Financial Highlights
01
Selected Financial Data
05
Corporate Structure
09
Offices
IO
Business Profile
13
President’s Letter
15
Economy
21
Board of Directors
22
Officers
24
Financial Review
29
Stockholders’ Information
94
t i l thouraids (vxcept tor per share r t w l l s )
2004
.. .
Operating results:
Net inkrest income
Provision for loati losses
Fain or1 sale of credit card portfolio
Gain on sale o( irivestmcnts, net
Other income
Ot.her operiiting expenses
Income t a x provisiori
Nel income
Pcr coniniori share:
Net incomc - basic
N c t income - diluted
Weighted average common shares:
B x i r
Diluted
~.
At year e n d
ASSPIS
Loms
Allnwarice for loan Iom?s
lrivestmcnts
Deposits
Borrowings
Capi
5 383,206
5?,/99
5,533
9,457
55,843
180,436
41,926
178,878
5
3.44
3.34
40,209
41,505
.
.
5 15,619,817
9 , ~ 8 , 0 1 7
,141,036
5,821,262
7,902,982
6,310,624
1,222,911
2003
,~
S 292,2'10
55,916
30,885
34,856
52,969
163,994
38,672
15 ?,3 3 8
5
3.04
2.98
39,994
40,983
$12,667,910
7,044,518
126,1im
.5,366,205
6,765,107
4,646J15
1,089,569
Market Price
per Common Share
(end of year)
$15 75
$19.00
522.60
$39.55
$63.51
I
I
I
I
I
I
!
~
~
I
i 2001
I
I
1
LO00
20b2
2(
3
2
4
Net Interest Income
(in millions)
$1908 $2361
$2669
$2977
$3832
Return on
Common Equity
(in percent)
27.81
2213
2190
2520
2333
2000
20'01
20b2
7003
2604
2
2004 Annual Repor I
First BanCorp
Diluted Earnings per
Common Share
\
'
5
I
2000
71
Return on Assets
(in percent)
'1.28
'I 18
'1.23
1.3'1
Com mon Stock holders'
Equity
(in millions)
52695
$3311
54.379
3!>3Y.5
56778
Since 1991 when currcnt inanagemerit took
ovcr, t i c Bank has Irnnsformed itsclf from
First kederal Savings Bank, a small Savings
and Loan inslitution with $1.9 billion in
into First BanCorp, ii $15.6 billion
assets,
financial holding company with a wide array
of operations arid expanded gcography.
Thc table on Lhe fallowing pagcs shows Lhe
l o n g - k r r n growth o f this Corporation. From
1991 to 2004 the Corripnny has reported
consisleiit growth. Ovcr this fourl.eer1 year
period net income grew eighteen fold froin
510 rnillion to $179 million, arrd per share
carnines multiplied 22 timcs from $0.15 1.0
$3.34 (diluted). Book value per common
share increased 1,800"h from $0.90 to
$16.66. The erlicirri(:y ratio irnprovcd dra-
matically from 63.69% to 3'>.74%.
The growth shown iin this u b l e ihas involved
great changes a t all levels o f the organiza-
Lion. The Corporation has adopt.rd new
technologies and entered into n c w busi-
nesses while a??hc same time expanding its
traditional operations. All this lids created
suhstantial value for the First BanCorp's
shareholders while providing greater
services to its clicnrs.
Iselected Financial Data
(In thousands cxcept for per share and financial ratios results)
I
~. -_-_I-
Condensed Income Statements. Year ended
_.--I_ -
2004
2003
. ""..
2002
2001
._.II- ~ ~ - " -
676,390
2 93,184
383,206
52,799
70,833
180,436
220,804
41,926
Total interest income
Total interest expense
Net interest income
Provision for loan losses
Other income
Other operating expenses
Unusual item - SAlF assessment
Income before income tax provision, extraordinary item
and cumulative effect of accounting change
Provision for income tax
Income before extraordinary item and
cumulative effect o f accounting change
Extraordinary item
Cumulative effect of accounting change
Nct income
Per Common Share Results (1)' Year ended
Income before extraordinary itern and
cumulative effect of accounting change diluted
Extraordinary item
Cumulative effect of accounting change
Net income per common share diluted
Net income per common share basic
Cash dividends declared
Average shares outstanding
Average shares outstanding diluted
$
$
$
$
$
Balance Sheet Data, End of year
Loans and loans held for sale
Allowance for possible loan losses
Investments
Total assets
Deposits
Borrowings
Total common equity
Total eqiiity
Book value per common share (I)
Regulatory Capital Ratios (In Percent): End o f year
Total capital t o risk weighted assets
Tier 1 capital t o risk weighted assets
Tier 1 capital t o average assets
-
Selected Financial Ratios (In Percent): Year ended
Net income t o 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 t o average total equity
Net income to average common equity
Average total equity to average total assets
Dividend payout ratio
Efficiency ratio (3)
---
Common Stock Price: End of year
Offices:
$
536,681
2 44,471
292,210
55,916
11 8,710
163,994
$
540,033
273,184
266,850
62,302
58,492
132,756
S
516,256
280,201
236,055
61,030
52,980
120,855
191,010
38,672
130,283
22,327
178,878
152,338
107,956
178,878
152,338
107,956
$
s
$
$
3 3 4
3 3 4
3 4 4
0 4 8
40,209
41,505
2 9 8
$
2 01
2 9 8
3 0 4
0 4 4
39,994
40,983
$
$
$
2 01
2 0 4
0 4 0
39,901
10,553
$
9,478,017
141,036
5,821,262
15,619,817
7,902,982
6,310,624
672,811
1,222,911
16 66
$ 7,044,518
126,378
5,366,205
12,667,910
6,765;107
4,646J15
539,469
1,089,569
13 48
s 5,637,851
111,911
3,728,669
9,643,852
5,482,918
3,749,355
437,924
798,424
10.96
14.89
13.57
9.25
1.31
3.12
3.40
5.62
2.50
15.63
23.33
8.41
13.94
39.74
.--..,.I-
15.22
13.65
8.35
1.46
2.93
3.24
5.66
2.73
17.06
25.20
8.56
14.43
39.91
13.75
11.90
7.35
1.23
3.20
3.56
6.77
3.57
14.90
21.90
8.28
19.58
40.81
107;150
20J34
87,016
(1,015)
86,001
s
s
S
$
176
(0 03)
1 73
1 74
035
39,851
40,144
s 4,308,780
91,060
3,715,999
8;197,518
4,098,554
3,425,236
334,419
602,919
8,39
14.50
1216
7.49
1.28
3.64
4.08
8 42
4.78
16.20
22.13
7 92
19.91
41 81
2000
463,388
272,615
19 0,773
45,719
50,032
11 3,049
82,037
14,761
67,276
67,276
1 47
1 47
148
0 2 9
40,415
10,718
$
$
$
$
$
$ 3,498,198
76,919
2,233,216
5,919,657
3,345,984
2,069,484
249,441
434,461
6.80
14 43
11 23
7 28
1.28
3 38
3.91
9 21
5 a3
21 21
27.81
6 05
19.72
46 95
I
I
'
" I
'
1
1
I
I
1
I
I
1
I
I
I
1
48
I
$
63.51
$
39.55
$
22.60
$
19.00
$
15.75
Number of full service branches
57
54
54
48
1. Amounts presented wcre recalculated, when applicable, Lo rerroactively considcr the effect of commnn \ruck +s
2. Ratios for 1993 and thereafter were computed on a taxablc cquivalent basis.
3. Other operating expenses Lo the sum of net intcrcst income and other incmrie
b
2004 Annual Rcpoi-t
First HaiiCorp
1999
1998
1997
1996
1995
1994
1993
5 369,063
183,330
185.731
47,961
32,862
'101,2/1
?, 37'1,298
155,130
'I 11h,'l6P
76,000
i8,240
91,798
5
185.160
130,129
'1.5,1,7.71
55,676
3!I,806
83,168
5 75ii,573
ii3,ov
'1~13,49b
31,582
29,614
82,498
9,115
S
708.488
96.838
.11.i,6.50
30,894
48,268
65,628
5
'150.309
76,674
'101,635
.17,674
18,lbY
60,760
5
'159,433
72,413
x7,nzu
18,669
1/,12)
56,991
43,370
'17,385
30,985
(.129)
30,556
0.67
(0.01)
0.66
0.68
N/A
44,966
46,289
28.480
6.n.5
21,955
6,810
78,795
0.42
01.1
0.56
0.63
N l A
43,983
49,419
$
5
s
69,363
7,288
62,075
56,610
1,798
55,653
8,17 5
19,915
17,7Kl
51,812
47,528
37,634
63,396
'14,795
19,101
u,n75
5'1.8'1 i
17,178
37,631
,19,i0'1
$
1.32
i 1 3 2
1.33
$
0.24
43,412
4i./YY
5
$
?,
$
5
1.16
$
1.w
$
0.81
I 1.05
'116
117
U.20
44,3/Y
W./W
i 'IO5
1.05
$
0.16
45,054
45,306
5
i 08.1
0.81
$
5
0.13
46,lYl
46,428
i 1.05
5
1.07
0.U5
i
45,888
46,6//
S 2,745,368
7'1,784
1,81'1,164
4,71 'l,i (>8
2,.5(15,422
'l,X~13,720
204,902
294,107
4.87
.
.
.
S 2,120,051
67,851
1.~nn.489
4,017,351
1.775.04.5
'1930,488
270.368
270,31111
6.11
S 1,959,301
57,717
.1,77h,900
3,377,430
1.594.63s
'1,461,581
236,379
7 3i>,.79
5.29
S 1,896,071
T.5,?54
830,980
?,877;147
1,703,921
880,1>6X
191,142
'19'1,147
4.21
5
'1,556,606
55,009
785,747
7,437,Plli
1,518,367
70Ll.il~Yi
171.202
.i7i,m
3.67
. . . . . . . . . .
.
.
.....
.
$
5
s
5
'1,501,773
37,413
.59s,.5.55
7,174,1197
1.493.44.5
!>38,UXU
~120,015
.I m.oi.5
2.Gb
5 1,337,938
30.453
603,373
'1.~13.9~12
1,348,247
4u0,!i//
92,785
92,785
2.09
.
.
.
.
.
.
- .....
s 1,182,409
31,474
636,781
1,888,754
1,359,448
415,251
50,194
88,(;22
1.17
1992
1991
. . . . . . . . . . . . .
s ~158,993
81,986
73,UUl
'13,596
13,563
51,715
s
'171,/8CY
'109.942
61,841
16,444
18,8Y5
51,421
18,229
7,879
15,350
(570)
12,875
'1,420
11,455
( i m )
.14,48n
.in,o.5.5
$
s
0.25
(0.02)
0.7.3
0.27
N/A
42,876
51,098
s
<
s
0.17
(0,0.3)
015
0.17
N/A
42,876
19.856
S 1,26A,380
29,001
564,431
1,8"8,395
1,396,066
408,414
38,410
74;146
0.90
16.16
1.1 6'9
7.17
'1.49
4 79
4,as
9 79
5.00
21.06
24.68
/.U/
17,96
4,533
S
.I.7.87
48
17.39
1'1.55
6,59
1.48
4.76
5.27
9 8.7
5.07
20.54
211.54
/.2L
1712
m9.i
17.26
11.07
7,11
1.63
r..2n
5.83
i0.lF
d.1.5
22.30
22.30
/.32
1511
4 7 79
15.25
9.32
6.65
1.48
5.411
6.03
'IO63
,5.17
2U.40
20.49
/.23
16.32
,17.66
1617
9 9 3
6,82
7.77
5 07
5,59
.m.ij
s.n.5
33.X
33.19
6 68
5,06
4101
9.76
8 50
5.71
153
5 7 3
5,65
9 63
4 40
29 (17
29.07
>.2/
N/A
'I9 88
5
867
5
746
5
3 89
s
36
36
32
9.05
7.7Y
1.70
4.73
5:in
9.10
4.37
3U.X
39.68
5.05
N/A
i 4 7.3
3119
33
9.32
8.06
4.60
0.78
3.66
4.w
8.80
5.14
'17.10
26.31
4.38
N/A
h.3.74
s
i..~, s
...
33
7,08
5 75
3.74
0..53
3.19
3.39
9.41
6.22
'14.38
20.20
3.67
N/A
63 69
n.hi
33
\
c Ban C o r p
Offices
45 FirstBank Puerto
Rico Branches
34 Money Express
First Express, Inc.
I1
FirstBank USVl
Branches
FirstMortgage, Inc.
03 First Insurance
Agency, Inc.
01 FirstBank
BVI Branch
12 FirstBank Insurance
Agency, Inc.
~~~
FirstBank-Florida
I Agency
09 First Leasing and
Rental Corporation
First Trade, Inc.
FirstBan k
Overseas Corp.
St. Thomas, USVl
PK
(d/h/a
Fii-st BaiiCorp (“tlw CorIpordLim”) is a publicly-
owned, PuctLo Kico-chartered financial holding
ronipdriy that i s subject t o regiilaticm, supt.rvi-
siori and examination Iiy the I crlcral Reserve
Roxd. First BanCorp operates two direct who1
ly-owried subsidiaries: FirstRank Pucr LO Rico
t h e h n k ” ) arid FirstBank
(”FirstBank or
Insurmr.e Agency 1nt. 111 additiuri, First BanCorp
owns sixly percerit of ”Crupo Emprcsas tlc
I iiidrice
Servicios Financieros”
Group), an auto Inan finmtc corripariy with
foms nil the u ~ d
car market. First.Bank is a
Pucrto Kico-c-hariered commercial bank arid
FimtBank Insuranr.e Agcncy ir a Puerto Rico-
chmcrctl iiisurarice agency. First.Rniik is subjccL
Lo Ltie supervision, exmination and regulation
of hoth t h c Ofiicc o l Lhe Commissioner of
Fiiianf.ici1 IrhsLitulioris of the Commonwealth of
PucrLo Kico arid the Federal Deposit Insurarice
Corporation. Deposits are i i w r c d Ltiiougti Lht.
SavinF Associat.ion Iiwraihtc I uiid. The Viirin
Islmds operationr o l I i r s t h i k are suhject. tn
regillation and exarriiriation by t.he Iliiired Statcs
Virgiri Islarids Banking Rnard aiid by lie UriListi
Virgin Islandr rinariLial Services Commission.
I irsLUarik lrisurance Agencx h c . is subject to
ruperuisioii. examination m c l regulation by the
Office of the Insiirilihce Corrimissioner of the
Comnionw~r.hll.li d h e r t o Rico.
First BanCorp isengaged in t.he hanking bt1siihess
arid provides a wide rmgc of linancial services
for retail, commcrtial arid iristitutional clients.
Firrt BaihCorp had total assets ot $15.6 billiori,
total deposits of S/,Y liilliori arid ~ o t a l stockhold-
er‘r cqiiity o l $1.2 billion as of Decemher 31,
2004. Uased on total assets, First RanCoip ir Llie
second largest Inr.ally owned lindricial holding
compiny lhcatlquar~cred in Ltie Commonwealth
or Puerlo Rico and the second largest dcposilo-
ry inst.itiitinn in Pucrto Kico.
FirsMaiik curlducts i t s business throiigli its nhdiii
offices located in Sail Inan, P u c i t Kiro, lorty-
five full 5etvir.e banking biaiic.tirs i r i h e r t o Rico.
twelvr Iiranchcs iri Lhr United States Virgin
Islarid5 (USVl) and British Virgin lslcahtk (UVI)
arida loan agency in Coral Gablcs, I lurida(USA).
FirstBank has lour wholly-owned suhsidiarics
with operations in Pileito Rico; r i i s L Lcdsirig and
Rental CorlmraLim, a vehicle leasing and daily
r c h h corripariy with nine offices in Pucrto Kiro;
First Federal Finance Corp. (tl/b/d Moriey
Express La Finanr.icra), a h a r i c e curripany with
thirty-one nfficcr ith h c r Lo Kico; FirstMortpage,
Inc., a rcsirlciilial rriortj;age
loan origination
corripariy with twenty-three offir.es in F i r s t h k
branches and at st.ind alone sites arid FirstBank
Overseas CorporaLioii, dri iriterriational hanking
enlily under the Internatioiial Banking tritily Act
o f Piiertn R i m I irstUarik has three subsidiaries
with opetalioris outside o f Puerto Rim; FirrL
Iihsurarice Agency, Inc., an insiiranc.? .lgcncy wilh
Lhree offices that sell insuranctr prmcluct, i r i Lhe
USVI, First Trade. Iiic., wliith provides l o r e i p
sales corporation managcirierlL services with a i l
office in the USVl arid ari office in Barhados and
I i r 3 L Lxpress, Inc., a small Ioaiis rompaiiy wilt1
three offir.es in the USVl.
Dear Stockholders:
On behalf of the Board of Directors, Officers and staff of first BanCorp, I am
extremely proud t o report that 2004 was another record year for the
Corporation. In 2004 First BanCorp earned $173.9 million representing $3.44 per
common share (basic) or $3.34 per common share (diluted). Earnings increased
$26.6 million or 17% as compared with 2003, when t h e Corporation earned
$152.3 million, equivalent to $3.04 per common share (basic) or $2.93 per. com-
mon share (diluted).
Earnings for 2004 and 2003 include after tax special gains of approximately $3.4
million and $18.8 million, respectively, from the sale of credit card portfolios pur-
suant t o a long-term strategic alliance commenced with MBNA in 2003. Earnings
excluding the after- tax effect of such gains totaled $175.5 million for
2004 or $3.36 (basic) and $3.26 (diluted) and $133.5 million for
2003 or $2.57 (basic) and $2.52 (diluted). This represents an
increase of $42 million or 31% for 2004.
The continued improverncnt in financial results has been possible
due to our commitment to keep Reaching Higher in everything we
do. In order t o achieve this, we have to constantly excel and differ-
entiatc ourselves from competitors. This commitment is represent-
ed by the positive outcomcs of our decision making stralegies,
operating principles, and excellent service culture.
Angel Alvarer Pi.rcz, Presideor, Chief E X ~ C U L ~ V E 0ff;i.er and Chinnun
Financial Performance
and Shareholder Value
Strong Asset Quality
We are committed t o continue Reaching Higher
for the benefit of our stockholders, who have
entrusted us with their capital. First BanCorp
grew significantly in 2004. This growth con-
tributed notably to the Corporation’s net interest
income which expanded by 31% or $91 million,
t o $383.2 million.
During 2004, the Corporation’s balance sheet
surpassed $15 billion, ending at $15.6 billion as of
December 31, 2004, solidifying the Corporation’s
position as the second largest financial holding
company headquartered in Puerto Rico. Net
loans increased 35% to $9.3 billion. Commercial
and residential mortgage loans portfolios con-
tributed significantly t o the Corporation’s inter-
est income. The leveraged growth of our securi-
ties portfolio was another factor that contributed
t o the increase in earnings as compared to 2003.
Capitalizing on favorable conditions at mid-year
2004, we re-entered the longer term investment
market by purchasing a substantial portion of
higher yielding investment securities. First
BanCorp has an increasingly flexible balance
sheet which has provided the opportunity to
facilitate decisions when faced with changes in
market conditions and interest rates.
The sustained efforts of Management and staff of
First BanCorp have paid off in strong earnings
growth. Main profitability ratios, excluding the
after tax effect o f the before mentioned special
gains, were: Return on Assets 1.29% for 2004
compared t o 1.28% for 2003, and Return on
Common Equity 22.76% for 2004 compared t o
21.31% for 2003. Our stock price has reflected
our growth and strong results. Investors who held
First BanCorp stock over the fourteen-year peri-
o d from 1991 t o year-end 2004 experienced a
cumulative total return o f 11,900% equivalent t o
44.49% annualized return.
Another factor contributing to strong financial
results was the stability of write offs of our loan
portfolio, as a normal result of the Corporation’s
prudent underwriting. During 2004,
the
Corporation wrote off $38(1 million of loans on a
net basis (0.48% of the average portfolio) com-
pared with $41.4 million o f loans on a net basis
(0.66 O/O of the average portfolio) in 2003.
16
2004 Anlludl Repor[
hrst BanCorp
Sources of Funds
Highly Efficient
Operation
Strengthening Market
Presence, New Products
and Services
Thc Coiporaliori's deposit basc itiireased t o 57.9
billion ;It r)cccrribt.r 31, 2004 or 1Pk. Ar tliicuszed
tiiithcr l : h w , [tiis increase iiirliidcs tlcpo\iis gath-
c r d ltirut,gti the Liiiiirliing o l rirw deposit p m l
ucls that hetter imcct ciirlurrier needs.
As of Llcct.rriber 31, 2004 tlic Ccrrporation hilt1
rrieditirri term inotcs ouhiaridirig approxiiwi[itng
$"I77 millinn ; i r d Trust Preterierl Sciui ilies
amounting L o 5225 rriillioii tliilt wcrc issucd during
tlic y m r . The 1-iirt Prccricd Securities qiiillity tor
Tiel- I q p i t a l uridt.r regulatory giiirlcliiici, here-
tort? contrkuiirig t o the CorIior<>liuii'z sotiiid c;lp
itiiig mall Incaticms LliroLij$oiit Pucrto Kico.
111 Octoher 7i)IM, I ir5iUarik opened rl lrrr>ti dp,er,cy
in Corill Giibles, FloridJ. Also, cluriiig 2004 tlie
Haink's rrioi-t.bige Ihnkitnp, arid s i n d I r m r W ~ J -
sidiaries exp,ini:lcrd heir opermnn w i h iicw loca-
tions. Plilns arc: preserltly underway (or wveral new
inriltioiii arid upgrader to cxisiirij;
facilitieq in
:,Oi)5, which will iiiilprcovc availability and roiivcri-
icince uf Fitst. B i l i i h i ) cuslorriers and stl-engtlicri
ihe CorporJticrn's peserice in Piicrtc Kicu arid in
t l i e Virgirl IMdiids.
FirstMortgage, the Corporation’s mortgage banking
operation, successfully completed its first full year of
operations. This subsidiary offers a wide array of
mortgage banking services and has emerged a lead-
ing company providing innovative products in the
highly Competitive residential mortgage loans mar-
ket.
Since the Corporation is a multi-product financial
institution we are diversifying our sources of rev-
enue through different strategies to maximize our
profits. As an example, our insurance subsidiary,
FirstBank Insurance Agency, has increased its busi-
ness through the offering of a wide array of insur-
ance related products.
We are constantly developing products to better
serve our clients and reach new markets. During
2004, we launched new products and emphasized
sales of previously introduced products that better
meet customer’s needs, including: the ”Cuenta
Perfecta”, a highly competitive demand deposit
product, the “Business Plus Account” a business
product for multiple bank account management,
“Rapid Cash”, a mortgage loan product offered
through our mortgage banking operation and “Easy
Cash” a convenient ATM and debit card product.
Money Express, our small loan subsidiary operating
in Puerto Rico, started offering mortgage loans
through its multiple locations.
We have been emphasizing a strategy aimed to cater
customer needs in the commercial loans middle
market segment. This commercial lending segment
is operated by well trained and highly competitive
officials with vast experience in commercial lending
the
and should result
Corporation.
in added profits
t o
Corporate Citizenship
We are committed to continue Reaching Higher for
the benefit of our communities, who have been part
of our growth to date and upon which the future
prosperity of our Corporation rests.
Since its founding in 1948, First BanCorp has been
deeply committed to the well being of the commu-
nities it serves. The Corporation has supported and
contributed to numerous charitable organizations in
Puerto Rico and in the Virgin Islands including
humanitarian organizations, educational institutions,
and other not-for-profit organizations focused on
arts and community services.
18
2004 Annual IReport
First BanCorp
Disciplined Risk
Management
Building a Great Culture
The Future
During 2004, we embraced tlnc U.S. Congress
Sarhanes Oxley Act Section 404 which requircd sic
riificarit eiior!s froin our Officers, staff and Board of
Director members t o fully comply with Act reqi.iire-
incnts. This 2nd other internal risk mariagerrieri! irri-
tiatives arid policies have enhanccd our oversight of
financial trmsactions t.hrough the integralion o i our
s t a i l in iiitcinal control related activities.
We are committed tu Reaching Higher for the henefir
of oiir staff. who have chosen to use their tale~i! here
and who dcrcrvc the opporiirnity t o achieve their full
potential.
Wc continuc to develop ciistomer sat.isfaction strate-
gies as we believe this is a key factor Lo our continued
mcccss. Through the continuoils development o f dif-
fereri! ernployee recognition programs siich as First
Bank's "Tb eres calidad program, along with ongo-
ing training, education, sales awards, arid rriotiva-
tioinal workshops we can build a stronger sales and
service cul!ure.
thrst banCorp is a multi-product financial services
institution. The st.ren@h o f First BanCorp has never
been rnoici sigriiiicarit to our future as it istoday. Our
relies oil perre!(a!ing
growth strat&
thc markcts
where we operate by diversifying our plodtic1 ofier-
ings while providing agility in service. We are certairi
our prcscnt strength will lead to tiit.ure growth.
In November 2004, the Corporation aririouriced the
signing of a definitive merger agreement for the
acquisiliori o i the parerit company of Unibank a fed-
cral savings and loan ar or 2 t i o w fiorri
Miarrii via air. Ptierto Ricans are U.S. citizens. As iii
U.S., tlie Island hasa dual jiidicial systcihh, local and
fderal. Thc Island conStituLcs a Llislricl uricler
Llhc I cclcrdl Judiciary arid has its own U.S. district
court. Most U.S. federal government ,ip:ncies
ire1present;ltioii officcs on ltic Islar~cl.
have
Howcvcr, (tic Isldrid liai i l i own Iritei-rial Revenue
system and is not. suhject t o 11.5. Taxes.
tYicriu KiLo's ewiiurriic perforrriarice is a natural
r e s t i l t o f its inci-easing integration into the LJ.S.
e:onomy. The Island iises U S . currency ant1
foi-ms pin nf tlic I1.S. financial sysicrrn Sirire
Puct~o Kicu L11> wiitiiri itie U.S. for ptii-poses o f
customs arid niigiation, thei-e is tiill mohility o t
fiiiids, people 2nd goods Ibctwccn Pucim Kico
anel thc U.S. irnairildrid. Puerlo Rico banks are sub-
ject t o tile saine F e d m laws, rtqnlatioiis and
otlicr fiiharicial ir>ililutiuris iri Lhe
supervisirii
n:st of the U.S. 1 lie Federal Deposit Insurance
Cui poratiori iristires the deposits o f Puerto Rico
chartei-ed coinniercial banks, including FirstRank,
the banking siihsidiary ot First RanCnrp,
As tlw Caribbedii's rriust iridustrially developed
islarid, Puerto Rico's economy has a strong man
utatturing base. The Islarid ii d iriajor producer
arid expoi ier o f rrianufactured goods, pliarma-
ceLiticals and Iiigli technology eqiiipnieiit. Tlic
Government o f Pueno Rico has specifically tar-
geted hiotcrhnnlogy as a key dcvclnpmcnt arc,i;
biotech giaiils hdvt. h r i d grmt upcraliurial arid
lirlaiicial benefits on the Island and have
annoiinccd siibstantial iinvcstincnts iii this S C C L ~ I .
I tie service sector, iricludirig tourism, also plays a
key role i i i the economy. The Island's economy
has Iheeii ilivcrsifying witli significant iinvcstiincinls
iih rcLdil hade, liiidiice arid irisuiarice, arid iraris-
portatiori. The Banking sector has been tlie inain
drivel- o f such diversificat.ion, serving as the tinan
cia1 si.i1bpor! (jl Ltic Islanil'i coriirrieicidl a i d iridti5-
Lridl growlti.
Rcal GNP y,rew 2.BYu ill Lical y ~ a i 2004 accord-
iiig t o the Ptierio Rico Planning Boai-d. The
Puerio Rim econoiny coiitiiiiies tn r e k t signs
o t gmwth, the Pucrto Kico Pl,inIning [{oarel Tore-
cash i t d l GNP p)owLh of 2.3% lor 2005. As per
Lhe Puwio Rick's Department o f Labor, the
unemployment rate derliiied iii December 7OU4
t o Y.II"/n to ctid tlhc ycar wilt1 Llne lowe>! tirierii-
pluyrrieril rate siiice 2000. Recerit i-eports on
retail Activity ilre eiirnnraging with lpcrccntagc
iincrcaic iri rehil sdles arid record vehicle sales
cItiririE the latter part o f 2001. Investment. in coil-
struction also increased during t h e laiter part of
7004. lhowcvcr cm a total ycai baris, a slowclowri
occ-i.irrw wlwn connl:raicd Lu 2003. Gdsdrie
piiccs riioilerdi?d lale i r i 2004, bul aie at histori-
cal highs. In 2001, the Island's tow-isin industry
henefited trom t l i e U S . aind glohal ccotioinic
rcbc~i.iiid, whicln boosled deiiiarici lor btisiriess
and leisui-e t.i-ilvel and helped inrreilse t h e hotcl
ocriIp.?nry rates.
2
3
4
5
Angel AIvarez-Perez
Chairman of the Board of Directors
1
Jose L. Ferrer-Canals
2
Annie Astor-Carbonell
3
Jose Teixidor-Mkndez
4
Jose Juli6n Alvarez-Bracero
5
22
2004 Annual Rrport
First BanCorp
6
/
n
9
Richard Reiss-Huyke
6
Sthiree Al-iri Urnpiei-re Catinchi
7
lorge I , Diar Iriziirry
8
Jose Men6tideL Cortada
9
1
4
Angel Alvarez-Perez
I
Annie Ascor-Carbonell
2
Luis M. Beauchamp
3
5
6
Aurelio Aleman
4
Fernando L. Batlle
5
Randolfo Rivera
6
7
1'1
'IO
12
'13
14
Dacio A. Pasarrll
7
Ctissari A, Pancham
s
L w M C h r e r , i
9
Alar1 Cuheri
10
Aida M. G x c h
'I 1
Migucl Mcjias
12
Carmen G Szendt-ey Ither Liabilities
categories, as applicahle. The estimated
fair values of derivatives instruments
held by the Corporatiori :ire obtained
from iicalcr quo tcs. In forma tioti regard-
i ng derivatives instruments is included
on Note 23 to the Corporation’s finan-
cial staternrnts.
Allowancc for I .oat1 T .osscs
Accou i i ti ng I’ron I) t i ncr in en I s
of
rnai 11 tai tis
Tlie Corpora ti on
tlic
allowaricc for loan losses a t a level that
Managenietit considers adequate to
ahsorb losses inherent in the loan port-
folio. ‘I’hc adcqiiacy ofthc allowatice for
loan losses is reviewed on a quarterly
hasis as part of tlie continuing evalua-
tion of the quality of the assets. Groups
of stria11 balance and hotnogcncous loans
arc collcctivcly cvaluatcd for inipair-
rricnt. Tlic portfolios of rcsidcn rial
rnortgagc I oa 11 s, co t i s 11 111 c I’ I oa t i s , a 11 to
loans and finance leases are considered
homogeneous and arc evaluated collec-
tively for irnpairrncnt. Tn dctcrrriining
probable losses for each category of
homogeneous
loans,
pools
Management uses historical information
about loan losses over several periods of
tirnr that reflect varying ccoriorriic c o ~ i -
ditions and adjusts such historical data
bascd oti the current conditions, consid-
ering information and trends on charge-
offs, noli-accrual
i n
underwriting policies, risk characteris-
tics relevant to the particular loan cate-
The
gory
Corporation iiicasiircs irripirmcnt indi-
vidually for those cotiimercial and real
estate loans with a principal balance
exceeding $1 million. A n allowance for
impaired loans is established based on
the present value ofexpectcd fiitiire cash
flows or the fair value ofthe collateral, if
is collateral dependent.
the
Accordingly,
tnc3siirenient of
impairment for loans evaluated individ-
by
ually
loans, changes
delinquencies.
assumptions
involves
loan
and
the
Tlie C:orporatioti is routinely subject to
examinations from governmental txxing
authoritirs. Such exarriiriatioris rriay
result i n challenges to the tax return
treatment applied by the Corporation to
specific transactions. Managerrirnt
belirves that the assumptions and judg-
ment used to record tax-related assets or
liabilities have heen appropriate. Should
tax laws change or the tax aiitliorities
assii i n p tio tis differ from Management’s
assumptions, the result and adjustments
required could have a material rffert on
the Corporation’s results of opetation.
There are currently no open income tax
investigations.
Information rrgarding
income taxrs is includrd in Note 25 to
the Corporation’s financial statcnicn~s.
During 2004, the I h n c i a l Accounting
Standards Board (FASR), its Etncrging
Tssucs Taslc Force (ETTF) and the SEC:
issued several accounting pronouncr-
ments, namely FASR Statcrncnt no.
123R, Sln*rr-Rmd P~~yment, FJTF Tssuc
no. 04- 10, nrierminin,: Whrihrr rn
Auantitativc arid Qilalitative
Disclosures about Markct Risk section
of this Management's Discussion and
Analysis for further discussion on intcr-
est rate risk rriariagrment strategies fol-
lowed hy the Corporatiori.
At 1)ccernber 31, 2004, 88%) of retail
hrokcrcd certificates of deposit held hy
the Corporation arc callable, but only at
Corporation's option. At Drcerriber 31,
2004, thc avcragc rcrnaitiirig rnaturity of
callahle and fixed tertii brokcrcd ccrtifi-
catrs approximated 13.44 years (2003-
14.28 years) and 1.27 years (2003-1.12
years), 1-espectively.
million aggregate principal amount of
the Corporation’s Junior Subordinated
Deferrable Debentures.
‘l’he ‘ h s t Preferred debentures arc pre-
sented in the Corporation’s Consoli-
dated Statement of kinancial Condition
as Other Borrowings, net of rclatcd
issuance costs. The variable rate trust
preferred sccurities are fully and uiicon-
ditionally
the
guaranteed
C:orporation. ‘l’he $100 million Junior
Subordinated Deferrable Debentures
issued by the Corporation in April 2004
and
in
September 2004, mature on September
17, 2034 and September 20, 2034,
respectively, however, iindcr ccrrain cir-
the $125 million
issued
by
cunistanccs
the maturity of Junior
Subordinated Debentures may he short-
ened (which shortening would result in
a mandatory redemption of the variable
rate trust preferred securities). ‘l’he trust
preferred securities, subject to ccriain
limitations, qualify as Tier I regulatory
capital under current Federal Keserve
rules and regulations.
The composition arid cstimated weight-
ed average iritcrcst rarcs o f interest bear-
ing liabilities a1 Dccctnber 31, 2004,
were as follows:
Interest bearing deposits
Borrowed funds
Contractual Obligations and
Commi tnients
The following tahle presents a detail of
the maturities of certificates of deposits,
long-term contractual debt obligations,
operating leases, other contractual obli-
gations, commitments to purchase loans
and commitments to extend credit:
Contractual Obligations:
Certificates of Deposit
Federal funds purchased and securities sold under
agreements to repurchase
Advances from FHLB
Notes payable
Other borrowings
Subordinated Notes
Operating Leases
Other contractual obligations
‘I’otal Contractual Ohligations
Conimicrnents to Purchase Mortgage Loans
Other Commitments:
Lines of Credit
Standby 1.etters of Credit
Other Commercial Commitments
‘Ibtal Cornnicrcial Cornmitments
Anioun t
(In thousands)
$
$
7,211,597
6,310,624
13,522,221
Weighted
Average Kate
2.29Yo
3.48%
2.84Yn
Contractual Ohligations and Comrnitnients
(In thousands)
‘lbtal
Less than
1 year
1-3 years
4-5 years
After
5 years
$ 5,749,516
$ 1,301,437
$
497,431
$ 304,398
$3,646,250
4,221,523
1,598,000
176,755
231,525
82,822
36,474
4,637
$12,101,252
$ 2,200,000
1,703,063
1,225,000
100,000
100,000
550,000
29,000
1,868,460
244,000
176,755
231,525
82,822
6,266
2,901
$4,321,483
10,748
1,736
$ 703,315
$ 2,200,000
7,663
11,797
$ 891,061
$6,178,787
$
130,989
99,134
1,238,941
$ 1,463,064
$ 130,989
99,134
1,238,941
$ 1,469,064
.
.. .
.. .. .
. ..
Firht BmCarrp
..
I,'irrrKnnk
Firri k h C u r p Banking Suhfiidiaiy
.
.
. .
Well- Carridired
Miiiiiiiuiii
... .
.
Qtrmtitativc and Qualitative
Disclosures ahout Markel Ihl,
Firstlhnk (ALC’X)). The ALCO is com-
posed of the following oficers: President
a n d CEO, the Senior Executive Vicc
President and C:hief Financial Oficei-,
the Executive Vice I’resident for Retail
arid Mortgage Ranking, the Senior Vicc
President of Treasury and Investments
and tlie Economist. The ALCO general-
ly meets o n a weekly hasis.
‘I’he
Economist also acts as secretary, keeping
minutes of all mertings. An Investment
Committee for First RariCorp also r i m -
itors rhc investment portfolio o f tlie
Ho Id i t i g C Io ni pa t i y. This C 10 in ni it tee
grnerally mrets weekly and has the same
membership as the ALCO Committee
described previously.
Committee meetings focus on, among
othcr things, current and expected coti-
ditions i n world financial markets, com-
petition and prevailing rates in the local
deposit market, reviews o f liquidity,
unrcalizcd gains and losses i n securities,
recent or proposed changes to the
investment portfolio, alternative fund-
ing sources and their costs, hedging and
the possible purchase of derivatives such
a s swaps and caps, and any tax or regti-
latory issues which tnay be pcrtincnt to
thcsc areas. Thc AI.CO approvcs fund-
ing decisions
the
in
Corporation’s overall growth strategies
arid objectives. On a quarterly basis thc
A I , C O performs a comprehensive
asset/liahility review, examining the
measures of interest rate risk described
below together with othcr matters such
as liqiiidiry and capital.
light
of
Thc Corporation uses simulations to
measure the effects of changing interest
‘l’hrse
rates on net interest income.
Inemires arc carricd out ovcr a otic-ycar
time horizon, assuming gradual upward
and downward intrrest rate movements
of200 basis points. Sirriiilatiotis arc c:ir-
ricd out in two ways:
(1) using a halance sheet which is
assumed to he at the same levels
existing on the simulation
date, and
(2) using a halance sheet, which has
growth patterns and strategies
similar to those which have
occuri-ed in the recent past.
The balarice sheet is divided into groups
of similar assets and liabilities in order to
simplify the process ofcarrying out these
projections. As interest ratcs rise or fdl,
thcsc simulations incorporate expected
future lending rates, current and rxpect-
ed fiiturr fiiridirig sources and cost, the
possiblc cxcrcisc of options, changes i t i
prepayment rates, and othrr factors
which may he important in determining
the future growth of net interest income.
All computations are done on a tax
equivalrnt basis, inclurling the cfkcts of
the changing cost of Tunds on llic lax-
exempt spreads of certain investnients.
The projectinns are carried out for First
BanCorp on a fully corisolidatcd basis.
These sirnulations arc highly complex,
and thcy use ilia t i y si ti1 pl i fyi ng assu ti1 p-
tions that are intended to reflect the gen-
ern1 behavior of tlie Corporation over
the period in question, hut there can he
no assurance that actiial Cvcrits will par-
allel thcsc assumptions i n all c;ascs. For
this reason, the results of these siniula-
tions are only approximations of the
true sensitivity of net interest income to
changes in market interest rates.
Assuming a no growth balance sheet as
ol: Dcccmbcr ’3 I ,
2004, tax equivalent
nct interest income projected for 2005
would fall by $7.5 niillion (1.55%)
under ;I rising rate scenario arid would
rise hy $ 1 6.3 million (3.37%)) under
falling rates.
As o f h x r n b e r 3 1, 2004, the same sirn-
ulations wcrc also carricd out assuming
that the Corporation would grow. The
growing balance sheet simulations indi-
cate t h a t tax equivalent net interest
income projected for 2005 would kill by
$9.5 million (1.86%) under a rising rate
scctiario and would rise by $29.6 mil-
lion (5.81%)) with falling ratrs.
The simulation Tor the year 2004 assiitn-
ing a no growth balance sheet as of
Ilecemher 31, 2003, concluded that
under a gradual 200 hasis point rising
rate scenario net intrrrst income would
have risrn by $15.6 million (3.78%) arid
that under a gradual 75 basis point
falling
scenario would have
increased by $7.4 rnilhori (1 .i’C)o/o).
rate
As of Deceniher 31,2003, the same sim-
ulations were also carried assuming that
Corporation was going to grow. The
growing balance sheet simulation i n d -
cated that tlie tax cquivalcnt net interest
incornc Tor 2004 would have risen hy
$16.2 million (3.70%) under a gradual
200 basis point rising interest rate scc-
tiario and increased hy $8.3 inillion
(1.89%) with rates gradually falling by
75 basis points.
The Corporation corriparcd 2004 pro-
jections with actiial results. T n the
growth scenario, which is more realistic,
tlic Ranlr projected taxahle equivalent
net intrrest income of $437.5 million
undrr flat rates for 2004. In reality, tax-
able equivalent net interest inconie was
$450.4 million. The most important
reason for this difference was that the
projections did not include changes
which Management made in the invest-
ment portfolio after the projection was
made. I’Lircliases of agcricy securities
during 2004 led to larger spreads than
anticipated in the initial projection. In
addition, the flat rate scenario did not
include the 125 basis point incrcasc in
short-tcrrn ratcs which occurrcd during
2004. Whilc this rate incrcasc was small-
er than that which had heen assumed i n
thc rising ratc scenario, it was still large
enough to affect significantly the yields
and costs on the Corporation’s variable
i t i
First UanC:orp uses derivative instru-
ments and other strategies to rrlarlage its
exposure to interest raw risk caused by
changcs
ratcs beyond
interest
Management’s control. The C:orpora-
tion’s asset liability management pro-
gram includes the use of derivatives
instruments, which have worked effec-
tively to date, arid that Managcrncnt
bclicvcs will continue to bc effective i n
the future.
The following ~~1tntnari7cs major stratc-
i t i cl ud i ng derivatives activities,
g i es,
used hy the (:oryoration in managing
interest rate risk:
lnterest rate swaps - Under interest rate
tlac Corpor:atioti
swap agreements,
agrecs with other parties to exchange,
at specified intervals, the difference
bciwccn lixcd-rate a n d floati ng-rare
interest rate amounts calculated by refer-
ence to an agreed riotiorlal priricipal
amoiint. Since a substantial portion of
rhc Corporation’s loans, mainly com-
rricrcial and mortgage loans, yicld vari-
Liquidity
ofa loan agctlcy in C o d G:~blc~, Florida
(U.S.A.). At necemher 31, 2004, thcrc
is n o significant concentration of credit
risk in any specific- industry.
Selected Quarterly Finallcia1 Data
l k m r i a l data showing results of the
2004 arid 2004 quaricrs is prcscritcd
below. In the opinion of Managctncnt,
all adjustments necessary for a Liir pres-
entation have been included:
lnrrrcsr income
Net interest iiiconie
PI-ovkion for loan losses
Net incomc
Eariiiiigs per coiiiiiioii share-basic
Earnings per common sharc-diluted
Interest income
Net inrcrrst income
I'rovision for loan losscs
Net iiicoiiie
Ea rn i n gs pc r co til r n () 1 ) a h :i re-has ic
Eariiiiigs per coiiiiiioii share-diluted
March 31
June 30
Sept. 30
Lkc. 31
(In thousands, except for per share results)
2004
$ 146,547
84,203
13,200
40,205
0.75
0.73
$
$
$
$
$
161,208
94,278
13,200
39,935
0.74
0.72
$ 180,079
103,272
13,200
49,079
0.97
0.94
$
$
$ 188,555
101,453
13,200
49,659
0.98
0.95
$
$
March 3 I
June 30
scpt. 30
Dcc. 31
--I---" I____ -I*.._.I
(In thousands, cxcept for per share results)
LUUS
$ 132,919
72,437
16,564
36,428
0.74
0.73
$
$
$ 122,825
63,903
12,600
29,271
0.56
0.55
$
$
$ 133,618
71,896
12,600
31,684
0.62
0.61
$
$
$ 147,319
83,974
14,152
54,955
1,12
1.09
$
$
Market Priccs and Stock Data
The C:otporation's common stock is
traded i n the New Yorlc Stock Exchange
(NYSE) under the syrnhol FRT! C)n
Ueceinher 31, 2004, there were 630
holders of reLord of the Corporation's
commori stock.
The following t h l e sets forth the high
m d low prices ol'thc Corpordtioris corm
inon stock for the pcriods indiwtcd JS
reported by the NYSE.
Oiiarter ended
High
Low
Last
2004:
I)e~emher
Scptcnibcr
June
March
2003:
I k c e m her
September
Jiiric
March
2002:
December
Scptcmhcr
June
March
$
$
$
64.85
49.85
42.67
43.32
40.32
31 98
31.68
28.00
26.38
27.61
25.1 3
19.80
$
$
$
47.30
39.62
35.14
39.00
31.24
28.35
27.45
22.71
22.08
22.82
19.1 3
18.43
$
$
$
(73.51
48.30
40.75
41.60
39.55
.30.75
27.45
26.98
22.60
25.41
25.13
19.27
il
2004 Annual Rcport
tll-rt H,lmCot-p