First BanCorp.
Annual Report 1999

Plain-text annual report

able of able of TTTTTable of able of able of Contents Contents Contents Contents Contents Financial Highlights ............................................. 2 Business Profile ................................................... 5 President’s Letter ................................................. 7 Achievements in 1999 ....................................... 10 Puerto Rico Economy ......................................... 13 Board of Directors ............................................. 14 Officers ............................................................ 15 Financial Review ............................................... 17 Stockholders’ Information ................................... 76 Financial Financial Financial Financial Financial Highlights Highlights Highlights Highlights Highlights In Thousands (Except for per share results) 1999 1998 O p e r a t i n g R e s u l t s : ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Net interest income Provision for loan losses Other income Other operating expenses Income tax provision Net income Per common share: Net income - basic Net income - diluted $ $ 185,733 47,960 32,862 101,272 7,288 62,075 2.00 1.98 166,168 76,000 58,240 91,798 4,798 51,812 1.75 1.74 We i g h t e d A v e r a g e S h a r e s : ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Basic Diluted A t Ye a r E n d : 28,941 29,199 29,586 29,858 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Assets Loans Allowance for loan losses Investments Deposits Borrowings Capital $ 4,721,568 2,745,368 71,784 1,811,164 2,565,422 1,803,729 294,902 $ 4,017,352 2,120,054 67,854 1,800,489 1,775,045 1,930,488 270,368 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ 2 3 PPPPPuerueruerueruertototototo RicoRicoRicoRicoRico 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 Aguada Aguadilla Isabela San Sebastián Arecibo Manatí Vega Baja Dorado Toa Baja Bayamón Guaynabo San Juan Carolina Río Grande Fajardo Humacao Yabucoa Caguas Aguas Buenas Cidra Guayama Cayey Barranquitas Ponce Utuado Yauco Cabo Rojo Mayagüez Saint Thomas Saint Croix BRANCH 48 OFFICES MONEY EXPRESS 27 OFFICES FIRST LEASING & RENTAL CORP. 6 OFFICES AUTO LOAN CENTER 2 OFFICES LOAN CENTER 2 OFFICES MORTGAGE LOAN CENTER 4 OFFICES TOTAL 89 OFFICES 4 Business Business Business Business Business Profile Profile Profile Profile Profile October 1, 1998 the Bank reorganized, making FirstBank a subsidiary of the holding company First BanCorp. First BanCorp, which is a well- capitalized institution under federal standards, operates 48 full service branches including three offices in the U.S. Virgin Islands. The Corporation also has two auto loan centers, two personal loan centers and four mort- gage loan centers in Puerto Rico. A second tier subsidiary, Money Express, operates 27 offices dedicated to small loans throughout Puerto Rico. First BanCorp also has a second tier subsid- iary known as First Leasing and Rental Corp., which rents and leases motor vehicles from its six offices in Puerto Rico. 5 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 $4.722 billion as of Decem- ber 31, 1999. The Corporation 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 business. The Corporation has a $1.2 billion portfolio of commercial loans, commercial mortgages, construction loans and other related commercial products. Its commer- cial clients include businesses of all sizes covering a wide range of economic activities. First BanCorp has a $474 million portfolio of residential mortgages. The institution has $1.1 billion in consumer loans, concentrated in auto loans and leases, personal loans and credit cards. Its $1.8 billion investment portfolio consists mostly of U.S. government securities and mortgage backed securities. Through a strategic alliance with Paine Webber, the Corporation offers full brokerage services in selected branches. Approximately 1,700 full time professionals and a sophisti- cated 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 was renamed “FirstBank”. Effective 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 Corpora- tion has offered a telephone information service called “Telebanco” since 1983. This was the first telebanking service offered in Puerto Rico. First BanCorp clients have access to an extensive ATM network all over the world. The Corpo- ration was 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 banking institution in Puerto Rico with a presence on the internet. During 2000, First BanCorp will launch a new, interactive web site where clients will be able to perform all types of banking transactions. First BanCorp and its subsidiaries are subject to supervision, examination and regulation of the Federal Reserve Board, the Federal Deposit Insurance Corporation and the Commissioner of Financial Institutions of Puerto Rico. First BanCorp is committed to provide the most efficient and cost effective banking services possible. Management’s goal is to be the premier financial institution in financial products and services in Puerto Rico. First BanCorp’s Management will work constantly to exceed the expectations of our stockholders, clients and employees. 6 President’s President’s President’s President’s President’s Letter Letter Letter Letter Letter TTTTTo our stockholders: o our stockholders: o our stockholders: o our stockholders: o our stockholders: On behalf of the Board of Directors and staff of First BanCorp I am pleased to submit our annual report for 1999, another record year. In 1999 First BanCorp earned $62.1 million, repre- senting $2.00 per share (basic) or $1.98 per share (diluted). These earnings compared favorably with 1998, when the Corporation earned $51.8 million, which came to $1.75 per share (basic) or $1.74 per share (diluted). Net income increased 19.8 percent and diluted earnings per share rose 13.8 percent in 1999. These achievements continue our record of consistent earnings growth. During 1999 we concentrated on investing in new technology and diversify- ing our services. The pace of change in First BanCorp accelerated with a series of targeted purchases and strategic alliances that laid the foundation for future growth. Growth and Diversification Growth and Diversification Growth and Diversification Growth and Diversification Growth and Diversification Last year we worked hard to increase commercial and construction lending. In consumer lending the Corpo- ration continued to improve the quality of the portfolio through improved underwrit- ing processes. At midyear we acquired the Puerto Rico operations of Royal Bank of Canada. This acquisition added $90 million of high quality commercial loans, while giving us a well-located branch facility in the Hato Rey financial district. In August we acquired the $42 million private label credit card business of Western Auto in Puerto Rico. This acquisition substantially increased our important credit card business. The largest acquisition occurred at year-end. We acquired four branches from Citibank’s Caribbean operations. One of these branches in St. Thomas will strengthen our existing business in the U.S. Virgin Islands. The three Puerto Rico branches will add to our business in San Juan, Ponce and Mayaguez. This acquisition included $83 million in retail deposits. Aside from all these acquisitions, we have moved quickly to take advan- tage of the Gramm-Leach-Bliley Act, passed by Congress in November 1999. This legislation removed the barriers separating the banking, insur- ance and brokerage industries. We expect the Puerto Rico legislature will quickly enact legislation to harmonize local and Federal banking laws in this area. We have recruited an Executive Vice President with many years of experience in local securities markets to oversee our entry into brokerage and investment banking business. Through an agreement with Goldman, Sachs & Co., First BanCorp 7 now participates in bond issues by the Government of Puerto Rico. The Corporation has also arranged a strategic alliance with Paine Webber of Puerto Rico, the largest brokerage firm in the Island with thirty five years of local experience. Early in the year 2000 Paine Webber opened offices in eleven of our branches. This arrangement gives the Corporation’s clients the widest range of investment advice, brokerage services, and money management experience available in Puerto Rico, while our officers are also available to sell our products and services to Paine Webber’s 32,000 clients in Puerto Rico. New Investments in New Investments in New Investments in New Investments in New Investments in acilities and acilities and echnology, F, F, F, F, Facilities and echnology echnology TTTTTechnology acilities and acilities and echnology raining raining TTTTTraining raining raining First BanCorp has been investing heavily in technology, particularly in the area of commercial banking services. During the first half of 2000 we are upgrading the computer systems in our branches. These changes will allow greater efficiency, while helping our employees develop and strengthen relationships with our clients. Also internet banking will be available by the midyear 2000. First BanCorp will provide an internet service while maintaining all existing banking services available to our clients. For this reason we are continuing our plans to expand First BanCorp’s branch network. During 1999 we added three new branches while acquiring five more from other institutions. We plan to open more branches this year. Our employees are the key to our success. We have reorganized our sales and distribution system, adding a newly recruited Senior Vice President with vast experience in marketing and sales to help make our branches more sales-oriented. In addition, the larger branches in the metropolitan area have two managers: one for regular clients and the other for commercial relationships. We have recruited a Senior Vice President with a long track record in commercial lending to administer this middle market strategy. We have completely restructured our branch-based deposits, introducing a new product which pays bonuses for clients with multiple relationships. We have created a corporate professional image by providing uniforms to all our branch employees and offered extended branch hours. To facilitate these changes we are expanding employee training in all areas of the Corporation. We have planned and coordinated these changes under a special project designed to simplify operations while making our services more efficient, responsive and convenient. We named the project “The Next Fifty” because we launched it in 1998, the Corporation’s 50th anniversary year, as a way to initiate our second fifty years of growth. Forty five employees participated full time in the project, generating more than 500 ideas for improvement. We expect “The Next Fifty” to add $12 million in annual- ized earnings through cost reductions and revenue enhancements. We are reinvesting most of these earnings in new technology. “The Next Fifty” will continue through into 2001. 8 As First BanCorp embarks on another year of growth and service to the Puerto Rican 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 we will continue to provide outstanding service to our clients, while benefiting employ- ees and stockholders in the years to come. Angel Alvarez-Pérez Chairman President Chief Executive Officer We expect these initiatives to favor continued low operating costs. During the past year our efficiency ratio averaged 46.6%, almost the same as the 46.5% of 1998. Enhancing Enhancing Enhancing Enhancing Enhancing Shareholder Valuealuealuealuealue Shareholder V Shareholder V Shareholder V Shareholder V Our efforts have paid off in strong earnings growth for 1999, with a return on equity of 21.06%, compared with 20.54% in 1998. Our stock price has not reflected these strong results during 1999. Nevertheless, investors who held First BanCorp stock over the ten year period from year-end 1989 to year-end 1999 received a cumulative total return of 1,661%, for an average annual growth rate of 33.2% on their investment. The Corporation began a stock repurchase program four years ago. During 1999 we repurchased 1,452,000 shares. This brought total activity over the course of our share repurchase program to 3,115,450 shares, adjusted for splits, representing a total investment of $54.3 million. In addition, officers and directors of First BanCorp own approximately 19 percent of its shares. This shows their confidence in First BanCorp’s future and their commitment to keep its fundamen- tals sound. During 1999 the magazine U.S. Banker mentioned First BanCorp’s outstanding performance in its annual survey of America’s 100 largest banks. During 1998 First BanCorp ranked fourth among all U.S. banks in cost control and in return on equity First BanCorp ranked tenth. We are confident that in the course of time our stock price will reflect this outstanding performance. 9 Achievements in Achievements in Achievements in Achievements in Achievements in 19991999199919991999 Record profits made 1999 a very successful year for First BanCorp. The company made exceptional progress. Besides making heavy investments in new computer systems, improving employee training and expanding commercial and construction loans, the Corporation launched several important strategic alliances. Profits continued their healthy growth as First BanCorp earned $62.1 million, which comes to $2.00 per share (basic) or $1.98 per share (diluted). In 1998 the Corporation earned $51.8 million, the equivalent of $1.75 (basic) or $1.74 (diluted) in per share terms. Net income increased by 19.8%, or 13.8% per share on a diluted basis. Net interest income, the main source of the Corporation’s earnings, grew by $19.5 million from $166.2 million in 1998 to $185.7 million in 1999. Gains on sale of investments contributed $1.4 million to net income in 1999, while in 1998 these sales contributed $26.8 million. First BanCorp’s assets grew by $705 million during 1999, ending the year at $4.722 billion. Loans increased by $625 million for the year, mainly from commercial loans growth of approxi- mately $400 million. The Corporation successfully issued $90 million in pre- ferred stock in April 1999. First BanCorp made three impor- tant acquisitions last year. At midyear FirstBank, the Corporation’s banking subsidiary, acquired the Puerto Rico operations of Royal Bank of Canada. This purchase included a $90 million portfolio of high quality commercial loans and an attractive branch in the Hato Rey financial district. In August, the Bank acquired the credit card business of Western Auto, the largest auto parts retailer in Puerto Rico with 38 stores. This transaction brought FirstBank a $42 million credit card portfolio distributed among roughly 100,000 clients. At year-end FirstBank also acquired four offices from Citibank. One of these branches is located in St. Thomas, U.S. Virgin Islands, and the other three are located in Puerto Rico. Besides the facilities and deposits, the Bank acquired approximately $30 million in loans as a part of this transaction. An Expanding Role An Expanding Role An Expanding Role An Expanding Role An Expanding Role for a Growing Branch for a Growing Branch for a Growing Branch for a Growing Branch for a Growing Branch Network Network Network Network Network During 1999 deposits grew from $1.775 billion to $2.565 billion, an increase of $790 million. Management worked intensively to lay the groundwork for future deposit growth by expanding the branch network and improving its products. Besides purchasing the five branches mentioned above, the Corpo- ration also opened three new branches during the year. The Corporation plans to open more branches during the year 2000. As the Corporation moves increasingly toward relationship banking, Management is placing loan centers in selected branches to increase originations of mortgages and commercial loans. Management restructured the Corporation’s deposit products, introduc- ing an innovative new product called the “Bonus Account”. This account rewards clients who have multiple relationships 10 with FirstBank (e.g. a checking account, a mortgage and an auto loan). At the same time, Management is holding back or eliminating some older products which are less popular than they were in past years. These changes will complement the development of the branch network. Management is also opening specialized offices in selected branches. Four branches now have mortgage loan centers, which will provide financing for new homes in the San Juan metropolitan area. In addition, several branches now include a commercial loan officer, aside from the traditional branch manager. Early in the year 2000 First BanCorp began offering brokerage services in selected branches through a new alliance with Paine Webber. This arrangement will give the Corporation’s clients the broadest range of brokerage and financial manage- ment services available in Puerto Rico. Previously First BanCorp formed an alliance with Goldman Sachs to participate in the underwriting of Puerto Rico government securities. During the year 2000, the Corporation will begin offering internet services for those clients who like the convenience of banking from their homes along with the security of having branch officers available. Improvements in Efficiency Improvements in Efficiency Improvements in Efficiency Improvements in Efficiency Improvements in Efficiency In 1998 Management began a comprehensive re-design plan to stream- line all corporate operations. The Corpo- ration named the project “The Next Fifty” because Management launched it in the Corporation’s 50th anniversary year as a way to initiate the second fifty years of growth. Management has invested most of the savings from this project in new technology. Largely because of this program First BanCorp was able to maintain an efficiency ratio of only 46.6% during 1999, almost equal to the 46.5% in 1998. Overall operating expenses were held to only $101.3 million for 1999 compared with $91.8 million in the previous year. Manage- ment achieved this in spite of significant increases in the size of the branch network and heavy investments in new computer systems. First BanCorp’s efficiency ratio compares very favorably with that of other commercial banks throughout the U.S. Improvements in the Improvements in the Improvements in the Improvements in the Improvements in the Balance Sheet Balance Sheet Balance Sheet Balance Sheet Balance Sheet Contributing to higher profits in 1999 was a significant improvement in asset quality. Two years ago Manage- ment substantially improved its system of underwriting consumer loans, introduced tighter underwriting proce- dures and improved the Corporation’s computer systems. As a result, the quality of the loan portfolio has im- proved. During 1999 First BanCorp provided $48 million for loan losses as compared with $76 million in 1998. This represents a reduction of 37 percent. Loan quality has improved according to other measures as well. On December 31, 1999 non-perform- ing loans totaled $53.8 million, com- pared to $57.0 million on the same date in 1998 and $52.9 million on a smaller portfolio at the end of 1997. By the end of 1999, the ratio of non-performing loans to total loans had fallen to 1.96%, compared with 2.69% at the end of 11 1998 and 2.70% at year-end 1997. The reserve coverage ratio (allowance for loan losses as a percentage of non- performing loans) reached 133.3% by the end of 1999, well above its earlier levels of 119.1% at year-end 1998 and 109.0% at the end of 1997. Manage- ment is committed to continuing these improvements in loan quality in coming years. During the early part of 1999 Management strengthened the capital structure of First BanCorp by issuing $90 million in preferred stock. This transaction will help the Corporation to maintain a solid capital structure. Although assets grew substantially during 1999, the Corporation’s capital ratios remained strong. The core capital ratio was 7.5% and the risk based capital ratio was 16.2% as of December 31, 1999. Increasing Increasing Increasing Increasing Increasing Shareholder Valuealuealuealuealue Shareholder V Shareholder V Shareholder V Shareholder V The financial results continue a trend of earnings growth that has produced excellent value for sharehold- ers. First BanCorp’s return on average equity was 21.06% in 1999, while average asset yield was 1.49%. Divi- dends increased in 1999, and reached a payout ratio of 17.96% compared with 17.12% in 1998. During 1999 the Corporation repurchased 1,452,000 common shares. While the stock price has not reflected these strong results during 1999, investors who held First BanCorp stock over the ten year period from year-end 1989 to year-end 1999 received a cumulative total return of 1,661%. This is equivalent to an average annual growth rate of 33.2% on the original investment. Management is optimistic about the future of First BanCorp. The range of services it offers, its effective network of offices and branches supplemented by new sales methods, its dedicated staff and its quality reputation with clients will all contribute to future earnings growth. Management will continue its efforts to improve First BanCorp’s excellent performance in 2000 and in the years to come. 12 to Rico to Rico PPPPPuerueruerueruerto Rico to Rico to Rico Economy Economy Economy Economy Economy The island of Puerto Rico is a U.S. Commonwealth with a population of 3.8 million, located in the Caribbean approxi- mately 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 over 4% in the 1999 fiscal year. Private economists are forecasting 2% to 3% real growth in the fiscal year 2000. Management expects recent growth patterns on the Island to continue, with some slowdown during the coming fiscal year. Puerto Rico’s economic perfor- mance 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. The Island uses U.S. currency and forms a part of the U.S. financial system. Federal courts enforce U.S. laws in Puerto Rico. 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 com- mercial banks, including FirstBank, the banking subsidiary of First BanCorp. Puerto Rico made a rapid transi- tion 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 some- what less dependent on manufacturing than it was in the early postwar period. Manufacturing attracted by tax exemp- tion 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 manufac- turing growth was balanced by strong construction activity, both private and public. Management is optimistic about Puerto Rico’s economic future. 13 Angel Alvarez-Pérez, Esq. Chairman Board of Board of Board of Board of Board of Directors Directors Directors Directors Directors Annie Astor de Carbonell, C.P.A. Angel L. Umpierre, C.P.A. José Teixidor Germán E. Malaret, M.D. Armando López Ortiz, Eng. Héctor M. Nevares, Esq. José Julián Alvarez Jorge Díaz Antonio Pavía Villamil, M.D. Francisco D. Fernández, Eng. Rafael Bouet, Eng. 14 PRESIDENT Angel Alvarez-Pérez Chief Executive Officer Chairman SENIOR EXECUTIVE VICE PRESIDENTS Annie Astor de Carbonell Chief Financial Officer Luis M. Beauchamp Chief Lending Officer Wholesale Banking EXECUTIVE VICE PRESIDENTS Aurelio Alemán Consumer Banking Fernando L. Batlle Sales & Distribution, Mortgage Banking Francisco Cortés Administrative Services Ricardo Ramos First Securities Randolfo Rivera Corporate Banking FirstFirstFirstFirstFirst BanCorp BanCorp BanCorp BanCorp BanCorp Officers Officers Officers Officers Officers Standing from left to right: Aida García, Francisco Cortés, Aurelio Alemán, Randolfo Rivera, Fernando L. Batlle, Luis Cabrera, Josianne M. Rosselló. Seated from left to right: Luis Beauchamp, Angel Alvarez-Pérez, Annie Astor de Carbonell. Not present: Miguel Mejías Ricardo Ramos Laura Villarino SENIOR VICE PRESIDENTS Miguel Babilonia Consumer Credit Policy & Portfolio Management Luis Cabrera Treasury & Investments Eva Candelario Corporate Business Development José Cerame Middle Market & Community Banking Aida M. García Human Resources Michael García Consumer Collection Fernando Iglesias Special Loans & Credit Administration Roger Lay Internal Auditing Miguel Mejías Information Systems John Ortiz Consumer Lending, Sales & Services Haydeé Rivera Branch Banking Operations Julio Rivera Construction Lending Josianne M. Rosselló Marketing & Public Relations Demetrio Santiago Auto Wholesale Business Héctor Santiago Auto Business Denise Segarra Sales & Distribution Laura Villarino Controller Miguel Pimentel Corporate Business Development Carlos Power Next Fifty Project Rolando Quevedo Legal Counsel Jorge Rendón Operational Support Migdalia Rivera Community Banking Sandra Rivera Auto Collection Belinda Rodríguez Consumer Sales José L. Rodríguez Information Systems Elizabeth Sánchez Marine Financing Roberto Sánchez Credit Risk Miguel Santin Corporate Banking Carmen Torres Capacity Planning Manager Raphael Torres Regional Sales Manager VICE PRESIDENTS William Alvarez Indirect Business Development José H. Aponte Commercial Mortgage Beverly Bachetti Private Banking Juan E. Barnés Branch Manager Ana Colón Centralized Accounting David González Corporate Business Development Nelson González Corporate Business Development Eric López Corporate Banking Marcelo López Regional Sales Manager Juanita Marrero Mortgage Banking Iván Martínez Project Manager José Negrón Auto Asset & Disposition Luis Orengo Commercial Loans Eduardo Ortiz Auto Wholesale Osvaldo Padilla Corporate Business Reynaldo Padilla Auto Finance 15 FIRST FEDERAL FINANCE CORPORATION DBA MONEY EXPRESS “LA FINANCIERA” Angel Alvarez-Pérez Chief Executive Officer Fernando L. Batlle President and Chief Operating Officer Orlando Vélez Vice President and Operations Manager FIRST LEASING AND RENTAL CORPORATION Angel Alvarez-Pérez Chief Executive Officer Aurelio Alemán President and Chief Operating Officer William Vélez Vice President and General Manager 16 SELECTED SELECTED SELECTED SELECTED SELECTED FINANCIAL DAAAAATTTTTAAAAA FINANCIAL D FINANCIAL D FINANCIAL D FINANCIAL D Year ended December 31, 1999 1998 1997 1996 1995 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ (In thousands except for per share results) Condensed Income Statements: Total interest income Total interest expense Net interest income Provision for loan losses Other income Other operating expenses Unusual item - SAIF assessment Income before income tax provision Provision for income tax Net income Per Common Share Results (1): Net income per common share - diluted Cash dividends declared Average shares outstanding Average shares-diluted Balance Sheet Data: $369,063 183,330 185,733 47,961 32,862 101,272 69,363 7,288 62,075 $1.98 $0.36 28,941 29,199 Loans and loans held for sale Allowance for possible loan losses Investments Total assets Deposits Borrowings Total capital Book value per common share, end of year (1) $ 2,745,368 71,784 1,811,164 4,721,568 2,565,422 1,803,729 294,902 7.30 Regulatory Capital Ratios (In Percent): Total capital to risk weighted assets Tier 1 capital to risk weighted assets Tier 1 capital to average assets Selected Financial Ratios (In Percent): Net income to average total assets Interest rate spread (2) Net interest income to average earning assets (2) Yield on average earning assets (2) Cost on average interest bearing liabilities Net income to average total equity Net income to average common equity Average total equity to average total assets Dividend payout ratio Efficiency ratio (3) Offices: Number of full service branches Loan origination offices 16.16 11.64 7.47 1.49 4.29 4.85 9.29 5.00 21.06 24.68 7.07 17.96 46.62 48 41 $321,298 155,130 166,168 76,000 58,240 91,798 56,610 4,798 51,812 $1.74 $0.30 29,586 29,858 $ 2,120,054 67,854 1,800,489 4,017,352 1,775,045 1,930,488 270,368 9.17 17.39 11.55 6.59 1.48 4.76 5.27 9.83 5.07 20.54 20.54 7.22 17.12 46.46 40 45 $285,160 130,429 154,731 55,676 39,866 83,268 55,653 8,125 47,528 $1.58 $0.24 30,036 30,204 $1,959,301 57,712 1,276,900 3,327,436 1,594,635 1,458,148 236,379 7.93 17.26 11.07 7.44 1.63 5.30 5.83 10.45 5.15 22.30 22.30 7.32 15.14 45.45 36 44 $256,523 113,027 143,496 31,582 29,614 82,498 9,115 49,915 12,281 37,634 $1.22 $0.20 30,794 30,952 $208,488 96,838 111,650 30,894 48,268 65,628 63,396 14,295 49,101 $1.58 $0.08 30,592 31,118 $ 1,896,074 55,254 830,980 2,822,147 1,703,926 884,741 191,142 6.32 $ 1,556,606 55,009 785,747 2,432,816 1,518,367 698,097 171,202 5.51 15.25 9.32 6.65 1.48 5.46 6.03 10.63 5.17 20.49 20.49 7.23 16.32 49.03 36 47 16.17 9.93 6.82 2.22 5.07 5.59 10.12 5.05 33.19 33.19 6.68 5.06 47.96 36 43 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ (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). 17 MANAGEMENT’S DISCUSSION AND MANAGEMENT’S DISCUSSION AND MANAGEMENT’S DISCUSSION AND MANAGEMENT’S DISCUSSION AND MANAGEMENT’S DISCUSSION AND YSIS OF FINANCIAL CONDITION YSIS OF FINANCIAL CONDITION ANALANALYSIS OF FINANCIAL CONDITION ANALANAL YSIS OF FINANCIAL CONDITION YSIS OF FINANCIAL CONDITION ANAL TIONS TIONS TS OF OPERA TS OF OPERA AND RESUL AND RESUL TIONS TS OF OPERATIONS AND RESULTS OF OPERA TIONS TS OF OPERA AND RESUL AND RESUL FINANCIAL REVIEW SUMMARY For the year 1999, First BanCorp (the Corporation) recorded earnings of $62,074,949 or $2.00 per common share (basic) and $1.98 per common share (diluted), compared to $51,812,387 or $1.75 per common share (basic) and $1.74 per common share (diluted) for 1998, and $47,527,552 or $1.58 per common share (basic and diluted) for 1997. The Corporation’s earnings are attributed to the net interest income earned on the growing portfolio of earning assets, improvements in asset quality resulting in a lower provision for loan losses, and controls over operating expenses. For 1999 as compared to 1998, net income increased by $10,262,562 or $0.24 per common share (diluted), and for 1998 as compared to 1997, by $4,284,835 or $0.16 per common share (diluted). Return on average assets was 1.49% for 1999, 1.48% for 1998 and 1.63% for 1997. Return on average equity was 21.06% for 1999, 20.54% for 1998 and 22.30% for 1997. RESULTS OF OPERATIONS The Corporation’s results of operations depend primarily on its net interest income, which is the difference between the interest income earned on interest earning assets, including investment securities and loans, and the interest expense paid on interest bearing liabilities, including deposits and borrowings. Also, the results of operations depend on the provision for loan losses, operating expenses (such as personnel, occupancy and other costs), other income (mainly service charges and fees on loans), and gains on sale of investments. Net Interest Income Net interest income increased to $185.7 million for 1999 from $166.2 million in 1998 and $154.7 million in 1997. This improvement results from 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 of $721.2 million for 1999 as compared to 1998 and of $582.7 million for 1998 as compared to 1997. Interest bearing liabilities increased by $606 million for 1999 as compared to 1998 and by $528 million for 1998 as compared to 1997. 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 vol- umes). 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. 18 PPPPPararararart It It It It I Year ended December 31, 1999 Average volume 1998 1997 Interest income (1) / expense 1997 1998 1999 Average rate (1) 1999 1998 1997 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ (Dollars in thousands) Earning Assets: Deposits at banks and other short-term investments Government obligations Mortgage backed securities Other investment FHLB stock Total investments Consumer loans (2) Residential real estate loans (2) Construction loans (2) Commercial loans (2) Finance leases (2) Total loans Total earning assets Interest Bearing Liabilities: Interest bearing checking accounts Savings accounts Certificate accounts Interest bearing deposits Other borrowed funds FHLB advances Total interest bearing liabilities Net interest income (1) Interest rate spread (1) Net interest margin (1) $ 27,344 $ 40,766 $ 67,969 404,517 319,777 415,742 428,804 1,032,632 1,294,195 519 1,150 18,646 10,150 10,252 16,170 911,959 1,404,577 1,772,097 1,090,991 1,032,704 1,013,782 283,799 290,564 327,700 10,488 19,169 94,940 473,093 613,697 847,917 50,823 43,108 68,577 1,909,194 1,999,242 2,352,916 $4,125,013 $ 3,403,819 $2,821,153 $ 450 24,997 92,157 1,598 1,101 120,303 138,130 30,754 9,216 75,879 9,080 263,059 $383,362 $ 2,028 $ 3,708 26,949 34,942 21 670 66,290 1.65% 4.97% 5.45% 6.01% 6.25% 6.66% 19,984 7.12% 7.50% 8.15% 77,463 8.57% 16.14% 4.24% 186 6.81% 7.25% 6.60% 743 6.79% 7.15% 7.27% 100,404 147,100 13.63% 13.49% 13.48% 139,309 9.38% 10.60% 10.39% 29,485 30,807 9.71% 9.66% 9.57% 1,004 1,852 44,770 8.95% 9.16% 9.46% 56,239 6,220 13.24% 13.97% 12.24% 6,022 228,579 11.18% 11.72% 11.97% 234,229 $334,633 $294,869 9.29% 9.83% 10.45% $140,690 413,662 1,373,263 1,927,615 1,728,913 8,451 $123,847 398,249 972,433 1,494,529 1,559,892 4,515 $116,852 400,998 985,124 1,502,974 1,012,757 15,157 $4,931 12,381 73,177 90,489 92,370 471 $ 4,487 11,717 54,214 70,418 84,460 252 $4,167 12,155 55,827 72,149 57,418 864 3.50% 3.62% 3.57% 2.99% 2.94% 3.03% 5.33% 5.58% 5.67% 4.69% 4.71% 4.80% 5.34% 5.41% 5.67% 5.57% 5.58% 5.70% $3,664,979 $ 3,058,936 $2,530,888 $183,330 $155,130 $130,431 5.00% 5.07% 5.15% $200,032 $179,503 $164,438 4.29% 4.76% 5.30% 4.85% 5.27% 5.83% ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ (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. 19 t IIt II t IIt II PPPPPararararart II ○ ○ ○ ○ 1999 compared to 1998 Increase (decrease) Due to: Rate ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ 1998 compared to 1997 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Total Volume Increase (decrease) Due to: Rate ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Total Volume ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ (In thousands) Earning assets: Deposits at banks and other short-term investments Government obligations Mortgage backed securities Other investment FHLB stock Total investments Consumer loans Residential real estate loans Construction loans Commercial loans Finance leases Total loans Total interest income Interest bearing liabilities: Deposits Other borrowed funds FHLB advances Total interest expense Change in net interest income $ (521) 5,884 19,123 2,143 416 27,045 (2,565) 3,711 7,355 21,212 3,465 33,178 60,223 20,368 9,091 219 29,678 $ 30,545 $ (1,057) (871) (4,429) (731) (58) (7,146) 1,386 (3,765) 9 (1,572) (406) (4,348) (11,494) (297) (1,181) 0 (1,478) $(10,016) $ (1,578) 5,013 14,694 1,412 358 19,899 (1,179) (54) 7,364 19,640 3,059 28,830 48,729 20,071 7,910 219 28,200 $ 20,529 $ (1,377) (5,375) 47,250 50 7 40,555 (7,861) 711 839 13,096 (1,011) 5,774 46,329 (403) 30,323 (594) 29,326 $ 17,003 $ (303) (1,589) (4,729) 114 66 (6,441) 70 612 9 (1,628) 811 (126) (6,567) (1,327) (3,282) (18) (4,627) $ (1,940) $ (1,680) (6,964) 42,521 164 73 34,114 (7,791) 1,323 848 11,468 (200) 5,648 39,762 (1,730) 27,041 (612) 24,699 $15,063 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Total interest income includes tax equivalent adjustments of $14.3 million, $13.3 million and $9.7 million for 1999, 1998, and 1997, respectively. On a tax equivalent basis, net interest income increased to $200 million for 1999 from $179.5 million for 1998, and $164.4 million for 1997. The interest rate spread and net interest margin amounted to 4.29% and 4.85%, respectively, for 1999, as compared to 4.76% and 5.27%, respectively, for 1998 and to 5.30% and 5.83%, respectively, for 1997. The reduction in the interest rate spread and net interest margin for 1999 is mainly due to the increase of $367.5 million in the average volume of total investments when compared to the average volume recorded for 1998. These investments have a lower spread than loans without considering the effects of credit risk. In addition, there was a reduction of $18.9 million in the average volume of consumer loans, which provide the highest spread, but have the highest credit risk in the portfolio. 1999 compared to 1998 On a tax equivalent basis interest income increased by $48.6 million for 1999 as compared to 1998. On a tax equivalent basis the yield on earning assets was 9.29% for 1999 as compared to 9.83% for 1998. The increase in interest income results from the growth in the average of interest earning assets of $721.2 million in 1999. For the loan portfolio, the growth in 1999 of $234.2 million in the average volume of commercial loans (including commercial real estate loans) represented an increase of $21.2 million in income due to volume, partially offset by a reduction of $1.6 million in interest income due to rate. The average portfolio of construction loans increased by $75.8 million for 1999, represent- ing a positive volume variance of $7.4 million. The average portfolio of residential mortgage loans increased by $37.1 million for 1999, representing a positive volume variance of $3.7 million. The average finance lease portfolio (mostly composed of consumer loans) increased by $25.5 million in 1999, representing a positive volume variance of $3.5 million. The decrease of $18.9 million 20 in the average volume of consumer loans in 1999 caused a negative variance in interest income due to volume of $2.6 million. The increase in the commercial real estate, construction and commercial loans portfolio resulted from the Corporation’s strategy to diversify its asset base, which was concentrated in consumer loans. The consumer loan portfolio decreased as a result of the tighter underwriting policies implemented during 1997. For the investment portfolio, the average volume of mortgage backed securities increased by $261.6 million in 1999. The tax equivalent yield on mortgage backed securities was 7.12% in 1999 and 7.50% in 1998. The portfolio of mortgage backed securities contributed $19.1 million in interest income due to volume net of $4.4 million decrease in interest income due to rate. The average volume of government obligations increased by $96 million for 1999 as compared to 1998, causing a total increase in interest income of $5 million. Interest expense increased by $28.2 million for 1999 as compared to 1998. This was the result of the increase in the average volume of interest bearing liabilities of $606 million for 1999 as compared to 1998 with a volume variance of $29.7 million. However, the negative variance was partially offset by a decrease in the cost of interest bearing liabilities from 5.07% for 1998 to 5.00% for 1999 causing a positive rate variance of $1.5 million for 1999 as compared to 1998. 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 interest earning assets of $582.7 million. For the investment portfolio, the average volume of mortgage backed securities increased by $603.8 million in 1998. 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 a $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, resulting in a total decrease in interest income of $7 million. For the loan portfolio, the growth in the average volume of commercial loans (including commercial real estate loans) of $140.6 million in 1998 represented an increase of $13.1 million in income due to volume, partially offset by a reduction of $1.6 million in interest income due to rate. In 1998 the average volume of residential real estate and construction loans increased by $6.8 million and $8.7 million, respectively, representing an increase in interest income of $1.3 million and $.8 million, respectively. The decrease of $58.3 million in the average volume of consumer loans caused a negative variance in interest income due to volume of $7.9 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 tighter underwriting policies implemented during 1997. Interest expense increased by $24.7 million for 1998 as compared to 1997. This results from the increase in the average volume of interest bearing liabilities of $528 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. 21 Provision for Loan Losses During 1999, the Corporation provided $48 million for loan losses, a significant decrease compared to $76 million in 1998 and $55.7 million in 1997. The provision for loan losses recorded in 1999 reflects the improvements in the credit quality of the loan portfolio. Net charge offs for 1999 amounted to $44 million, a significant reduction compared to net charge offs for 1998 of $65.9 million and of $53.2 million for 1997. Net charge offs to average loans outstanding has significantly improved to 1.87% as compared to 3.29% and 2.79% for 1998 and 1997, respectively. The allowance activity for 1999, and previous four years was as follows: Year ended December 31, 1999 1998 1997 1996 1995 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Allowance for loan losses, beginning of period Provision for loan losses Loans charged off: Commercial real estate Commercial Finance leases Consumer Recoveries and other adjustments Net charge offs Allowance for loan losses, end of period Allowance for loan losses to year end total loans and loans held for sale Net charge offs to average loans outstanding during the period $67,854 47,960 (51) (774) (793) (52,047) 9,634 (44,031) $71,784 (Dollars in thousands) $55,254 55,675 $55,009 31,582 $57,712 76,000 (168) (712) (3,438) (67,906) 6,366 (65,858) $67,854 (284) (597) (1,399) (57,311) 6,374 (53,217) $57,712 (492) (781) (161) (33,295) 3,392 (31,337) $55,254 $37,413 30,894 (403) (3,299) (10,821) 1,225 (13,298) $55,009 2.61% 3.20% 2.95% 2.91% 3.53% 1.87% 3.29% 2.79% 1.80% .93% ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ 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, 1999 1998 1997 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Other fees on loans Service charges on deposit accounts Fees on loans serviced for others Rental income Other operating income Other income before gain on sale of investments and trading Gain on sale of investments Trading (loss) income Total $12,887 8,540 864 2,610 6,592 31,493 1,377 (8) $32,862 (In thousands) $11,158 7,844 1,617 2,292 5,137 28,048 26,827 3,365 $58,240 $ 10,899 7,363 2,670 1,935 4,866 27,733 11,388 745 $ 39,866 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ 22 Other income primarily consists of service charges on deposit accounts, fees on loans, servicing income, commissions derived from various banking activities, the results of trading activities and gains on sale of investments. Other fees on loans consist mainly of credit card fees and late charges collected on loans. The increase in this source of income to $12.9 million in 1999 from $11.2 million in 1998 and $10.9 million in 1997 was due to fees generated on the increased portfolio of commercial loans. Service charges on deposit accounts represent an important and stable source of other income for the Corporation. This source of income increased to $8.5 million in 1999 from $7.8 million in 1998 and $7.4 million in 1997. 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. The decrease in this account is due to the continued repayment of the auto loan portfolio. The Corporation’s second tier subsidiary, First Leasing and Rental Corporation, generates income on the rental of various types of motor vehicles. This source of income has averaged approximately $2 million in the past three years. The other operating income category is composed of various types of service fee such as check fees and rental of safe deposit boxes. Other operating income also includes earned discounts on tax credits purchased and utilized against income tax payments. Gains on sale of investment securities amounted to $1.4 million in 1999, $26.8 million in 1998 and $11.4 million in 1997. These gains reflect market opportunities that arose and that are in consonance to the Corporation’s investment policies. Other Operating Expense Other operating expenses amounted to $101.3 million for 1999 as compared to $91.8 million for 1998 and $83.3 million for 1997. The following table presents the compo- nents of other operating expenses. Year ended December 31, 1999 1998 1997 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Salaries and benefits Occupancy and equipment Deposit insurance premium Other taxes and insurance Professional and service fees Business promotion Communications Real estate owned operations Amortization of debt issue costs Expense of rental equipment Other Total $ 48,546 20,137 1,096 5,683 6,672 5,896 4,667 (303) 612 1,478 6,789 $101,273 (In thousands) $ 43,185 18,155 971 5,607 5,820 5,922 4,330 42 691 1,226 5,849 $ 91,798 $38,644 16,101 1,040 5,536 4,883 4,993 4,364 (21) 788 1,184 5,756 $83,268 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ 23 Management’s goal has been to make expenditures that directly contribute to increase the efficiency and profitability of the Corporation. This control over other operating expenses has been an important factor contributing to the increase in earnings in recent years. In 1999, the Corpora- tion started the implementation of a cost restructuring project, which has transformed the opera- tions and processes toward a more cost efficient institution. The savings generated by this effort have been invested mainly in new technology. The Corporation’s efficiency ratio, which is the ratio of other operating expenses to the sum of net interest income and other recurring income, was 46.62% for 1999 as compared to 46.46% and 45.45% for 1998 and 1997, respectively. The increase in operating expenses for 1999 is mainly the result of the investments made in new technology, the expansion of the Corporation’s branch network, the acquisition of new business and branches and the staffing of the commercial lending business to support the growth in the portfolio. During 1999 the Corporation opened a new full-service branch and two in-store branches. In July of 1999, the Corporation acquired the Royal Bank’s operations in Puerto Rico including its full service branch in the financial district of Hato Rey. In August of 1999, the Corporation acquired the credit card portfolio of Western Auto. In December of 1999, the Corporation acquired four branches from CitiBank. To emphasize the commercial lending area, the Corporation recruited new officers for the origination of loans to the middle market throughout selected branches. The salary and benefits category was also 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 the result of the enhancement of hardware and software through system conver- sions, which have enabled the Corporation to offer new products, and improve customer service and portfolio servicing. 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 1999 is primarily attributed to the credit card processing and assessment fees resulting from the increase in the credit card portfolio and the increase in the number of accounts managed due to the acquisition of the Western Auto portfolio. The increase in credit card fee income exceeded the related processing costs. Business promotion costs amounted to $5.9 million for 1999 as compared to $5.9 million in 1998, and $5 million for 1997. Business promotion expenses have been incurred to increase loan and deposit volumes. In addition, in 1999 the Corporation launched a distinct publicity campaign to promote its new “Bonus account” and a corporate image. Income Tax Expense The provision for income tax amounted to $7.3 million (or 11% of pre-tax earnings) for 1999 as compared to $4.8 million (or 8% of pre-tax earnings) in 1998, and $8.1 million (or 15% of pre-tax earnings) in 1997. The Corporation has maintained an effective tax rate lower than the statutory rate of 39% mainly by investing in obligations and loans exempt from federal and Puerto Rico income tax. For additional information relating to taxes, see Note 28 of the Corporation’s financial statements - “Income Taxes.” 24 FINANCIAL CONDITION The following table presents an average balance sheet as of the dates indicated: December 31, 1999 1998 1997 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Assets Interest earning assets: Deposits at banks and other short-term investments Government obligations Mortgage backed securities Other investment FHLB stock Total investments Consumer loans Residential real estate loans Construction loans Commercial loans Finance leases Total loans Total interest earning assets (1) Total non-interest earning assets Total assets Liabilities and stockholders’ equity Interest bearing liabilities: Interest bearing checking accounts Savings accounts Certificate accounts Interest bearing deposits Other borrowed funds FHLB advances Total interest bearing liabilities Total non-interest bearing liabilities Total liabilities Stockholders’ equity Total liabilities and stockholders’ equity (In thousands) $ 40,766 319,777 1,032,632 1,150 10,252 1,404,577 1,032,704 290,564 19,169 613,697 43,108 1,999,242 3,403,819 89,717 $3,493,536 $ 123,847 398,249 972,433 1,494,529 1,559,892 4,515 3,058,936 182,369 3,241,305 252,231 $3,493,536 $ 67,969 404,517 428,804 519 10,150 911,959 1,090,991 283,799 10,488 473,093 50,823 1,909,194 2,821,153 91,355 $2,912,508 $ 116,852 400,998 985,124 1,502,974 1,012,757 15,157 2,530,888 168,515 2,699,403 213,105 $2,912,508 $ 27,344 415,742 1,294,195 18,646 16,170 1,772,097 1,013,782 327,700 94,940 847,917 68,577 2,352,916 4,125,013 47,768 $ 4,172,781 $ 140,690 413,662 1,373,263 1,927,615 1,728,913 8,451 3,664,979 212,993 3,877,972 294,809 $ 4,172,781 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ (1) Net of the allowance for loan losses and the valuation on investments securities available for sale. 25 Assets The Corporation’s total assets at December 31, 1999 amounted to $4,722 million, $704 million over the $4,017 million at December 31, 1998. The increase in total assets results primarily from the growth in total loans receivable (net of the allowance for loan losses) of $621 million. The following table presents the composition of the loan portfolio at year-end for each of the last five years. December 31, % of Total % of Total 1998 1999 % of Total % of Total 1996 1997 1995 % of Total ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ (Dollars in thousands) Residential real estate loans Commercial real estate loans Construction loans Commercial loans Total commercial Finance leases Consumer loans Total $ 473,563 17 $ 303,011 14 $ 292,604 15 $ 297,246 16 $ 319,758 21 371,643 132,068 655,417 1,159,128 85,692 1,026,985 $ 2,745,368 332,219 14 62,963 5 368,549 24 763,731 43 52,214 3 37 1,001,098 100 $2,120,054 16 3 17 36 3 47 100 306,734 9,279 235,571 551,584 42,500 1,072,613 $1,959,301 15 1 12 28 2 55 100 256,227 10,209 174,770 441,206 58,481 1,099,141 $1,896,074 13 210,645 14 1 9,233 1 10 156,369 9 24 376,247 24 2 32,965 3 57 53 827,636 100 $1,556,606 100 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ During 1999 the Corporation continued its strategy of diversifying its loan portfolio composition through the origination and purchase of commercial loans. This resulted in a significant increase of $395.4 million in the commercial loan portfolio. This increase includes approximately $90 million in commercial loans purchased from Royal Bank of Puerto Rico. Residential real estate loans increased in 1999 by $170.6 million as a result of new resources added to this line of business. Finance leases, which are mostly composed of loans to individuals to finance the acquisition of an auto, increased by $33.5 million. Consumer loans increased by $25.9 million in 1999 as a result of the acquisition of a $42 million credit card portfolio from Western Auto, offset by a decrease in the rest of the portfolio of $16.1 million. 26 The Corporation’s investment portfolio at December 31, 1999 amounted to $1,811 million, in line with the investment portfolio of $1,801 million at December 31, 1998. The composition and tax equivalent weighted average interest rates of the Corporation’s earning assets at December 31, 1999 were as follows: ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Amount (In thousands) Weighted Average Rate Money market instruments Government obligations Mortgage backed securities FHLB of N.Y. stock Other investment Total investments Consumer loans Residential real estate loans Construction loans Commercial and commercial real estate loans Finance leases Total loans(1) Total earning assets $ 35,217 437,705 1,223,873 17,827 96,541 1,811,163 1,026,985 473,563 132,068 1,027,060 85,692 2,745,368 $ 4,556,531 4.64% 6.74% 7.20% 6.81% 7.33% 7.04% 15.02% 8.94% 8.88% 8.15% 12.41% 11.02% 9.44% ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ (1) Excludes the reserve for loan losses. Generally, non-accruing loans were included in this analysis as if they were accruing interest. 27 Non-performing Assets Total non-performing assets are the sum of non-accruing loans, OREO’s and other repossessed properties. Non-accruing loans are loans as to which interest is no longer being recognized. When loans fall into non-accruing status, all previously accrued and uncollected interest is charged against interest income. At December 31, 1999, total non-performing assets amounted to $57 million (1.22% of total assets) as compared to $63 million (1.57% of total assets) at December 31, 1998 and $63 million (1.89% of total assets) at December 31, 1997. The Corporation’s reserve to non- performing loans was 133.4% at December 31, 1999 as compared to 119.1% and 109.0% at December 31, 1998 and 1997, respectively. Past due loans are loans delinquent 90 days or more as to principal and/or interest, and still accruing interest. The following table presents non-performing assets at the dates indicated. The presentation of non-performing assets was changed for 1999 and previous four years to exclude past due and still accruing loans to conform it to the industry practice. December 31, 1999 1998 1997 1996 1995 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Non-accruing loans: Residential real estate Commercial and commercial real estate Finance leases Consumer Other real estate owned (OREO) Other repossessed property Total non-performing assets Past due loans Non-performing assets to total assets Non-performing loans to total loans Allowance for loan losses Allowance to total non-performing loans $ 8,633 17,975 2,482 24,726 53,816 517 3,112 $ 57,445 $ 13,781 1.22% 1.96% $ 71,784 133.39% $ 9,151 19,355 1,716 26,736 56,958 3,642 2,277 $ 62,877 $ 15,110 1.57% 2.69% $ 67,854 119.13% (Dollars in thousands) $ 6,963 16,869 4,560 24,547 52,939 1,132 8,702 $ 62,773 $ 11,544 1.89% 2.70% $ 57,712 109.02% $ 8,814 11,568 5,125 25,655 51,162 1,696 7,566 $60,424 $ 9,752 2.14% 2.70% $55,254 108.00% $ 9,309 18,979 297 26,085 54,670 2,991 3,132 $ 60,793 5,544 $ 2.50% 3.51% $ 55,009 100.62% ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ 28 Non-accruing Loans Residential Real Estate Loans- The Corporation classifies all real estate loans delinquent 90 days or more in non-accruing status. Even though these loans are in non-accruing status, Management considers based on the value of the underlying collateral and the loan to value ratios, that no material losses will be incurred in this portfolio. Management’s understanding is based on the historical experience of the Corporation. Non-accruing real estate loans amounted to $8.6 million (1.82% of total residential real estate loans) at December 31, 1999, as compared to $9.2 million (3.02% of total residential real estate loans) and $7 million (2.38% of total residential real estate loans) at December 31, 1998 and 1997, 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 $18 million (1.55% of total commercial loans) at December 31, 1999 as compared to $19.4 million (2.53% of total commercial loans) and $16.9 million (3.06% of total commercial loans) at December 31, 1998 and 1997, respectively. At December 31, 1999, there was only one non- accruing commercial loan of over $1 million, which is a $2.6 million loan, partially secured by inventory, accounts receivable and real estate collateral. Finance Leases - Finance leases are classified as non-accruing when they are delinquent 90 days or more. Non-accruing finance leases amounted to $2.5 million (2.90% of total finance leases) at December 31, 1999, compared to $1.7 million (3.29% of total finance leases) at December 31, 1998, and $4.6 million (10.73% of total finance leases) at December 31, 1997. 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 $24.7 million (2.41% of the total con- sumer loan portfolio) at December 31, 1999, $26.7 million (or 2.67% of the total consumer loan portfolio) at December 31, 1998 and $24.5 million (or 2.29% of the total consumer loan portfolio) at December 31, 1997. The decrease in the ratio and amount of non-accruing loans was the result of the improvement on the credit quality of the portfolio. This improvement resulted in a decrease in charge off of consumer loans to $52 million in 1999 from $67.9 million in 1998, and $57.3 million in 1997. 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. Repossessed Property The Repossessed Property category includes repossessed boats and autos acquired in settlement of loans. Repossessed boats are recorded at the lower of cost or estimated fair value. Repossessed autos are recorded at the principal balance of the loans less an estimated loss on the disposition of certain units. Past Due Loans Past due loans are accruing commercial and consumer loans, which are contractually delinquent 90 days or more. Past due commercial loans are current as to interest but delinquent in the payment of principal. Past due consumer loans include personal lines of credit and credit card loans delinquent 90 days up to 179 days and personal loans (including small loans) delinquent 90 days up to 119 days. 29 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 $2,565 million at December 31, 1999, as compared to $1,775 million and $1,595 million at December 31, 1998 and 1997, respectively. Total deposits are composed of branch-based deposits and institutional deposits. The following table presents the composition of total deposits. December 31, 1999 1998 1997 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Savings accounts Interest bearing checking accounts Certificates of deposit Interest bearing deposits Non-interest bearing deposits Total Weighted average rate during the period on interest bearing deposit Interest bearing deposits: Average balance outstanding Non-interest bearing deposits: Average balance outstanding (Dollars in thousands) $ 447,946 162,601 1,742,978 2,353,525 211,896 $2,565,421 $ 416,424 130,883 1,054,634 1,601,941 173,104 $ 1,775,045 $ 403,129 121,452 929,955 1,454,536 140,099 $1,594,635 4.69% 4.71% 4.80% $1,927,614 $ 1,494,529 $1,502,975 179,478 145,357 127,256 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Institutional deposits include brokered certificates of deposits and certificates issued to agencies of the Government of Puerto Rico. Total interest bearing deposits increased by $751.6 million at December 31, 1999 when compared to December 31, 1998. This fluctuation was mainly due to: (1) an increase in branch-based deposits of $206.7 million; (2) an increase of $560 million in brokered certificates of deposits; net of (3) a decrease of $10 million in certificates issued to corporations operating under Internal Revenue Code Section 936; and (4) a decrease of $5.0 million in certificates issued to the agencies of the Government of Puerto Rico. Non-interest bearing deposits increased by $38.8 million in 1999. The increase in total branch based deposits includes the deposits of the five branches acquired from other financial institutions. Borrowings At December 31, 1999 total borrowings amounted to $1,804 million as compared to $1,931 million and $1,458 million at December 31, 1998 and 1997, respectively. The following table presents the composition of borrowings. December 31, 1999 1998 1997 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ (Dollars in thousands) Federal funds purchased and securities sold under agreements to repurchase Other short term borrowings Advances from FHLB Notes payable Subordinated notes Total $1,452,151 152,484 50,000 55,500 93,594 $1,803,729 $1,623,698 86,595 2,600 118,100 99,496 $1,930,489 $ 965,869 231,505 29,000 132,350 99,423 $1,458,147 Weighted average rate during the period 5.34% 5.41% 5.67% ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ 30 The Corporation uses federal funds purchased, repurchase agreements, advances from FHLB and notes payable as additional funding sources. The borrowings of the Corporation consist primarily of federal funds purchased and securities sold under agreements to repurchase (repur- chase agreements) which at December 31, 1999 amounted to $1,452.2 million or 81% of total borrowings. Repurchase agreements had a total weighted average cost of 5.07%, during the year ended December 31, 1999. For more information on borrowings please refer to Notes 20 through 24 of the Corporation’s financial statements. The composition and weighted average interest rates of interest bearing liabilities at December 31, 1999, were as follows: Amount (In thousands) Weighted Average rate ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Interest bearing deposits Borrowed funds $ 2,353,525 1,803,729 4.94% 5.60% ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Capital During 1999, the Corporation increased its total capital from $270.4 million at Decem- ber 31, 1998 to $294.9 million at December 31, 1999. Total capital increased by $24.5 million due to earnings of $62.1 million, the issuance of 3,600,000 shares of preferred stock at $86.9 million, the issuance of 13,000 shares of common stock through the exercise of stock options at a cost of $176,313, reduced by the repurchased shares of common stock at a total cost of $32.5 million, an unrealized loss on investment securities available for sale of $77.4 million and cash dividends of $14.7 million. The Corporation’s objective is to maintain a solid capital position above the “well capitalized” classification under the federal banking regulations. The Corporation continues to exceed the well capitalized guidelines. To be in a “well capitalized” position, an institution should have: (i) a leverage ratio of 5% or greater; (ii) a total risk based capital ratio of 10% or greater; and (iii) a Tier 1 risk-based capital ratio of 6% or greater. At December 31, 1999 the Corporation had a leverage ratio of 7.47%; a total risk based capital ratio of 16.16%; and a Tier 1 risk-based capital ratio of 11.64%. Dividends In 1999, 1998 and 1997 the Corporation declared four quarterly cash dividends of $0.09, $0.075 and $0.06 per common share, respectively, for an annual dividend of $0.36, $0.30 and $0.24, respectively. Total cash dividends paid on common shares amounted to $10.4 million for 1999 (or a 17.96% dividend payout ratio), $8.9 million for 1998 (or a 17.12% dividend payout ratio) and $7.2 million for 1997 (or a 15.14% dividend payout ratio). Dividends declared on preferred stock amounted to $4.3 million in 1999. Year 2000 The transition to the year 2000 occurred as expected without any significant problems on the Corporation’s computer systems or any other date sensitive operating equipment. The expenses incurred to comply with the year 2000 date change amounted to approximately $1.4 million for the year 1999 and $650,000 for the year 1998. 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. 31 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 1999. Management considers that the ranges of the GAP ratio achieved during 1999 are adequate, considering the Corporation’s net interest margin and capital ratios. The Corporation’s interest rate risk position is measured on a quarterly basis and is evaluated by the Asset Liability Management and Investment Committee. This Committee is in charge, among other things, of informing Management as to the current levels of interest rate risk and, when necessary, managing the repricing of the Corporation’s assets, liabilities and off balance sheet contracts to maintain that risk at reasonable and prudent levels. Liquidity Liquidity refers to the level of cash and eligible investments to meet loan and investment commitments, potential deposit outflows and debt repayments. The Asset Liability Management and Investment Committee, using measures of liquidity developed by Management reviews the Corporation’s liquidity position and liquidity targets on a weekly basis. The principal sources of short-term funds are loan repayments, deposits, securities sold under agreements to repurchase, and lines of credit with the FHLB and other financial institutions. The Investment Committee reviews credit availability on a regular basis. In addition, the Corpora- tion 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. Market Prices and Stock Data Quarter ended High Low ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ The Corporation’s common stock is traded in the New York Stock Exchange (NYSE) under the symbol FBP. On Decem- ber 31, 1999, there were 641 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. 1999: December September June March 1998: December September June March 1997: December September June March $22.81 24.75 28.50 30.38 $30.50 29.50 29.63 23.88 $18.82 17.75 13.63 14.38 $19.25 19.75 22.00 22.69 $21.38 23.63 22.72 16.50 $15.13 12.53 11.69 12.50 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ 32 TIVE AND QUALITALITALITALITALITAAAAATIVETIVETIVETIVETIVE TIVE AND QU TIVE AND QU ANTITAAAAATIVE AND QU ANTIT ANTIT QUQUQUQUQUANTIT TIVE AND QU ANTIT DISCLOSURES ABOUT MARKET RISK DISCLOSURES ABOUT MARKET RISK DISCLOSURES ABOUT MARKET RISK DISCLOSURES ABOUT MARKET RISK 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 also acts as secretary, keeping minutes of all meetings. Committee meetings focus on, among other things, current and expected conditions in world financial markets, competition and prevailing rates in the local deposit market, reviews of liquidity, unrealized gains and losses in securities, recent or proposed changes to the investment portfolio, alternative funding sources and their costs, hedging and the possible purchase of derivatives such as swaps and caps, and any tax or regulatory issues which may be pertinent to these areas. The ALCO approves pricing and funding decisions in the light of the Corporation’s overall growth strategies and objectives. On a quarterly basis the ALCO performs a comprehen- sive asset/liability review, examining the measures of interest rate risk described below together with other matters such as liquidity and capital. The Corporation uses simulations to measure the effects of changing interest rates on net interest income. These measures are carried out in two ways, assuming upward and downward interest rate movements of 200 basis points: (1) using a balance sheet which is assumed to be flat at the levels existing on the simulation date, and (2) using a balance sheet which has growth patterns and strategies similar to those which have occurred in the recent past. Assuming a flat balance sheet, tax equivalent net interest income for the twelve months following December 31, 1999 and 1998 would be $203.3 million and $207.1 million, respec- tively, under flat rates, $183.5 million and $185.4 million, respectively, under rising rates, and $222.3 million and $211.0 million, respectively, under falling rates. Assuming a growing balance sheet, tax equivalent net interest income for 1999 would be $213.5 million under flat rates (1998 - $209.1 million), $192.9 million under rising rates (1998 - $188.3 million) and $228.4 million under falling rates (1998 - $212.5 million). 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 incorpo- rate expected future lending rates, current and expected future funding sources and cost, the possible exercise of options, liquidity requirements, and other factors which may be important in determining the future growth of net interest income. Only interest and fee income is included in these projections; profits on the sale of assets are excluded. All computations are done on a tax equivalent basis, including the effects of the changing cost of funds on the tax-exempt spreads of certain investments. The projections are carried out for First BanCorp on a fully consolidated basis. These simulations are highly complex, and they use many simplifying assumptions which are intended to reflect the general behavior of the Corporation over the period in question, but there can be no assurance that actual events will parallel these assumptions in all cases. For this reason, the results of these simulations are only approximations of the true sensitivity of net interest income to changes in market interest rates. 33 35 FIRST BANCORP FIRST BANCORP FIRST BANCORP FIRST BANCORP FIRST BANCORP TEMENTS OF TEMENTS OF TED STAAAAATEMENTS OF TED ST TED ST CONSOLIDAAAAATED ST CONSOLID CONSOLID TEMENTS OF TEMENTS OF TED ST CONSOLID CONSOLID FINANCIAL CONDITION FINANCIAL CONDITION FINANCIAL CONDITION FINANCIAL CONDITION FINANCIAL CONDITION ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ December 31, ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ 1999 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ 1998 ○ ○ ○ ○ ○ ○ Assets Cash and due from banks Money market instruments Investment securities available for sale, at market: United States and Puerto Rico Government obligations Mortgage backed securities Other investments Total investment securities available for sale Investment securities held to maturity, at cost: United States and Puerto Rico Government obligations Mortgage backed securities Total investment securities held to maturity Federal Home Loan Bank (FHLB) stock Loans held for sale Loans receivable Total loans Allowance for loan losses Total loans - net Other real estate owned Premises and equipment - net Accrued interest receivable Due from customers on acceptances Other assets Total assets Liabilities and Stockholders’ Equity Liabilities: Non-interest bearing deposits Interest bearing deposits Federal funds purchased and securities sold under agreements to repurchase Other short-term borrowings Advances from FHLB Notes payable Bank acceptances outstanding Accounts payable and other liabilities Subordinated notes Stockholders’ equity: Preferred Stock, authorized 50,000,000 shares: issued and outstanding 3,600,000 shares at $25.00 liquidation value per share Common stock, $1.00 par value, authorized 250,000,000 shares; issued 29,612,552 shares Less: Treasury Stock (at par value) Common stock outstanding Additional paid-in capital Capital reserve Legal surplus Retained earnings Accumulated other comprehensive income - unrealized gain (loss) on securities available for sale, net of tax $ 58,267,929 35,217,064 340,356,015 1,017,176,782 96,541,374 1,454,074,171 97,349,381 206,696,658 304,046,039 17,826,500 37,794,078 2,707,574,019 2,745,368,097 (71,784,237) 2,673,583,860 517,405 61,947,817 17,917,526 2,738,176 95,431,678 $ 4,721,568,165 $ 211,896,459 2,353,525,177 1,452,151,222 152,484,084 50,000,000 55,500,000 2,738,176 54,776,718 4,333,071,836 93,594,080 90,000,000 29,612,552 (1,552,000) 28,060,552 19,863,466 40,000,000 126,792,514 58,834,676 (68,648,959) 294,902,249 $ 39,416,097 525,669 268,611,106 1,492,538,909 1,620,000 1,762,770,015 26,921,836 26,921,836 10,270,600 20,641,628 2,099,412,756 2,120,054,384 (67,854,066) 2,052,200,318 3,642,525 51,537,192 10,738,072 2,392,338 56,937,413 $ 4,017,352,075 $ 173,103,709 1,601,941,185 1,623,697,988 86,594,710 2,600,000 118,100,000 2,392,338 39,058,247 3,647,488,177 99,495,830 29,599,552 (100,000) 29,499,552 23,575,936 30,000,000 53,454,469 125,088,180 8,749,931 270,368,068 Contingencies and commitments Total liabilities and stockholders’ equity $ 4,721,568,165 $ 4,017,352,075 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ The accompanying notes are an integral part of these statements. 37 FIRST BANCORP FIRST BANCORP FIRST BANCORP FIRST BANCORP FIRST BANCORP TEMENTS TEMENTS TED STAAAAATEMENTS TED ST TED ST CONSOLIDAAAAATED ST CONSOLID CONSOLID TEMENTS TEMENTS TED ST CONSOLID CONSOLID OF INCOME OF INCOME OF INCOME OF INCOME OF INCOME 1999 Year ended December 31, 1998 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ 1997 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Interest income: Loans Investment securities Short-term investments Dividends on FHLB stock Total interest income Interest expense: Deposits Short-term borrowings Notes payable Advances from FHLB Total interest expense Net interest income Provision for loan losses Net interest income after provision for loan losses Other income: Other fees on loans Service charges on deposit accounts Trading (loss) income Fees on loans serviced for others Gain on sale of investments Rental income Other operating income Total other income Other operating expenses: Employees’ compensation and benefits Occupancy and equipment Taxes and insurance Net (gain) cost of operations and disposition of other real estate owned Amortization of debt issuance costs Other Total other operating expenses Income before income tax provision Income tax provision Net income Earnings per common share - basic Earnings per common share - diluted $ 260,741,177 106,770,856 450,248 1,100,823 369,063,104 $ 231,513,730 88,312,096 729,417 743,161 321,298,404 $ 225,524,452 55,310,691 3,654,806 670,156 285,160,105 90,489,121 79,455,499 12,914,538 470,590 183,329,748 185,733,356 47,960,500 137,772,856 12,886,541 8,540,291 (7,946) 864,278 1,376,672 2,609,657 6,592,940 32,862,433 48,545,839 20,137,354 6,778,354 (303,359) 612,404 25,501,303 101,271,895 69,363,394 7,288,445 62,074,949 2.00 1.98 $ $ $ 70,418,359 69,494,151 14,965,751 251,707 155,129,968 166,168,436 76,000,000 90,168,436 11,157,852 7,843,837 3,364,843 1,617,292 26,827,417 2,291,814 5,136,795 58,239,850 43,185,324 18,154,663 6,577,894 42,359 691,411 23,146,048 91,797,699 56,610,587 4,798,200 $ 51,812,387 $ $ 1.75 1.74 $ $ $ 72,147,084 39,460,518 17,958,092 863,599 130,429,293 154,730,812 55,675,500 99,055,312 10,898,586 7,363,369 744,789 2,669,673 11,388,137 1,935,169 4,865,788 39,865,511 38,644,042 16,101,054 6,575,896 (21,128) 787,745 21,180,662 83,268,271 55,652,552 8,125,000 47,527,552 1.58 1.58 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ The accompanying notes are an integral part of these statements. 38 FIRST BANCORP FIRST BANCORP FIRST BANCORP FIRST BANCORP FIRST BANCORP TEMENTS OF CASH TEMENTS OF CASH TED STAAAAATEMENTS OF CASH TED ST TED ST CONSOLIDAAAAATED ST CONSOLID CONSOLID TEMENTS OF CASH TEMENTS OF CASH TED ST CONSOLID CONSOLID FLOWS FLOWS FLOWS FLOWS FLOWS ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ 1999 ○ Year ended December 31, 1998 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ 1997 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Cash flows from (for) operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation Provision for loan losses Increase in taxes payable Increase in deferred tax asset (Increase) decrease in accrued interest receivable Increase (decrease) in accrued interest payable Amortization of deferred loan fees (costs) Net gain on sale of investments securities Originations of loans held for sale Proceeds from sale of loans Decrease in other assets Increase (decrease) in other liabilities Total adjustments Net cash provided by operating activities Cash flows from (for) investing activities: Principal collected on loans Loans originated Purchase of loans Sales of investment securities Purchase of securities held-to-maturity Purchases of securities available-for-sale Principal repayments and maturities of securities held-to-maturity Principal repayments of securities available-for-sale Additions to premises and equipment Purchase of FHLB stock Net cash used by investing activities Cash flows from (for) financing activities: Net increase (decrease) in deposits Net increase (decrease) in federal funds purchased and securities sold under repurchase agreements Net increase (decrease) in other short-term borrowings FHLB-N.Y. advances taken/paid Payments of notes payable Decrease (increase) in debt securities issuance cost Dividends Repurchase of common stock Issuance of preferred stock Treasury stock acquired Exercise of stock options Net cash provided by financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Cash and cash equivalents include: Cash and due from banks Money market instruments $ 62,074,949 $ 51,812,387 $ 47,527,552 7,645,035 47,960,500 2,345,647 (6,702,849) (7,179,454) 10,056,988 (680,735) (1,376,673) (18,222,990) 1,266,787 12,950,921 5,012,929 53,076,106 115,151,055 719,964,127 (1,270,442,873) (118,603,000) 9,630,866 (277,624,203) (6,069,805,410) 500,000 6,267,048,544 (18,055,660) (7,555,900) (764,943,509) 7,827,866 76,000,000 3,454,049 (11,454,033) 2,297,862 1,072,485 881,411 (26,827,417) (9,086,622) 20,776,413 1,718,242 66,660,256 118,472,643 559,726,839 (797,256,751) (1,330,497) 302,128,585 (6,899,653,771) 34,782,596 6,061,838,410 (10,917,891) (120,300) (750,802,780) 7,281,936 55,675,500 1,464,869 (1,765,992) (3,843,610) (2,371,552) (30,868) (11,388,137) (7,668,575) 1,249,543 48,813,231 (3,157,333) 84,259,012 131,786,564 661,129,038 (819,802,988) 118,004,497 (18,837,919) (8,185,668,960) 27,591,758 7,518,487,101 (6,739,859) (705,837,332) 790,376,740 180,410,210 (109,290,923) (172,898,023) 65,889,375 47,400,000 (68,501,750) 1,211,219 (14,657,799) 86,850,217 (32,510,611) 176,313 703,335,681 53,543,227 39,941,766 $ 93,484,993 $ 58,267,929 35,217,064 $ 93,484,993 654,760,505 (144,910,185) (26,400,000) (14,177,660) (1,049,270) (8,870,832) (3,656,420) (2,211,250) 196,501 634,091,599 1,761,462 38,180,304 $ 39,941,766 $ 39,416,097 525,669 $ 39,941,766 381,012,600 231,504,896 14,900,000 (54,010,993) 957,972 (7,197,417) (6,899,822) 382,249 451,358,562 (122,692,206) 160,872,510 38,180,304 37,666,068 514,236 38,180,304 $ $ $ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ The accompanying notes are integral part of these statements. 39 FIRST BANCORP FIRST BANCORP FIRST BANCORP FIRST BANCORP FIRST BANCORP TEMENTS TEMENTS TED STAAAAATEMENTS TED ST TED ST CONSOLIDAAAAATED ST CONSOLID CONSOLID TEMENTS TEMENTS TED ST CONSOLID CONSOLID OF CHANGES IN STOCKHOLDERS’ EQUITY OF CHANGES IN STOCKHOLDERS’ EQUITY OF CHANGES IN STOCKHOLDERS’ EQUITY OF CHANGES IN STOCKHOLDERS’ EQUITY OF CHANGES IN STOCKHOLDERS’ EQUITY Preferred stock Common stock Additional paid-in capital Capital reserve Legal surplus Retained earnings Unrealized gain (loss) on securities available for sale ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ December 31, 1996 Net income Change in valuation of securities available for sale Addition to legal surplus Addition to capital reserve Repurchase of common stock Stock option exercised Cash dividends-common stock December 31, 1997 Net income Change in valuation of securities available for sale Addition to capital reserve Repurchase of common stock Treasury stock Stock option exercised Cash dividends-common stock Common stock split on May 29, 1998 December 31, 1998 Net income Change in valuation of securities available for sale Issuance of preferred stock Addition to legal surplus Addition to capital reserve Treasury stock Stock options exercised Cash dividends: Common stock Preferred stock December 31, 1999 $ $15,116,651 $38,599,962 $10,000,000 $49,106,995 $77,711,586 47,527,552 $607,119 4,347,474 10,000,000 (247,825) 33,000 (495,650) 349,249 14,901,826 38,453,561 20,000,000 53,454,469 10,000,000 (108,800) (100,000) 10,000 (217,600) (50,000) 186,501 11,424,325 12,031,444 (3,281,513) (4,347,474) (10,000,000) (6,156,347) (7,197,417) 97,537,900 51,812,387 (10,000,000) (3,330,024) (2,061,250) (8,870,832) 14,796,526 29,499,552 (14,796,526) 23,575,936 30,000,000 53,454,469 125,088,180 8,749,931 90,000,000 (3,149,783) (1,452,000) 13,000 (726,000) 163,313 73,338,045 10,000,000 (77,398,890) 62,074,949 (73,338,045) (10,000,000) (30,332,611) (10,382,797) (4,275,000) $90,000,000 $28,060,552 $19,863,466 $40,000,000 $126,792,514 $58,834,676 $(68,648,959) ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ The accompanying notes are an integral part of these statements. 40 FIRST BANCORP FIRST BANCORP FIRST BANCORP FIRST BANCORP FIRST BANCORP TEMENTS OF TEMENTS OF TED STAAAAATEMENTS OF TED ST TED ST CONSOLIDAAAAATED ST CONSOLID CONSOLID TEMENTS OF TEMENTS OF TED ST CONSOLID CONSOLID COMPREHENSIVE INCOME COMPREHENSIVE INCOME COMPREHENSIVE INCOME COMPREHENSIVE INCOME COMPREHENSIVE INCOME ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ 1999 $ 62,074,949 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Year ended December 31, 1998 $ 51,812,387 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ 1997 47,527,552 ○ ○ ○ ○ ○ ○ ○ $ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Net income Other comprehensive income net of tax: Unrealized (losses) gains on securities: Unrealized holding (losses) gains arising during the period Less: reclassification adjustment for gains included in net income Total other comprehensive (loss) income (76,501,672) 8,102,283 12,081,362 897,218 (77,398,890) 11,383,796 (3,281,513) 657,037 11,424,325 Comprehensive (loss) income $ (15,323,941) $ 48,530,874 $ 58,951,877 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ The accompanying notes are an integral part of these statements. 41 NOTES TO CONSOLIDAAAAATEDTEDTEDTEDTED NOTES TO CONSOLID NOTES TO CONSOLID NOTES TO CONSOLID NOTES TO CONSOLID TEMENTS TEMENTS FINANCIAL STAAAAATEMENTS FINANCIAL ST FINANCIAL ST TEMENTS TEMENTS FINANCIAL ST FINANCIAL ST 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 reorga- nization each of the Bank’s outstanding shares of common stock was converted into one share of common stock of the new bank holding company. First BanCorp is subject to the Federal Bank Holding Company Act and to the regulations, supervision, and examination of the Federal Reserve Board. FirstBank, the Corporation’s subsidiary, is a commercial bank chartered under the laws of the Commonwealth of Puerto Rico. Its main office is located in San Juan, Puerto Rico, and has 45 full service banking branches in Puerto Rico and three in the U.S. Virgin Islands. It also has loan origination offices in Puerto Rico focusing on consumer loans and residential mortgage loans. In addition, through its wholly owned subsidiaries, FirstBank operates other offices in Puerto Rico specializing in small personal loans, finance leases and vehicle rental. The Bank is subject to the supervi- sion, examination and regulation of the Office of the Commissioner of Financial Institutions of Puerto Rico and the Federal Deposit Insurance Corporation (FDIC), which insures its deposits through the Savings Association Insurance Fund (SAIF). Note 2 - Summary of Significant Accounting Policies The accounting and reporting policies of the Corporation and its subsidiaries conform with generally accepted accounting principles, and, as such, include amounts based on judgments, estimates and assumptions made by Management that affect the reported amounts of assets and liabilities and contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Following is a description of the more significant accounting policies followed by the Corporation: Principles of consolidation The consolidated financial statements include the accounts of the Corpora- tion and its subsidiaries, all of which are wholly owned. All significant intercompany balances and transactions have been eliminated in consolidation. Statement of cash flows For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks and money market instruments. 42 Segments of the Corporation and related information Operating segments are components of the Corporation about which separate financial information is available based on which Management makes operating decisions and assesses performance. 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. The Corporation monitors the market value of the underlying securities as compared to the related receivable, including accrued interest, and requests additional collateral where deemed appropriate. 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 unreal- ized 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. 43 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 approxi- mates 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 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. 44 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 without exceeding 40 years. Depreciation of leasehold improve- ments 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 mainte- nance 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. Intangible assets Intangible assets consist of core deposits values which are amortized using straight line method over ten years. Securities sold under agreements to repurchase The Corporation enters into sales of securities under agreements to repur- chase the same or similar securities. Generally, similar securities are securities from the same issuer, with identical form and type, similar maturity, identical contractual interest rates, similar assets as collateral and the same aggregate unpaid principal amount. The 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. 45 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 divi- dends are retroactively recognized in all periods presented in financial statements. Reporting comprehensive income 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’ presenta- tion. Reclassification of financial statements for earlier periods was presented for comparative purposes. Reclassifications Certain amounts in the 1998 and 1997 financial statements have been reclassified to conform with the 1999 presentation. 46 Accounting for derivative instruments and hedging activities In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133 “Accounting for Deriva- tive 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 standard- izes 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. On July 7, 1999, the FASB issued SFAS No. 137, “Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133”. SFAS No. 137 delays the effective date of SFAS No. 133. SFAS No. 133 would be effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. 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 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, 10,000 and 13,000 shares of common stock were issued during 1998 and 1999 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 $0.24 per share in 1997, of $0.30 per share in 1998, and of $0.36 per share in 1999. 47 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 1,452,000 shares of common stock at a cost of $32,510,611 during 1999, 317,600 shares of common stock at a cost of $5,867,674 during 1998, and 495,650 shares of common stock at a cost of $6,899,822 during 1997. The number of shares were adjusted to recognize the May 1998 stock split. From the total amount of stocks repurchased, 1,552,000 shares were held as treasury stock at December 31, 1999 (1998 - 100,000 shares) and were available for general corporate purposes. 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 autho- rized under the 1996 Program have been repurchased. Preferred stock The Corporation has 50,000,000 shares of authorized non-cumulative and non-convertible 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. On April 30, 1999, the Corporation issued 3,600,000 shares of preferred stock. The liquidation value per share is $25. Annual dividends of $1.78125 per share, are payable monthly, if declared by the board of directors. At December 31, 1998, no shares of preferred stock were outstanding. Capital reserve The capital reserve account was established to comply with certain regula- tory 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. 48 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 require- ments 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. 49 Capital standards established by regulations require the Corporation to maintain minimum amounts and ratios of Tier 1 capital to total average assets (lever- age 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% depend- ing on the nature of the asset. At December 31, 1999 and 1998, the Corporation exceeded the require- ments for an adequately capitalized institution. At December 31, 1999 and 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 and its banking subsidiary’s regulatory capital positions were as follows: ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Regulatory requirements Actual Amount Ratio For capital adequacy purposes Ratio Amount To be well capitalized Amount Ratio ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ At December 31, 1999 Total Capital (to Risk-Weighted Assets): First BanCorp FirstBank Tier I Capital (to Risk-Weighted Assets): First BanCorp FirstBank Tier I Capital (to Average Assets): First BanCorp FirstBank $468,261 409,173 16.16% 14.26% $337,284 279,383 11.64% 9.73% $337,284 279,383 7.47% 6.26% (Dollars in thousands) $231,758 229,608 $115,879 114,804 $135,473 133,953 8% 8% 4% 4% 3% 3% $289,697 287,010 10% 10% $173,818 172,206 $225,789 223,255 6% 6% 5% 5% ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Regulatory requirements Actual Amount Ratio For capital adequacy purposes Ratio Amount To be well capitalized Amount Ratio ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ At December 31, 1998 Total Capital (to Risk-Weighted Assets): First BanCorp FirstBank Tier I Capital (to Risk-Weighted Assets): First BanCorp FirstBank Tier I Capital (to Average Assets): First BanCorp FirstBank (Dollars in thousands) $377,939 372,015 17.39% 17.12% $173,835 173,817 $250,910 244,989 11.55% 11.28% $ 86,917 86,909 $250,910 244,989 6.59% 6.44% $114,204 114,204 8% 8% 4% 4% 3% 3% $217,294 217,271 10% 10% $130,376 130,363 $190,340 190,340 6% 6% 5% 5% ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ 50 Note 5 - Stock Option Plan The Corporation has a stock option plan covering certain employees. The options granted under the plan cannot exceed 20% of the number of common shares outstanding. Each option provides for the purchase of one share of common stock at a price not less than the fair market value of the stock on the date the option is granted. 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 of Options Weighted Average Exercise Price per Option At December 31, 1996 Granted Exercised Expired or canceled At December 31, 1997 Granted Exercised At December 31, 1998 Granted Exercised At December 31, 1999 325,714 240,000 (66,000) (25,714) 474,000 296,000 (13,500) 756,500 223,000 (13,000) 966,500 $ 6.15 15.45 5.79 10.20 10.68 24.85 14.56 16.16 19.99 13.56 17.07 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ The options outstanding at December 31, 1999 have an original expiration term of ten years and all of them are exercisable. The exercise price of the options outstanding at December 31, 1999 ranges from $5.79 to $28.38 and the weighted average remaining contractual life is approximately eight years. Following is additional information concerning the stock options outstanding at December 31, 1999. The data included herein have been adjusted to reflect the May 1998 stock split. Number of Options Exercise Price per Option Contractual Maturity ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ 234,000 213,500 60,000 7,000 40,000 12,000 177,000 2,000 3,500 15,000 202,500 966,500 $ 5.79 15.63 19.19 28.38 27.09 26.56 26.00 25.94 26.44 22.56 19.63 November 2004 November 2007 February 2008 April 2008 May 2008 June 2008 November 2008 February 2009 April 2009 August 2009 November 2009 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ 51 Note 6 - Earnings Per Common Share The calculations of earnings per common share for the years ended Decem- ber 31, 1999, 1998 and 1997 follow (in thousands, except per share data): ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Net income Less: Preferred stock dividend Net income - attributable to common stockholders $62,075 $ 51,812 $47,528 (4,275) $57,800 $ 51,812 $47,528 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Year ended December 31, 1999 1998 1997 Year ended December 31, 1999 1998 1997 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Earnings per common share-basic: Net income - available to common stockholders Weighted average common shares outstanding Earnings per common share-basic Earnings per common share-diluted: $57,800 $51,812 29,586 1.75 2.00 $ 28,941 $ $47,528 30,036 $ 1.58 Net income - available to common stockholders Weighted average common shares and share equivalents: Average common shares outstanding Common stock equivalents - Options Total Earnings per common share-diluted $57,800 $51,812 $47,528 28,941 258 29,199 $ 1.98 29,586 272 29,858 $ 1.74 30,036 168 30,204 $ 1.58 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ 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 thou- sands, except per share data): Year ended December 31, 1999 1998 1997 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Pro forma earnings per common share: Net income - available to common stockholders Earnings per common share-basic Earnings per common share-diluted $56,341 $1.95 $1.93 $48,592 $46,354 $1.55 $1.54 $1.64 $1.63 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Management uses the binomial model for the computation of the fair value of each option granted to buy shares of the Corporation’s common stock. The fair value of each option granted during 1999, 1998 and 1997 was estimated using the following assumptions: weighted dividend growth of 22.38% (1999) and 21.97% (1998); expected life of 10 years; weighted expected volatility of 29.46% (1999), 36.08% (1998), and 29.8% (1997), and weighted risk-free interest rate of 6.04% (1999), 5.10% (1998) and 5.76% (1997). The weighted estimated fair value of the options granted was $6.54 (1999), $10.95 (1998) and $4.89 (1997) per option. Note 7 - Cash and Due from Banks The Corporation is required by law to maintain average reserve balances. The amount of those reserve average balances was approximately $40,975,700 at December 31, 1999 (1998 - $34,867,200). 52 Note 8 - Securities Purchased Under Agreements To Resell At December 31, 1999 and 1998, there were no securities purchased under agreements to resell. The maximum aggregate balance outstanding at any month-end during 1999 was approximately $17,421,000 (1998 - $209,232,000). The average aggregate balance during 1999 was $1,577,504 (1998 - $15,009,052). 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 - Investment Securities Held For Trading At December 31, 1999 and 1998, there were no securities held for trading purposes or options on such securities. All trading instruments are subject to market risk, the risk that future changes in market conditions, such as fluctuations in market prices or interest rates, may make an instrument less valuable or more onerous. The instruments are accounted for at market value, and their changes are reported directly in earnings. The Corporation may write options on trading securities as part of its trading activities. Also the Corporation may enter in securities sold not yet purchased transactions for trading purposes. These transactions are carried at market value. Net gains and losses resulting from these transactions are recorded in the trading income or loss account. The net loss from the sale of trading securities amounted to $7,946 for the year ended December 31, 1999 (a gain of $3,364,843 for 1998 and a gain of $744,789 for 1997), and were included in earnings as trading income. Note 10 - Investment Securities Held To Maturity The amortized cost, unrealized gains and losses, approximate market value, taxable equivalent weighted average yield and maturities of investment securities held to maturity at December 31, 1999 and 1998 were as follows (dollars in thousands): ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ December 31, 1999 December 31, 1998 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Amortized cost Unrealized gains (losses) Market value Weighted average yield% Amortized cost Unrealized gains (losses) Market value Weighted average yield% Obligations of U.S. Government Agencies: Within 1 year After 5 to 10 years After 10 years Puerto Rico Government Obligations: After 10 years Total Mortgage backed securities: Government National Mortgage Association (GNMA) certificates After 10 years $10,000 83,756 $ (166) (9,255) $9,834 74,501 8.34 9.15 $ 500 $(2) $ 498 3.37 23,051 $569 23,620 10.20 3,593 $97,349 $57 3,650 $57 $(9,421) $87,985 7.46 9.00 3,371 $26,922 204 $ 773 3,575 $(2) $27,693 7.41 9.73 $206,697 $(7,851) $198,845 8.18 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Expected maturities of mortgage backed securities and certain other securi- ties might differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. 53 Note 11 -Investment Securities Held For Sale The amortized cost, gross unrealized gains and losses, approximate market value, taxable equivalent weighted average yield and maturities of investment securi- ties held for sale at December 31, 1999 and 1998 were as follows (dollars in thou- sands): December 31, 1999 December 31, 1998 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Amortized cost Unrealized gains (losses) Market value Weighted average Amortized yield% cost Unrealized gains (losses) Market value Weighted average yield% ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ $ 39,577 67,468 $ (4,302) (9,621) $ 35,275 57,847 4.90 5.84 219,065 27,457 $ 53 (58) (5,127) 219,060 22,330 6.11 8.36 $ 240,040 25,619 $ 51 $ (159) $ 240,091 25,460 5,880 $ 359,447 (36) 53 $(19,144) 5,844 $ 340,356 $ 8.00 6.13 2,964 $ 268,623 96 $ 147 $ (159) 3,060 $ 268,611 $ 997 9,905 22,872 33,774 $ $ (25) (255) (155) (435) 972 9,650 22,728 33,350 $ 11 11 3,674 1,039,069 1,042,743 1,410 1,410 (46) (76,054) (76,100) 3,628 964,425 968,053 8.07 7.02 7.26 7.21 6.39 6.95 6.95 $ 4,564 1,001 10,169 32,363 48,097 $ 19 9 149 802 979 $ 4,583 1,010 10,318 33,166 49,077 1,411,369 1,411,369 9,936 9,936 $(357) (357) 1,420,947 1,420,947 6.91 6.91 644 188 11,109 11,941 299 299 (7) (6) (46) (59) 637 182 11,362 12,181 8.75 8.08 10.34 10.22 157 2,691 274 14,299 17,421 1 30 11 605 647 (10) (10) 158 2,721 285 14,894 18,058 8.23 8.40 10.28 10.35 10.02 2,463 757 3,220 11.70 2,764 767 3,530 9.33 361 12 373 17.33 $1,091,282 $2,489 $(76,594) $1,017,177 7.01 865 62 $1,480,516 $12,391 $ (367) 927 $1,492,539 11.63 7.02 $ 67,359 14,750 11,779 990 94,878 $ $1,914 $ $ (88) (162) $1,914 $ (250) $ 69,273 14,662 11,617 990 96,542 6.73 8.91 8.69 $ 8.38 7.33 $ 1,964 1,964 $ (344) $ (344) $ $ 1,620 15.76 1,620 15.76 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ 54 U.S. Treasury Securities: After 5 to 10 years After 10 years Obligations of other U.S. Government Agencies: Within 1 year After 10 years Puerto Rico Government Obligations: After 10 years Total Mortgage backed securities- Federal Home Loan Mortgage Corporation (FHLMC) certificates: Within 1 year After 1 to 5 years After 5 to 10 years After 10 years Government National Mortgage Association (GNMA) certificates: After 5 to 10 years After 10 years Federal National Mortgage Association (FNMA) certificates: Within 1 year After 1 to 5 years After 5 to 10 years After 10 years Mortgage pass through certificates: After 10 years Real Estate Mortgage Interest Conduit: Within 1 year After 1 to 5 years Total Other investment: Within 1 year After 1 to 5 years After 5 to 10 years After 10 years Total 5.00 8.32 7.18 5.35 7.84 8.14 7.68 9.07 8.64 Maturities for mortgage backed securities are based upon contratual terms assuming no repayments. The weighted average yield on investment securities held for sale is based on amortizet cost, therefore it does not give effect to changes in fair value. At December 31, 1999, the net unrealized loss of $68,648,959 (1998 - net unrealized gain of $8,749,931) on securities available for sale after the estimated income tax of $22,882,986 (1998 - $2,916,644) was reported as a separate component of stockholders’ equity. For 1999, the change in the net unrealized holding gain/loss on the available for sale securities amounted to a loss of $103,198,520 (1998 - a loss of $4,375,351) before estimated income taxes. For 1999, proceeds from the sale of securities amounted to $9.6 million (1998 - $302.1 million, 1997 - $118.0 million) resulting in a realized gain of $1.4 million (1998 - $26.8 million, 1997 -$11.4 million). No losses were recognized on those sales. Note 12 - Federal Home Loan Bank (FHLB) Stock At December 31, 1999 and 1998, there were investments in FHLB stock with book value of $17,826,500 and $10,270,600, 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): ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Mortgage-backed securities: Taxable Exempt ○ ○ Other investment securities: Taxable Exempt ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Year ended December 31, 1999 1998 1997 $ 4,137 77,900 $82,037 $ 1,528 24,758 $26,286 $ 5,230 63,131 $68,361 $ 801 20,621 $21,422 $ 6,239 24,481 $30,720 $ 1,372 27,544 $28,916 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ 55 Note 14 - Loans Receivable The following is a detail of the loan portfolio: ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ December 31, 1999 December 31, 1998 Residential real estate loans: Secured by first mortgages: Conventional Insured by government agencies: Federal Housing Administration and Veterans Administration Puerto Rico Housing Bank and Finance Agency Secured by second mortgages Deferred loan and commitment fees - net Residential real estate loans $395,884,613 $237,560,711 6,543,487 32,928,102 5,706,225 441,062,427 (5,293,370) 435,769,057 8,185,232 38,515,744 4,956,196 289,217,883 ( 6,848,311) 282,369,572 161,498,219 (98,535,025) 62,963,194 Construction, land acquisition and land improvements Undisbursed portion of loans in process Construction loans 288,301,904 (156,233,791) 132,068,113 Commercial loans: Commercial loans Commercial mortgage Commercial loans Finance leases Consumer and other loans: Personal Personal lines of credit Auto Boat Credit card Home equity reserve loans Unearned interest Other Consumer and other loans Loans receivable Loans held for sale Total loans Allowance for loan losses Total loans-net 655,417,037 371,642,698 1,027,059,735 368,548,532 332,219,186 700,767,718 85,692,482 52,214,184 422,722,624 13,029,258 532,242,160 37,018,313 168,045,087 2,656,713 (148,835,815) 1,026,878,340 106,292 1,026,984,632 2,707,574,019 37,794,078 2,745,368,097 (71,784,237) $2,673,583,860 463,052,946 9,535,354 512,116,471 32,208,879 125,955,592 3,385,220 (145,284,440) 1,000,970,022 128,066 1,001,098,088 2,099,412,756 20,641,628 2,120,054,384 (67,854,066) $2,052,200,318 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ The Corporation’s primary lending area is Puerto Rico. At December 31, 1999 and 1998 there is no significant concentration of credit risk in any specific industry on the loan portfolio. At December 31, 1999, loans in which the accrual of interest income had been discontinued amounted to $53,816,000 (1998 - $56,958,000; 1997 - $52,939,000). If these loans had been accruing interest, the additional interest income realized would have been approximately $4,544,000 (1998 - $4,970,000; 1997 - $5,246,000). There are no material commitments to lend additional funds to borrow- ers whose loans were in non-accruing status at these dates. At December 31, 1999 and 1998 mortgage loans held for sale amounted to $37,794,078 and $20,641,628, respectively. All mortgage loans originated and sold during 1999 and 1998 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. 56 At December 31, 1999, the Corporation was servicing mortgage loans owned by others aggregating approximately $134,348,000 (1998 - $147,439,000; 1997 - $168,416,000). 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). During 1999 the auto loans securitized were paid off. 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 mortgage loans pledged as collateral amounted to $157,612,921 and $222,732,275 at December 31, 1999 and 1998, respectively. A portfolio of personal loans was assigned as collateral for short-term borrowings as explained in Note 21 - “Other Short-Term Borrowings.” The personal loans pledged as collateral amounted to $186,417,700 and $220,443,511 at December 31, 1999 and 1998, respectively. Note 15 - Allowance for Loan Losses The changes in the allowance for loan losses were as follows: 1999 Year ended December 31, 1998 1997 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Balance at beginning of period Provision charged to income Losses charged against the allowance Recoveries credited to the allowance Other adjustments Balance at end of period $67,854,066 47,960,500 (53,664,742) 9,047,548 586,865 $71,784,237 $ 57,711,927 76,000,000 (72,223,389) 6,033,922 331,606 $ 67,854,066 $55,253,546 55,675,500 (59,590,916) 6,373,797 $57,711,927 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ At December 31, 1999, $4.4 million ($14.3 million at December 31, 1998) in commercial and real estate loans over $1,000,000 was considered impaired with an allowance of $1.3 million ($3.8 million at December 31, 1998). 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, 1999 and 1998. The average recorded investment in impaired loans amounted to $9.4 million for 1999 (1998 - $10.8 million). Interest income in the amount of approximately $428,470 was recognized on impaired loans for 1999 (1998 - approximately $736,000). 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 move- ment and balance of these loans were as follows: ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Amount Balance at December 31, 1997 New loans Payments Balance at December 31, 1998 New loans Payments Balance at December 31, 1999 $ 8,902,326 21,006,257 (8,379,759) 21,528,824 2,105,812 (541,851) $ 23,092,785 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ 57 Note 17 - Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation as follows: ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ December 31, 1999 1998 Land Buildings and improvements Leasehold improvements Furniture and equipment Accumulated depreciation Projects in progress Total premises and equipment - net $ 6,853,249 33,433,031 14,222,676 50,531,481 105,040,437 (48,232,875) 56,807,562 5,140,255 $61,947,817 $ 5,825,249 30,976,673 10,807,734 41,330,835 88,940,491 (42,167,391) 46,773,100 4,764,092 $51,537,192 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Note 18 - Other Assets Following is a detail of other assets: ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ December 31, 1999 1998 Deferred tax asset Accounts receivable Prepaid expenses Revenue earning vehicles Other repossessed property Insurance claims Other Total $54,645,143 8,202,865 9,243,210 5,679,920 2,709,258 1,618,037 13,333,245 $95,431,678 $22,142,665 10,023,555 10,219,939 4,465,609 2,276,766 1,778,133 6,030,746 $56,937,413 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Note 19 - Deposits and Related Interest Deposits and related interest consist of the following: ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ December 31, 1999 1998 Type of account and interest rate at: Savings accounts - 2.75% to 4.00% (1998 - 2.75% to 4.00%) Interest bearing checking accounts - 2.75% to 4.50% (1998 - 2.90% to 4.50%) Non-interest bearing checking accounts Certificate accounts - 3.80% to 8.00% (1998 - 3.80% to 7.15%) $ 447,945,723 $ 416,423,889 162,601,169 211,896,459 130,883,438 173,103,709 1,742,978,285 $2,565,421,636 1,054,633,858 $1,775,044,894 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ 58 The weighted average interest rate on total deposits at December 31, 1999 and 1998 was 4.94% and 4.57%, respectively. At December 31, 1999, the aggregate amount of demand deposits that were reclassified as loan amounted to $6,939,685 (1998 - $8,180,802). The following table presents a summary of certificates of deposits with remaining term of more than one year at December 31, 1999 (in thousands): ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Total Over one year to two years Over two years to three years Over three years to four years Over four years to five years Over five years Total $ 75,329 58,647 94,766 50,702 153,346 $432,790 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ At December 31, 1999 time deposits in denominations of $100,000 or higher amounted to $1,283,083,091 (1998 - $667,373,511) including brokered certificates of deposit of $843,217,222 (1998 - $283,249,222) at a weighted average rate of 5.84% (1998 - 5.63%). At December 31, 1999, certificates of deposits aggregating $49,000,000 (1998 - $59,000,000) were guaranteed by irrevocable standby letters of credit issued by the Federal Home Loan Bank of New York and other banks. At Decem- ber 31, 1999 specific mortgage loans with a carrying value of $71,165,714 (1998 - $137,483,494) and estimated market value of $58,992,705 (1998 - $141,951,708) and securities with a book value of $5,401,047 (1998 - $6,877,563) and approxi- mate market value of $5,351,690 (1998 - $7,041,301) were pledged to the Federal Home Loan Bank of New York as part of the agreements covering the letters of credit. At December 31, 1999, deposit accounts issued to government agencies with a carrying value of $62,378,476 (1998 - $67,306,284) were collateralized by securities with a carrying value of $78,782,695 (1998 - $70,892,236) and estimated market value of $75,677,459 (1998 - $72,177,444) and specific mortgage loans with a carrying value of $3,947,207 (1998 - $4,838,781) and estimated market value of $3,758,925 (1998 - $5,684,600). A table showing interest expense on deposits follows: Year ended December 31, 1998 1999 1997 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Savings Interest bearing checking accounts Certificates Total $12,380,515 4,931,452 73,177,154 $90,489,121 $11,716,764 4,486,582 54,215,013 $70,418,359 $12,155,192 4,167,371 55,824,521 $72,147,084 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ 59 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, 1999 1998 Federal funds purchased, interest rate (1998 - 5.32%) Repurchase agreements, interest ranging from 4.50% to 6.35% (1998 - 4.65% to 5.80%) Accrued interest payable Total $ 1,447,732,029 1,447,732,029 4,419,193 $ 1,452,151,222 $ 15,000,000 1,605,630,051 1,620,630,051 3,067,937 $1,623,697,988 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Federal funds purchased and repurchase agreements mature as follows: ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ December 31, 1999 1998 Federal funds purchased: One to thirty days Repurchase agreements: One to thirty days Over thirty to ninety days Over ninety days Total $ 1,229,448,029 8,450,000 209,834,000 1,447,732,029 $ 1,447,732,029 $ 15,000,000 1,158,520,676 247,109,375 200,000,000 1,605,630,051 $ 1,620,630,051 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ 60 The following securities were sold under agreements to repurchase: ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ December 31, 1999 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Amortized cost of underlying securities Balance of borrowing Approximate market value of underlying securities Weighted average interest rate Underlying securities U.S. Treasury Securities and obligations of other U.S. Government Agencies Mortgage backed securities Total $ 325,528,692 1,233,633,232 $1,559,161,924 $ 296,719,958 1,151,012,071 $1,447,732,029 $ 303,107,211 1,150,557,955 $1,453,665,166 5.77% 6.16% Accrued interest receivable $ 3,152,900 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ December 31, 1998 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Amortized cost of underlying securities Balance of borrowing Approximate market value of underlying securities Weighted average interest rate Underlying securities U.S. Treasury Securities and obligations of other U.S. Government Agencies Mortgage backed securities Total $ 216,073,870 1,393,322,895 $1,609,396,765 $ 214,716,114 1,390,913,937 $1,605,630,051 $ 216,111,108 1,403,729,265 $1,619,840,373 5.13% 6.08% Accrued interest receivable $ 4,321,371 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ The weighted average interest rates of federal funds purchased and repurchase agreements at December 31, 1999 and 1998 was 5.38% and 5.03%, respectively. At December 31, 1999, 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 1999 was $1,631,913,357 (1998 - $1,648,513,898). The average balance during 1999 was approximately $1,441,486,000 (1998 - $1,225,726,000). 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, 1999 borrowings through this arrangement amounted to $152,484,084 (1998 - $86,594,710). 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, 1999 was 36 days (1998 - 21 days). The weighted average interest rate of these borrowings at December 31, 1999 and 1998 was 6.20% and 6.38%, respectively. The maximum aggregate balance outstanding at any month-end was approximately $152,484,084 (1998 - $224,780,000). The average aggregate balance outstanding during the year was approximately $97,373,301 (1998 - $111,236,888). 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, 1999 amounted to $186,417,700 (1998 - $220,443,511). 61 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 1999 1998 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ February 3, 2000 February 28, 2000 January 4, 1999 Total 5.86% 6.03% 5.13% $20,000,000 30,000,000 $50,000,000 $2,600,000 $2,600,000 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ 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, 1999, specific mortgage loans with an estimated market value of $56,303,500 (1998 - $3,155,152) were pledged to the FHLB-N.Y. as part of the Collateral Agreement. The carrying value of such loans at December 31, 1999 amounted to $55,000,000 (1998 - $2,860,000). Note 23 - Notes Payable Following is a detail of notes payable outstanding: ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Issue date (footnote) Maturity Interest rate 1999 1998 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ December 31, 1999 December 31, February 11, 1994 (b) May 13, 1994 (b) May 26, 1994 (b) September 7, 1994 (a) September 29, 1994 (a) September 12, 1996 (b) September 20, 1996 (b) September 20, 1996 (a) Total 1999 1999 1999 1999 1999 2001 2001 2001 5.44% 6.19% 6.09% 4.33% 6.40% 5.82% 5.61% 5.49% $ 2,100,000 10,000,000 5,000,000 15,500,000 30,000,000 10,000,000 20,500,000 25,000,000 $118,100,000 $10,000,000 20,500,000 25,000,000 $55,500,000 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ 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, deter- mined 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. 62 At December 31, 1999, specific mortgage loans with a book value of $27,500,000 (1998 - $77,550,000) and an estimated market value of $28,459,750 (1998 - $88,887,810) 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, 1999 amounted to $30,152,980 (1998 - $46,162,955) and $29,793,954 (1998 - $45,328,289), 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, 1999 the outstanding balance net of the unamortized discount and notes repurchased in 1999 was $93,594,080 (1998 - $99,495,830). 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, 1999, the Bank has transferred to capital reserves from the retained earnings account $40,000,000, as a result of the requirement explained in Note 3 - “Stock- holders’ Equity.” Note 25 - Unused Lines Of Credit The Corporation maintains unsecured standby lines of credit with other banks. At December 31, 1999, the Corporation’s total unused lines of credit with these banks amounted to approximately $123,500,000 (1998 - $69,500,000). At December 31, 1999, the Corporation has an available line of credit with the FHLB guaranteed with excess collateral, in the amount of $2,812,126 (1998 - $20,808,133). Note 26 - Employees’ Benefit Plan FirstBank has a defined contribution retirement plan (the Plan) qualified under the provisions of the Puerto Rico Internal Revenue Code Section 1165(e). All employees (excluding the Bank’s subsidiaries) are eligible to participate in the Plan after one year of service. Under the provisions of the Plan, the Bank is required to make a contribution of a quarter of the first 4% of each participant’s compensation. Partici- pants 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 $625,375, $575,000 and $540,000 during 1999, 1998 and 1997, respectively, to the Plan. 63 Note 27 - Other Expenses A detail of other expenses follows: Year ended December 31, 1998 1999 1997 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Professional and service fees Advertising and business promotion Communications Revenue earning equipment Supplies and printing Other Total $ 6,672,254 5,896,265 4,666,698 1,478,492 1,361,374 5,426,220 $25,501,303 $ 5,819,978 5,922,039 4,330,023 1,225,689 1,314,131 4,534,188 $23,146,048 $ 4,883,088 4,993,392 4,363,802 1,183,557 1,128,672 4,628,151 $21,180,662 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Note 28 - Income Taxes The Corporation is subject to Puerto Rico income tax on its income from all sources. For United States income tax purposes, the Corporation is treated as a foreign corporation. Accordingly, it is generally subject to United States income tax only on its income from 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 condi- tions 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 1999 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Current Deferred Total $13,991 (6,703) $ 7,288 $17,845 (13,047) $ 4,798 $16,364 (8,239) $ 8,125 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ 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, 1999 Amount % of pre-tax income 1998 Amount % of pre-tax income 1997 Amount % of pre-tax income ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Computed income tax at statutory rate Benefit of net exempt income Other-net Total income tax provision $27,052 (13,959) (5,805) $ 7,288 39 (20) (8) 11 $22,078 (22,078) 4,798 $ 4,798 39 (39) 8 8 $21,705 (13,137) (443) $ 8,125 39 (24) 15 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ 64 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, 1999 1998 Deferred tax asset: Adjustment to charge-off method Unrealized loss on available for sale securities Other Deferred tax asset Deferred tax liability: Unrealized gain on available for sale securities Other Deferred tax liability $27,995 22,883 4,114 $54,992 $ (347) $ (347) $25,460 1,232 $26,692 $ (2,917) (1,633) $ (4,550) ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Due to the above temporary differences, a net deferred tax asset resulted amounting to $54.6 million at December 31, 1999 (1998 - $22.1 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 29 - Commitments At December 31, 1999 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, 1999, the obligation under various leases was follows: Year Amount ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ 2000 2001 2002 2003 2004 and later years Total $ 3,012,850 2,403,792 1,964,048 1,176,557 4,631,265 $13,188,512 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Rental expense included in occupancy and equipment expense was $3,390,786 in 1999 (1998 - $3,158,156; 1997 - $2,933,798). 65 Note 30 - Fair Value of Financial Instruments The information about the estimated fair values of financial instruments as required by generally accepted accounting principles, is presented hereunder including some items not recognized in the statement of financial condition. The disclosure requirements exclude certain financial instruments and all non financial instruments. Accordingly, the aggregate fair value amounts presented do not repre- sent Management’s estimation of the underlying value of the Corporation. A sum- mary table of estimated fair values and carrying values of financial instruments at December 31, 1999 and 1998 follows (in thousands): December 31, 1999 1998 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Estimated fair value Carrying value Estimated fair value Carrying value ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Assets: Money market instruments Investment securities FHLB stock Loans receivable - net Liabilities: Deposits Federal funds, securities sold under agreements to repurchase and other short-term borrowings Advances from FHLB Debt security borrowings $ 35,217 1,740,905 17,827 2,753,597 $ 35,217 1,758,120 17,827 2,673,584 $ 526 1,790,463 10,271 2,146,003 $ 526 1,789,692 10,271 2,052,200 2,554,429 2,565,422 1,776,811 1,775,045 1,604,635 50,000 145,994 1,604,635 50,000 149,094 1,710,293 2,600 231,923 1,710,293 2,600 217,596 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ 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 deter- mined 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 esti- mates of their fair values. Investment securities The fair values of investment securities are the market values based on quoted market prices and dealer quotes. FHLB stock Investments in FHLB stock are valued at their redemption values. 66 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, residential mortgage, credit card and automobile. These asset categories were further seg- mented 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 calcu- lated 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. Dis- count rates are based on the broker certificate of deposit 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, due to its short time to maturity. Debt security borrowings The fair value of debt security borrowings with fixed maturities was deter- mined 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 broker CD 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. 67 Note 31 - Supplemental Cash Flow Information Supplemental cash flow information follows (in thousands): Year ended December 31, 1998 1997 1999 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Cash paid for: Interest Income tax Non cash investing and financing activities: Mortgage loans exchanged for mortgage backed securities Additions to other real estate owned $173,273 6,271 $153,645 1,494 $132,801 1,089 639 2,975 4,046 541 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Note 32 - Financial Instruments With Off-Balance Sheet Risk, Commitments to Extend Credit and Standby Letters of Credit The following table presents a detail of commitments to extend credit and standby letters of credit (in thousands): ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ December 31, 1999 1998 Financial instruments whose contract amounts represent credit risk: Commitments to extend credit: To originate loans Unused credit card lines Unused personal lines of credit Commercial lines of credit Commercial letters of credit Standby letters of credit $465,902 253,463 10,362 244,135 12,345 13,754 $245,257 132,867 10,536 96,874 19,101 1,575 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ 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 instru- ments. Management uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. These commitments generally expire within one year. Since certain commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. In the case of credit cards and personal lines of credit, the Corporation can at any time and without cause, cancel the unused credit facility. The amount of collateral, obtained if deemed necessary by the Corporation upon extension of credit, is based on Management’s credit evaluation of the borrower. Rates charged on the loans that are finally disbursed is the rate being offered at the time the loans are closed, therefore, no fee is charged on these commitments. The fee is the amount which is used as the estimate of the fair value of commitments. 68 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, 1999 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 manage- ment, the Corporation has entered into a series of interest rate swap agreements. Under the interest rate swaps, the Corporation agrees with other parties to ex- change, 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, 1997, 1998 and 1999 Receive-fixed swaps: Balance at December 31, 1997 Expired contracts Balance at December 31, 1998 Expired contracts New contracts Balance at December 31, 1999 $ 50,000 $ 80,000 40,000 40,000 40,000 185,000 $ 185,000 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Pay-fixed swaps at December 31, 1999, have a fixed weighted average rate payment of 6.48% (1998 - 5.41%) and a floating weighted average rate receiving of 6.07% (1998 - 6.48%). Receive-fixed swaps at December 31, 1999, have a floating weighted average rate payment of 6.09% (1998 - 5.13%) and a fixed weighted average rate receiving of 7.05% (1998 - 7.15%). 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, 1999 the Corporation had total net receivable of $1,286,445 (1998 - $876,949) 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, 1999 was approximately $6.6 69 million and $6.7 million, respectively (1998 - $1.8 million and $1.9 million, respec- tively). The period to maturity of the swaps at December 31, 1999 ranged from five months through fifteen years (1998 - from one year and four months through eight years and two months). At December 31, 1999, the estimated fair value to liquidate the Corporation’s interest rate swaps was approximately $192,000 (1998 - $2,760,000). Options From time to time the Corporation may enter into put and call options with the intention of enhancing the yield of its investment portfolio. The aggregate amount permitted to be outstanding under this program is limited by resolution of the Board of Directors. During 1999 and 1998 there was no activity under the program. 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, 1999 (dollars in thousands): Cap agreements notional amount Cap Rate Current 90 day LIBOR Maturity ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ $50,000 200,000 200,000 6.00% 6.50% 6.50% 6.00% 6.00% 6.00% March 27, 2000 June 4, 2000 October 2, 2000 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ 70 Note 33 - 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. Certain small commercial loans originated by the branches are included in the Retail business. Consumer loans include loans such as personal, residential real estate, auto, credit card and small loans. Finance leases are also included in Retail business. The Commercial Corporate segment is composed of commercial loans and corporate services such as letters of credit and cash management. The Treasury and Invest- ment 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. 71 The following table presents information about the reportable segments (in thousands): ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Retail Treasury and Investments Commercial Corporate Total For the year ended December 31, 1999: Interest income Net (charge) credit for transfer of funds Interest expense Net interest income Provision for loan losses Segment income Average earning assets For the year ended December 31, 1998: Interest income Net (charge) credit for transfer of funds Interest expense Net interest income Provision for loan losses Segment income Average earning assets For the year ended December 31, 1997: Interest income Net (charge) credit for transfer of funds Interest expense Net interest income Provision for loan losses Segment income Average earning assets $ 186,224 (4,018) (58,665) 123,541 (46,802) 76,739 1,462,311 $ 178,251 7,683 (60,003) 125,931 (74,837) 51,094 1,364,803 $ 184,761 (4,396) (58,553) 121,812 (52,343) 69,469 1,443,982 $ 108,332 48,737 (124,665) 32,404 32,404 1,726,719 $ 89,785 20,698 (95,127) 15,356 15,356 1,418,791 $ 59,263 27,534 (71,876) 14,921 14,921 909,457 $ 74,508 (44,719) 29,789 (1,159) 28,630 815,569 $ 52,499 (28,381) 24,118 (1,163) 22,955 561,612 $ 40,246 (23,138) 17,108 (3,332) 13,776 415,427 $ 369,064 (183,330) 185,734 (47,961) 137,773 4,004,599 $ 320,535 (155,130) 165,405 (76,000) 89,405 3,345,206 $ 284,270 (130,429) 153,841 (55,675) 98,166 2,768,866 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ The following table presents a reconciliation of the reportable segment financial information to the consolidated totals (in thousands): ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ 1999 Year ended December 31, 1998 1997 Interest income: Total interest income for segments Interest income credited to expense accounts Total consolidated interest income Net income: Total income for segments Other income Operating expenses Income taxes Total consolidated net income Average assets: Total average earning assets for segments Average non earning assets Total consolidated average assets $ 369,064 $ 369,064 $ 320,535 763 $ 321,298 $ 284,270 890 $ 285,160 $ 137,773 32,862 (101,272) (7,288) 62,075 $ $ $ 89,405 58,240 (91,035) (4,798) 51,812 $ $ 98,166 39,866 (82,379) (8,125) 47,528 $4,004,599 168,182 $4,172,781 $3,345,206 148,331 $3,493,537 $2,768,866 143,643 $2,912,509 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ 72 Note 34 - Litigation The Corporation is a defendant in a number of legal proceedings arising in the normal course of business. Management believes, based on the opinion of legal counsel, that the final disposition of these matters will not have a material adverse effect on the Corporation’s financial position or results of operations. Note 35 - Selected Quarterly Financial Data (Unaudited) Financial data showing results of the 1999 and 1998 quarters is presented below. These results are unaudited. In the opinion of Management, all adjustments necessary for a fair presentation have been included: March 31 June 30 Sept. 30 Dec. 31 1999 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Interest income Net interest income Provision for loan losses Net income Earnings per common share-basic Earnings per common share-diluted $87,142,829 44,597,465 13,800,000 14,141,215 $87,255,568 46,340,663 12,949,500 15,393,514 $94,475,146 $100,189,561 48,006,136 10,194,500 16,332,074 46,789,092 11,016,500 16,208,146 $0.48 $0.48 $0.49 $0.49 $0.50 $0.50 $0.52 $0.51 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ March 31 June 30 Sept. 30 Dec. 31 1998 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Interest income Net interest income Provision for loan losses Net income Earnings per common share-basic Earnings per common share-diluted $77,397,641 40,607,988 21,738,000 12,360,681 $77,731,354 41,193,889 13,929,000 12,700,723 $79,846,911 $ 86,322,498 44,554,228 39,812,331 18,913,000 21,420,000 13,686,365 13,064,618 $0.42 $0.42 $0.43 $0.43 $0.44 $0.43 $0.46 $0.46 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Note 36 - First BanCorp (Holding Company Only) Financial Information The following condensed financial information presents the financial position of the Holding Company only at December 31, 1999 and 1998 and the results of its operations and its cash flows for the period ended on December 31, 1999 and from October 1st, 1998 through December 31, 1998. 73 Statements of Statements of Statements of Statements of Statements of Financial Condition Financial Condition Financial Condition Financial Condition Financial Condition ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ December 31, 1999 December 31,1998 Assets: Cash and due from depository institutions Money market instruments Investment securities available for sale, at market value: United States Government obligations Other investments Total investment securities available for sale Investment in FirstBank Puerto Rico, at equity Other assets Total assets Liabilities & Stockholders’ Equity: Other borrowings Accounts payable and other liabilities Total liabilities Stockholders’ equity Contingencies and commitments Total liabilities and stockholders’ equity $ 13,159,737 1,777,750 24,890,139 21,291,774 46,181,913 235,637,500 348,337 $297,105,237 $ 865,360 1,337,628 2,202,988 294,902,249 $ 5,702,362 264,447,053 218,653 $ 270,368,068 $ 270,368,068 $297,105,237 $ 270,368,068 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Statements of Income Statements of Income Statements of Income Statements of Income Statements of Income and of Comprehensive Income and of Comprehensive Income and of Comprehensive Income and of Comprehensive Income and of Comprehensive Income Year ended December 31, 1999 Period from October 1, 1998 through December 31,1998 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Income: Interest income on investment securities Interest income on other investments Dividend from subsidiary Other income Expenses: Other operating expenses Income before income taxes and equity in undistributed earnings of subsidiary Income taxes Equity in undistributed earnings of subsidiary Net income Other comprehensive (loss) income, net of tax Comprehensive (loss) income $ 1,536,930 1,140,656 10,000,000 61,161 12,738,747 $10,359,843 10,359,843 242,178 15,110 12,496,569 374,245 49,952,625 62,074,949 (77,398,890) $(15,323,941) 10,344,733 3,341,632 13,686,365 8,749,931 $22,436,296 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ The principal source of income for the Holding Company consists of earnings from FirstBank. 74 Statements of Statements of Statements of Statements of Statements of Cash Flows Cash Flows Cash Flows Cash Flows Cash Flows ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ Year ended December 31, 1999 Period from October 1, 1998 through December 31, 1998 Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed earnings of subsidiary Net increase in other assets Net increase in other liabilities Total adjustments Net cash provided by operating activities Cash flows from investing activities: Purchases of securities available for sale Net cash used by investing activities Cash flows from financing activities: Proceeds from other borrowings Proceeds from issuance on preferred stock Exercise of stock options Cash dividends paid Treasury stock acquired Net cash provided by financing activities Net increase in cash Cash and cash equivalents the beginning of period Cash and cash equivalents at the end of period Cash and cash equivalents include: Cash and due from banks Money market instruments $ 62,074,949 $ 13,686,365 (49,952,625) (129,686) 883,201 (49,199,110) 12,875,839 (44,364,194) (44,364,194) 865,360 86,850,217 176,313 (14,657,799) (32,510,611) 40,723,480 9,235,125 5,702,362 $ 14,937,487 $ 13,159,737 1,777,750 $ 14,937,487 (3,341,632) (218,654) (3,560,286) 10,126,079 (2,212,467) (2,211,250) (4,423,717) 5,702,362 $ 5,702,362 $ 5,702,362 $ 5,702,362 ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ 75 Stockholders’ Stockholders’ Stockholders’ Stockholders’ Stockholders’ Information Information Information Information Information Independent Certified Public Accountants PricewaterhouseCoopers LLP Annual Meeting: The annual meeting of stockholders will be held on April 27, 2000, at 2:00 p.m., at the main office of the Corporation located at 1519 Ponce de León 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, González & Rodríguez, LLP Látimer, Biaggi, Rachid & Godreau Meléndez Pérez, Morán & Santiago 76 

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