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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 130
of the Securities Exchange Act of 1934
For the Quarter ended Commission File 001-14793
JUNE 30, 2002
FIRST BANCORP.
-------------------------------
(Exact name of Corporation as specified in its charter)
PUERTO RICO 66-0561882
-------------------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1519 PONCE DE LEON AVENUE, STOP 23
SANTURCE, PUERTO RICO 00908
----------------------------------------- ---------------------
(Address of principal office) (Zip Code)
Corporation's telephone number, including area code:
(787) 729-8200
Indicate by check mark whether the Corporation (1) has filed all reports
required by Section 13 of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Corporation was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Number of shares of the Corporation's Common Stock outstanding as of August 12,
2002
26,615,452
FIRST BANCORP
[CONTENTS]
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements:
Consolidated Statements of Financial Condition 3
Consolidated Statements of Income 4
Consolidated Statements of Cash Flows 5
Consolidated Statements of Changes in Stockholders' Equity 6
Consolidated Statements of Comprehensive Income 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 19
Item 3. Quantitative and Qualitative Disclosures About Market Risk 32
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 33
Item 2. Changes in Securities 33
Item 3. Defaults Upon Senior Securities 33
Item 4. Submission of Matters to a Vote of Security Holders 33
Item 5. Other Information 33
Item 6. Exhibits and Report on Form 8-K 33
SIGNATURES 34
FORWARD LOOKING STATEMENTS. When used in this Form 10-Q or future filings by
First BanCorp (the "Corporation") with the Securities and Exchange Commission,
in the Corporation's press releases or other public or shareholder
communication, or in oral statements made with the approval of an authorized
executive officer, the word of phrases "would be", "will allow", "intends to",
"will likely result", "are expected to", "will continue", "is anticipated",
"estimated", "project", "believe", or similar expressions are intended to
identify "forward looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995.
The future results of the Corporation could be affected by subsequent
events and could differ materially from those expressed in forward-looking
statements. If future events and actual performance differ from the
Corporation's assumptions, the actual results could vary significantly from the
performance projected in the forward-looking statements.
The Corporation wishes to caution readers not to place undue reliance
on any such forward-looking statements, which speak only as of the date made,
and to advise readers that various factors, including regional and national
conditions, substantial changes in levels of market interest rates, credit and
other risks of lending and investment activities, competitive and regulatory
factors and legislative changes, could affect the Corporation's financial
performance and could cause the Corporation's actual results for future periods
to differ materially from those anticipated or projected. The Corporation does
not undertake, and specifically disclaims any obligation, to update any
forward-looking statements to reflect occurrences or unanticipated events or
circumstances after the date of such statements.
2
FIRST BANCORP
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
JUNE 30, 2002 DECEMBER 31, 2001
--------------- -----------------
ASSETS
Cash and due from banks $ 68,144,854 $ 59,898,550
--------------- ---------------
Money market instruments 43,009,631 34,564,568
--------------- ---------------
Investment securities available for sale, at market:
Securities pledged that can be repledged 1,994,774,831 2,988,828,088
Other investment securities 216,387,544 385,419,989
--------------- ---------------
Total investment securities available for sale 2,211,162,375 3,374,248,077
--------------- ---------------
Investment securities held to maturity, at cost:
Securities pledged that can be repledged 1,083,267,413 171,152,930
Other investment securities 388,276,209 113,142,662
--------------- ---------------
Total investment securities held to maturity 1,471,543,622 284,295,592
--------------- ---------------
Federal Home Loan Bank (FHLB) stock 35,629,500 22,890,600
--------------- ---------------
Loans net of allowance for loans losses of $104,150,526
(2001-$91,060,307) 4,564,399,217 4,213,089,836
Loans held for sale 21,520,469 4,629,562
--------------- ---------------
Total loans 4,585,919,686 4,217,719,398
--------------- ---------------
Other real estate owned 1,183,566 1,455,577
Premises and equipment 76,031,012 76,155,620
Accrued interest receivable 34,841,537 37,630,883
Due from customers on acceptances 170,495 262,153
Other assets 121,370,660 88,396,770
--------------- ---------------
Total assets $ 8,649,006,938 $ 8,197,517,788
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Non-interest bearing deposits $ 230,746,852 $ 239,850,816
Interest bearing deposits 4,512,974,109 3,858,703,322
Federal funds purchased and securities
sold under agreements to repurchase 2,660,487,501 2,997,173,944
Advances from FHLB 336,000,000 343,700,000
Bank acceptances outstanding 170,495 262,153
Accounts payable and other liabilities 91,372,822 70,547,126
--------------- ---------------
7,831,751,779 7,510,237,361
Subordinated notes 84,363,223 84,361,525
--------------- ---------------
Stockholders' equity:
Preferred stock, authorized 50,000,000 shares: issued and
outstanding 14,420,000 shares at $25.00 liquidation
value per share (2001 - 10,740,000) 360,500,000 268,500,000
--------------- ---------------
Common stock, $1.00 par value, authorized 250,000,000
shares; issued 29,881,052 shares (2001-29,852,552) 29,881,052 29,852,552
Less: Treasury stock (at par value) (3,280,600) (3,280,600)
--------------- ---------------
Common stock outstanding 26,600,452 26,571,952
--------------- ---------------
Additional paid-in capital 11,685,627 14,214,877
Capital reserve 60,000,000 60,000,000
Legal surplus 136,792,514 136,792,514
Retained earnings 134,885,621 103,132,913
Accumulated other comprehensive income - unrealized
gain (loss) on securities available for sale, net of tax of
$809,241 (2001-$2,097,785) 2,427,722 (6,293,354)
--------------- ---------------
732,891,936 602,918,902
--------------- ---------------
Contingencies and commitments
--------------- ---------------
Total liabilities and stockholders' equity $ 8,649,006,938 $ 8,197,517,788
=============== ===============
The accompanying notes are an integral part of these statements.
3
FIRST BANCORP
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------- -------------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
INTEREST INCOME:
Loans $ 84,794,833 $ 89,078,153 $168,289,311 $180,315,454
Investments 51,086,925 36,784,564 104,055,022 73,956,457
Dividends on FHLB stock 466,163 314,742 719,452 655,814
------------ ------------ ------------ ------------
Total interest income 136,347,921 126,177,459 273,063,785 254,927,725
------------ ------------ ------------ ------------
INTEREST EXPENSE:
Deposits 33,736,063 41,388,925 66,279,582 85,653,959
Short term borrowings 32,393,483 24,296,875 65,599,497 53,659,767
Long term borrowings 1,695,112 2,391,160 3,390,224 5,039,211
------------ ------------ ------------ ------------
Total interest expense 67,824,658 68,076,960 135,269,303 144,352,937
------------ ------------ ------------ ------------
Net interest income 68,523,263 58,100,499 137,794,482 110,574,788
------------ ------------ ------------ ------------
PROVISION FOR LOAN LOSSES 14,500,499 17,800,000 34,300,998 32,800,000
------------ ------------ ------------ ------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 54,022,764 40,300,499 103,493,484 77,774,788
------------ ------------ ------------ ------------
OTHER INCOME:
Other fees on loans 5,465,426 5,171,189 10,728,121 9,794,770
Service charges on deposit accounts 2,354,493 2,384,642 4,832,597 4,770,245
Mortgage banking activities 895,838 825,102 1,309,744 933,353
Gain (loss) on investments (211,329) 2,937,887 616,518 9,526,776
Derivative loss (2,253,522) (2,253,522)
Other operating income 4,746,834 3,021,981 8,255,051 5,799,218
------------ ------------ ------------ ------------
Total other income 10,997,740 14,340,801 23,488,509 30,824,362
------------ ------------ ------------ ------------
OTHER OPERATING EXPENSES:
Employees' compensation and benefits 14,437,748 13,462,053 28,817,733 26,592,525
Occupancy and equipment 6,862,318 6,017,382 13,689,546 11,827,640
Business promotion 2,455,271 2,248,368 5,098,128 4,272,145
Taxes 1,643,889 1,355,194 3,286,719 2,699,604
Insurance 721,654 580,463 1,359,219 1,118,150
Other 5,727,087 6,554,320 11,445,240 13,526,700
------------ ------------ ------------ ------------
Total other operating expenses 31,847,967 30,217,780 63,696,585 60,036,764
------------ ------------ ------------ ------------
Income before income tax provision and
cumulative effect of accounting change 33,172,537 24,423,520 63,285,408 48,562,386
Income tax provision 6,193,483 4,251,721 10,656,836 8,589,891
------------ ------------ ------------ ------------
Income before cumulative effect of accounting change 26,979,054 20,171,799 52,628,572 39,972,495
CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAX (1,014,889)
------------ ------------ ------------ ------------
NET INCOME $ 26,979,054 $ 20,171,799 $ 52,628,572 $ 38,957,606
============ ============ ============ ============
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS $ 20,228,052 $ 17,003,049 $ 39,724,295 $ 32,620,103
============ ============ ============ ============
NET INCOME PER COMMON SHARE- BASIC:
Income before cumulative effect of accounting change $ 0.76 $ 0.64 $ 1.49 $ 1.27
Cumulative effect of accounting change (0.04)
------------ ------------ ------------ ------------
Earnings per common share-basic $ 0.76 $ 0.64 $ 1.49 $ 1.23
============ ============ ============ ============
NET INCOME PER COMMON SHARE-DILUTED:
Income before cumulative effect of accounting change $ 0.75 $ 0.64 $ 1.48 $ 1.26
Cumulative effect of accounting change (0.04)
------------ ------------ ------------ ------------
Earnings per common share-diluted $ 0.75 $ 0.64 $ 1.48 $ 1.22
============ ============ ============ ============
DIVIDENDS DECLARED PER COMMON SHARE $ 0.15 $ 0.13 $ 0.30 $ 0.26
============ ============ ============ ============
The accompanying notes are an integral part of these statements.
4
FIRST BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 2002 JUNE 30, 2001
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 52,628,572 $ 38,957,606
---------------- ----------------
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 5,649,614 4,508,530
Core deposit intangible amortization 459,631 459,631
Provision for loan losses 34,300,998 32,800,000
Deferred tax asset provision (6,400,930) (3,149,127)
Gain on sale of investments (616,518) (9,526,776)
Increase in taxes payable 4,645,560 6,635,486
Decrease (increase) in accrued interest receivable 2,789,347 (8,098,672)
Increase in accrued interest payable 4,949,898 3,584,482
Amortization of deferred net loan fees (1,000,656) 394,770
Increase in loans held for sale (16,620,907)
Decrease in other assets 2,951,689 4,344,180
Increase (decrease) in other liabilities 10,796,240 (4,865,149)
---------------- ----------------
Total adjustments 41,903,966 27,087,355
---------------- ----------------
Net cash provided by operating activities 94,532,538 66,044,961
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Principal collected on loans 491,059,389 399,783,962
Loans originated (532,005,574) (592,510,027)
Purchase of loans (354,645,777) (202,888,515)
Proceeds from sale of investments available for sale 547,538,534 317,687,253
Purchase of securities held to maturity (6,423,506,156) (80,801,786)
Purchase of securities available for sale (6,721,924,357) (3,718,347,345)
Principal repayments and maturities of securities held to maturity 5,236,258,127 76,354,381
Principal repayments of securities available for sale 7,348,923,095 3,314,059,225
Additions to premises and equipment (5,525,007) (8,725,925)
Purchase of FHLB stock (12,738,900) (4,354,102)
---------------- ----------------
Net cash used in investing activities (426,566,626) (499,742,879)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 623,297,666 335,172,161
Net decrease in federal funds purchased and securities
sold under repurchase agreements (335,495,597) (174,447,419)
FHLB advances paid/taken (7,700,000) 227,000,000
Payments of notes payable (6,446,115)
Dividends (20,875,864) (13,260,653)
Exercise of stock options 593,250 1,355,211
Issuance of preferred stock 88,906,000 89,900,000
Treasury stock acquired (1,317,388)
---------------- ----------------
Net cash provided by financing activities 348,725,455 457,955,797
---------------- ----------------
Net (decrease) increase in cash and cash equivalents 16,691,367 24,257,879
Cash and cash equivalents at beginning of period 94,463,118 65,392,939
---------------- ----------------
Cash and cash equivalents at end of period $ 111,154,485 $ 89,650,818
---------------- ----------------
Cash and cash equivalents include:
Cash and due from banks $ 68,144,854 $ 75,515,308
Money market instruments 43,009,631 14,135,510
---------------- ----------------
$ 111,154,485 $ 89,650,818
================ ================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 130,319,405 140,768,455
Income Taxes 7,236,912 2,965,487
The accompanying notes are an integral part of these statements.
5
FIRST BANCORP
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
ACCUMULATED
ADDITIONAL OTHER
PREFERRED COMMON PAID-IN CAPITAL LEGAL RETAINED COMPREHENSIVE
STOCK STOCK CAPITAL RESERVE SURPLUS EARNINGS INCOME (LOSS)
------------ ---------- ----------- ----------- ------------ ------------ ----------
DECEMBER 31, 2000 $165,000,000 $26,424,152 $16,567,516 $50,000,000 $126,792,514 $69,275,152 $(19,598,785)
Net income 86,001,444
Other comprehensive income 13,305,431
Issuance of preferred stock 103,500,000 (3,430,750)
Addition to legal surplus 10,000,000 (10,000,000)
Addition to capital reserve 10,000,000 (10,000,000)
Treasury stock acquired (86,200) (43,100) (1,800,385)
Stock options exercised 234,000 1,121,211
Cash dividends:
Common stock (13,835,100)
Preferred stock (16,508,198)
------------ ---------- ----------- ----------- ------------ ------------ ----------
DECEMBER 31, 2001 268,500,000 26,571,952 14,214,877 60,000,000 136,792,514 103,132,913 (6,293,354)
Net income 52,628,572
Other comprehensive income 8,721,076
Issuance of preferred stock 92,000,000 (3,094,000)
Stock options exercised 28,500 564,750
Cash dividends:
Common stock (7,971,588)
Preferred stock (12,904,276)
------------ ---------- ----------- ----------- ------------ ------------ ----------
JUNE 30, 2002 $360,500,000 $26,600,452 $11,685,627 $60,000,000 $136,792,514 $134,885,621 $2,427,722
============ =========== =========== =========== ============ ============ ==========
The accompanying notes are an integral part of these statements.
6
FIRST BANCORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------ -----------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2002 2001 2002 2001
----------- ------------ ----------- -----------
Net income $26,979,054 $ 20,171,799 $52,628,572 $38,957,606
----------- ------------ ----------- -----------
Other comprehensive income, net of tax:
Unrealized gain (losses) on securities:
Unrealized holding gains (losses)
arising during the period
net of tax of $7,392,746
(2001-$4,280,397) for the quarter
and $3,061,155 (2001-$2,178,859)
for the six-month period 22,178,237 (12,841,190) 9,183,465 6,536,578
Less: reclassification adjustment
for gains(losses) included in net
income net of tax of $52,832
(2001-$734,472) for the quarter
and $154,129 (2001-$2,381,694)
for the six-month period 158,497 (2,203,415) (462,389) (7,145,082)
Cumulative effect of accounting change,
net of tax benefit of $331,500 994,500
----------- ------------ ----------- -----------
Total other comprehensive (loss) income 22,336,734 (15,044,605) 8,721,076 385,996
----------- ------------ ----------- -----------
Comprehensive income $49,315,788 $ 5,127,194 $61,349,648 $39,343,602
=========== ============ =========== ===========
The accompanying notes are an integral part of these statements.
7
FIRST BANCORP
PART I - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 - NATURE OF BUSINESS
First BanCorp (the Corporation) is a financial holding company offering
a full range of financial services. First BanCorp is subject to the Federal Bank
Holding Company Act and to the regulations, supervision, and examination of the
Federal Reserve Board.
FirstBank Puerto Rico (FirstBank or the Bank), the Corporation's wholly
owned bank subsidiary, is a commercial bank chartered under the laws of the
Commonwealth of Puerto Rico. Its main office is located in San Juan, Puerto
Rico, and it has 44 full-service banking branches in Puerto Rico and four in the
U.S. Virgin Islands. It also has loan origination offices in Puerto Rico
focusing on consumer loans and residential mortgage loans. In addition, through
its wholly-owned subsidiaries, FirstBank operates other offices in Puerto Rico
specializing in small personal loans, finance leases and vehicle rental. The
Bank offers brokerage services in selected branches through an alliance with a
national brokerage house in Puerto Rico. The Bank is subject to the supervision,
examination and regulation of the Office of the Commissioner of Financial
Institutions of Puerto Rico and the Federal Deposit Insurance Corporation
(FDIC), which insures its deposits through the Savings Association Insurance
Fund (SAIF).
Effective August 2001, the Corporation entered into the insurance
business through a wholly owned subsidiary, FirstBank Insurance Agency. This
subsidiary is subject to the supervision, examination and regulation of the
Office of the Commissioner of Insurance of Puerto Rico.
On April 25, 2002, the Corporation filed a Report on Form 8-K,
reporting under item 5, a Definitive Agreement to acquire JPMorgan Chase's
Eastern Caribbean Region business in the U.S. Virgin Islands, British Virgin
Islands and Barbados. On August 8, 2002, the Corporation received the approval
for this transaction from the U.S. Virgin Islands Banking Board. This
transaction is pending other regulatory approvals. Management expects that the
acquisition will be completed during the second semester of 2002.
2 - ACCOUNTING POLICIES
The accounting and reporting policies of the Corporation and its
subsidiaries conform with generally accepted accounting principles, and, as
such, include amounts based on judgments, estimates and assumptions made by
Management that affect the reported amounts of assets and liabilities and
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates. The accompanying unaudited
financial statements have been prepared in accordance with the instructions for
Form 10-Q. Complete information regarding the financial statements can be found
in the notes to the financial statements for the year ended December 31, 2001
contained in the annual report of the Corporation. Certain amounts in the 2001
financial statements have been reclassified to conform with the 2002
presentation.
In the opinion of Management, the accompanying unaudited consolidated
statements of financial condition and the related consolidated statements of
income, of comprehensive income, of cash flows, and of changes in stockholders'
equity include all adjustments (consisting only of normal recurring accruals)
necessary for a fair statement of the Corporation's financial position at June
30, 2002, and the results of operations and the cash flows for the three and six
months ended on June 30, 2002 and 2001. The results of operations for the three
and six months ended on June 30, 2002, are not necessarily indicative of the
results to be expected for the entire year.
8
NEW ACCOUNTING PRONOUNCEMENTS
During 2001 the Financial Accounting Standards Board (FASB) issued the
following statements of financial accounting standards (SFAS):
SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of SFAS
No. 13, and Technical Corrections" - In April 2002, the FASB issued SFAS No.
145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of SFAS No. 13,
and Technical Corrections". This statement rescinds SFAS No. 4, "Reporting Gains
and Losses from Extinguishment of Debt, an amendment of APB Opinion No. 30",
which required all gains and losses from extinguishment of debt to be aggregated
and, if material, classified as extraordinary item, net of related income tax
effect. As a result, the criteria in Opinion No. 30 will now be used to classify
those gains and losses. This amendment became effective on July 1, 2002. SFAS
No.145 also amends SFAS No. 13, "Accounting for Leases", which requires that
certain lease modifications that have economics effects similar to
sale-leaseback transactions be accounted for in the same manner as
sale-leaseback transactions. This amendment became effective for transactions
occurring after May 15, 2002. The adoption of this statement did not have a
significant impact on the Corporation's financial statements.
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities"
- - In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". SFAS No. 146 requires that a liability for a
cost associated with an exit or disposal activity be recognized when the
liability is incurred. The provisions of this statement are effective for exit
or disposal activities that are initiated after December 31, 2002, with early
application encouraged. Management expects that the adoption of this statement
will not have a significant impact on the Corporation's financial statements.
GOODWILL AND OTHER INTANGIBLE ASSETS
During 2001 the FASB issued the SFAS No. 142, "Goodwill and Other
Intangible Assets". This statement addresses financial accounting and reporting
for intangible assets acquired individually or with a group of other assets (but
not those acquired in a business combination) at acquisition or subsequent to
their acquisition. SFAS No. 142 also addresses how goodwill and other intangible
assets should be accounted for after they have been initially recognized in the
financial statements. Specifically, under this statement, goodwill and other
indefinite life intangibles will no longer be amortized but will be evaluated at
least annually for impairment. The standard also provides a methodology for
evaluating impairment of goodwill and other intangibles based on fair value. The
provisions of this statement apply to fiscal years beginning after December 15,
2001. Retroactive application is not permitted. The Corporation does not have
goodwill. Management has reviewed the Corporation's core deposit intangible
assets, and determined that there is no impairment of the intangible assets and
that the useful life of ten years used to amortize them is the best estimate of
the economic benefit period. At June 30, 2002, the Corporation has a core
deposit intangible with a carrying amount of $6,739,808 (gross carrying amount
of $9,170,846 and accumulated amortization of $2,431,038) included in the Other
Assets category. The straight-line amortization expense for the period ended on
June 30, 2002 amounted to $459,631. The estimated aggregate amortization expense
for each of the five succeeding fiscal years will amount to approximately
$919,260.
3 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Corporation adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", as amended, on January 1, 2001. Upon
adoption of SFAS No. 133, as amended, a loss of approximately $1.3 million was
recognized in the statement of income as a cumulative effect, as a result of
unamortized premium paid for interest rate caps of $1.5 million less an
estimated fair market value of $200,000.
9
At June 30, 2002, interest rate swap agreements with an aggregate
notional amount of $2,035.9 million under which the Corporation agrees to pay
variable-rates of interest are considered to be a hedge against changes in the
fair value of the Corporation fixed-rate certificates of deposit. The interest
rate swap agreements are reflected at its fair value of $8.1 million in the
Corporation's consolidated statement of financial condition as a swap asset with
a corresponding increase in certificates of deposit by the same amount. The
hedge relationship is estimated to be 100 percent effective; therefore, there is
no impact on the statement of income nor on comprehensive income.
Interest rate swaps under which the Corporation agrees to pay
fixed-rates of interest are considered to be a hedge against changes in the fair
value attributable to market interest rates of fixed rate available for sale
corporate bonds. Accordingly, the interest rate swap agreements and the
securities being hedged are reflected at fair value in the Corporation's
consolidated statement of financial condition. The hedge relationship is
estimated to be 100 percent effective; therefore, there is no impact on the
statement of income. Interest rate swaps with an aggregate notional principal
balance of $25 million had an unrealized loss of approximately $467,000 at June
30, 2002, attributable to credit risk which was recorded in accumulated
comprehensive income net of income tax.
During the quarter ended on June 30, 2002, the Corporation sold certain
corporate bonds to which interest rate swap agreements with an aggregate
notional principal balance of $53.2 million were attributable. Therefore, these
swaps no longer qualify for hedge accounting, and an unrealized loss of $2.4
million was recorded to reflect changes in the fair value of these derivatives
as a derivative loss in the Other Income section of the statement of income.
The Corporation also writes covered call options on securities
maintained in the portfolio. The Corporation receives a premium on these call
options. Changes in the fair value of these call options are recorded as
derivative income or loss in the statement of income. For the quarter ended on
June 30, 2002, a total of $132,737 was recorded as a derivative income in the
Other Income section of the statement of income.
4 - STOCKHOLDERS' EQUITY
PREFERRED STOCK
The Corporation has 50,000,000 shares of authorized non-cumulative and
non-convertible preferred stock with a par value of $1, redeemable at the
Corporation's option subject to certain terms. This stock may be issued in
series and the shares of each series shall have such rights and preferences as
shall be fixed by the Board of Directors when authorizing the issuance of that
particular series. During the period ended on June 30, 2002, the Corporation
issued 3,680,000 shares of preferred stock (4,140,000 shares-2001; 3,000,000
shares-2000; 3,600,000 shares-1999). The liquidation value per share is $25.
Annual dividends of $1.8125 per share (issuance of 2002), of $1.85 per share
(issuance of 2001), of $2.0875 per share (issuance of 2000) and of $1.78125 per
share (issuance of 1999), are payable monthly, if declared by the Board of
Directors.
10
5 - EARNINGS PER COMMON SHARE
The calculations of earnings per common share for the three and six
months ended on June 30, 2002 and 2001 are as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
2002 2001 2002 2001
--------- --------- --------- ---------
(In thousands, except per share data)
Income before cumulative effect of accounting change
and dividend on preferred stock $ 26,979 $ 20,172 $ 52,628 $ 39,973
Dividend on preferred stock (6,751) (3,169) (12,904) (6,338)
--------- --------- --------- ---------
Income before cumulative effect of accounting change 20,228 17,003 39,724 33,635
Cumulative effect of accounting change (1,015)
--------- --------- --------- ---------
Net income available to common stockholders $ 20,228 $ 17,003 $ 39,724 $ 32,620
========= ========= ========= =========
Earnings per common share basic:
Weighted average common shares outstanding 26,575 26,597 26,573 26,550
========= ========= ========= =========
Income before cumulative effect of accounting change $ 0.76 $ 0.64 $ 1.49 $ 1.27
Cumulative effect of accounting change (0.04)
--------- --------- --------- ---------
Earnings per common share basic $ 0.76 $ 0.64 $ 1.49 $ 1.23
========= ========= ========= =========
Earnings per common share diluted:
Weighted average common shares and share equivalents:
Average common shares outstanding 26,575 26,597 26,573 26,550
Common stock equivalents - Options 430 174 355 158
--------- --------- --------- ---------
Total 27,005 26,771 26,928 26,708
========= ========= ========= =========
Income before cumulative effect of accounting change $ 0.75 $ 0.64 $ 1.48 $ 1.26
Cumulative effect of accounting change (0.04)
--------- --------- --------- ---------
Earnings per common share diluted $ 0.75 $ 0.64 $ 1.48 $ 1.22
========= ========= ========= =========
Stock options outstanding under the Corporation's stock option plan for
officers are common stock equivalents and, therefore, considered in the
computation of earnings per common share diluted. Common stock equivalents were
computed using the treasury stock method. At June 30, 2002, all options
outstanding during the period have been included in the computation of
outstanding shares. At June 30, 2001, 239,500 stock options were not included in
the computation of outstanding shares because they were antidilutive.
6 - INVESTMENT SECURITIES
The amortized cost, gross unrealized gains and losses, approximate
market value, weighted average yield and maturities of investment securities
were as follows:
11
INVESTMENT SECURITIES AVAILABLE FOR SALE
June 30, 2002 December 31, 2001
------------------------------------------- --------------------------------------------------
Weighted Weighted
Amortized Unrealized Market average Amortized Unrealized Market average
cost gains (losses) value yield% cost gains (losses) value yield%
---------- ------- -------- ---------- ------ ---------- ------- -------- ---------- ----
U.S. Treasury Securities: (Dollars in thousands)
Within 1 year $ 7,726 $ 30 $ 7,756 3.18
Obligations of other U.S.
Government Agencies:
Within 1 year 407,324 $ (32) 407,292 1.72
After 5 to 10 years $ 750 $ 7 $ 757 5.60 500 1 501 5.59
After 10 years 100,069 640 $(1,062) 99,647 7.57 87,519 469 (1,805) 86,183 7.55
Puerto Rico Government
Obligations:
After 5 to 10 years 4,872 156 5,028 6.25 4,458 128 4,586 6.19
After 10 years 5,659 272 5,931 6.31 5,932 151 6,083 6.34
---------- ------- -------- ---------- ---------- ------- -------- ----------
United States and
Puerto Rico Government
Obligations $ 111,350 $ 1,075 $ (1,062) $ 111,363 7.44 $ 513,459 $ 779 $ (1,837) $ 512,401 2.83
========== ======= ======== ========== ========== ======= ======== ==========
Mortgage backed securities:
FHLMC certificates:
Within 1 year $ 8 $ 8 5.85
After 1 to 5 years $ 361 $ 13 $ 374 6.81 112 $ 4 116 7.63
After 5 to 10 years 11,226 609 11,835 7.30 13,211 576 13,787 7.29
After 10 years 7,142 287 7,429 6.92 8,030 172 $ (6) 8,196 6.95
---------- ------- ---------- ---------- ------- -------- ----------
18,729 909 19,638 7.15 21,361 752 (6) 22,107 7.16
---------- ------- ---------- ---------- ------- -------- ----------
GNMA certificates:
After 5 to 10 years 4,112 104 $ (9) 4,207 6.41 4,605 101 4,706 6.39
After 10 years 1,855,803 30,765 1,886,568 6.45 2,515,953 12,672 (6,539) 2,522,086 6.52
---------- ------- -------- ---------- ---------- ------- -------- ----------
1,859,915 30,869 (9) 1,890,775 6.45 2,520,558 12,773 (6,539) 2,526,792 6.52
---------- ------- -------- ---------- ---------- ------- -------- ----------
FNMA certificates:
Within 1 year 24 24 5.77
After 1 to 5 years 64 2 66 7.10 158 4 162 6.92
After 5 to 10 years 94 5 99 7.29 124 5 129 7.32
After 10 years 6,115 384 6,499 7.51 7,095 408 7,503 7.96
---------- ------- ---------- ---------- ------- ----------
6,297 391 6,688 7.50 7,377 417 7,794 7.93
---------- ------- ---------- ---------- ------- ----------
Mortgage pass through
certificates:
After 10 years 1,452 21 1,473 8.41 1,958 38 1,996 8.70
---------- ------- ---------- ---------- ------- ----------
Mortgage backed
securities $1,886,393 $32,190 $ (9) $1,918,574 6.46 $2,551,254 $13,980 $ (6,545) $2,558,689 6.53
========== ======= ======== ========== ========== ======= ======== ==========
Corporate bonds:
Within 1 year $ 8,774 $ 70 $ 8,844 7.55 $ 19,246 $ 410 $ 19,656 7.70
After 1 to 5 years 86,471 799 $(12,904) 74,366 6.27 118,919 1,770 $ (2,899) 117,790 6.68
After 5 to 10 years 57,378 743 (1,837) 56,284 7.66 114,855 77 (1,906) 113,026 7.34
After 10 years 18,531 328 18,859 7.35
---------- ------- ---------- ---------- ------- -------- ----------
Corporate bonds $ 152,623 $ 1,612 $(14,741) $ 139,494 6.87 $ 271,551 $ 2,585 $ (4,805) $ 269,331 7.08
========== ======= ======== ========== ========== ======= ======== ==========
Equity securities (without
contractual maturity) $ 57,092 $ 8,011 $(23,372) $ 41,731 1.24 $ 45,115 $ 4,901 $(16,189) $ 33,827 1.43
========== ======= ======== ========== ========== ======= ======== ==========
Total Investments Securities
Available for Sale $2,207,458 $42,888 $(39,184) $2,211,162 6.40 $3,381,379 $22,245 $(29,376) $3,374,248 5.95
========== ======= ======== ========== ========== ======= ======== ==========
Maturities for mortgage backed securities are based upon contractual
terms assuming no repayments. The weighted average yield on investment
securities held for sale is based on amortized cost; therefore it does not give
effect to changes in fair value.
12
The Corporation's bank subsidiary is restructuring its portfolio of
mortgage backed securities available for sale, in order to shorten its duration
to enable a future reinvestment, in the next two to four years, at expected
higher interest rates. If rates stay at today's levels, the proceeds would be
reinvested at these lower levels. As a result, during late June 2002,
approximately $550 million of 30 year mortgage backed securities and certain
corporate bonds were sold. An additional amount of approximately $600 million of
30 year mortgage backed securities was sold during the third quarter, before the
filing of this report. These sales of securities were substantially substituted
with $900 million of 15 year mortgage backed securities which have a lower
average life and yield, and which value is less sensitive to increases in
interest rates.
It is the Corporation's policy to invest in corporate bonds, which at
the time of the investment, are of an investment grade quality. The total
carrying amount of the corporate bonds portfolio is $203.6 million, or 5.4% of
total investments of the Corporation as of June 30, 2002. During the second
quarter of 2002, two of the bonds in the FirstBank's portfolio were downgraded
to non-investment grade quality by the credit rating agencies. These were,
WorldCom Corporation, $15.5 million outstanding at the time of the downgrade and
Nortel Networks Corporation, $18.5 million outstanding at the time of the
downgrade. Management performed an impairment analysis on these securities and
determined that an other-than-temporary impairment of approximately $11.7
million had occurred in the case of the WorldCom Corporation bonds. The
estimated impairment amount of this security was recognized as a loss in
accordance with SFAS No. 115 in the statement of income. In addition, Management
reclassified to non-accruing status the remaining carrying amount of $3.8
million as presented in the Non-performing Assets section of the Management
Discussion Analysis of this report.
The Corporation's equity securities portfolio carrying amount is $41.7
million, and its cost is $57.1 million as of June 30, 2002. The Corporation's
current policy guidelines limit the equities portfolio investments to $60
million, which is 1.6% of the Corporations total investments as of June 30,
2002. Management performed an impairment analysis on the Corporation's
investment in equity securities and determined that an other-than-temporary
impairment had occurred in the case of a $2.3 million investment in WorldCom
Corporation shares of common stock. In accordance with SFAS No. 115, the
Corporation recorded a loss in the statement of income for such amount on this
investment.
At June 30, 2002, Management determined that except for the impairment
on the WorldCom Corporation bonds and stock, there are no other-than-temporary
impairments on the rest of the bonds and equity securities portfolio. Management
will continue monitoring the Corporation's investment on individual corporate
bonds and equity securities to identify any other-than-temporary impairment in
accordance with SFAS No.115. Future other-than-temporary impairments may occur
that would need to be recognized as a loss.
For the six-month ended on June 30, 2002, proceeds from the sale of
securities amounted to $547.5 million (2001 - $317.7 million) resulting in gross
realized gains of $15.4 million (2001 - $10.3 million), and gross realized
losses of $14.8 million (2001 - $822,034).
13
INVESTMENT SECURITIES HELD TO MATURITY
June 30, 2002 December 31, 2001
------------------------------------------------ ----------------------------------------------------
Weighted Weighted
Amortized Unrealized Market average Amortized Unrealized Market average
cost gains (losses) value yield% cost gains (losses) value yield%
--------- ----- -------- ------- ------- --------- ----- ------- ------ ------
(Dollars in thousands)
U.S. Treasury Securities:
Within 1 year $ 19,380 $19,380 1.65
Obligations of U.S.
Government Agencies:
Within 1 year 860,090 $ (115) 859,975 1.84
After 10 years 518,634 $4,789 (1,893) 521,530 7.70 $211,194 $ 3 $(6,466) $204,731 7.39
Puerto Rico Government
Obligations:
After 1 to 5 years 5,000 25 5,025 5.00 5,000 5,000 5.00
After 10 years 4,217 404 4,621 6.50 4,084 228 4,312 6.50
---------- --------- ------- ---------- ------ ---- --------
United States and Puerto
Rico Government
Obligations $1,407,321 $5,218 $(2,008) $1,410,531 4.02 $220,278 $231 $(6,466) $214,043 7.32
========== ====== ======= ========== ======== ==== ======= ========
Corporate bonds:
After 1 to 5 years $64,223 $8 $ (153) $64,078 3.46 $64,018 $(277) $ 63,741 3.49
======= == ======= ======= ======= ====== ========
Total Investment Securities
Held to Maturity $1,471,544 $5,226 $(2,161) $1,474,609 4.00 $284,296 $231 $(6,743) $277,784 6.46
========== ====== ======= ========== ======== ==== ======= ========
Expected maturities of mortgage backed securities and certain other
securities might differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties. At January 1, 2001, in connection with the adoption of SFAS No. 133,
the Corporation transferred a portfolio of $207 million of GNMA certificates
from held to maturity into the available for sale category. The unrealized gain
of $994,500, net of taxes, was reflected in other comprehensive income as a
cumulative effect of the change in accounting principle.
7 - INVESTMENT IN FHLB STOCK
At June 30, 2002 and December 31, 2001, there were investments in FHLB
stock with book value of $35,629,500 and $22,890,600, respectively. The
estimated market value of such investments is its redemption value.
14
8 - LOANS RECEIVABLE
The following is a detail of the loan portfolio:
JUNE 30, DECEMBER 31,
2002 2001
------------------ --------------
(IN THOUSANDS)
Residential real estate loans:
Secured by first mortgages:
Conventional $ 1,170,043 $ 955,573
Insured by government agencies:
Federal Housing Administration and Veterans
Administration 34,967 25,211
Puerto Rico Housing Bank and Finance Agency 21,229 23,513
Secured by second mortgages 7,242 8,088
---------------- ---------------
1,233,481 1,012,385
Deferred net loan fees (5,085) (5,107)
----------------- ---------------
Residential real estate loans 1,228,396 1,007,278
------------- ------------
Commercial loans:
Construction loans 214,647 219,396
Commercial loans 1,289,359 1,238,173
Commercial mortgage 777,341 688,922
------------ ------------
Commercial loans 2,281,347 2,146,491
----------- -----------
Finance leases 138,617 127,935
------------ ------------
Consumer and other loans:
Personal 361,505 362,490
Personal lines of credit 10,757 11,216
Auto 498,087 502,902
Boat 47,177 39,570
Credit card 162,771 176,226
Home equity reserve loans 1,646 1,851
Unearned interest (61,754) (71,810)
------------ ------------
Consumer and other loans 1,020,189 1,022,445
----------- -----------
Loans receivable 4,668,549 4,304,149
Allowance for loan losses (104,150) (91,060)
----------- ------------
Loans receivable-net 4,564,399 4,213,089
Loans held for sale 21,521 4,630
------------- -------------
Total loans $4,585,920 $4,217,719
========== ==========
9- IMPAIRED LOANS
At June 30, 2002, the Corporation had $31.3 million ($10.7 million at
December 31, 2001) in commercial and real estate loans over $1,000,000
considered impaired with an allowance of $7.6 million ($3.7 million at December
31, 2001), of which $7.1 million was established based on the fair value of the
collateral (2001-$2 million) and $500,000 was established based on the present
value of expected future cash flows (2001-$1.7 million). The allowance for
impairment loans is part of the allowance for loan losses. The average recorded
investment in impaired loans amounted to $17 million for the six months ended on
June 30, 2002 (2001 - $11.9 million). Interest income in the amount of
approximately $570,000 and $84,000 was recognized on impaired loans for the
period ended on June 30, 2002 and 2001, respectively.
15
10 - SEGMENT INFORMATION
The Corporation has three reportable segments: Retail business,
Treasury and Investments, Commercial Corporate business and Other. Management
determined the reportable segments based on the internal reporting used to
evaluate performance and to assess where to allocate resources. Other factors
such as the Corporation's organizational chart, nature of the products,
distribution channels and the economic characteristics of the products were also
considered in the determination of the reportable segments.
The Retail business segment is composed of the Corporation's branches
and loan centers together with the retail products of deposits and consumer
loans. Consumer loans include loans such as personal, residential real estate,
auto, credit card and small loans. Finance leases are also included in Retail
business. The Commercial Corporate segment is composed of commercial loans
including commercial real estate and construction loans. The Treasury and
Investment segment is responsible for the Corporation investment portfolio and
treasury functions. The Other Income segment is mainly composed of insurance and
other commissions income and earned discounts on tax credits purchased and
utilized against income tax payments.
The accounting policies of the segments are the same as those
described in Note 2 of the Corporation's financial statements for the year ended
December 31, 2001 contained in the annual report of the Corporation.
The Corporation evaluates the performance of the segments based on net
interest income after the estimated provision for loan losses, other income and
direct operating expenses. The segments are also evaluated based on the average
volume of its earning assets less the allowance for loan losses.
The only intersegment transaction is the net transfer of funds between
the Treasury and Investment segment and the retail and commercial corporate
segments. The Treasury and Investment segment sells funds to the Retail and
Commercial Corporate segments to finance their lending activities and purchases
funds gathered by those segments. The interest rates charged or credited by
Investment and Treasury segment are based on market rates.
16
The following table presents information about the reportable segments (in
thousands):
TREASURY AND COMMERCIAL
RETAIL INVESTMENTS CORPORATE OTHER TOTAL
------ ------------ ----------- ----- ------
FOR THE QUARTER ENDED JUNE 30, 2002:
Interest income $ 54,842 $ 51,553 $ 29,953 $ 136,348
Net (charge) credit for transfer of funds (12,681) 26,999 (14,318)
Interest expense (14,560) (53,264) (67,824)
Net interest income 27,601 25,288 15,635 68,524
Provision for loan losses (8,383) (6,117) (14,500)
Other income 9,977 (2,295) 1,103 $ 2,212 10,997
Direct operating expenses (18,173) (527) (1,359) (158) (20,217)
Segment income $ 11,022 $ 22,466 $ 9,262 $ 2,054 $ 44,804
Average earning assets $2,230,054 $3,571,237 $2,178,420 $ 7,979,711
FOR THE PERIOD ENDED JUNE 30, 2002:
Interest income $ 108,592 $ 104,774 $ 59,698 $ 273,064
Net (charge) credit for transfer of funds (23,770) 52,071 (28,301)
Interest expense (29,276) (105,993) (135,269)
Net interest income 55,546 50,852 31,397 137,795
Provision for loan losses (21,328) (12,972) (34,300)
Other income 19,430 (1,309) 2,083 $3,283 23,487
Direct operating expenses (35,068) (1,076) (2,776) (276) (39,196)
Segment income $ 18,580 $ 48,467 $ 17,731 $3,007 $ 87,786
Average earning assets $2,174,623 $3,646,760 $2,156,930 $ 7,978,313
TREASURY AND COMMERCIAL
RETAIL INVESTMENTS CORPORATE OTHER TOTAL
------ ------------ ---------- ------- ------
FOR THE QUARTER ENDED JUNE 30, 2001:
Interest income $ 54,398 $ 37,099 $ 34,680 $ 126,177
Net (charge) credit for transfer of funds (3,846) 24,865 (21,019)
Interest expense (18,860) (49,217) (68,077)
Net interest income 31,692 12,747 13,661 58,100
Provision for loan losses (14,790) (3,010) (17,800)
Other income 9,625 3,107 909 $ 700 14,341
Direct operating expenses (17,277) (444) (1,343) (61) (19,125)
Segment income $ 9,250 $ 15,410 $ 10,217 $ 639 $ 35,516
Average earning assets $1,927,782 $2,327,290 $1,727,054 $5,982,126
FOR THE PERIOD ENDED JUNE 30, 2001:
Interest income $ 108,394 $ 74,612 $ 71,921 $ 254,927
Net (charge) credit for transfer of funds (5,047) 49,786 (44,739)
Interest expense (38,966) (105,387) (144,353)
Net interest income 64,381 19,011 27,182 110,574
Provision for loan losses (27,243) (5,557) (32,800)
Other income 17,931 9,860 2,013 $1,021 30,825
Direct operating expenses (32,951) (885) (2,555) (119) (36,510)
Segment income $ 22,118 $ 27,986 $ 21,083 $ 902 $ 72,089
Average earning assets $1,895,539 $2,299,078 $1,694,546 $ 5,889,164
17
The following table presents a reconciliation of the reportable segment
financial information to the consolidated totals (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- ----------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net income:
Total income for segments $ 44,804 $ 35,515 $ 87,786 $ 72,089
Other operating expenses (11,631) (11,091) (24,501) (23,526)
Income taxes (6,193) (4,252) (10,657) (8,590)
----------- ----------- ----------- -----------
Income before cumulative effect of
accounting change 26,980 20,172 52,628 39,973
----------- ----------- ----------- -----------
Cumulative effect of accounting change (1,015)
-----------
Total consolidated net income $ 26,980 $ 20,172 $ 52,628 $ 38,958
=========== =========== =========== ===========
Average assets:
Total average earning assets for segments $ 7,979,711 $ 5,982,126 $ 7,978,313 $ 5,889,164
Average non earning assets 318,514 370,904 318,802 329,687
----------- ----------- ----------- -----------
Total consolidated average assets $ 8,298,225 $ 6,353,030 $ 8,297,115 $ 6,218,851
=========== =========== =========== ===========
11 - INCOME TAX
The Puerto Rico Treasury Department is conducting an investigation of
the Bank's income tax returns for the years 1995, 1997, 1998 and 1999.
Management has prepared these tax returns in accordance with the Puerto Rico
Internal Revenue Code and its regulations. Therefore, Management believes that a
deficiency, if any, resulting from this investigation, will not have a material
effect on the Corporation's financial position.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
SELECTED FINANCIAL DATA
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30
2002 2001 2002 2001
----------- ----------- ----------- -----------
CONDENSED INCOME STATEMENTS (IN THOUSANDS):
Interest income $ 136,348 $ 126,178 $ 273,064 $ 254,928
Interest expense 67,825 68,077 135,269 144,353
----------- ----------- ----------- -----------
Net interest income 68,523 58,101 137,795 110,575
Provision for loan losses 14,500 17,800 34,301 32,800
----------- ----------- ----------- -----------
Net interest income after provision
for loan losses 54,023 40,301 103,494 77,775
Other income 11,209 11,403 22,872 21,298
Gain on sale of investments (211) 2,938 617 9,527
Other operating expense 31,848 30,218 63,697 60,037
----------- ----------- ----------- -----------
Income before income tax expense and cumulative
effect of accounting change 33,173 24,424 63,286 48,563
Income tax expense 6,194 4,252 10,657 8,590
----------- ----------- ----------- -----------
Income before cumulative effect of accounting change 26,979 20,172 52,629 39,973
Cumulative effect of accounting change (1,015)
----------- ----------- ----------- -----------
Net income $ 26,979 $ 20,172 $ 52,629 $ 38,958
=========== =========== =========== ===========
Net income available to common stockholders $ 20,228 $ 17,003 $ 39,724 $ 32,620
=========== =========== =========== ===========
PER COMMON SHARE RESULTS (DILUTED):
Income before cumulative effect of accounting change $ 0.75 $ 0.64 $ 1.48 $ 1.26
Cumulative effect of accounting change (0.04)
----------- ----------- ----------- -----------
Net income per common share $ 0.75 $ 0.64 $ 1.48 $ 1.22
=========== =========== =========== ===========
Cash dividends declared $ 0.15 $ 0.13 $ 0.30 $ 0.26
SELECTED FINANCIAL RATIOS (IN PERCENT):
Average yield on earning assets (1) 7.41 8.77 7.47 8.93
Cost of interest bearing liabilities 3.74 4.92 3.74 5.34
Interest rate spread (1) 3.67 3.85 3.73 3.59
Net interest margin (1) 4.04 4.28 4.09 4.06
Net income to average total assets 1.30 1.27 1.27 1.25
Net income to average total equity 15.07 17.39 15.12 17.00
Net income to average common equity 22.75 22.91 22.53 22.33
Average equity to average total assets 8.63 7.30 8.39 7.37
Dividend payout ratio 19.70 20.39 20.07 21.22
Efficiency ratio (2) 40.05 41.71 39.49 42.46
JUNE 30, DECEMBER 31,
2002 2001
---- ----
REGULATORY CAPITAL RATIOS (IN PERCENT):
Total capital to risk weighted assets 15.81 14.50
Tier 1 capital to risk weighted assets 13.54 12.16
Tier 1 capital to average assets 8.19 7.49
BALANCE SHEET DATA (IN THOUSANDS):
Loans and loans held for sale $4,690,070 $4,308,780
Allowance for loan losses 104,150 91,060
Investments 3,761,345 3,715,999
Total assets 8,649,007 8,197,518
Deposits 4,743,721 4,098,554
Borrowings 3,080,851 3,425,236
Total common equity 372,392 334,419
Total equity 732,892 602,919
Book value per common share $14.00 $12.59
Number of full service branches 48 48
Loan origination offices 43 43
(1) On a taxable equivalent basis.
(2) Other operating expenses to the sum of net interest income and other
income.
19
RESULTS OF OPERATIONS
First BanCorp's results of operations depend primarily upon its net
interest income, which is the difference between the interest income earned on
its earning assets, including investment securities and loans, and the interest
expense on its interest bearing liabilities including deposits and borrowings.
The Corporation's results of operations also depend on the provision for loan
losses; other income, mainly service charges and fees on loans; operating
expenses, such as personnel, occupancy and other costs; gains on sales of
investments; and income taxes.
For the quarter ended on June 30, 2002, the Corporation recorded
earnings of $26,979,054 or $0.76 per common share (basic) and $0.75 per share
(diluted), a per share increase of 17.2% as compared to earnings of $20,171,799
or $0.64 per common share (basic and diluted) for the second quarter of 2001.
Earnings for the six months ended on June 30, 2002 amounted to $52,628,572 or
$1.49 per common share (basic) and $1.48 per common share (diluted), as compared
to earnings of $38,957,606 or $1.23 per common share (basic) and $1.22 per
common share (diluted) for the same period of 2001. On a per share
basis-diluted, earnings for the six months ended on June 30, 2002 increased by
21.3% as compared to earnings for the six months ended on June 30, 2001.
NET INTEREST INCOME
Net interest income for the three and six months ended on June 30, 2002
increased by $10.4 million and $27.2 million, respectively, as compared with the
same periods in 2001; or by $16.7 million and $43.4 million on a taxable
equivalent basis. The interest rate spread and net interest margin, on a taxable
equivalent basis, amounted to 3.67% and 4.04%, respectively, for the second
quarter of 2002 as compared to 3.85% and 4.28%, respectively, for the second
quarter of 2001. The interest rate spread and net interest margin on a taxable
equivalent basis, amounted to 3.73% and 4.09%, respectively, for the six months
ended on June 30, 2002 as compared to 3.59% and 4.06%, respectively, for the six
months ended on June 30, 2001.
Part I of the following table presents average volumes and rates on a
taxable equivalent basis and Part II describes the respective extent to which
changes in interest rates and changes in volume of interest-related assets and
liabilities have affected the Corporation's interest income and interest expense
during the periods indicated. For each category of earning assets and interest
bearing liabilities, information is provided on changes attributable to (i)
changes in volume (changes in volume multiplied by old rates), (ii) changes in
rate (changes in rate multiplied by old volumes). Rate-volume variances (changes
in rate multiplied by the changes in volume) have been allocated to the changes
in volume and changes in rate based upon their respective percentage of the
combined totals.
20
PART I THREE MONTHS ENDED JUNE 30,
AVERAGE VOLUME INTEREST INCOME (1) / EXPENSE AVERAGE RATE (1)
----------------------------- ----------------------------- -----------------
2002 2001 2002 2001 2002 2001
---- ----- ----- ----- ----- ----
(DOLLARS IN THOUSANDS)
Earning assets:
Money market instruments $ 57,309 $ 29,386 $ 261 $ 307 1.83% 4.19%
Government obligations 915,941 571,042 14,668 9,071 6.42% 6.37%
Mortgage backed securities 2,284,457 1,412,891 43,556 26,622 7.65% 7.56%
FHLB stock 35,630 22,891 466 315 5.25% 5.52%
Corporate bonds 270,724 296,205 4,273 6,440 6.33% 8.72%
------------ ---------- ------------ -----------
Total investments 3,564,061 2,332,415 63,224 42,755 7.12% 7.35%
----------- --------- ----------- ----------
Residential real estate loans 1,136,570 825,260 17,556 16,442 6.20% 7.99%
Construction 212,048 223,284 2,825 4,557 5.34% 8.19%
Commercial loans 2,014,653 1,523,432 27,258 30,182 5.43% 7.95%
Finance leases 135,061 128,155 3,657 3,691 10.86% 11.55%
Consumer loans 1,017,214 1,037,461 34,659 35,152 13.67% 13.59%
----------- --------- ----------- ----------
Total loans (2) 4,515,546 3,737,592 85,955 90,024 7.64% 9.66%
----------- --------- ----------- ----------
Total earning assets $8,079,607 $6,070,007 $149,179 $132,779 7.41% 8.77%
========== ========== ======== ========
Interest-bearing liabilities:
Deposits $4,370,813 $3,360,525 $ 33,736 $ 41,389 3.10% 4.94%
Other borrowed funds 2,575,800 1,889,217 30,195 23,146 4.70% 4.91%
FHLB advances 325,693 294,525 3,894 3,541 4.80% 4.82%
------------ ----------- ------------ -----------
Total interest-bearing liabilities $7,272,306 $5,544,267 $ 67,825 $ 68,076 3.74% 4.92%
========== ========== ========= =========
Net interest income $ 81,354 $ 64,703
========= =========
Interest rate spread 3.67% 3.85%
Net interest margin 4.04% 4.28%
SIX MONTHS ENDED JUNE 30,
AVERAGE VOLUME INTEREST INCOME (1) / EXPENSE AVERAGE RATE (1)
---------------------------- ----------------------------- ------------------
2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- -----
(DOLLARS IN THOUSANDS)
Earning assets:
Money market instruments $ 50,924 $ 17,348 $ 461 $ 375 1.83% 4.36%
Government obligations 876,699 567,671 26,214 19,043 6.03% 6.76%
Mortgage backed securities 2,371,471 1,450,139 90,933 52,396 7.73% 7.29%
FHLB stock 29,577 20,774 719 656 4.90% 6.37%
Corporate bonds 305,643 247,011 10,256 10,512 6.77% 8.58%
---------- ----------- ---------- ----------
Total investments 3,634,314 2,302,943 128,583 82,982 7.13% 7.27%
--------- ---------- --------- ----------
Residential real estate loans 1,081,403 790,703 34,114 32,054 6.36% 8.17%
Construction 212,409 217,881 5,713 9,690 5.42% 8.97%
Commercial loans 1,987,221 1,497,514 54,176 62,231 5.50% 8.38%
Finance leases 133,291 126,400 7,312 7,367 11.06% 11.75%
Consumer loans 1,020,168 1,040,249 69,146 70,437 13.67% 13.65%
--------- ----------- ---------- -----------
Total loans (2) 4,434,492 3,672,747 170,461 181,779 7.75% 9.98%
--------- ----------- --------- ----------
Total earning assets $8,068,806 $5,975,690 $299,044 $264,761 7.47% 8.93%
========== ========== ======== ========
Interest-bearing liabilities:
Deposits $4,233,784 $3,283,354 $66,280 $ 85,654 3.16% 5.26%
Other borrowed funds 2,731,440 1,958,174 61,193 53,586 4.52% 5.52%
FHLB advances 325,781 205,092 7,797 5,112 4.83% 5.03%
------------ ------------ ----------- -----------
Total interest-bearing liabilities $7,291,005 $5,446,620 $135,270 $144,352 3.74% 5.34%
========== ========== ======== ========
Net interest income $163,774 $120,409
======== ========
Interest rate spread 3.73% 3.59%
Net interest margin 4.09% 4.06%
(1) On a tax equivalent basis. The tax equivalent yield was computed dividing
the interest rate spread on exempt assets by (1- statutory tax rate) and adding
to it the cost of interest bearing liabilities. When adjusted to a tax
equivalent basis, yields on taxable and exempt assets are comparative.
(2) Non-accruing loans are included in the average balances.
21
PART II THREE MONTHS ENDED ON JUNE 30, SIX MONTHS ENDED ON JUNE 30,
2002 COMPARED TO 2001 2002 COMPARED TO 2001
--------------------------------------- -----------------------------------
VARIANCE VARIANCE VARIANCE VARIANCE
DUE TO DUE TO TOTAL DUE TO DUE TO TOTAL
VOLUME RATE VARIANCE VOLUME RATE VARIANCE
----------- --------- -------- ---------- --------- ---------
(IN THOUSANDS)
Interest income on earning assets:
Money market instruments $ 211 $ (257) $ (46) $ 519 $ (433) $ 86
Government obligations 5,523 74 5,597 9,856 (2,685) 7,171
Mortgage backed securities 16,614 320 16,934 35,148 3,389 38,537
FHLB stock 172 (21) 151 248 (185) 63
Corporate bonds (549) (1,618) (2,167) 2,187 (2,443) (256)
--------- ---------- ---------- -------- --------- -----------
Total investments 21,971 (1,502) 20,469 47,958 (2,357) 45,601
------- ---------- --------- ------- --------- --------
Consumer loans (695) 202 (493) (1,369) 78 (1,291)
Real estate loans 5,518 (4,404) 1,114 10,556 (8,496) 2,060
Construction loans (203) (1,529) (1,732) (212) (3,765) (3,977)
Commercial loans 8,204 (11,128) (2,924) 17,076 (25,131) (8,055)
Finance leases 194 (228) (34) 394 (449) (55)
--------- ---------- ----------- --------- ----------------------
Total loans 13,018 (17,087) (4,069) 26,445 (37,763) (11,318)
------- -------- --------- ------ -------- ---------
Total interest income 34,989 (18,589) 16,400 74,403 (40,120) 34,283
------- -------- -------- ------ -------- --------
Interest expense on interest
bearing liabilities:
Deposits 10,159 (17,812) (7,653) 20,082 (39,456) (19,374)
Other borrowed funds 8,243 (1,194) 7,049 19,370 (11,763) 7,607
FHLB advances 375 (22) 353 2,962 (277) 2,685
---------- ----------- ------- --------- ----------- ---------
Total interest expense 18,777 (19,028) (251) 42,414 (51,496) (9,082)
-------- --------- -------- -------- --------- ----------
Change in net interest income $ 16,212 $ 439 $ 16,651 $ 31,989 $ 11,376 $ 43,365
======== =========== ======== ======== ========= ========
Total interest income includes tax equivalent adjustments based on the
Puerto Rico income tax rate of $12.8 million and $26.0 million for the three and
six months ended on June 30, 2002, respectively, and of $6.6 million and $9.8
million for the three and six months ended on June 30, 2001, respectively. The
adjustments have been made on debt securities (primarily United States and
Puerto Rico government obligations) and on loans guaranteed by United States and
Puerto Rico government agencies. The computation considers the interest expense
disallowance as required by the Puerto Rico tax law.
INTEREST INCOME
Interest income increased by $10.2 million and $18.1 million for the
three and six months ended on June 30, 2002, respectively, as compared to the
same periods for 2001. When adjusted to a taxable equivalent basis, interest
income increased by $16.4 million and $34.3 million for the three and six months
ended on June 30, 2002, respectively, as compared to the same periods in 2001.
The yield on earning assets, on a taxable equivalent basis, amounted to 7.41%
and 8.77% for the three months ended on June 30, 2002 and 2001, respectively;
and 7.47% and 8.93% for the six months ended on June 30, 2002 and 2001,
respectively. The improvement in the interest income for the periods analyzed
was due to the increase in the average volume of earning assets, partially
offset by a lower yield due to lower market rates. The average volume of earning
assets increased by $2,010 million and $2,093 million for the three and six
months ended on June 30, 2002, respectively, as compared to the same periods in
2001.
22
The average volume of total investments increased by $1,231.6 million
and $1,331.4 million for the three and six month period ended on June 30, 2002
as compared with the same periods in 2001, mostly concentrated in government
obligations and mortgage backed securities.
The average volume of the loan portfolio increased by $778.0 million and
$761.7 million for the three and six months ended on June 30, 2002,
respectively, as compared with the same periods in 2001, mostly concentrated in
residential real estate and commercial loans.
INTEREST EXPENSE
Interest expense decreased by $252,000 and $9.1 million for the three
and six months ended on June 30, 2002, respectively, as compared with the
amounts recorded in the same periods of 2001. The decrease in the interest
expense for the period ended on June 30, 2002 when compared with the same period
last year, was the result of a decrease in the cost of interest bearing
liabilities, due to lower market rates, causing a positive rate variance of $19
million and $51.5 million, for the three and six months period ended June 30,
2002. This positive effect was partially offset with an increase in the average
volume of interest bearing liabilities generating a negative volume variance of
$18.8 million and $42.4 million, for the three and six months period ended June
30, 2002. The cost of interest bearing liabilities decreased from 4.92% and
5.34% for the three and six month periods ended on June 30, 2001 to 3.74% for
the three and six month periods ended on June 30, 2002.
PROVISION FOR LOAN LOSSES
For the three and six months ended on June 30, 2002, the Corporation
provided $14.5 million and $34.3 million for loan losses, as compared to $17.8
million and $32.8 million for the same periods of 2001. The provision for loan
losses recorded for such periods was necessary to maintain the allowance for
loan losses on the loan portfolio at a level that Management considers adequate
to absorb losses inherent in the portfolio. The Corporation establishes a
quarterly allowance for loan losses based on its asset classification report to
cover the total amount of any assets classified as a "loss," the probable loss
exposure of other classified assets, and a percentage of the assets not
classified. The adequacy of the allowance for loan losses is also based upon a
number of additional factors including historical loan loss experience, current
economic conditions, fair value of the underlying collateral, financial
condition of the borrowers, and, as such, includes amounts based on judgments
and estimates made by Management. Although Management believes that the
allowance for loan losses is adequate, factors beyond the Corporation's control,
including factors affecting the Puerto Rico economy, may contribute to
delinquencies and defaults thus necessitating additional reserves.
The allowance for loan losses on commercial and real estate loans over
$1 million is determined based on the present value of expected future cash
flows or the fair value of the collateral, if the loan is collateral dependent.
23
The following table sets forth an analysis of the activity in the
allowance for loan losses during the periods indicated:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2002 2001 2002 2001
--------- ---------- ------------ ------------
(DOLLARS IN THOUSANDS)
Allowance for loan losses, beginning of period $ 99,467 $ 77,639 $ 91,060 $ 76,919
Provision for loan losses 14,500 17,800 34,301 32,800
---------- ---------- ---------- ----------
Loans Charge-Offs:
Residential real estate (2) (38) (107)
Commercial (1,420) (2,160) (2,266) (7,185)
Finance leases (369) (689) (1,102) (1,352)
Consumer (9,819) (10,501) (21,424) (20,625)
--------- ---------- -------- ---------
Total charge-offs (11,610) (13,350) (24,830) (29,269)
-------- --------- -------- --------
Recoveries of loans previously charged-off:
Commercial 180 21 191 82
Finance leases 90 42 160 96
Consumer 1,523 1,857 3,268 3,381
----------- ----------- ------------ ----------
Total recoveries 1,793 1,920 3,619 3,559
----------- ----------- ------------ ----------
Net charge-offs (9,817) (11,430) (21,211) (25,710)
---------- ---------- ---------- --------
Allowance for loan losses, end of period $104,150 $ 84,009 $104,150 $ 84,009
======== ========= ======== ========
Allowance for loan losses to total loans 2.22% 2.18% 2.22% 2.18%
Net charge-offs annualized to average loans
outstanding during the period 0.87% 1.22% 0.96% 1.40%
24
OTHER INCOME
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- -----------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Other fees on loans $ 5,465 $ 5,171 $ 10,728 $ 9,795
Service charges on deposit accounts 2,354 2,385 4,833 4,770
Mortgage banking activities 896 825 1,310 933
Rental income 577 559 1,128 1,096
Insurance income 570 996
Other commissions 333 702 770 802
Dividend on equity securities 170 169 328 333
Other operating income 3,098 1,592 5,033 3,569
--------- --------- --------- --------
Other income before gain (loss) on
investments and derivative income (loss) 13,463 11,403 25,126 21,298
-------- -------- -------- -------
Gain (loss) on sale of investments 13,961 2,938 15,039 9,527
Impairment on investments (14,172) (14,422)
------- ------- ------- ---------
Gain (loss) on investments (211) 2,938 617 9,527
---------- ---------- ---------- --------
Derivative loss (2,254) (2,254)
-------- --------- -------- --------
Total $10,998 $ 14,341 $23,489 $30,825
======= ======== ======= =======
Other income primarily consists of fees on loans; service charges on
deposit accounts; commissions derived from various banking, securities and
insurance activities; net gains (losses) on sale of investments; and derivative
income. Other fees on loans consist mainly of credit card fees and late charges
collected on loans. The increase of approximately $294,000 and $933,000 during
the three and six months ended on June 30, 2002, respectively, when compared
with the same periods last year was mainly due to fees generated on the
increased portfolio of loans.
Service charges on deposit accounts represent an important and stable
source of other income for the Corporation.
Mortgage banking activities income reflects the servicing fees on
residential mortgage loans originated by the Corporation and subsequently
securitized or sold, and gain on sale of loans.
The Corporation's subsidiary, First Leasing and Rental Corporation,
generates income on the rental of various types of motor vehicles.
Insurance income includes the commissions earned by the new subsidiary
FirstBank Insurance Agency, Inc.
Other commissions income is the result of an agreement with Goldman,
Sachs & Co. to participate in bond issues by the Government Development Bank of
Puerto Rico, and an agreement with a national brokerage house in Puerto Rico to
offer brokerage services in selected branches.
The other operating income category is composed of miscellaneous fees
such as check fees and rental of safe deposit boxes. Other operating income also
includes earned discounts on tax credits purchased and utilized against income
tax payments, and other fees generated on the portfolio of commercial loans.
25
The gain (loss) on investment securities reflects gains or losses as a
result of sales that are in consonance to the Corporation's investment policies
as well as impairments on securities held in the portfolio. During the second
quarter of 2002 losses on the impairment of certain securities were realized as
explained in Note 6 of this report. In addition, during the quarter ended on
June 30, 2002 gains of $14 million on the sale of mortgage backed securities and
corporate bonds were realized, as part of the Bank's restructuring of the
investment portfolio, as explained in Note 6 of this report.
The derivative income (loss) includes an unrealized loss of $2.4
million due to the valuation to fair value of a portfolio of swaps that does not
qualify for hedge accounting in accordance with SFAS No. 133, as previously
explained in Note 3 of this report.
OTHER OPERATING EXPENSES
The following table presents the detail of other operating expenses for
the periods indicated:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------- -----------------------------
2002 2001 2002 2001
------------- ------------- ------------ ----------
(DOLLARS IN THOUSANDS)
Employees' compensation and benefits $14,438 $13,463 $28,818 $26,593
Occupancy and equipment 6,862 6,018 13,690 11,828
Business promotion 2,455 2,248 5,098 4,272
Taxes 1,644 1,355 3,287 2,700
Insurance 722 580 1,359 1,118
Net cost (gain) of operations and
disposition of other real estate owned (70) 27 51 128
Professional fees 751 619 1,491 1,164
Servicing and processing fees 1,359 1,188 2,644 2,503
Communications 1,352 1,368 2,651 2,659
Supplies and printing 457 325 741 658
Other 1,878 3,027 3,867 6,414
--------- --------- --------- ---------
Total $31,848 $30,218 $63,697 $60,037
======= ======= ======= =======
Operating expenses increased to $31.8 million and $63.7 million for the
three and six months ended on June 30, 2002, respectively, as compared to $30.2
million and $60.0 million for the same periods in 2001. The increase in
operating expenses for 2002 is mainly the result of technology investments and
the general growth in the subsidiary Bank's operations.
Management's goal has been to make only expenditures that contribute
clearly and directly to increase the efficiency and profitability of the
Corporation. This control over other operating expenses has been an important
factor contributing to the improvement in earnings in recent years. The
Corporation's efficiency ratio, which is the ratio of other operating expenses
to the sum of net interest income and other income, was 39.49% for the six
months period ended June 30, 2002 as compared to 42.5% for the same period last
year.
26
PROVISION FOR INCOME TAX
The provision for income tax amounted to $10.7 million (or 16.8% of
pretax earnings) for the six months ended on June 30, 2002 as compared to $8.6
million (or 17.7% of pretax earnings) for the same period in 2001. The
Corporation has maintained an effective tax rate lower than the statutory rate
of 39% mainly by investing in obligations and loans exempt from federal and
Puerto Rico income taxes.
FINANCIAL CONDITION
ASSETS
Total assets as of June 30, 2002 amounted to $8,649 million, an increase
of $451 million as compared to total assets as of December 31, 2001 of $8,198
million. The increase was mainly the result of an increase of $381.3 million in
total loans and $45.3 million in total investments and money market instruments.
The composition of loans receivable:
JUNE 30, DECEMBER 31, INCREASE
2002 2001 (DECREASE)
-------------- ---------------- --------
(DOLLARS IN THOUSANDS)
Residential real estate loans $1,249,917 $1,011,908 $238,009
---------- ---------- --------
Commercial real estate loans 777,341 688,922 88,419
Construction loans 214,647 219,396 (4,749)
Commercial loans 1,289,359 1,238,173 51,186
----------- ----------- ----------
Total commercial 2,281,347 2,146,491 134,856
----------- ----------- ---------
Finance leases 138,617 127,935 10,682
Consumer and other loans 1,020,189 1,022,445 (2,256)
----------- ----------- -----------
Total $4,690,070 $4,308,779 $381,291
========== ========== ========
The fluctuation in the loans receivable category was the net result of
total loan origination and purchases of $886.7 million and repayments and other
adjustments of $505.4 million. The Corporation continued its strategy of
diversifying its loan portfolio composition through the origination of
commercial loans and residential real estate loans. This resulted in an increase
of $134.9 million in the commercial loan portfolio and of $238 million in
residential real estate loans. Finance leases, which are mostly composed of
loans to individuals to finance the acquisition of an auto, increased by $10.7
million.
NON-PERFORMING ASSETS
Total non-performing assets are the sum of non-accruing loans, OREO's,
other repossessed properties and investment securities. Non-accruing loans are
loans as to which interest is no longer being recognized. When loans fall into
non-accruing status, all previously accrued and uncollected interest is charged
against interest income.
At June 30, 2002, total non-performing assets amounted to $79.4 million
(0.92% of total assets) as compared to $79 million (0.96% of total assets) at
December 31, 2001 and $74 million (1.25% of total assets) at December 31, 2000.
The Corporation's allowance for loan losses to non-performing loans ratio was
148.1% at June 30, 2002 as compared to 124.7% and 113.6% at December 31, 2001
and 2000, respectively.
Past due loans are loans delinquent 90 days or more as to principal
and/or interest and still accruing interest.
27
The following table presents non-performing assets at the dates
indicated:
JUNE 30, DECEMBER 31,
2002 2001 2000
----------- ---------- -----------
(DOLLARS IN THOUSANDS)
Non-accruing loans:
Residential real estate $18,544 $18,540 $15,977
Commercial and commercial real estate 32,106 29,378 31,913
Finance leases 2,514 2,469 2,032
Consumer 17,167 22,611 17,794
-------- -------- --------
70,331 72,998 67,716
-------- -------- --------
Other real estate owned (OREO) 1,184 1,456 2,981
Other repossessed property 4,147 4,596 3,374
Investment securities 3,750
-------- -------- --------
Total non-performing assets $79,412 $79,050 $74,071
======= ======= =======
Past due loans $24,823 $27,497 $16,358
Non-performing assets to total assets 0.92% 0.96% 1.25%
Non-performing loans to total loans 1.50% 1.69% 1.94%
Allowance for loan losses $104,150 $91,060 $76,919
Allowance to total non-performing loans 148.09% 124.74% 113.59%
NON-ACCRUING LOANS
RESIDENTIAL REAL ESTATE LOANS - The Corporation classifies all
residential real estate loans delinquent 90 days or more in non-accruing status.
Even though these loans are in non-accruing status, Management considers based
on the value of the underlying collateral and the loan to value ratios, that no
material losses will be incurred in this portfolio. Management's understanding
is based on the historical experience of the Corporation. Non-accruing
residential real estate loans amounted to $18.5 million (1.48% of total
residential real estate loans) at June 30, 2002, as compared to $19 million
(1.83% of total residential real estate loans) and $16 million (2.14% of total
residential real estate loans) at December 31, 2001 and 2000, respectively.
COMMERCIAL LOANS - The Corporation places all commercial loans
(including commercial real estate and construction loans) 90 days delinquent as
to principal and interest in non-accruing status. The risk exposure of this
portfolio is diversified. Non-accruing commercial loans amounted to $32.1
million (1.41% of total commercial loans) at June 30, 2002 as compared to $29
million (1.37% of total commercial loans) and $32 million (2.01% of total
commercial loans) at December 31, 2001 and 2000, respectively. At June 30, 2002,
there were only one non-accruing commercial loan of over $1 million, of $1.4
million.
FINANCE LEASES - Finance leases are classified as non-accruing status
when they are delinquent 90 days or more. Non-accruing finance leases amounted
to $2.5 million (1.81% of total finance leases) at June 30, 2002, as compared to
$2 million (1.93% of total finance leases) and $2 million (1.65% of total
finance leases) at December 31, 2001 and 2000, respectively.
CONSUMER LOANS - Consumer loans are classified as non-accruing when
they are delinquent 90 days in auto, boat and home equity reserve loans, 120
days in personal loans (including small loans) and 180 days in credit cards and
personal lines of credit.
28
Non-accruing consumer loans amounted to $17.2 million (1.68% of the
total consumer loan portfolio) at June 30, 2002, $23 million (or 2.21% of the
total consumer loan portfolio) at December 31, 2001 and $18 million (or 1.71% of
the total consumer loan portfolio) at December 31, 2000.
OTHER REAL ESTATE OWNED (OREO)
OREO acquired in settlement of loans is carried at the lower of cost
(carrying value of the loan) or fair value less estimated cost to sell off the
real estate at the date of acquisition.
OTHER REPOSSESSED PROPERTY
The other repossessed property category includes repossessed boats and
autos acquired in settlement of loans. Repossessed boats are recorded at the
lower of cost or estimated fair value. Repossessed autos are recorded at the
principal balance of the loans less an estimated loss on the disposition.
INVESTMENT SECURITIES
This category presents the carrying amount of $3.8 million of the
Bank's investment in WorldCom Corporation bonds which was reclassified to
non-accruing status on June 30, 2002 as explained in Note 6 of this 10-Q.
PAST DUE LOANS
Past due loans are accruing commercial and consumer loans, which are
contractually delinquent 90 days or more. Past due commercial loans are current
as to interest but delinquent in the payment of principal. Past due consumer
loans include personal lines of credit and credit card loans delinquent 90 days
up to 179 days and personal loans (including small loans) delinquent 90 days up
to 119 days.
SOURCES OF FUNDS
As of June 30, 2002, total liabilities amounted to $7,916 million, an
increase of $321 million as compared to $7,595 million as of December 31, 2001.
The increase in total liabilities was mainly due to: (1) an increase in total
deposits of $645 million; (2) an increase in accounts payable and other
liabilities of $20.7 million; net of a decrease in federal funds and securities
sold under agreements to repurchase of $336.7 million; and (4) a decrease in
advances from FHLB of $7.7 million.
The Corporation maintains unsecured standby lines of credit with other
banks. At June 30, 2002, the Corporation's total unused lines of credit with
these banks amounted to approximately $180,000,000 (2001 - $180,000,000). At
June 30, 2002, the Corporation has an available line of credit with the FHLB
guaranteed with excess collateral, in the amount of $44,644,982. At June 30,
2002, the Corporation has available collateral that can be pledged with the FHLB
to obtain additional line of credit in the amount of $604,377,482.
CAPITAL
Total stockholders' equity as of June 30, 2002 amounted to $733
million, increasing by $130 million from the amount as of December 31, 2001. The
increase was mainly the result of earnings for the period ended on June 30, 2002
of $52.6 million, the issuance of 3,680,000 shares of preferred stock at $89
million, the issuance of 28,500 shares of common stock through the exercise of
stock options with proceeds of $593,250, the positive fluctuation in the
valuation of securities available for sale of $8.7 million, reduced by dividends
paid of $20.9 million.
29
The Corporation is subject to various regulatory capital requirements
imposed by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Corporation's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Corporation must meet specific capital guidelines that involve quantitative
measures of the Corporation's assets, liabilities, and certain off-balance sheet
items as calculated under regulatory accounting practices. The Corporation's
capital amounts and classification are also subject to qualitative judgment by
the regulators about components, risk weightings and other factors.
Capital standards established by regulations require the Corporation to
maintain minimum amounts and ratios of Tier 1 capital to total average assets
(leverage ratio) and ratios of Tier 1 and total capital to risk-weighted assets,
as defined in the regulations. The total amount of risk-weighted assets is
computed by applying risk weighting factors to the Corporation's assets, which
vary from 0% to 100% depending on the nature of the asset.
At June 30, 2002 and December 31, 2001, the most recent notification
from FDIC, categorized the Corporation as a well capitalized institution under
the regulatory framework for prompt corrective action. To be categorized as well
capitalized the Corporation must maintain minimum total risk based, Tier 1 risk
based and Tier 1 leverage ratios as set forth in the following table. Management
believes that there are no conditions or events since that date that have
changed that classification.
The Corporation's and its banking subsidiary's regulatory capital
positions were as follows:
REGULATORY REQUIREMENTS
FOR CAPITAL
ACTUAL ADEQUACY PURPOSES TO BE WELL CAPITALIZED
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
(DOLLARS IN THOUSANDS)
At June 30, 2002
Total Capital (to Risk-Weighted Assets):
First BanCorp $789,966 15.81% $399,693 8% $499,616 10%
FirstBank 619,669 12.46% 398,000 8% 497,500 10%
Tier I Capital (to Risk-Weighted Assets):
First BanCorp $676,485 13.54% $199,846 4% $299,770 6%
FirstBank 506,450 10.18% 199,000 4% 298,500 6%
Tier I Capital (to Average Assets):
First BanCorp $676,485 8.19% $247,809 3% $413,015 5%
FirstBank 506,450 6.20% 245,176 3% 408,626 5%
At December 31, 2001
Total Capital (to Risk-Weighted Assets):
First BanCorp $678,679 14.50% $374,498 8% $468,123 10%
FirstBank 590,652 12.75% 370,472 8% 463,090 10%
Tier I Capital (to Risk-Weighted Assets):
First BanCorp $569,255 12.16% $187,249 4% $280,874 6%
FirstBank 481,850 10.41% 185,236 4% 277,854 6%
Tier I Capital (to Average Assets):
First BanCorp $569,255 7.49% $228,074 3% $380,124 5%
FirstBank 481,850 6.40% 225,738 3% 376,231 5%
30
DIVIDENDS
During the period ended June 30, 2002, the Corporation declared a
quarterly cash dividend of $0.15 per common share representing a 15% increase
over the quarterly cash dividend of $0.13 per common share declared for the same
period in 2001. Total dividends declared per common share for the period ended
on June 30, 2002 amounted to $8.0 million for an annualized dividend payout
ratio of 20.07% as compared to $6.9 million for the period ended June 30, 2001
(or a 21.22% dividend payout ratio). Dividends declared on preferred stock
amounted to $12.9 million for the period ended on June 30, 2002 as compared to
$6.3 million for the same period last year.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
The following table presents a detail of the maturities of contractual
debt obligations and commitments to extend credit:
Total Less than 1 year 1-3 years 4-5 year After 5 years
----- ---------------- --------- -------- -------------
Contractual Obligations:
Federal funds purchased and
securities sold under agreements
to repurchase, excluding
accrued interest $2,649,830 $574,870 $156,500 $100,000 $1,818,460
Advances from FHLB 336,000 13,000 50,000 273,000
Subordinated Notes 84,363 84,363
--------- -------- -------- ------- ---------
Total Contractual Cash Obligations $3,070,193 $587,870 $290,863 $100,000 $2,091,460
========== ======== ======== ======== ==========
Other Commitments:
Lines of Credit $304,726 $304,726
Standby Letters of Credit 24,929 24,929
Other Commercial Commitments 657,834 657,834
------- -------
Total Commercial Commitments $987,489 $987,489
======== ========
The Corporation has obligations and commitments to make future payments
under contracts, such as debt, and under other commitments to extend credit.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Since
certain commitments are expected to expire without being drawn upon, the total
commitment amount does not necessarily represent future cash requirements. In
the case of credit cards and personal lines of credit, the Corporation can at
any time and without cause, cancel the unused credit facility.
The Corporation has obligations to make future payments under lease
agreements contracts. The maturities of the operational leases are included on
page 75 of the Corporation's annual report to security holders for the year
ended December 31, 2001.
CRITICAL ACCOUNTING POLICIES AND PRACTICES
The information required herein is incorporated by reference from page
43 of the annual report to security holders for the year ended December 31,
2001.
31
LIQUIDITY
Liquidity refers to the level of cash and eligible investments readily
available to meet loan and investment commitments, potential deposit outflows
and debt repayments. The Corporation's liquidity position and liquidity targets
are reviewed on a weekly basis by the Asset Liability Management and Investment
Committee, using measures of liquidity developed by Management.
The Corporation's principal sources of short-term funds are loan
repayments, deposits, securities sold under agreements to repurchase, and lines
of credit with the FHLB and other financial institutions. The Investment
Committee reviews credit availability on a regular basis. In the past, the
Corporation has securitized and sold auto and mortgage loans as a supplementary
source of funding. Commercial paper had also provided additional funding. The
Corporation has obtained long-term funding through the issuance of notes and
long-term institutional certificates of deposit. The Corporation's principal
uses of funds are the origination of loans and investments, and the repayment of
maturing deposit accounts and borrowings.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required herein is incorporated by reference from
pages 41 to 43 of the annual report to security holders for the year ended
December 31, 2001.
32
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Corporation is a defendant in a number of legal proceedings arising
out of, and incidental to its business. Based on its review with counsel on the
development of these matters to date, Management is of the opinion that the
ultimate aggregate liability, if any, resulting from these pending proceedings
will not have a material adverse effect on the accompanying consolidated
financial statements.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
For the preparation of the Corporation's earnings release dated July
16, 2002, total average assets and total average earning assets were
inadvertently erroneously calculated. As a result, the following numbers and
ratios, which are computed based on the above-mentioned average balances were
incorrectly presented in the release. The net interest margin for the six months
ended June 30, 2002 was 4.09% as compared to 4.01% presented in the earnings
release. Total average earning assets for the six month period ended June 30,
2002 was $8,069 million as compared to $8,232 million presented on the earnings
release. Total average earning loans for the six months period ended June 30,
2002 was $4,434 million as compared to $4,597 million presented on the earnings
release. Net write offs to average loans for the six month ended June 30, 2002
was 0.96% instead of 0.92% as reported in the earnings release. Average earnings
assets, average loans, net interest margin and the net write offs to average
loans for the quarter ended June 30, 2002 were correctly presented in the
release. Total average assets for the three and six month period ended June 30,
2002 was $8,298 million and $8,297 million, respectively, as compared to $8,266
million and $8,281 million, respectively, presented on the earnings release. The
return on assets for the quarter ended on June 30, 2002 was 1.30% instead of
1.31% as reported in the earnings release. The return on assets for the six
month period ended on June 30, 2002 was correctly presented in the release.
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K
Not applicable.
33
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the Corporation has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized:
FIRST BANCORP.
Name of the Corporation
Date: August 13, 2002 By: /S/ ANGEL ALVAREZ-PEREZ, ESQ.
--------------------------------
Angel Alvarez-Perez, Esq.
Chairman, President and Chief
Executive Officer
Date: August 13, 2002 By: /S/ ANNIE ASTOR-CARBONELL
-----------------------------
Annie Astor-Carbonell
Senior Executive Vice President
and Chief Financial Officer
34