112UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549FORM 10-K
Annual Report Pursuant to Section 13 of the Securities Exchange Act of 1934 For the fiscal year ended
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File
December 31, 2000No. 001-14793First BanCorp.-------------------------------- (Exact
(Exact name ofCorporationregistrant as specified in its charter)Puerto Rico 66-0561882 - ------------------------------- --------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1519 Ponce de Leon Avenue, Stop 23 Santurce, Puerto Rico 00908 - ------------------------------ ------------------------ (Address of principal office) (Zip Code) Corporation's
Puerto Rico 66-0561882 (State or other jurisdiction of
incorporation or organization)(I.R.S. Employer
Identification No.)1519 Ponce de León Avenue, Stop 23
Santurce, Puerto Rico00908 (Address of principal office) (Zip Code) Registrant’s telephone number, including area code:
(787) 729-8200
Securities registered under Section 12(b) of the Act:
Common Stock ($1.00 par value)
New York Stock Exchange - ------------------------------ ------------------------ Title of Class Name of exchange on which registered7.125% Noncumulative Perpetual Monthly Income
Preferred Stock,($25.00 liquidation preferenceSeries A (Liquidation Preference $25 pershare New Yorkshare)
8.35% Noncumulative Perpetual Monthly Income
Preferred Stock,Exchange - ----------------------------------------- ----------------------- Title of Class Name of exchange on which registeredSeries B (Liquidation Preference $25 per share)
7.40% Noncumulative Perpetual Monthly Income
Preferred Stock, Series C (Liquidation Preference $25 per share)
7.25% Noncumulative Perpetual Monthly Income
Preferred Stock, Series D (Liquidation Preference $25 per share)1
Securities registered under Section 12(g) of the Act:
Not applicable
Indicate by check mark whether the
Corporationregistrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that theCorporationregistrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YesX[X] No___[ ]Indicate by check mark if disclosure of delinquent filer pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the
Corporation'sregistrant’s knowledge, in definite proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]-Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [X] No [ ]
State the aggregate market value of the voting common stock held by nonaffiliates of the Corporation:
$487,304,294Approximately $895,105,000 (based on the closing sales price of$23.10$25.133 atMarch 27, 2001June 28, 2002 for such shares). Number of shares of Common Stock outstanding as of March27, 2001: 26,636,75218, 2003:39,955,285
Documents Incorporated by Reference
(1) Portions of the
annual reportAnnual Report to security holders for the fiscal year ended December 31,20002002 are incorporated by reference in Part I, II and IV; and (2) Portions of the definite proxy statement filed on/or about March 28,20012003 are incorporated by reference in Part III.FIRST BANCORP.Forward Looking Statements
When used in this Form 10-K or future filings by First BanCorp (First BanCorp or the “Corporation”) with the Securities and Exchange Commission, in the Corporation’s press releases or other public or shareholder communication, or in oral statements made with the approval of an authorized executive officer, the words or phrases “would be”, “will allow”, “intends to”, “will likely result”, “are expected to”, “will continue”, “is anticipated”, “estimated”, “project”, “believe”, or similar expressions are intended to identify “forward looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.
The future results of the Corporation could be affected by subsequent events and could differ materially from those expressed in forward-looking statements. If future events and actual performance differ from the Corporation’s assumptions, the actual results could vary significantly from the performance projected in the forward-looking statements.
The Corporation wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made, and to advise readers that various factors, including regional and national conditions, substantial changes in levels of market interest rates, credit and other risks of lending and investment activities, competitive and regulatory factors and legislative changes, could affect the Corporation’s financial performance and could cause the Corporation’s actual results for future periods to differ materially from those anticipated or projected. The Corporation does not undertake, and specifically disclaims any obligation, to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements.
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TABLE OF CONTENTSFIRST BANCORP
CONTENTS
PART I Item 1. Business 4 Item 2. Properties 19 Item 3. Legal Proceedings 19 Item 4. Submission of Matters to a Vote of Security Holders 19 PART II Item 5. Market for Registrant’s Common Stock and Related Stockholder Matters 20 Item 6. Selected Financial Data 21 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 21 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 21 Item 8. Financial Statements and Supplementary Data 21 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 21 PART III Item 10. Directors, Executive Officers and Control Persons of the Registrant 22 Item 11. Executive Compensation 22 Item 12. Security Ownership of Certain Beneficial Owners and Management 22 Item 13. Certain Relationships and Related Transactions 22 Item 14. Controls and Procedures 22 PART IV Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 23 SIGNATURES .............................................................................................2425 CERTIFICATIONS 27 3
PART I
Item 1. Business
GENERAL
First
BanCorp. (the Corporation)BanCorp is a publicly owned financial holding companyforoffering a full range of financial services through its wholly owned subsidiaries, FirstBank Puerto Rico(FirstBank or the Bank).(FirstBank) and FirstBank Insurance Agency. First BanCorp is subject to the Federal Bank Holding Company Act and to the regulations, supervision, and examination of the Federal Reserve Board. Its insurance subsidiary, FirstBank Insurance Agency, is subject to the supervision, examination and regulation of the Commissioner of Insurance of Puerto Rico.Based on total assets, the Corporation is the second largest
locally ownedbank holding company headquartered in the Commonwealth of Puerto Rico and thethird largestsecond depository institution in Puerto Rico. The Corporation had total assets of$5.920$9.644 billion, total deposits of$3.346$5.483 billion and totalstockholders'stockholders’ equity of$434.5$798.4 million at December 31,2000.2002.The
Corporation's onlyCorporation’s wholly owned bank subsidiary, FirstBank,conducts its business through its main office located in San Juan, Puerto Rico, 44 full-service branches in Puerto Rico and four branches in the U.S. Virgin Islands of St. Thomas and St. Croix. The Bank also has four loan origination offices focusing on mortgage loans, a loan origination office focusing on personal loans and credit cards, and a loan origination office focusing on auto loans. Firstchartered in 1948,FirstBankwas the first savings and loan association established in Puerto Rico. It has been a stockholder-owned institution since January 1987. Effective at the close of business on October 31, 1994, FirstBank converted to a Puerto Rico chartered commercial bank. The Bank is subject to supervision, examination and regulation by the Office of the Commissioner of Financial Institutions of Puerto Rico (the Commissioner) and the Federal Deposit Insurance Corporation (FDIC), which insures its deposits through the Savings Association Insurance Fund (SAIF). FirstBank conducts its business through its main office located in San Juan, Puerto Rico, 43 full-service branches in Puerto Rico and 11 full-service branches in the U.S. and British Virgin Islands. The Bank also has nine loan origination offices focusing on mortgage loans, and two loan origination offices focusing on auto loans. The Bank offers brokerage services in selected branches through an alliance with a national brokerage house in Puerto Rico. FirstBank has four subsidiaries, First Leasing and Rental Corporation, a vehicleleasingand daily rental company with six offices,andFirst Federal Finance Corp. D/B/A Money Express"La Financiera,"“La Financiera”, a small loan company with26 offices.27 offices, FirstBank Insurance Agency V.I., Inc., with one office selling insurance in the U.S. Virgin Islands and First Trade Inc., a trade financing subsidiary with one office in the Virgin Islands and one office in Barbados. The Virgin Islands operations of FirstBank are regulated by the Virgin Islands Banking Board (for the USVI) and by the British Virgin Islands Financial Services Commission (for the BVI).In October 2002, the Corporation acquired JPMorgan Chase’s Eastern Caribbean Region business in the U.S. Virgin Islands, British Virgin Islands and Barbados. In addition to branches acquired, this transaction included the acquisition of the assets of the former Chase Trade, Inc., now the aforementioned First Trade, Inc., and of all outstanding shares of the former Chase Agency Services, Inc., now the aforementioned FirstBank Insurance Agency V.I., Inc.
First BanCorp has distinguished itself by providing innovative marketing strategies and novel products to attract clients. Besides
theits branches and specialized lending offices,described above,the Corporation has offered a telephone information service called"Telebanco"“Telebanco” since 1983. This was the first telebanking service offered in Puerto Rico.The Corporation'sFirst BanCorp clients have access to an extensive ATM network with access all over the world. The Corporation was also the first in Puerto Rico to open on weekends and the first to offer in-store branches to its clients.The CorporationFirst BanCorp was also the first banking institution in4
Puerto Rico with a presence on the
Internet. Early in the year 2001 First BanCorp. will launch a new, interactive web site where clients will be able to perform all types of banking transactions.internet. The Corporation now offers a wide menu of internet banking services to its clients.First BanCorp is committed to
continueproviding the most efficient and cost effective banking servicespossiblepossible. Management’s goal is to make the Corporation the premier financial institution inselected products niches.Puerto Rico and the Virgin Islands, recognized for consistently exceeding the expectations of its clients, employees and stockholders.The information under the caption
"Achievements in 2000"“President’s Letter” on pages1215 to1417 and the information under Note33 -30 — Segment Information on pages7278 to7480 of theCorporation'sCorporation’s annual report to security holders for the year ended December 31,2000 is2002 are incorporated herein by reference.4WEBSITE ACCESS TO REPORTS
We made our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, filed or furnished pursuant to section 13(a) or 15(d) of the Securities Exchange Act of 1934 available free of charge on or through our internet website www.firstbankpr.com, (First BanCorp section, Company Filings link), as soon as reasonably practicable after we electronically file such material with, or furnish it to , the SEC.
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SUPERVISION AND REGULATION
Bank Holding Company Activities and Other
Limitations.Limitations. The Corporation is subject to ongoing regulation, supervision, and examination by the Federal Reserve Board, and is required to file with the Federal Reserve Board periodic and annual reports and other information concerning its own business operations and those of its subsidiaries. In addition, under the provisions of the Bank Holding Company Act, a bank holding company must obtain Federal Reserve Board approval before it acquires directly or indirectly ownership or control of more than 5% of the voting shares of a second bank. Furthermore, Federal Reserve Board approval must also be obtained before such a company acquires all or substantially all of the assets of a second bank or merges or consolidates with another bank holding company. The Federal Reserve Board also has authority to issue cease and desist orders against holding companies and their non-bank subsidiaries.Under the Federal Reserve Board policy, a bank holding company such as the Corporation is expected to act as a source of financial strength to its main banking subsidiaries and to also commit support to them. This support may be required at times when, absent such policy, the bank holding company might not otherwise provide such support. In the event of a bank holding
company'scompany’s bankruptcy, any commitment by the bank holding company to the federal bank regulatory agency to maintain capital of a subsidiary bank will be assumed by the bankruptcy trustee and be entitled to a priority of payment. In addition, any capital loans by a bank holding company to any of its subsidiary banks must be subordinated in right of payment to deposits and to certain other indebtedness of such subsidiary bank. FirstBank is currently the only depository institution subsidiary of the Corporation.The Gramm-Leach-Bliley Act, revised and expanded the
existingprovisions of the Bank Holding Company Act by including anewsection that permits a bank holding company to elect to become a financial holding company to engage in a full range of financial activities.DuringIn 2000, the Corporation electedto be treated asthis option and is currently a financial holding company. The qualification requirements and the process for a bank holding company that elects to be treated as a financial holding company requires that all the subsidiary banks controlled by the bank holding company at the time of election to become a financial holding company must be and remain at all times well capitalized and well managed.The financial holding companies may engage, directly or indirectly, in any activity that is determined to be (i) financial in nature, (ii) incidental to such financial activity, or (iii) complementary to a financial activity and does not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally. The Gramm-Leach-Bliley Act, specifically provides that the following activities have been determined to be
"financial“financial innature"nature”: (a) Lending, trust and other banking activities; (b) Insurance activities; (c) Financial or economic advice or services; (d) Pooled investments; (e) Securities underwriting and dealing; (f) Existing bank holding company domestic activities; (g) Existing bank holding company foreign activities; and (h) Merchant banking activities. The Corporation offers insurance agency services through its wholly-owned subsidiary, FirstBank Insurance Agency, Inc. and through FirstBank Insurance Agency V. I., Inc., a subsidiary of FirstBank Puerto Rico.In addition, the Gramm-Leach-Bliley Act specifically gives the Federal Reserve Board the authority, by regulation or order, to expand the list of
"financial"“financial” or"incidental"“incidental” activities, but requires consultation with the U.S. Treasury, and gives the Federal Reserve Board authority to allow a financial holding company to engage in any activity that is"complementary"“complementary” to a financial activity and does not"pose“pose a substantial risk to the safety and soundness of depository institutions or the financial system generally." 5” 6
State Chartered Non-Member Bank.FirstBank is subject to extensive regulation and examination by the Commissioner and the FDIC, and subject to certain requirements established by the Federal Reserve Board. The federal and state laws and regulations which are applicable to banks regulate, among other things, the scope of their business, their investments, their reserves against deposits, the timing and availability of deposited funds and the nature and amount of and collateral for certain loans. In addition to the impact of regulations, commercial banks are affected significantly by the actions of the Federal Reserve Board as it attempts to control the money supply and credit availability in order to influence the economy.
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'sCorporation’s net assets in excess of capital or in the absence of such excess, from theCorporation'sCorporation’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.At present, the principal source of funds for the Corporation is earnings from FirstBank. The ability of FirsBank to pay dividends on its common stock is restricted by the Banking Law (as defined herein), the Federal Deposit Insurance Act and FDIC regulations. In general terms, the Puerto Rico Banking Law provides that when the expenditures of a bank are greater than receipts, the excess of expenditures over receipts shall be charged against undistributed profits of the bank and the balance, if any, shall be charged against the required reserve fund of the bank. If there is no sufficient reserve fund to cover such balance in whole or in part, the outstanding amount shall be charged against the
bank'sbank’s capital account. The Puerto Rico Banking Law provides that until said capital has been restored to its original amount and the reserve fund to 20% of the original capital, the bank may not declare any dividends.In general terms, the Federal Deposit Insurance Act and the FDIC regulations restrict the payment of dividend when a bank is undercapitalized, when a bank has failed to pay insurance assessments, or when there are safety and soundness concerns regarding such bank.
Limitations on Transactions with Affiliates.Transactions between financial institutions such as the Bank and any affiliate are governed by Sections 23A and 23B of the Federal Reserve
Act.Act and by Regulation W, which becomes effective on April 1, 2003. An affiliate of a financial institution is any company or entity, which controls, is controlled by or is under common control with the financial institution. In a holding company context, the parent bank holding company and any companies which are controlled by such parent holding company are affiliates of the financial institution. Generally, Sections 23A and 23B of the Federal Reserve Act (i) limit the extent to which the financial institution or its subsidiaries may engage in"covered transactions"“covered transactions” with any one affiliate to an amount equal to 10% of suchinstitution'sinstitution’s capital stock and surplus, and contain an aggregate limit on all such transactions with all affiliates to an amount equal to 20% of such capital stock and surplus and (ii) require that all such transactions be on terms substantially the same, or at least as favorable, to the institution or subsidiary, as those provided to a non-affiliate. The term"covered transaction"“covered transaction” includes the making of loans, purchase of assets, issuance of a guarantee and other similar transactions.The Gramm-Leach-Bliley Act provides that financial subsidiaries of banks
arebe treated as affiliates for purposes of sections 23A and 23B of the Federal Reserve Act, but provides that (i) the 10% capital limit on transactions between the bank and such financial subsidiary as an affiliate is not applicable, and (ii) the investment by the bank in the financial subsidiary does not include retained7
earnings in the financial subsidiary. Certain anti-evasion provisions have been included that relate to
6the relationship between any financial subsidiary of a bank and sister companies of the bank: (1) any purchase of, or investment in, the securities of a financial subsidiary by any affiliate of the parent bank is considered a purchase or investment by the bank; or (2) if the Federal Reserve Board determines that such treatment is necessary, any loan made by an affiliate of the parent bank to the financial subsidiary is to be considered a loan made by the parent bank. In addition, Sections 22(h) and (g) of the Federal Reserve Act, implemented through Regulation “O”, place restrictions on loans to executive officers, directors and principal stockholders. Under Section 22(h) of the Federal Reserve Act loans to a director, an executive officer and to a greater than 10% stockholder of a financial institution, and certain affiliated interests of these, may not exceed, together with all other outstanding loans to such person and affiliated interests, the financial
institution'sinstitution’s loans to one borrower limit, generally equal to 15% of theinstitution'sinstitution’s unimpaired capital and surplus. Section 22(h) of the Federal Reserve Act also requires that loans to directors, executive officers and principal stockholders be made on terms substantially the same as offered in comparable transactions to other persons and also requires prior board approval for certain loans. In addition, the aggregate amount of extensions of credit by a financial institution to insiders cannot exceed theinstitution'sinstitution’s unimpaired capital and surplus. Furthermore, Section 22(g) of the Federal Reserve Act places additional restrictions on loans to executive officers.Capital Requirements.The Federal Reserve Board has adopted capital adequacy guidelines pursuant to which it assesses the adequacy of capital in examining and supervising a bank holding company and in analyzing applications to it under the Bank Holding Company Act. The Federal Reserve Board capital adequacy guidelines generally require bank holding companies to maintain total capital equal to 8% of total risk-adjusted assets, with at least one-half of that amount consisting of Tier I or core capital and up to one-half of that amount consisting of Tier II or supplementary capital. Tier I capital for bank holding companies generally consists of the sum of common
stockholders'stockholders’ equity and perpetual preferred stock, subject in the case of the latter to limitations on the kind and amount of such stocks which may be included as Tier I capital, less goodwill and, with certain exceptions, other intangibles. Tier II capital generally consists of hybrid capital instruments, perpetual preferred stock which is not eligible to be included as Tier I capital; term subordinated debt and intermediate-term preferred stock; and, subject to limitations, generally allowances for loan losses. Assets are adjusted under the risk-based guidelines to take into account different risk characteristics, with the categories ranging from 0% (requiring no additional capital) for assets such as cash to 100% for the bulk of assets which are typically held by a bank holding company, including multi-family residential and commercial real estate loans, commercial business loans and commercial loans. Off-balance sheet items also are adjusted to take into account certain risk characteristics.In addition to the risk-based capital requirements, the Federal Reserve Board requires bank holding companies to maintain a minimum leverage capital ratio of Tier I capital to total assets of 3.0%. Total assets for this purpose does not include goodwill and any other intangible assets and investments that the Federal Reserve Board determines should be deducted from Tier I capital. The Federal Reserve Board has announced that the 3.0% Tier I leverage capital ratio requirement is the minimum for the top-rated bank holding companies without a supervisory, financial or operational weaknesses or deficiencies or those which are not experiencing or anticipating significant growth. Other bank holding companies will be expected to maintain Tier I leverage capital ratios of at least 4.0% or more, depending on their overall condition.
At December 31, 2000, the Corporation exceeded each of its capital requirements and was a well-capitalized institution as defined in the Federal Reserve Board regulations. 7FDIC Capital
Requirements.Requirements. The FDIC has promulgated regulations and adopted a statement of policy regarding the capital adequacy of state-chartered non-member banks like the Bank. These8
requirements are substantially similar to those adopted by the Federal Reserve Board regarding bank holding companies, as described above.
The FDIC also requires that banks meet a risk-based capital standard. The risk-based capital standard for banks requires the maintenance of total capital (which is defined as Tier I capital and supplementary (Tier 2) capital) to risk weighted assets of 8%. In determining the amount of risk-weighted assets of 0% to 100%, weights used are based on the risks the FDIC believes are inherent in the type of asset or item. The components of Tier I capital are equivalent to those discussed above under the 3% leverage capital standard. The components of supplementary capital include certain perpetual preferred stock, certain mandatory convertible securities, certain subordinated debt and intermediate preferred stock and generally allowances for loan and lease losses. Allowance for loan and lease losses includable in supplementary capital is limited to a maximum of 1.25% of risk-weighted assets. Overall, the amount of capital counted toward supplementary capital cannot exceed 100% of core capital.
The
FDIC'sFDIC’s capital regulations establish a minimum 3.0% Tier I capital to total assets requirement for the most highly-rated state-chartered, non-member banks, with an additional cushion of at least 100 to 200 basis points for all other state-chartered, non-member banks, which effectively will increase the minimum Tier I leverage ratio for such other banks to 4.0% to 5.0% or more. Under theFDIC'sFDIC’s regulation, the highest-rated banks are those that the FDIC determines are not anticipating or experiencing significant growth and have well diversified risk, including no undue interest rate risk exposure, excellent asset quality, high liquidity, good earnings and, in general, which are considered a strong banking organization and are rated composite I under the Uniform Financial Institutions Rating System. Leverage or core capital is defined as the sum of commonstockholders'stockholders’ equity including retained earnings, noncumulative perpetual preferred stock and related surplus, and minority interests in consolidated subsidiaries, minus all intangible assets other than certain qualifying supervisory goodwill and certain purchased mortgage servicing rights. At December 31,2000,2002, the most recent notification from FDIC, categorized the Bankexceeded each of its capital requirements and wasas a well-capitalized institutionas defined inunder theFDIC regulations.regulatory framework for prompt corrective action.Activities and Investments.The activities and equity investments of FDIC-insured, state-chartered banks such as the Bank are generally limited to those that are permissible for national banks. Under regulations dealing with equity investments, an insured state bank generally may not directly or indirectly acquire or retain any equity investments of a type, or in an amount, that is not permissible for a national bank. An insured state bank is not prohibited from, among other things, (i) acquiring or retaining a majority interest in a subsidiary, (ii) investing as a limited partner in a partnership the sole purpose of which is direct or indirect investment in the acquisition, rehabilitation or new construction of a qualified housing project, provided that such limited partnership investments may not exceed 2% of the
bank'sbank’s total assets, (iii) acquiring up to 10% of the voting stock of a company that solely provides or reinsuresdirectors'directors’,trustees'trustees’ andofficers'officers’ liability insurance coverage orbankers'bankers’ blanket bond group insurance coverage for insured depository institutions, and (iv) acquiring or retaining the voting shares of a depository institution if certain requirements are met. In addition, an insured state-chartered bank may not, directly, or indirectly through a subsidiary, engage as"principal"“principal” in any activity that is not permissible for a national bank unless the FDIC has determined that such activity would pose no risk to the insurance fund of which it is a member and the bank is in compliance with applicable regulatory capital requirements. Any insured state-chartered bank directly or indirectly engaged in any activity that is not permitted for a national bank must cease the impermissible activity.8Puerto Rico Banking Law.As a commercial bank organized under the laws of Commonwealth, FirstBank is subject to supervision, examination and regulation by the Commissioner
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pursuant to the Puerto Rico Banking Law of 1933, as amended (the Banking Law). The Banking Law contains provisions governing the incorporation and organization, rights and responsibilities of directors, officers and stockholders as well as the corporate powers, lending limitations, capital requirements, investment requirements and other aspects of the Bank and its affairs. In addition, the Commissioner is given extensive rule making power and administrative discretion under the Banking Law.
The Banking Law authorizes Puerto Rico commercial banks to conduct certain financial and related activities directly or through subsidiaries, including finance leasing of personal property and operating a small loan company.
The Banking Law requires every bank to maintain a legal reserve which shall not be less than twenty percent (20%) of its demand liabilities, except government deposits (federal, state and municipal) which are secured by actual collateral. The reserve is required to be composed of any of the following securities or combination thereof: (1) legal tender of the United States; (2) checks on banks or trust companies located in any part of Puerto Rico, to be presented for collection during the day following that on which they are received, and (3) money deposited in other banks provided said deposits are authorized by the Commissioner, subject to immediate collection.
The Banking Law permits Puerto Rico commercial banks to make loans to any one person, firm, partnership or corporation, up to an aggregate amount of fifteen percent (15%) of paid-in capital and reserve fund of the commercial bank. If such loans are secured by collateral worth at least twenty-five percent (25%) more than the amount of the loan, the aggregate maximum amount may reach one third of the paid-in capital of the commercial bank, plus its reserve fund. There are no restrictions under the Banking Law on the amount of loans which are wholly secured by bonds, securities and other evidences of indebtedness of the Government of the United States, of the Commonwealth of Puerto Rico, or by bonds, not in default, of municipalities or instrumentalities of the Commonwealth of Puerto Rico.
The Banking Law prohibits Puerto Rico commercial banks from making loans secured by their own stock, and from purchasing their own stock, unless such purchase is made pursuant to a stock repurchase program approved by the Commissioner or is necessary to prevent losses because of a debt previously contracted in good faith. The stock so purchased by the Puerto Rico commercial bank must be sold by the bank in a public or private sale within one year from the date of purchase.
The Banking Law provides that no officers, directors, agents or employees of a Puerto Rico commercial bank may serve or discharge a position of officer, director, agent or employee of another Puerto Rico commercial bank, financial company, savings and loan association, trust company, company engaged in granting mortgage loans or any other institution engaged in the money lending business in Puerto Rico. This prohibition is not applicable to the subsidiaries of a Puerto Rico commercial bank.
The Banking Law requires that Puerto Rico commercial banks strike each year a general balance of their operations, and to submit such balance for approval to a regular general meeting of stockholders, together with an explanatory report thereon. The Banking Law also requires that at least ten percent (10%) of the yearly net income of a Puerto Rico commercial bank be credited annually, to a reserve fund. This apportionment is required to be done every year until such reserve fund shall be equal to the total paid in capital of the bank.
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The Banking Law also provides that when the expenditures of a Puerto Rico commercial bank are greater than receipts, the excess of the expenditures over receipts shall be charged against the undistributed profits of the bank, and the balance, if any, shall be charged against the reserve fund, as a reduction thereof. If there is no reserve fund sufficient to cover such balance in whole or in part, the outstanding amount shall be charged against the capital account and no dividend shall be declared until said capital has been restored to its original amount and the reserve fund to twenty percent (20%) of the original capital.
The Finance Board, which is composed of the Commissioner, the Secretary of the Treasury, the Secretary of Commerce, the Secretary of Consumer Affairs, the President of the Economic Development Bank, the President of the Government Development Bank, and the President of the Planning Board, has the authority to regulate the maximum interest rates and finance charges that may be charged on loans to individuals and unincorporated businesses in Puerto Rico. The current regulations of the Finance Board provide that the applicable interest rate on loans to individuals and unincorporated businesses, including real estate development loans but excluding certain other personal and commercial loans secured by mortgages on real estate properties, is to be determined by free competition. Regulations adopted by the Finance Board deregulated the maximum finance charges on retail installment sales contracts, and for credit card purchases. These regulations do not set a maximum rate for charges on retail installment sales contracts and for credit card purchases and set aside previous regulations which regulated these maximum finance charges. Furthermore, there is no maximum rate set for installment sales contracts involving motor vehicles, commercial, agricultural and industrial equipment, commercial electric appliances and insurance premiums.
10International Banking Act of Puerto Rico (IBE Act). The business and operations of the First BanCorp and FirstBank IBE’s are subject to supervision and regulation by the Commissioner. Under the IBE Act, certain sales, encumbrances, assignments, mergers, exchange or transfer of shares, interest or participation in the capital of an international banking entity (an “IBE”) may not be initiated without the prior approval of the Commissioner. The IBE Act and the regulations issued thereunder by the Commissioner (the “IBE Regulations”) limit the business activities that may be carried out by an IBE. Such activities are limited in part to persons and assets located outside of Puerto Rico.
Pursuant to the IBE Act and the IBE Regulations, the First BanCorp and FirstBank IBE’s must maintain books and records of all its transactions in the ordinary course of business. The First BanCorp and FirstBank are also required thereunder to submit to the Commissioner quarterly and annual reports of its financial condition and results of operations, including annual audited financial statements.
The IBE Act empowers the Commissioner to revoke or suspend, after notice and hearing, a license issued thereunder if, among other things, the IBE fails to comply with the IBE Act, the IBE Regulations or the terms of its license, or if the Commissioner finds that the business or affairs of the IBE are conducted in a manner that is not consistent with the public interest.
Insurance Operations Regulation.FirstBank Insurance Agency, Inc. is registered as an insurance agency with the Commissioner of Insurance of Puerto Rico. FirstBank Insurance Agency, Inc. is subject to regulations issued by the Commissioner of Insurance of Puerto Rico and FDIC relating to, among other things, licensing of employees, sales, solicitation and advertising practices, and consumer protections.
Community Reinvestment.Under the Community Reinvestment Act (“CRA”), federally insured banks have a continuing and affirmative obligation to meet the credit needs of their entire community, including low and moderate-income residents, consistent with its safe and sound
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operation. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit and institution’s discretion to develop the type of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the federal supervisory agencies, as part of the general examination of supervised banks, to assess the bank’s record of meeting the credit needs of its community, assign a performance rating, and to take such record and rating into account in its evaluation of certain applications by such bank. The CRA also requires all institutions to make public disclosure of their CRA ratings. FirstBank received a “satisfactory” CRA rating in its most recent examination.
Recent Legislation.The Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley Act”), which became law on July 30, 2002, added new legal requirements for public companies affecting corporate governance, accounting and corporate reporting.
The Sarbanes-Oxley Act provides for, among other things:
| • | a prohibition on personal loans made or arranged by the issuer to its directors and executive officers (except for loans made by a bank subject to Regulation O); | |
| • | independence requirements for audit committee members; | |
| • | independence requirements for company auditors; | |
| • | certification of financial statements on Forms 10-K and 10-Q reports by the chief executive officer and the chief financial officer; | |
| • | the forfeiture by the chief executive officer and the chief financial officer of bonuses or other incentive-based compensation and profits from the sale of an issuer’s securities by such officers in the twelve month period following initial publication of any financial statements that later require restatement due to corporate misconduct; | |
| • | disclosure of off-balance sheet transactions; | |
| • | two-business day filing requirements for insiders filing Form 4s; | |
| • | disclosure of a code of ethics for financial officers and filing a Form 8-K for a change in or waiver of such code; | |
| • | the reporting of securities violations “up the ladder” by both in-house and outside attorneys; | |
| • | restrictions on the use of non-GAAP financial measures in press releases and SEC filings; | |
| • | the formation of a public accounting oversight board; and | |
| • | various increased criminal penalties for violations of securities laws. |
The Sarbanes-Oxley Act contains provisions which became effective upon enactment on July 30, 2002 and provisions which will become effective from within 30 days to one year from enactment.
The SEC has been delegated the task of enacting rules to implement various provisions. In addition, each of the national stock exchanges has proposed new corporate governance rules, including
12
rules strengthening director independence requirements for boards, the adoption of corporate governance codes and charters for the nominating, corporate governance and audit committees.
As part of the USA Patriot Act, signed into law on October 26, 2001, Congress adopted the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 (the “Act”). The Act authorizes the Secretary of the Treasury, in consultation with the heads of other government agencies, to adopt special measures applicable to financial institutions such as banks, bank holding companies, broker-dealers and insurance companies. Among its other provisions, the Act requires each financial institution: (i) to establish an anti-money laundering program; (ii) to establish due diligence policies, procedures and controls that are reasonably designed to detect and report instances of money laundering in United States private banking accounts and correspondent accounts maintained for non-United States persons or their representatives; and (iii) to avoid establishing, maintaining, administering, or managing correspondent accounts in the United States for, or on behalf of, a foreign shell bank that does not have a physical presence in any country. In addition, the Act expands the circumstances under which funds in a bank account may be forfeited and requires covered financial institutions to respond under certain circumstances to requests for information from federal banking agencies within 120 hours.
MARKET AREA AND COMPETITION
Puerto Rico, where the banking market is highly competitive, is the main geographic service area of the Corporation. At December 31, 2000, Puerto
Rico had 17 banking institutions with a total of approximately $55 billion in
assets accordingAccording to the latest industry statistics published by the Commissioner.Commissioner, Puerto Rico has 17 banking institutions with approximately $67 billion in assets. The Corporation ranked thirdsecond based on total assets at December 31, 2000.assets. The other
largest banksbank in order of size werewas Banco Popular de Puerto Rico and Banco
Santander Puerto Rico. Puerto Rico banks are subject to the same federal laws, regulations and supervision that apply to similar institutions on the United States mainland.
In addition, the Corporation competes with brokerage firms with retail operations, credit unions, cooperatives, small loan companies and mortgage banks in Puerto Rico.
The Corporation encounters intense competition in attracting and retaining deposits and in its consumer and commercial lending activities. The Corporation competes for loans with other financial institutions, some of which are larger and have available resources greater than those of the Corporation.
There can be no assurance that in the future the Corporation will be able to
continue to increase its deposit base or originate loans in the manner or on the
terms on which it has done so in the past.
Management believes that the Corporation has been able to compete effectively for deposits and loans by offering a variety of transaction account products and loans with competitive features, by pricing its products at competitive interest rates and by offering convenient branch locations and emphasizing the quality of its service. The Corporation'sCorporation’s ability to originate loans depends primarily on the rates and fees charged and the service it provides to its borrowers in making prompt credit decisions. 11
13
FINANCIAL CONDITION
The Corporation'sCorporation’s total assets at December 31, 20002002 amounted to $5,920$9,644 million, $1,198$1,446 million over the $4,722$8,198 million at December 31, 1999.2001.
The following table sets forth the maturity distribution of earning assets at December 31, 2000:
2002:
| As of December 31, 2002 | |||||||||||||||||||||||||
| Maturities | |||||||||||||||||||||||||
| After one year | |||||||||||||||||||||||||
| through five years | After five years | ||||||||||||||||||||||||
| Fixed | Variable | Fixed | Variable | ||||||||||||||||||||||
| One year | interest | interest | interest | interest | |||||||||||||||||||||
| or less | rates | rates | rates | rates | Total | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||
| Money market securities | $ | 273,660 | $ | 273,660 | |||||||||||||||||||||
| Investment securities(1) | 103,328 | $ | 63,138 | $ | 59,432 | $ | 3,218,492 | $ | 10,619 | 3,455,009 | |||||||||||||||
| Loans(2): | |||||||||||||||||||||||||
| Residential real estate | 61,627 | 87,219 | 99,472 | 817,825 | 787,925 | 1,854,068 | |||||||||||||||||||
| Construction | 27,268 | 2,126 | 2,803 | 226,856 | 259,053 | ||||||||||||||||||||
| Commercial and commercial real estate | 423,580 | 58,368 | 267,497 | 163,349 | 1,319,511 | 2,232,305 | |||||||||||||||||||
| Lease financing | 3,717 | 108,539 | 31,156 | 143,412 | |||||||||||||||||||||
| Consumer | 429,289 | 649,459 | 3,081 | 52,941 | 14,242 | 1,149,012 | |||||||||||||||||||
| Total Loans | 945,481 | 905,711 | 370,050 | 1,068,074 | 2,348,534 | 5,637,850 | |||||||||||||||||||
| Total | $ | 1,322,469 | $ | 968,849 | $ | 429,482 | $ | 4,286,566 | $ | 2,359,153 | $ | 9,366,519 | |||||||||||||
| (1) | Equity securities and FHLB stock were included under the “one year | |
| (2) | Non-accruing loans were included under the “one year or less category”. |
LENDING ACTIVITIES
At December 31, 20002002 First BanCorp.'sBanCorp’s lending activities include total commercial loans of $1,590$2,491 million (45%(44% of total loans), total consumer loans of $1,039$1,149 million (30%(20% of total loans), and total residential mortgage loans of $747$1,854 million (21%(33% of total loans). The Corporation'sCorporation’s portfolio of commercial loans is composed in its majority of asset based financing and commercial mortgagereal estate loans. Total commercial loans include $438$814 million in commercial real estate loans and $204$259 million in construction loans. The consumer loan portfolio consists principally of auto loans, personal loans and credit cards. The Portfolioportfolio of Financefinance leases of $123$143 million (3% of total loans), is mostly composed of loans to individuals to finance the acquisition of an auto.
12
14
The following table sets forth the composition of First BanCorp.'sBanCorp’s total loanloans at the dates indicated.
2000 1999 1998 1997 1996
------------ ------------ ------------ -------------- -------------
(In thousands)
Residential real estate loans:
Secured by first mortgages:
Conventional $695,344 $395,885 $237,561 $223,098 $224,253
Insured by government agencies:
Federal Housing Administration
and Veterans Administration 20,004 6,543 8,185 10,176 9,282
Puerto Rico Housing Corporation
and Finance Agency 28,037 32,928 38,516 44,073 50,016
Secured by second mortgages 8,964 5,706 4,956 14,171 14,375
------------ ----------- -------- -------- -----------
752,349 441,062 289,218 291,518 297,926
Deferred net loan fees (5,557) (5,293) (6,848) (9,138) (8,531)
----------- ---------- -------- -------- ------------
Residential real estate loans 746,792 435,769 282,370 282,380 289,395
---------- --------- ------- ------- -----------
Commercial loans:
Construction, land acquisition and
land improvements 484,986 288,302 161,498 15,400 12,407
Undisbursed portion of loans
in process (281,031) (156,234) (98,535) (6,121) (2,198)
----------- --------- --------- -------- ----------
Construction loans 203,955 132,068 62,963 9,279 10,209
Commercial loans 947,709 655,417 368,549 235,571 174,770
Commercial mortgage 438,321 371,643 332,219 306,734 256,227
------------- ------------- ---------- --------- -----------
Commercial loans 1,589,985 1,159,128 763,731 551,584 441,206
------------ ----------- ---------- --------- ----------
Finance leases 122,883 85,692 52,214 42,500 58,481
------------ ------------- ----------- ---------- -----------
Consumer and other loans:
Personal 401,548 435,752 472,588 676,965 749,732
Auto 530,534 532,242 512,116 512,938 510,083
Boat 33,954 37,018 32,209 29,145 29,458
Credit card 174,797 168,045 125,956 116,734 109,259
Home equity reserve 2,134 2,657 3,385 4,282 5,828
Other 106 128 148 651
Unearned finance interest (104,429) (148,836) (145,284) (267,599) (305,870)
----------- ---------- ----------- ------------ ----------
Consumer and other loans 1,038,538 1,026,985 1,001,098 1,072,613 1,099,141
----------- ---------- ---------- ----------- ----------
Loans receivable 3,498,198 2,707,574 2,099,413 1,949,077 1,888,223
Loans available for sale _________ 37,794 20,642 10,225 7,851
------------ ----------- ----------- ------------
Total loans 3,498,198 2,745,368 2,120,054 1,959,302 1,896,074
Allowance for loan losses (76,919) (71,784) (67,854) (57,712) (55,254)
------------ ------------ ------------ ----------- -----------
Total loans-net $3,421,279 $2,673,584 $2,052,200 $1,901,590 $1,840,821
========== ========== ========== ========== ==========
13
| Year ended December 31, | ||||||||||||||||||||||
| 2002 | 2001 | 2000 | 1999 | 1998 | ||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||
| Residential real estate loans: | ||||||||||||||||||||||
| Secured by first mortgages: | ||||||||||||||||||||||
| Conventional | $ | 1,778,046 | $ | 955,573 | $ | 695,344 | $ | 395,885 | $ | 237,561 | ||||||||||||
| Insured by government agencies: | ||||||||||||||||||||||
| Federal Housing Administration and Veterans Administration | 41,805 | 25,211 | 20,004 | 6,543 | 8,185 | |||||||||||||||||
| Puerto Rico Housing Corporation and Finance Agency | 19,060 | 23,513 | 28,037 | 32,928 | 38,516 | |||||||||||||||||
| Secured by second mortgages | 7,650 | 8,088 | 8,964 | 5,706 | 4,956 | |||||||||||||||||
| 1,846,561 | 1,012,385 | 752,349 | 441,062 | 289,218 | ||||||||||||||||||
| Deferred net loan fees | (3,247 | ) | (5,107 | ) | (5,557 | ) | (5,293 | ) | (6,848 | ) | ||||||||||||
| Residential real estate loans | 1,843,314 | 1,007,278 | 746,792 | 435,769 | 282,370 | |||||||||||||||||
| Commercial loans: | ||||||||||||||||||||||
| Construction, land acquisition and land improvements | 467,978 | 413,218 | 484,986 | 288,302 | 161,498 | |||||||||||||||||
| Undisbursed portion of loans in process | (208,925 | ) | (193,822 | ) | (281,031 | ) | (156,234 | ) | (98,535 | ) | ||||||||||||
| Construction loans | 259,053 | 219,396 | 203,955 | 132,068 | 62,963 | |||||||||||||||||
| Commercial loans | 1,418,792 | 1,238,173 | 947,709 | 655,417 | 368,549 | |||||||||||||||||
| Commercial mortgage | 813,513 | 688,922 | 438,321 | 371,643 | 332,219 | |||||||||||||||||
| Commercial loans | 2,491,358 | 2,146,491 | 1,589,985 | 1,159,128 | 763,731 | |||||||||||||||||
| Finance leases | 143,412 | 127,935 | 122,883 | 85,692 | 52,214 | |||||||||||||||||
| Consumer loans: | ||||||||||||||||||||||
| Personal | 424,332 | 373,706 | 401,548 | 435,858 | 472,716 | |||||||||||||||||
| Auto | 565,478 | 502,902 | 530,534 | 532,242 | 512,116 | |||||||||||||||||
| Boat | 53,017 | 39,570 | 33,954 | 37,018 | 32,209 | |||||||||||||||||
| Credit card | 164,172 | 176,226 | 174,797 | 168,045 | 125,956 | |||||||||||||||||
| Home equity reserve | 4,566 | 1,851 | 2,134 | 2,657 | 3,385 | |||||||||||||||||
| Unearned finance interest | (62,553 | ) | (71,810 | ) | (104,429 | ) | (148,836 | ) | (145,284 | ) | ||||||||||||
| Consumer and other loans | 1,149,012 | 1,022,445 | 1,038,538 | 1,026,985 | 1,001,098 | |||||||||||||||||
| Loans receivable | 5,627,096 | 4,304,149 | 3,498,198 | 2,707,574 | 2,099,413 | |||||||||||||||||
| Loans held for sale | 10,754 | 4,630 | 37,794 | 20,642 | ||||||||||||||||||
| Total loans | 5,637,850 | 4,308,779 | 3,498,198 | 2,745,368 | 2,120,054 | |||||||||||||||||
| Allowance for loan losses | (111,911 | ) | (91,060 | ) | (76,919 | ) | (71,784 | ) | (67,854 | ) | ||||||||||||
| Total loans-net | $ | 5,525,939 | $ | 4,217,719 | $ | 3,421,279 | $ | 2,673,584 | $ | 2,052,200 | ||||||||||||
15
The following table sets forth the composition of First BanCorp.'sBanCorp’s total loan portfolio before the allowance for loan losses and the estimated weighted average taxable equivalent interest rates of loans in each category at December 31, 2000.
2002.
December 31, 2000
Weighted
(In thousands) average rate
Residential real estate loans $ 746,792 8.69%
-------------
Construction loans 203,955 10.32%
--------------
Commercial and commercial real estate loans 1,386,030 9.33%
-------------
Finance leases 122,883 11.79%
----------------
Consumer and other loans
Auto 467,367 10.60%
Personal 362,243 16.84%
Credit card 174,797 15.46%
Boat 31,997 10.29%
Home equity reserve loans 2,134 12.88%
---------------
Total consumer and other loans 1,038,538 13.59%
-------------
Total $ 3,498,198 10.61%
===========
| December 31, 2002 | |||||||||
| Weighted | |||||||||
| (In thousands) | average rate | ||||||||
| Residential real estate loans | $ | 1,854,068 | 5.43 | % | |||||
| Construction loans | 259,053 | 5.13 | % | ||||||
| Commercial and commercial real estate loans | 2,232,305 | 5.03 | % | ||||||
| Finance leases | 143,412 | 10.14 | % | ||||||
| Consumer loans: | |||||||||
| Auto | 550,697 | 10.69 | % | ||||||
| Personal | 377,303 | 16.47 | % | ||||||
| Credit card | 164,172 | 14.98 | % | ||||||
| Boat | 52,274 | 8.53 | % | ||||||
| Home equity reserve loans | 4,566 | 7.45 | % | ||||||
| Total consumer and other loans | 1,149,012 | 13.13 | % | ||||||
| Total | $ | 5,637,850 | 6.95 | % | |||||
Loan Activity
The following table sets forth certain additional data related to the Corporation'sCorporation’s loan portfolio net of the allowance for loan losses for the dates indicated:
| For the year ended December 31, | ||||||||||||||||||||
| 2002 | 2001 | 2000 | 1999 | 1998 | ||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
| Beginning balance | $ | 4,217,719 | $ | 3,421,279 | $ | 2,673,584 | $ | 2,052,200 | $ | 1,901,590 | ||||||||||
| Residential real estate loans originated and purchased | 1,045,268 | 613,698 | 416,077 | 216,713 | 93,552 | |||||||||||||||
| Commercial loans originated and purchased | 581,654 | 798,038 | 555,530 | 623,590 | 307,009 | |||||||||||||||
| Finance leases originated | 54,750 | 45,094 | 65,646 | 51,618 | 34,427 | |||||||||||||||
| Consumer loans originated | 431,588 | 363,582 | 423,411 | 515,348 | 371,333 | |||||||||||||||
Total loans originated(1) | 2,113,260 | 1,820,412 | 1,460,664 | 1,407,269 | 806,321 | |||||||||||||||
| Sales and securitizations of loans | (80,446 | ) | (41,060 | ) | (1,267 | ) | ||||||||||||||
| Repayments and prepayments | (635,765 | ) | (897,832 | ) | (646,581 | ) | (719,964 | ) | (559,727 | ) | ||||||||||
Other decreases(2) | (88,829 | ) | (85,080 | ) | (66,388 | ) | (64,654 | ) | (95,984 | ) | ||||||||||
| Net increase | 1,308,220 | 796,440 | 747,695 | 621,384 | 150,610 | |||||||||||||||
| Ending balance | $ | 5,525,939 | $ | 4,217,719 | $ | 3,421,279 | $ | 2,673,584 | $ | 2,052,200 | ||||||||||
| Percentage increase | 31.02 | % | 23.28 | % | 27.97 | % | 30.28 | % | 7.92 | % | ||||||||||
| (1) | Loan origination includes $435 million acquired from JP Morgan Chase VI operations together with the | |
| (2) | Includes the change in the allowance for loan losses and cancellation of loans due to the repossession of the collateral. |
16
INVESTMENT ACTIVITIES
The Corporation'sCorporation’s investments are managed by the Treasury and Investment Division, under the supervision of the Senior Vice President, Treasury and Investments, who reports to the Corporation'sCorporation’s Senior Executive Vice President and Chief Financial Officer. Investment policy for the holding company is set by the Corporation'sCorporation’s Investment Committee, which includes the President and Chief Executive Officer, the Senior Executive Vice President and Chief Financial Officer, the Executive Vice President for First Securities, the
Executive Vice President for Sales and DistributionRetail and Mortgage Banking, the Senior Vice President for Treasury and Investments, and the Economist. Significant investment transactions are reported to the Investment Committee.
Investment policy for FirstBank, the principal subsidiary of First BanCorp, is set by the Bank'sBank’s Asset Liability Management and Investment Committee (ALCO), which has the same members of the CorporationCorporation’s Investment Committee. The ALCO sets investment policies, monitors liquidity trends, and conducts quarterly reviews of the Bank'sBank’s interest rate risk exposure. Significant investment transactions are reported to the ALCO.
The Corporation'sCorporation’s investment policies are designed primarily to provide a portfolio of high credit quality while seeking high levels of net interest income within acceptable limits of interest rate risk, credit risk, capital and liquidity. Under the Corporation'sCorporation’s current policy, the Treasury and Investments Division is authorized to purchase and sell federal funds, certificates of deposit in other banks, bankers'bankers’ acceptances of commercial banks that are members of the FDIC, mortgage backed securities, U.S.United States and Puerto Rico obligations, corporate debt and stocks and other investments. In addition, the Treasury and Investments Division is authorized to invest in securities purchased under agreements to resell. As part of the Corporation'sCorporation’s asset and liability management, the Treasury and Investments Division also engages in hedging activities as approved by the Board of Directors and as set forth in the Corporation'sCorporation’s hedging policy monitored by the Investment Committee.
SOURCES OF FUNDS
First BanCorp.'sBanCorp’s principal funding sources are branch-based deposits, retail brokered deposits, institutional deposits, federal funds purchased and securities sold under agreements to repurchase, and notes.FHLB advances. Through its branch banking system First BanCorp.BanCorp offers individual non-interest bearing checking accounts, savings accounts, personal interest-bearing checking accounts, certificates of deposit, IRA accounts and commercial non-interest bearing checking accounts.
Deposit Accounts
Deposits represent First BanCorp.'sBanCorp’s largest source of funding. The Corporation'sCorporation’s deposit accounts are insured up to applicable limits by the SAIF. Management makes retail deposit pricing decisions periodically through the ALCO, which adjusts the rates paid on retail deposits in response to general market conditions and local competition. Pricing decisions take into account the rates being offered by other local banks, LIBOR and mainland United States interest rates. The following table presents the amount and weighted average interest rates of deposit accounts as of each date indicated in the categories set forth below, including the percentage of total assets represented by those deposits.
15
Weighted average
rates at
December 31, December 31,
------------ ----------------------------------------
2000 2000 1999 1998
---- ---- ---- ----
(Dollars in thousands)
Non-interest bearing checking accounts $ 232,164 $ 211,896 $ 173,104
Saving accounts 2.95% 430,298 447,946 416,424
Interest bearing checking accounts 3.50% 170,631 162,601 130,883
Certificate accounts 6.49% 2,512,891 1,742,978 1,054,634
----------- ----------- -----------
Total $3,345,984 $2,565,422 $1,775,045
========== ========== ==========
Weighted average rate on interest
bearing deposits 5.83%
Total deposits as a percentage of
total assets 56.52% 54.33% 44.18%
17
| Weighted | |||||||||||||||||
| average | |||||||||||||||||
| rates at | |||||||||||||||||
| December31, | December 31, | ||||||||||||||||
| 2002 | 2002 | 2001 | 2000 | ||||||||||||||
| (Dollars in thousands) | |||||||||||||||||
| Non-interest bearing checking accounts | $ | 447,076 | $ | 239,851 | $ | 232,164 | |||||||||||
| Saving accounts | 1.82 | % | 921,103 | 469,452 | 430,298 | ||||||||||||
| Interest bearing checking accounts | 1.70 | % | 230,743 | 205,760 | 170,631 | ||||||||||||
| Certificate accounts | 2.83 | % | 3,883,996 | 3,183,491 | 2,512,891 | ||||||||||||
| �� | |||||||||||||||||
| Total | $ | 5,482,918 | $ | 4,098,554 | $ | 3,345,984 | |||||||||||
| Weighted average rate on interest bearing deposits | 2.58 | % | |||||||||||||||
| Total deposits as a percentage of total assets | 56.85 | % | 50.00 | % | 56.52 | % | |||||||||||
Certificate accounts include institutional deposits which consist mainly of brokered certificate of deposits, and certificates issued to agencies of the Government of Puerto Rico. Under FDIC these regulations, a bank cannot accept, roll over or renew brokered deposits, which term is defined also to include any deposit with an interest rate more than 75 basis points above prevailing rates, unless (i) it is well capitalized or (ii) it is adequately capitalized and receives a waiver from the FDIC. The Bank has no such restrictions since it is a well capitalized institution.
The following table presents a maturity summary of certificates of deposits with balances of $100,000 or more at December 31, 2000.
(In thousands)
Three months or less $ 346,526
Over three months to six months 217,094
Over six months to one year 158,131
Over one year 1,273,980
------------
Total $1,995,731
==========
16
| (In thousands) | |||||
| Three months or less | $ | 514,811 | |||
| Over three months to six months | 169,814 | ||||
| Over six months to one year | 70,902 | ||||
| Over one year | 2,624,222 | ||||
| Total | $ | 3,379,749 | |||
Borrowings
The following table presents the amount and weighted average interest rates of borrowings as of each date indicated in the categories set forth below.
Weighted average
rates at December 31, December 31,
---------------------- -------------------------------------------------------
2000 2000 1999 1998
---- ------ ----- ----
(Dollars in thousands)
Borrowings:
Federal funds purchased and
securities sold under
agreements to repurchase 6.32% $1,851,286 $1,447,732 $1,620,630
FHLB advances 6.30% 67,000 50,000 2,600
Notes payable 6.08% 55,500 55,500 118,100
Other short-term borrowings 152,484 86,595
Subordinated notes 8.14% 90,548 93,594 99,496
------------- ------------- ------------
Total 6.39% $2,064,334 $1,799,310 $1,927,421
========== ========== ==========
Total borrowed funds as a percentage
of total assets 34.87% 38.11% 47.98%
Weighted average interest rate during the period:
Securities sold under agreements to repurchase 6.23% 5.07% 5.07%
Other short-term borrowings 6.29% 6.39%
| Weighted average | |||||||||||||||||
| rates at December 31, | December 31, | ||||||||||||||||
| 2002 | 2002 | 2001 | 2000 | ||||||||||||||
| (Dollars in thousands) | |||||||||||||||||
| Borrowings: | |||||||||||||||||
| Federal funds purchased and securities sold under agreements to repurchase | 3.82 | % | $ | 2,793,540 | $ | 2,997,174 | $ | 1,856,436 | |||||||||
| FHLB advances | 4.34 | % | 373,000 | 343,700 | 67,000 | ||||||||||||
| Subordinated notes | 8.04 | % | 82,815 | 84,362 | 90,548 | ||||||||||||
| Notes payable | 55,500 | ||||||||||||||||
| Total | 3.98 | % | $ | 3,249,355 | $ | 3,425,236 | $ | 2,069,484 | |||||||||
| Total borrowed funds as a percentage of total assets | 33.69 | % | 41.65 | % | 34.87 | % | |||||||||||
| Weighted average interest rate during the period: | |||||||||||||||||
| Securities sold under agreements to repurchase | 4.21 | % | 4.90 | % | 6.23 | % | |||||||||||
18
CAPITAL
At December 31, 2000,2002, total stockholders'stockholders’ equity for the Corporation amounted to $434$798 million, an increase of $139$195 million as compared to $295$603 million at December 31, 1999.
2001. During 2002 First BanCorp issued $92 million of preferred stock.
Employees
At December 31, 20002002, the Corporation employed 1,6661,973 persons. None of its employees are represented by a collective bargaining group. The Corporation considers its employees'employees’ relations to be good.
17
Item 2. Properties
At December 31, 20002002, First BanCorp.BanCorp owned the following three main offices premises,
13located in Puerto Rico:
| Main offices: | ||
| 1. | Headquarters Offices – Located at First Federal Building, 1519 Ponce de León Avenue, Santurce, Puerto Rico, a 16 story office building. Approximately 61% of the building and an underground three levels parking lot are owned by the Corporation. | |
| 2. | EDP & Operations Center – A five story structure located at 1506 Ponce de León Avenue, Santurce, Puerto Rico. These facilities are fully occupied by the Corporation. | |
| 3. | Consumer Lending Center – A three story building with a three levels parking lot located at 876 Muñoz Rivera Avenue, corner Jesús T. Piñero Avenue, Hato Rey, Puerto Rico. These facilities are fully occupied by the Corporation. |
In addition, the Corporation owned 14 branch and office premises four loan centers and an auto lot. All these
premises are located in Puerto Rico. In addition, at December 31, 2000, theThe Corporation leased in Puerto Rico 3140 branch premises, 28 loan and office centers and sevensix other facilities. The Corporation leased four branchAll these premises are located in Puerto Rico and in the Virgin Islands.Eastern Caribbean Region. Management believes that the Corporation'sCorporation’s properties are well maintained and are suitable for the Corporation'sCorporation’s business as presently conducted.
Main offices:
------------
1. Headquarters Offices - Located at First Federal Building, 1519 Ponce de
Leon Avenue, Santurce, Puerto Rico, a 16 story office building.
Approximately 50% of the building and an underground three levels parking
lot are owned by the Corporation.
2. EDP & Operations Center - A five story structure located at 1506 Ponce de
Leon Avenue, Santurce, Puerto Rico. These facilities are fully occupied by
the Corporation.
3. Personal Lending and Branch Administration Center - A three story
building with a three levels parking lot located at 876 Munoz Rivera Avenue,
corner Jesus T. Pinero Avenue, Hato Rey, Puerto Rico. These facilities are fully
occupied by the Corporation.
Item 3. Legal Proceedings
The information required herein is incorporated by reference from page 7480 of the annual report to security holders for the year ended December 31, 20002002 (see Exhibit 13 to this Form 10-K).
Item 4. Submission of Matters to a Vote of Security Holders
No matters were voted upon during the fourth quarter of 2000.
18
19
PART II
Item 5. Market for Corporation'sRegistrant’s Common EquityStock and Related Stockholder Matters
a) Market Information
The information required herein is incorporated by reference from page 3947 of the annual report to security holders for the year ended December 31, 2000.
2002.
b) Holders
The information required herein is incorporated by reference from page 3947 of the annual report to security holders for the year ended December 31, 2000.
2002.
c) Dividends
The Corporation has a policy providing for the payment of quarterly cash dividends on its outstanding shares of common stock. Accordingly, the Corporation declared a cash dividend of $0.11$0.10 per share for each quarter of 2000,2002, $0.09 per share for each quarter of 19992001 and $0.075$0.07 per share for each quarter of 1998.2000.
The Puerto Rico Internal Revenue Code requires the withholding of income tax from dividends income derived by resident U.S. citizens, special partnerships, trusts and estates and by non-resident U.S. citizens, custodians, partnerships, and corporations from sources within Puerto Rico.
Resident U.S. Citizens
A special tax of 10% is imposed on eligible dividends paid to individuals, special partnerships, trusts and estates to be applied to all distributions unless the taxpayer specifically elects otherwise. Once this election is made it is irrevocable. However, the taxpayer can elect to include in gross income the eligible distributions received and take a credit for the amount of tax withheld. If he does not make this election in his tax return, then he can exclude from his gross income the distributions received and reported without claiming the credit for the tax withheld.
Nonresident U.S. Citizens
Have the right to certain exemptions when a Withholding Tax Exemption Certificate (Form 2732) is properly filled-in and filed with the Corporation. The Corporation as withholding agent is authorized to withhold a tax of 10% only from the excess of the income paid over the applicable tax-exempt amount.
U.S. Corporations and Partnerships
Corporations or partnerships not organized under Puerto Rico laws that have not engaged in business or trade in Puerto Rico during the taxable year in which the dividend is paid are subject to the 10% dividend tax withholding.
Corporations or partnerships not organized under the laws of Puerto Rico that have engaged in trade or business in Puerto Rico corporations or partnerships are not subject to the 10% retention,withholding, but they must declare the dividend as gross income in their Puerto Rico income tax return.
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20
Item 6. Selected Financial Data
The information required herein is incorporated by reference from page 228 through 239 of the annual report to security holders for the year ended December 31, 2000.
2002.
Item 7. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
The information required herein is incorporated by reference from page 2428 through 3947 of the annual report to security holders for the year ended December 31, 2000.
2002.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information required herein is incorporated by reference from page 4044 through 45 of the annual report to security holders for the year ended December 31, 2000.
2002.
Item 8. Financial Statements and Supplementary Data
The information required herein is incorporated by reference from page 4149 through 7682 of the annual report to security holders for the year ended December 31, 2000.
2002.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
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21
PART III
Item 10. Directors, Executive Officers and Control Persons of the CorporationRegistrant
The information required herein is incorporated by reference to the information under the captions "Information“Information with respect to nominees for directors of the Company, directors whose terms continue and executive officers of the Company"Company” and "Section“Section 16(a) Compliance"Compliance” in the Corporation'sCorporation’s definite proxy statement filed on/or about March 28, 2001.
2003.
Item 11. Executive Compensation
The information required herein is incorporated by reference to the information under the captions "Compensation“Compensation of Directors"Directors”, "Compensation“Compensation of Executive Officers"Officers”, "Stock“Stock Options Plans"Plans”, "Options/“Options/Grants in Last Fiscal Year"Year”, "Aggregate“Aggregate Options/SAR Exercises in Last Fiscal Year and Fiscal Year-End Options/SAR Values"Options Values”, "Employment Agreements"“Employment Agreements”, "Defined“Defined Contributions Retirement Plan"Plan”, "Report“Report of the Compensation Committee"Committee”, "Compensation“Compensation Committee Interlocks and Insider Participation"Participation”, "Other“Other Employment Benefits"Benefits”, “Deferred Compensation Plan” and "Performance“Performance of Common Stock"Stock” in the definite proxy statement filed on/or about March 28, 2001.
2003.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required herein is incorporated by reference to the information under the caption "Benefical“Beneficial Ownership of Securities"Securities” in the Corporation'sCorporation’s definite proxy statement filed on/or about March 28, 2001.
2003.
Item 13. Certain Relationships and Related Transactions
The information required herein is incorporated by reference to the information under the caption "Business“Business Transactions Between the Company and its Subsidiaries and Executive Officers and Directors"Directors” in the Corporation'sCorporation’s definite proxy statement filed on/on or about March 28, 2001.
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Item 14. Controls and Procedures
Within the 90-day period prior to the filing of this Annual Report on Form 10-K, an evaluation was carried out under the supervision and with the participation of First BanCorp Management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-14 (c) under the Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective. No significant changes were made in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.
22
PART IV
Item 14.15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) The following financial statements are included in Item 8 thereof:
- - Report of independent accountants
- Consolidated Statements of Financial Condition at December 31, 2000 and
1999.
- Consolidated Statements of Income for Each of the Three Years in the
Period Ended December 31, 2000.
- Consolidated Statements of Changes in Stockholders' Equity for Each of
the Three Years in the Period Ended December 31, 2000.
- Consolidated Statements of Comprehensive Income for each of the Three
Years in the Period Ended December 31, 2000.
- Consolidated Statements of Cash Flows for Each of the Three Years in the
Period Ended December 31, 2000.
- - Notes to Consolidated Financial Statements.
(2) Financial statement schedules.
Schedules are omitted because they are not applicable or because the
required information is contained in the Consolidated Financial
Statements described in (a)(1) above or in the Notes thereto.
(3) Exhibits
| (a) | (1) The following financial statements are included in Item 8 thereof: |
| - Report of Independent Accountants | |||
| - Consolidated Statements of Financial Condition at December 31, 2002 and 2001. | |||
| - Consolidated Statements of Income for Each of the Three Years in the Period Ended December 31, 2002. | |||
| - Consolidated Statements of Changes in Stockholders’ Equity for Each of the Three Years in the Period Ended December 31, 2002. | |||
| - Consolidated Statements of Comprehensive Income for each of the Three Years in the Period Ended December 31, 2002. | |||
| - Consolidated Statements of Cash Flows for Each of the Three Years in the Period Ended December 31, 2002. | |||
| - Notes to Consolidated Financial Statements. | |||
| (2) | Financial statement schedules. | ||
| None. | |||
| (3) | Exhibits | ||
| The exhibits listed on the Exhibits Index on section |
| (b) | Reports on Form 8-K. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| On January 17, 2003, the Corporation filed a Form 8-K. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (c) | See
23 Index to Exhibits
24 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934 the FIRST
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
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26 CERTIFICATIONS I, Angel
27 CERTIFICATIONS I, Annie Astor-Carbonell,
28 |