710,293 1,200,808 1,200,808
Advances from FHLB 2,600 2,600 29,000 29,000
Debt security borrowings 231,923 217,596 233,425 231,773
The estimated fair values were based on judgments regarding current and
future economic conditions. The estimates are subjective in nature and involve
uncertainties and matters of significant judgment and, therefore, cannot be
determined with precision. Changes in the underlying assumptions used in
calculating the fair values could significantly affect the results. In addition,
the fair value estimates are based on outstanding balances without attempting to
estimate the value of anticipated future business. Therefore, the estimated fair
values may materially differ from the values that could actually be realized on
a sale.
The estimated fair values were calculated using certain facts and
assumptions which vary depending on the specific financial instrument, as
follows:
Money market instruments
The carrying amounts of money market instruments are reasonable
estimates of their fair values.
Debt securities
The fair values of debt securities are the market values based on
quoted market prices and dealer quotes. The fair value of debt securities
available for sale equals their carrying value since they are marked-to-market
for accounting purposes with unrealized gains and losses, net of deferred tax,
reported as a separate component of stockholders' equity.
Other investment
The fair value of other investments securities represents the market
value of the securities in which the funds are invested.
FHLB stock
Investments in FHLB stock are valued at their redemption values.
Loans receivable - net
The fair value of all loans was estimated by discounting loans with
similar financial characteristics. Loans were classified by type such as
commercial, conventional residential mortgage, credit card and automobile. These
asset categories were further segmented into fixed and adjustable rate
categories and by accruing and non-accruing groups. Performing floating rate
loans were valued at book if they reprice at least once every three months. The
fair value of fixed rate performing loans was calculated by discounting expected
cash flows through the estimated maturity date. Recent prepayment experience was
assumed to continue for mortgage loans, credit cards, auto loans and personal
loans. Other loans assumed little or no prepayment. Prepayment estimates were
based on the Corporation's historical data for similar loans. Discount rates
were based on the Treasury Yield Curve at the date of the analysis, with an
offset which reflects the risk and other costs inherent in the loan category. In
certain cases, where recent experience was available regarding the sale of
loans, this information was also incorporated into the fair value estimates.
Non-accruing loans covered by a specific loan loss reserve were viewed
as immediate losses and were valued at zero. Other non-accruing loans were
arbitrarily assumed to be repaid after one year. Presumably this would occur
either because loan is repaid, collateral has been sold to satisfy the loan or
because general reserves are applied to it. The value of non-accruing loans not
covered by specific reserves was discounted for one year at the going rate for
new loans.
Deposits
The estimated fair values of demand deposits and savings accounts,
which are the deposits with no defined maturities, are the amount payable on
demand at the reporting date. For deposits with stated maturities, but that
reprice at least quarterly, the fair values are estimated to be the amount
payable at the reporting date.
The fair values of fixed rate deposits with stated maturities, are
based on the discounted value of the future cash flows expected to be paid on
deposits. The cash flows are based on contractual maturities; no early
repayments are assumed. Discount rates are based on the wholesale certificate of
deposit yield curve and the LIBOR yield curve. The estimated fair values of
total deposits exclude the fair value of core deposits intangible, which
represent the value of the customer relationship measured by the values of
demand deposits and savings deposits that bear a low or zero rate of interest
and do not fluctuate in response to changes in interest rates.
Federal funds, securities sold under agreements to repurchase and other
short-term borrowings
Federal funds purchased, repurchase agreements and other short-term
borrowings are commitments to borrow funds which reprice at least quarterly.
Therefore, their outstanding balances are estimated to be their fair values.
Advances from FHLB
The fair value of advances was determined using book value, since they
have terms of less than three months. Therefore, their outstanding balances are
estimated to be their fair values.
Debt security borrowings
The fair value of debt security borrowings with fixed maturities was
determined using discounted cash flow analysis over the full term of the
borrowings. The cash flows assumed no early repayment of the borrowings.
Discount rates were based on the LIBOR yield curve. Variable rate debt
securities reprice at intervals of three months or less, therefore, their
outstanding balances are estimated to be their fair values.
Note 32 - Supplemental Cash Flow Information
Supplemental cash flow information follows (in thousands):
Year ended December 31,
------------------------------------
1998 1997 1996
-------------- ---------------- ----------
Cash paid for:
Interest $153,645 $132,801 $108,500
Income tax 1,494 1,089 9,461
Non cash investing and financing activities:
Mortgage loans exchanged for mortgage
backed securities 4,046 6,128
Additions to other real estate owned 2,975 541 3,485
Note 33 - Financial Instruments With Off-Balance Sheet Risk, Commitments to
Extend Credit and Standby Letters of Credit
The following table presents a detail of commitments to extend credit and standby letters of credit (in thousands):
December 31,
1998 1997
---- ----
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit:
To originate loans $245,257 $103,214
Unused credit card lines 132,867 103,842
Unused personal lines of credit 10,536 11,021
Commercial lines of credit 96,874 64,584
Commercial letters of credit 19,101 22,966
Standby letters of credit 1,575 4,660
The Corporation's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument on commitments to
extend credit and standby letters of credit is represented by the contractual
amount of those instruments. Management uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
These commitments generally expire within one year. Commitments to originate
loans are mainly for mortgage loans at auction rates of the insuring agencies at
the time the loans are closed. Since certain commitments are expected to expire
without being drawn upon, the total commitment amount does not necessarily
represent future cash requirements. In the case of credit cards and personal
lines of credit, the Corporation can at any time and without cause, cancel the
unused credit facility. The amount of collateral, obtained if deemed necessary
by the Corporation upon extension of credit, is based on Management's credit
evaluation of the borrower. Rates charged on the loans that are finally
disbursed is the rate being offered at the time the loans are closed, therefore,
no fee is charged on these commitments. The fee is the amount which is used as
the estimate of the fair value of commitments.
In general, commercial and standby letters of credit are issued to
facilitate foreign and domestic trade transactions. Normally, commercial and
standby letters of credit are short-term commitments used to finance commercial
contracts for the shipment of goods. The collateral for these letters of credit
include cash or available commercial lines of credit. The fair value of
commercial and standby letters of credit is based on the fees currently charged
for such agreements, which at December 31, 1998 is not significant.
Interest rate risk management
The operations of the Corporation are subject to interest rate
fluctuations to the extent that interest-earning assets and interest-bearing
liabilities mature or reprice at different times or in different amounts. As
part of the interest rate risk management, the Corporation has entered into a
series of interest rate swap agreements. Under the interest rate swaps, the
Corporation agrees with other parties to exchange, at specified intervals, the
difference between fixed-rate and floating-rate interest amounts calculated by
reference to an agreed notional principal amount. Net interest settlements on
interest rate swaps are recorded as an adjustment to interest expense on deposit
accounts.
The following table indicates the types of swaps used (in thousands):
Notional amount
Pay-fixed swaps:
Balance at December 31, 1996 $220,000
Expired contracts in 1996 170,000
---------
Balance at December 31, 1997 and 1998 $ 50,000
=========
Receive-fixed swaps:
Balance at December 31, 1996 $65,000
Expired contracts 25,000
New contracts 40,000
--------
Balance at December 31, 1997 80,000
Expired contracts 40,000
-------
Balance at December 31, 1998 $40,000
=======
Pay-fixed swaps at December 31, 1998, have a fixed weighted average
rate payment of 5.41% (1997 - 6.48%) and a floating weighted average rate
receiving of 6.48% (1997 - 5.88%). Receive-fixed swaps at December 31, 1998,
have a floating weighted average rate payment of 5.13% (1997 - 5.68%) and a
fixed weighted average rate receiving of 7.15% (1997 - 7.12%). Floating rates
are based on an 85% to 100% of the average of the last three months LIBOR rate.
For swap transactions, the amounts potentially subject to credit loss
are the net streams of payments under the agreements and not the notional
principal amounts used to express the volume of the swaps. At December 31, 1998
the Corporation had total assets of $876,949 (1997 - $956,530) related to the
swap transactions. The Corporation controls the credit risk of its interest rate
swap agreements through approvals, limits, and monitoring procedures. The
Corporation does not anticipate non-performance by the counterparties. As part
of the swap transactions, the Corporation is required to pledge collateral in
the form of deposits in banks or securities. The book value and aggregate market
value of securities pledged as collateral for interest rate swaps at December
31, 1998 was approximately $1.8 million and $1.9 million, respectively (1997 -
$2.69 million and $2.73 million, respectively). The period to maturity of the
swaps at December 31, 1998 ranged from one year and four months through eight
years and two months (1997 - from two years and five months through nine years
and three months).
At December 31, 1998, the estimated fair value to liquidate the
Corporation's interest rate swaps was approximately $2,760,000 (1997 -
$4,013,500).
Yield enhancement program
The Corporation writes put and call options with the intention of
enhancing the yield of its investment portfolio (Yield Enhancement Program). The
Corporation acquires and manages a portfolio of assets consisting of Treasury
notes. The aggregate amount permitted to be outstanding under this program
cannot exceed $120 million. Future changes to this limitation may be made by
resolution of the Board of Directors. The Corporation does not write uncovered
calls (i.e., calls on securities which are not in the portfolio when the call is
written) under this program.
The Corporation writes covered call options on securities maintained
in the portfolio, and put options on securities eligible for inclusion in the
portfolio. The Corporation will only write put options on securities that the
Corporation has the intention and ability to own. When put options are
exercised, the related securities enter the pool. The purchase price of the
securities is reduced by the amount of the option premium received. Call options
are subsequently written on the assets in the pool, and the pool is reduced in
size if the call options are exercised. The Corporation receives a premium on
these call options, thereby increasing the net price received when the
securities are sold. Premiums from expired call options are applied to reduce
the book value of the corresponding securities; those from expired put options
are recorded as income.
During 1998, no premiums were received under this program (1997 -
$685,938; 1996 - $1,579,686). At December 31, 1998 no options were outstanding
under this program. The options either expired or were exercised, and premiums
were either recorded as other income or applied to the price of the security
purchased or sold.
The risks in the Yield Enhancement Program stem from the possibility
of large, unforeseen adverse market movements while the options are in effect.
If the market falls sharply after the Corporation sells a put option, the
Corporation may be forced to purchase a security at a price above that which
could have been obtained by buying in the open market at expiration, even after
adjusting the yield for the option premium received. In this case, the
Corporation would be unable to take advantage of unexpectedly lower market
prices. Similarly, if the market rises sharply and suddenly after the
Corporation sells a call option, it may be forced to sell the security at a
price below the market, even after adjusting for the option premium. In this
case, the Corporation will fail to participate fully in the market rally with
respect to this particular transaction.
Management considers that the risks inherent in this program are
controlled, prudent, and moderate compared to the opportunities for enhancing
the income stream of the Corporation through option premiums.
Forward contracts
Forward contracts are commitments for future purchase of a specific
quantity of debt securities for purposes other than trading at a price specified
at the beginning of the contract and at a specified rate with delivery and
settlement at a specified future date. The market risk relates to economic
losses due to adverse changes in the fair value of the contract related to price
and liquidity. At December 31, 1998 the Corporation had no forward contracts. At
December 31, 1997, the Corporation had a commitment to purchase mortgage backed
securities (GNMA's) in the amount of $300 million, which was exercised in
January 1998.
Interest Rate Protection Agreements (Caps)
The Corporation also issues interest rate protection agreements (Caps)
to limit its exposure to rising interest rates on its deposits. Under these
agreements, the Corporation pays an up front premium or fee for the right to
receive cash flow payments in excess of the predetermined cap rate; thus,
effectively capping its interest rate cost for the duration of the agreement.
The premium is amortized as an adjustment to interest expense on deposits. The
following table indicates the agreements outstanding at December 31, 1998
(dollars in thousands):
Cap agreements notional amount Cap Rate Current 90 day LIBOR Maturity
- - ------------------------------ -------- -------------------- -----------
$ 50,000 6.00% 5.065% March 27, 2000
200,000 6.50% 5.065% June 4, 2000
Note 34 - Segment Information
In 1998, the Corporation implemented SFAS No. 131 "Disclosures about
Segments of an Enterprise and Related Information". The Corporation has three
reportable segments: Retail business, Treasury and Investments, and Commercial
Corporate business. Management determined the reportable segments based on the
internal reporting used to evaluate performance and to assess where to allocate
resources. Other factors such as the Corporation's organizational chart, nature
of the products, distribution channels and the economic characteristics of the
products were also considered in the determination of the reportable segments.
The Retail business segment is composed of the Corporation's branches
and loan centers together with the retail products of deposits and consumer
loans. Consumer loans include loans such as personal, residential real estate,
auto, credit card and small loans. Finance leases are also included in Retail
business. The Commercial Corporate segment is composed of commercial loans and
corporate services such as letters of credit and cash management. The Treasury
and Investment segment is responsible for the Corporation investment portfolio
and treasury functions.
The accounting policies of the segments are the same as those described in
Note 2 - "Summary of Significant Accounting Policies."
The Corporation evaluates the performance of the segments based on net
interest income after the estimated provision for loan losses. The segments are
also evaluated based on the average volume of its earning assets less the
allowance for loan losses.
The only intersegment transaction is the net transfer of funds between
the segments and the Treasury and Investment segment. The Treasury and
Investment segment sells funds to the Retail and Commercial Corporate segments
to finance their lending activities and purchases funds gathered by those
segments. The interest rates charge or credit by Investment and Treasury is
based on market rates.
The following table presents information about the reportable segments
(in thousands):
Treasury and Commercial
Retail Investments Corporate Total
For the year ended December 31, 1998:
Interest income $ 178,251 $ 89,785 $ 52,499 $ 320,535
Net (charge) credit for transfer of funds 7,683 20,698 (28,381)
Interest expense (60,003) (95,127) (155,130)
Net interest income 125,931 15,356 24,118 165,405
Provision for loan losses (74,837) (1,163) (76,000)
Segment income 51,094 15,356 22,955 89,405
Average earning assets 1,364,803 1,418,791 561,612 3,345,206
For the year ended December 31, 1997:
Interest income $ 184,761 $ 59,263 $ 40,246 $ 284,270
Net (charge) credit for transfer of funds (4,396) 27,534 (23,138)
Interest expense (58,553) (71,876) (130,429)
Net interest income 121,812 14,921 17,108 153,841
Provision for loan losses (52,343) (3,332) (55,675)
Segment income 69,469 14,921 13,776 98,166
Average earning assets 1,443,982 909,457 415,427 2,768,866
For the year ended December 31, 1996:
Interest income $ 177,354 $ 42,773 $ 35,666 $ 255,793
Net (charge) credit for transfer of funds (1,310) 20,088 (18,778)
Interest expense (52,156) (60,871) (113,027)
Net interest income 123,888 1,990 16,888 142,766
Provision for loan losses (31,038) (544) (31,582)
Segment income 92,850 1,990 16,344 111,184
Average earning assets 1,337,197 714,753 354,296 2,406,246
The following table presents a reconciliation of the reportable
segment financial information to the consolidated totals (in thousands):
Year ended December 31,
1998 1997 1996
Interest income :
Total interest income for segments $320,535 $284,270 $255,793
Interest income credited to expense accounts 763 890 730
------------ ------------ ------------
Total consolidated interest income $321,298 $285,160 $256,523
======== ======== ========
Net income:
Total income for segments $89,405 $98,166 $111,184
Other income 58,240 39,866 29,614
Operating expenses (91,035) (82,379) (90,883)
Income taxes (4,798) (8,125) (12,281)
-------- --------- ---------
Total consolidated net income $51,812 $47,528 $37,634
======= ======= ========
Average assets:
Total average earning assets for segments $3,345,206 $2,768,866 $2,406,246
Average non earning assets 148,331 143,643 133,421
------------ ------------ ------------
Total consolidated average assets $3,493,537 $2,912,509 $2,539,667
========== ========== ==========
Note 35 - Litigation
The Corporation is a defendant in a number of legal proceedings
arising in the normal course of business. Management believes, based on the
opinion of legal counsel, that the final disposition of these matters will not
have a material adverse effect on the Corporation's financial position or
results of operations.
Note 36 - Selected Quarterly Financial Data (Unaudited)
Financial data showing results of the 1998 and 1997 quarters is
presented below. These results are unaudited. In the opinion of Management, all
adjustments necessary for a fair presentation have been included:
1998
March 31 June 30 Sept. 30 Dec. 31
------------ -------------- --------------- -----------
Interest income $77,397,641 $77,731,354 $79,846,911 $86,322,498
Net interest income 40,607,988 41,193,889 39,812,331 44,554,228
Provision for loan losses 21,738,000 13,929,000 21,420,000 18,913,000
Net income 12,360,681 12,700,723 13,064,618 13,686,365
Earnings per common share-basic $0.42 $0.43 $0.44 $0.46
Earnings per common share-diluted $0.42 $0.43 $0.43 $0.46
1997
March 31 June 30 Sept. 30 Dec. 31
------------ -------------- --------------- -----------
Interest income $70,227,271 $72,237,188 $69,877,982 $72,817,664
Net interest income 38,277,561 38,864,060 38,230,170 39,359,021
Provision for loan losses 10,025,500 13,575,000 17,962,500 14,112,500
Net income 11,645,214 11,815,757 11,920,926 12,145,655
Earnings per common share-basic $0.39 $0.39 $0.40 $0.40
Earnings per common share-diluted $0.39 $0.39 $0.40 $0.40
Note 37 - First BanCorp (Holding Company Only) Financial Information:
The following condensed financial information presents the financial
position of the Holding Company only at December 31, 1998 and the results of its
operations and its cash flows for the period from October 1st , 1998 through
December 31, 1998.
Statement of Financial Condition
December 31, 1998
Assets
Cash and due from depository institutions $ 5,702,362
Investment in FirstBank Puerto Rico, at equity 264,447,053
Other assets 218,653
----------------
Total assets $270,368,068
----------------
Liabilities & Stockholders' Equity
Borrowings -
Accounts payable and other liabilities -
Stockholders' equity $270,368,068
----------------
Total liabilities and stockholders' equity $270,368,068
----------------
Statement of Income
Period from October 1, 1998
through December 31, 1998
Income:
Dividend from subsidiary $ 10,359,843
Expenses:
Operating expenses 15,110
Income before income taxes and equity in
undistributed earnings of subsidiary 10,344,733
Equity in undistributed earnings of subsidiary 3,341,632
-------------
Net income $13,686,365
===========
Statement of Cash Flows
Period from October 1, 1998
through December 31, 1998
Cash flows from operating activities:
Net income $13,686,365
-----------
Adjustments to reconcile net income to net
Cash provided by operating activities:
Equity in undistributed earnings of subsidiary (3,341,632)
Net increase in other assets (218,654)
------------
Total adjustments (3,560,286)
-----------
Net cash provided by operating activities 10,126,079
-----------
Cash flows from financing activities:
Cash dividends paid (2,212,467)
Treasury stock acquired (2,211,250)
-----------
Net cash provided by financing activities (4,423,717)
-----------
Net increase in cash 5,702,362
Cash at the beginning of period
Cash at the end of period $ 5,702,362
============
The principal source of income for the Holding Company consists of
dividends from FirstBank.
Stockholders' Information
Independent Certified Public Accountants
PricewaterhouseCoopers LLP
Annual Meeting:
The annual meeting of stockholders will be held on April 27, 1999, at 2:00 p.m.,
at the main office of the Corporation located at 1519 Ponce de Leon Avenue,
Santurce, Puerto Rico.
Telephone (787) 729-8200
Internet http://www.1bankpr.com
Additional Information and Form 10-K:
Additional financial information about First BanCorp may be requested to Mrs.
Laura Villarino, Senior Vice President and Controller, PO Box 9146, Santurce,
Puerto Rico 00908. Copies of First BanCorp's Form 10K filed with the SEC, will
be provided to stockholders upon written request to Mrs. Laura Villarino at the
same mailing address.
Transfer Agent and Registrar:
The Bank of New York, 101 Barclay Street 12W, New York, NY 10286
General Counsels:
Fiddler, Gonzalez & Rodriguez, LLP
Latimer, Biaggi, Rachid & Godreau
Melendez Perez, Moran & Santiago