e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
|
|
|
þ |
|
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended June 30, 2010
Commission File Number: 001-34084
POPULAR, INC.
(Exact name of registrant as specified in its charter)
|
|
|
Puerto Rico
|
|
66-0667416 |
|
|
|
(State or other jurisdiction of
|
|
(IRS Employer Identification Number) |
incorporation or organization) |
|
|
|
|
|
Popular Center Building |
|
|
209 Muñoz Rivera Avenue, Hato Rey |
|
|
San Juan, Puerto Rico
|
|
00918 |
|
|
|
(Address of principal executive offices)
|
|
(Zip code) |
(787) 765-9800
(Registrants telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (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 the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
þ Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
|
|
|
|
|
|
|
Large accelerated filer þ
|
|
Accelerated filer o
|
|
Non-accelerated filer o
|
|
Smaller reporting company o |
|
|
|
|
(Do not check if a smaller reporting company) |
|
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
o Yes þ No
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date: Common Stock $0.01 par value, 1,022,695,797 shares outstanding as of
August 5, 2010.
POPULAR, INC.
INDEX
|
|
|
|
|
|
|
Page |
|
Part I Financial Information |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
|
|
5 |
|
|
|
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
|
|
7 |
|
|
|
|
|
|
|
|
|
8 |
|
|
|
|
|
|
|
|
|
9 |
|
|
|
|
|
|
|
|
|
95 |
|
|
|
|
|
|
|
|
|
146 |
|
|
|
|
|
|
|
|
|
154 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
155 |
|
|
|
|
|
|
|
|
|
156 |
|
|
|
|
|
|
|
|
|
159 |
|
|
|
|
|
|
|
|
|
159 |
|
|
|
|
|
|
|
|
|
|
|
2
Forward-Looking Information
The information included in this Form 10-Q contains certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements
may relate to Popular, Inc.s (the Corporation) financial condition, results of operations,
plans, objectives, future performance and business, including, but not limited to, statements with
respect to the adequacy of the allowance for loan losses, market risk and the impact of interest
rate changes, capital markets conditions, capital adequacy and liquidity, and the effect of legal
proceedings and new accounting standards on the Corporations financial condition and results of
operations. All statements contained herein that are not clearly historical in nature are
forward-looking, and the words anticipate, believe, continues, expect, estimate,
intend, project and similar expressions and future or conditional verbs such as will,
would, should, could, might, can, may, or similar expressions are generally intended to
identify forward-looking statements.
These statements are not guarantees of future performance and involve certain risks, uncertainties,
estimates and assumptions by management that are difficult to predict.
Various factors, some of which are beyond Populars control, could cause actual results to differ
materially from those expressed in, or implied by, such forward-looking statements. Factors that
might cause such a difference include, but are not limited to:
|
|
|
the rate of growth in the economy and employment levels, as well as general business and
economic conditions; |
|
|
|
|
difficulties in combining the operations of acquired entities, including in connection
with our acquisition of certain assets and assumption of certain liabilities of Westernbank
Puerto Rico from the Federal Deposit Insurance Corporation (FDIC); |
|
|
|
|
lower than expected gains related to any sale or potential sale of businesses; |
|
|
|
|
changes in interest rates, as well as the magnitude of such changes; |
|
|
|
|
the fiscal and monetary policies of the federal government and its agencies; |
|
|
|
|
changes in federal bank regulatory and supervisory policies, including required levels
of capital; |
|
|
|
|
regulatory approvals that may be necessary to undertake certain actions or consummate
strategic transactions such as acquisitions and dispositions; |
|
|
|
|
the impact of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (Financial Reform Act) on the Corporations
businesses, business practices and costs of operations; |
|
|
|
|
the relative strength or weakness of the consumer and commercial credit sectors and of
the real estate markets in Puerto Rico and the other markets in which borrowers are
located; |
|
|
|
|
the performance of the stock and bond markets; |
|
|
|
|
competition in the financial services industry; |
|
|
|
|
additional FDIC assessments; and |
|
|
|
|
possible legislative, tax or regulatory changes. |
Investors should refer to the Corporations Annual Report on Form 10-K for the year ended December
31, 2009 as well as Part II, Item 1A of this Form 10-Q for a discussion of such factors and
certain risks and uncertainties to which the Corporation is subject.
Moreover, the outcome of legal proceedings, as discussed in Part II, Item I. Legal Proceedings,
is inherently uncertain and depends on judicial interpretations of law and the findings of
regulators, judges and juries.
All forward-looking statements included in this document are based upon information available to
the Corporation as of the date of this document, and other than as required by law, including the
requirements of applicable securities laws, we assume no obligation to update or revise any such
forward-looking statements to reflect occurrences or unanticipated events or circumstances after
the date of such statements.
3
ITEM 1. FINANCIAL STATEMENTS
POPULAR, INC.
CONSOLIDATED STATEMENTS OF CONDITION
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except share information) |
|
June 30, 2010 |
|
December 31, 2009 |
|
June 30, 2009 |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
744,769 |
|
|
$ |
677,330 |
|
|
$ |
661,852 |
|
|
Money market investments: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold |
|
|
11,540 |
|
|
|
159,807 |
|
|
|
106,092 |
|
Securities purchased under agreements to resell |
|
|
299,921 |
|
|
|
293,125 |
|
|
|
306,974 |
|
Time deposits with other banks |
|
|
2,132,748 |
|
|
|
549,865 |
|
|
|
538,581 |
|
|
Total money market investments |
|
|
2,444,209 |
|
|
|
1,002,797 |
|
|
|
951,647 |
|
|
Trading account securities, at fair value: |
|
|
|
|
|
|
|
|
|
|
|
|
Pledged securities with creditors right to repledge |
|
|
371,619 |
|
|
|
415,653 |
|
|
|
400,128 |
|
Other trading securities |
|
|
29,924 |
|
|
|
46,783 |
|
|
|
87,054 |
|
Investment securities available-for-sale, at fair value: |
|
|
|
|
|
|
|
|
|
|
|
|
Pledged securities with creditors right to repledge |
|
|
1,981,931 |
|
|
|
2,330,441 |
|
|
|
2,599,558 |
|
Other investment securities available-for-sale |
|
|
4,499,256 |
|
|
|
4,364,273 |
|
|
|
4,646,901 |
|
Investment securities held-to-maturity, at amortized cost (fair value as of June 30, 2010 -
$209,207; December 31, 2009 - $213,146; June 30, 2009 - $313,462) |
|
|
209,416 |
|
|
|
212,962 |
|
|
|
320,061 |
|
Other investment securities, at lower of cost or realizable value (realizable value as of June
30, 2010 - $153,845; December 31, 2009 - $165,497; June 30, 2009 - $216,551) |
|
|
152,562 |
|
|
|
164,149 |
|
|
|
214,923 |
|
Loans held-for-sale measured at lower of cost or fair value |
|
|
101,251 |
|
|
|
90,796 |
|
|
|
242,847 |
|
|
Loans held-in-portfolio: |
|
|
|
|
|
|
|
|
|
|
|
|
Loans not covered under loss sharing agreements with the FDIC |
|
|
22,576,299 |
|
|
|
23,827,263 |
|
|
|
24,717,321 |
|
Loans covered under loss sharing agreements with the FDIC |
|
|
4,079,017 |
|
|
|
|
|
|
|
|
|
Less Unearned income |
|
|
109,911 |
|
|
|
114,150 |
|
|
|
111,259 |
|
Allowance for loan losses |
|
|
1,277,016 |
|
|
|
1,261,204 |
|
|
|
1,146,239 |
|
|
Total loans held-in-portfolio, net |
|
|
25,268,389 |
|
|
|
22,451,909 |
|
|
|
23,459,823 |
|
|
FDIC loss share indemnification asset |
|
|
3,345,896 |
|
|
|
|
|
|
|
|
|
Premises and equipment, net |
|
|
573,941 |
|
|
|
584,853 |
|
|
|
614,366 |
|
Other real estate not covered under loss sharing agreements with the FDIC |
|
|
142,372 |
|
|
|
125,483 |
|
|
|
105,553 |
|
Other real estate covered under loss sharing agreements with the FDIC |
|
|
76,331 |
|
|
|
|
|
|
|
|
|
Accrued income receivable |
|
|
151,245 |
|
|
|
126,080 |
|
|
|
135,978 |
|
Servicing assets (at fair value on June 30, 2010 - $171,994; December 31, 2009 - $169,747;
June 30, 2009 - $180,808) |
|
|
174,170 |
|
|
|
172,505 |
|
|
|
184,189 |
|
Other assets (See Note 12) |
|
|
1,402,072 |
|
|
|
1,322,159 |
|
|
|
1,214,849 |
|
Goodwill |
|
|
710,579 |
|
|
|
604,349 |
|
|
|
607,164 |
|
Other intangible assets |
|
|
63,720 |
|
|
|
43,803 |
|
|
|
48,447 |
|
Assets from discontinued operations |
|
|
|
|
|
|
|
|
|
|
3,452 |
|
|
Total assets |
|
$ |
42,443,652 |
|
|
$ |
34,736,325 |
|
|
$ |
36,498,792 |
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing |
|
$ |
4,793,338 |
|
|
$ |
4,495,301 |
|
|
$ |
4,408,865 |
|
Interest bearing |
|
|
22,320,235 |
|
|
|
21,429,593 |
|
|
|
22,504,620 |
|
|
Total deposits |
|
|
27,113,573 |
|
|
|
25,924,894 |
|
|
|
26,913,485 |
|
Federal funds purchased and assets sold under agreements to repurchase |
|
|
2,307,194 |
|
|
|
2,632,790 |
|
|
|
2,941,678 |
|
Other short-term borrowings |
|
|
1,263 |
|
|
|
7,326 |
|
|
|
1,825 |
|
Notes payable |
|
|
8,237,401 |
|
|
|
2,648,632 |
|
|
|
2,643,722 |
|
Other liabilities |
|
|
1,180,773 |
|
|
|
983,866 |
|
|
|
1,084,455 |
|
Liabilities from discontinued operations |
|
|
|
|
|
|
|
|
|
|
13,926 |
|
|
Total liabilities |
|
|
38,840,204 |
|
|
|
32,197,508 |
|
|
|
33,599,091 |
|
|
Commitments and contingencies (See Note 19) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, 30,000,000 shares authorized; 2,006,391 shares issued and outstanding at
June 30, 2010 and December 31, 2009 (June 30, 2009 - 24,410,000) (aggregate liquidation
preference value as of June 30, 2010 and December 31, 2009 - $50,160 (June 30, 2009 -
$1,521,875)) |
|
|
50,160 |
|
|
|
50,160 |
|
|
|
1,487,000 |
|
Common stock, $0.01 par value; 1,700,000,000 shares authorized as of June 30, 2010 (December
31, 2009 and June 30, 2009 - 700,000,000); 1,022,878,228 shares issued as of June 30, 2010
(December 31,2009 - 639,544,895; June 30, 2009 - 282,034,819) and 1,022,695,797 outstanding
as of June 30, 2010 (December 31, 2009 - 639,540,105; June 30, 2009 - 282,031,548) |
|
|
10,229 |
|
|
|
6,395 |
|
|
|
2,820 |
|
Surplus |
|
|
4,094,429 |
|
|
|
2,804,238 |
|
|
|
2,185,757 |
|
Accumulated deficit |
|
|
(625,302 |
) |
|
|
(292,752 |
) |
|
|
(659,165 |
) |
Treasury stock at cost, 182,431 shares as of June 30, 2010 (December 31, 2009 - 4,790 shares;
June 30, 2009 - 3,271) |
|
|
(518 |
) |
|
|
(15 |
) |
|
|
(11 |
) |
Accumulated other comprehensive income (loss), net of tax expense of $17,744 (December 31, 2009
- $33,964; June 30, 2009 - $67,257) |
|
|
74,450 |
|
|
|
(29,209 |
) |
|
|
(116,700 |
) |
|
Total stockholders equity |
|
|
3,603,448 |
|
|
|
2,538,817 |
|
|
|
2,899,701 |
|
|
Total liabilities and stockholders equity |
|
$ |
42,443,652 |
|
|
$ |
34,736,325 |
|
|
$ |
36,498,792 |
|
|
The accompanying notes are an integral part of these unaudited consolidated financial statements.
4
POPULAR, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended |
|
Six months ended |
|
|
June 30, |
|
June 30, |
(In thousands, except per share information) |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
INTEREST INCOME: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
$ |
385,314 |
|
|
$ |
382,244 |
|
|
$ |
739,963 |
|
|
$ |
784,012 |
|
Money market investments |
|
|
1,893 |
|
|
|
2,381 |
|
|
|
2,935 |
|
|
|
5,514 |
|
Investment securities |
|
|
62,915 |
|
|
|
75,818 |
|
|
|
127,841 |
|
|
|
149,301 |
|
Trading account securities |
|
|
6,599 |
|
|
|
10,603 |
|
|
|
13,177 |
|
|
|
21,411 |
|
|
Total interest income |
|
|
456,721 |
|
|
|
471,046 |
|
|
|
883,916 |
|
|
|
960,238 |
|
|
INTEREST EXPENSE: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
90,615 |
|
|
|
128,452 |
|
|
|
183,589 |
|
|
|
276,491 |
|
Short-term borrowings |
|
|
15,552 |
|
|
|
16,631 |
|
|
|
30,811 |
|
|
|
37,334 |
|
Long-term debt |
|
|
71,578 |
|
|
|
42,903 |
|
|
|
121,623 |
|
|
|
90,867 |
|
|
Total interest expense |
|
|
177,745 |
|
|
|
187,986 |
|
|
|
336,023 |
|
|
|
404,692 |
|
|
Net interest income |
|
|
278,976 |
|
|
|
283,060 |
|
|
|
547,893 |
|
|
|
555,546 |
|
Provision for loan losses |
|
|
202,258 |
|
|
|
349,444 |
|
|
|
442,458 |
|
|
|
721,973 |
|
|
Net interest income after provision for loan losses |
|
|
76,718 |
|
|
|
(66,384 |
) |
|
|
105,435 |
|
|
|
(166,427 |
) |
|
Service charges on deposit accounts |
|
|
50,679 |
|
|
|
53,463 |
|
|
|
101,257 |
|
|
|
107,204 |
|
Other service fees (See Note 24) |
|
|
103,725 |
|
|
|
102,437 |
|
|
|
205,045 |
|
|
|
200,970 |
|
Net gain on sale and valuation adjustments of investment securities |
|
|
397 |
|
|
|
53,705 |
|
|
|
478 |
|
|
|
229,851 |
|
Trading account profit |
|
|
2,464 |
|
|
|
16,839 |
|
|
|
2,241 |
|
|
|
23,662 |
|
Loss on sale of loans, including adjustments to indemnity
reserves, and valuation adjustments on loans
held-for-sale |
|
|
(9,311 |
) |
|
|
(13,453 |
) |
|
|
(21,533 |
) |
|
|
(27,266 |
) |
FDIC loss share income |
|
|
23,334 |
|
|
|
|
|
|
|
23,334 |
|
|
|
|
|
Fair value change in equity appreciation instrument |
|
|
24,394 |
|
|
|
|
|
|
|
24,394 |
|
|
|
|
|
Other operating income |
|
|
20,176 |
|
|
|
12,848 |
|
|
|
38,508 |
|
|
|
26,149 |
|
|
Total non-interest income |
|
|
215,858 |
|
|
|
225,839 |
|
|
|
373,724 |
|
|
|
560,570 |
|
|
OPERATING EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel costs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries |
|
|
109,124 |
|
|
|
107,079 |
|
|
|
204,997 |
|
|
|
212,402 |
|
Pension and other benefits |
|
|
28,908 |
|
|
|
29,127 |
|
|
|
53,967 |
|
|
|
69,095 |
|
|
Total personnel costs |
|
|
138,032 |
|
|
|
136,206 |
|
|
|
258,964 |
|
|
|
281,497 |
|
Net occupancy expenses |
|
|
29,058 |
|
|
|
26,024 |
|
|
|
57,934 |
|
|
|
52,465 |
|
Equipment expenses |
|
|
25,346 |
|
|
|
25,202 |
|
|
|
48,799 |
|
|
|
51,306 |
|
Other taxes |
|
|
12,459 |
|
|
|
13,084 |
|
|
|
24,763 |
|
|
|
26,260 |
|
Professional fees |
|
|
34,225 |
|
|
|
27,048 |
|
|
|
61,274 |
|
|
|
51,949 |
|
Communications |
|
|
11,342 |
|
|
|
12,386 |
|
|
|
22,114 |
|
|
|
24,213 |
|
Business promotion |
|
|
10,204 |
|
|
|
9,946 |
|
|
|
18,499 |
|
|
|
17,856 |
|
Printing and supplies |
|
|
2,653 |
|
|
|
3,017 |
|
|
|
5,022 |
|
|
|
5,807 |
|
FDIC deposit insurance |
|
|
17,393 |
|
|
|
36,331 |
|
|
|
32,711 |
|
|
|
45,448 |
|
Other operating expenses |
|
|
45,249 |
|
|
|
38,968 |
|
|
|
74,745 |
|
|
|
73,202 |
|
Amortization of intangibles |
|
|
2,455 |
|
|
|
2,433 |
|
|
|
4,504 |
|
|
|
4,839 |
|
|
Total operating expenses |
|
|
328,416 |
|
|
|
330,645 |
|
|
|
609,329 |
|
|
|
634,842 |
|
|
Loss from continuing operations before income tax |
|
|
(35,840 |
) |
|
|
(171,190 |
) |
|
|
(130,170 |
) |
|
|
(240,699 |
) |
Income tax expense (benefit ) |
|
|
19,988 |
|
|
|
5,393 |
|
|
|
10,713 |
|
|
|
(21,540 |
) |
|
Loss from continuing operations |
|
|
(55,828 |
) |
|
|
(176,583 |
) |
|
|
(140,883 |
) |
|
|
(219,159 |
) |
Loss from discontinued operations, net of income tax |
|
|
|
|
|
|
(6,599 |
) |
|
|
|
|
|
|
(16,545 |
) |
|
NET LOSS |
|
$ |
(55,828 |
) |
|
$ |
(183,182 |
) |
|
$ |
(140,883 |
) |
|
$ |
(235,704 |
) |
|
NET LOSS APPLICABLE TO COMMON STOCK |
|
$ |
(247,495 |
) |
|
$ |
(207,810 |
) |
|
$ |
(332,550 |
) |
|
$ |
(285,010 |
) |
|
NET LOSS PER COMMON SHARE BASIC |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations |
|
$ |
(0.29 |
) |
|
$ |
(0.71 |
) |
|
$ |
(0.45 |
) |
|
$ |
(0.95 |
) |
Net loss from discontinued operations |
|
|
|
|
|
|
(0.03 |
) |
|
|
|
|
|
|
(0.06 |
) |
|
Net loss per common share basic |
|
$ |
(0.29 |
) |
|
$ |
(0.74 |
) |
|
$ |
(0.45 |
) |
|
$ |
(1.01 |
) |
|
NET LOSS PER COMMON SHARE DILUTED |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations |
|
$ |
(0.29 |
) |
|
$ |
(0.71 |
) |
|
$ |
(0.45 |
) |
|
$ |
(0.95 |
) |
Net loss from discontinued operations |
|
|
|
|
|
|
(0.03 |
) |
|
|
|
|
|
|
(0.06 |
) |
|
Net loss per common share diluted |
|
$ |
(0.29 |
) |
|
$ |
(0.74 |
) |
|
$ |
(0.45 |
) |
|
$ |
(1.01 |
) |
|
DIVIDENDS DECLARED PER COMMON SHARE |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.02 |
|
|
The accompanying notes are an integral part of these unaudited consolidated financial
statements.
5
POPULAR, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
other |
|
|
|
|
Common |
|
Preferred |
|
|
|
|
|
Accumulated |
|
comprehensive |
|
|
(In thousands) |
|
stock |
|
stock |
|
Surplus |
|
deficit |
|
(loss) income |
|
Total |
|
Balance as of December 31,
2008 |
|
$ |
1,566,277 |
|
|
$ |
1,483,525 |
|
|
$ |
621,879 |
|
|
$ |
(374,488 |
) |
|
$ |
(28,829 |
) |
|
$ |
3,268,364 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(235,704 |
) |
|
|
|
|
|
|
(235,704 |
) |
Accretion of discount |
|
|
|
|
|
|
3,475 |
[1] |
|
|
|
|
|
|
(3,475 |
) [1] |
|
|
|
|
|
|
|
|
Stock options expense on
unexercised options, net
of forfeitures |
|
|
|
|
|
|
|
|
|
|
45 |
|
|
|
|
|
|
|
|
|
|
|
45 |
|
Change in par value |
|
|
(1,689,389 |
) [2] |
|
|
|
|
|
|
1,689,389 |
[2] |
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,641 |
) |
|
|
|
|
|
|
(5,641 |
) |
Preferred stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(39,857 |
) |
|
|
|
|
|
|
(39,857 |
) |
Common stock reissuance |
|
|
378 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
378 |
|
Common stock
purchases |
|
|
(13 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13 |
) |
Treasury stock retired |
|
|
125,556 |
|
|
|
|
|
|
|
(125,556 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive
loss, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(87,871 |
) |
|
|
(87,871 |
) |
|
Balance as of June 30, 2009 |
|
$ |
2,809 |
|
|
$ |
1,487,000 |
|
|
$ |
2,185,757 |
|
|
$ |
(659,165 |
) |
|
$ |
(116,700 |
) |
|
$ |
2,899,701 |
|
|
Balance as of December 31,
2009 |
|
$ |
6,380 |
|
|
$ |
50,160 |
|
|
$ |
2,804,238 |
|
|
$ |
(292,752 |
) |
|
$ |
(29,209 |
) |
|
$ |
2,538,817 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(140,883 |
) |
|
|
|
|
|
|
(140,883 |
) |
Issuance of stocks |
|
|
|
|
|
|
1,150,000 |
[3] |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,150,000 |
|
Issuance of common stock upon
conversion of preferred stock |
|
|
3,834 |
[3] |
|
|
(1,150,000 |
) [3] |
|
|
1,337,833 |
[3] |
|
|
|
|
|
|
|
|
|
|
191,667 |
|
Issuance costs |
|
|
|
|
|
|
|
|
|
|
(47,642 |
) [4] |
|
|
|
|
|
|
|
|
|
|
(47,642 |
) |
Deemed dividend on
preferred stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(191,667 |
) |
|
|
|
|
|
|
(191,667 |
) |
Common stock purchases |
|
|
(503 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(503 |
) |
Other comprehensive
income, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
103,659 |
|
|
|
103,659 |
|
|
Balance as of June 30, 2010 |
|
$ |
9,711 |
|
|
$ |
50,160 |
|
|
$ |
4,094,429 |
|
|
$ |
(625,302 |
) |
|
$ |
74,450 |
|
|
$ |
3,603,448 |
|
|
|
|
|
[1] |
|
Accretion of preferred stock discount 2008 Series C preferred stock |
|
[2] |
|
Change in par value from $6.00 to $0.01 (not in thousands) |
|
[3] |
|
Issuance and subsequent conversion of depositary shares
representing interests in shares of contingent convertible non-cumulative preferred stock Series D into common stock |
|
[4] |
|
Issuance costs related to issuance and conversion of depositary shares (Preferred stock Series D) |
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
Disclosure of changes in number of shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
June 30, |
|
|
2010 |
|
2009 |
|
2009 |
|
Preferred Stock: |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
beginning of period |
|
|
2,006,391 |
|
|
|
24,410,000 |
|
|
|
24,410,000 |
|
Issuance of stocks |
|
|
1,150,000 |
[1] |
|
|
(22,403,609 |
) [2] |
|
|
|
|
|
Conversion of stocks |
|
|
(1,150,000 |
) [1] |
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
|
2,006,391 |
|
|
|
2,006,391 |
|
|
|
24,410,000 |
|
|
Common Stock Issued: |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period |
|
|
639,544,895 |
|
|
|
295,632,080 |
|
|
|
295,632,080 |
|
Issuance of stocks |
|
|
383,333,333 |
[1] |
|
|
357,510,076 |
[3] |
|
|
|
|
Treasury stock retired |
|
|
|
|
|
|
(13,597,261 |
) |
|
|
(13,597,261 |
) |
|
Balance at end of period |
|
|
1,022,878,228 |
|
|
|
639,544,895 |
|
|
|
282,034,819 |
|
|
Treasury stock |
|
|
(182,431 |
) |
|
|
(4,790 |
) |
|
|
(3,271 |
) |
|
Common Stock outstanding |
|
|
1,022,695,797 |
|
|
|
639,540,105 |
|
|
|
282,031,548 |
|
|
|
|
|
[1] |
|
Issuance of 46,000,000 in depositary shares; converted into 383,333,333 common shares (full
conversion of depositary shares, each representing a 1/40th interest in shares of contingent convertible
perpetual non-cumulative preferred stock, into common stock). |
|
[2] |
|
Exchange of 21,468,609 preferred stock Series A and B for
common shares, and exchange of 935,000 preferred stock Series C for
trust preferred securities. |
|
[3] |
|
Shares issued in exchange of Series A and B preferred stock and early extinguishment of debt
(exchange of trust preferred securities for common stock). |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
6
POPULAR, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended |
|
Six months ended |
|
|
June 30, |
|
June 30, |
(In thousands) |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
Net loss |
|
$ |
(55,828 |
) |
|
$ |
(183,182 |
) |
|
$ |
(140,883 |
) |
|
$ |
(235,704 |
) |
|
Other comprehensive income (loss) before tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment |
|
|
(1,531 |
) |
|
|
(877 |
) |
|
|
(577 |
) |
|
|
(757 |
) |
Adjustment of pension and postretirement benefit plans |
|
|
4,486 |
|
|
|
1,855 |
|
|
|
6,236 |
|
|
|
63,095 |
|
Unrealized holding gains (losses) on securities available-for-sale
arising during the period |
|
|
80,801 |
|
|
|
(34,712 |
) |
|
|
116,912 |
|
|
|
(19,399 |
) |
Reclassification adjustment for losses (gains) included in net loss |
|
|
6 |
|
|
|
(1,410 |
) |
|
|
16 |
|
|
|
(177,556 |
) |
Unrealized net losses on cash flow hedges |
|
|
(1,509 |
) |
|
|
(37 |
) |
|
|
(1,540 |
) |
|
|
(1,623 |
) |
Reclassification adjustment for losses (gains) included in net loss |
|
|
31 |
|
|
|
3,469 |
|
|
|
(1,168 |
) |
|
|
5,883 |
|
|
Other comprehensive income (loss) before tax: |
|
|
82,284 |
|
|
|
(31,712 |
) |
|
|
119,879 |
|
|
|
(130,357 |
) |
Income tax (expense) benefit |
|
|
(12,065 |
) |
|
|
5,694 |
|
|
|
(16,220 |
) |
|
|
42,486 |
|
|
Total other comprehensive income (loss), net of tax |
|
|
70,219 |
|
|
|
(26,018 |
) |
|
|
103,659 |
|
|
|
(87,871 |
) |
|
Comprehensive income (loss), net of tax |
|
$ |
14,391 |
|
|
$ |
(209,200 |
) |
|
$ |
(37,224 |
) |
|
$ |
(323,575 |
) |
|
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
Tax Effects Allocated to Each Component of Other Comprehensive Income (Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended |
|
Six months ended |
|
|
June 30, |
|
June 30, |
(In thousands) |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
Underfunding of pension and postretirement benefit plans |
|
$ |
(882 |
) |
|
|
|
|
|
$ |
(1,765 |
) |
|
$ |
(22,783 |
) |
Unrealized holding gains (losses) on securities available-for-sale
arising during the period |
|
|
(11,759 |
) |
|
$ |
6,050 |
|
|
|
(15,507 |
) |
|
|
3,293 |
|
Reclassification adjustment for losses (gains) included in net loss |
|
|
|
|
|
|
247 |
|
|
|
(4 |
) |
|
|
62,709 |
|
Unrealized net losses on cash flows hedges |
|
|
588 |
|
|
|
15 |
|
|
|
600 |
|
|
|
633 |
|
Reclassification adjustment for losses (gains) included in net loss |
|
|
(12 |
) |
|
|
(618 |
) |
|
|
456 |
|
|
|
(1,366 |
) |
|
Income tax (expense) benefit |
|
$ |
(12,065 |
) |
|
$ |
5,694 |
|
|
$ |
(16,220 |
) |
|
$ |
42,486 |
|
|
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
Disclosure of accumulated other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
June 30, |
|
|
|
|
(In thousands) |
|
2010 |
|
2009 |
|
2009 |
|
|
|
|
|
Foreign currency translation adjustment |
|
$ |
(41,253 |
) |
|
$ |
(40,676 |
) |
|
$ |
(39,825 |
) |
|
|
|
|
|
Underfunding of pension and postretirement benefit plans |
|
|
(121,550 |
) |
|
|
(127,786 |
) |
|
|
(197,114 |
) |
|
|
|
|
Tax effect |
|
|
46,801 |
|
|
|
48,566 |
|
|
|
76,858 |
|
|
|
|
|
|
Underfunding of pension and postretirement benefit plans, net of tax |
|
|
(74,749 |
) |
|
|
(79,220 |
) |
|
|
(120,256 |
) |
|
|
|
|
|
Unrealized holding gains on securities available-for-sale |
|
|
221,018 |
|
|
|
104,090 |
|
|
|
53,019 |
|
|
|
|
|
Tax effect |
|
|
(29,645 |
) |
|
|
(14,134 |
) |
|
|
(9,616 |
) |
|
|
|
|
|
Unrealized holding gains on securities available-for-sale, net of tax |
|
|
191,373 |
|
|
|
89,956 |
|
|
|
43,403 |
|
|
|
|
|
|
Unrealized (losses) gains on cash flows hedges |
|
|
(1,509 |
) |
|
|
1,199 |
|
|
|
(37 |
) |
|
|
|
|
Tax effect |
|
|
588 |
|
|
|
(468 |
) |
|
|
15 |
|
|
|
|
|
|
Unrealized (losses) gains on cash flows hedges, net of tax |
|
|
(921 |
) |
|
|
731 |
|
|
|
(22 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss) |
|
$ |
74,450 |
|
|
$ |
(29,209 |
) |
|
$ |
(116,700 |
) |
|
|
|
|
|
The accompanying notes are an integral part of these unaudited consolidated financial statements.
7
POPULAR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
Six months ended |
|
|
June 30, |
(In thousands) |
|
2010 |
|
2009 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(140,883 |
) |
|
$ |
(235,704 |
) |
|
Adjustments to reconcile net loss to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization of premises and equipment |
|
|
30,759 |
|
|
|
33,603 |
|
Provision for loan losses |
|
|
442,458 |
|
|
|
721,973 |
|
Amortization of intangibles |
|
|
4,504 |
|
|
|
4,839 |
|
Fair value adjustments of mortgage servicing rights |
|
|
9,577 |
|
|
|
10,505 |
|
Net
(accretion of discounts) amortization of premiums |
|
|
(18,639 |
) |
|
|
8,126 |
|
Net gain on sale and valuation adjustments of investment securities |
|
|
(478 |
) |
|
|
(229,851 |
) |
Fair value
change in equity appreciation instrument |
|
|
(24,394 |
) |
|
|
|
|
FDIC loss share income |
|
|
(23,334 |
) |
|
|
|
|
Gains from changes in fair value related to instruments measured at fair value
pursuant to the fair value option |
|
|
|
|
|
|
(1,141 |
) |
Net (gain) loss on disposition of premises and equipment |
|
|
(2,071 |
) |
|
|
1,771 |
|
Net loss on sale of loan, including adjustments to indemnity reserves and
valuation adjustments on loans held-for-sale |
|
|
21,533 |
|
|
|
32,472 |
|
Net amortization of deferred loan origination fees and costs |
|
|
2,140 |
|
|
|
4,374 |
|
Earnings from investments under the equity method |
|
|
(14,513 |
) |
|
|
(6,380 |
) |
Net loss on sale and subsequent write-downs of foreclosed assets |
|
|
8,429 |
|
|
|
8,585 |
|
Stock options expense |
|
|
|
|
|
|
45 |
|
Deferred income taxes, net of valuation |
|
|
(15,752 |
) |
|
|
(73,983 |
) |
Net disbursements on loans held-for-sale |
|
|
(312,489 |
) |
|
|
(685,500 |
) |
Acquisitions of loans held-for-sale |
|
|
(133,798 |
) |
|
|
(209,814 |
) |
Proceeds from sale of loans held-for-sale |
|
|
35,867 |
|
|
|
43,875 |
|
Net decrease in trading securities |
|
|
396,940 |
|
|
|
911,066 |
|
Net decrease in accrued income receivable |
|
|
10,729 |
|
|
|
19,553 |
|
Net decrease in other assets |
|
|
22,935 |
|
|
|
46,218 |
|
Net decrease in interest payable |
|
|
(17,566 |
) |
|
|
(30,133 |
) |
Net increase in postretirement benefit obligation |
|
|
1,627 |
|
|
|
2,404 |
|
Net increase in other liabilities |
|
|
9,312 |
|
|
|
61,055 |
|
|
Total adjustments |
|
|
433,776 |
|
|
|
673,662 |
|
|
Net cash provided by operating activities |
|
|
292,893 |
|
|
|
437,958 |
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Net increase in money market investments |
|
|
(1,344,614 |
) |
|
|
(156,993 |
) |
Purchases of investment securities: |
|
|
|
|
|
|
|
|
Available-for-sale |
|
|
(542,506 |
) |
|
|
(3,962,978 |
) |
Held-to-maturity |
|
|
(37,131 |
) |
|
|
(28,328 |
) |
Other |
|
|
(13,076 |
) |
|
|
(22,243 |
) |
Proceeds from calls, paydowns, maturities and redemptions of investment securities: |
|
|
|
|
|
|
|
|
Available-for-sale |
|
|
818,380 |
|
|
|
846,944 |
|
Held-to-maturity |
|
|
40,716 |
|
|
|
3,133 |
|
Other |
|
|
83,272 |
|
|
|
24,988 |
|
Proceeds from sale of investment securities available-for-sale |
|
|
19,484 |
|
|
|
3,747,567 |
|
Proceeds from sale of other investment securities |
|
|
|
|
|
|
44,425 |
|
Net repayments on loans |
|
|
1,024,846 |
|
|
|
670,771 |
|
Proceeds from sale of loans |
|
|
10,878 |
|
|
|
304,468 |
|
Acquisition of loan portfolios |
|
|
(87,471 |
) |
|
|
(18,260 |
) |
Cash received from acquisitions |
|
|
261,311 |
|
|
|
|
|
Mortgage servicing rights purchased |
|
|
(364 |
) |
|
|
(727 |
) |
Acquisition of premises and equipment |
|
|
(27,161 |
) |
|
|
(37,741 |
) |
Proceeds from sale of premises and equipment |
|
|
9,626 |
|
|
|
8,800 |
|
Proceeds from sale of foreclosed assets |
|
|
69,058 |
|
|
|
76,334 |
|
|
Net cash provided by investing activities |
|
|
285,248 |
|
|
|
1,500,160 |
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Net decrease in deposits |
|
|
(1,202,219 |
) |
|
|
(633,722 |
) |
Net decrease in assets sold under agreements to repurchase |
|
|
(325,596 |
) |
|
|
(609,930 |
) |
Net decrease in other short-term borrowings |
|
|
(6,063 |
) |
|
|
(3,109 |
) |
Payments of notes payable |
|
|
(189,780 |
) |
|
|
(804,072 |
) |
Proceeds from issuance of notes payable |
|
|
111,101 |
|
|
|
61,031 |
|
Net proceeds from issuance of depositary shares |
|
|
1,102,358 |
|
|
|
|
|
Dividends paid |
|
|
|
|
|
|
(71,438 |
) |
Treasury stock acquired |
|
|
(503 |
) |
|
|
(13 |
) |
|
Net cash used in financing activities |
|
|
(510,702 |
) |
|
|
(2,061,253 |
) |
|
Net increase (decrease) in cash and due from banks |
|
|
67,439 |
|
|
|
(123,135 |
) |
Cash and due from banks at beginning of period |
|
|
677,330 |
|
|
|
784,987 |
|
|
Cash and due from banks at end of period |
|
$ |
744,769 |
|
|
$ |
661,852 |
|
|
The accompanying notes are an integral part of these unaudited consolidated financial statements.
Note: The Consolidated Statement of Cash Flows for the six months ended June 30, 2009 includes the
cash flows from operating, investing and financing activities associated with discontinued
operations.
8
Notes to Unaudited Consolidated Financial Statements
|
Note 1 - Nature of Operations |
Note 2 - Business Combination |
Note 3 - Basis of Presentation and Summary of Significant Accounting Policies |
Note 4 - Adoption of New Accounting Standards and Issued But Not Yet Effective Accounting
Standards |
Note 5 - Discontinued Operations |
Note 6 - Restrictions on Cash and Due from Banks and Certain Securities |
Note 7 - Pledged Assets |
Note 8 - Investment Securities Available-For-Sale |
Note 9 - Investment Securities Held-to-Maturity |
Note 10 - Loans Held-in-Portfolio and Allowance for Loan Losses |
Note 11 - Transfers of Financial Assets and Mortgage Servicing Rights |
Note 12 - Other Assets |
Note 13 - Goodwill and Other Intangible Assets |
Note 14 - Derivative Instruments and Hedging Activities |
Note 15 - Deposits |
Note 16 - Borrowings |
Note 17 - Trust Preferred Securities |
Note 18 - Stockholders Equity |
Note 19 - Commitments, Contingencies and Guarantees |
Note 20 - Non-consolidated Variable Interest Entities |
Note 21 - Fair Value Measurement |
Note 22 - Fair Value of Financial Instruments |
Note 23 - Net Loss per Common Share |
Note 24 - Other Service Fees |
Note 25 - Pension and Postretirement Benefits |
Note 26 - Stock-Based Compensation |
Note 27 - Income Taxes |
Note 28 - Supplemental Disclosure on the Consolidated Statements of Cash Flows |
Note 29 - Segment Reporting |
Note 30 - Subsequent Events |
Note 31 - Condensed Consolidating Financial Information of Guarantor and Issuers of Registered
Guaranteed Securities |
9
Notes to Unaudited Consolidated Financial Statements
Note 1 Nature of Operations
Popular, Inc. (the Corporation or Popular) is a diversified, publicly owned financial holding
company subject to the supervision and regulation of the Board of Governors of the Federal Reserve
System. The Corporation has operations in Puerto Rico, the United States, the Caribbean and Latin
America. In Puerto Rico, the Corporation provides retail and commercial banking services through
its principal banking subsidiary, Banco Popular de Puerto Rico (BPPR), as well as auto and
equipment leasing and financing, mortgage loans, investment banking, broker-dealer and insurance
services through specialized subsidiaries. In the United States, the Corporation operates Banco
Popular North America (BPNA), including its wholly-owned subsidiary E-LOAN. BPNA is a community
bank providing a broad range of financial services and products to the communities it serves. BPNA
operates branches in New York, California, Illinois, New Jersey and Florida. E-LOAN markets deposit
accounts under its name for the benefit of BPNA. The Corporation, through its subsidiary EVERTEC,
provides transaction processing services throughout the Caribbean and Latin America, as well as
internally services many of Populars subsidiaries system infrastructures and transactional
processing businesses. The sections that follow provide a description of two significant
transactions that impacted or will impact the Corporations current and future operations.
Westernbank FDIC-Assisted Transaction
On April 30, 2010, BPPR entered into a purchase and assumption agreement with the Federal Deposit
Insurance Corporation (the FDIC) to acquire certain assets and assume certain deposits and
liabilities of Westernbank Puerto Rico, a Puerto Rico state-chartered bank headquartered in
Mayaguez, Puerto Rico (Westernbank)(herein the Westernbank FDIC-assisted transaction).
Westernbank was a wholly-owned commercial bank subsidiary of W Holding Company, Inc. and operated
through a network of 45 branches located throughout Puerto Rico. On May 1, 2010, Westernbanks
branches reopened as branches of BPPR; however, the physical branch locations and leases were not
immediately acquired by BPPR. BPPR has an option, which was extended until August 30, 2010, to
acquire, at fair market value, any bank premises that were owned by, or any leases relating to bank
premises held by, Westernbank (including ATM locations). BPPR is currently reviewing the bank
premises and related leases of Westernbank, and expects to reduce the number of branches due to
bank synergies. Currently, all former Westernbank banking facilities and equipment used by the
Corporation are leased from the FDIC on a month-to-month basis. The integration of Westernbanks
operations into BPPR is expected to be substantially completed by the end of the third quarter of
2010. Refer to Note 2 to the consolidated financial statements for detailed information on the
Westernbank FDIC-assisted transaction. Refer to the Corporations Form 8-K/A filed on July 16, 2010
for additional information with respect to this FDIC-assisted transaction.
EVERTEC
Popular, EVERTEC, and two newly formed subsidiaries of a fund managed by an affiliate of Apollo
Management VII, L.P. (Apollo), AP Carib Holdings, Ltd. (AP Carib) and Carib Acquisition, Inc.
(Merger Sub), have entered into an Agreement and Plan of
Merger (the Merger Agreement) dated as of June 30, 2010, as amended as of August 5, 2010 and August 8, 2010,
pursuant to which Merger Sub will be merged with and into EVERTEC (the Merger). EVERTEC currently
operates Populars merchant acquiring and processing and technology business and owns the ATH
Network connecting the ATMs of various financial institutions throughout Puerto Rico, the U.S.
Virgin Islands and the British Virgin Islands. Following the effective time of the Merger, AP Carib
and Popular will contribute their respective shares of EVERTEC capital stock to Carib Holdings,
Inc. (Carib Holdings) in exchange for shares of Carib Holdings capital stock. Following that
contribution, EVERTEC will be a wholly-owned subsidiary of Carib Holdings, and Carib Holdings will
be operated as a joint venture between Apollo and Popular, with AP Carib and Popular initially
owning 51% and 49%, respectively, of Carib Holdingss outstanding capital stock, subject to pro
rata dilution to the extent that non-voting stock or other securities convertible into non-voting
stock and/or derivative securities whose value is derived from such capital stock or non-voting
stock are issued to EVERTEC management. The transaction is expected to contribute significantly to
the Corporations capital levels and capital ratios, and results of operations. The closing of the
transaction is currently expected to be completed in the third quarter of 2010 and is subject to
various conditions and regulatory approvals. Refer to the Corporations Form 8-K filed with the
Securities and Exchange Commission (SEC) on July 8, 2010 for additional information regarding transaction
terms and structure.
Under the Merger Agreement, Apollo has the option to require the Corporation to sell or retain
EVERTECs operations in Venezuela. Apollo has informed management of the Corporation of
their plan to exercise this option. Therefore, as a condition to closing, EVERTEC must transfer
its operations in Venezuela to another one of the Corporations subsidiaries for an amount equal
to the net book value of those operations and the transaction consideration will be reduced.
10
Prior to entering into the merger agreement, Popular and its subsidiaries BPPR, Popular
International Bank, Inc. (PIBI) and EVERTEC completed an internal reorganization transferring
certain intellectual property assets and interests in certain foreign subsidiaries to EVERTEC on
June 30, 2010. Commencing on June 30, 2010, PIBIs wholly-owned subsidiaries ATH Costa Rica S.A.
and T.I.I. Smart Solutions Inc. became wholly-owned subsidiaries of EVERTEC. These foreign
subsidiaries were reported as part of the EVERTEC reportable segment prior to the internal
reorganization. Also, in connection with the reorganization, BPPRs Merchant Business and TicketPop
divisions were transferred to EVERTEC. As of June 30, 2010, the Corporation continued to evaluate
and report the merchant acquiring business and TicketPop divisions as part of the BPPR reportable
segment.
Note 2 Business Combination
As indicated in Note 1 to the consolidated financial statements, on April 30, 2010, the
Corporations banking subsidiary, BPPR, acquired certain assets and assumed certain deposits of
Westernbank Puerto Rico from the FDIC, as receiver for Westernbank, in an assisted transaction.
BPPR acquired approximately $9.1 billion in assets and assumed approximately $2.4 billion in
deposits, excluding the effects of purchase accounting adjustments. As part of the transaction,
BPPR issued a five-year $5.8 billion note payable to the FDIC bearing an annual interest rate of
2.50%. The note is secured by a substantial amount of the assets, including loans and foreclosed
other real estate properties acquired by BPPR from the FDIC in the Westernbank assisted
transaction, and which are subject to the loss sharing agreements. In addition, as part of the
consideration for the transaction, the FDIC received a cash-settled equity appreciation instrument,
which is described in detail below.
Loss Sharing Agreements
In connection with the acquisition, BPPR entered into loss sharing agreements with the FDIC with
respect to approximately $8.6 billion of loans and other real estate (the covered assets)
acquired in the Westernbank FDIC-assisted transaction. Pursuant to the terms of the loss sharing
agreements, the FDICs obligation to reimburse BPPR for losses with respect to covered assets
begins with the first dollar of loss incurred. The FDIC will reimburse BPPR for 80% of losses with
respect to covered assets, and BPPR will reimburse the FDIC for 80% of recoveries with respect to
losses for which the FDIC paid BPPR 80% reimbursement under the loss sharing agreements. The loss
sharing agreement applicable to single-family residential mortgage loans provides for FDIC loss and
recoveries sharing for ten years. The loss sharing agreement applicable to commercial and consumer
loans provides for FDIC loss sharing for five years and BPPR reimbursement to the FDIC for eight
years, in each case, on the same terms and conditions as described above.
In addition, BPPR has agreed to make a true-up payment to the FDIC on the date that is 45 days
following the last day (the True-Up Measurement Date) of the final shared loss month, or upon the
final disposition of all covered assets under the loss sharing agreements in the event losses on
the loss sharing agreements fail to reach expected levels. The estimated fair value of such true-up
payment is recorded as a reduction in the fair value of the FDIC loss share indemnification asset.
Under the loss sharing agreements, BPPR shall pay to the FDIC, 50% of the excess, if any, of: (i)
20% of the Intrinsic Loss Estimate of $4.6 billion (or $925 million)(as determined by the FDIC)
less (ii) the sum of: (A) 25% of the asset discount (per bid) (or ($1.1 billion)); plus (B) 25% of
the cumulative shared-loss payments (defined as the aggregate of all of the payments made or
payable to BPPR minus the aggregate of all of the payments made or payable to the FDIC); plus (C)
the sum of the period servicing amounts for every consecutive twelve-month period prior to and
ending on the True-Up Measurement Date in respect of each of the loss sharing agreements during
which the loss sharing provisions of the applicable loss sharing agreement is in effect (defined as
the product of the simple average of the principal amount of shared loss loans and shared loss
assets at the beginning and end of such period times 1%).
Covered loans under loss sharing agreements with the FDIC (the covered loans) are reported in
loans exclusive of the estimated FDIC loss share indemnification asset. The covered loans acquired
in the Westernbank transaction are, and will continue to be, reviewed for collectability, based on
the expectations of cash flows on these loans. As a result, if there is a decrease in the expected
cash flows due to an increase in estimated credit losses compared to the estimate made at the April
30, 2010 acquisition date, the Corporation will record a charge to the provision for loan losses
and an allowance for loan losses will be established. A related credit to income and an increase in the FDIC loss share indemnification asset will be recognized at the same time, measured
based on the loss share percentages described above.
The operating results of the Corporation for the quarter and six-months ended June 30, 2010
include the operating results produced by the acquired assets and liabilities assumed for the
period of May 1, 2010 to June 30, 2010. Note 29 to the consolidated financial statements
provides limited information on the results of the BPPR Westernbank operations, which is
presented as additional information within the BPPR reportable segment. The Corporation believes
that given the nature of assets and liabilities assumed, the significant amount of fair value
adjustments, the nature of additional consideration provided to the FDIC (note payable and
equity appreciation instrument) and the FDIC loss sharing agreements now in place, historical
results of Westernbank are not meaningful to Populars results, and thus no pro forma
information is presented.
11
The following table presents balances recorded by the Corporation at the time of the Westernbank
FDIC-assisted transaction on April 30, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book value |
|
|
|
|
|
|
|
|
|
|
|
|
prior to |
|
|
|
|
|
|
|
|
|
|
|
|
purchase |
|
|
|
|
|
|
|
|
|
As recorded by |
|
|
accounting |
|
Fair value |
|
Additional |
|
Popular, Inc. on |
(In thousands) |
|
adjustments |
|
adjustments |
|
consideration |
|
April 30, 2010 |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and money market investments |
|
$ |
358,132 |
|
|
|
|
|
|
|
|
|
|
$ |
358,132 |
|
Investment in Federal Home Loan Bank
stock |
|
|
58,610 |
|
|
|
|
|
|
|
|
|
|
|
58,610 |
|
Covered loans |
|
|
8,510,748 |
|
|
$ |
(4,293,756 |
) |
|
|
|
|
|
|
4,216,992 |
|
Non-covered loans |
|
|
43,996 |
|
|
|
|
|
|
|
|
|
|
|
43,996 |
|
FDIC loss share indemnification asset |
|
|
|
|
|
|
3,322,561 |
|
|
|
|
|
|
|
3,322,561 |
|
Covered other real estate owned |
|
|
125,947 |
|
|
|
(52,712 |
) |
|
|
|
|
|
|
73,235 |
|
Core deposit intangible |
|
|
|
|
|
|
24,415 |
|
|
|
|
|
|
|
24,415 |
|
Receivable from FDIC (associated to
the Note payable
issued to the FDIC) |
|
|
|
|
|
|
|
|
|
$ |
111,101 |
|
|
|
111,101 |
|
Other assets |
|
|
44,926 |
|
|
|
|
|
|
|
|
|
|
|
44,926 |
|
|
Total assets |
|
$ |
9,142,359 |
|
|
$ |
(999,492 |
) |
|
$ |
111,101 |
|
|
$ |
8,253,968 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
$ |
2,380,170 |
|
|
$ |
11,465 |
|
|
|
|
|
|
$ |
2,391,635 |
|
Note payable issued to the FDIC
(including a premium
of $11,612 resulting from the fair
value adjustment) |
|
|
|
|
|
|
|
|
|
$ |
5,769,696 |
|
|
|
5,769,696 |
|
Equity appreciation instrument |
|
|
|
|
|
|
|
|
|
|
52,500 |
|
|
|
52,500 |
|
Contingent liability on unfunded loan
commitments |
|
|
|
|
|
|
132,442 |
|
|
|
|
|
|
|
132,442 |
|
Accrued expenses and other liabilities |
|
|
13,925 |
|
|
|
|
|
|
|
|
|
|
|
13,925 |
|
|
Total liabilities |
|
$ |
2,394,095 |
|
|
$ |
143,907 |
|
|
$ |
5,822,196 |
|
|
$ |
8,360,198 |
|
|
Excess of assets acquired over
liabilities assumed |
|
$ |
6,748,264 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate fair value adjustments |
|
|
|
|
|
$ |
(1,143,399 |
) |
|
|
|
|
|
|
|
|
|
Aggregate additional consideration, net |
|
|
|
|
|
|
|
|
|
$ |
5,711,095 |
|
|
|
|
|
|
Goodwill on acquisition |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
106,230 |
|
|
|
As previously disclosed, the fair values initially assigned to the assets acquired and
liabilities assumed were preliminary and subject to refinement for up to one year after the closing
date of the acquisition as new information relative to closing date fair values becomes available. Because
of the short time period between the April 30, 2010 closing of the transaction and the June 30,
2010 reporting date, as well as delays in the receipt of certain information, the Corporation
continues to analyze its estimates of fair value on loans acquired, FDIC loss share indemnification
asset recorded and the note payable issued to the FDIC. As the Corporation finalizes its analyses
of these assets and liabilities, there may be adjustments to the recorded carrying values, and thus
the recognized goodwill may increase or decrease.
12
The following is a description of the methods used to determine the fair values of significant
assets and liabilities:
Loans
Fair values for loans were based on a discounted cash flow methodology. Certain loans were valued
individually, while other loans were valued as pools. Aggregation into pools considered
characteristics such as loan type, payment term, rate type and accruing status, among others.
Principal and interest projections considered prepayment rates and credit loss expectations. The
discount rates were developed based on the relative risk of the cash flows, taking into account
principally the loan type, market rates as of the valuation date, liquidity expectations, and the
expected life of the loans.
FDIC loss share indemnification asset
Fair value was estimated using projected cash flows related to the loss sharing agreements based on
the expected reimbursements for losses, including consideration of the true up payment and the
applicable loss sharing percentages. These expected reimbursements do not include reimbursable
amounts related to future covered expenditures. The estimates of expected losses used in valuation
of this asset are consistent with the loss estimates used in the valuation of the covered assets.
These cash flows were discounted to reflect the estimated timing of the receipt of the loss share
reimbursement from the FDIC and the value of any true-up payment due to the FDIC at the end of the
loss sharing agreements, to the extent applicable. The discount rate used in this calculation was
determined using a yield of an A-rated corporate security with a term based on the weighted average
life of the recovery of cash flows plus a risk premium reflecting the uncertainty related to the
timing of cash flows and the potential rejection of claims by the FDIC. Due to the increased
uncertainty of the true-up payment, an additional risk premium was added to the discount rate.
As of June 30, 2010, the Corporation has not made any claims to the FDIC associated with losses
incurred on covered loans or covered other real estate owned. Non-interest income for the quarter
ended June 30, 2010 was positively impacted by $23.3 million derived from the two-month accretion
of the FDIC loss share indemnification asset.
Receivable from the FDIC
The note payable issued to the FDIC as of the April 30, 2010 transaction date was determined based
on a pro-forma statement of assets acquired and liabilities assumed as of February 24, 2010, the
bid transaction date. The receivable from the FDIC represents an adjustment to reconcile the
consideration paid based on the assets acquired and liabilities assumed as of April 30, 2010
compared with the pro-forma statement as of February 24, 2010. The carrying amount of this
receivable was a reasonable estimate of fair value based on its short-term nature. The receivable
from the FDIC was collected by BPPR in June 2010 and is reflected as a cash inflow from financing
activities in the consolidated statement of cash flows for the six months ended June 30, 2010. The
proceeds were remitted to the FDIC in July 2010 as a payment on the note.
Other real estate covered under loss sharing agreements with the FDIC (OREO)
OREO includes real estate acquired in settlement of loans. OREO properties were recorded at
estimated fair values less costs to sell at the date acquired based on managements assessments of
existing appraisals or broker price opinions. The estimated costs to sell are based on past
experience with similar property types and terms customary for real estate transactions.
Goodwill
The amount of goodwill is the residual difference in the fair value of liabilities assumed and net
consideration paid to the FDIC over the fair value of the assets acquired. The goodwill is
deductible for income tax purposes. The goodwill from the Westernbank FDIC-assisted transaction was
assigned to the BPPR reportable segment.
Core deposit intangible
This intangible asset represents the value of the relationships that Westernbank had with its
deposit customers. The fair value of this intangible asset was estimated based on a discounted cash
flow methodology that gave appropriate consideration to expected customer attrition rates, cost of
the core deposit base, interest costs, and the net maintenance cost attributable to customer
deposits, and the cost of alternative funds.
Deposits
The fair values used for the demand and savings deposits that comprise the transaction accounts
acquired, by definition equal the amount payable on demand at the reporting date. The fair values
for time deposits were estimated using a discounted cash flow calculation that applies interest
rates currently offered to comparable time deposits with similar maturities.
13
Contingent liability on unfunded loan commitments
Unfunded loan commitments are contractual obligations to provide future funding. The fair value of
a liability associated to unfunded loan commitments is principally based on the expected
utilization rate or likelihood that the commitment will be exercised. The estimated value of the
unfunded commitments was equal to the expected loss associated with the balance expected to be
funded. The expected loss is comprised of both credit and non-credit components; therefore, the
discounts derived from the loan valuation were applied to the expected funded balance to derive to
fair value. The unfunded loan commitments outstanding as of the April 30, 2010 transaction date,
which approximated $227 million, relate principally to commercial and construction loans and
commercial revolving lines of credit. Losses incurred on loan disbursements made under these
unfunded loan commitments are covered by the FDIC loss sharing agreements provided that the
Corporation complies with specific requirements under such agreements. The fair value of the
unfunded loan commitments amounting to $132 million is included as part of other liabilities in
the consolidated statement of condition as of June 30, 2010.
Deferred taxes
Deferred taxes relate to a difference between the financial statement and tax basis of the assets
acquired and liabilities assumed in the transaction. Deferred taxes are reported based upon the
principles in ASC Topic 740 Income Taxes, and are measured using the enacted statutory income tax
rate to be in effect for BPPR at the time the deferred tax is expected to reverse, which is 39%.
For income tax purposes, the Westernbank transaction was accounted for as an asset purchase and the
tax bases of assets acquired were allocated based on fair values using a modified residual method.
Under this method, the purchase price was allocated among the assets in order of liquidity (the
most liquid first) up to its fair market value.
Note payable issued to the FDIC
The fair value of the note payable issued to the FDIC was determined using discounted cash flows
based on market rates currently available for debt with similar terms, including consideration that
the debt is collateralized by the assets covered under the loss sharing agreements. The principal
source of cash flows to pay down the note payable derives from the cash flows collected from the
covered assets, as well as payments from the FDIC on claimed credit losses associated to the
covered assets. The Corporation is required under the agreements with the FDIC to use those
proceeds to repay the note payable and remit payments on a monthly basis.
Equity appreciation instrument
As part of the consideration, BPPR also issued an equity appreciation instrument to the FDIC. Under
the terms of the equity appreciation instrument, the FDIC has the opportunity to obtain a cash
payment with a value equal to the product of (a) 50 million units and (b) the difference between
(i) Popular, Inc.s average volume weighted price over the two NASDAQ trading days immediately
prior to the exercise date and (ii) the exercise price of $3.43. The equity appreciation instrument
is exercisable by the holder thereof, in whole or in part, up to May 7, 2011. The fair value of the
equity appreciation instrument was estimated by determining a call option value using the
Black-Scholes Option Pricing Model. The equity appreciation instrument is recorded as a liability
and any subsequent changes in its estimated fair value will be recognized in earnings. The
Corporation recognized non-interest income of $24.4 million during the quarter ended June 30, 2010
as a result of a decrease in the fair value of the equity appreciation instrument.
Note 3 Basis of Presentation and Summary of Significant Accounting Policies
The consolidated financial statements include the accounts of Popular, Inc. and its majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated
in consolidation. The consolidated interim financial statements have been prepared without audit.
The statement of condition data as of December 31, 2009 was derived from audited financial
statements. The unaudited interim financial statements are, in the opinion of management, a fair
statement of the results for the periods reported and include all necessary adjustments, all of a
normal recurring nature, for a fair statement of such results.
Certain information and note disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of America have
been condensed or omitted from the unaudited financial statements pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly, these financial statements
should be read in conjunction with the audited consolidated financial statements of the
Corporation for the year ended December 31, 2009, included in the Corporations Annual Report
on Form 10-K filed on March 1, 2010 (the 2009 Annual Report). Additionally, where
applicable, the policies conform to the accounting and reporting guidelines prescribed by bank
regulatory authorities. Operating results for the interim periods disclosed herein are not
necessarily indicative of the results that may be expected for a full year or any future period.
14
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and
assumptions that affect the amounts reported in the consolidated statement of condition.
Management exercised significant judgment regarding assumptions about discount rates, future
expected cash flows including prepayments, default rates, market conditions and other future
events that are highly subjective in nature, and subject to change, and all of which affected the
estimation of the fair values of the net assets acquired in the Westernbank FDIC-assisted
transaction. Actual results could differ from those estimates; others provided with the same
information could draw different reasonable conclusions and calculate different fair values.
Changes that may vary significantly from our assumptions include loan prepayments, credit
losses, the estimated market values of collateral at disposition, the timing of such disposition, and
deposit attrition.
Business Acquisition
The Corporation determined that the acquisition of certain assets and assumption of certain
liabilities of Westernbank in the Westernbank FDIC-assisted transaction constitutes a business
acquisition as defined by the Financial Accounting Standards Board (FASB) Codification
(ASC) Topic 805 Business Combinations. The assets and liabilities, both tangible and
intangible, were initially recorded at their estimated fair values. Fair values were determined
based on the requirements of FASB Codification Topic 820 Fair Value Measurements. These
fair value estimates are preliminary and subject to refinement for up to one year after the closing
date of the acquisition as additional information regarding the closing date fair value becomes
available. Acquisition-related costs are expensed as incurred.
Loans acquired in an FDIC-assisted transaction
Loans acquired in a business acquisition are recorded at their fair value at the acquisition date.
Credit discounts are included in the determination of fair value; therefore, an allowance for loan
losses is not recorded at the acquisition date.
Since the loans from the Westernbank FDIC-assisted transaction were acquired with a significant
discount for credit, the Corporation applied the discount accretion guidance of ASC Subtopic
310-30 Loans and Debt Securities Acquired with Deteriorated Credit Quality (ASC Subtopic
310-30) to all acquired loans, except for credit cards and revolving lines of credit that were
expressly scoped out from the application of this guidance. As documented in a letter from the
AICPA Depository Institutions Expert Panel (DIEP) to the Office of Chief Accountant of the
SEC, on December 5, 2009, the SEC addressed the recognition of discount accretion for loans
acquired under these circumstances. As referred to in the AICPAs letter, when loans are acquired
with a significant discount for credit and such loans are not within the scope of ASC 310-30, they
believed that the SEC would not object to an accounting policy based on contractual cash flows
or an accounting policy based on expected cash flows, meaning that an entity could either apply
the accretion guidance of ASC 310-20 or that of ASC 310-30 to such loans. Consistent with the
AICPAs views, the Corporation applied the guidance of ASC 310-30 to all loans acquired in
Westernbank FDIC-assisted transaction, except for credit cards and revolving lines of credit as
indicated above.
Under ASC Subtopic 310-30, the covered loans acquired from the FDIC were aggregated into
pools based on similar characteristics, including factors such as loan type, interest rate type,
accruing status, and amortization type. Each loan pool is accounted for as a single asset with a
single composite interest rate and an aggregate expectation of cash flows. Under ASC Subtopic
310-30, the difference between the undiscounted cash flows expected at acquisition and the fair
value in the loans, or the accretable yield, is recognized as interest income using the effective
yield method over the estimated life of the loan if the timing and amount of the future cash flows
of the pool is reasonably estimable. The non-accretable difference represents the difference
between contractually required principal and interest and the cash flows expected to be collected.
Subsequent to the acquisition date, increases in cash flows over those expected at the acquisition
date are recognized as interest income prospectively. Decreases in expected cash flows after the
acquisition date are recognized by recording an allowance for loan losses.
15
The fair value discount of lines of credit with revolving privileges that are accounted for pursuant
to the guidance of ASC Subtopic 310-20, represents the difference between the contractually
required loan payment receivable in excess of the initial investment in the loan. This discount is
accreted into interest income over the life of the loan if the loan is in accruing status. Any cash
flows collected in excess of the carrying amount of the loan are recognized in earnings at the time
of collection. The carrying amount of lines of credit with revolving privileges, which are
accounted pursuant to the guidance of ASC Subtopic 310-20, are subject to periodic review to
determine the need for recognizing an allowance for loan losses.
Covered Assets
Assets subject to loss sharing agreements with the FDIC are labeled covered on the
consolidated statement of condition and include certain loans and other real estate properties.
Loans acquired in the Westernbank FDIC-assisted transaction, except for credit cards, are
considered covered loans because the Corporation will be reimbursed for 80% of any future
losses on these loans subject to the terms of the FDIC loss sharing agreements.
FDIC Loss Share Indemnification Asset
The acquisition date fair value of the reimbursement that the Corporation expects to receive from
the FDIC under the loss sharing agreements was recorded as an FDIC loss share indemnification
asset on the consolidated statement of condition. Fair value was estimated using projected cash
flows related to the loss sharing agreements. Refer to Note 2 for additional information on the
valuation methodology. The impact of the FDIC loss share indemnification on the Corporations
results of operations is included in non-interest income,
particularly in the category of FDIC loss
share income, and considers the accretion due to discounting and the changes in expected loss
sharing reimbursements. Decreases in expected reimbursements will be recognized in income
prospectively consistent with the approach taken to recognize increases in cash flows on covered
loans. Increases in expected reimbursements will be recognized in income in the same period that
the allowance for credit losses for the related loans is recognized.
The FDIC loss share indemnification asset for loss share agreements is measured separately from
the related covered assets as it is not contractually embedded in the assets and is not transferable
with the assets should the assets be sold.
Equity Appreciation Instrument
The equity appreciation instrument is recorded as an other liability in the consolidated
statement of condition and any subsequent change in its estimated fair value is recognized in
earnings on each quarterly reporting date. Refer to Note 2 to the consolidated financial statements
for additional information on the equity appreciation instrument issued to the FDIC.
Note 4 Adoption of New Accounting Standards and Issued But Not Yet Effective Accounting
Standards
FASB Accounting Standards Update 2009-16, Transfers and Servicing (Accounting Standards
Codification (ASC)
16
Topic 860) Accounting for Transfers of Financial Assets (ASU 2009-16)
ASU 2009-16 amends previous guidance relating to transfers of financial assets and eliminates the
concept of a qualifying special-purpose entity, removes the exception for guaranteed mortgage
securitizations when a transferor has not surrendered control over the transferred financial
assets, changes the requirements for derecognizing financial assets, and includes additional
disclosures requiring more information about transfers of financial assets in which entities have
continuing exposure to the risks related to the transferred financial assets. Among the most
significant amendments and additions to this guidance are changes to the conditions for sales of
financial assets which objective is to determine whether a transferor and its consolidated
affiliates included in the financial statements have surrendered control over transferred financial
assets or third-party beneficial interests; and the addition of the meaning of the term
participating interest which represents a proportionate (pro rata) ownership interest in an entire
financial asset. The requirements for sale accounting must be applied only to a financial asset in
its entirety, a pool of financial assets in its entirety, or participating interests as defined in
ASC Subparagraph 860-10-40-6A. This guidance has been applied as of the beginning of the first
annual reporting period that began after November 15, 2009, for interim periods within that first
annual reporting period and will be applied for interim and annual reporting periods thereafter.
Earlier application was prohibited. The recognition and measurement provisions have been applied to
transfers that have occurred on or after the effective date. On and after the effective date,
existing qualifying special-purpose entities have been evaluated for consolidation in accordance
with the applicable consolidation guidance in the Codification. The Corporation adopted this new
authoritative accounting guidance effective January 1, 2010. The Corporation evaluated transfers of
financial assets executed during the six months ended June 30, 2010 pursuant to the new accounting
guidance, principally consisting of guaranteed mortgage securitizations (Government National
Mortgage Association (GNMA) and Federal National Mortgage Association (FNMA) mortgage-backed
securities, and determined that the adoption of ASU 2009-16 did not have a significant impact on
the Corporations accounting for such transactions or results of operations or financial condition
for such period.
A securitization of a financial asset, a participating interest in a financial asset, or a pool of
financial assets in which the Corporation (and its consolidated affiliates) (a) surrenders control
over the transferred assets and (b) receives cash or other proceeds is accounted for as a sale.
Control is considered to be surrendered only if all three of the following conditions are met: (1)
the assets have been legally isolated; (2) the transferee has the ability to pledge or exchange the
assets; and (3) the transferor no longer maintains effective control over the assets. When the
Corporation transfers financial assets and the transfer fails any one of the above criteria, the
Corporation is prevented from derecognizing the transferred financial assets and the transaction is
accounted for as a secured borrowing.
The Corporation recognizes and initially measures at fair value a servicing asset or servicing
liability each time it undertakes an obligation to service a financial asset by entering into a
servicing contract in either of the following situations: (1) a transfer of an entire financial
asset, a group of entire financial assets, or a participating interest in an entire financial asset
that meets the requirements for sale accounting; or (2) an acquisition or assumption of a servicing
obligation of financial assets that do not pertain to the Corporation or its consolidated
subsidiaries. Upon adoption of ASU 2009-16, the Corporation does not recognize either a servicing
asset or a servicing liability if it transfers or securitizes financial assets in a transaction
that does not meet the requirements for sale accounting and is accounted for as a secured
borrowing.
Refer to Note 11 to the consolidated financial statements for disclosures on transfers of financial
assets and servicing assets retained as part of guaranteed mortgage securitizations.
FASB Accounting Standards Update 2009-17, Consolidations (ASC Topic 810) Improvements to
Financial Reporting by Enterprises Involved with Variable Interest Entities (ASU 2009-17) and
FASB Accounting Standards Update 2010-10, Consolidation (ASC Topic 810): Amendments for Certain
Investment Funds (ASU 2010-10)
ASU 2009-17 amends the guidance applicable to variable interest entities (VIE) and changes how a
reporting entity determines when an entity that is insufficiently capitalized or is not controlled
through voting (or similar rights) should be consolidated. This guidance replaces a
quantitative-based risks and rewards calculation for determining which entity, if any, has both (a)
a controlling financial interest in a variable interest entity with an approach focused on
identifying which entity has the power to direct the activities of a variable interest entity that
17
most significantly impact the entitys economic performance and (b) the obligation to absorb losses
of the entity or the right to receive benefits from the entity that could potentially be
significant to the variable interest entity. This guidance requires reconsideration of whether an
entity is a variable interest entity when any changes in facts or circumstances occur such that the
holders of the equity investment at risk, as a group, lose the power to direct the activities of
the entity that most significantly impact the entitys economic performance. It also requires
ongoing assessments of whether a variable interest holder is the primary beneficiary of a variable
interest entity. The amendments to the consolidated guidance affect all entities that were within
the scope of the original guidance, as well as qualifying special-purpose entities (QSPEs) that
were previously excluded from the guidance. ASU 2009-17 requires a reporting entity to provide
additional disclosures about its involvement with variable interest entities and any significant
changes in risk exposure due to that involvement. The Corporation adopted this new authoritative
accounting guidance effective January 1, 2010. The new accounting guidance on variable interest
entities did not have an effect on the Corporations consolidated statement of condition or results
of operations upon adoption.
The principal variable interest entities evaluated by the Corporation during the six months ended
June 30, 2010 included: (1) GNMA and FNMA guaranteed mortgage securitizations and for which
management has concluded that the Corporation is not the primary beneficiary (refer to Note 20 to
the consolidated financial statements) and (2) the trust preferred securities for which management
believes that the Corporation does not possess a significant variable interest on the trusts (refer
to Note 17 to the consolidated financial statements).
Additionally, the Corporation has variable interests in certain investments that have the
attributes of investment companies, as well as limited partnership investments in venture capital
companies. However, in January 2010, the FASB issued ASU 2010-10, Consolidation (ASC Topic 810),
Amendments for Certain Investment Funds, which deferred the effective date of the provisions of ASU
2009-17 for a reporting entitys interest in an entity that has all the attributes of an investment
company; or for which it is industry practice to apply measurement principles for financial
reporting purposes that are consistent with those followed by investment companies. The deferral
allows asset managers that have no obligation to fund potentially significant losses of an
investment entity to continue to apply the previous accounting guidance to investment entities that
have the attributes of entities subject to ASC Topic 946 (the Investment Company Guide). The FASB
also decided to defer the application of ASU 2009-17 for money market funds subject to Rule 2a-7 of
the Investment Company Act of 1940. Asset managers would continue to apply the applicable existing
guidance to those entities that qualify for the deferral. ASU 2010-10 did not defer the disclosure
requirements in ASU 2009-17.
The Corporation was not required to consolidate existing variable interest entities for which it
has a variable interest as of June 30, 2010. Refer to Note 20 to the consolidated financial
statements for required disclosures associated with the guaranteed mortgage securitizations in
which the Corporation holds a variable interest.
FASB Accounting Standards Update 2010-06, Fair Value Measurements and Disclosures (ASC Topic 820) -
Improving Disclosures about Fair Value Measurements (ASU 2010-06)
ASU 2010-06, issued in January 2010, revises two disclosure requirements concerning fair value
measurements and clarifies two others. It requires separate presentation of significant transfers
into and out of Levels 1 and 2 of the fair value hierarchy and disclosure of the reasons for such
transfers. It will also require the presentation of purchases, sales, issuances and settlements
within Level 3 on a gross basis rather than a net basis. The amendments also clarify that
disclosures should be disaggregated by class of asset or liability and that disclosures about
inputs and valuation techniques should be provided for both recurring and non-recurring fair value
measurements. ASU 2010-06 has been effective for interim and annual reporting periods beginning
after December 15, 2009, except for the disclosures about purchases, sales, issuances, and
settlements in the rollforward of activity in Level 3 fair value measurements, which are effective
for interim and annual reporting periods beginning after December 15, 2010. This guidance impacts
disclosures only and will not have an effect on the Corporations consolidated statements of
condition or results of operations. The Corporations disclosures about fair value measurements are
presented in Note 21 to the consolidated financial statements.
FASB Accounting Standards Update 2010-11, Derivatives and Hedging (ASC Topic 815): Scope Exception
Related to Embedded Credit Derivatives (ASU 2010-11)
18
ASU 2010-11 clarifies the type of embedded credit derivative that is exempt from embedded
derivative bifurcation requirements. The type of credit derivative that qualifies for the exemption
is related only to the subordination of one financial instrument to another. As a result, entities
that have contracts containing an embedded credit derivative feature in a form other than such
subordination may need to separately account for the embedded credit derivative feature. The
amendments in ASU 2010-11 are effective for each reporting entity at the beginning of its first
fiscal quarter beginning after June 15, 2010. Early adoption is permitted at the beginning of each
entitys first fiscal quarter beginning after March 5, 2010. The Corporation does not expect that
the adoption of this standard will have a significant effect, if any, on its consolidated financial
statements.
FASB Accounting Standards Update 2010-18, Receivables (ASC Topic 310): Effect of a Loan
Modification When the Loan is Part of a Pool That is Accounted for as a Single Asset (ASU
2010-18)
The amendments in ASU 2010-18, issued in April 2010, affect any entity that acquires loans subject
to ASC Subtopic 310-30, that accounts for some or all of those loans within pools, and that
subsequently modifies one or more of those loans after acquisition. ASC Subtopic 310-30 provides
guidance on accounting for acquired loans that have evidence of credit deterioration upon
acquisition. As a result of the amendments in ASU 2010-18, modifications of loans that are
accounted for within a pool under ASC Subtopic 310-30 do not result in the removal of those loans
from the pool even if the modification of those loans would otherwise be considered a troubled debt
restructuring. An entity will continue to be required to consider whether the pool of assets in
which the loan is included is impaired if expected cash flows for the pool change. The amendments
in ASU 2010-18 do not affect the accounting for loans under the scope of Subtopic 310-30 that are
not accounted for within pools. Loans accounted for individually under Subtopic 310-30 continue to
be subject to the troubled debt restructuring accounting provisions within ASC Subtopic 310-40,
ReceivablesTroubled Debt Restructurings by Creditors. The amendments in ASU 2010-18 are effective
for modifications of loans accounted for within pools under Subtopic 310-30 occurring in the first
interim or annual period ending on or after July 15, 2010. The amendments are to be applied
prospectively. Early application is permitted. Upon initial adoption of the guidance in ASU
2010-18, an entity may make a one-time election to terminate accounting for loans as a pool under
Subtopic 310-30. This election may be applied on a pool-by-pool basis and does not preclude an
entity from applying pool accounting to subsequent acquisitions of loans with credit deterioration.
The Corporation elected to early adopt the provisions of this statement, effective with the closing
of the Westernbank FDIC-assisted transaction on April 30, 2010. As a result, the accounting for
modified loans follows the guidelines of ASU 2010-18; however, the adoption of these provisions did
not have a significant impact on the Corporations result of operations or financial position as of
June 30, 2010.
FASB Accounting Standards Update 2010-20, Receivables (ASC Topic 310): Disclosure about the Credit
Quality of Financing Receivables and the Allowance for Credit Losses (ASU 2010-20)
ASU 2010-20, issued in July 2010, expands disclosure requirements about the credit quality of
financing receivables and allowance for credit losses. The objective of this ASU is for an entity
to provide disclosures that facilitate financial statement users evaluation of the
following: (1) the nature of credit risk inherent in the entitys portfolio of financing
receivables; (2) how that risk is analyzed and assessed in arriving at the allowance for credit
losses; and (3) the changes and reasons for those changes in the allowance for credit losses.
Disclosures should be provided on a disaggregated basis on two defined levels: (1) portfolio
segment; and (2) class of financing receivable. The ASU 2010-20 makes changes to existing
disclosure requirements and includes additional disclosure requirements about financing
receivables, including: the credit quality indicators of financing receivables at the end of the
reporting period by class of financing receivables; the aging of past due financing receivables at
the end of the reporting period by class of financing receivables; and the nature and extent of
troubled debt restructurings that occurred during the period by class of financing receivables and
their effect on the allowance for credit losses. The disclosure requirements as of the end of a
reporting period are effective for interim and annual reporting periods ending on or after December
15, 2010. The disclosures about activity that occurs during a reporting period are effective for
interim and annual reporting periods beginning on or after December 15, 2010. This guidance impacts
disclosures only and will not have an effect on the Corporations consolidated statements of
condition or results of operations.
Note 5 Discontinued Operations
In 2008, the Corporation discontinued the operations of Popular Financial Holdings (PFH) by
selling assets and closing service branches and other units. The loss from discontinued operations
for the quarter and six months
19
ended June 30, 2009 was $6.6 million and $16.5 million, respectively, net of taxes. This loss was
primarily related to salary and other expenses incurred in providing loan portfolio servicing to
affiliated companies and other costs for full-time equivalent employees (FTEs) that were retained
for a transition period, as well as adjustments to indemnity reserves on loans previously sold.
Note 6 Restrictions on Cash and Due from Banks and Certain Securities
The Corporations subsidiary banks are required by federal and state regulatory agencies to
maintain average reserve balances with the Federal Reserve Bank or other banks. Those required
average reserve balances were $788 million as of June 30, 2010 (December 31, 2009 $721 million;
June 30, 2009 $718 million). Cash and due from banks as well as other short-term, highly-liquid
securities are used to cover the required average reserve balances.
As required by the Puerto Rico International Banking Center Regulatory Act, as of June 30, 2010,
December 31, 2009, and June 30, 2009, the Corporation maintained separately for its two
international banking entities (IBEs), $0.6 million in time deposits, equally divided for the two
IBEs, which were considered restricted assets.
As part of a line of credit facility with a financial institution, as of June 30, 2010, the
Corporation maintained restricted cash of $1 million (December 31, 2009 and June 30, 2009 $2
million) as collateral for the line of credit. The cash is being held in certificates of deposits
which mature in less than 90 days. The line of credit is used to support letters of credit.
As of June 30, the Corporation maintained restricted cash of $6 million to support letters of
credit (December 31, 2009 $4 million; June 30, 2009 $5 million).
As of June 30, 2010, the Corporation maintained restricted cash of $2 million that represents funds
deposited in an escrow account which are guaranteeing possible liens or encumbrances over the title
of insured properties.
As of June 30, 2010, the Corporation maintained restricted cash of $5 million as collateral for
repurchase liabilities.
As of June 30, 2010, the Corporation had restricted cash of $4 million which represents cash
received on deposit from participant institutions of the ATH network that has been segregated for
the development of the ATH brand.
As of June 30, 2010, the Corporation maintained restricted cash of $12 million to comply with the
requirements of the credit card networks.
Note 7 Pledged Assets
Certain securities and loans were pledged principally to secure public and trust deposits, assets
sold under agreements to repurchase, other borrowings and credit facilities available, derivative
positions and loan servicing agreements.
The classification and carrying amount of the Corporations pledged assets, in which the secured
parties are not permitted to sell or repledge the collateral, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
June 30, |
(In thousands) |
|
2010 |
|
2009 |
|
2009 |
|
Investment securities available-for-sale, at fair value |
|
$ |
2,384,829 |
|
|
$ |
1,923,338 |
|
|
$ |
2,252,017 |
|
Investment securities held-to-maturity, at amortized cost |
|
|
125,770 |
|
|
|
125,769 |
|
|
|
125,770 |
|
Loans held-for-sale measured at lower of cost or fair value |
|
|
3,069 |
|
|
|
2,254 |
|
|
|
34,014 |
|
Loans held-in-portfolio covered under loss sharing agreements with the FDIC |
|
|
3,932,700 |
|
|
|
|
|
|
|
|
|
Loans held-in-portfolio not covered under loss sharing agreements with the FDIC |
|
|
9,392,857 |
|
|
|
8,993,967 |
|
|
|
7,629,613 |
|
Other real estate covered under loss sharing agreements with the FDIC |
|
|
76,331 |
|
|
|
|
|
|
|
|
|
|
Total pledged assets |
|
$ |
15,915,556 |
|
|
$ |
11,045,328 |
|
|
$ |
10,041,414 |
|
|
Pledged investment securities and loans in which the creditor has the right by custom or
contract to repledge are presented separately in the consolidated statements of condition.
20
Investment securities available-for-sale and held-to-maturity totaling $2.0 billion as of June 30,
2010 served as collateral to secure public funds.
The Corporations banking subsidiaries have the ability to borrow funds from the Federal Home Loan
Bank of New York (FHLB) and from the Federal Reserve Bank of New York (Fed). As of June 30,
2010, the banking subsidiaries had short-term and long-term credit facilities authorized with the
FHLB aggregating $1.7 billion. Refer to Note 16 to the consolidated financial statements for
borrowings outstanding under these credit facilities. As of June 30, 2010, the credit facilities
authorized with the FHLB were collateralized by $3.0 billion in loans held-in-portfolio and
investment securities available-for-sale. Also, the Corporations banking subsidiaries had a
borrowing capacity at the Fed discount window of $3.2 billion, which remained unused as of such
date. The amount available under this credit facility is dependent upon the balance of loans and
securities pledged as collateral. As of June 30, 2010, the credit facilities with the Fed were
collateralized by $6.4 billion in loans held-in-portfolio. These pledged assets are included in the
above table and were not reclassified and separately reported in the consolidated statement of
condition as of June 30, 2010.
Loans held-in-portfolio and other real estate owned that are covered by loss sharing agreements
with the FDIC amounting to $4.0 billion as of June 30, 2010, serve as collateral to secure the Note
payable issued to the FDIC. Refer to Note 2 to the consolidated financial statements for
descriptive information on the note payable issued to the FDIC.
21
Note 8 Investment Securities Available-For-Sale
The amortized cost, gross unrealized gains and losses, fair value and weighted average yield of
investment securities available-for-sale as of June 30, 2010, December 31, 2009 and June 30, 2009
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AS OF JUNE 30, 2010 |
|
|
|
|
|
|
Gross |
|
Gross |
|
|
|
|
|
Weighted |
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Fair |
|
Average |
(In thousands) |
|
Cost |
|
Gains |
|
Losses |
|
Value |
|
Yield |
|
U.S. Treasury securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After 1 to 5 years |
|
$ |
107,776 |
|
|
$ |
1,311 |
|
|
|
|
|
|
$ |
109,087 |
|
|
|
1.47 |
% |
After 5 to 10 years |
|
|
29,023 |
|
|
|
2,577 |
|
|
|
|
|
|
|
31,600 |
|
|
|
3.80 |
|
|
Total U.S. Treasury securities |
|
|
136,799 |
|
|
|
3,888 |
|
|
|
|
|
|
|
140,687 |
|
|
|
1.97 |
|
|
Obligations of U.S. Government sponsored entities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within 1 year |
|
|
384,536 |
|
|
|
5,504 |
|
|
|
|
|
|
|
390,040 |
|
|
|
3.52 |
|
After 1 to 5 years |
|
|
1,254,234 |
|
|
|
65,786 |
|
|
|
|
|
|
|
1,320,020 |
|
|
|
3.41 |
|
After 5 to 10 years |
|
|
11,928 |
|
|
|
83 |
|
|
|
|
|
|
|
12,011 |
|
|
|
5.30 |
|
After 10 years |
|
|
26,887 |
|
|
|
517 |
|
|
|
|
|
|
|
27,404 |
|
|
|
5.68 |
|
|
Total obligations of U.S. Government sponsored entities |
|
|
1,677,585 |
|
|
|
71,890 |
|
|
|
|
|
|
|
1,749,475 |
|
|
|
3.49 |
|
|
Obligations of Puerto Rico, States and political subdivisions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After 1 to 5 years |
|
|
22,406 |
|
|
|
171 |
|
|
|
|
|
|
|
22,577 |
|
|
|
4.09 |
|
After 5 to 10 years |
|
|
27,049 |
|
|
|
321 |
|
|
$ |
4 |
|
|
|
27,366 |
|
|
|
5.12 |
|
After 10 years |
|
|
5,560 |
|
|
|
129 |
|
|
|
|
|
|
|
5,689 |
|
|
|
5.28 |
|
|
Total obligations of Puerto Rico, States and political subdivisions |
|
|
55,015 |
|
|
|
621 |
|
|
|
4 |
|
|
|
55,632 |
|
|
|
4.72 |
|
|
Collateralized mortgage obligations federal agencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within 1 year |
|
|
159 |
|
|
|
3 |
|
|
|
|
|
|
|
162 |
|
|
|
4.06 |
|
After 1 to 5 years |
|
|
4,714 |
|
|
|
136 |
|
|
|
|
|
|
|
4,850 |
|
|
|
4.61 |
|
After 5 to 10 years |
|
|
98,717 |
|
|
|
1,507 |
|
|
|
88 |
|
|
|
100,136 |
|
|
|
2.65 |
|
After 10 years |
|
|
1,310,206 |
|
|
|
32,005 |
|
|
|
2,341 |
|
|
|
1,339,870 |
|
|
|
2.93 |
|
|
Total collateralized mortgage obligations federal agencies |
|
|
1,413,796 |
|
|
|
33,651 |
|
|
|
2,429 |
|
|
|
1,445,018 |
|
|
|
2.92 |
|
|
Collateralized mortgage obligations private label |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After 5 to 10 years |
|
|
16,737 |
|
|
|
21 |
|
|
|
522 |
|
|
|
16,236 |
|
|
|
2.08 |
|
After 10 years |
|
|
92,212 |
|
|
|
116 |
|
|
|
6,577 |
|
|
|
85,751 |
|
|
|
2.37 |
|
|
Total collateralized mortgage obligations private label |
|
|
108,949 |
|
|
|
137 |
|
|
|
7,099 |
|
|
|
101,987 |
|
|
|
2.32 |
|
|
Mortgage-backed securities agencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within 1 year |
|
|
20,661 |
|
|
|
177 |
|
|
|
|
|
|
|
20,838 |
|
|
|
2.96 |
|
After 1 to 5 years |
|
|
20,438 |
|
|
|
544 |
|
|
|
|
|
|
|
20,982 |
|
|
|
3.96 |
|
After 5 to 10 years |
|
|
188,865 |
|
|
|
12,762 |
|
|
|
|
|
|
|
201,627 |
|
|
|
4.72 |
|
After 10 years |
|
|
2,629,056 |
|
|
|
107,342 |
|
|
|
161 |
|
|
|
2,736,237 |
|
|
|
4.31 |
|
|
Total mortgage-backed securities agencies |
|
|
2,859,020 |
|
|
|
120,825 |
|
|
|
161 |
|
|
|
2,979,684 |
|
|
|
4.33 |
|
|
Equity securities |
|
|
9,005 |
|
|
|
202 |
|
|
|
503 |
|
|
|
8,704 |
|
|
|
3.46 |
|
|
Total investment securities available-for-sale |
|
$ |
6,260,169 |
|
|
$ |
231,214 |
|
|
$ |
10,196 |
|
|
$ |
6,481,187 |
|
|
|
3.70 |
% |
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AS OF DECEMBER 31, 2009 |
|
|
|
|
|
|
Gross |
|
Gross |
|
|
|
|
|
Weighted |
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Fair |
|
Average |
(In thousands) |
|
Cost |
|
Gains |
|
Losses |
|
Value |
|
Yield |
|
U.S. Treasury securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After 5 to 10 years |
|
$ |
29,359 |
|
|
$ |
1,093 |
|
|
|
|
|
|
$ |
30,452 |
|
|
|
3.80 |
% |
|
Obligations of U.S. Government sponsored entities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within 1 year |
|
|
349,424 |
|
|
|
7,491 |
|
|
|
|
|
|
|
356,915 |
|
|
|
3.67 |
|
After 1 to 5 years |
|
|
1,177,318 |
|
|
|
58,151 |
|
|
|
|
|
|
|
1,235,469 |
|
|
|
3.79 |
|
After 5 to 10 years |
|
|
27,812 |
|
|
|
680 |
|
|
|
|
|
|
|
28,492 |
|
|
|
4.96 |
|
After 10 years |
|
|
26,884 |
|
|
|
176 |
|
|
|
|
|
|
|
27,060 |
|
|
|
5.68 |
|
|
Total obligations of U.S. Government sponsored entities |
|
|
1,581,438 |
|
|
|
66,498 |
|
|
|
|
|
|
|
1,647,936 |
|
|
|
3.82 |
|
|
Obligations of Puerto Rico, States and political subdivisions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After 1 to 5 years |
|
|
22,311 |
|
|
|
7 |
|
|
$ |
15 |
|
|
|
22,303 |
|
|
|
6.92 |
|
After 5 to 10 years |
|
|
50,910 |
|
|
|
249 |
|
|
|
632 |
|
|
|
50,527 |
|
|
|
5.08 |
|
After 10 years |
|
|
7,840 |
|
|
|
|
|
|
|
61 |
|
|
|
7,779 |
|
|
|
5.26 |
|
|
Total obligations of Puerto Rico, States and political subdivisions |
|
|
81,061 |
|
|
|
256 |
|
|
|
708 |
|
|
|
80,609 |
|
|
|
5.60 |
|
|
Collateralized mortgage obligations federal agencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within 1 year |
|
|
41 |
|
|
|
|
|
|
|
|
|
|
|
41 |
|
|
|
3.78 |
|
After 1 to 5 years |
|
|
4,875 |
|
|
|
120 |
|
|
|
|
|
|
|
4,995 |
|
|
|
4.44 |
|
After 5 to 10 years |
|
|
125,397 |
|
|
|
2,105 |
|
|
|
404 |
|
|
|
127,098 |
|
|
|
2.85 |
|
After 10 years |
|
|
1,454,833 |
|
|
|
19,060 |
|
|
|
5,837 |
|
|
|
1,468,056 |
|
|
|
3.03 |
|
|
Total collateralized mortgage obligations federal agencies |
|
|
1,585,146 |
|
|
|
21,285 |
|
|
|
6,241 |
|
|
|
1,600,190 |
|
|
|
3.02 |
|
|
Collateralized mortgage obligations private label |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After 5 to 10 years |
|
|
20,885 |
|
|
|
|
|
|
|
653 |
|
|
|
20,232 |
|
|
|
2.00 |
|
After 10 years |
|
|
105,669 |
|
|
|
109 |
|
|
|
8,452 |
|
|
|
97,326 |
|
|
|
2.59 |
|
|
Total collateralized mortgage obligations private label |
|
|
126,554 |
|
|
|
109 |
|
|
|
9,105 |
|
|
|
117,558 |
|
|
|
2.50 |
|
|
Mortgage-backed securities agencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within 1 year |
|
|
26,878 |
|
|
|
512 |
|
|
|
|
|
|
|
27,390 |
|
|
|
3.61 |
|
After 1 to 5 years |
|
|
30,117 |
|
|
|
823 |
|
|
|
|
|
|
|
30,940 |
|
|
|
3.94 |
|
After 5 to 10 years |
|
|
205,480 |
|
|
|
8,781 |
|
|
|
|
|
|
|
214,261 |
|
|
|
4.80 |
|
After 10 years |
|
|
2,915,689 |
|
|
|
32,102 |
|
|
|
10,203 |
|
|
|
2,937,588 |
|
|
|
4.40 |
|
|
Total mortgage-backed securities agencies |
|
|
3,178,164 |
|
|
|
42,218 |
|
|
|
10,203 |
|
|
|
3,210,179 |
|
|
|
4.42 |
|
|
Equity securities |
|
|
8,902 |
|
|
|
233 |
|
|
|
1,345 |
|
|
|
7,790 |
|
|
|
3.65 |
|
|
Total investment securities available-for-sale |
|
$ |
6,590,624 |
|
|
$ |
131,692 |
|
|
$ |
27,602 |
|
|
$ |
6,694,714 |
|
|
|
3.91 |
% |
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AS OF JUNE 30, 2009 |
|
|
|
|
|
|
Gross |
|
Gross |
|
|
|
|
|
Weighted |
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Market |
|
Average |
(In thousands) |
|
Cost |
|
Gains |
|
Losses |
|
Value |
|
Yield |
|
U.S. Treasury securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After 5 to 10 years |
|
$ |
29,695 |
|
|
$ |
1,138 |
|
|
|
|
|
|
$ |
30,833 |
|
|
|
3.80 |
% |
|
Obligations of U.S. Government sponsored entities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within 1 year |
|
|
154,896 |
|
|
|
2,990 |
|
|
|
|
|
|
|
157,886 |
|
|
|
4.33 |
|
After 1 to 5 years |
|
|
1,476,345 |
|
|
|
65,241 |
|
|
$ |
174 |
|
|
|
1,541,412 |
|
|
|
3.77 |
|
After 5 to 10 years |
|
|
27,811 |
|
|
|
1,060 |
|
|
|
|
|
|
|
28,871 |
|
|
|
4.96 |
|
After 10 years |
|
|
26,880 |
|
|
|
579 |
|
|
|
|
|
|
|
27,459 |
|
|
|
5.68 |
|
|
Total obligations of U.S. Government sponsored entities |
|
|
1,685,932 |
|
|
|
69,870 |
|
|
|
174 |
|
|
|
1,755,628 |
|
|
|
3.87 |
|
|
Obligations of Puerto Rico, States and political subdivisions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within 1 year |
|
|
4,500 |
|
|
|
10 |
|
|
|
|
|
|
|
4,510 |
|
|
|
6.10 |
|
After 1 to 5 years |
|
|
2,150 |
|
|
|
5 |
|
|
|
8 |
|
|
|
2,147 |
|
|
|
4.95 |
|
After 5 to 10 years |
|
|
68,476 |
|
|
|
264 |
|
|
|
4,906 |
|
|
|
63,834 |
|
|
|
4.79 |
|
After 10 years |
|
|
28,690 |
|
|
|
4 |
|
|
|
277 |
|
|
|
28,417 |
|
|
|
5.23 |
|
|
Total obligations of Puerto Rico, States and political subdivisions |
|
|
103,816 |
|
|
|
283 |
|
|
|
5,191 |
|
|
|
98,908 |
|
|
|
4.97 |
|
|
Collateralized mortgage obligations federal agencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within 1 year |
|
|
266 |
|
|
|
1 |
|
|
|
|
|
|
|
267 |
|
|
|
4.12 |
|
After 1 to 5 years |
|
|
8,566 |
|
|
|
181 |
|
|
|
16 |
|
|
|
8,731 |
|
|
|
5.16 |
|
After 5 to 10 years |
|
|
148,888 |
|
|
|
2,202 |
|
|
|
473 |
|
|
|
150,617 |
|
|
|
3.04 |
|
After 10 years |
|
|
1,508,619 |
|
|
|
17,049 |
|
|
|
11,638 |
|
|
|
1,514,030 |
|
|
|
3.19 |
|
|
Total collateralized mortgage obligations federal agencies |
|
|
1,666,339 |
|
|
|
19,433 |
|
|
|
12,127 |
|
|
|
1,673,645 |
|
|
|
3.18 |
|
|
Collateralized mortgage obligations private label |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within 1 year |
|
|
221 |
|
|
|
|
|
|
|
1 |
|
|
|
220 |
|
|
|
3.87 |
|
After 5 to 10 years |
|
|
27,224 |
|
|
|
|
|
|
|
746 |
|
|
|
26,478 |
|
|
|
2.35 |
|
After 10 years |
|
|
128,354 |
|
|
|
3 |
|
|
|
18,567 |
|
|
|
109,790 |
|
|
|
3.60 |
|
|
Total collateralized mortgage obligations private label |
|
|
155,799 |
|
|
|
3 |
|
|
|
19,314 |
|
|
|
136,488 |
|
|
|
3.38 |
|
|
Mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within 1 year |
|
|
5,143 |
|
|
|
52 |
|
|
|
|
|
|
|
5,195 |
|
|
|
3.04 |
|
After 1 to 5 years |
|
|
78,841 |
|
|
|
1,502 |
|
|
|
1 |
|
|
|
80,342 |
|
|
|
3.80 |
|
After 5 to 10 years |
|
|
149,901 |
|
|
|
4,812 |
|
|
|
4 |
|
|
|
154,709 |
|
|
|
4.82 |
|
After 10 years |
|
|
3,304,858 |
|
|
|
17,212 |
|
|
|
19,559 |
|
|
|
3,302,511 |
|
|
|
4.50 |
|
|
Total mortgage-backed securities |
|
|
3,538,743 |
|
|
|
23,578 |
|
|
|
19,564 |
|
|
|
3,542,757 |
|
|
|
4.50 |
|
|
Equity securities |
|
|
13,116 |
|
|
|
81 |
|
|
|
4,997 |
|
|
|
8,200 |
|
|
|
2.48 |
|
|
Total investment securities available-for-sale |
|
$ |
7,193,440 |
|
|
$ |
114,386 |
|
|
$ |
61,367 |
|
|
$ |
7,246,459 |
|
|
|
4.02 |
% |
|
24
The following table shows the Corporations fair value and gross unrealized losses of
investment securities available-for-sale, aggregated by investment category and length of time that
individual securities have been in a continuous unrealized loss position as of June 30, 2010,
December 31, 2009 and June 30, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AS OF JUNE 30, 2010 |
|
|
Less than 12 months |
|
12 months or more |
|
Total |
|
|
|
|
|
|
Gross |
|
|
|
|
|
Gross |
|
|
|
|
|
Gross |
|
|
|
|
|
|
Unrealized |
|
Fair |
|
Unrealized |
|
|
|
|
|
Unrealized |
(In thousands) |
|
Fair Value |
|
Losses |
|
Value |
|
Losses |
|
Fair Value |
|
Losses |
|
Obligations of Puerto Rico, States and political subdivisions |
|
|
|
|
|
|
|
|
|
$ |
305 |
|
|
$ |
4 |
|
|
$ |
305 |
|
|
$ |
4 |
|
Collateralized mortgage obligations federal agencies |
|
$ |
138,856 |
|
|
$ |
1,915 |
|
|
|
114,113 |
|
|
|
514 |
|
|
|
252,969 |
|
|
|
2,429 |
|
Collateralized mortgage obligations private label |
|
|
200 |
|
|
|
8 |
|
|
|
84,564 |
|
|
|
7,091 |
|
|
|
84,764 |
|
|
|
7,099 |
|
Mortgage-backed securities agencies |
|
|
8,174 |
|
|
|
109 |
|
|
|
1,465 |
|
|
|
52 |
|
|
|
9,639 |
|
|
|
161 |
|
Equity securities |
|
|
22 |
|
|
|
18 |
|
|
|
7,191 |
|
|
|
485 |
|
|
|
7,213 |
|
|
|
503 |
|
|
Total investment securities available-for-sale in an
unrealized loss position |
|
$ |
147,252 |
|
|
$ |
2,050 |
|
|
$ |
207,638 |
|
|
$ |
8,146 |
|
|
$ |
354,890 |
|
|
$ |
10,196 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AS OF DECEMBER 31, 2009 |
|
|
Less than 12 months |
|
12 months or more |
|
Total |
|
|
|
|
|
|
Gross |
|
|
|
|
|
Gross |
|
|
|
|
|
Gross |
|
|
|
|
|
|
Unrealized |
|
Fair |
|
Unrealized |
|
|
|
|
|
Unrealized |
(In thousands) |
|
Fair Value |
|
Losses |
|
Value |
|
Losses |
|
Fair Value |
|
Losses |
|
Obligations of Puerto Rico, States and political subdivisions |
|
$ |
2,387 |
|
|
$ |
8 |
|
|
$ |
63,429 |
|
|
$ |
700 |
|
|
$ |
65,816 |
|
|
$ |
708 |
|
Collateralized mortgage obligations federal agencies |
|
|
298,917 |
|
|
|
3,667 |
|
|
|
359,214 |
|
|
|
2,574 |
|
|
|
658,131 |
|
|
|
6,241 |
|
Collateralized mortgage obligations private label |
|
|
6,716 |
|
|
|
18 |
|
|
|
97,904 |
|
|
|
9,087 |
|
|
|
104,620 |
|
|
|
9,105 |
|
Mortgage-backed securities agencies |
|
|
905,028 |
|
|
|
10,130 |
|
|
|
3,566 |
|
|
|
73 |
|
|
|
908,594 |
|
|
|
10,203 |
|
Equity securities |
|
|
2,347 |
|
|
|
981 |
|
|
|
3,898 |
|
|
|
364 |
|
|
|
6,245 |
|
|
|
1,345 |
|
|
Total investment securities available-for-sale in an
unrealized loss position |
|
$ |
1,215,395 |
|
|
$ |
14,804 |
|
|
$ |
528,011 |
|
|
$ |
12,798 |
|
|
$ |
1,743,406 |
|
|
$ |
27,602 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AS OF JUNE 30, 2009 |
|
|
Less than 12 months |
|
12 months or more |
|
Total |
|
|
|
|
|
|
Gross |
|
|
|
|
|
Gross |
|
|
|
|
|
Gross |
|
|
|
|
|
|
Unrealized |
|
Fair |
|
Unrealized |
|
|
|
|
|
Unrealized |
(In thousands) |
|
Fair Value |
|
Losses |
|
Value |
|
Losses |
|
Fair Value |
|
Losses |
|
Obligations of U.S. government sponsored entities |
|
$ |
60,287 |
|
|
$ |
174 |
|
|
|
|
|
|
|
|
|
|
$ |
60,287 |
|
|
$ |
174 |
|
Obligations of Puerto Rico, States and political subdivisions |
|
|
28,498 |
|
|
|
253 |
|
|
$ |
52,609 |
|
|
$ |
4,938 |
|
|
|
81,107 |
|
|
|
5,191 |
|
Collateralized mortgage obligations federal agencies |
|
|
284,948 |
|
|
|
4,493 |
|
|
|
483,759 |
|
|
|
7,634 |
|
|
|
768,707 |
|
|
|
12,127 |
|
Collateralized mortgage obligations private label |
|
|
19,433 |
|
|
|
869 |
|
|
|
116,674 |
|
|
|
18,445 |
|
|
|
136,107 |
|
|
|
19,314 |
|
Mortgage-backed securities agencies |
|
|
1,613,487 |
|
|
|
19,151 |
|
|
|
45,984 |
|
|
|
413 |
|
|
|
1,659,471 |
|
|
|
19,564 |
|
Equity securities |
|
|
5,969 |
|
|
|
4,770 |
|
|
|
2,096 |
|
|
|
227 |
|
|
|
8,065 |
|
|
|
4,997 |
|
|
Total investment securities available-for-sale in an
unrealized loss position |
|
$ |
2,012,622 |
|
|
$ |
29,710 |
|
|
$ |
701,122 |
|
|
$ |
31,657 |
|
|
$ |
2,713,744 |
|
|
$ |
61,367 |
|
|
25
Management evaluates investment securities for other-than-temporary (OTTI) declines in fair
value on a quarterly basis. Once a decline in value is determined to be other-than-temporary, the
value of a debt security is reduced and a corresponding charge to earnings is recognized for
anticipated credit losses. Also, for equity securities that are considered other-than-temporarily
impaired, the excess of the securitys carrying value over its fair value at the evaluation date is
accounted for as a loss in the results of operations. The OTTI analysis requires management to
consider various factors, which include, but are not limited to: (1) the length of time and the
extent to which fair value has been less than the amortized cost basis, (2) the financial condition
of the issuer or issuers, (3) actual collateral attributes, (4) the payment structure of the debt
security and the likelihood of the issuer being able to make payments, (5) any rating changes by a
rating agency, (6) adverse conditions specifically related to the security, industry, or a
geographic area, and (7) managements intent to sell the debt security or whether it is more likely
than not that the Corporation would be required to sell the debt security before a forecasted
recovery occurs.
As of June 30, 2010, management performed its quarterly analysis of all debt securities in an
unrealized loss position. Based on the analyses performed, management concluded that no individual
debt security was other-than-temporarily impaired as of such date. As of June 30, 2010, the
Corporation does not have the intent to sell debt securities in an unrealized loss position and it
is not more likely than not that the Corporation will have to sell the investment securities prior
to recovery of their amortized cost basis. Also, management evaluated the Corporations portfolio
of equity securities as of June 30, 2010. During the quarter ended June 30, 2010, the Corporation
did not record any other-than-temporary impairment losses on equity securities. Management has the
intent and ability to hold the investments in equity securities that are at a loss position as of
June 30, 2010 for a reasonable period of time for a forecasted recovery of fair value up to (or
beyond) the cost of these investments.
The unrealized losses reported for Collateralized mortgage obligations federal agencies are
principally associated to CMOs that were issued by U.S. Government-sponsored entities and agencies,
primarily Federal National Mortgage Association (FNMA) and Federal Home Loan Mortgage Corporation
(FHLMC), institutions which the government has affirmed its commitment to support, and Government
National Mortgage Association (GNMA), which has the full faith and credit of the U.S. Government.
These collateralized mortgage obligations are rated AAA by the major rating agencies and are backed
by residential mortgages. The unrealized losses in this portfolio were primarily attributable to
changes in interest rates and levels of market liquidity relative to when the investment securities
were purchased and not due to credit quality of the securities.
The unrealized losses associated with Collateralized mortgage obligations private label
are primarily related to securities backed by residential mortgages. In addition to verifying the
credit ratings for the private-label CMOs, management analyzed the underlying mortgage loan
collateral for these bonds. Various statistics or metrics were reviewed for each private-label CMO,
including among others, the weighted average loan-to-value, FICO score, and delinquency and
foreclosure rates of the underlying assets in the securities. As of June 30, 2010, there were no
sub-prime or Alt-A securities in the Corporations private-label CMOs portfolios. For
private-label CMOs with unrealized losses as of June 30, 2010, credit impairment was assessed using
a cash flow model that estimates the cash flows on the underlying mortgages, using the
security-specific collateral and transaction structure. The model estimates cash flows from the
underlying mortgage loans and distributes those cash flows to various tranches of securities,
considering the transaction structure and any subordination and credit enhancements that exist in
that structure. The cash flow model incorporates actual cash flows through the current period and
then projects the expected cash flows using a number of assumptions, including default rates, loss
severity and prepayment rates. Managements assessment also considered tests using more stressful
parameters. Based on the assessments, management concluded that the tranches of the private-label
CMOs held by the Corporation were not other-than-temporarily impaired as of June 30, 2010, thus
management expects to recover the amortized cost basis of the securities.
All of the Corporations securities classified as mortgage-backed securities were issued by U.S.
Government-sponsored entities and agencies, primarily GNMA and FNMA, thus as previously expressed,
have the guarantee or support of the U.S. Government. These mortgage-backed securities are rated
AAA by the major rating agencies and are backed by residential mortgages. Most of the
mortgage-backed securities held as of June 30, 2010 with unrealized
26
losses had been purchased at a premium during 2009, and although their fair values have declined,
they continue to exceed the par value of the securities. The unrealized losses in this portfolio
were generally attributable to changes in interest rates relative to when the investment securities
were purchased and not due to credit quality of the securities.
Proceeds from the sale of investment securities available-for-sale during the six months ended June
30, 2010 amounted to $19.5 million with no realized gains as the securities were sold at par value,
and mostly related to the sale of Commonwealth of Puerto Rico Appropriation Bonds. This compares
with proceeds of $3.7 billion for the six months ended June 30, 2009, mostly related to the sale of
FHLB notes during the first quarter of 2009, and realized net gains of $184.1 million.
During the six months ended June 30, 2009, the Corporation recognized approximately $6.6 million in
losses in equity securities classified as available-for-sale that management considered to be
other-than-temporarily impaired.
The following table states the names of issuers and the aggregate amortized cost and fair value of
the securities of such issuer (includes available-for-sale and held-to-maturity securities), in
which the aggregate amortized cost of such securities exceeds 10% of stockholders equity. This
information excludes securities of the U.S. Government agencies and corporations. Investments in
obligations issued by a State of the U.S. and its political subdivisions and agencies, which are
payable and secured by the same source of revenue or taxing authority, other than the U.S.
Government, are considered securities of a single issuer.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
December 31, 2009 |
|
June 30, 2009 |
(In thousands) |
|
Amortized Cost |
|
Fair Value |
|
Amortized Cost |
|
Fair Value |
|
Amortized Cost |
|
Fair Value |
|
FNMA |
|
$ |
963,714 |
|
|
$ |
996,966 |
|
|
$ |
970,744 |
|
|
$ |
991,825 |
|
|
$ |
1,230,691 |
|
|
$ |
1,246,060 |
|
FHLB |
|
|
1,418,562 |
|
|
|
1,486,376 |
|
|
|
1,385,535 |
|
|
|
1,449,454 |
|
|
|
1,465,847 |
|
|
|
1,532,656 |
|
Freddie Mac |
|
|
624,844 |
|
|
|
638,388 |
|
|
|
959,316 |
|
|
|
971,556 |
|
|
|
999,435 |
|
|
|
1,006,425 |
|
|
27
Note 9 Investment Securities Held-to-Maturity
The amortized cost, gross unrealized gains and losses, fair value and weighted average yield
of investment securities held-to-maturity as of June 30, 2010, December 31, 2009 and June 30, 2009
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AS OF JUNE 30, 2010 |
|
|
|
|
|
|
Gross |
|
Gross |
|
|
|
|
|
Weighted |
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Fair |
|
Average |
(In thousands) |
|
Cost |
|
Gains |
|
Losses |
|
Value |
|
Yield |
|
U.S. Treasury securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within 1 year |
|
$ |
25,797 |
|
|
$ |
4 |
|
|
|
|
|
|
$ |
25,801 |
|
|
|
0.22 |
% |
|
Obligations of Puerto Rico, States and political subdivisions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within 1 year |
|
|
7,110 |
|
|
|
13 |
|
|
|
|
|
|
|
7,123 |
|
|
|
2.12 |
|
After 1 to 5 years |
|
|
109,820 |
|
|
|
509 |
|
|
|
|
|
|
|
110,329 |
|
|
|
5.52 |
|
After 5 to 10 years |
|
|
17,808 |
|
|
|
289 |
|
|
$ |
75 |
|
|
|
18,022 |
|
|
|
5.94 |
|
After 10 years |
|
|
46,050 |
|
|
|
63 |
|
|
|
1,000 |
|
|
|
45,113 |
|
|
|
3.88 |
|
|
Total obligations of Puerto Rico, States and political subdivisions |
|
|
180,788 |
|
|
|
874 |
|
|
|
1,075 |
|
|
|
180,587 |
|
|
|
5.01 |
|
|
Collateralized mortgage obligations private label |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After 10 years |
|
|
209 |
|
|
|
|
|
|
|
12 |
|
|
|
197 |
|
|
|
5.45 |
|
|
Others |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within 1 year |
|
|
1,372 |
|
|
|
|
|
|
|
|
|
|
|
1,372 |
|
|
|
1.91 |
|
After 1 to 5 years |
|
|
1,250 |
|
|
|
|
|
|
|
|
|
|
|
1,250 |
|
|
|
0.84 |
|
|
Total others |
|
|
2,622 |
|
|
|
|
|
|
|
|
|
|
|
2,622 |
|
|
|
1.40 |
|
|
Total investment securities held-to-maturity |
|
$ |
209,416 |
|
|
$ |
878 |
|
|
$ |
1,087 |
|
|
$ |
209,207 |
|
|
|
4.38 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AS OF DECEMBER 31, 2009 |
|
|
|
|
|
|
Gross |
|
Gross |
|
|
|
|
|
Weighted |
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Fair |
|
Average |
(In thousands) |
|
Cost |
|
Gains |
|
Losses |
|
Value |
|
Yield |
|
U.S. Treasury securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within 1 year |
|
$ |
25,777 |
|
|
$ |
4 |
|
|
|
|
|
|
$ |
25,781 |
|
|
|
0.11 |
% |
|
Obligations of Puerto Rico, States and political subdivisions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within 1 year |
|
|
7,015 |
|
|
|
6 |
|
|
|
|
|
|
|
7,021 |
|
|
|
2.04 |
|
After 1 to 5 years |
|
|
109,415 |
|
|
|
3,157 |
|
|
$ |
6 |
|
|
|
112,566 |
|
|
|
5.51 |
|
After 5 to 10 years |
|
|
17,112 |
|
|
|
39 |
|
|
|
452 |
|
|
|
16,699 |
|
|
|
5.79 |
|
After 10 years |
|
|
48,600 |
|
|
|
|
|
|
|
2,552 |
|
|
|
46,048 |
|
|
|
4.00 |
|
|
Total obligations of Puerto Rico, States and political subdivisions |
|
|
182,142 |
|
|
|
3,202 |
|
|
|
3,010 |
|
|
|
182,334 |
|
|
|
5.00 |
|
|
Collateralized mortgage obligations private label |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After 10 years |
|
|
220 |
|
|
|
|
|
|
|
12 |
|
|
|
208 |
|
|
|
5.45 |
|
|
Others |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within 1 year |
|
|
3,573 |
|
|
|
|
|
|
|
|
|
|
|
3,573 |
|
|
|
3.77 |
|
After 1 to 5 years |
|
|
1,250 |
|
|
|
|
|
|
|
|
|
|
|
1,250 |
|
|
|
1.66 |
|
|
Total others |
|
|
4,823 |
|
|
|
|
|
|
|
|
|
|
|
4,823 |
|
|
|
3.22 |
|
|
Total investment securities held-to-maturity |
|
$ |
212,962 |
|
|
$ |
3,206 |
|
|
$ |
3,022 |
|
|
$ |
213,146 |
|
|
|
4.37 |
% |
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AS OF JUNE 30, 2009 |
|
|
|
|
|
|
Gross |
|
Gross |
|
|
|
|
|
Weighted |
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Fair |
|
Average |
(In thousands) |
|
Cost |
|
Gains |
|
Losses |
|
Value |
|
Yield |
|
Obligations of U.S. Government sponsored entities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within 1 year |
|
$ |
25,795 |
|
|
$ |
14 |
|
|
|
|
|
|
$ |
25,809 |
|
|
|
0.37 |
% |
|
Obligations of Puerto Rico, States and political subdivisions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within 1 year |
|
|
106,985 |
|
|
|
7 |
|
|
|
|
|
|
|
106,992 |
|
|
|
2.67 |
|
After 1 to 5 years |
|
|
109,245 |
|
|
|
79 |
|
|
$ |
44 |
|
|
|
109,280 |
|
|
|
5.51 |
|
After 5 to 10 years |
|
|
16,818 |
|
|
|
51 |
|
|
|
1,381 |
|
|
|
15,488 |
|
|
|
5.77 |
|
After 10 years |
|
|
50,340 |
|
|
|
|
|
|
|
5,312 |
|
|
|
45,028 |
|
|
|
4.36 |
|
|
Total obligations of Puerto Rico, States and political subdivisions |
|
|
283,388 |
|
|
|
137 |
|
|
|
6,737 |
|
|
|
276,788 |
|
|
|
4.25 |
|
|
Collateralized mortgage obligations private label |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After 10 years |
|
|
231 |
|
|
|
|
|
|
|
13 |
|
|
|
218 |
|
|
|
5.45 |
|
|
Others |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within 1 year |
|
|
9,147 |
|
|
|
|
|
|
|
|
|
|
|
9,147 |
|
|
|
3.92 |
|
After 1 to 5 years |
|
|
1,500 |
|
|
|
|
|
|
|
|
|
|
|
1,500 |
|
|
|
2.51 |
|
|
Total others |
|
|
10,647 |
|
|
|
|
|
|
|
|
|
|
|
10,647 |
|
|
|
3.72 |
|
|
Total investment securities held-to-maturity |
|
$ |
320,061 |
|
|
$ |
151 |
|
|
$ |
6,750 |
|
|
$ |
313,462 |
|
|
|
3.92 |
% |
|
The following table shows the Corporations fair value and gross unrealized losses of
investment securities held-to-maturity, aggregated by investment category and length of time that
individual securities have been in a continuous unrealized loss position as of June 30, 2010,
December 31, 2009 and June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AS OF JUNE 30, 2010 |
|
|
|
|
Less than 12 months |
|
12 months or more |
Total |
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
Gross |
|
|
|
|
|
Gross |
|
|
|
|
|
|
Unrealized |
|
Fair |
|
Unrealized |
|
|
|
|
|
Unrealized |
(In thousands) |
|
Fair Value |
|
Losses |
|
Value |
|
Losses |
|
Fair Value |
|
Losses |
|
Obligations of Puerto Rico, States and political subdivisions |
|
|
|
|
|
|
|
|
|
$ |
45,460 |
|
|
$ |
1,075 |
|
|
$ |
45,460 |
|
|
$ |
1,075 |
|
Collateralized mortgage obligations private label |
|
|
|
|
|
|
|
|
|
|
197 |
|
|
|
12 |
|
|
|
197 |
|
|
|
12 |
|
|
Total investment securities held-to-maturity in an
unrealized loss position |
|
|
|
|
|
|
|
|
|
$ |
45,657 |
|
|
$ |
1,087 |
|
|
$ |
45,657 |
|
|
$ |
1,087 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AS OF DECEMBER 31, 2009 |
|
|
Less than 12 months |
|
12 months or more |
|
Total |
|
|
|
|
|
|
Gross |
|
|
|
|
|
Gross |
|
|
|
|
|
Gross |
|
|
|
|
|
|
Unrealized |
|
Fair |
|
Unrealized |
|
|
|
|
|
Unrealized |
(In thousands) |
|
Fair Value |
|
Losses |
|
Value |
|
Losses |
|
Fair Value |
|
Losses |
|
Obligations of Puerto Rico, States and political subdivisions |
|
$ |
21,187 |
|
|
$ |
1,908 |
|
|
$ |
37,718 |
|
|
$ |
1,102 |
|
|
$ |
58,905 |
|
|
$ |
3,010 |
|
Collateralized mortgage obligations private label |
|
|
|
|
|
|
|
|
|
|
208 |
|
|
|
12 |
|
|
|
208 |
|
|
|
12 |
|
|
Total investment securities held-to-maturity in an
unrealized loss position |
|
$ |
21,187 |
|
|
$ |
1,908 |
|
|
$ |
37,926 |
|
|
$ |
1,114 |
|
|
$ |
59,113 |
|
|
$ |
3,022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AS OF JUNE 30, 2009 |
|
|
Less than 12 months |
|
12 months or more |
|
Total |
|
|
|
|
|
|
Gross |
|
|
|
|
|
Gross |
|
|
|
|
|
Gross |
|
|
|
|
|
|
Unrealized |
|
Fair |
|
Unrealized |
|
|
|
|
|
Unrealized |
(In thousands) |
|
Fair Value |
|
Losses |
|
Value |
|
Losses |
|
Fair Value |
|
Losses |
|
Obligations of Puerto Rico, States and political subdivisions |
|
$ |
61,746 |
|
|
$ |
6,654 |
|
|
$ |
562 |
|
|
$ |
83 |
|
|
$ |
62,308 |
|
|
$ |
6,737 |
|
Collateralized mortgage obligations private label |
|
|
|
|
|
|
|
|
|
|
218 |
|
|
|
13 |
|
|
|
218 |
|
|
|
13 |
|
Others |
|
|
3,000 |
|
|
|
|
|
|
|
250 |
|
|
|
|
|
|
|
3,250 |
|
|
|
|
|
|
Total investment securities held-to-maturity in an unrealized
loss position |
|
$ |
64,746 |
|
|
$ |
6,654 |
|
|
$ |
1,030 |
|
|
$ |
96 |
|
|
$ |
65,776 |
|
|
$ |
6,750 |
|
|
As indicated in Note 8 to these consolidated financial statements, management evaluates
investment securities for other-than-temporary (OTTI) declines in fair value on a quarterly
basis.
29
The Obligations of Puerto Rico, States and political subdivisions classified as held-to-maturity
as of June 30, 2010 are primarily associated with securities issued by municipalities of Puerto
Rico and are generally not rated by a credit rating agency. The Corporation performs periodic
credit quality reviews on these issuers. The decline in fair value as of June 30, 2010 was
attributable to changes in interest rates and not credit quality; thus no other-than-temporary
decline in value was recorded in these held-to-maturity securities. As of June 30, 2010, the
Corporation does not have the intent to sell securities held-to-maturity and it is not more likely
than not that the Corporation will have to sell these investment securities prior to recovery of
their amortized cost basis.
Note 10 Loans Held-in-Portfolio and Allowance for Loan Losses
Because of the loss protection provided by the FDIC, the risks of the Westernbank
FDIC-assisted transaction acquired loans are significantly different from those loans not covered
under the FDIC loss sharing agreements. Accordingly, the Corporation presents loans subject to the
loss sharing agreements as covered loans in the information below and loans that are not subject
to the FDIC loss sharing agreements as non-covered loans.
The composition of loans held-in-portfolio (HIP) as of June 30, 2010, December 31, 2009, and June
30, 2009 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-covered |
|
Covered |
|
Total loans HIP |
|
|
|
|
|
|
loans as of |
|
loans as of |
|
as of June 30, |
|
December 31, |
|
June 30, |
(In thousands) |
|
June 30, 2010 |
|
June 30, 2010 |
|
2010 |
|
2009 |
|
2009 |
|
Commercial |
|
$ |
11,786,235 |
|
|
$ |
2,421,708 |
|
|
$ |
14,207,943 |
|
|
$ |
12,664,059 |
|
|
$ |
13,078,506 |
|
Construction |
|
|
1,495,615 |
|
|
|
281,178 |
|
|
|
1,776,793 |
|
|
|
1,724,373 |
|
|
|
2,033,448 |
|
Lease financing |
|
|
636,913 |
|
|
|
|
|
|
|
636,913 |
|
|
|
675,629 |
|
|
|
730,396 |
|
Mortgage [1] |
|
|
4,688,656 |
|
|
|
1,192,786 |
|
|
|
5,881,442 |
|
|
|
4,603,245 |
|
|
|
4,444,498 |
|
Consumer |
|
|
3,858,969 |
|
|
|
183,345 |
|
|
|
4,042,314 |
|
|
|
4,045,807 |
|
|
|
4,319,214 |
|
|
Total loans
held-in-portfolio |
|
$ |
22,466,388 |
|
|
$ |
4,079,017 |
|
|
$ |
26,545,405 |
|
|
$ |
23,713,113 |
|
|
$ |
24,606,062 |
|
|
|
|
|
[1] |
|
Includes residential construction loans. |
|
|
The following table presents acquired loans accounted for pursuant to ASC Subtopic 310-30 as of the
April 30, 2010 acquisition date:
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Contractually-required principal and interest |
|
$ |
10,995,387 |
|
Non-accretable difference |
|
|
5,789,480 |
|
|
Cash flows expected to be collected |
|
|
5,205,907 |
|
Accretable yield |
|
|
1,303,908 |
|
|
Fair value of loans accounted for under ASC Subtopic 310-30 |
|
$ |
3,901,999 |
[1] |
|
|
|
|
[1] |
|
Reflects a difference of $11.4 million compared with the amounts disclosed
in the Form 8-K/A filed on July 16, 2010, which included the financial
statements and exhibits pertaining to the Westernbank FDIC-assisted transaction
at the acquisition date. The Corporation reassessed the classification of
certain acquired loans and, due to their revolving characteristics,
reclassified the loans for accounting purposes from ASC Subtopic 310-30 to ASC
Subtopic 310-20. The reclassification did not impact the fair value of the
loans. |
|
|
The cash flows expected to be collected consider the estimated remaining life of the underlying
loans and include the effects of estimated prepayments. The unpaid principal balance of the
acquired loans from the Westernbank FDIC-assisted transaction that are accounted under ASC Subtopic
310-30 amounted to $7.8 billion as of the April 30, 2010 transaction date.
Changes in the carrying amount and the accretable yield for the acquired loans in the Westernbank
FDIC-assisted transaction as of and for the quarter ended June 30, 2010, and which are accounted
pursuant to the ASC Subtopic 310-30, were as follows:
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying amount |
(In thousands) |
|
Accretable yield |
|
of loans |
|
Balance at beginning of period |
|
|
|
|
|
|
|
|
Additions [1] |
|
$ |
1,303,908 |
|
|
$ |
3,901,999 |
|
Accretion |
|
|
(38,998 |
) |
|
|
38,998 |
|
Payments received, net |
|
|
|
|
|
|
(130,169 |
) |
|
Balance at end of period |
|
$ |
1,264,910 |
|
|
$ |
3,810,828 |
|
|
|
|
|
[1] |
|
Represents the estimated fair value of the loans at the date of
acquisition. There were no reclassifications from non-accretable difference to
accretable yield from April 30, 2010 to June 30, 2010. |
|
|
As of June 30, 2010, none of the acquired loans accounted under ASC Subtopic 310-30 were
considered non-performing loans. Therefore, interest income, through accretion of the difference
between the carrying amount of the loans and the expected cash flows, was recognized on all
acquired loans. There was no allowance for loan losses related to the covered loans as of June 30,
2010, since the loan pools are performing as anticipated in the projections used in the purchase
accounting fair value calculations.
As indicated in Note 3 to the consolidated financial statements, the Corporation accounts for lines
of credit with revolving privileges under the accounting guidance of ASC Subtopic 310-20, which
requires that any differences between the contractually required loan payment receivable in excess
of the initial investment in the loans be accreted into interest income using the effective yield
method over the life of the loan, if the loan is accruing interest. The following table presents
acquired loans accounted for under ASC Subtopic 310-20 as of the April 30, 2010 acquisition date:
|
|
|
|
|
(In thousands) |
|
|
|
|
|
|
Fair value of loans accounted under ASC Subtopic 310-20 |
|
$ |
358,989 |
[1] |
|
Gross contractual amounts receivable (principal and interest) |
|
$ |
1,007,880 |
|
|
Estimate of contractual cash flows not expected to be collected |
|
$ |
614,653 |
|
|
|
|
|
[1] |
|
Reflects a difference of $11.4 million compared with the amounts
disclosed in the Form 8-K/A filed on July 16, 2010, which included the
financial statements and exhibits pertaining to the Westernbank FDIC-assisted
transaction at the acquisition date. The Corporation reassessed the
classification of certain acquired loans and, due to their revolving
characteristics, reclassified the loans for accounting purposes from ASC
Subtopic 310-30 to ASC Subtopic 310-20. The reclassification did not impact the
fair value of the loans. |
|
|
The cash flows expected to be collected consider the estimated remaining life of the underlying
loans and include the effects of estimated prepayments. The unpaid principal balance of the
acquired loans from the Westernbank FDIC-assisted transaction that are accounted pursuant to ASC
Subtopic 310-20 amounted to $739 million as of the April 30, 2010 transaction date.
The activity in the allowance for loan losses for the six months ended June 30, 2010 and 2009 is
summarized as follows:
|
|
|
|
|
|
|
|
|
(In thousands) |
|
June 30, 2010 |
|
June 30, 2009 |
|
Balances at beginning of period |
|
$ |
1,261,204 |
|
|
$ |
882,807 |
|
Provision for loan losses |
|
|
442,458 |
|
|
|
721,973 |
|
Loan charge-offs |
|
|
(477,958 |
) |
|
|
(489,134 |
) |
Loan recoveries |
|
|
51,312 |
|
|
|
30,593 |
|
|
Balance at end of period |
|
$ |
1,277,016 |
|
|
$ |
1,146,239 |
|
|
Note 11 Transfers of Financial Assets and Mortgage Servicing Rights
The Corporation typically transfers conforming residential mortgage loans in conjunction with GNMA
and FNMA securitization transactions whereby the loans are exchanged for cash or securities and
servicing rights. The securities issued through these transactions are guaranteed by the
corresponding agency and, as such, under seller/servicer
31
agreements the Corporation is required to service the loans in accordance with the agencies
servicing guidelines and standards. Substantially all mortgage loans securitized by the Corporation
in GNMA and FNMA securities have fixed rates and represent conforming loans. As seller, the
Corporation has made certain representations and warranties with respect to the originally
transferred loans and, in some instances, has sold loans with credit recourse to a
government-sponsored entity, namely FNMA. Refer to Note 19 to the consolidated financial statements
for a description of such arrangements.
During the six months ended June 30, 2010, the Corporation retained servicing rights on guaranteed
mortgage securitizations (FNMA and GNMA) and whole loan sales involving approximately $452 million
in principal balance outstanding (June 30, 2009 $805 million). During the quarter and six months
ended June 30, 2010, the Corporation recognized gains of approximately $2.8 million and $8.8
million, respectively, on these transactions (June 30, 2009 $27.0 million for the quarter and
$26.4 million for the six-month period). All loan sales or securitizations performed during the six
months ended June 30, 2010 were without credit recourse arrangements.
During the quarter ended June 30, 2010, the Corporation obtained as proceeds $210 million of assets
as a result of securitization transactions with FNMA and GNMA, consisting of $206 million in
mortgage-backed securities and $4 million in servicing rights. During the six months ended June 30,
2010, the Corporation obtained as proceeds $419 million of assets as a result of securitization
transactions with FNMA and GNMA, consisting of $411 million in mortgage-backed securities and $8
million in servicing rights. No liabilities were incurred as a result of these transfers during the
quarter and six month-period ended June 30, 2010 because they did not contain any credit recourse
arrangements. The Corporation recorded a gain of $5.0 million and $10.3 million, respectively,
during the quarter and six months ended June 30, 2010 related to these residential mortgage loans
securitized.
The following tables present the initial fair value of the assets obtained as proceeds from
residential mortgage loans securitized during the quarter and six months ended June 30, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds Obtained During Quarter Ended June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial Fair |
(In thousands) |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Value |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities GNMA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities FNMA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading account securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities GNMA |
|
|
|
|
|
$ |
165,675 |
|
|
$ |
2,518 |
|
|
$ |
168,193 |
|
Mortgage-backed securities FNMA |
|
|
|
|
|
|
37,814 |
|
|
|
|
|
|
|
37,814 |
|
|
Total trading account securities |
|
|
|
|
|
$ |
203,489 |
|
|
$ |
2,518 |
|
|
$ |
206,007 |
|
|
Mortgage servicing rights |
|
|
|
|
|
|
|
|
|
$ |
3,794 |
|
|
$ |
3,794 |
|
|
Total |
|
|
|
|
|
$ |
203,489 |
|
|
$ |
6,312 |
|
|
$ |
209,801 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds Obtained During Six Months Ended June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial Fair |
(In thousands) |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Value |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities GNMA |
|
|
|
|
|
|
|
|
|
$ |
2,810 |
|
|
$ |
2,810 |
|
Mortgage-backed securities FNMA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities available-for-sale |
|
|
|
|
|
|
|
|
|
$ |
2,810 |
|
|
$ |
2,810 |
|
|
Trading account securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities GNMA |
|
|
|
|
|
$ |
327,600 |
|
|
$ |
4,147 |
|
|
$ |
331,747 |
|
Mortgage-backed securities FNMA |
|
|
|
|
|
|
76,506 |
|
|
|
|
|
|
|
76,506 |
|
|
Total trading account securities |
|
|
|
|
|
$ |
404,106 |
|
|
$ |
4,147 |
|
|
$ |
408,253 |
|
|
Mortgage servicing rights |
|
|
|
|
|
|
|
|
|
$ |
7,535 |
|
|
$ |
7,535 |
|
|
Total |
|
|
|
|
|
$ |
404,106 |
|
|
$ |
14,492 |
|
|
$ |
418,598 |
|
|
32
Refer to Note 21 to the consolidated financial statements for key inputs, assumptions, and
valuation techniques used to measure the fair value of these mortgage-backed securities and
mortgage servicing rights.
Mortgage servicing rights
The Corporation recognizes as assets the rights to service loans for others, whether these rights
are purchased or result from asset transfers such as sales and securitizations.
Classes of mortgage servicing rights were determined based on the different markets or types of
assets being serviced. The Corporation recognizes the servicing rights of its banking subsidiaries
that are related to residential mortgage loans as a class of servicing rights. These mortgage
servicing rights (MSRs) are measured at fair value. Fair value determination is performed on a
subsidiary basis, with assumptions varying in accordance with the types of assets or markets
served.
The Corporation uses a discounted cash flow model to estimate the fair value of MSRs. The
discounted cash flow model incorporates assumptions that market participants would use in
estimating future net servicing income, including estimates of prepayment speeds, discount rate,
cost to service, escrow account earnings, contractual servicing fee income, prepayment and late
fees, among other considerations. Prepayment speeds are adjusted for the Corporations loan
characteristics and portfolio behavior.
The following table presents the changes in residential MSRs measured using the fair value method
for the six months ended June 30, 2010 and June 30, 2009.
|
|
|
|
|
|
|
|
|
(In thousands) |
|
2010 |
|
2009 |
|
Fair value as of January 1 |
|
$ |
169,747 |
|
|
$ |
176,034 |
|
Purchases |
|
|
4,015 |
|
|
|
727 |
|
Servicing from securitizations or asset transfers |
|
|
7,809 |
|
|
|
13,661 |
|
Changes due to payments on loans [1] |
|
|
(7,932 |
) |
|
|
(7,921 |
) |
Changes in fair value due to changes in valuation model |
|
|
|
|
|
|
|
|
inputs or assumptions |
|
|
(1,645 |
) |
|
|
(1,693 |
) |
|
Fair value as of June 30 |
|
$ |
171,994 |
|
|
$ |
180,808 |
|
|
|
|
|
[1] |
|
Represents changes due to collection / realization of expected cash flows over time. |
Residential mortgage loans serviced for others were $17.9 billion as of June 30, 2010
(December 31, 2009 $17.7 billion; June 30, 2009 $17.7 billion).
Net mortgage servicing fees, a component of other service fees in the consolidated statements of
operations, include the changes from period to period in the fair value of the MSRs, which may
result from changes in the valuation model inputs or assumptions (principally reflecting changes in
discount rates and prepayment speed assumptions) and other changes, including changes due to
collection / realization of expected cash flows. Mortgage servicing fees, excluding fair value
adjustments, for the quarter and six months ended June 30, 2010 amounted to $11.9 million and $23.8
million, respectively (June 30, 2009 $11.3 million and $23.0 million). The banking subsidiaries
receive servicing fees based on a percentage of the outstanding loan balance. As of June 30, 2010,
those weighted average mortgage servicing fees were 0.27% (June 30, 2009 0.26%). Under these
servicing agreements, the banking subsidiaries do not generally earn significant prepayment penalty
fees on the underlying loans serviced.
The discussion that follows includes information on assumptions used in the valuation model of the
MSRs, originated and purchased.
Key economic assumptions used in measuring the servicing rights retained at the date of the
residential mortgage loan securitizations and whole loan sales by the banking subsidiaries during
the quarter ended June 30, 2010 and year ended December 31, 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
December 31, 2009 |
|
Prepayment speed |
|
|
4.6 |
% |
|
|
7.8 |
% |
Weighted average life |
|
21.8 years |
|
12.8 years |
Discount rate (annual rate) |
|
|
11.5 |
% |
|
|
11.0 |
% |
|
33
Key economic assumptions used to estimate the fair value of MSRs derived from sales and
securitizations of mortgage loans performed by the banking subsidiaries and the sensitivity to
immediate changes in those assumptions as of June 30, 2010 and December 31, 2009 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
Originated MSRs |
(In thousands) |
|
June 30, 2010 |
|
December 31, 2009 |
|
Fair value of retained interests |
|
$ |
100,956 |
|
|
$ |
97,870 |
|
Weighted average life |
|
|
11.8 years |
|
|
|
8.8 years |
Weighted average prepayment speed (annual rate) |
|
|
8.5 |
% |
|
|
11.4 |
% |
Impact on fair value of 10% adverse change |
|
$ |
(3,296 |
) |
|
$ |
(3,182 |
) |
Impact on fair value of 20% adverse change |
|
$ |
(6,521 |
) |
|
$ |
(7,173 |
) |
Weighted average discount rate (annual rate) |
|
|
12.86 |
% |
|
|
12.41 |
% |
Impact on fair value of 10% adverse change |
|
$ |
(4,212 |
) |
|
$ |
(2,715 |
) |
Impact on fair value of 20% adverse change |
|
$ |
(8,201 |
) |
|
$ |
(6,240 |
) |
|
The banking subsidiaries also own servicing rights purchased from other financial
institutions. The fair value of purchased MSRs, their related valuation assumptions and the
sensitivity to immediate changes in those assumptions as of period end were as follows:
|
|
|
|
|
|
|
|
|
|
|
Purchased MSRs |
(In thousands) |
|
June 30, 2010 |
|
December 31, 2009 |
|
Fair value of retained interests |
|
$ |
71,038 |
|
|
$ |
71,877 |
|
Weighted average life |
|
|
12.7 years |
|
|
|
9.9 years |
Weighted average prepayment speed (annual rate) |
|
|
7.9 |
% |
|
|
10.1 |
% |
Impact on fair value of 10% adverse change |
|
$ |
(2,715 |
) |
|
$ |
(2,697 |
) |
Impact on fair value of 20% adverse change |
|
$ |
(4,801 |
) |
|
$ |
(5,406 |
) |
Weighted average discount rate (annual rate) |
|
|
11.6 |
% |
|
|
11.1 |
% |
Impact on fair value of 10% adverse change |
|
$ |
(3,150 |
) |
|
$ |
(2,331 |
) |
Impact on fair value of 20% adverse change |
|
$ |
(5,604 |
) |
|
$ |
(4,681 |
) |
|
The sensitivity analyses presented in the tables above for servicing rights are
hypothetical and should be used with caution. As the figures indicate, changes in fair value
based on a 10 and 20 percent variation in assumptions generally cannot be extrapolated because
the relationship of the change in assumption to the change in fair value may not be linear.
Also, in the sensitivity tables included herein, the effect of a variation in a particular
assumption on the fair value of the retained interest is calculated without changing any other
assumption. In reality, changes in one factor may result in changes in another (for example,
increases in market interest rates may result in lower prepayments and increased credit losses),
which might magnify or counteract the sensitivities.
As of June 30, 2010, the Corporation serviced $4.2 billion (December 31, 2009 $4.5 billion; June
30, 2009 $4.7 billion) in residential mortgage loans with credit recourse to the Corporation.
Under the GNMA securitizations, the Corporation has the right to repurchase, at its option and
without GNMAs prior authorization, any loan that is collateral for a GNMA guaranteed
mortgage-backed security when certain delinquency criteria are met. At the time that individual
loans meet GNMAs specified delinquency criteria and are eligible for repurchase, the Corporation
is deemed to have regained effective control over these loans. As of June 30, 2010, the Corporation
had recorded $141 million in mortgage loans on its financial statements related to this buy-back
option program (December 31, 2009 $124 million; June 30, 2009 $88 million).
34
Note 12 Other Assets
The caption of other assets in the consolidated statements of condition consists of the following
major categories:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
June 30, |
(In thousands) |
|
2010 |
|
2009 |
|
2009 |
|
Net deferred tax assets (net of
valuation allowance) |
|
$ |
347,396 |
|
|
$ |
363,967 |
|
|
$ |
390,467 |
|
Bank-owned life insurance program |
|
|
235,499 |
|
|
|
232,387 |
|
|
|
228,675 |
|
Prepaid FDIC insurance assessment |
|
|
179,130 |
|
|
|
206,308 |
|
|
|
|
|
Other prepaid expenses |
|
|
161,963 |
|
|
|
130,762 |
|
|
|
136,634 |
|
Investments under the equity method |
|
|
98,234 |
|
|
|
99,772 |
|
|
|
91,558 |
|
Derivative assets |
|
|
79,571 |
|
|
|
71,822 |
|
|
|
76,019 |
|
Trade receivables from brokers and
counterparties |
|
|
73,110 |
|
|
|
1,104 |
|
|
|
66,943 |
|
Others |
|
|
227,169 |
|
|
|
216,037 |
|
|
|
224,553 |
|
|
Total other assets |
|
$ |
1,402,072 |
|
|
$ |
1,322,159 |
|
|
$ |
1,214,849 |
|
|
Note 13 Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill for the six months ended June 30, 2010 and 2009,
allocated by reportable segments, were as follows (refer to Note 29 for the definition of the
Corporations reportable segments):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
Purchase |
|
|
|
|
|
|
|
|
Balance as of |
|
Goodwill |
|
accounting |
|
|
|
|
|
Balance as of |
(In thousands) |
|
January 1, 2010 |
|
on acquisition |
|
adjustments |
|
Other |
|
June 30, 2010 |
|
Banco Popular de Puerto Rico: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Banking |
|
$ |
31,729 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
31,729 |
|
Consumer and Retail Banking |
|
|
117,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
117,000 |
|
Other Financial Services |
|
|
8,296 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,296 |
|
Westernbank |
|
|
|
|
|
$ |
106,230 |
|
|
|
|
|
|
|
|
|
|
|
106,230 |
|
Banco Popular North America: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banco Popular North America |
|
|
402,078 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
402,078 |
|
EVERTEC |
|
|
45,246 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,246 |
|
|
Total Popular, Inc. |
|
$ |
604,349 |
|
|
$ |
106,230 |
|
|
|
|
|
|
|
|
|
|
$ |
710,579 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
|
|
|
|
Goodwill |
|
Purchase |
|
|
|
|
|
|
|
|
Balance as of |
|
on |
|
accounting |
|
|
|
|
|
Balance as of |
(In thousands) |
|
January 1, 2009 |
|
acquisition |
|
adjustments |
|
Other |
|
June 30, 2009 |
|
Banco Popular de Puerto Rico: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Banking |
|
$ |
31,729 |
|
|
|
|
|
|
|
|
|
|
$ |
111 |
|
|
$ |
31,840 |
|
Consumer and Retail Banking |
|
|
117,000 |
|
|
|
|
|
|
$ |
1 |
|
|
|
544 |
|
|
|
117,545 |
|
Other Financial Services |
|
|
8,330 |
|
|
|
|
|
|
|
(34 |
) |
|
|
|
|
|
|
8,296 |
|
Banco Popular North America: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banco Popular North America |
|
|
404,237 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
404,237 |
|
EVERTEC |
|
|
44,496 |
|
|
|
|
|
|
|
750 |
|
|
|
|
|
|
|
45,246 |
|
|
Total Popular, Inc. |
|
$ |
605,792 |
|
|
|
|
|
|
$ |
717 |
|
|
$ |
655 |
|
|
$ |
607,164 |
|
|
35
The gross amount of goodwill and accumulated impairment losses at the beginning and the end of
the quarter by reportable segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
Balance at |
|
Accumulated |
|
Balance at |
|
Balance at |
|
Accumulated |
|
Balance at |
|
|
January 1, 2010 |
|
Impairment |
|
January 1, 2010 |
|
June 30, 2010 |
|
Impairment |
|
June 30, 2010 |
(In thousands) |
|
(Gross amounts) |
|
Losses |
|
(Net amounts) |
|
(Gross amounts) |
|
Losses |
|
(Net amounts) |
|
Banco Popular de Puerto Rico: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Banking |
|
$ |
31,729 |
|
|
|
|
|
|
$ |
31,729 |
|
|
$ |
31,729 |
|
|
|
|
|
|
$ |
31,729 |
|
Consumer and Retail Banking |
|
|
117,000 |
|
|
|
|
|
|
|
117,000 |
|
|
|
117,000 |
|
|
|
|
|
|
|
117,000 |
|
Other Financial Services |
|
|
8,296 |
|
|
|
|
|
|
|
8,296 |
|
|
|
8,296 |
|
|
|
|
|
|
|
8,296 |
|
Westernbank |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
106,230 |
|
|
|
|
|
|
|
106,230 |
|
Banco Popular North America: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banco Popular North America |
|
|
402,078 |
|
|
|
|
|
|
|
402,078 |
|
|
|
402,078 |
|
|
|
|
|
|
|
402,078 |
|
E-LOAN |
|
|
164,411 |
|
|
$ |
164,411 |
|
|
|
|
|
|
|
164,411 |
|
|
$ |
164,411 |
|
|
|
|
|
EVERTEC |
|
|
45,429 |
|
|
|
183 |
|
|
|
45,246 |
|
|
|
45,429 |
|
|
|
183 |
|
|
|
45,246 |
|
|
Total Popular, Inc. |
|
$ |
768,943 |
|
|
$ |
164,594 |
|
|
$ |
604,349 |
|
|
$ |
875,173 |
|
|
$ |
164,594 |
|
|
$ |
710,579 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
Balance at |
|
Accumulated |
|
Balance at |
|
Balance at |
|
Accumulated |
|
Balance at |
|
|
January 1, 2009 |
|
Impairment |
|
January 1, 2009 |
|
June 30, 2009 |
|
Impairment |
|
June 30, 2009 |
(In thousands) |
|
(Gross amounts) |
|
Losses |
|
(Net amounts) |
|
(Gross amounts) |
|
Losses |
|
(Net amounts) |
|
Banco Popular de Puerto Rico: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Banking |
|
$ |
31,729 |
|
|
|
|
|
|
$ |
31,729 |
|
|
$ |
31,840 |
|
|
|
|
|
|
$ |
31,840 |
|
Consumer and Retail Banking |
|
|
117,000 |
|
|
|
|
|
|
|
117,000 |
|
|
|
117,545 |
|
|
|
|
|
|
|
117,545 |
|
Other Financial Services |
|
|
8,330 |
|
|
|
|
|
|
|
8,330 |
|
|
|
8,296 |
|
|
|
|
|
|
|
8,296 |
|
Banco Popular North America: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banco Popular North America |
|
|
404,237 |
|
|
|
|
|
|
|
404,237 |
|
|
|
404,237 |
|
|
|
|
|
|
|
404,237 |
|
E-LOAN |
|
|
164,411 |
|
|
$ |
164,411 |
|
|
|
|
|
|
|
164,411 |
|
|
$ |
164,411 |
|
|
|
|
|
EVERTEC |
|
|
44,679 |
|
|
|
183 |
|
|
|
44,496 |
|
|
|
45,429 |
|
|
|
183 |
|
|
|
45,246 |
|
|
Total Popular, Inc. |
|
$ |
770,386 |
|
|
$ |
164,594 |
|
|
$ |
605,792 |
|
|
$ |
771,758 |
|
|
$ |
164,594 |
|
|
$ |
607,164 |
|
|
The goodwill recognized in the BPPR reportable segment during the quarter ended June 30, 2010
relates to the Westernbank FDIC-assisted transaction. Refer to Note 2 to the consolidated financial
statements for further information on the accounting for the transaction and the resulting goodwill
recognition. The fair values initially assigned to the assets acquired and liabilities assumed in
the Westernbank FDIC-assisted transaction are subject to refinement for up to one year after the
closing date of the acquisition as new information relative to closing date fair values becomes
available. Any changes in such fair value estimates may impact the goodwill initially recorded.
The purchase accounting adjustments in the EVERTEC reportable segment for the six months ended June
30, 2009 are related to contingency payments on acquisitions made prior to January 1, 2009.
As of June 30, 2010, December 31, 2009 and June 30, 2009, the Corporation had $6 million of
identifiable intangible assets, other than goodwill, with indefinite useful lives.
36
The following table reflects the components of other intangible assets subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
December 31, 2009 |
|
June 30, 2009 |
|
|
Gross |
|
Accumulated |
|
Gross |
|
Accumulated |
|
Gross |
|
Accumulated |
(In thousands) |
|
Amount |
|
Amortization |
|
Amount |
|
Amortization |
|
Amount |
|
Amortization |
|
Core deposits |
|
$ |
80,591 |
|
|
$ |
25,625 |
|
|
$ |
65,379 |
|
|
$ |
30,991 |
|
|
$ |
65,379 |
|
|
$ |
27,560 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other customer
relationships |
|
|
8,743 |
|
|
|
6,372 |
|
|
|
8,816 |
|
|
|
5,804 |
|
|
|
8,816 |
|
|
|
5,152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other intangibles |
|
|
125 |
|
|
|
90 |
|
|
|
125 |
|
|
|
71 |
|
|
|
2,981 |
|
|
|
2,366 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
89,459 |
|
|
$ |
32,087 |
|
|
$ |
74,320 |
|
|
$ |
36,866 |
|
|
$ |
77,176 |
|
|
$ |
35,078 |
|
|
During the quarter ended June 30, 2010, the Corporation recognized $24 million in a core
deposit intangible asset associated with the Westernbank FDIC-assisted transaction. This core
deposit intangible asset is to be amortized to operating expenses ratably on a monthly basis over a
10-year period.
Certain core deposit intangible with a gross amount of $9 million became fully amortized during the
six months ended June 30, 2010, and, as such, their gross amount and accumulated amortization were
eliminated from the tabular disclosure presented above.
During the quarter ended June 30, 2010, the Corporation recognized $2.5 million in amortization
related to other intangible assets with definite useful lives (June 30, 2009 $2.4 million).
During the six months ended June 30, 2010, the Corporation recognized $4.5 million in amortization
related to other intangible assets with definite useful lives (June 30, 2009 $4.8 million).
The following table presents the estimated amortization of the intangible assets with definite
useful lives for each of the following periods:
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Remaining 2010 |
|
$ |
4,802 |
|
Year 2011 |
|
|
9,424 |
|
Year 2012 |
|
|
8,409 |
|
Year 2013 |
|
|
8,225 |
|
Year 2014 |
|
|
7,587 |
|
Year 2015 |
|
|
5,478 |
|
|
Note 14 Derivative Instruments and Hedging Activities
Refer to Note 31 to the consolidated financial statements included in the 2009 Annual Report for a
complete description of the Corporations derivative activities.
The following discussion and tables provide a description of the derivative instruments used as
part of the Corporations interest rate risk management strategies. The use of derivatives is
incorporated as part of the Corporations overall interest rate risk management strategy to
minimize significant unplanned fluctuations in earnings and cash flows that are caused by interest
rate volatility. The Corporations goal is to manage interest rate sensitivity by modifying the
repricing or maturity characteristics of certain balance sheet assets and liabilities so that the
net interest income is not, on a material basis, adversely affected by movements in interest rates.
The Corporation uses derivatives in its trading activities to facilitate customer transactions, to
take proprietary positions and as a means of risk management. As a result of interest rate
fluctuations, hedged fixed and variable interest rate assets and liabilities will appreciate or
depreciate in fair value. The effect of this unrealized appreciation or depreciation is expected to
be substantially offset by the Corporations gains or losses on the derivative instruments that are
linked to these hedged assets and liabilities. As a matter of policy, the Corporation does not use
highly leveraged derivative instruments for interest rate risk management.
37
By using derivative instruments, the Corporation exposes itself to credit and market risk. If a
counterparty fails to fulfill its performance obligations under a derivative contract, the
Corporations credit risk will equal the fair value of the derivative asset. Generally, when the
fair value of a derivative contract is positive, this indicates that the counterparty owes the
Corporation, thus creating a repayment risk for the Corporation. To manage the level of credit
risk, the Corporation deals with counterparties of good credit standing, enters into master netting
agreements whenever possible and, when appropriate, obtains collateral. The derivative assets
include a $5.7 million negative adjustment as a result of the credit risk of the counterparties as
of June 30, 2010 (December 31, 2009 $5.1 million negative adjustment; June 30, 2009 $4.2
million negative adjustment). On the other hand, when the fair value of a derivative contract is
negative, the Corporation owes the counterparty and, therefore, the fair value of derivative
liabilities incorporates nonperformance risk or the risk that the obligation will not be fulfilled.
The derivative liabilities include a $1.2 million positive adjustment related to the incorporation
of the Corporations own credit risk as of June 30, 2010 (December 31, 2009 $2.1 million positive
adjustment; June 30, 2009 $1.2 million positive adjustment).
Market risk is the adverse effect that a change in interest rates, currency exchange rates, or
implied volatility rates might have on the value of a financial instrument. The Corporation manages
the market risk associated with interest rates and, to a limited extent, with fluctuations in
foreign currency exchange rates by establishing and monitoring limits for the types and degree of
risk that may be undertaken. The Corporation regularly measures this risk by using static gap
analysis, simulations and duration analysis.
Pursuant to the Corporations accounting policy, the fair value of derivatives is not offset with
the amounts for the right to reclaim cash collateral or the obligation to return cash collateral.
As of June 30, 2010, the amount recognized for the right to reclaim cash collateral under master
netting arrangements was $93 million and the amount recognized for the obligation to return cash
collateral was $5 million (December 31, 2009 $88 million and $4 million, respectively).
Certain of the Corporations derivative instruments include financial covenants tied to the
corresponding banking subsidiarys well-capitalized status and credit rating. These agreements
could require exposure collateralization, early termination, or both. The aggregate fair value of
all derivative instruments with contingent features that were in a liability position as of June
30, 2010 was $79 million (December 31, 2009 $66 million; June 30, 2009 $72 million). Based on
the contractual obligations established on these derivative instruments, the Corporation has fully
collateralized these positions by pledging collateral of $93 million as of June 30, 2010 (December
31, 2009 $88 million; June 30, 2009 $79 million).
38
Financial instruments designated as cash flow hedges or non-hedging derivatives outstanding as
of June 30, 2010 and December 31, 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2010 |
|
|
|
|
|
|
Derivative Assets |
|
Derivative Liabilities |
|
|
|
|
|
|
Statement of |
|
|
|
|
|
Statement of |
|
|
|
|
Notional |
|
Condition |
|
Fair |
|
Condition |
|
|
(In thousands) |
|
Amount |
|
Classification |
|
Value |
|
Classification |
|
Fair Value |
Derivatives designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward commitments |
|
$ |
130,225 |
|
|
Other assets |
|
$ |
17 |
|
|
Other liabilities |
|
$ |
1,527 |
|
|
Total derivatives designated as hedging
instruments |
|
$ |
130,225 |
|
|
|
|
|
|
$ |
17 |
|
|
|
|
|
|
$ |
1,527 |
|
|
Derivatives not designated as hedging
instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward contracts |
|
$ |
157,085 |
|
|
Trading account securities |
|
$ |
40 |
|
|
Other liabilities |
|
$ |
1,480 |
|
Interest rate swaps associated with: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- swaps with corporate clients |
|
|
936,782 |
|
|
Other assets |
|
|
73,858 |
|
|
|
|
|
|
|
- swaps offsetting position of corporate
clients swaps |
|
|
936,782 |
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
79,317 |
|
Foreign currency and exchange rate commitments
with clients |
|
|
200 |
|
|
Other assets |
|
|
13 |
|
|
|
|
|
|
|
|
Foreign currency and exchange rate commitments
with counterparty |
|
|
199 |
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
12 |
|
Interest rate caps and floors |
|
|
89,748 |
|
|
Other assets |
|
|
231 |
|
|
|
|
|
|
|
|
Interest rate caps and floors for the benefit of
corporate clients |
|
|
89,748 |
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
231 |
|
Indexed options on deposits |
|
|
76,089 |
|
|
Other assets |
|
|
5,452 |
|
|
|
|
|
|
|
|
Bifurcated embedded options |
|
|
72,583 |
|
|
|
|
|
|
|
|
|
Interest bearing deposits |
|
|
4,279 |
|
|
Total derivatives not designated as hedging
instruments |
|
$ |
2,359,216 |
|
|
|
|
|
|
$ |
79,594 |
|
|
|
|
|
|
$ |
85,319 |
|
|
Total derivative assets and liabilities |
|
$ |
2,489,441 |
|
|
|
|
|
|
$ |
79,611 |
|
|
|
|
|
|
$ |
86,846 |
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009 |
|
|
|
|
|
|
Derivative Assets |
|
Derivative Liabilities |
|
|
|
|
|
|
Statement of |
|
|
|
|
|
Statement of |
|
|
|
|
Notional |
|
Condition |
|
|
|
|
|
Condition |
|
|
(In thousands) |
|
Amount |
|
Classification |
|
Fair Value |
|
Classification |
|
Fair Value |
|
Derivatives designated as hedging
instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward commitments |
|
$ |
120,800 |
|
|
Other assets |
|
$ |
1,346 |
|
|
Other liabilities |
|
$ |
22 |
|
|
Total derivatives designated as
hedging instruments |
|
$ |
120,800 |
|
|
|
|
|
|
$ |
1,346 |
|
|
|
|
|
|
$ |
22 |
|
|
Derivatives not designated as hedging
instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward contracts |
|
$ |
165,300 |
|
|
Trading account securities |
|
$ |
1,253 |
|
|
Other liabilities |
|
$ |
79 |
|
Interest rate swaps associated with: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- swaps with corporate clients |
|
|
1,006,154 |
|
|
Other assets |
|
|
63,120 |
|
|
Other liabilities |
|
|
131 |
|
- swaps offsetting position of
corporate clients swaps |
|
|
1,006,154 |
|
|
Other assets |
|
|
131 |
|
|
Other liabilities |
|
|
67,358 |
|
Interest rate caps and floors |
|
|
139,859 |
|
|
Other assets |
|
|
249 |
|
|
|
|
|
|
|
|
|
Interest rate caps and floors for the
benefit of corporate clients |
|
|
139,859 |
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
249 |
|
Indexed options on deposits |
|
|
110,900 |
|
|
Other assets |
|
|
6,976 |
|
|
|
|
|
|
|
|
|
Bifurcated embedded options |
|
|
84,316 |
|
|
|
|
|
|
|
|
|
Interest bearing deposits |
|
|
5,402 |
|
|
Total derivatives not designated as
hedging instruments |
|
$ |
2,652,542 |
|
|
|
|
|
|
$ |
71,729 |
|
|
|
|
|
|
$ |
73,219 |
|
|
Total derivative assets and liabilities |
|
$ |
2,773,342 |
|
|
|
|
|
|
$ |
73,075 |
|
|
|
|
|
|
$ |
73,241 |
|
|
Cash Flow Hedges
The Corporation utilizes forward contracts to hedge the sale of mortgage-backed securities with
duration terms over one month. Interest rate forwards are contracts for the delayed delivery of
securities, which the seller agrees to deliver on a specified future date at a specified price or
yield. These forward contracts are hedging a forecasted transaction and thus qualify for cash flow
hedge accounting. Changes in the fair value of the derivatives are recorded in other comprehensive
income (loss). The amount included in accumulated other comprehensive income (loss) corresponding
to these forward contracts is expected to be reclassified to earnings in the next twelve months.
These contracts have a maximum remaining maturity of 83 days as of June 30, 2010.
For cash flow hedges, gains and losses on derivative contracts that are reclassified from
accumulated other comprehensive income (loss) to current period earnings are included in the line
in which the hedged item is recorded and during the period in which the forecasted transaction
impacts earnings, as presented in the tables below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classification of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) |
|
Amount of Gain |
|
|
|
|
|
|
Classification in |
|
|
|
|
|
Recognized in |
|
(Loss) Recognized |
|
|
Amount of |
|
the |
|
|
|
|
|
Income on |
|
in Income on |
|
|
Gain (Loss) |
|
Statement of |
|
Amount of Gain |
|
Derivatives |
|
Derivatives |
|
|
Recognized in |
|
Operations of the |
|
(Loss) |
|
(Ineffective Portion |
|
(Ineffective Portion |
|
|
OCI on |
|
Gain (Loss) |
|
Reclassified from |
|
and Amount |
|
and Amount |
|
|
Derivatives |
|
Reclassified from |
|
AOCI into |
|
Excluded from |
|
Excluded from |
|
|
(Effective |
|
AOCI into Income |
|
Income (Effective |
|
Effectiveness |
|
Effectiveness |
(In thousands) |
|
Portion) |
|
(Effective Portion) |
|
Portion) |
|
Testing) |
|
Testing) |
|
Forward
commitments |
|
$ |
(1,509 |
) |
|
Trading account profit |
|
$ |
(31 |
) |
|
|
|
|
|
|
|
|
|
Total cash flow
hedges |
|
$ |
(1,509 |
) |
|
|
|
|
|
$ |
(31 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
OCI |
|
Other Comprehensive Income |
|
AOCI |
|
Accumulated Other Comprehensive Income |
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classification of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) |
|
Amount of Gain |
|
|
|
|
|
|
Classification in |
|
|
|
|
|
Recognized in |
|
(Loss) Recognized |
|
|
Amount of |
|
the |
|
|
|
|
|
Income on |
|
in Income on |
|
|
Gain (Loss) |
|
Statement of |
|
Amount of Gain |
|
Derivatives |
|
Derivatives |
|
|
Recognized in |
|
Operations of the |
|
(Loss) |
|
(Ineffective Portion |
|
(Ineffective Portion |
|
|
OCI on |
|
Gain (Loss) |
|
Reclassified from |
|
and Amount |
|
and Amount |
|
|
Derivatives |
|
Reclassified from |
|
AOCI into |
|
Excluded from |
|
Excluded from |
|
|
(Effective |
|
AOCI into Income |
|
Income (Effective |
|
Effectiveness |
|
Effectiveness |
(In thousands) |
|
Portion) |
|
(Effective Portion) |
|
Portion) |
|
Testing) |
|
Testing) |
|
Forward commitments |
|
$ |
(1,540 |
) |
|
Trading account profit |
|
$ |
1,168 |
|
|
|
|
|
|
|
|
|
|
Total cash flow
hedges |
|
$ |
(1,540 |
) |
|
|
|
|
|
$ |
1,168 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended June 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classification of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) |
|
Amount of Gain |
|
|
|
|
|
|
Classification in |
|
|
|
|
|
Recognized in |
|
(Loss) Recognized |
|
|
Amount of |
|
the |
|
|
|
|
|
Income on |
|
in Income on |
|
|
Gain (Loss) |
|
Statement of |
|
Amount of Gain |
|
Derivatives |
|
Derivatives |
|
|
Recognized in |
|
Operations of the |
|
(Loss) |
|
(Ineffective Portion |
|
(Ineffective Portion |
|
|
OCI on |
|
Gain (Loss) |
|
Reclassified from |
|
and Amount |
|
and Amount |
|
|
Derivatives |
|
Reclassified from |
|
AOCI into |
|
Excluded from |
|
Excluded from |
|
|
(Effective |
|
AOCI into Income |
|
Income (Effective |
|
Effectiveness |
|
Effectiveness |
(In thousands) |
|
Portion) |
|
(Effective Portion) |
|
Portion) |
|
Testing) |
|
Testing) |
|
Forward commitments |
|
$ |
(37 |
) |
|
Trading account profit |
|
$ |
(1,586 |
) |
|
|
|
|
|
|
|
|
Interest rate swaps |
|
|
|
|
|
Interest expense |
|
|
(1,883 |
) |
|
|
|
|
|
|
|
|
|
Total cash flow
hedges |
|
$ |
(37 |
) |
|
|
|
|
|
$ |
(3,469 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classification of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) |
|
Amount of Gain |
|
|
|
|
|
|
Classification in |
|
|
|
|
|
Recognized in |
|
(Loss) Recognized |
|
|
Amount of |
|
the |
|
|
|
|
|
Income on |
|
in Income on |
|
|
Gain (Loss) |
|
Statement of |
|
Amount of Gain |
|
Derivatives |
|
Derivatives |
|
|
Recognized in |
|
Operations of the |
|
(Loss) |
|
(Ineffective Portion |
|
(Ineffective Portion |
|
|
OCI on |
|
Gain (Loss) |
|
Reclassified from |
|
and Amount |
|
and Amount |
|
|
Derivatives |
|
Reclassified from |
|
AOCI into |
|
Excluded from |
|
Excluded from |
|
|
(Effective |
|
AOCI into Income |
|
Income (Effective |
|
Effectiveness |
|
Effectiveness |
(In thousands) |
|
Portion) |
|
(Effective Portion) |
|
Portion) |
|
Testing) |
|
Testing) |
|
Forward commitments |
|
$ |
(1,623 |
) |
|
Trading account profit |
|
$ |
(3,503 |
) |
|
|
|
|
|
|
|
|
Interest rate swaps |
|
|
|
|
|
Interest expense |
|
|
(2,380 |
) |
|
|
|
|
|
|
|
|
|
Total cash flow
hedges |
|
$ |
(1,623 |
) |
|
|
|
|
|
$ |
(5,883 |
) |
|
|
|
|
|
|
|
|
|
41
Non-Hedging Activities
For the quarters and six months ended June 30, 2010, the Corporation recognized a loss of $7.9
million and $12.1 million, respectively (June 30, 2009 loss of $1.8 million and $14.1
million, respectively) related to its non-hedging derivatives, as detailed in the tables below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss) Recognized in |
|
|
Classification of Gain |
|
Income on Derivatives |
|
|
(Loss) Recognized in |
|
Quarter ended |
|
Six months ended |
(In thousands) |
|
Income on Derivatives |
|
June 30, 2010 |
|
June 30, 2010 |
|
Forward contracts |
|
Trading account profit |
|
$ |
(8,639 |
) |
|
$ |
(11,710 |
) |
Interest rate swap contracts |
|
Other operating income |
|
|
513 |
|
|
|
(1,221 |
) |
Foreign currency and exchange
rate commitments |
|
Interest expense |
|
|
(1 |
) |
|
|
1 |
|
Foreign currency and exchange
rate commitments |
|
Other operating income |
|
|
5 |
|
|
|
5 |
|
Indexed options |
|
Interest expense |
|
|
(1,609 |
) |
|
|
(1,346 |
) |
Bifurcated embedded options |
|
Interest expense |
|
|
1,872 |
|
|
|
2,158 |
|
|
Total |
|
|
|
|
|
$ |
(7,859 |
) |
|
$ |
(12,113 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss) Recognized in |
|
|
Classification of Gain |
|
Income on Derivatives |
|
|
(Loss) Recognized in |
|
Quarter ended |
|
Six months ended |
(In thousands) |
|
Income on Derivatives |
|
June 30, 2009 |
|
June 30, 2009 |
|
Forward contracts |
|
Trading account profit |
|
$ |
1,204 |
|
|
$ |
(6,848 |
) |
Interest rate swap contracts |
|
Other operating income |
|
|
(1,554 |
) |
|
|
(5,524 |
) |
Credit derivatives |
|
Other operating income |
|
|
(2,599 |
) |
|
|
(2,599 |
) |
Foreign currency and exchange
rate commitments |
|
Interest expense |
|
|
(3 |
) |
|
|
(2 |
) |
Foreign currency and exchange
rate commitments |
|
Other operating income |
|
|
10 |
|
|
|
19 |
|
Indexed options |
|
Interest expense |
|
|
470 |
|
|
|
(746 |
) |
Bifurcated embedded options |
|
Interest expense |
|
|
698 |
|
|
|
1,575 |
|
|
Total |
|
|
|
|
|
$ |
(1,774 |
) |
|
$ |
(14,125 |
) |
|
Forward Contracts
The Corporation has forward contracts to sell mortgage-backed securities with terms lasting less
than a month, which are accounted for as trading derivatives. Changes in their fair value are
recognized in trading account profit (loss).
Interest Rates Swaps and Foreign Currency and Exchange Rate Commitments
In addition to using derivative instruments as part of its interest rate risk management strategy,
the Corporation also utilizes derivatives, such as interest rate swaps and foreign exchange
contracts, in its capacity as an intermediary on behalf of its customers. The Corporation minimizes
its market risk and credit risk by taking offsetting positions under the same terms and conditions
with credit limit approvals and monitoring procedures. Market value changes on these swaps and
other derivatives are recognized in earnings in the period of change.
Interest Rate Caps and Floors
The Corporation enters into interest rate caps and floors as an intermediary on behalf of its
customers and simultaneously takes offsetting positions under the same terms and conditions, thus
minimizing its market and credit risks.
42
Note 15 Deposits
Total interest bearing deposits as of June 30, 2010 and December 31, 2009, consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
(In thousands) |
|
2010 |
|
2009 |
|
Savings deposits |
|
$ |
6,093,088 |
|
|
$ |
5,480,124 |
|
NOW, money market and other interest bearing demand deposits |
|
|
5,133,317 |
|
|
|
4,726,204 |
|
|
Total savings, NOW, money market and other
Interest bearing demand deposits |
|
|
11,226,405 |
|
|
|
10,206,328 |
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposits: |
|
|
|
|
|
|
|
|
Under $100,000 |
|
|
6,476,312 |
[1] |
|
|
6,553,022 |
[1] |
$100,000 and over |
|
|
4,617,518 |
|
|
|
4,670,243 |
|
|
Total certificates of deposits |
|
|
11,093,830 |
|
|
|
11,223,265 |
|
|
Total interest bearing deposits |
|
$ |
22,320,235 |
|
|
$ |
21,429,593 |
|
|
|
|
|
[1] |
|
Includes brokered certificates of deposit amounting to $2.0 billion as of June 30, 2010
and $2.7 billion as of December 31, 2009. |
|
|
A summary of certificates of deposit by maturity as of June 30, 2010 follows:
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Remaining 2010 |
|
$ |
4,777,350 |
|
2011 |
|
|
3,283,244 |
|
2012 |
|
|
1,166,393 |
|
2013 |
|
|
618,196 |
|
2014 |
|
|
408,342 |
|
2015 and thereafter |
|
|
840,305 |
|
|
Total |
|
$ |
11,093,830 |
|
|
Note 16 Borrowings
The composition of federal funds purchased and assets sold under agreements to repurchase was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
June 30, |
(In thousands) |
|
2010 |
|
2009 |
|
2009 |
|
Federal funds purchased |
|
$ |
9,900 |
|
|
|
|
|
|
|
|
|
Assets sold under agreements to repurchase |
|
|
2,297,294 |
|
|
$ |
2,632,790 |
|
|
$ |
2,941,678 |
|
|
Total federal funds purchased and assets sold under agreements to repurchase |
|
$ |
2,307,194 |
|
|
$ |
2,632,790 |
|
|
$ |
2,941,678 |
|
|
The repurchase agreements outstanding as of June 30, 2010 were collateralized by $2.0 billion
in investment securities available-for-sale and $372 million in trading securities. It is the
Corporations policy to maintain effective control over assets sold under agreements to repurchase;
accordingly, such securities continue to be carried on the consolidated statements of condition.
In addition, there were repurchase agreements outstanding collateralized by $177 million in
securities purchased underlying agreements to resell to which the Corporation has the right to
repledge. It is the Corporations policy to take possession of securities purchased under
agreements to resell. However, the counterparties to such agreements maintain effective control
over such securities, and accordingly are not reflected in the Corporations consolidated
statements of condition.
43
Other short-term borrowings consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
June 30, |
(In thousands) |
|
2010 |
|
2009 |
|
2009 |
|
Secured borrowing with clearing broker with an interest rate of 1.50% |
|
|
|
|
|
$ |
6,000 |
|
|
|
|
|
Unsecured borrowings with private investors paying interest at a fixed rate of 0.40% |
|
|
|
|
|
|
|
|
|
$ |
500 |
|
Others |
|
$ |
1,263 |
|
|
|
1,326 |
|
|
|
1,325 |
|
|
Total other short-term borrowings |
|
$ |
1,263 |
|
|
$ |
7,326 |
|
|
$ |
1,825 |
|
|
Notes payable consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
June 30, |
(In thousands) |
|
2010 |
|
2009 |
|
2009 |
|
Advances with the FHLB: |
|
|
|
|
|
|
|
|
|
|
|
|
-with maturities ranging from 2010 through 2015 paying
interest at monthly fixed
rates ranging from 1.48% to 5.10% (June 30, 2009
1.48% to 5.06%) |
|
$ |
1,032,873 |
|
|
$ |
1,103,627 |
|
|
$ |
1,107,216 |
|
-maturing in 2010 paying interest quarterly at a fixed
rate of 5.10% |
|
|
20,000 |
|
|
|
20,000 |
|
|
|
20,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note payable issued to the FDIC, including unamortized
premium of $10,091; paying
interest monthly at an annual fixed rate of 2.50%;
maturing on April 30, 2015
or such earlier date as such amount may become due
and payable pursuant to
the terms of the note |
|
|
5,728,078 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term notes paying interest monthly at fixed rates
ranging from 3.00% to 6.00% |
|
|
|
|
|
|
|
|
|
|
3,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term notes with maturities ranging from 2011 to 2013
paying interest semiannually
at fixed rates ranging from 5.25% to 13.00% (June 30,
2009 5.20% to 9.75%) |
|
|
380,995 |
|
|
|
382,858 |
|
|
|
383,720 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term notes with maturities ranging from 2010 to 2013
paying interest
monthly at a floating rate of 3.00% over the 10-year
U.S. Treasury note rate |
|
|
1,217 |
|
|
|
1,528 |
|
|
|
2,678 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term notes maturing in 2011 paying interest quarterly
at a floating rate
of 9.75% (June 30, 2009 6.00%) over the 3-month
LIBOR rate |
|
|
175,000 |
|
|
|
250,000 |
|
|
|
250,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Junior subordinated deferrable interest debentures
(related to trust preferred
securities) with maturities ranging from 2027 to 2034
with fixed interest
rates ranging from 6.125% to 8.327% (Refer to Note 17) |
|
|
439,800 |
|
|
|
439,800 |
|
|
|
849,672 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Junior subordinated deferrable interest debentures
(related to trust preferred
securities) ($936,000 less discount of $502,113 as of
June 30, 2010) with no
stated maturity and a fixed interest rate of 5.00%
until, but excluding December 5,
2013 and 9.00% thereafter (Refer to Note 17) |
|
|
433,887 |
|
|
|
423,650 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Others |
|
|
25,551 |
|
|
|
27,169 |
|
|
|
27,336 |
|
|
Total notes payable |
|
$ |
8,237,401 |
|
|
$ |
2,648,632 |
|
|
$ |
2,643,722 |
|
|
|
|
|
Note: |
|
Refer to the Corporations Form 10-K for the year ended December 31, 2009, for rates and maturity
information corresponding to the borrowings outstanding as of such date. Key index rates as of June 30,
2010 and June 30, 2009, respectively, were as follows: 3-month LIBOR rate = 0.53% and 0.60%; 10-year U.S.
Treasury note = 2.93% and 3.54%. |
|
|
Included in the table above are $175 million in term notes with interest that adjusted in the
event of senior debt rating downgrades. These floating rate term notes had an interest rate of
9.75% over the 3-month LIBOR as of June 30, 2010. These term notes, which had contractual
maturities in September 2011, were repurchased by the Corporation
from holders of record in July 2010.
44
In consideration for the excess assets acquired over liabilities assumed as part of the Westernbank
FDIC-assisted transaction, BPPR issued to the FDIC a secured note (the note payable issued to the
FDIC) in the amount of $5.8 billion as of April 30, 2010 bearing an annual interest rate of 2.50%,
which has full recourse to BPPR. As indicated in Note 2 to the consolidated financial statements,
the note payable issued to the FDIC is collateralized by the loans (other than certain consumer
loans) and other real estate acquired in the agreement with the FDIC and all proceeds derived from
such assets, including cash inflows from claims to the FDIC under the loss sharing agreements.
Proceeds received from such sources are used to pay the note under the conditions stipulated in the
agreement. As of June 30, 2010, the carrying amount of loans and other real estate property that
serves as collateral on the note amounted to approximately $4.0 billion. The entire outstanding
principal balance of the note payable issued to the FDIC is due five years from issuance (April 30,
2015), or such date as such amount may become due and payable pursuant to the terms of the note
payable issued to the FDIC. Borrowings under the note bear interest at a fixed annual rate of 2.50%
and is paid monthly. If the Corporation fails to pay any interest as and when due, such interest
shall accrue interest at the note interest rate plus 2.00% per annum. The Corporation may repay the
note in whole or in part without any penalty subject to certain notification requirements indicated
in the agreement. In July 2010, the Corporation prepaid $2.0 billion of the note payable to the
FDIC from funds unrelated to the assets securing the note.
A breakdown of borrowings by contractual maturities as of June 30, 2010 is included in the table
below. Given its nature, the maturity of the Note payable to the FDIC was based on expected
repayment dates and not in its April 30, 2015 contractual maturity date. The expected repayments
consider the timing of expected cash inflows on the loans, OREO and claims on the loss sharing
agreements that will be applied to repay the note during the period that the note payable to the
FDIC is outstanding. The table also reflects the $2.0 billion partial prepayment on the Note
payable to the FDIC described in the preceding paragraph in 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds |
|
|
|
|
|
|
|
|
sold and |
|
|
|
|
|
|
|
|
repurchase |
|
Short-term |
|
|
|
|
(In thousands) |
|
agreements |
|
borrowings |
|
Notes payable |
|
Total |
|
Year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
$ |
1,145,004 |
|
|
$ |
1,263 |
|
|
$ |
3,334,119 |
|
|
$ |
4,480,386 |
|
2011 |
|
|
50,000 |
|
|
|
|
|
|
|
3,232,390 |
|
|
|
3,282,390 |
|
2012 |
|
|
75,000 |
|
|
|
|
|
|
|
631,529 |
|
|
|
706,529 |
|
2013 |
|
|
49,000 |
|
|
|
|
|
|
|
128,059 |
|
|
|
177,059 |
|
2014 |
|
|
350,000 |
|
|
|
|
|
|
|
10,824 |
|
|
|
360,824 |
|
Later years |
|
|
638,190 |
|
|
|
|
|
|
|
466,593 |
|
|
|
1,104,783 |
|
No stated maturity |
|
|
|
|
|
|
|
|
|
|
936,000 |
|
|
|
936,000 |
|
|
Subtotal |
|
$ |
2,307,194 |
|
|
$ |
1,263 |
|
|
$ |
8,739,514 |
|
|
$ |
11,047,971 |
|
Less: Discount |
|
|
|
|
|
|
|
|
|
|
502,113 |
|
|
|
502,113 |
|
|
Total borrowings |
|
$ |
2,307,194 |
|
|
$ |
1,263 |
|
|
$ |
8,237,401 |
|
|
$ |
10,545,858 |
|
|
Note 17 Trust Preferred Securities
As of June 30, 2010 and 2009, the Corporation had established four trusts (BanPonce Trust I,
Popular Capital Trust I, Popular North America Capital Trust I and Popular Capital Trust II) for
the purpose of issuing trust preferred securities (also referred to as capital securities) to the
public. The proceeds from such issuances, together with the proceeds of the related issuances of
common securities of the trusts (the common securities), were used by the trusts to purchase
junior subordinated deferrable interest debentures (the junior subordinated debentures) issued by
the Corporation. In August 2009, the Corporation established the Popular Capital Trust III for the
purpose of exchanging the shares of Series C preferred stock held by the U.S. Treasury at the time
for trust preferred securities issued by this trust. In connection with this exchange, the trust
used the Series C preferred stock, together with the proceeds of issuance and sale of common
securities of the trust, to purchase junior subordinated debentures issued by the Corporation.
The sole assets of the five trusts consisted of the junior subordinated debentures of the
Corporation and the related accrued interest receivable. These trusts are not consolidated by the
Corporation.
45
The junior subordinated debentures are included by the Corporation as notes payable in the
consolidated statements of condition, while the common securities issued by the issuer trusts are
included as other investment securities. The common securities of each trust are wholly-owned, or
indirectly wholly-owned, by the Corporation.
Financial data pertaining to the trusts as of June 30, 2010 and December 31, 2009 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
Popular North |
|
|
|
|
|
|
BanPonce |
|
Popular Capital |
|
America Capital |
|
Popular Capital |
|
Popular Capital |
Issuer |
|
Trust I |
|
Trust I |
|
Trust I |
|
Trust II |
|
Trust III |
|
Capital securities |
|
$ |
52,865 |
|
|
$ |
181,063 |
|
|
$ |
91,651 |
|
|
$ |
101,023 |
|
|
$ |
935,000 |
|
Distribution rate |
|
|
8.327 |
% |
|
|
6.700 |
% |
|
|
6.564 |
% |
|
|
6.125 |
% |
|
5.000% until, but excluding December 5, 2013 and 9.000% thereafter |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common securities |
|
$ |
1,637 |
|
|
$ |
5,601 |
|
|
$ |
2,835 |
|
|
$ |
3,125 |
|
|
$ |
1,000 |
|
Junior subordinated
debentures
aggregate
liquidation amount |
|
$ |
54,502 |
|
|
$ |
186,664 |
|
|
$ |
94,486 |
|
|
$ |
104,148 |
|
|
$ |
936,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stated maturity date |
|
February 2027 |
|
|
November 2033 |
|
|
September 2034 |
|
|
December 2034 |
|
|
Perpetual |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reference notes |
|
|
[a],[c],[f],[g] |
|
|
|
[b],[d],[f] |
|
|
|
[a],[c],[f] |
|
|
|
[b],[d],[f] |
|
|
|
[b], [d], [h], [i] |
|
|
Financial data pertaining to the trusts as of June 30, 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
Popular North |
|
|
|
|
|
|
BanPonce |
|
Popular Capital |
|
America Capital |
|
Popular Capital |
|
Popular Capital |
Issuer |
|
Trust I |
|
Trust I |
|
Trust I |
|
Trust II |
|
Trust III |
|
Capital securities |
|
$ |
144,000 |
|
|
$ |
300,000 |
|
|
$ |
250,000 |
|
|
$ |
130,000 |
|
|
|
|
|
Distribution rate |
|
|
8.327 |
% |
|
|
6.700 |
% |
|
|
6.564 |
% |
|
|
6.125 |
% |
|
|
|
|
Common securities |
|
$ |
4,640 |
|
|
$ |
9,279 |
|
|
$ |
7,732 |
|
|
$ |
4,021 |
|
|
|
|
|
Junior subordinated
debentures aggregate
liquidation amount |
|
$ |
148,640 |
|
|
$ |
309,279 |
|
|
$ |
257,732 |
|
|
$ |
134,021 |
|
|
|
|
|
Stated maturity date |
|
February 2027 |
|
|
November 2033 |
|
|
September 2034 |
|
|
December 2034 |
|
|
|
|
|
Reference notes |
|
|
[a],[c],[e],[f],[g] |
|
|
|
[b],[d],[f] |
|
|
|
[a],[c],[f] |
|
|
|
[b],[d],[f] |
|
|
|
|
|
|
|
|
|
[a] |
|
Statutory business trust that is wholly-owned by Popular North America (PNA) and
indirectly wholly-owned by the Corporation. |
|
[b] |
|
Statutory business trust that is wholly-owned by the Corporation. |
|
[c] |
|
The obligations of PNA under the junior subordinated debentures and its guarantees of the
capital securities under the trust are fully and unconditionally guaranteed on a subordinated
basis by the Corporation to the extent set forth in the applicable guarantee agreement. |
|
[d] |
|
These capital securities are fully and unconditionally guaranteed on a subordinated basis by
the Corporation to the extent set forth in the applicable guarantee agreement. |
|
[e] |
|
The original issuance was for $150 million. The Corporation had reacquired $6 million of
the 8.327% capital securities as of December 31, 2008. |
|
[f] |
|
The Corporation has the right, subject to any required prior approval from the Federal
Reserve, to redeem after certain dates or upon the occurrence of certain events mentioned below,
the junior subordinated debentures at a redemption price equal to 100% of the principal amount,
plus accrued and unpaid interest to the date of redemption. The maturity of the junior
subordinated debentures may be shortened at the option of the Corporation prior to their stated
maturity dates (i) on or after the stated optional redemption dates stipulated in the agreements,
in whole at any time or in part from time to time, or (ii) in whole, but not in part, at any time
within
90 days following the occurrence and during the continuation of a tax event, an investment
company event or a capital treatment event as set forth in the indentures relating to the capital
securities, in each case subject to regulatory approval. |
|
[g] |
|
Same as [f] above, except that the investment company event does not apply for early
redemption. |
46
|
|
|
[h] |
|
The debentures are perpetual and may be redeemed by Popular at any time, subject to the
consent of the Board of Governors of the Federal Reserve System. |
|
[i] |
|
Carrying value of junior subordinates debentures of $434 million as of June 30, 2010 ($936
million aggregate liquidation amount, net of $502 million discount) and $424 million as of
December 31, 2009 ($936 million aggregate liquidation amount, net of $512 million
discount). |
In accordance with the Federal Reserve Board guidance, the trust preferred securities
represent restricted core capital elements and qualify as Tier 1 Capital, subject to quantitative
limits. The aggregate amount of restricted core capital elements that may be included in the Tier 1
Capital of a banking organization must not exceed 25% of the sum of all core capital elements
(including cumulative perpetual preferred stock and trust preferred securities). As of June 30,
2010, the Corporations restricted core capital elements did not exceed the 25% limitation. Thus,
all trust preferred securities were allowed as Tier 1 capital. As of December 31, 2009, there were
$7 million of the outstanding trust preferred securities which were disallowed as Tier 1 capital.
Amounts of restricted core capital elements in excess of this limit generally may be included in
Tier 2 capital, subject to further limitations. The Federal Reserve Board revised the quantitative
limit which would limit restricted core capital elements included in the Tier 1 capital of a bank
holding company to 25% of the sum of core capital elements (including restricted core capital
elements), net of goodwill less any associated deferred tax liability. The new limit would be
effective on March 31, 2011. Furthermore, the Dodd-Frank Wall Street Reform and Consumer Protection
Act, recently passed in July 2010, has a provision to effectively phase out the use of trust
preferred securities as Tier 1 capital throughout a five-year period. As of June 30, 2010, the
Corporation had $427 million in trust preferred securities (capital securities) that are subject to
the phase-out. As of June 30, 2010, the remaining $935 million in trust preferred securities
corresponded to capital securities issued to the U.S. Treasury pursuant to the Emergency Economic
Stabilization Act of 2008 that are exempt from the phase-out provisions of the Act.
Note 18 Stockholders Equity
Increase in authorized shares of common stock
On May 4, 2010, following stockholder approval, the Corporation amended its certificate of
incorporation to provide for an increase in the number of shares of the Corporations common stock
authorized for issuance from 700 million shares to 1.7 billion shares.
Issuance of depositary shares representing preferred stock and conversion to shares of common
stock
In April 2010, the Corporation raised $1.15 billion through the sale of 46,000,000 depositary
shares, each representing a 1/40th interest in a share of Contingent Convertible Perpetual
Non-Cumulative Preferred Stock, Series D, no par value, $1,000 liquidation preference per share.
The preferred stock represented by depositary shares automatically converted into shares of
Popular, Inc.s common stock at a conversion rate of 8.3333 shares of common stock for each
depositary share on May 11, 2010, which was the 5th business day after the Corporations
common shareholders approved the amendment to the Corporations restated certificate of
incorporation to increase the number of authorized shares of common stock. The conversion of the
depositary shares of preferred stock resulted in the issuance of 383,333,333 additional shares of
common stock. The net proceeds from the public offering amounted to approximately $1.1 billion,
after deducting the underwriting discount and estimated offering expenses. Note 23 to the
consolidated financial statements provides information on the impact of the conversion on net loss
per common share.
BPPR statutory reserve
The Banking Act of the Commonwealth of Puerto Rico requires that a minimum of 10% of BPPRs net
income for the year be transferred to a statutory reserve account until such statutory reserve
equals the total of paid-in capital on common and preferred stock. Any losses incurred by a bank
must first be charged to retained earnings and then to the reserve fund. Amounts credited to the
reserve fund may not be used to pay dividends without the prior consent of the Puerto Rico
Commissioner of Financial Institutions. The failure to maintain sufficient statutory reserves would
preclude BPPR from paying dividends. BPPRs statutory reserve fund totaled $402 million as of June
30, 2010 (December 31, 2009 $402 million; June 30, 2009 $392 million). There were no transfers
between the statutory reserve account and the retained earnings account during the quarters ended
June 30, 2010 and 2009.
47
Note 19 Commitments, Contingencies and Guarantees
Commercial letters of credit and standby letters of credit amounted to $16 million and $142
million, respectively, as of June 30, 2010 (December 31, 2009 $13 million and $134 million,
respectively; and June 30, 2009 $18 million and $168 million, respectively). In addition, the
Corporation has commitments to originate mortgage loans amounting to $46 million as of June 30,
2010 (December 31, 2009 $48 million; June 30, 2009 $59 million).
As of
June 30, 2010, the Corporation recorded a liability of $0.5 million (December 31, 2009 $0.7
million and June 30, 2009 $0.6 million), which represents the unamortized balance of the
obligations undertaken in issuing the guarantees under the standby letters of credit. The
Corporation recognizes at fair value the obligation at inception of the standby letters of credit.
The fair value approximates the fee received from the customer for issuing such commitments. These
fees are deferred and recognized over the commitment period. This liability is included as part of
other liabilities in the consolidated statements of condition. The contract amounts in standby
letters of credit outstanding represent the maximum potential amount of future payments the
Corporation could be required to make under the guarantees in the event of nonperformance by the
customers. These standby letters of credit are used by the customer as a credit enhancement and
typically expire without being drawn upon. In the event of nonperformance by the customers, the
Corporation has rights to the underlying collateral provided, if any, which normally includes cash
and marketable securities, real estate, receivables, among others. Management does not anticipate
any material losses related to these instruments.
Commitments to extend credit, which include credit card lines, commercial lines of credit, and
other unused credit commitments, amounted to $6.3 billion as of June 30, 2010 (December 31, 2009 -
$7.0 billion; June 30, 2009 $7.2 billion),
excluding the commitments to extend credit that pertain to the
lending relationships of the Westernbank
operations.
As of June 30, 2010, the Corporation maintained a reserve of approximately $10 million for
potential losses associated with unfunded loan commitments related to commercial and consumer lines
of credit unrelated to the acquired lending relationships from the Westernbank FDIC-assisted
transaction (December 31, 2009 $15 million; June 30, 2009 $17 million). The estimated reserve
is principally based on the expected draws on these facilities using historical trends and the
application of the corresponding reserve factors determined under the Corporations allowance for
loan losses methodology. This reserve for unfunded exposures remains separate and distinct from the
allowance for loan losses and is reported as part of other liabilities in the consolidated
statement of condition.
As of
June 30, 2010, the commitments to extend credit related to the
Westernbank operations approximated $0.2 billion. The acquired commitments to extend credit are covered under
the loss sharing agreements with the FDIC, subject to FDIC approvals, limitations on the timing for
such disbursements, and servicing guidelines, among various considerations. As indicated in Note 2
to the consolidated financial statements, on the April 30, 2010 acquisition date, the Corporation
recorded a contingent liability for such commitments at fair value, which was estimated at $132
million. As of June 30, 2010, that contingent liability remained at that level and is recorded as
part of other liabilities in the consolidated statement of condition.
The Corporation securitized mortgage loans into guaranteed mortgage-backed securities subject to
limited, and in certain instances, lifetime credit recourse on the loans that serve as collateral
for the mortgage-backed securities. Also, from time to time, the Corporation may have sold, in bulk
sale transactions, residential mortgage loans subject to credit recourse or to certain
representations and warranties from the Corporation to the purchaser. These representations and
warranties may relate, for example, to borrower creditworthiness, loan documentation, collateral,
prepayment and early payment defaults. The Corporation may be required to repurchase the loans
under the credit recourse agreements or for breach of representations and warranties.
As of June 30, 2010, the Corporation serviced $4.2 billion (December 31, 2009 $4.5 billion; June
30, 2009 $4.7 billion) in residential mortgage loans subject to credit recourse provisions,
principally loans associated with FNMA and Freddie Mac programs. In the event of any customer
default, pursuant to the credit recourse provided, the Corporation may be required to repurchase
the loan or reimburse for the incurred loss. The maximum potential
amount of future payments that the Corporation would be required to make under the recourse
arrangements in the event of nonperformance by the borrowers is equivalent to the total outstanding
balance of the residential mortgage loans serviced with recourse and
interest, if applicable. During the six months ended June
30, 2010, the Corporation repurchased approximately $60 million in mortgage loans subject to the
credit recourse provisions. In the event of
48
nonperformance by the borrower, the Corporation has
rights to the underlying collateral securing the mortgage loan. The Corporation suffers losses on
these loans when the proceeds from a foreclosure sale of the property underlying a defaulted
mortgage loan are less than the outstanding principal balance of the loan plus any uncollected
interest advanced and the costs of holding and disposing of the related property. The losses
associated to these credit recourse arrangements, which pertain to residential mortgage loans in
Puerto Rico, have not been significant. As of June 30, 2010, the Corporations liability
established to cover the estimated credit loss exposure related to loans sold or serviced with
credit recourse amounted to $37 million (December 31, 2009 $16 million; June 30, 2009 $13
million).
When the Corporation sells or securitizes mortgage loans, it generally makes customary
representations and warranties regarding the characteristics of the loans sold. The Corporations
mortgage operations in Puerto Rico group conforming mortgage loans into pools which are exchanged
for FNMA and GNMA mortgage-backed securities, which are generally sold to private investors, or may
sell the loans directly to FNMA or other private investors for cash. To the extent the loans do not
meet specified characteristics, the Corporation may be required to repurchase such loans or
indemnify for losses. As required under the government agency programs, quality review procedures
are performed by the Corporation to ensure that asset guideline qualifications are met. The
Corporation has not recorded any specific contingent liability in the consolidated financial
statements for these customary representation and warranties related to loans sold by the
Corporations mortgage operations in Puerto Rico, and management believes that, based on historical
data, the probability of payments and expected losses under these representations and warranty
arrangements is not significant.
Servicing agreements relating to the mortgage-backed securities programs of FNMA and GNMA, and to
mortgage loans sold or serviced to certain other investors, including FHLMC, require the
Corporation to advance funds to make scheduled payments of principal, interest, taxes and
insurance, if such payments have not been received from the borrowers. As of June 30, 2010, the
Corporation serviced $17.9 billion in mortgage loans, including the loans serviced with credit
recourse (December 31, 2009 $17.7 billion; June 30, 2009 $13.0 billion). The Corporation
generally recovers funds advanced pursuant to these arrangements from the mortgage owner, from
liquidation proceeds from mortgage loans foreclosed or, in the case of FHA/VA loans, under the
applicable FHA and VA insurance and guarantee programs. However, in the meantime, the Corporation
must absorb the cost of the funds it advances during the time the advance is outstanding. The
Corporation must also bear the costs of attempting to collect on delinquent and defaulted mortgage
loans. In addition, if a defaulted loan is not cured, the mortgage loan would be canceled as part
of the foreclosure proceedings and the Corporation would not receive any future servicing income
with respect to that loan. As of June 30, 2010, the outstanding balance of funds advanced by the
Corporation under such mortgage loan servicing agreements was approximately $26 million (December
31, 2009 $14 million; June 30, 2009 $12 million). To the extent the mortgage loans underlying
the Corporations servicing portfolio experience increased delinquencies, the Corporation would be
required to dedicate additional cash resources to comply with its obligation to advance funds as
well as incur additional administrative costs related to increases in collection efforts.
As of June 30, 2010, the Corporation established reserves for customary representations and
warranties related to loans sold by its U.S. subsidiary E-LOAN. Loans had been sold to investors on
a servicing released basis subject to certain representations and warranties. Although the risk of
loss or default was generally assumed by the investors, the Corporation is required to make certain
representations relating to borrower creditworthiness, loan documentation and collateral, which if
not complied, may result in requiring the Corporation to repurchase the loans or indemnify
investors for any related losses associated to these loans. The loans had been sold prior to 2009.
As of June 30, 2010, the Corporations reserve for estimated losses from such representation and
warranty arrangements amounted to $33 million, which was included as part of other liabilities in
the consolidated statement of condition (December 31, 2009 $33 million; June 30, 2009 $15
million). E-LOAN is no longer originating and selling loans, since the subsidiary ceased these
activities during 2008. On a quarterly basis, the Corporation reassesses its estimate for expected
losses associated to E-LOANs customary representation and warranty arrangements. The analysis
incorporates expectations on future disbursements based on quarterly repurchases and make-whole
events. The analysis also considers factors such as the average length-time between the loans
funding date and the loan repurchase date as observed in the historical loan data. During the six
months ended June 30, 2010, E-LOAN charged-off approximately $6.2 million
against this representation and warranty reserve associated with loan repurchases and
indemnification or make-whole events (six months ended June 30, 2009 $9 million). Make-whole
events are typically defaulted loans in which the investor attempts to recover through the
collateral or guarantees, and the seller is obligated to cover any impaired or unrecovered portion
of the loan.
49
During 2008, the Corporation provided indemnifications for the breach of certain representations or
warranties in connection with various sales of assets by the discontinued operations of PFH. These
sales were on a non-credit recourse basis. The agreements primarily include indemnification for
breaches of certain key representations and warranties, some of which expire within a definite time
period; others survive until the expiration of the applicable statute of limitations, and others do
not expire. Certain of the indemnifications are subject to a cap or maximum aggregate liability
defined as a percentage of the purchase price. The indemnifications agreements outstanding as of
June 30, 2010 are related principally to make-whole arrangements. As of June 30, 2010, the
Corporations reserve related to PFHs indemnity arrangements amounted to $7 million (December 31,
2009 $9 million; June 30, 2009 $19 million). During the six months ended June 30, 2010, the
Corporation recorded charge-offs with respect to the PFHs representation and warranty arrangements
amounting to approximately $1.6 million (six months ended June 30, 2009 $0.6 million). The
reserve balance as of June 30, 2010 contemplates historical indemnity payments. Certain
indemnification provisions, which included, for example, reimbursement of premiums on early loan
payoffs and repurchase obligations for defaulted loans within a short-term period, expired during
2009. Popular, Inc. Holding Company and Popular North America have agreed to guarantee certain
obligations of PFH with respect to the indemnification obligations.
During the six months ended June 30, 2009, the Corporation sold a lease financing portfolio of
approximately $0.3 billion. As of June 30, 2010, the reserve established to provide for any losses
on the breach of certain representations and warranties included in the associated sale agreements
amounted to $3 million (December 31, 2009 $6 million; June 30, 2009 $12 million). This reserve
is included as part of other liabilities in the consolidated statement of condition.
Popular, Inc. Holding Company (PIHC) fully and unconditionally guarantees certain borrowing
obligations issued by certain of its wholly-owned consolidated subsidiaries totaling $0.6 billion
as of June 30, 2010 (December 31, 2009 $0.6 billion; June 30, 2009 $1.0 billion). In addition,
as of June 30, 2010, PIHC fully and unconditionally guaranteed on a subordinated basis $1.4
billion of capital securities (trust preferred securities) (December 31, 2009 $1.4 billion; June
30, 2009 $0.8 billion) issued by wholly-owned issuing trust entities to the extent set forth in
the applicable guarantee agreement. Refer to Note 17 to the consolidated financial statements for
further information on the trust preferred securities.
As described in Note 2 to the consolidated financial statements, as part of the Westernbank
FDIC-assisted transaction, BPPR has agreed to make a true-up payment to the FDIC on the true up
measurement date of the final shared loss month, or upon the final disposition of all covered
assets under the loss sharing agreements in the event losses on the loss sharing agreements fail to
reach expected levels. The estimated fair value of such true up payment is recorded as a reduction
in the fair value of the FDIC loss share indemnification asset.
Legal Proceedings
The Corporation and its subsidiaries are defendants in a number of legal proceedings arising in the
ordinary course of business. Based on the opinion of legal counsel, management believes that the
final disposition of these matters, except for the matters described below which are each in early
stages and management cannot currently predict their outcome, will not have a material adverse
effect on the Corporations business, results of operations, financial condition and liquidity.
Between May 14, 2009 and September 9, 2009, five putative class actions and two derivative claims
were filed in the United States District Court for the District of Puerto Rico and the Puerto Rico
Court of First Instance, San Juan Part, against Popular, Inc., certain of its directors and
officers, among others. The five class actions have now been consolidated into two separate
actions: a securities class action captioned Hoff v. Popular, Inc., et al. (consolidated with Otero
v. Popular, Inc., et al.) and an Employee Retirement Income Security Act (ERISA) class action
entitled In re Popular, Inc. ERISA Litigation (comprised of the consolidated cases of Walsh v.
Popular, Inc. et al.; Montañez v. Popular, Inc., et al.; and Dougan v. Popular, Inc., et al.).
On October 19, 2009, plaintiffs in the Hoff case filed a consolidated class action complaint which
includes as defendants the underwriters in the May 2008 offering of Series B Preferred Stock, among
others. The consolidated action purports to be on behalf of purchasers of Populars securities
between January 24, 2008 and February 19,
50
2009 and alleges that the defendants violated Section
10(b) of the Exchange Act, and Rule 10b-5 promulgated thereunder, and Section 20(a) of the Exchange
Act by issuing a series of allegedly false and/or misleading statements and/or omitting to disclose
material facts necessary to make statements made by the Corporation not false and misleading. The
consolidated action also alleges that the defendants violated Section 11, Section 12(a)(2) and
Section 15 of the Securities Act by making allegedly untrue statements and/or omitting to disclose
material facts necessary to make statements made by the Corporation not false and misleading in
connection with the May 2008 offering of Series B Preferred Stock. The consolidated securities
class action complaint seeks class certification, an award of compensatory damages and reasonable
costs and expenses, including counsel fees. On January 11, 2010, Popular, the underwriter
defendants and the individual defendants moved to dismiss the consolidated securities class action
complaint. On August 2, 2010, the U.S. District Court for the District of Puerto Rico granted the
motion to dismiss filed by the underwriter defendants on statute of limitations grounds. The Court
also dismissed the Section 11 claim brought against Populars directors on statute of limitations
grounds and the Section 12(a)(2) claim brought against Popular because plaintiffs lacked standing.
The Court declined to dismiss the claims brought against Popular and certain of its officers under
Section 10(b) of the Exchange Act (and Rule 10b-5 promulgated thereunder), Section 20(a) of the
Exchange Act, and Sections 11 and 15 of the Securities Act, holding that plaintiffs had adequately
alleged that defendants made materially false and misleading statements with the requisite state of
mind.
On November 30, 2009, plaintiffs in the ERISA case filed a consolidated class action complaint. The
consolidated complaint purports to be on behalf of employees participating in the Popular, Inc.
U.S.A. 401(k) Savings and Investment Plan and the Popular, Inc. Puerto Rico Savings and Investment
Plan from January 24, 2008 to the date of the Complaint to recover losses pursuant to Sections 409
and 502(a)(2) of the ERISA against Popular, certain directors, officers and members of plan
committees, each of whom is alleged to be a plan fiduciary. The consolidated complaint alleges that
the defendants breached their alleged fiduciary obligations by, among other things, failing to
eliminate Popular stock as an investment alternative in the plans. The complaint seeks to recover
alleged losses to the plans and equitable relief, including injunctive relief and a constructive
trust, along with costs and attorneys fees. On December 21, 2009, and in compliance with a
scheduling order issued by the Court, Popular and the individual defendants submitted an answer to
the amended complaint. Shortly thereafter, on December 31, 2009, Popular and the individual
defendants filed a motion to dismiss the consolidated class action complaint or, in the
alternative, for judgment on the pleadings. On May 5, 2010, a magistrate judge issued a report and
recommendation in which he recommended that the motion to dismiss be denied except with respect to
Banco Popular de Puerto Rico, as to which he recommended that the motion be granted. On May 19,
2010, Popular filed objections to the magistrate judges report and recommendation. On June 21,
2010, plaintiffs filed a response to these objections. On July 9, 2010, with leave of the Court,
Popular filed a reply to plaintiffs response.
The derivative actions (García v. Carrión, et al. and Díaz v. Carrión, et al.) have been brought
purportedly for the benefit of nominal defendant Popular, Inc. against certain executive officers
and directors and allege breaches of fiduciary duty, waste of assets and abuse of control in
connection with our issuance of allegedly false and misleading financial statements and financial
reports and the offering of the Series B Preferred Stock. The derivative complaints seek a judgment
that the action is a proper derivative action, an award of damages and restitution, and costs and
disbursements, including reasonable attorneys fees, costs and expenses. On October 9, 2009, the
Court coordinated for purposes of discovery the García action and the consolidated securities class
action. On October 15, 2009, Popular and the individual defendants moved to dismiss the García
complaint for failure to make a demand on the Board of Directors prior to initiating litigation. On
November 20, 2009, and pursuant to a stipulation among the parties, plaintiffs filed an amended
complaint, and on December 21, 2009, Popular and the individual defendants moved to dismiss the
García amended complaint. The Díaz case, filed in the Puerto Rico Court of First Instance, San
Juan, has been removed to the U.S. District Court for the District of Puerto Rico. On October 13,
2009, Popular and the individual defendants moved to consolidate the García and Díaz actions. On
October 26, 2009, plaintiff moved to remand the Díaz case to the Puerto Rico Court of First
Instance and to stay defendants consolidation motion pending the outcome of the remand
proceedings. At a scheduling conference held on January 14, 2010, the Court stayed discovery in
both the Hoff and García matters pending resolution of their respective motions to dismiss.
On April 13, 2010, the Puerto Rico Court of First Instance in San Juan granted summary judgment
dismissing a separate complaint brought by plaintiff in the García action that sought to enforce an
alleged right to inspect the books and records of the Corporation in support of the pending
derivative action. The Court held that the plaintiff had not propounded a proper purpose under
Puerto Rico law for such inspection. On April 28, 2010, the plaintiff in that action moved for
reconsideration of the Courts dismissal. On May 4, 2010, the Court denied plaintiffs
51
request for
reconsideration. On June 7, 2010, plaintiff filed an appeal before the Puerto Rico Court of
Appeals. On June 11, 2010, Popular and the individual defendants moved to dismiss the appeal. On
June 22, 2010, the Court of Appeals dismissed the appeal. On July 6, 2010, plaintiff moved for
reconsideration of the Courts dismissal. On July 16, 2010, the Court of Appeals denied plaintiffs
request for reconsideration.
At this early stage, it is not possible for management to assess the probability of an adverse
outcome, or reasonably estimate the amount of any potential loss. It is possible that the ultimate
resolution of these matters, if unfavorable, may be material to the Corporations results of
operations.
Note 20 Non-Consolidated Variable Interest Entities
The Corporation transfers residential mortgage loans in guaranteed loan securitizations. The
Corporations continuing involvement in these transfers includes owning certain beneficial
interests in the form of securities as well as the servicing rights retained. The Corporation is
not required to provide additional financial support to any of the variable interest entities to
which it has transferred the financial assets. The mortgage-backed securities, to the extent
retained, are classified in the Corporations consolidated statement of condition as
available-for-sale or trading securities.
The Corporation is involved with various special purpose entities mainly in guaranteed mortgage
securitization transactions. These special purpose entities are deemed to be variable interest
entities (VIEs) since they lack equity investments at risk. As part of the adoption of ASU
2009-17, during the first quarter of 2010, the Corporation evaluated these guaranteed mortgage
securitization structures in which it participates, including GNMA and FNMA, and concluded that the
Corporation is not the primary beneficiary of these VIEs, and therefore, are not required to be
consolidated in the Corporations financial statements. The Corporation qualitatively assessed
whether it held a controlling financial interest in these VIEs, which included analyzing if it had
both the power to direct the activities of the VIE that most significantly impact the entitys
economic performance and the obligation to absorb losses of the entity that could potentially be
significant to the VIE. The Corporation concluded that, essentially, these entities (FNMA and GNMA)
control the design of the VIE, dictate the quality and nature of the collateral, require the
underlying insurance, set the servicing standards via the servicing guides and can change them at
will, and remove a primary servicer with cause, and without cause in the case of FNMA. Moreover,
through their guarantee obligations, agencies (FNMA and GNMA) have the obligation to absorb losses
that could be potentially significant to the VIE. The conclusion on the assessment of these
guaranteed mortgage securitization transactions did not change during the second quarter of 2010.
The Corporation holds variable interests in these VIEs in the form of agency mortgage-backed
securities and collateralized mortgage obligations, including those securities originated by the
Corporation and those acquired from third parties. Additionally, the Corporation holds agency
mortgage-backed securities, agency collateralized mortgage obligations and private label
collateralized mortgage obligations issued by third party VIEs in which it has no other form of
continuing involvement. Refer to Note 21 to the consolidated financial statements for additional
information on the debt securities outstanding as of June 30, 2010, December 31, 2009 and June 30,
2009, which are classified as available-for-sale and trading securities in the Corporations
consolidated statement of condition. In addition, the Corporation may retain the right to service
the transferred loans in those government-sponsored special purpose entities (SPEs) and may also
purchase the right to service loans in other government-sponsored SPEs that were transferred to
those SPEs by a third-party. Pursuant to ASC Subtopic 810-10, the servicing fees that the
Corporation receives for its servicing role are considered variable interests in the VIEs because
the servicing fees are subordinated to the principal and interest that first needs to be paid to
the mortgage-backed securities investors and to the guaranty fees that need to be paid to the
federal agencies.
52
The following table presents the carrying amount and classification of the assets related to the
Corporations variable interests in non-consolidated VIEs and the maximum exposure to loss as a
result of the Corporations involvement as servicer with non-consolidated VIEs as of June 30, 2010
and December 31, 2009.
|
|
|
|
|
|
|
|
|
(In thousands) |
|
June 30, 2010 |
|
|
December 31, 2009 |
|
|
Assets |
|
|
|
|
|
|
|
|
|
Servicing assets: |
|
|
|
|
|
|
|
|
Mortgage servicing rights |
|
$ |
106,428 |
|
|
$ |
104,984 |
|
|
Total servicing assets |
|
$ |
106,428 |
|
|
$ |
104,984 |
|
|
Other assets: |
|
|
|
|
|
|
|
|
Servicing advances |
|
$ |
2,894 |
|
|
$ |
2,029 |
|
|
Total other assets |
|
$ |
2,894 |
|
|
$ |
2,029 |
|
|
Total |
|
$ |
109,322 |
|
|
$ |
107,013 |
|
|
Maximum exposure to loss |
|
$ |
109,322 |
|
|
$ |
107,013 |
|
|
The size of the non-consolidated VIEs, in which the Corporation has a variable interest in the
form of servicing fees, measured as the total unpaid principal balance of the loans, amounted to
$9.3 billion as of June 30, 2010 and December 31, 2009.
Maximum exposure to loss represents the maximum loss, under a worst case scenario, that would be
incurred by the Corporation, as servicer for the VIEs, assuming all loans serviced are delinquent
and that the value of the Corporations interests and any associated collateral declines to zero,
without any consideration of recovery. The Corporation determined that the maximum exposure to loss
includes the fair value of the MSRs and the assumption that the servicing advances as of June 30,
2010 and December 31, 2009 will not be recovered. The agency debt securities are not included as
part of the maximum exposure to loss since they are guaranteed by the related agencies.
Note 21 Fair Value Measurement
ASC Subtopic 820-10 Fair Value Measurements and Disclosures establishes a fair value hierarchy
that prioritizes the inputs to valuation techniques used to measure fair value into three levels in
order to increase consistency and comparability in fair value measurements and disclosures. The
hierarchy is broken down into three levels based on the reliability of inputs as follows:
|
|
|
Level 1- Unadjusted quoted prices in active markets for identical assets or liabilities
that the Corporation has the ability to access at the measurement date. Valuation on these
instruments does not necessitate a significant degree of judgment since valuations are
based on quoted prices that are readily available in an active market. |
|
|
|
|
Level 2- Quoted prices other than those included in Level 1 that are observable either
directly or indirectly. Level 2 inputs include quoted prices for similar assets or
liabilities in active markets, quoted prices for identical or similar assets or liabilities
in markets that are not active, or other inputs that are observable or that can be
corroborated by observable market data for substantially the full term of the financial
instrument. |
|
|
|
|
Level 3- Inputs are unobservable and significant to the fair value measurement.
Unobservable inputs reflect the Corporations own assumptions about assumptions that market
participants would use in pricing the asset or liability. |
The Corporation maximizes the use of observable inputs and minimizes the use of unobservable inputs
by requiring that the observable inputs be used when available. Fair value is based upon quoted
market prices when available. If listed prices or quotes are not available, the Corporation employs
internally-developed models that primarily use market-based inputs including yield curves, interest
rates, volatilities, and credit curves, among others. Valuation adjustments are limited to those
necessary to ensure that the financial instruments fair value is adequately representative of the
price that would be received or paid in the marketplace. These adjustments include amounts that
reflect counterparty credit quality, the Corporations credit standing, constraints on liquidity
and unobservable parameters that are applied consistently.
The estimated fair value may be subjective in nature and may involve uncertainties and matters of
significant judgment for certain financial instruments. Changes in the underlying assumptions used
in calculating the fair value could significantly affect the results.
53
Fair Value on a Recurring Basis
The following fair value hierarchy tables present information about the Corporations assets and
liabilities measured at fair value on a recurring basis as of June 30, 2010, December 31, 2009 and
June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of |
(In millions) |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
June 30, 2010 |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities |
|
|
|
|
|
$ |
141 |
|
|
|
|
|
|
$ |
141 |
|
Obligations of U.S. Government sponsored
entities |
|
|
|
|
|
|
1,749 |
|
|
|
|
|
|
|
1,749 |
|
Obligations of Puerto Rico, States and
political subdivisions |
|
|
|
|
|
|
55 |
|
|
|
|
|
|
|
55 |
|
Collateralized mortgage obligations
federal
agencies |
|
|
|
|
|
|
1,445 |
|
|
|
|
|
|
|
1,445 |
|
Collateralized mortgage obligations
private
label |
|
|
|
|
|
|
102 |
|
|
|
|
|
|
|
102 |
|
Residential mortgage-backed securities
agencies |
|
|
|
|
|
|
2,948 |
|
|
$ |
32 |
|
|
|
2,980 |
|
Equity securities |
|
$ |
4 |
|
|
|
5 |
|
|
|
|
|
|
|
9 |
|
|
Total investment securities available-for-sale |
|
$ |
4 |
|
|
$ |
6,445 |
|
|
$ |
32 |
|
|
$ |
6,481 |
|
|
Trading account securities, excluding
derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of Puerto Rico, States and
political subdivisions |
|
|
|
|
|
$ |
10 |
|
|
|
|
|
|
$ |
10 |
|
Collateralized mortgage obligations |
|
|
|
|
|
|
1 |
|
|
$ |
3 |
|
|
|
4 |
|
Residential mortgage-backed securities
agencies |
|
|
|
|
|
|
261 |
|
|
|
114 |
|
|
|
375 |
|
Other |
|
|
|
|
|
|
9 |
|
|
|
3 |
|
|
|
12 |
|
|
Total trading account securities |
|
|
|
|
|
$ |
281 |
|
|
$ |
120 |
|
|
$ |
401 |
|
|
Mortgage servicing rights |
|
|
|
|
|
|
|
|
|
$ |
172 |
|
|
$ |
172 |
|
Derivatives (Refer to Note 14) |
|
|
|
|
|
$ |
80 |
|
|
|
|
|
|
$ |
80 |
|
|
Total |
|
$ |
4 |
|
|
$ |
6,806 |
|
|
$ |
324 |
|
|
$ |
7,134 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives (Refer to Note 14) |
|
|
|
|
|
$ |
(87 |
) |
|
|
|
|
|
$ |
(87 |
) |
Equity appreciation instrument |
|
|
|
|
|
$ |
(28 |
) |
|
|
|
|
|
$ |
(28 |
) |
|
Total |
|
|
|
|
|
$ |
(115 |
) |
|
|
|
|
|
$ |
(115 |
) |
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
(In millions) |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
2009 |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities |
|
|
|
|
|
$ |
30 |
|
|
|
|
|
|
$ |
30 |
|
Obligations of U.S. Government sponsored
entities |
|
|
|
|
|
|
1,648 |
|
|
|
|
|
|
|
1,648 |
|
Obligations of Puerto Rico, States and
political subdivisions |
|
|
|
|
|
|
81 |
|
|
|
|
|
|
|
81 |
|
Collateralized mortgage obligations
federal
agencies |
|
|
|
|
|
|
1,600 |
|
|
|
|
|
|
|
1,600 |
|
Collateralized mortgage obligations
private
label |
|
|
|
|
|
|
118 |
|
|
|
|
|
|
|
118 |
|
Residential mortgage-backed securities
agencies |
|
|
|
|
|
|
3,176 |
|
|
$ |
34 |
|
|
|
3,210 |
|
Equity securities |
|
$ |
3 |
|
|
|
5 |
|
|
|
|
|
|
|
8 |
|
|
Total investment securities available-for-sale |
|
$ |
3 |
|
|
$ |
6,658 |
|
|
$ |
34 |
|
|
$ |
6,695 |
|
|
Trading account securities, excluding
derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of Puerto Rico, States and
political subdivisions |
|
|
|
|
|
$ |
13 |
|
|
|
|
|
|
$ |
13 |
|
Collateralized mortgage obligations |
|
|
|
|
|
|
1 |
|
|
$ |
3 |
|
|
|
4 |
|
Residential mortgage-backed securities
agencies |
|
|
|
|
|
|
208 |
|
|
|
224 |
|
|
|
432 |
|
Other |
|
|
|
|
|
|
9 |
|
|
|
3 |
|
|
|
12 |
|
|
Total trading account securities |
|
|
|
|
|
$ |
231 |
|
|
$ |
230 |
|
|
$ |
461 |
|
|
Mortgage servicing rights |
|
|
|
|
|
|
|
|
|
$ |
170 |
|
|
$ |
170 |
|
Derivatives (Refer to Note 14) |
|
|
|
|
|
$ |
73 |
|
|
|
|
|
|
$ |
73 |
|
|
Total |
|
$ |
3 |
|
|
$ |
6,962 |
|
|
$ |
434 |
|
|
$ |
7,399 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives (Refer to Note 14) |
|
|
|
|
|
$ |
(73 |
) |
|
|
|
|
|
$ |
(73 |
) |
|
Total |
|
|
|
|
|
$ |
(73 |
) |
|
|
|
|
|
$ |
(73 |
) |
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of |
(In millions) |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
June 30, 2009 |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities |
|
|
|
|
|
$ |
31 |
|
|
|
|
|
|
$ |
31 |
|
Obligations of U.S. Government sponsored
entities |
|
|
|
|
|
|
1,756 |
|
|
|
|
|
|
|
1,756 |
|
Obligations of Puerto Rico, States and
political subdivisions |
|
|
|
|
|
|
99 |
|
|
|
|
|
|
|
99 |
|
Corporate bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage obligations
federal
agencies |
|
|
|
|
|
|
1,673 |
|
|
|
|
|
|
|
1,673 |
|
Collateralized mortgage obligations
private
label |
|
|
|
|
|
|
136 |
|
|
|
|
|
|
|
136 |
|
Residential mortgage-backed securities
agencies |
|
|
|
|
|
|
3,508 |
|
|
$ |
35 |
|
|
|
3,543 |
|
Equity securities |
|
$ |
3 |
|
|
|
5 |
|
|
|
|
|
|
|
8 |
|
|
Total investment securities available-for-sale |
|
$ |
3 |
|
|
$ |
7,208 |
|
|
$ |
35 |
|
|
$ |
7,246 |
|
|
Trading account securities, excluding
derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of Puerto Rico, States and
political subdivisions |
|
|
|
|
|
$ |
14 |
|
|
|
|
|
|
$ |
14 |
|
Collateralized mortgage obligations |
|
|
|
|
|
|
2 |
|
|
$ |
5 |
|
|
|
7 |
|
Residential mortgage-backed securities
agencies |
|
|
|
|
|
|
163 |
|
|
|
284 |
|
|
|
447 |
|
Other |
|
|
|
|
|
|
13 |
|
|
|
5 |
|
|
|
18 |
|
|
Total trading account securities |
|
|
|
|
|
$ |
192 |
|
|
$ |
294 |
|
|
$ |
486 |
|
|
Mortgage servicing rights |
|
|
|
|
|
|
|
|
|
$ |
181 |
|
|
$ |
181 |
|
Derivatives (Refer to Note 14) |
|
|
|
|
|
$ |
77 |
|
|
|
|
|
|
$ |
77 |
|
|
Discontinued Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans measured at fair value pursuant to
fair value option |
|
|
|
|
|
|
|
|
|
$ |
1 |
|
|
$ |
1 |
|
|
Total |
|
$ |
3 |
|
|
$ |
7,477 |
|
|
$ |
511 |
|
|
$ |
7,991 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives (Refer to Note 14) |
|
|
|
|
|
$ |
(80 |
) |
|
|
|
|
|
$ |
(80 |
) |
|
Total |
|
|
|
|
|
$ |
(80 |
) |
|
|
|
|
|
$ |
(80 |
) |
|
56
The following tables present the changes in Level 3 assets and liabilities measured at fair
value on a recurring basis for the quarters and six months ended June 30, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
unrealized |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
gains (losses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
included in |
|
|
|
|
|
|
|
|
|
|
Purchases, |
|
|
|
|
|
|
|
|
|
earnings |
|
|
|
|
|
|
|
|
|
|
sales, |
|
|
|
|
|
|
|
|
|
related to |
|
|
|
|
|
|
|
|
|
|
issuances, |
|
|
|
|
|
|
|
|
|
assets and |
|
|
Balance |
|
Gains |
|
settlements, |
|
|
|
|
|
|
|
|
|
liabilities still |
|
|
as of |
|
(losses) |
|
and |
|
Transfers |
|
Balance as |
|
held as of |
|
|
March 31, |
|
included in |
|
paydowns |
|
in (out) of |
|
of June 30, |
|
June 30, |
(In millions) |
|
2010 |
|
earnings |
|
(net) |
|
Level 3 |
|
2010 |
|
2010 |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed securities
agencies |
|
$ |
36 |
|
|
|
|
|
|
$ |
(1 |
) |
|
$ |
(3 |
) |
|
$ |
32 |
|
|
|
|
|
|
Total investment
securities
available-for-sale |
|
$ |
36 |
|
|
|
|
|
|
$ |
(1 |
) |
|
$ |
(3 |
) |
|
$ |
32 |
|
|
|
|
|
|
Trading account
securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage
obligations |
|
$ |
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3 |
|
|
|
|
|
Residential mortgage-backed securities-agencies |
|
|
197 |
|
|
$ |
(5 |
) |
|
$ |
(2 |
) |
|
$ |
(76 |
) |
|
|
114 |
|
|
$ |
1 |
[a] |
Other |
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
Total trading account
securities |
|
$ |
203 |
|
|
$ |
(5 |
) |
|
$ |
(2 |
) |
|
$ |
(76 |
) |
|
$ |
120 |
|
|
$ |
1 |
|
|
Mortgage servicing rights |
|
$ |
173 |
|
|
$ |
(9 |
) |
|
$ |
8 |
|
|
|
|
|
|
$ |
172 |
|
|
$ |
(5 |
) [b] |
|
Total |
|
$ |
412 |
|
|
$ |
(14 |
) |
|
$ |
5 |
|
|
$ |
(79 |
) |
|
$ |
324 |
|
|
$ |
(4 |
) |
|
|
|
|
[a] |
|
Gains (losses) are included in Trading account profit in the statement of operations |
|
[b] |
|
Gains (losses) are included in Other service fees in the statement of operations |
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
unrealized |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
gains (losses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
included in |
|
|
|
|
|
|
|
|
|
|
Purchases, |
|
|
|
|
|
|
|
|
|
earnings |
|
|
|
|
|
|
|
|
|
|
sales, |
|
|
|
|
|
|
|
|
|
related to |
|
|
|
|
|
|
|
|
|
|
issuances, |
|
|
|
|
|
|
|
|
|
assets and |
|
|
Balance |
|
Gains |
|
settlements, |
|
|
|
|
|
|
|
|
|
liabilities still |
|
|
as of |
|
(losses) |
|
and |
|
Transfers |
|
Balance as |
|
held as of |
|
|
January 1, |
|
included in |
|
paydowns |
|
in (out) of |
|
of June 30, |
|
June 30, |
(In millions) |
|
2010 |
|
earnings |
|
(net) |
|
Level 3 |
|
2010 |
|
2010 |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed securities
agencies |
|
$ |
34 |
|
|
|
|
|
|
$ |
1 |
|
|
$ |
(3 |
) |
|
$ |
32 |
|
|
|
|
|
|
Total investment
securities
available-for-sale |
|
$ |
34 |
|
|
|
|
|
|
$ |
1 |
|
|
$ |
(3 |
) |
|
$ |
32 |
|
|
|
|
|
|
Trading account
securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage
obligations |
|
$ |
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3 |
|
|
|
|
|
Residential mortgage-backed securities-agencies |
|
|
224 |
|
|
$ |
(5 |
) |
|
$ |
(29 |
) |
|
$ |
(76 |
) |
|
|
114 |
|
|
$ |
1 |
[a] |
Other |
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
Total trading account
securities |
|
$ |
230 |
|
|
$ |
(5 |
) |
|
$ |
(29 |
) |
|
$ |
(76 |
) |
|
$ |
120 |
|
|
$ |
1 |
|
|
Mortgage servicing rights |
|
$ |
170 |
|
|
$ |
(10 |
) |
|
$ |
12 |
|
|
|
|
|
|
$ |
172 |
|
|
$ |
(2 |
) [b] |
|
Total |
|
$ |
434 |
|
|
$ |
(15 |
) |
|
$ |
(16 |
) |
|
$ |
(79 |
) |
|
$ |
324 |
|
|
$ |
(1 |
) |
|
|
|
|
[a] |
|
Gains (losses) are included in Trading account profit in the statement of operations |
|
[b] |
|
Gains (losses) are included in Other service fees in the statement of operations |
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended June 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
unrealized |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
gains (losses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases, |
|
|
|
|
|
included in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
sales, |
|
|
|
|
|
earnings |
|
|
|
|
|
|
|
|
|
|
Gains (losses) |
|
Increase |
|
issuances, |
|
|
|
|
|
related to |
|
|
Balance |
|
Gains |
|
included in |
|
(decrease) |
|
settlements, |
|
|
|
|
|
assets and |
|
|
as of |
|
(losses) |
|
other |
|
in accrued |
|
and |
|
Balance as |
|
liabilities still |
|
|
January 1, |
|
included in |
|
comprehensive |
|
interest |
|
paydowns |
|
of June 30, |
|
held as of June |
(In millions) |
|
2009 |
|
earnings |
|
income |
|
receivable |
|
(net) |
|
2009 |
|
30, 2009 |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage-
backed securities
agencies |
|
$ |
36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(1 |
) |
|
$ |
35 |
|
|
|
|
|
|
Total investment
securities
available-for-sale |
|
$ |
36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(1 |
) |
|
$ |
35 |
|
|
|
|
|
|
Trading account
securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage
obligations |
|
$ |
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2 |
|
|
$ |
5 |
|
|
|
|
|
Residential mortgage-
backed securities-
agencies |
|
|
276 |
|
|
$ |
(1 |
) |
|
|
|
|
|
|
|
|
|
|
9 |
|
|
|
284 |
|
|
$ |
1 |
[a] |
Other |
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
|
|
|
Total trading account
securities |
|
$ |
284 |
|
|
$ |
(1 |
) |
|
|
|
|
|
|
|
|
|
$ |
11 |
|
|
$ |
294 |
|
|
$ |
1 |
|
|
Mortgage servicing rights |
|
$ |
177 |
|
|
$ |
(4 |
) |
|
|
|
|
|
|
|
|
|
$ |
8 |
|
|
$ |
181 |
|
|
$ |
(1 |
) [c] |
|
Discontinued Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans measured at fair
value pursuant to
fair value option |
|
$ |
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(4 |
) |
|
$ |
1 |
|
|
|
|
[b] |
|
Total |
|
$ |
502 |
|
|
$ |
(5 |
) |
|
|
|
|
|
|
|
|
|
$ |
14 |
|
|
$ |
511 |
|
|
|
|
|
|
|
|
|
[a] |
|
Gains (losses) are included in Trading account profit in the statement of operations |
|
[b] |
|
Gains (losses) are included in Loss from discontinued operations, net of tax in the
statement of operations |
|
[c] |
|
Gains (losses) are included in Other service fees in the statement of operations |
59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
unrealized |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
gains (losses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases, |
|
|
|
|
|
included in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
sales, |
|
|
|
|
|
earnings |
|
|
|
|
|
|
|
|
|
|
Gains (losses) |
|
Increase |
|
issuances, |
|
|
|
|
|
related to |
|
|
Balance |
|
Gains |
|
included in |
|
(decrease) |
|
settlements, |
|
|
|
|
|
assets and |
|
|
as of |
|
(losses) |
|
other |
|
in accrued |
|
and |
|
Balance as |
|
liabilities still |
|
|
January 1, |
|
included in |
|
comprehensive |
|
interest |
|
paydowns |
|
of June 30, |
|
held as of June |
(In millions) |
|
2009 |
|
earnings |
|
income |
|
receivable |
|
(net) |
|
2009 |
|
30, 2009 |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
securities
agencies |
|
$ |
37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(2 |
) |
|
$ |
35 |
|
|
|
|
|
|
Total investment
securities
available-for-sale |
|
$ |
37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(2 |
) |
|
$ |
35 |
|
|
|
|
|
|
Trading account
securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage
obligations |
|
$ |
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2 |
|
|
$ |
5 |
|
|
|
|
|
Residential mortgage-
backed securities-
agencies |
|
|
292 |
|
|
$ |
1 |
|
|
|
|
|
|
|
|
|
|
|
(9 |
) |
|
|
284 |
|
|
$ |
4 |
[a] |
Other |
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
|
|
|
Total trading account
securities |
|
$ |
300 |
|
|
$ |
1 |
|
|
|
|
|
|
|
|
|
|
$ |
(7 |
) |
|
$ |
294 |
|
|
$ |
4 |
|
|
Mortgage servicing rights |
|
$ |
176 |
|
|
$ |
(9 |
) |
|
|
|
|
|
|
|
|
|
$ |
14 |
|
|
$ |
181 |
|
|
$ |
(2 |
) [c] |
|
Discontinued Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans measured at fair
value pursuant to
fair value option |
|
$ |
5 |
|
|
$ |
1 |
|
|
|
|
|
|
|
|
|
|
$ |
(5 |
) |
|
$ |
1 |
|
|
|
|
[b] |
|
Total |
|
$ |
518 |
|
|
$ |
(7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
511 |
|
|
$ |
2 |
|
|
|
|
|
[a] |
|
Gains (losses) are included in Trading account profit in the statement of operations |
|
[b] |
|
Gains (losses) are included in Loss from discontinued operations, net of tax in the
statement of operations |
|
[c] |
|
Gains (losses) are included in Other service fees in the statement of operations |
|
|
There were $79 million in transfers out of Level 3 for financial instruments measured at fair
value on a recurring basis during the quarter and six months ended June 30, 2010. These transfers
resulted from exempt FNMA mortgage-backed securities, which were transferred out of Level 3 and
into Level 2, as a result of a change in valuation methodology from an internally-developed matrix
pricing to pricing them based on a bonds theoretical value from similar bonds defined by credit
quality and market sector. Their fair value incorporates an option adjusted spread. Pursuant to the
Corporations policy, these transfers were recognized as of the end of the reporting period. There
were no transfers in and / or out of Level 1 during the quarter and six months ended June 30, 2010.
There were no transfers in and / or out of Level 3 for financial instruments measured at fair value
on a recurring basis during the quarter and six months ended June 30, 2009. There were no transfers
in and / or out of Level 1 and Level 2 during the quarter and six months ended June 30, 2009.
60
Gains and losses (realized and unrealized) included in earnings for the quarters and six months
ended June 30, 2010 and 2009 for Level 3 assets and liabilities included in the previous tables are
reported in the consolidated statement of operations as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended June 30, 2010 |
|
Six months ended June 30, 2010 |
|
|
|
|
|
|
Changes in |
|
|
|
|
|
Changes in |
|
|
|
|
|
|
unrealized gains |
|
|
|
|
|
unrealized gains |
|
|
|
|
|
|
(losses) relating to |
|
|
|
|
|
(losses) relating to |
|
|
Total gains (losses) |
|
assets / liabilities |
|
Total gains (losses) |
|
assets / liabilities |
|
|
included in |
|
still held at |
|
included in |
|
still held at |
(In millions) |
|
earnings |
|
reporting date |
|
earnings |
|
reporting date |
|
Continuing Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other service fees |
|
$ |
(9 |
) |
|
$ |
(5 |
) |
|
$ |
(10 |
) |
|
$ |
(2 |
) |
Trading account profit |
|
|
(5 |
) |
|
|
1 |
|
|
|
(5 |
) |
|
|
1 |
|
|
Total |
|
$ |
(14 |
) |
|
$ |
(4 |
) |
|
$ |
(15 |
) |
|
$ |
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended June 30, 2009 |
|
Six months ended June 30, 2009 |
|
|
|
|
|
|
Changes in |
|
|
|
|
|
Changes in |
|
|
|
|
|
|
unrealized gains |
|
|
|
|
|
unrealized gains |
|
|
|
|
|
|
(losses) relating to |
|
|
|
|
|
(losses) relating to |
|
|
Total gains (losses) |
|
assets / liabilities |
|
Total gains (losses) |
|
assets / liabilities |
|
|
included in |
|
still held at |
|
included in |
|
still held at |
(In millions) |
|
earnings |
|
reporting date |
|
earnings |
|
reporting date |
|
Continuing Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other service fees |
|
$ |
(4 |
) |
|
$ |
(1 |
) |
|
$ |
(9 |
) |
|
$ |
(2 |
) |
Trading account profit |
|
|
(1 |
) |
|
|
1 |
|
|
|
1 |
|
|
|
4 |
|
Discontinued Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from
discontinued
operations, net of
tax |
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
Total |
|
$ |
(5 |
) |
|
|
|
|
|
$ |
(7 |
) |
|
$ |
2 |
|
|
Additionally, in accordance with generally accepted accounting principles, the Corporation may
be required to measure certain assets at fair value on a nonrecurring basis in periods subsequent
to their initial recognition. The adjustments to fair value usually result from the application of
lower of cost or fair value accounting, identification of impaired loans requiring specific
reserves under ASC Subsection 310-10-35 Accounting by Creditors for Impairment of a Loan, or
write-downs of individual assets. The following tables present financial and non-financial assets
that were subject to a fair value measurement on a nonrecurring basis during the six months ended
June 30, 2010 and 2009, and which were still included in the consolidated statement of condition as
of such dates. The amounts disclosed represent the aggregate fair value measurements of those
assets as of the end of the reporting period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying value as of June 30, 2010 |
(In millions) |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans [1] |
|
|
|
|
|
|
|
|
|
$ |
610 |
|
|
$ |
610 |
|
Loans held-for-sale [2] |
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
2 |
|
Other real estate owned [3] |
|
|
|
|
|
|
|
|
|
|
42 |
|
|
|
42 |
|
|
Total |
|
|
|
|
|
|
|
|
|
$ |
654 |
|
|
$ |
654 |
|
|
|
|
|
[1] |
|
Relates mostly to certain impaired collateral dependent loans. The
impairment was measured based on the fair value of the collateral, which
is derived from appraisals that take into consideration prices in observed
transactions involving similar assets in similar locations, in
accordance with the provisions of ASC Subsection 310-10-35. |
|
[2] |
|
Relates to lower of cost or fair value adjustments of loans held-for-sale and
loans transferred from loans held-in- portfolio to loans
held-for-sale. These adjustments were principally determined based on negotiated
price terms for the loans. |
|
[3] |
|
Represents the fair value of foreclosed real estate and other collateral owned
that were measured at fair value. |
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying value as of June 30, 2009 |
(In millions) |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans [1] |
|
|
|
|
|
|
|
|
|
$ |
612 |
|
|
$ |
612 |
|
Loans held-for-sale [2] |
|
|
|
|
|
|
|
|
|
|
16 |
|
|
|
16 |
|
Other real estate owned [3] |
|
|
|
|
|
|
|
|
|
|
51 |
|
|
|
51 |
|
Other foreclosed assets [3] |
|
|
|
|
|
|
|
|
|
|
7 |
|
|
|
7 |
|
Discontinued Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held-for-sale [2] |
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
1 |
|
|
Total |
|
|
|
|
|
|
|
|
|
$ |
687 |
|
|
$ |
687 |
|
|
|
|
|
[1] |
|
Relates mostly to certain impaired collateral dependent loans. The
impairment was measured based on the fair value of the collateral, which
is derived from appraisals that take into consideration prices in observed
transactions involving similar assets in similar locations, in
accordance with the provisions of ASC Subsection 310-10-35. |
|
[2] |
|
Relates to lower of cost or fair value adjustments of loans held-for-sale and
loans transferred from loans held-in- portfolio to loans
held-for-sale. These adjustments were principally determined based on negotiated
price terms for the loans. |
|
[3] |
|
Represents the fair value of foreclosed real estate and other collateral owned
that were measured at fair value. |
|
|
Following is a description of the Corporations valuation methodologies used for assets and
liabilities measured at fair value. The disclosure requirements exclude certain financial
instruments and non-financial instruments. Accordingly, the aggregate fair value of the financial
instruments disclosed do not represent managements estimate of the underlying value of the
Corporation.
Trading Account Securities and Investment Securities Available-for-Sale
|
|
|
U.S. Treasury securities: The fair value of U.S. Treasury securities is based on yields
that are interpolated from the constant maturity treasury curve. These securities are
classified as Level 2. |
|
|
|
|
Obligations of U.S. Government sponsored entities: The Obligations of U.S. Government
sponsored entities include U.S. agency securities, which fair value is based on an active
exchange market and on quoted market prices for similar securities. The U.S. agency
securities are classified as Level 2. |
|
|
|
|
Obligations of Puerto Rico, States and political subdivisions: Obligations of Puerto
Rico, States and political subdivisions include municipal bonds. The bonds are segregated
and the like characteristics divided into specific sectors. Market inputs used in the
evaluation process include all or some of the following: trades, bid price or spread, two
sided markets, quotes, benchmark curves including but not limited to Treasury benchmarks,
LIBOR and swap curves, market data feeds such as MSRB, discount and capital rates, and
trustee reports. The municipal bonds are classified as Level 2. |
|
|
|
|
Mortgage-backed securities agencies: Certain agency mortgage-backed securities (MBS)
are priced based on a bonds theoretical value from similar bonds defined by credit quality
and market sector. Their fair value incorporates an option adjusted spread. The agency MBS
are classified as Level 2. Other agency MBS such as GNMA Puerto Rico Serials are priced
using an internally-developed pricing matrix with quoted prices from local broker dealers.
These particular MBS are classified as Level 3. |
|
|
|
|
Collateralized mortgage obligations: Agency and private collateralized mortgage
obligations (CMOs) are priced based on a bonds theoretical value from similar bonds
defined by credit quality and market sector and for which fair value incorporates an option
adjusted spread. The option adjusted spread model includes prepayment and volatility
assumptions, ratings (whole loans collateral) and spread adjustments. These investment
securities are classified as Level 2. |
|
|
|
|
Equity securities: Equity securities with quoted market prices obtained from an active
exchange market are classified as Level 1. Other equity securities that do not trade in
highly liquid markets are classified as Level 2. |
62
|
|
|
Corporate securities and mutual funds (included as other in the trading account
securities category): Quoted prices for these security types are obtained from broker
dealers. Given that the quoted prices are for similar instruments or do not trade in highly
liquid markets, the corporate securities and mutual funds are classified as Level 2. The
important variables in determining the prices of Puerto Rico tax-exempt mutual fund shares
are net asset value, dividend yield and type of assets in the fund. All funds trade based
on a relevant dividend yield taking into consideration the aforementioned variables. In
addition, demand and supply also affect the price. Corporate securities that trade less
frequently or are in distress are classified as Level 3. |
Mortgage servicing rights
Mortgage servicing rights (MSRs) do not trade in an active market with readily observable prices.
MSRs are priced internally using a discounted cash flow model. The valuation model considers
servicing fees, portfolio characteristics, prepayment assumptions, delinquency rates, late charges,
other ancillary revenues, cost to service and other economic factors. Due to the unobservable
nature of certain valuation inputs, the MSRs are classified as Level 3.
Derivatives
Interest rate swaps, interest rate caps and indexed options are traded in over-the-counter active
markets. These derivatives are indexed to an observable interest rate benchmark, such as LIBOR or
equity indexes, and are priced using an income approach based on present value and option pricing
models using observable inputs. Other derivatives are liquid and have quoted prices, such as
forward contracts or to be announced securities (TBAs). All of these derivatives are classified
as Level 2. The non-performance risk is determined using internally-developed models that consider
the collateral held, the remaining term, and the creditworthiness of the entity that bears the
risk, and uses available public data or internally-developed data related to current spreads that
denote their probability of default.
Equity appreciation instrument
Refer to Note 2 to the consolidated financial statements for a description of the terms of the
equity appreciation instrument. The fair value of the equity appreciation instrument was estimated
by determining a call option value using the Black-Scholes Option Pricing Model. The principal
variables in determining the fair value of the equity appreciation instrument include the implied
volatility determined based on the one-year historical daily volatility of the Corporations common
stock, the exercise price of the instrument, the price of the call option, and the risk-free rate.
The equity appreciation instrument is classified as Level 2.
Loans held-in-portfolio considered impaired under ASC Subsection 310-10-35 that are collateral
dependent
The impairment is measured based on the fair value of the collateral, which is derived from
appraisals that take into consideration prices in observed transactions involving similar assets in
similar locations, in accordance with the provisions of ASC Subsection 310-10-35. Currently, the
associated loans considered impaired are classified as Level 3.
Loans measured at fair value pursuant to lower of cost or fair value adjustments
Loans measured at fair value on a nonrecurring basis pursuant to lower of cost or fair value were
priced based on bids received from potential buyers, secondary market prices, and discounted cash
flow models which incorporate internally-developed assumptions for prepayments and credit loss
estimates. These loans are classified as Level 3.
Other real estate owned and other foreclosed assets
Other real estate owned includes real estate properties securing mortgage, consumer, and commercial
loans. Other foreclosed assets include automobiles securing auto loans. The fair value of
foreclosed assets may be determined using an external appraisal, broker price opinion or an
internal valuation. These foreclosed assets are classified as Level 3 given certain internal
adjustments that may be made to external appraisals.
63
Note 22 Fair Value of Financial Instruments
The fair value of financial instruments is the amount at which an asset or obligation could be
exchanged in a current transaction between willing parties, other than in a forced or liquidation
sale. Fair value estimates are made at a specific point in time based on the type of financial
instrument and relevant market information. Many of these estimates involve various assumptions and
may vary significantly from amounts that could be realized in actual transactions.
The information about the estimated fair values of financial instruments presented hereunder
excludes all nonfinancial instruments and certain other specific items.
Derivatives are considered financial instruments and their carrying value equals fair value. For
disclosures about the fair value of derivative instruments refer to Note 14 to the consolidated
financial statements.
For those financial instruments with no quoted market prices available, fair values have been
estimated using present value calculations or other valuation techniques, as well as managements
best judgment with respect to current economic conditions, including discount rates, estimates of
future cash flows, and prepayment assumptions.
The fair values reflected herein have been determined based on the prevailing interest rate
environment as of June 30, 2010 and December 31, 2009, respectively. In different interest rate
environments, fair value estimates can differ significantly, especially for certain fixed rate
financial instruments. In addition, the fair values presented do not attempt to estimate the value
of the Corporations fee generating businesses and anticipated future business activities, that is,
they do not represent the Corporations value as a going concern. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of the Corporation. The methods and
assumptions used to estimate the fair values of significant financial instruments as of June 30,
2010 and December 31, 2009 are described in the paragraphs below.
Short-term financial assets and liabilities have relatively short maturities, or no defined
maturities, and little or no credit risk. The carrying amounts of other liabilities reported in the
consolidated statements of condition approximate fair value because of the short-term maturity of
those instruments or because they carry interest rates which approximate market. Included in this
category are: cash and due from banks, federal funds sold and securities purchased under
agreements to resell, time deposits with other banks, bankers acceptances and assets sold under
agreements to repurchase and short-term borrowings. The equity appreciation instrument is included
in other liabilities and is accounted at fair value. Note 21 to the consolidated financial
statements provides a description of the valuation methodology for the equity appreciation
instrument. Resell and repurchase agreements with long-term maturities are valued using discounted
cash flows based on market rates currently available for agreements with similar terms and
remaining maturities.
Trading and investment securities, except for investments classified as other investment securities
in the consolidated statement of condition, are financial instruments that regularly trade on
secondary markets. The estimated fair value of these securities was determined using either market
prices or dealer quotes, where available, or quoted market prices of financial instruments with
similar characteristics. Trading account securities and securities available-for-sale are reported
at their respective fair values in the consolidated statements of condition since they are
marked-to-market for accounting purposes. These instruments are detailed in the consolidated
statements of condition and in Notes 8 and 9.
The estimated fair value for loans held-for-sale was based on secondary market prices, bids
received from potential buyers and discounted cash flow models. The fair values of the loans
held-in-portfolio have been determined for groups of loans with similar characteristics. Loans were
segregated by type such as commercial, construction, residential mortgage, consumer, and credit
cards. Each loan category was further segmented based on loan characteristics, including interest
rate terms, credit quality and vintage. Generally, fair values were estimated based on an exit
price by discounting scheduled cash flows for the segmented groups of loans using a discount rate
that considers interest, credit and expected return by market participant under current market
conditions. Additionally, prepayment, default and recovery assumptions have been applied in the
mortgage loan portfolio valuations. Generally accepted accounting principles do not require a fair
valuation of the lease financing portfolio, therefore it is included in the loans total at its
carrying amount.
64
The fair value of deposits with no stated maturity, such as non-interest bearing demand deposits,
savings, NOW, and money market accounts was, for purposes of this disclosure, equal to the amount
payable on demand as of the respective dates. The fair value of certificates of deposit was based
on the discounted value of contractual cash flows using interest rates being offered on
certificates with similar maturities. The value of these deposits in a transaction between willing
parties is in part dependent of the buyers ability to reduce the servicing cost and the attrition
that sometimes occurs. Therefore, the amount a buyer would be willing to pay for these deposits
could vary significantly from the presented fair value.
Long-term borrowings were valued using discounted cash flows, based on market rates currently
available for debt with similar terms and remaining maturities and in certain instances using
quoted market rates for similar instruments as of June 30, 2010 and December 31, 2009.
As part of the fair value estimation procedures of certain liabilities, including repurchase
agreements (regular and structured) and FHLB advances, the Corporation considered, where
applicable, the collateralization levels as part of its evaluation of non-performance risk. Also,
for certificates of deposit, the non-performance risk was determined using internally-developed
models that consider, where applicable, the collateral held, amounts insured, the remaining term,
and the credit premium of the institution.
Refer to Note 2 to the consolidated financial statements for a description of the FDIC loss share
indemnification asset, equity appreciation instrument issued to the FDIC and the contingent
liability on unfunded loan commitments, which are separately disclosed in the table below and all
relate to the Westernbank FDIC-assisted transaction. The latter two items are included as other
liabilities in the consolidated statement of condition.
Commitments to extend credit were valued using the fees currently charged to enter into similar
agreements. For those commitments where a future stream of fees is charged, the fair value was
estimated by discounting the projected cash flows of fees on commitments. The fair value of letters
of credit was based on fees currently charged on similar agreements.
65
Carrying or notional amounts, as applicable, and estimated fair values for financial instruments
were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
December 31, 2009 |
|
|
Carrying |
|
Fair |
|
Carrying |
|
Fair |
(In thousands) |
|
amount |
|
value |
|
amount |
|
value |
|
Financial Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and money market investments |
|
$ |
3,188,978 |
|
|
$ |
3,188,978 |
|
|
$ |
1,680,127 |
|
|
$ |
1,680,127 |
|
Trading securities |
|
|
401,543 |
|
|
|
401,543 |
|
|
|
462,436 |
|
|
|
462,436 |
|
Investment securities available-for-sale |
|
|
6,481,187 |
|
|
|
6,481,187 |
|
|
|
6,694,714 |
|
|
|
6,694,714 |
|
Investment securities held-to-maturity |
|
|
209,416 |
|
|
|
209,207 |
|
|
|
212,962 |
|
|
|
213,146 |
|
Other investment securities |
|
|
152,562 |
|
|
|
153,845 |
|
|
|
164,149 |
|
|
|
165,497 |
|
Loans held-for-sale |
|
|
101,251 |
|
|
|
105,448 |
|
|
|
90,796 |
|
|
|
91,542 |
|
Loans held-in-portfolio, net |
|
|
25,268,389 |
|
|
|
22,720,737 |
|
|
|
22,451,909 |
|
|
|
20,021,224 |
|
FDIC loss share indemnification asset |
|
|
3,345,896 |
|
|
|
3,345,896 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
$ |
27,113,573 |
|
|
$ |
27,245,650 |
|
|
$ |
25,924,894 |
|
|
$ |
26,076,515 |
|
Federal funds purchased |
|
|
9,900 |
|
|
|
9,900 |
|
|
|
|
|
|
|
|
|
Assets sold under agreements to repurchase |
|
|
2,297,294 |
|
|
|
2,443,281 |
|
|
|
2,632,790 |
|
|
|
2,759,438 |
|
Short-term borrowings |
|
|
1,263 |
|
|
|
1,263 |
|
|
|
7,326 |
|
|
|
7,326 |
|
Notes payable |
|
|
8,237,401 |
|
|
|
8,141,882 |
|
|
|
2,648,632 |
|
|
|
2,453,037 |
|
Contingent liability on unfunded loan
commitments |
|
|
132,441 |
|
|
|
132,441 |
|
|
|
|
|
|
|
|
|
Equity appreciation instrument |
|
|
28,106 |
|
|
|
28,106 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional |
|
Fair |
|
Notional |
|
Fair |
(In thousands) |
|
amount |
|
Value |
|
Amount |
|
Value |
|
Commitments to extend credit |
|
$ |
6,547,201 |
|
|
$ |
1,730 |
|
|
$ |
7,013,148 |
|
|
$ |
882 |
|
Letters of credit |
|
|
158,344 |
|
|
|
1,265 |
|
|
|
147,647 |
|
|
|
1,565 |
|
|
Note 23 Net Loss per Common Share
The computation of net loss per common share (EPS) follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
(In thousands, except share information) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
Net loss from continuing operations |
|
$ |
(55,828 |
) |
|
$ |
(176,583 |
) |
|
$ |
(140,883 |
) |
|
$ |
(219,159 |
) |
Net loss from discontinued operations |
|
|
|
|
|
|
(6,599 |
) |
|
|
|
|
|
|
(16,545 |
) |
Preferred stock dividends |
|
|
|
|
|
|
(22,915 |
) |
|
|
|
|
|
|
(45,831 |
) |
Preferred stock discount accretion |
|
|
|
|
|
|
(1,713 |
) |
|
|
|
|
|
|
(3,475 |
) |
Deemed dividend on preferred stock |
|
|
(191,667 |
) |
|
|
|
|
|
|
(191,667 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss applicable to common stock |
|
$ |
(247,495 |
) |
|
$ |
(207,810 |
) |
|
$ |
(332,550 |
) |
|
$ |
(285,010 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares outstanding |
|
|
853,010,208 |
|
|
|
281,888,394 |
|
|
|
746,598,082 |
|
|
|
281,861,563 |
|
Average potential common shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares outstanding assuming dilution |
|
|
853,010,208 |
|
|
|
281,888,394 |
|
|
|
746,598,082 |
|
|
|
281,861,563 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted EPS from continuing operations |
|
$ |
(0.29 |
) |
|
$ |
(0.71 |
) |
|
$ |
(0.45 |
) |
|
$ |
(0.95 |
) |
Basic and diluted EPS from discontinued operations |
|
|
|
|
|
|
(0.03 |
) |
|
|
|
|
|
|
(0.06 |
) |
|
Basic and diluted EPS |
|
$ |
(0.29 |
) |
|
$ |
(0.74 |
) |
|
$ |
(0.45 |
) |
|
$ |
(1.01 |
) |
|
The conversion of contingently convertible perpetual non-cumulative preferred stock into
shares of the Corporations common stock, as discussed in Note 18 to the financial statements,
resulted in a non-cash beneficial conversion of $191.7 million, representing the intrinsic value
between the conversion rate of $3.00 and the common stock closing price of $3.50 on April 13,
2010, the date the preferred shares were offered. The beneficial
66
conversion was recorded as a deemed dividend to the preferred stockholders reducing retained
earnings, with a corresponding offset to surplus (paid in capital), and thus did not affect
total stockholders equity or the book value of the common stock. However, the deemed dividend
increased the net loss applicable to common stock and affected the calculation of basic and
diluted EPS for the quarter and six months ended June 30, 2010. Moreover, in computing diluted
EPS, dilutive convertible securities that remained outstanding for the period prior to actual
conversion were not included as average potential common shares because the effect would have
been antidilutive. In computing both basic and diluted EPS, the common shares issued upon actual
conversion were included in the weighted average calculation of common shares, after the date of
conversion, that they remained outstanding.
Potential common shares consist of common stock issuable under the assumed exercise of stock
options and restricted stock awards using the treasury stock method. This method assumes that
the potential common shares are issued and the proceeds from exercise, in addition to the amount
of compensation cost attributed to future services, are used to purchase common stock at the
exercise date. The difference between the number of potential shares issued and the shares
purchased is added as incremental shares to the actual number of shares outstanding to compute
diluted earnings per share. Warrants, stock options and restricted stock awards that result in
lower potential shares issued than shares purchased under the treasury stock method are not
included in the computation of dilutive earnings per share since their inclusion would have an
antidilutive effect in earnings per common share.
For the quarter and six-month period ended June 30, 2010, there were 1,272,058 and 2,541,337
weighted average antidilutive stock options outstanding, respectively (June 30, 2009
2,702,428 and 2,819,169). Additionally, the Corporation has outstanding a warrant to purchase
20,932,836 shares of common stock, which has an antidilutive effect as of June 30, 2010. The
Corporation also has 1,323,445 restricted shares, which have an antidilutive effect as of June
30, 2010.
Note 24 Other Service Fees
The caption of other service fees in the consolidated statements of operations consists of the
following major categories:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended |
|
Six months ended |
|
|
June 30, |
|
June 30, |
(In thousands) |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
Debit card fees |
|
$ |
29,176 |
|
|
$ |
27,508 |
|
|
$ |
55,769 |
|
|
$ |
53,881 |
|
Credit card fees and discounts |
|
|
26,013 |
|
|
|
23,449 |
|
|
|
49,310 |
|
|
|
47,454 |
|
Processing fees |
|
|
14,170 |
|
|
|
13,727 |
|
|
|
28,132 |
|
|
|
27,135 |
|
Insurance fees |
|
|
12,084 |
|
|
|
12,547 |
|
|
|
23,074 |
|
|
|
24,551 |
|
Sale and administration of
investment products |
|
|
10,245 |
|
|
|
9,694 |
|
|
|
17,412 |
|
|
|
17,023 |
|
Other fees |
|
|
12,037 |
|
|
|
15,512 |
|
|
|
31,348 |
|
|
|
30,926 |
|
|
Total other service fees |
|
$ |
103,725 |
|
|
$ |
102,437 |
|
|
$ |
205,045 |
|
|
$ |
200,970 |
|
|
67
Note 25 Pension and Postretirement Benefits
The Corporation has noncontributory defined benefit pension plans (the retirement plans) and
supplementary benefit pension plans for regular employees of certain of its subsidiaries. Effective
May 1, 2009, the accrual of the benefits under the BPPR retirement plan was frozen to all
participants. Pursuant to the amendment, the retirement plan participants will not receive any
additional credit for compensation earned and service performed after April 30, 2009 for purposes
of calculating benefits under the retirement plans.
During the second quarter of 2010, the Corporation settled its U.S. retirement plan, which had been
frozen in 2007. The U.S. retirement plan assets are expected to be distributed to plan participants
during the last two quarters of 2010.
The components of net periodic pension cost for the quarters and six months ended June 30, 2010 and
2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit Restoration |
|
|
|
|
|
|
|
|
|
Benefit Restoration |
|
|
Pension Plans |
|
Plans |
|
Pension Plans |
|
Plans |
|
|
Quarters ended |
|
Quarters ended |
|
Six months ended |
|
Six months ended |
|
|
June 30, |
|
June 30, |
|
June 30, |
|
June 30, |
(In thousands) |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
Service cost |
|
|
|
|
|
$ |
887 |
|
|
|
|
|
|
$ |
116 |
|
|
|
|
|
|
$ |
3,330 |
|
|
|
|
|
|
$ |
341 |
|
Interest cost |
|
$ |
7,953 |
|
|
|
8,042 |
|
|
$ |
385 |
|
|
|
390 |
|
|
$ |
15,906 |
|
|
|
16,589 |
|
|
$ |
769 |
|
|
|
834 |
|
Expected return on plan assets |
|
|
(7,777 |
) |
|
|
(6,222 |
) |
|
|
(404 |
) |
|
|
(307 |
) |
|
|
(15,553 |
) |
|
|
(13,099 |
) |
|
|
(807 |
) |
|
|
(625 |
) |
Amortization of prior service
cost (credit) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44 |
|
|
|
|
|
|
|
(8 |
) |
Amortization of net loss |
|
|
2,206 |
|
|
|
3,204 |
|
|
|
99 |
|
|
|
185 |
|
|
|
4,412 |
|
|
|
7,387 |
|
|
|
198 |
|
|
|
498 |
|
|
Net periodic cost |
|
|
2,382 |
|
|
|
5,911 |
|
|
|
80 |
|
|
|
384 |
|
|
|
4,765 |
|
|
|
14,251 |
|
|
|
160 |
|
|
|
1,040 |
|
Curtailment loss (gain) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
820 |
|
|
|
|
|
|
|
(341 |
) |
Settlement loss |
|
|
3,380 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,380 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost |
|
$ |
5,762 |
|
|
$ |
5,911 |
|
|
$ |
80 |
|
|
$ |
384 |
|
|
$ |
8,145 |
|
|
$ |
15,071 |
|
|
$ |
160 |
|
|
$ |
699 |
|
|
During the quarter and six months ended June 30, 2010, the Corporation made contributions to
the pension and benefit restoration plans amounting to $0.4 million. The total contributions
expected to be paid during the year 2010 for the pension and benefit restoration plans amount to
approximately $3.2 million.
The Corporation also provides certain health care benefits for retired employees of certain
subsidiaries. The components of net periodic postretirement benefit cost for the quarters and six
months ended June 30, 2010 and 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters ended |
|
Six months ended |
|
|
June 30, |
|
June 30, |
(In thousands) |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
Service cost |
|
$ |
432 |
|
|
$ |
549 |
|
|
$ |
864 |
|
|
$ |
1,098 |
|
Interest cost |
|
|
1,608 |
|
|
|
2,026 |
|
|
|
3,217 |
|
|
|
4,052 |
|
Amortization of prior service cost |
|
|
(261 |
) |
|
|
(262 |
) |
|
|
(523 |
) |
|
|
(523 |
) |
Amortization of net gain |
|
|
(294 |
) |
|
|
|
|
|
|
(588 |
) |
|
|
|
|
|
Total net periodic cost |
|
$ |
1,485 |
|
|
$ |
2,313 |
|
|
$ |
2,970 |
|
|
$ |
4,627 |
|
|
Contributions made to the postretirement benefit plan for the quarter and six months ended
June 30, 2010 amounted to approximately $1.3 million and $2.4 million, respectively. The total
contributions expected to be paid during the year 2010 for the postretirement benefit plan amount
to approximately $5.2 million.
Note 26 Stock-Based Compensation
The Corporation maintained a Stock Option Plan (the Stock Option Plan), which permitted the
granting of incentive awards in the form of qualified stock options, incentive stock options, or
non-statutory stock options of the Corporation. In April 2004, the Corporations shareholders
adopted the Popular, Inc. 2004 Omnibus Incentive Plan (the Incentive Plan), which replaced and
superseded the Stock Option Plan. The adoption of the Incentive Plan did not alter the original
terms of the grants made under the Stock Option Plan prior to the adoption of the Incentive Plan.
68
Stock Option Plan
Employees and directors of the Corporation or any of its subsidiaries were eligible to participate
in the Stock Option Plan. The Board of Directors or the Compensation Committee of the Board had the
absolute discretion to determine the individuals that were eligible to participate in the Stock
Option Plan. This plan provided for the issuance of Popular, Inc.s common stock at a price equal
to its fair market value at the grant date, subject to certain plan provisions. The shares are to
be made available from authorized but unissued shares of common stock or treasury stock. The
Corporations policy has been to use authorized but unissued shares of common stock to cover each
grant. The maximum option term is ten years from the date of grant. Unless an option agreement
provides otherwise, all options granted are 20% exercisable after the first year and an additional
20% is exercisable after each subsequent year, subject to an acceleration clause at termination of
employment due to retirement.
The following table presents information on stock options outstanding as of June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Not in thousands) |
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
Remaining Life of |
|
Options |
|
Weighted-Average |
Exercise Price |
|
Options |
|
Exercise Price of |
|
Options Outstanding |
|
Exercisable |
|
Exercise Price of |
Range per Share |
|
Outstanding |
|
Options Outstanding |
|
In Years |
|
(fully vested) |
|
Options Exercisable |
|
$14.39 - $18.50 |
|
|
1,231,412 |
|
|
$ |
15.84 |
|
|
|
2.24 |
|
|
|
1,231,412 |
|
|
$ |
15.84 |
|
$19.25 - $27.20 |
|
|
1,298,725 |
|
|
$ |
25.21 |
|
|
|
3.99 |
|
|
|
1,298,725 |
|
|
$ |
25.21 |
|
|
$14.39 - $27.20 |
|
|
2,530,137 |
|
|
$ |
20.65 |
|
|
|
3.14 |
|
|
|
2,530,137 |
|
|
$ |
20.65 |
|
|
There was no intrinsic value of options outstanding as of June 30, 2010 (June 30, 2009 $0.2
million). There was no intrinsic value of options exercisable as of June 30, 2010 and 2009.
The following table summarizes the stock option activity and related information:
|
|
|
|
|
|
|
|
|
|
|
Options |
|
Weighted-Average |
(Not in thousands) |
|
Outstanding |
|
Exercise Price |
|
Outstanding as of January 1, 2009 |
|
|
2,965,843 |
|
|
$ |
20.59 |
|
Granted |
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
Forfeited |
|
|
(59,631 |
) |
|
|
26.42 |
|
Expired |
|
|
(353,549 |
) |
|
|
19.25 |
|
|
Outstanding as of December 31, 2009 |
|
|
2,552,663 |
|
|
$ |
20.64 |
|
Granted |
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
Forfeited |
|
|
|
|
|
|
|
|
Expired |
|
|
(22,526 |
) |
|
|
19.56 |
|
|
Outstanding as of June 30, 2010 |
|
|
2,530,137 |
|
|
$ |
20.65 |
|
|
The stock options exercisable as of June 30, 2010 totaled 2,530,137 (June 30, 2009
2,613,446). There were no stock options exercised during the quarters and six-month periods ended
June 30, 2010 and 2009. Thus, there was no intrinsic value of options exercised during the quarters
and six month-periods ended June 30, 2010 and 2009.
There were no new stock option grants issued by the Corporation under the Stock Option Plan during
2009 and 2010.
For the quarter ended June 30, 2010, there was no stock option expense recognized (June 30, 2009
credit of $0.1 million, with an income tax expense of $51 thousand). For the six months ended June
30, 2010, there was no stock option expense recognized (June 30, 2009 $27 thousand, with a tax
benefit of $4 thousand).
69
Incentive Plan
The Incentive Plan permits the granting of incentive awards in the form of Annual Incentive Awards,
Long-term Performance Unit Awards, Stock Options, Stock Appreciation Rights, Restricted Stock,
Restricted Units or Performance Shares. Participants in the Incentive Plan are designated by the
Compensation Committee of the Board of Directors (or its delegate as determined by the Board).
Employees and directors of the Corporation and / or any of its subsidiaries are eligible to
participate in the Incentive Plan. The shares may be made available from common stock purchased by
the Corporation for such purpose, authorized but unissued shares of common stock or treasury stock.
The Corporations policy with respect to the shares of restricted stock has been to purchase such
shares in the open market to cover each grant.
Under the Incentive Plan, the Corporation has issued restricted shares, which become vested based
on the employees continued service with Popular. Unless otherwise stated in an agreement, the
compensation cost associated with the shares of restricted stock is determined based on a two-prong
vesting schedule. The first part is vested ratably over five years commencing at the date of grant
and the second part is vested at termination of employment after attainment of 55 years of age and
10 years of service. The five-year vesting part is accelerated at termination of employment after
attaining 55 years of age and 10 years of service.
The following table summarizes the restricted stock activity under the Incentive Plan for members
of management:
|
|
|
|
|
|
|
|
|
|
|
Restricted |
|
Weighted-Average |
(Not in thousands) |
|
Stock |
|
Grant Date Fair Value |
|
Non-vested as of January 1, 2009 |
|
|
248,339 |
|
|
$ |
22.83 |
|
Granted |
|
|
|
|
|
|
|
|
Vested |
|
|
(104,791 |
) |
|
|
21.93 |
|
Forfeited |
|
|
(5,036 |
) |
|
|
19.95 |
|
|
Non-vested as of December 31, 2009 |
|
|
138,512 |
|
|
$ |
23.62 |
|
Granted |
|
|
1,525,416 |
|
|
|
2.70 |
|
Vested |
|
|
(163,993 |
) |
|
|
11.67 |
|
Forfeited |
|
|
(176,490 |
) |
|
|
2.04 |
|
|
Non-vested as of June 30, 2010 |
|
|
1,323,445 |
|
|
$ |
3.86 |
|
|
During the quarter ended June 30, 2010, 563,043 shares of restricted stock were awarded to
management under the Incentive Plan, from which 360,527 shares of restricted stock were awarded to
management consistent with the requirements of the TARP Interim Final Rule. During the six-month
period ended June 30, 2010, 1,525,416 shares of restricted stock were awarded to management under
the Incentive Plan, from which 1,246,755 shares of restricted stock were awarded to management
consistent with the requirements of the TARP Interim Final Rule. The shares of restricted stock,
which were awarded to management consistent with the requirements of the TARP Interim Final Rule,
were determined upon consideration of managements execution of critical 2009 initiatives to manage
the Corporations liquidity and capitalization, strategically reposition its United States
operations, and improve management effectiveness and cost control. The shares will vest on the
secondary anniversary of the grant date, and they may become payable in 25% increments as the
Corporation repays each 25% portion of the aggregate financial assistance received under the United
States Treasury Departments Capital Purchase Program under the Emergency Economic Stabilization
Act of 2008. In addition, the grants are also subject to further performance criteria as the
Corporation must achieve profitability for at least one fiscal year for awards to be payable.
During the quarter and six-month period ended June 30, 2009, no shares of restricted stock were
awarded to management under the Incentive Plan.
Beginning in 2007, the Corporation authorized the issuance of performance shares, in addition to
restricted shares, under the Incentive Plan. The performance share awards consist of the
opportunity to receive shares of Popular, Inc.s common stock provided that the Corporation
achieves certain performance goals during a three-year performance cycle. The compensation cost
associated with the performance shares is recorded ratably over a three-
70
year performance period.
The performance shares are granted at the end of the three-year
period and vest at grant date, except when the participants employment is terminated by the Corporation without cause. In such
case, the participant would receive a pro-rata amount of shares calculated as if the Corporation
would have met the performance goal for the performance period. As of June 30, 2010, 12,426 shares
have been granted under this plan (June 30, 2009 33,700).
During the quarter ended June 30, 2010, the Corporation recognized a credit of $0.2 million of
restricted stock related to management incentive awards, with an income tax expense of $56
thousand (June 30, 2009 $0.6 million, with a tax benefit of $0.2 million). For the six-month
period ended June 30, 2010, the Corporation recognized $0.1 million of restricted stock expense
related to management incentive awards, with a tax benefit of $71 thousand (June 30, 2009 $0.8
million, with a tax benefit of $0.3 million). The fair market value of the restricted stock vested
was $2.5 million at grant date and $0.4 million at vesting date. This triggers a shortfall, net of
windfalls, of $2.1 million that was recorded as an additional income tax expense at the applicable
income tax rate, net of the deferred tax asset valuation allowance. During the quarter ended June
30, 2010, there was no performance share expense recognized (June 30, 2009 $0.4 million, with a
tax benefit of $99 thousand). During the six-month period ended June 30, 2010, the Corporation
recognized $0.1 million of performance share expense, with a tax benefit of $60 thousand (June 30,
2009 $0.2 million, with a tax benefit of $21 thousand). The total unrecognized compensation cost
related to non-vested restricted stock awards and performance shares to members of management as of
June 30, 2010 was $3.3 million and is expected to be recognized over a weighted-average period of 2
years.
The following table summarizes the restricted stock activity under the Incentive Plan for members
of the Board of Directors:
|
|
|
|
|
|
|
|
|
|
|
Restricted |
|
Weighted-Average |
(Not in thousands) |
|
Stock |
|
Grant Date Fair Value |
|
Non-vested as of January 1, 2009 |
|
|
|
|
|
|
|
|
Granted |
|
|
270,515 |
|
|
$ |
2.62 |
|
Vested |
|
|
(270,515 |
) |
|
|
2.62 |
|
Forfeited |
|
|
|
|
|
|
|
|
|
Non-vested as of December 31, 2009 |
|
|
|
|
|
|
|
|
Granted |
|
|
242,394 |
|
|
$ |
3.00 |
|
Vested |
|
|
(242,394 |
) |
|
|
3.00 |
|
Forfeited |
|
|
|
|
|
|
|
|
|
Non-vested as of June 30, 2010 |
|
|
|
|
|
|
|
|
|
During the quarter ended June 30, 2010, the Corporation granted 207,261 shares of restricted
stock to members of the Board of Directors of Popular, Inc. and BPPR, which became vested at grant
date (June 30, 2009 151,612). During this period, the Corporation recognized $0.1 million of
restricted stock expense related to these restricted stock grants, with a tax benefit of $60
thousand (June 30, 2009 $0.1 million, with a tax benefit of $47 thousand). For the six-month
period ended June 30, 2010, the Corporation granted 242,394 shares of restricted stock to members
of the Board of Directors of Popular, Inc. and BPPR, which became vested at grant date (June 30,
2009 173,923). During this period, the Corporation recognized $0.3 million of restricted stock
expense related to these restricted stock grants, with a tax benefit of $0.1 million (June 30, 2009
- $0.2 million, with a tax benefit of $94 thousand). The fair value at vesting date of the
restricted stock vested during 2010 for directors was $0.7 million.
71
Note 27 Income Taxes
The reconciliation of unrecognized tax benefits was as follows:
|
|
|
|
|
|
|
|
|
(In millions) |
|
2010 |
|
2009 |
|
Balance as of January 1 |
|
$ |
41.8 |
|
|
$ |
40.5 |
|
Additions for tax positions January through March |
|
|
0.4 |
|
|
|
1.0 |
|
Reduction as a result of settlements January
through March |
|
|
(14.3 |
) |
|
|
(0.6 |
) |
|
Balance as of March 31 |
|
$ |
27.9 |
|
|
$ |
40.9 |
|
Additions for tax positions April through June |
|
|
0.2 |
|
|
|
1.3 |
|
Reduction for tax positions April through June |
|
|
(1.6 |
) |
|
|
|
|
|
Balance as of June 30 |
|
$ |
26.5 |
|
|
$ |
42.2 |
|
|
As of June 30, 2010, the related accrued interest approximated $7.1 million (June 30, 2009 -
$6.3 million). Management determined that as of June 30, 2010 and 2009 there was no need to accrue
for the payment of penalties.
After consideration of the effect on U.S. federal tax of unrecognized U.S. state tax benefits, the
total amount of unrecognized tax benefits, including U.S. and Puerto Rico, that if recognized,
would affect the Corporations effective tax rate, was approximately $32.1 million as of June 30,
2010 (June 30, 2009 $46.8 million).
The amount of unrecognized tax benefits may increase or decrease in the future for various reasons
including adding amounts for current tax year positions, expiration of open income tax returns due
to the statutes of limitation, changes in managements judgment about the level of uncertainty,
status of examinations, litigation and legislative activity and the addition or elimination of
uncertain tax positions.
The Corporation and its subsidiaries file income tax returns in Puerto Rico, the U.S. federal
jurisdiction, various U.S. states and political subdivisions, and foreign jurisdictions. As of June
30, 2010, the following years remain subject to examination in the U.S. Federal jurisdiction: 2008
and thereafter; and in the Puerto Rico jurisdiction, 2005 and thereafter. During 2010, the U.S.
Internal Revenue Service (IRS) completed an examination of the Corporations U.S. operations tax
return for 2007, and as a result, the Corporation recognized a tax benefit of $14.3 million during
the first quarter of 2010.
The Corporation does not anticipate a significant change to the total amount of unrecognized tax
benefits within the next 12 months.
72
The following table presents the components of the Corporations deferred tax assets and
liabilities.
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
(In thousands) |
|
2010 |
|
2009 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Tax credits available for carryforward |
|
$ |
8,687 |
|
|
$ |
11,026 |
|
Net operating loss and donation carryforward available |
|
|
924,410 |
|
|
|
843,968 |
|
Postretirement and pension benefits |
|
|
104,890 |
|
|
|
103,979 |
|
Deferred loan origination fees |
|
|
7,817 |
|
|
|
7,880 |
|
Allowance for loan losses |
|
|
549,580 |
|
|
|
536,277 |
|
Deferred gains |
|
|
13,462 |
|
|
|
14,040 |
|
Accelerated depreciation |
|
|
2,372 |
|
|
|
2,418 |
|
Intercompany deferred gains |
|
|
8,048 |
|
|
|
7,015 |
|
Other temporary differences |
|
|
20,710 |
|
|
|
39,096 |
|
|
Total gross deferred tax assets |
|
|
1,639,976 |
|
|
|
1,565,699 |
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Differences between assigned values and the tax basis of the
assets and liabilities recognized in purchase business combinations |
|
|
43,870 |
|
|
|
25,896 |
|
Deferred loan origination costs |
|
|
8,795 |
|
|
|
9,708 |
|
Unrealized net gain on trading and available-for-sale securities |
|
|
54,368 |
|
|
|
30,323 |
|
Other temporary differences |
|
|
3,453 |
|
|
|
5,923 |
|
|
Total gross deferred tax liabilities |
|
|
110,486 |
|
|
|
71,850 |
|
|
Gross deferred tax assets less liabilities |
|
|
1,529,490 |
|
|
|
1,493,849 |
|
Less: Valuation allowance |
|
|
1,182,114 |
|
|
|
1,129,882 |
|
|
Net deferred tax assets |
|
$ |
347,376 |
|
|
$ |
363,967 |
|
|
A deferred tax asset should be reduced by a valuation allowance if based on the weight of all
available evidence; it is more likely than not (a likelihood of more than 50%) that some portion or
the entire deferred tax asset will not be realized. The valuation allowance should be sufficient to
reduce the deferred tax asset to the amount that is more likely than not to be realized. The
determination of whether a deferred tax asset is realizable is based on weighting all available
evidence, including both positive and negative evidence. The realization of deferred tax assets,
including carryforwards and deductible temporary differences, depends upon the existence of
sufficient taxable income of the same character during the carryback or carryforward period. The
analysis considers all sources of taxable income available to realize the deferred tax asset,
including the future reversal of existing taxable temporary differences, future taxable income
exclusive of reversing temporary differences and carryforwards, taxable income in prior carryback
years and tax-planning strategies.
The Corporations U.S. mainland operations are in a cumulative loss position for the three-year
period ended June 30, 2010. For purposes of assessing the realization of the deferred tax assets in
the U.S. mainland, this cumulative taxable loss position is considered significant negative
evidence and has caused management to conclude that the Corporation will not be able to realize the
associated deferred tax assets in the future. As of June 30, 2010, the Corporation recorded a
valuation allowance of $1.2 billion on the deferred tax asset of its U.S. operations. As of June
30, 2010, the Corporations deferred tax assets related to its Puerto Rico operations amounted to
$366.8 million and the deferred tax liability, net of the valuation allowance, of its U.S.
operations amounted to $19.4 million. The Corporation assessed the realization of the Puerto Rico
portion of the net deferred tax asset and based on the weighting of all available evidence has
concluded that it is more likely than not that such net deferred tax assets will be realized.
During the second quarter of 2010, a deferred tax asset of $1.33 billion and a deferred tax
liability of $1.34 billion was recognized as a result of Westernbank FDIC-assisted transaction. The
net amount is included as part of the deferred tax liability due to the differences between
assigned values and the tax basis of the assets and liabilities recognized in the purchase business
combination.
73
Note 28 Supplemental Disclosure on the Consolidated Statements of Cash Flows
Additional disclosures on non-cash activities for the six-month period are listed in the following
table:
|
|
|
|
|
|
|
|
|
(In thousands) |
|
June 30, 2010 |
|
June 30, 2009 |
|
Non-cash activities: |
|
|
|
|
|
|
|
|
Loans transferred to other real estate |
|
$ |
77,919 |
|
|
$ |
71,766 |
|
Loans transferred to other property |
|
|
19,968 |
|
|
|
19,757 |
|
|
Total loans transferred to foreclosed assets |
|
|
97,887 |
|
|
|
91,523 |
|
Transfers from loans held-in-portfolio to loans
held-for-sale |
|
|
23,159 |
|
|
|
29,332 |
|
Transfers from loans held-for-sale to loans
held-in-portfolio |
|
|
6,292 |
|
|
|
91,985 |
|
Loans securitized into investment securities [a] |
|
|
411,063 |
|
|
|
759,532 |
|
Recognition of mortgage servicing rights on
securitizations or asset
transfers |
|
|
7,809 |
|
|
|
13,661 |
|
Treasury stock retired |
|
|
|
|
|
|
207,139 |
|
Conversion of preferred stock to common stock: |
|
|
|
|
|
|
|
|
Preferred stock converted |
|
|
(1,150,000 |
) |
|
|
|
|
Commons stock issued |
|
|
1,341,667 |
|
|
|
|
|
|
|
|
|
[a] |
|
Includes loans securitized into investment securities
and subsequently sold before quarter end. |
|
|
For the six months ended June 30, 2010 the changes in operating assets and liabilities
included in the reconciliation of net income to net cash provided by operating activities, as well
as the changes in assets and liabilities presented in the investing and financing sections are net
of the effect of the assets acquired and liabilities assumed from the Westernbank FDIC-assisted
transaction. Refer to Note 2 to the consolidated financial statements for the composition and
balances of the assets and liabilities recorded at fair value by the Corporation on April 30, 2010.
The cash received in the transaction, which amounted to $261 million, is presented in the investing
activities section of the Consolidated Statement of Cash Flows as Cash received from acquisition.
Note 29 Segment Reporting
The Corporations corporate structure consists of three reportable segments Banco Popular de
Puerto Rico, Banco Popular North America and EVERTEC.
Management determined the reportable segments based on the internal reporting used to evaluate
performance and to assess where to allocate resources. The segments were determined based on the
organizational structure, which focuses primarily on the markets the segments serve, as well as on
the products and services offered by the segments.
Banco Popular de Puerto Rico:
Given that Banco Popular de Puerto Rico constitutes a significant portion of the Corporations
results of operations and total assets as of June 30, 2010, additional disclosures are provided for
the business areas included in this reportable segment, as described below:
|
|
Commercial banking represents the Corporations banking operations conducted at BPPR, which
are targeted mainly to corporate, small and middle size businesses. It includes aspects of the
lending and depository businesses, as well as other finance and advisory services. BPPR
allocates funds across business areas based on duration matched transfer pricing at market
rates. This area also incorporates income related with the investment of excess funds, as well
as a proportionate share of the investment function of BPPR. |
|
|
Consumer and retail banking represents the branch banking operations of BPPR which focus on
retail clients. It includes the consumer lending business operations of BPPR, as well as the
lending operations of Popular Auto and Popular Mortgage. Popular Auto focuses on auto and
lease financing, while Popular Mortgage focuses principally in residential mortgage loan
originations. The consumer and retail banking area also incorporates income related with the
investment of excess funds from the branch network, as well as a proportionate share of the
investment function of BPPR. |
74
|
|
Other financial services include the trust and asset management service units of BPPR, the
brokerage and investment banking operations of Popular Securities, and the insurance agency
and reinsurance businesses of
Popular Insurance, Popular Insurance V.I., Popular Risk Services, and Popular Life Re. Most of
the services that are provided by these subsidiaries generate profits based on fee income. |
|
|
Westernbank includes revenues and expenses related to the assets acquired, liabilities
assumed and additional consideration paid to the FDIC as it relates to the FDIC-assisted
transaction described in Note 2 to the consolidated financial statements. It also includes
operating costs to run the branches and certain back-office operations during the two-month
period ended June 30, 2010, as well as acquisition and integration costs. |
Banco Popular North America:
Banco Popular North Americas reportable segment consists of the banking operations of BPNA,
E-LOAN, Popular Equipment Finance, Inc. and Popular Insurance Agency, U.S.A. BPNA operates through
a retail branch network in the U.S. mainland, while E-LOAN supports BPNAs deposit gathering
through its online platform. All direct lending activities at E-LOAN were ceased during the fourth
quarter of 2008. Popular Equipment Finance, Inc. also holds a running-off loan portfolio as this
subsidiary ceased originating loans during 2009. Popular Insurance Agency, U.S.A. offers investment
and insurance services across the BPNA branch network.
EVERTEC:
This reportable segment includes the financial transaction processing and technology functions of
the Corporation, including EVERTEC, with offices in Puerto Rico, Florida, the Dominican Republic
and Venezuela; and ATH Costa Rica, S.A., EVERTEC LATINOAMERICA, SOCIEDAD ANONIMA and T.I.I. Smart
Solutions Inc. located in Costa Rica. In addition, this reportable segment includes the equity
investments in Consorcio de Tarjetas Dominicanas, S.A. (CONTADO) and Servicios Financieros, S.A.
de C.V. (Serfinsa), which operate in the Dominican Republic and El Salvador, respectively. This
segment provides processing and technology services to other units of the Corporation as well as to
third parties, principally other financial institutions in Puerto Rico, the Caribbean and Central
America.
As indicated in Note 1 to the consolidated financial statements, BPPRs merchant acquiring business
and TicketPop divisions were transferred to EVERTEC in connection with an internal corporate
reorganization effected on June 30, 2010. For the quarter and six months ended June 30, 2010, the
merchant acquiring business and TicketPop divisions continued to be evaluated and reported as part
of the BPPR reportable segment.
The Corporate group consists primarily of the holding companies: Popular, Inc., Popular North
America and Popular International Bank, excluding the equity investments in CONTADO and Serfinsa,
which due to the nature of their operations are included as part of the EVERTEC segment. The
Corporate group also includes the expenses of certain corporate areas that are identified as
critical to the organization: Finance, Risk Management and Legal.
The accounting policies of the individual operating segments are the same as those of the
Corporation. Transactions between reportable segments are primarily conducted at market rates,
resulting in profits that are eliminated for reporting consolidated results of operations.
75
The results of operations included in the tables below for the quarter ended June 30, 2009
exclude the results of operations of the discontinued business of PFH. Segment assets as of June
30, 2009 also exclude the assets of the discontinued operations.
2010
For the quarter ended June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banco Popular de |
|
Banco Popular |
|
|
|
|
|
Intersegment |
(In thousands) |
|
Puerto Rico |
|
North America |
|
EVERTEC |
|
Eliminations |
|
Net interest income (expense) |
|
$ |
232,140 |
|
|
$ |
75,323 |
|
|
$ |
(275 |
) |
|
|
|
|
Provision for loan losses |
|
|
122,267 |
|
|
|
79,991 |
|
|
|
|
|
|
|
|
|
Non-interest income |
|
|
169,880 |
|
|
|
15,926 |
|
|
|
65,402 |
|
|
$ |
(37,427 |
) |
Amortization of intangibles |
|
|
1,358 |
|
|
|
910 |
|
|
|
187 |
|
|
|
|
|
Depreciation expense |
|
|
9,478 |
|
|
|
2,450 |
|
|
|
3,242 |
|
|
|
|
|
Other operating expenses |
|
|
227,134 |
|
|
|
64,923 |
|
|
|
42,632 |
|
|
|
(37,516 |
) |
Income tax expense |
|
|
16,248 |
|
|
|
798 |
|
|
|
7,284 |
|
|
|
37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
25,535 |
|
|
|
(57,823 |
) |
|
$ |
11,782 |
|
|
$ |
52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Assets |
|
$ |
32,279,408 |
|
|
$ |
9,857,865 |
|
|
$ |
241,024 |
|
|
$ |
(74,387 |
) |
|
For the quarter ended June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Reportable |
|
|
|
|
|
|
(In thousands) |
|
Segments |
|
Corporate |
|
Eliminations |
|
Popular, Inc. |
|
Net interest income (expense) |
|
$ |
307,188 |
|
|
$ |
(28,375 |
) |
|
$ |
163 |
|
|
$ |
278,976 |
|
Provision for loan losses |
|
|
202,258 |
|
|
|
|
|
|
|
|
|
|
|
202,258 |
|
Non-interest income |
|
|
213,781 |
|
|
|
5,197 |
|
|
|
(3,120 |
) |
|
|
215,858 |
|
Amortization of intangibles |
|
|
2,455 |
|
|
|
|
|
|
|
|
|
|
|
2,455 |
|
Depreciation expense |
|
|
15,170 |
|
|
|
198 |
|
|
|
|
|
|
|
15,368 |
|
Other operating expenses |
|
|
297,173 |
|
|
|
14,781 |
|
|
|
(1,361 |
) |
|
|
310,593 |
|
Income tax expense (benefit) |
|
|
24,367 |
|
|
|
(4,345 |
) |
|
|
(34 |
) |
|
|
19,988 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(20,454 |
) |
|
$ |
(33,812 |
) |
|
$ |
(1,562 |
) |
|
$ |
(55,828 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Assets |
|
$ |
42,303,910 |
|
|
$ |
5,051,934 |
|
|
$ |
(4,912,192 |
) |
|
$ |
42,443,652 |
|
|
For the six months ended June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banco Popular de |
|
Banco Popular |
|
|
|
|
|
Intersegment |
(In thousands) |
|
Puerto Rico |
|
North America |
|
EVERTEC |
|
Eliminations |
|
Net interest income (expense) |
|
$ |
451,503 |
|
|
$ |
154,177 |
|
|
$ |
(502 |
) |
|
|
|
|
Provision for loan losses |
|
|
230,639 |
|
|
|
211,819 |
|
|
|
|
|
|
|
|
|
Non-interest income |
|
|
280,597 |
|
|
|
32,485 |
|
|
|
127,599 |
|
|
$ |
(74,877 |
) |
Amortization of intangibles |
|
|
2,309 |
|
|
|
1,820 |
|
|
|
375 |
|
|
|
|
|
Depreciation expense |
|
|
19,073 |
|
|
|
4,881 |
|
|
|
6,414 |
|
|
|
|
|
Other operating expenses |
|
|
410,255 |
|
|
|
128,551 |
|
|
|
83,950 |
|
|
|
(74,971 |
) |
Income tax expense |
|
|
17,263 |
|
|
|
1,584 |
|
|
|
14,397 |
|
|
|
39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
52,561 |
|
|
$ |
(161,993 |
) |
|
$ |
21,961 |
|
|
$ |
55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76
For the six months ended June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Reportable |
|
|
|
|
|
|
(In thousands) |
|
Segments |
|
Corporate |
|
Eliminations |
|
Popular, Inc. |
|
Net interest income (expense) |
|
$ |
605,178 |
|
|
$ |
(57,610 |
) |
|
$ |
325 |
|
|
$ |
547,893 |
|
Provision for loan losses |
|
|
442,458 |
|
|
|
|
|
|
|
|
|
|
|
442,458 |
|
Non-interest income |
|
|
365,804 |
|
|
|
11,745 |
|
|
|
(3,825 |
) |
|
|
373,724 |
|
Amortization of intangibles |
|
|
4,504 |
|
|
|
|
|
|
|
|
|
|
|
4,504 |
|
Depreciation expense |
|
|
30,368 |
|
|
|
391 |
|
|
|
|
|
|
|
30,759 |
|
Other operating expenses |
|
|
547,785 |
|
|
|
28,870 |
|
|
|
(2,589 |
) |
|
|
574,066 |
|
Income tax expense (benefit) |
|
|
33,283 |
|
|
|
(22,751 |
) |
|
|
181 |
|
|
|
10,713 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(87,416 |
) |
|
$ |
(52,375 |
) |
|
$ |
(1,092 |
) |
|
$ |
(140,883 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
For the quarter ended June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banco Popular de |
|
Banco Popular |
|
|
|
|
|
Intersegment |
(In thousands) |
|
Puerto Rico |
|
North America |
|
EVERTEC |
|
Eliminations |
|
Net interest income (expense) |
|
$ |
216,906 |
|
|
$ |
80,821 |
|
|
$ |
(236 |
) |
|
|
|
|
Provision for loan losses |
|
|
181,659 |
|
|
|
167,785 |
|
|
|
|
|
|
|
|
|
Non-interest income |
|
|
185,433 |
|
|
|
5,726 |
|
|
|
70,482 |
|
|
$ |
(36,866 |
) |
Amortization of intangibles |
|
|
1,315 |
|
|
|
910 |
|
|
|
208 |
|
|
|
|
|
Depreciation expense |
|
|
9,730 |
|
|
|
2,732 |
|
|
|
3,516 |
|
|
|
(4 |
) |
Other operating expenses |
|
|
200,380 |
|
|
|
88,561 |
|
|
|
41,484 |
|
|
|
(36,700 |
) |
Income tax expense |
|
|
2,425 |
|
|
|
788 |
|
|
|
6,953 |
|
|
|
(66 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
6,830 |
|
|
$ |
(174,229 |
) |
|
$ |
18,085 |
|
|
$ |
(96 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Assets |
|
$ |
24,248,498 |
|
|
$ |
11,633,079 |
|
|
$ |
260,222 |
|
|
$ |
(47,848 |
) |
|
For the quarter ended June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Reportable |
|
|
|
|
|
|
(In thousands) |
|
Segments |
|
Corporate |
|
Eliminations |
|
Popular, Inc. |
|
Net interest income (expense) |
|
$ |
297,491 |
|
|
$ |
(14,698 |
) |
|
$ |
267 |
|
|
$ |
283,060 |
|
Provision for loan losses |
|
|
349,444 |
|
|
|
|
|
|
|
|
|
|
|
349,444 |
|
Non-interest income |
|
|
224,775 |
|
|
|
2,993 |
|
|
|
(1,929 |
) |
|
|
225,839 |
|
Amortization of intangibles |
|
|
2,433 |
|
|
|
|
|
|
|
|
|
|
|
2,433 |
|
Depreciation expense |
|
|
15,974 |
|
|
|
580 |
|
|
|
|
|
|
|
16,554 |
|
Other operating expenses |
|
|
293,725 |
|
|
|
19,469 |
|
|
|
(1,536 |
) |
|
|
311,658 |
|
Income tax expense (benefit) |
|
|
10,100 |
|
|
|
(4,645 |
) |
|
|
(62 |
) |
|
|
5,393 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(149,410 |
) |
|
$ |
(27,109 |
) |
|
$ |
(64 |
) |
|
$ |
(176,583 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Assets |
|
$ |
36,093,951 |
|
|
$ |
5,429,459 |
|
|
$ |
(5,028,070 |
) |
|
$ |
36,495,340 |
|
|
77
For the six months ended June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banco Popular de |
|
Banco Popular |
|
|
|
|
|
Intersegment |
(In thousands) |
|
Puerto Rico |
|
North America |
|
EVERTEC |
|
Eliminations |
|
Net interest income (expense) |
|
$ |
433,068 |
|
|
$ |
157,341 |
|
|
$ |
(481 |
) |
|
|
|
|
Provision for loan losses |
|
|
332,993 |
|
|
|
388,980 |
|
|
|
|
|
|
|
|
|
Non-interest income |
|
|
496,254 |
|
|
|
9,497 |
|
|
|
132,010 |
|
|
$ |
(73,135 |
) |
Amortization of intangibles |
|
|
2,599 |
|
|
|
1,821 |
|
|
|
419 |
|
|
|
|
|
Depreciation expense |
|
|
19,885 |
|
|
|
5,579 |
|
|
|
6,995 |
|
|
|
(22 |
) |
Other operating expenses |
|
|
387,863 |
|
|
|
166,408 |
|
|
|
84,084 |
|
|
|
(72,869 |
) |
Income tax (benefit) expense |
|
|
(659 |
) |
|
|
(8,245 |
) |
|
|
12,065 |
|
|
|
(98 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
186,641 |
|
|
$ |
(387,705 |
) |
|
$ |
27,966 |
|
|
$ |
(146 |
) |
|
For the six months ended June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Reportable |
|
|
|
|
|
|
(In thousands) |
|
Segments |
|
Corporate |
|
Eliminations |
|
Popular, Inc. |
|
Net interest income (expense) |
|
$ |
589,928 |
|
|
$ |
(34,915 |
) |
|
$ |
533 |
|
|
$ |
555,546 |
|
Provision for loan losses |
|
|
721,973 |
|
|
|
|
|
|
|
|
|
|
|
721,973 |
|
Non-interest income (loss) |
|
|
564,626 |
|
|
|
(602 |
) |
|
|
(3,454 |
) |
|
|
560,570 |
|
Amortization of intangibles |
|
|
4,839 |
|
|
|
|
|
|
|
|
|
|
|
4,839 |
|
Depreciation expense |
|
|
32,437 |
|
|
|
1,166 |
|
|
|
|
|
|
|
33,603 |
|
Other operating expenses |
|
|
565,486 |
|
|
|
34,419 |
|
|
|
(3,505 |
) |
|
|
596,400 |
|
Income tax expense (benefit) |
|
|
3,063 |
|
|
|
(24,818 |
) |
|
|
215 |
|
|
|
(21,540 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(173,244 |
) |
|
$ |
(46,284 |
) |
|
$ |
369 |
|
|
$ |
(219,159 |
) |
|
Additional disclosures with respect to the Banco Popular de Puerto Rico reportable segment
are as follows:
2010
For the quarter ended June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
Consumer and |
|
Financial |
|
|
|
|
|
|
|
|
|
Total Banco Popular |
(In thousands) |
|
Banking |
|
Retail Banking |
|
Services |
|
Westernbank |
|
Eliminations |
|
de Puerto Rico |
|
Net interest income |
|
$ |
67,835 |
|
|
$ |
145,155 |
|
|
$ |
2,391 |
|
|
$ |
16,693 |
|
|
$ |
66 |
|
|
$ |
232,140 |
|
Provision for loan losses |
|
|
77,546 |
|
|
|
44,721 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
122,267 |
|
Non-interest income |
|
|
25,808 |
|
|
|
63,987 |
|
|
|
27,567 |
|
|
|
52,587 |
|
|
|
(69 |
) |
|
|
169,880 |
|
Amortization of intangibles |
|
|
25 |
|
|
|
785 |
|
|
|
142 |
|
|
|
406 |
|
|
|
|
|
|
|
1,358 |
|
Depreciation expense |
|
|
4,070 |
|
|
|
5,078 |
|
|
|
299 |
|
|
|
31 |
|
|
|
|
|
|
|
9,478 |
|
Other operating expenses |
|
|
63,832 |
|
|
|
126,981 |
|
|
|
16,242 |
|
|
|
20,148 |
|
|
|
(69 |
) |
|
|
227,134 |
|
Income tax (benefit) expense |
|
|
(19,390 |
) |
|
|
15,412 |
|
|
|
4,903 |
|
|
|
15,296 |
|
|
|
27 |
|
|
|
16,248 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(32,440 |
) |
|
$ |
16,165 |
|
|
$ |
8,372 |
|
|
$ |
33,399 |
|
|
$ |
39 |
|
|
$ |
25,535 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Assets |
|
$ |
8,951,109 |
|
|
$ |
17,073,124 |
|
|
$ |
624,185 |
|
|
$ |
8,863,625 |
|
|
$ |
(3,232,635 |
) |
|
$ |
32,279,408 |
|
|
78
For the six months ended June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
Consumer and |
|
Financial |
|
|
|
|
|
|
|
|
|
Total Banco Popular |
(In thousands) |
|
Banking |
|
Retail Banking |
|
Services |
|
Westernbank |
|
Eliminations |
|
de Puerto Rico |
|
Net interest income |
|
$ |
138,897 |
|
|
$ |
290,887 |
|
|
$ |
4,894 |
|
|
$ |
16,693 |
|
|
$ |
132 |
|
|
$ |
451,503 |
|
Provision for loan losses |
|
|
150,717 |
|
|
|
79,922 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
230,639 |
|
Non-interest income |
|
|
51,332 |
|
|
|
128,888 |
|
|
|
47,681 |
|
|
|
52,587 |
|
|
|
109 |
|
|
|
280,597 |
|
Amortization of intangibles |
|
|
53 |
|
|
|
1,569 |
|
|
|
281 |
|
|
|
406 |
|
|
|
|
|
|
|
2,309 |
|
Depreciation expense |
|
|
8,032 |
|
|
|
10,406 |
|
|
|
604 |
|
|
|
31 |
|
|
|
|
|
|
|
19,073 |
|
Other operating expenses |
|
|
110,865 |
|
|
|
248,907 |
|
|
|
30,476 |
|
|
|
20,148 |
|
|
|
(141 |
) |
|
|
410,255 |
|
Income tax (benefit) expense |
|
|
(34,202 |
) |
|
|
28,299 |
|
|
|
7,714 |
|
|
|
15,296 |
|
|
|
156 |
|
|
|
17,263 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(45,236 |
) |
|
$ |
50,672 |
|
|
$ |
13,500 |
|
|
$ |
33,399 |
|
|
$ |
226 |
|
|
$ |
52,561 |
|
|
2009
For the quarter ended June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Banco |
|
|
Commercial |
|
Consumer and |
|
Other Financial |
|
|
|
|
|
Popular de |
(In thousands) |
|
Banking |
|
Retail Banking |
|
Services |
|
Eliminations |
|
Puerto Rico |
|
Net interest income |
|
$ |
73,823 |
|
|
$ |
139,947 |
|
|
$ |
2,965 |
|
|
$ |
171 |
|
|
$ |
216,906 |
|
Provision for loan losses |
|
|
122,606 |
|
|
|
59,053 |
|
|
|
|
|
|
|
|
|
|
|
181,659 |
|
Non-interest income |
|
|
27,585 |
|
|
|
131,776 |
|
|
|
26,274 |
|
|
|
(202 |
) |
|
|
185,433 |
|
Amortization of intangibles |
|
|
27 |
|
|
|
1,079 |
|
|
|
209 |
|
|
|
|
|
|
|
1,315 |
|
Depreciation expense |
|
|
3,663 |
|
|
|
5,756 |
|
|
|
311 |
|
|
|
|
|
|
|
9,730 |
|
Other operating expenses |
|
|
53,617 |
|
|
|
130,241 |
|
|
|
16,601 |
|
|
|
(79 |
) |
|
|
200,380 |
|
Income tax (benefit) expense |
|
|
(31,664 |
) |
|
|
29,899 |
|
|
|
4,168 |
|
|
|
22 |
|
|
|
2,425 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(46,841 |
) |
|
$ |
45,695 |
|
|
$ |
7,950 |
|
|
$ |
26 |
|
|
$ |
6,830 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Assets |
|
$ |
10,158,302 |
|
|
$ |
17,310,758 |
|
|
$ |
669,492 |
|
|
$ |
(3,890,054 |
) |
|
$ |
24,248,498 |
|
|
For the six months ended June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Banco |
|
|
Commercial |
|
Consumer and |
|
Other Financial |
|
|
|
|
|
Popular de |
(In thousands) |
|
Banking |
|
Retail Banking |
|
Services |
|
Eliminations |
|
Puerto Rico |
|
Net interest income |
|
$ |
148,318 |
|
|
$ |
278,226 |
|
|
$ |
6,185 |
|
|
$ |
339 |
|
|
$ |
433,068 |
|
Provision for loan losses |
|
|
217,469 |
|
|
|
115,524 |
|
|
|
|
|
|
|
|
|
|
|
332,993 |
|
Non-interest income |
|
|
104,627 |
|
|
|
344,807 |
|
|
|
47,264 |
|
|
|
(444 |
) |
|
|
496,254 |
|
Amortization of intangibles |
|
|
103 |
|
|
|
2,111 |
|
|
|
385 |
|
|
|
|
|
|
|
2,599 |
|
Depreciation expense |
|
|
8,733 |
|
|
|
10,509 |
|
|
|
643 |
|
|
|
|
|
|
|
19,885 |
|
Other operating expenses |
|
|
103,572 |
|
|
|
253,436 |
|
|
|
30,988 |
|
|
|
(133 |
) |
|
|
387,863 |
|
Income tax (benefit) expense |
|
|
(56,169 |
) |
|
|
48,426 |
|
|
|
7,067 |
|
|
|
17 |
|
|
|
(659 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(20,763 |
) |
|
$ |
193,027 |
|
|
$ |
14,366 |
|
|
$ |
11 |
|
|
$ |
186,641 |
|
|
79
Additional disclosures with respect to the Banco Popular North America reportable segment are
as follows:
2010
For the quarter ended June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
Banco Popular |
|
|
|
|
|
|
|
|
|
Banco Popular |
(In thousands) |
|
North America |
|
E-LOAN |
|
Eliminations |
|
North America |
|
Net interest income |
|
$ |
74,664 |
|
|
$ |
659 |
|
|
|
|
|
|
$ |
75,323 |
|
Provision for loan losses |
|
|
66,285 |
|
|
|
13,706 |
|
|
|
|
|
|
|
79,991 |
|
Non-interest income (loss) |
|
|
20,882 |
|
|
|
(4,956 |
) |
|
|
|
|
|
|
15,926 |
|
Amortization of intangibles |
|
|
910 |
|
|
|
|
|
|
|
|
|
|
|
910 |
|
Depreciation expense |
|
|
2,174 |
|
|
|
276 |
|
|
|
|
|
|
|
2,450 |
|
Other operating expenses |
|
|
63,347 |
|
|
|
1,576 |
|
|
|
|
|
|
|
64,923 |
|
Income tax expense |
|
|
798 |
|
|
|
|
|
|
|
|
|
|
|
798 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(37,968 |
) |
|
$ |
(19,855 |
) |
|
|
|
|
|
$ |
(57,823 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Assets |
|
$ |
10,518,983 |
|
|
$ |
494,622 |
|
|
$ |
(1,155,740 |
) |
|
$ |
9,857,865 |
|
|
For the six months ended June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
Banco Popular |
|
|
|
|
|
|
|
|
|
Banco Popular |
(In thousands) |
|
North America |
|
E-LOAN |
|
Eliminations |
|
North America |
|
Net interest income |
|
$ |
152,040 |
|
|
$ |
2,193 |
|
|
$ |
(56 |
) |
|
$ |
154,177 |
|
Provision for loan losses |
|
|
185,991 |
|
|
|
25,828 |
|
|
|
|
|
|
|
211,819 |
|
Non-interest income (loss) |
|
|
39,067 |
|
|
|
(6,582 |
) |
|
|
|
|
|
|
32,485 |
|
Amortization of intangibles |
|
|
1,820 |
|
|
|
|
|
|
|
|
|
|
|
1,820 |
|
Depreciation expense |
|
|
4,354 |
|
|
|
527 |
|
|
|
|
|
|
|
4,881 |
|
Other operating expenses |
|
|
125,068 |
|
|
|
3,483 |
|
|
|
|
|
|
|
128,551 |
|
Income tax expense |
|
|
1,584 |
|
|
|
|
|
|
|
|
|
|
|
1,584 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(127,710 |
) |
|
$ |
(34,227 |
) |
|
$ |
(56 |
) |
|
$ |
(161,993 |
) |
|
2009
For the quarter ended June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
Banco Popular |
|
|
|
|
|
|
|
|
|
Banco Popular |
(In thousands) |
|
North America |
|
E-LOAN |
|
Eliminations |
|
North America |
|
Net interest income |
|
$ |
78,817 |
|
|
$ |
1,702 |
|
|
$ |
302 |
|
|
$ |
80,821 |
|
Provision for loan losses |
|
|
131,823 |
|
|
|
35,962 |
|
|
|
|
|
|
|
167,785 |
|
Non-interest income (loss) |
|
|
17,934 |
|
|
|
(12,194 |
) |
|
|
(14 |
) |
|
|
5,726 |
|
Amortization of intangibles |
|
|
910 |
|
|
|
|
|
|
|
|
|
|
|
910 |
|
Depreciation expense |
|
|
2,437 |
|
|
|
295 |
|
|
|
|
|
|
|
2,732 |
|
Other operating expenses |
|
|
83,324 |
|
|
|
5,235 |
|
|
|
2 |
|
|
|
88,561 |
|
Income tax expense |
|
|
788 |
|
|
|
|
|
|
|
|
|
|
|
788 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(122,531 |
) |
|
$ |
(51,984 |
) |
|
$ |
286 |
|
|
$ |
(174,229 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Assets |
|
$ |
12,188,040 |
|
|
$ |
651,805 |
|
|
$ |
(1,206,766 |
) |
|
$ |
11,633,079 |
|
|
80
For the six months ended June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
Banco Popular |
|
|
|
|
|
|
|
|
|
Banco Popular |
(In thousands) |
|
North America |
|
E-LOAN |
|
Eliminations |
|
North America |
|
Net interest income |
|
$ |
149,731 |
|
|
$ |
6,971 |
|
|
$ |
639 |
|
|
$ |
157,341 |
|
Provision for loan losses |
|
|
318,375 |
|
|
|
70,605 |
|
|
|
|
|
|
|
388,980 |
|
Non-interest income (loss) |
|
|
26,803 |
|
|
|
(17,268 |
) |
|
|
(38 |
) |
|
|
9,497 |
|
Amortization of intangibles |
|
|
1,821 |
|
|
|
|
|
|
|
|
|
|
|
1,821 |
|
Depreciation expense |
|
|
4,972 |
|
|
|
607 |
|
|
|
|
|
|
|
5,579 |
|
Other operating expenses |
|
|
153,268 |
|
|
|
13,138 |
|
|
|
2 |
|
|
|
166,408 |
|
Income tax benefit |
|
|
(622 |
) |
|
|
(7,623 |
) |
|
|
|
|
|
|
(8,245 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(301,280 |
) |
|
$ |
(87,024 |
) |
|
$ |
599 |
|
|
$ |
(387,705 |
) |
|
A breakdown of intersegment eliminations, particularly revenues, by segment in which the
revenues are recorded follows:
INTERSEGMENT REVENUES*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended |
|
Six months ended |
|
|
June 30, |
|
June 30, |
|
June 30, |
|
June 30, |
(In thousands) |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
Banco Popular de Puerto Rico: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Banking |
|
|
|
|
|
$ |
1 |
|
|
$ |
1 |
|
|
|
|
|
Consumer and Retail Banking |
|
$ |
2 |
|
|
|
2 |
|
|
|
3 |
|
|
|
|
|
Other Financial Services |
|
|
(94 |
) |
|
|
(62 |
) |
|
|
(164 |
) |
|
$ |
(130 |
) |
Banco Popular North America |
|
|
5 |
|
|
|
8 |
|
|
|
11 |
|
|
|
19 |
|
EVERTEC |
|
|
(37,340 |
) |
|
|
(36,815 |
) |
|
|
(74,728 |
) |
|
|
(73,024 |
) |
|
Total intersegment revenues
from continuing
operations |
|
$ |
(37,427 |
) |
|
$ |
(36,866 |
) |
|
$ |
(74,877 |
) |
|
$ |
(73,135 |
) |
|
* For purposes of the intersegment revenues disclosure, revenues include interest income (expense) related to internal funding and other income derived from intercompany
transactions, mainly related to processing / information technology
services.
A breakdown of revenues and selected balance sheet information by geographical area follows:
Geographic Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended |
|
Six months ended |
|
|
June 30, |
|
June 30, |
|
June 30, |
|
June 30, |
(In thousands) |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
Revenues [1] |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Puerto Rico |
|
$ |
378,499 |
|
|
$ |
406,155 |
|
|
$ |
687,079 |
|
|
$ |
913,285 |
|
United States |
|
|
87,334 |
|
|
|
69,915 |
|
|
|
176,972 |
|
|
|
128,998 |
|
Other |
|
|
29,001 |
|
|
|
32,829 |
|
|
|
57,566 |
|
|
|
73,833 |
|
|
Total consolidated
revenues from
continuing operations |
|
$ |
494,834 |
|
|
$ |
508,899 |
|
|
$ |
921,617 |
|
|
$ |
1,116,116 |
|
|
|
|
|
[1] |
|
Total revenues include net interest income, service charges on deposit
accounts, other service fees, net gain (loss) on sale and valuation adjustments of
investment securities, trading account profit (loss), gain (loss) on sale of loans
and valuation adjustments on loans held-for-sale, FDIC loss share income, fair
value adjustment of equity appreciation instrument, and other operating income. |
81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
June 30, |
(In thousands) |
|
2010 |
|
2009 |
|
2009 |
|
Selected Balance Sheet Information: [1] |
|
|
|
|
|
|
|
|
|
|
|
|
Puerto Rico |
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
31,207,607 |
|
|
$ |
22,480,832 |
|
|
$ |
23,460,745 |
|
Loans |
|
|
17,883,824 |
|
|
|
14,176,793 |
|
|
|
14,622,320 |
|
Deposits |
|
|
18,784,350 |
|
|
|
16,634,123 |
|
|
|
16,896,704 |
|
Mainland United States |
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
9,974,846 |
|
|
$ |
11,033,114 |
|
|
$ |
11,900,910 |
|
Loans |
|
|
7,921,222 |
|
|
|
8,825,559 |
|
|
|
9,511,048 |
|
Deposits |
|
|
7,250,120 |
|
|
|
8,242,604 |
|
|
|
8,880,892 |
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,261,199 |
|
|
$ |
1,222,379 |
|
|
$ |
1,133,685 |
|
Loans |
|
|
841,610 |
|
|
|
801,557 |
|
|
|
715,541 |
|
Deposits [2] |
|
|
1,079,103 |
|
|
|
1,048,167 |
|
|
|
1,135,889 |
|
|
|
|
[1] |
|
Does not include balance sheet information of the discontinued operations for the period ended June 30, 2009. |
|
[2] |
|
Represents deposits from BPPR operations located in the U.S. and British Virgin Islands. |
|
|
Note 30 Subsequent Events
Subsequent events are events and transactions that occur after the balance sheet date but before
financial statements are issued. The effects of subsequent events and transactions are recognized
in the financial statements when they provide additional evidence about conditions that existed at
the balance sheet date. The Corporation has evaluated events and transactions occurring subsequent
to June 30, 2010. Such evaluation resulted in no adjustments to the consolidated financial
statements for the quarter and six months ended June 30, 2010.
As expressed in Note 16 to the consolidated financial statements, in July 2010, the Corporation
prepaid $2 billion of the outstanding balance of the Note payable issued to the FDIC as part of the
Westernbank FDIC-assisted transaction. Also, in July 2010, the Corporation repurchased $175 million
in term notes, which had a contractual maturity of September 2011.
Note 31 Condensed Consolidating Financial Information of Guarantor and Issuers of Registered
Guaranteed Securities
The following condensed consolidating financial information presents the financial position of
Popular, Inc. Holding Company (PIHC) (parent only), Popular International Bank, Inc. (PIBI),
Popular North America, Inc. (PNA), and all other subsidiaries of the Corporation as of June 30,
2010, December 31, 2009 and June 30, 2009, and the results of their operations and cash flows for
periods ended June 30, 2010 and 2009.
PIBI is an operating subsidiary of PIHC and, as of June 30, 2010, is the holding company of its
wholly-owned subsidiaries: Popular Insurance V.I., Inc., EVERTEC LATINOAMERICA, SOCIEDAD ANONIMA,
and PNA. Prior to the internal reorganization discussed in Note 1 to the consolidated financial
statements that was effected in June 2010, ATH Costa Rica S.A., and T.I.I. Smart Solutions Inc.
were also wholly-owned subsidiaries of PIBI.
PNA is an operating subsidiary of PIBI and is the holding company of its wholly-owned
subsidiaries:
|
|
|
Equity One, Inc.; and |
|
|
|
|
Banco Popular North America (BPNA), including its wholly-owned subsidiaries Popular
Equipment Finance, Inc., Popular Insurance Agency, U.S.A., and E-LOAN, Inc. |
PIHC fully and unconditionally guarantees all registered debt securities issued by PNA.
82
The principal source of income for the PIHC consists of dividends from BPPR. As members subject to
the regulations of the Federal Reserve System, BPPR and BPNA must obtain the approval of the
Federal Reserve Board for any dividend if the total of all dividends declared by each entity
during the calendar year would exceed the total of its net income for that year, as defined by the
Federal Reserve Board, combined with its retained net income for the preceding two years, less any
required transfers to surplus or to a fund for the retirement of any preferred stock. The payment
of dividends by BPPR may also be affected by other regulatory requirements and policies, such as
the maintenance of certain minimum capital levels. As of June 30, 2010, BPPR could have declared a
dividend of approximately $96 million (June 30, 2009 $77 million) without the approval of the
Federal Reserve Board. As of December 31, 2009, BPPR was required to obtain the approval of the
Federal Reserve Board to declare a dividend. As of June 30, 2010, December 31, 2009 and June 30,
2009, BPNA was required to obtain the approval of the Federal Reserve Board to declare a dividend.
The Corporation has never received dividend payments from its U.S. subsidiaries. Refer to Popular,
Inc.s Form 10-K for the year ended December 31, 2009 for further information on dividend
restrictions imposed by regulatory requirements and policies on the payment of dividends by BPPR
and BPNA.
83
POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CONDITION
JUNE 30, 2010
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All other |
|
|
|
|
|
|
Popular, Inc. |
|
PIBI |
|
PNA |
|
subsidiaries |
|
Elimination |
|
Popular, Inc. |
(In thousands) |
|
Holding Co. |
|
Holding Co. |
|
Holding Co. |
|
and eliminations |
|
entries |
|
Consolidated |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
825 |
|
|
$ |
295 |
|
|
$ |
735 |
|
|
$ |
744,990 |
|
|
$ |
(2,076 |
) |
|
$ |
744,769 |
|
Money market investments |
|
|
51 |
|
|
|
5,903 |
|
|
|
299 |
|
|
|
2,444,104 |
|
|
|
(6,148 |
) |
|
|
2,444,209 |
|
Trading account securities, at fair value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
401,543 |
|
|
|
|
|
|
|
401,543 |
|
Investment securities available-for-sale, at fair value |
|
|
|
|
|
|
3,373 |
|
|
|
|
|
|
|
6,479,276 |
|
|
|
(1,462 |
) |
|
|
6,481,187 |
|
Investment securities held-to-maturity, at amortized cost |
|
|
395,797 |
|
|
|
1,000 |
|
|
|
|
|
|
|
182,619 |
|
|
|
(370,000 |
) |
|
|
209,416 |
|
Other investment securities, at lower of cost or realizable value |
|
|
10,850 |
|
|
|
1 |
|
|
|
4,492 |
|
|
|
137,219 |
|
|
|
|
|
|
|
152,562 |
|
Investment in subsidiaries |
|
|
3,809,398 |
|
|
|
812,321 |
|
|
|
1,269,857 |
|
|
|
|
|
|
|
(5,891,576 |
) |
|
|
|
|
Loans held-for-sale measured at lower of cost or fair value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101,251 |
|
|
|
|
|
|
|
101,251 |
|
|
Loans held-in-portfolio: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans not covered under loss sharing agreements with FDIC |
|
|
366,632 |
|
|
|
|
|
|
|
|
|
|
|
22,570,367 |
|
|
|
(360,700 |
) |
|
|
22,576,299 |
|
Loans covered under loss sharing agreements with FDIC |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,079,017 |
|
|
|
|
|
|
|
4,079,017 |
|
Less Unearned income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
109,911 |
|
|
|
|
|
|
|
109,911 |
|
Allowance for loan losses |
|
|
60 |
|
|
|
|
|
|
|
|
|
|
|
1,276,956 |
|
|
|
|
|
|
|
1,277,016 |
|
|
Total loans held-in-portfolio, net |
|
|
366,572 |
|
|
|
|
|
|
|
|
|
|
|
25,262,517 |
|
|
|
(360,700 |
) |
|
|
25,268,389 |
|
|
FDIC loss share indemnification asset |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,345,896 |
|
|
|
|
|
|
|
3,345,896 |
|
Premises and equipment, net |
|
|
3,166 |
|
|
|
|
|
|
|
123 |
|
|
|
570,652 |
|
|
|
|
|
|
|
573,941 |
|
Other real estate not covered under loss sharing agreements with
the FDIC |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
142,372 |
|
|
|
|
|
|
|
142,372 |
|
Other real estate covered under loss sharing agreements with the
FDIC |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76,331 |
|
|
|
|
|
|
|
76,331 |
|
Accrued income receivable |
|
|
131 |
|
|
|
5 |
|
|
|
111 |
|
|
|
151,039 |
|
|
|
(41 |
) |
|
|
151,245 |
|
Servicing assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
174,170 |
|
|
|
|
|
|
|
174,170 |
|
Other assets |
|
|
44,262 |
|
|
|
77,812 |
|
|
|
17,984 |
|
|
|
1,300,436 |
|
|
|
(38,422 |
) |
|
|
1,402,072 |
|
Goodwill |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
710,579 |
|
|
|
|
|
|
|
710,579 |
|
Other intangible assets |
|
|
554 |
|
|
|
|
|
|
|
|
|
|
|
63,166 |
|
|
|
|
|
|
|
63,720 |
|
|
Total assets |
|
$ |
4,631,606 |
|
|
$ |
900,710 |
|
|
$ |
1,293,601 |
|
|
$ |
42,288,160 |
|
|
$ |
(6,670,425 |
) |
|
$ |
42,443,652 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,795,414 |
|
|
$ |
(2,076 |
) |
|
$ |
4,793,338 |
|
Interest bearing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,326,383 |
|
|
|
(6,148 |
) |
|
|
22,320,235 |
|
|
Total deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,121,797 |
|
|
|
(8,224 |
) |
|
|
27,113,573 |
|
Federal funds purchased and assets sold under agreements to
repurchase |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,307,194 |
|
|
|
|
|
|
|
2,307,194 |
|
Other short-term borrowings |
|
$ |
1,500 |
|
|
|
|
|
|
$ |
20,000 |
|
|
|
340,463 |
|
|
|
(360,700 |
) |
|
|
1,263 |
|
Notes payable at cost |
|
|
999,698 |
|
|
|
|
|
|
|
429,983 |
|
|
|
6,807,720 |
|
|
|
|
|
|
|
8,237,401 |
|
Subordinated notes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
370,000 |
|
|
|
(370,000 |
) |
|
|
|
|
Other liabilities |
|
|
26,960 |
|
|
$ |
1,838 |
|
|
|
43,955 |
|
|
|
1,148,222 |
|
|
|
(40,202 |
) |
|
|
1,180,773 |
|
|
Total liabilities |
|
|
1,028,158 |
|
|
|
1,838 |
|
|
|
493,938 |
|
|
|
38,095,396 |
|
|
|
(779,126 |
) |
|
|
38,840,204 |
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock |
|
|
50,160 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,160 |
|
Common stock |
|
|
10,229 |
|
|
|
3,961 |
|
|
|
2 |
|
|
|
53,351 |
|
|
|
(57,314 |
) |
|
|
10,229 |
|
Surplus |
|
|
4,085,901 |
|
|
|
3,666,984 |
|
|
|
3,566,208 |
|
|
|
5,485,877 |
|
|
|
(12,710,541 |
) |
|
|
4,094,429 |
|
Accumulated deficit |
|
|
(616,774 |
) |
|
|
(2,764,377 |
) |
|
|
(2,797,501 |
) |
|
|
(1,456,719 |
) |
|
|
7,010,069 |
|
|
|
(625,302 |
) |
Treasury stock, at cost |
|
|
(518 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(518 |
) |
Accumulated other comprehensive income (loss), net of tax |
|
|
74,450 |
|
|
|
(7,696 |
) |
|
|
30,954 |
|
|
|
110,255 |
|
|
|
(133,513 |
) |
|
|
74,450 |
|
|
Total stockholders equity |
|
|
3,603,448 |
|
|
|
898,872 |
|
|
|
799,663 |
|
|
|
4,192,764 |
|
|
|
(5,891,299 |
) |
|
|
3,603,448 |
|
|
Total liabilities and stockholders equity |
|
$ |
4,631,606 |
|
|
$ |
900,710 |
|
|
$ |
1,293,601 |
|
|
$ |
42,288,160 |
|
|
$ |
(6,670,425 |
) |
|
$ |
42,443,652 |
|
|
84
POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CONDITION
DECEMBER 31, 2009
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All other |
|
|
|
|
|
|
Popular, Inc. |
|
PIBI |
|
PNA |
|
subsidiaries |
|
Elimination |
|
Popular, Inc. |
(In thousands) |
|
Holding Co. |
|
Holding Co. |
|
Holding Co. |
|
and eliminations |
|
entries |
|
Consolidated |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
1,174 |
|
|
$ |
300 |
|
|
$ |
738 |
|
|
$ |
677,606 |
|
|
$ |
(2,488 |
) |
|
$ |
677,330 |
|
Money market investments |
|
|
51 |
|
|
|
56,144 |
|
|
|
238 |
|
|
|
1,002,702 |
|
|
|
(56,338 |
) |
|
|
1,002,797 |
|
Trading account securities, at fair value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
462,436 |
|
|
|
|
|
|
|
462,436 |
|
Investment securities available-for-sale, at fair value |
|
|
|
|
|
|
2,448 |
|
|
|
|
|
|
|
6,694,053 |
|
|
|
(1,787 |
) |
|
|
6,694,714 |
|
Investment securities held-to-maturity, at amortized cost |
|
|
455,777 |
|
|
|
1,250 |
|
|
|
|
|
|
|
185,935 |
|
|
|
(430,000 |
) |
|
|
212,962 |
|
Other investment securities, at lower of cost or
realizable value |
|
|
10,850 |
|
|
|
1 |
|
|
|
4,492 |
|
|
|
148,806 |
|
|
|
|
|
|
|
164,149 |
|
Investment in subsidiaries |
|
|
3,046,342 |
|
|
|
733,737 |
|
|
|
1,156,680 |
|
|
|
|
|
|
|
(4,936,759 |
) |
|
|
|
|
Loans held-for-sale measured at lower of cost or fair value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90,796 |
|
|
|
|
|
|
|
90,796 |
|
|
Loans held-in-portfolio |
|
|
109,632 |
|
|
|
|
|
|
|
|
|
|
|
23,844,455 |
|
|
|
(126,824 |
) |
|
|
23,827,263 |
|
Less Unearned income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
114,150 |
|
|
|
|
|
|
|
114,150 |
|
Allowance for loan losses |
|
|
60 |
|
|
|
|
|
|
|
|
|
|
|
1,261,144 |
|
|
|
|
|
|
|
1,261,204 |
|
|
Total loans held-in-portfolio, net |
|
|
109,572 |
|
|
|
|
|
|
|
|
|
|
|
22,469,161 |
|
|
|
(126,824 |
) |
|
|
22,451,909 |
|
|
Premises and equipment, net |
|
|
2,907 |
|
|
|
|
|
|
|
125 |
|
|
|
581,821 |
|
|
|
|
|
|
|
584,853 |
|
Other real estate |
|
|
74 |
|
|
|
|
|
|
|
|
|
|
|
125,409 |
|
|
|
|
|
|
|
125,483 |
|
Accrued income receivable |
|
|
120 |
|
|
|
127 |
|
|
|
132 |
|
|
|
125,857 |
|
|
|
(156 |
) |
|
|
126,080 |
|
Servicing assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
172,505 |
|
|
|
|
|
|
|
172,505 |
|
Other assets |
|
|
33,828 |
|
|
|
73,308 |
|
|
|
21,162 |
|
|
|
1,242,099 |
|
|
|
(48,238 |
) |
|
|
1,322,159 |
|
Goodwill |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
604,349 |
|
|
|
|
|
|
|
604,349 |
|
Other intangible assets |
|
|
554 |
|
|
|
|
|
|
|
|
|
|
|
43,249 |
|
|
|
|
|
|
|
43,803 |
|
|
Total assets |
|
$ |
3,661,249 |
|
|
$ |
867,315 |
|
|
$ |
1,183,567 |
|
|
$ |
34,626,784 |
|
|
$ |
(5,602,590 |
) |
|
$ |
34,736,325 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,497,730 |
|
|
$ |
(2,429 |
) |
|
$ |
4,495,301 |
|
Interest bearing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,485,931 |
|
|
|
(56,338 |
) |
|
|
21,429,593 |
|
|
Total deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,983,661 |
|
|
|
(58,767 |
) |
|
|
25,924,894 |
|
Assets sold under agreements to repurchase |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,632,790 |
|
|
|
|
|
|
|
2,632,790 |
|
Other short-term borrowings |
|
$ |
24,225 |
|
|
|
|
|
|
$ |
700 |
|
|
|
107,226 |
|
|
|
(124,825 |
) |
|
|
7,326 |
|
Notes payable at cost |
|
|
1,064,462 |
|
|
|
|
|
|
|
433,846 |
|
|
|
1,152,324 |
|
|
|
(2,000 |
) |
|
|
2,648,632 |
|
Subordinated notes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
430,000 |
|
|
|
(430,000 |
) |
|
|
|
|
Other liabilities |
|
|
33,745 |
|
|
$ |
40 |
|
|
|
45,547 |
|
|
|
954,525 |
|
|
|
(49,991 |
) |
|
|
983,866 |
|
|
Total liabilities |
|
|
1,122,432 |
|
|
|
40 |
|
|
|
480,093 |
|
|
|
31,260,526 |
|
|
|
(665,583 |
) |
|
|
32,197,508 |
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock |
|
|
50,160 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,160 |
|
Common stock |
|
|
6,395 |
|
|
|
3,961 |
|
|
|
2 |
|
|
|
52,322 |
|
|
|
(56,285 |
) |
|
|
6,395 |
|
Surplus |
|
|
2,797,328 |
|
|
|
3,437,437 |
|
|
|
3,321,208 |
|
|
|
4,637,181 |
|
|
|
(11,388,916 |
) |
|
|
2,804,238 |
|
Accumulated deficit |
|
|
(285,842 |
) |
|
|
(2,541,802 |
) |
|
|
(2,627,520 |
) |
|
|
(1,329,311 |
) |
|
|
6,491,723 |
|
|
|
(292,752 |
) |
Treasury stock, at cost |
|
|
(15 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15 |
) |
Accumulated other comprehensive (loss) income, net of tax |
|
|
(29,209 |
) |
|
|
(32,321 |
) |
|
|
9,784 |
|
|
|
6,066 |
|
|
|
16,471 |
|
|
|
(29,209 |
) |
|
Total stockholders equity |
|
|
2,538,817 |
|
|
|
867,275 |
|
|
|
703,474 |
|
|
|
3,366,258 |
|
|
|
(4,937,007 |
) |
|
|
2,538,817 |
|
|
Total liabilities and stockholders equity |
|
$ |
3,661,249 |
|
|
$ |
867,315 |
|
|
$ |
1,183,567 |
|
|
$ |
34,626,784 |
|
|
$ |
(5,602,590 |
) |
|
$ |
34,736,325 |
|
|
85
POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CONDITION
JUNE 30, 2009
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All other |
|
|
|
|
|
|
Popular, Inc. |
|
PIBI |
|
PNA |
|
subsidiaries |
|
Elimination |
|
Popular, Inc. |
(In thousands) |
|
Holding Co. |
|
Holding Co. |
|
Holding Co. |
|
and eliminations |
|
entries |
|
Consolidated |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
1,341 |
|
|
$ |
175 |
|
|
$ |
382 |
|
|
$ |
662,124 |
|
|
$ |
(2,170 |
) |
|
$ |
661,852 |
|
Money market investments |
|
|
11,729 |
|
|
|
47,185 |
|
|
|
308 |
|
|
|
951,611 |
|
|
|
(59,186 |
) |
|
|
951,647 |
|
Trading account securities, at fair value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
487,182 |
|
|
|
|
|
|
|
487,182 |
|
Investment securities available-for-sale, at fair value |
|
|
197,125 |
|
|
|
3,115 |
|
|
|
|
|
|
|
7,046,219 |
|
|
|
|
|
|
|
7,246,459 |
|
Investment securities held-to-maturity, at amortized cost |
|
|
455,794 |
|
|
|
1,250 |
|
|
|
|
|
|
|
293,017 |
|
|
|
(430,000 |
) |
|
|
320,061 |
|
Other investment securities, at lower of cost or realizable value |
|
|
14,425 |
|
|
|
1 |
|
|
|
12,392 |
|
|
|
188,105 |
|
|
|
|
|
|
|
214,923 |
|
Investment in subsidiaries |
|
|
2,915,614 |
|
|
|
577,113 |
|
|
|
1,238,697 |
|
|
|
|
|
|
|
(4,731,424 |
) |
|
|
|
|
Loans held-for-sale measured at lower of cost or fair value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
242,847 |
|
|
|
|
|
|
|
242,847 |
|
|
Loans held-in-portfolio |
|
|
53,225 |
|
|
|
|
|
|
|
4,300 |
|
|
|
24,732,416 |
|
|
|
(72,620 |
) |
|
|
24,717,321 |
|
Less Unearned income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
111,259 |
|
|
|
|
|
|
|
111,259 |
|
Allowance for loan losses |
|
|
60 |
|
|
|
|
|
|
|
|
|
|
|
1,146,179 |
|
|
|
|
|
|
|
1,146,239 |
|
|
Total loans held-in-portfolio |
|
|
53,165 |
|
|
|
|
|
|
|
4,300 |
|
|
|
23,474,978 |
|
|
|
(72,620 |
) |
|
|
23,459,823 |
|
|
Premises and equipment, net |
|
|
17,936 |
|
|
|
|
|
|
|
127 |
|
|
|
596,303 |
|
|
|
|
|
|
|
614,366 |
|
Other real estate |
|
|
74 |
|
|
|
|
|
|
|
|
|
|
|
105,479 |
|
|
|
|
|
|
|
105,553 |
|
Accrued income receivable |
|
|
981 |
|
|
|
144 |
|
|
|
311 |
|
|
|
134,710 |
|
|
|
(168 |
) |
|
|
135,978 |
|
Servicing assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
184,189 |
|
|
|
|
|
|
|
184,189 |
|
Other assets |
|
|
91,245 |
|
|
|
67,255 |
|
|
|
18,832 |
|
|
|
1,069,808 |
|
|
|
(32,291 |
) |
|
|
1,214,849 |
|
Goodwill |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
607,164 |
|
|
|
|
|
|
|
607,164 |
|
Other intangible assets |
|
|
554 |
|
|
|
|
|
|
|
|
|
|
|
47,893 |
|
|
|
|
|
|
|
48,447 |
|
Assets from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,452 |
|
|
|
|
|
|
|
3,452 |
|
|
Total assets |
|
$ |
3,759,983 |
|
|
$ |
696,238 |
|
|
$ |
1,275,349 |
|
|
$ |
36,095,081 |
|
|
$ |
(5,327,859 |
) |
|
$ |
36,498,792 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,410,977 |
|
|
$ |
(2,112 |
) |
|
$ |
4,408,865 |
|
Interest bearing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,552,078 |
|
|
|
(47,458 |
) |
|
|
22,504,620 |
|
|
Total deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,963,055 |
|
|
|
(49,570 |
) |
|
|
26,913,485 |
|
Federal funds purchased and assets sold under agreements
to repurchase |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,953,406 |
|
|
|
(11,728 |
) |
|
|
2,941,678 |
|
Other short-term borrowings |
|
$ |
24,520 |
|
|
|
|
|
|
|
|
|
|
|
47,925 |
|
|
|
(70,620 |
) |
|
|
1,825 |
|
Notes payable at cost |
|
|
793,300 |
|
|
|
|
|
|
$ |
692,092 |
|
|
|
1,160,330 |
|
|
|
(2,000 |
) |
|
|
2,643,722 |
|
Subordinated notes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
430,000 |
|
|
|
(430,000 |
) |
|
|
|
|
Other liabilities |
|
|
42,462 |
|
|
$ |
97 |
|
|
|
42,086 |
|
|
|
1,032,409 |
|
|
|
(32,599 |
) |
|
|
1,084,455 |
|
Liabilities from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,926 |
|
|
|
|
|
|
|
13,926 |
|
|
Total liabilities |
|
|
860,282 |
|
|
|
97 |
|
|
|
734,178 |
|
|
|
32,601,051 |
|
|
|
(596,517 |
) |
|
|
33,599,091 |
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock |
|
|
1,487,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,487,000 |
|
Common stock |
|
|
2,820 |
|
|
|
3,961 |
|
|
|
2 |
|
|
|
52,322 |
|
|
|
(56,285 |
) |
|
|
2,820 |
|
Surplus |
|
|
2,176,963 |
|
|
|
2,966,193 |
|
|
|
2,849,964 |
|
|
|
4,365,510 |
|
|
|
(10,172,873 |
) |
|
|
2,185,757 |
|
Accumulated deficit |
|
|
(650,371 |
) |
|
|
(2,223,211 |
) |
|
|
(2,302,924 |
) |
|
|
(855,291 |
) |
|
|
5,372,632 |
|
|
|
(659,165 |
) |
Treasury stock, at cost |
|
|
(11 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11 |
) |
Accumulated other comprehensive loss, net of tax |
|
|
(116,700 |
) |
|
|
(50,802 |
) |
|
|
(5,871 |
) |
|
|
(68,511 |
) |
|
|
125,184 |
|
|
|
(116,700 |
) |
|
Total stockholders equity |
|
|
2,899,701 |
|
|
|
696,141 |
|
|
|
541,171 |
|
|
|
3,494,030 |
|
|
|
(4,731,342 |
) |
|
|
2,899,701 |
|
|
Total liabilities and stockholders equity |
|
$ |
3,759,983 |
|
|
$ |
696,238 |
|
|
$ |
1,275,349 |
|
|
$ |
36,095,081 |
|
|
$ |
(5,327,859 |
) |
|
$ |
36,498,792 |
|
|
86
POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED JUNE 30, 2010
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All other |
|
|
|
|
|
|
Popular, Inc. |
|
PIBI |
|
PNA |
|
subsidiaries |
|
Elimination |
|
Popular, Inc. |
(In thousands) |
|
Holding Co. |
|
Holding Co. |
|
Holding Co. |
|
and eliminations |
|
entries |
|
Consolidated |
|
INTEREST AND DIVIDEND INCOME: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
$ |
2,141 |
|
|
|
|
|
|
|
|
|
|
$ |
385,093 |
|
|
$ |
(1,920 |
) |
|
$ |
385,314 |
|
Money market investments |
|
|
50 |
|
|
$ |
10 |
|
|
$ |
1 |
|
|
|
1,893 |
|
|
|
(61 |
) |
|
|
1,893 |
|
Investment securities |
|
|
6,274 |
|
|
|
8 |
|
|
|
80 |
|
|
|
62,401 |
|
|
|
(5,848 |
) |
|
|
62,915 |
|
Trading account securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,599 |
|
|
|
|
|
|
|
6,599 |
|
|
Total interest and dividend income |
|
|
8,465 |
|
|
|
18 |
|
|
|
81 |
|
|
|
455,986 |
|
|
|
(7,829 |
) |
|
|
456,721 |
|
|
INTEREST EXPENSE: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90,625 |
|
|
|
(10 |
) |
|
|
90,615 |
|
Short-term borrowings |
|
|
10 |
|
|
|
|
|
|
|
91 |
|
|
|
17,423 |
|
|
|
(1,972 |
) |
|
|
15,552 |
|
Long-term debt |
|
|
29,511 |
|
|
|
|
|
|
|
7,650 |
|
|
|
40,427 |
|
|
|
(6,010 |
) |
|
|
71,578 |
|
|
Total interest expense |
|
|
29,521 |
|
|
|
|
|
|
|
7,741 |
|
|
|
148,475 |
|
|
|
(7,992 |
) |
|
|
177,745 |
|
|
Net interest (loss) income |
|
|
(21,056 |
) |
|
|
18 |
|
|
|
(7,660 |
) |
|
|
307,511 |
|
|
|
163 |
|
|
|
278,976 |
|
Provision for loan losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
202,258 |
|
|
|
|
|
|
|
202,258 |
|
|
Net interest (loss) income after provision for loan losses |
|
|
(21,056 |
) |
|
|
18 |
|
|
|
(7,660 |
) |
|
|
105,253 |
|
|
|
163 |
|
|
|
76,718 |
|
Service charges on deposit accounts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,679 |
|
|
|
|
|
|
|
50,679 |
|
Other service fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
105,770 |
|
|
|
(2,045 |
) |
|
|
103,725 |
|
Net gain on sale and valuation adjustments of investment securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
397 |
|
|
|
|
|
|
|
397 |
|
Trading account profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,464 |
|
|
|
|
|
|
|
2,464 |
|
Loss on sale of loans, including adjustments to indemnity reserves,
and valuation adjustments on loans held-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,311 |
) |
|
|
|
|
|
|
(9,311 |
) |
FDIC loss share income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,334 |
|
|
|
|
|
|
|
23,334 |
|
Fair value adjustment of equity appreciation instrument |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,394 |
|
|
|
|
|
|
|
24,394 |
|
Other operating (loss) income |
|
|
(693 |
) |
|
|
4,997 |
|
|
|
(248 |
) |
|
|
17,194 |
|
|
|
(1,074 |
) |
|
|
20,176 |
|
|
Total non-interest (loss) income |
|
|
(693 |
) |
|
|
4,997 |
|
|
|
(248 |
) |
|
|
214,921 |
|
|
|
(3,119 |
) |
|
|
215,858 |
|
|
OPERATING EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel costs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries |
|
|
5,529 |
|
|
|
105 |
|
|
|
|
|
|
|
103,800 |
|
|
|
(310 |
) |
|
|
109,124 |
|
Pension and other benefits |
|
|
817 |
|
|
|
15 |
|
|
|
|
|
|
|
28,076 |
|
|
|
|
|
|
|
28,908 |
|
|
Total personnel costs |
|
|
6,346 |
|
|
|
120 |
|
|
|
|
|
|
|
131,876 |
|
|
|
(310 |
) |
|
|
138,032 |
|
Net occupancy expenses |
|
|
757 |
|
|
|
11 |
|
|
|
|
|
|
|
28,290 |
|
|
|
|
|
|
|
29,058 |
|
Equipment expenses |
|
|
740 |
|
|
|
|
|
|
|
|
|
|
|
24,606 |
|
|
|
|
|
|
|
25,346 |
|
Other taxes |
|
|
457 |
|
|
|
|
|
|
|
|
|
|
|
12,002 |
|
|
|
|
|
|
|
12,459 |
|
Professional fees |
|
|
3,583 |
|
|
|
3 |
|
|
|
3 |
|
|
|
31,259 |
|
|
|
(623 |
) |
|
|
34,225 |
|
Communications |
|
|
112 |
|
|
|
5 |
|
|
|
5 |
|
|
|
11,220 |
|
|
|
|
|
|
|
11,342 |
|
Business promotion |
|
|
269 |
|
|
|
|
|
|
|
|
|
|
|
9,935 |
|
|
|
|
|
|
|
10,204 |
|
Printing and supplies |
|
|
23 |
|
|
|
|
|
|
|
|
|
|
|
2,630 |
|
|
|
|
|
|
|
2,653 |
|
FDIC deposit insurance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,393 |
|
|
|
|
|
|
|
17,393 |
|
Other operating expenses |
|
|
(12,155 |
) |
|
|
(99 |
) |
|
|
108 |
|
|
|
57,823 |
|
|
|
(428 |
) |
|
|
45,249 |
|
Amortization of intangibles |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,455 |
|
|
|
|
|
|
|
2,455 |
|
|
Total operating expenses |
|
|
132 |
|
|
|
40 |
|
|
|
116 |
|
|
|
329,489 |
|
|
|
(1,361 |
) |
|
|
328,416 |
|
|
(Loss) income before income tax and equity in losses of subsidiaries |
|
|
(21,881 |
) |
|
|
4,975 |
|
|
|
(8,024 |
) |
|
|
(9,315 |
) |
|
|
(1,595 |
) |
|
|
(35,840 |
) |
Income tax (benefit) expense |
|
|
(1,616 |
) |
|
|
1,791 |
|
|
|
|
|
|
|
19,846 |
|
|
|
(33 |
) |
|
|
19,988 |
|
|
(Loss) income before equity in losses of subsidiaries |
|
|
(20,265 |
) |
|
|
3,184 |
|
|
|
(8,024 |
) |
|
|
(29,161 |
) |
|
|
(1,562 |
) |
|
|
(55,828 |
) |
Equity in undistributed losses of subsidiaries |
|
|
(35,563 |
) |
|
|
(66,736 |
) |
|
|
(59,613 |
) |
|
|
|
|
|
|
161,912 |
|
|
|
|
|
|
NET LOSS |
|
$ |
(55,828 |
) |
|
$ |
(63,552 |
) |
|
$ |
(67,637 |
) |
|
$ |
(29,161 |
) |
|
$ |
160,350 |
|
|
$ |
(55,828 |
) |
|
87
POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED JUNE 30, 2009
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All other |
|
|
|
|
|
|
Popular, Inc. |
|
PIBI |
|
PNA |
|
subsidiaries |
|
Elimination |
|
Popular, Inc. |
(In thousands) |
|
Holding Co. |
|
Holding Co. |
|
Holding Co. |
|
and eliminations |
|
entries |
|
Consolidated |
|
INTEREST AND DIVIDEND INCOME: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend income from subsidiaries |
|
$ |
33,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(33,000 |
) |
|
|
|
|
Loans |
|
|
4,203 |
|
|
|
|
|
|
$ |
32 |
|
|
$ |
382,015 |
|
|
|
(4,006 |
) |
|
$ |
382,244 |
|
Money market investments |
|
|
16 |
|
|
$ |
296 |
|
|
|
30 |
|
|
|
2,381 |
|
|
|
(342 |
) |
|
|
2,381 |
|
Investment securities |
|
|
10,595 |
|
|
|
13 |
|
|
|
224 |
|
|
|
72,002 |
|
|
|
(7,016 |
) |
|
|
75,818 |
|
Trading account securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,603 |
|
|
|
|
|
|
|
10,603 |
|
|
Total interest and dividend income |
|
|
47,814 |
|
|
|
309 |
|
|
|
286 |
|
|
|
467,001 |
|
|
|
(44,364 |
) |
|
|
471,046 |
|
|
INTEREST EXPENSE: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
128,776 |
|
|
|
(324 |
) |
|
|
128,452 |
|
Short-term borrowings |
|
|
27 |
|
|
|
|
|
|
|
(14 |
) |
|
|
20,624 |
|
|
|
(4,006 |
) |
|
|
16,631 |
|
Long-term debt |
|
|
13,136 |
|
|
|
|
|
|
|
17,412 |
|
|
|
19,656 |
|
|
|
(7,301 |
) |
|
|
42,903 |
|
|
Total interest expense |
|
|
13,163 |
|
|
|
|
|
|
|
17,398 |
|
|
|
169,056 |
|
|
|
(11,631 |
) |
|
|
187,986 |
|
|
Net interest income (loss) |
|
|
34,651 |
|
|
|
309 |
|
|
|
(17,112 |
) |
|
|
297,945 |
|
|
|
(32,733 |
) |
|
|
283,060 |
|
Provision for loan losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
349,444 |
|
|
|
|
|
|
|
349,444 |
|
|
Net interest income (loss) after provision for loan losses |
|
|
34,651 |
|
|
|
309 |
|
|
|
(17,112 |
) |
|
|
(51,499 |
) |
|
|
(32,733 |
) |
|
|
(66,384 |
) |
Service charges on deposit accounts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53,463 |
|
|
|
|
|
|
|
53,463 |
|
Other service fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
103,983 |
|
|
|
(1,546 |
) |
|
|
102,437 |
|
Net gain on sale and valuation adjustments of investment securities |
|
|
950 |
|
|
|
|
|
|
|
|
|
|
|
52,755 |
|
|
|
|
|
|
|
53,705 |
|
Trading account profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,839 |
|
|
|
|
|
|
|
16,839 |
|
Loss on sale of loans and valuation adjustments on loans
held-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,453 |
) |
|
|
|
|
|
|
(13,453 |
) |
Other operating income (loss) |
|
|
675 |
|
|
|
4,791 |
|
|
|
(3,091 |
) |
|
|
10,855 |
|
|
|
(382 |
) |
|
|
12,848 |
|
|
Total non-interest income (loss) |
|
|
1,625 |
|
|
|
4,791 |
|
|
|
(3,091 |
) |
|
|
224,442 |
|
|
|
(1,928 |
) |
|
|
225,839 |
|
|
OPERATING EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel costs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries |
|
|
6,464 |
|
|
|
97 |
|
|
|
|
|
|
|
100,518 |
|
|
|
|
|
|
|
107,079 |
|
Pension, profit sharing and other benefits |
|
|
1,891 |
|
|
|
15 |
|
|
|
|
|
|
|
27,221 |
|
|
|
|
|
|
|
29,127 |
|
|
Total personnel costs |
|
|
8,355 |
|
|
|
112 |
|
|
|
|
|
|
|
127,739 |
|
|
|
|
|
|
|
136,206 |
|
Net occupancy expenses |
|
|
634 |
|
|
|
7 |
|
|
|
1 |
|
|
|
25,382 |
|
|
|
|
|
|
|
26,024 |
|
Equipment expenses |
|
|
814 |
|
|
|
|
|
|
|
1 |
|
|
|
24,387 |
|
|
|
|
|
|
|
25,202 |
|
Other taxes |
|
|
1,011 |
|
|
|
|
|
|
|
|
|
|
|
12,073 |
|
|
|
|
|
|
|
13,084 |
|
Professional fees |
|
|
3,824 |
|
|
|
4 |
|
|
|
(61 |
) |
|
|
24,423 |
|
|
|
(1,142 |
) |
|
|
27,048 |
|
Communications |
|
|
124 |
|
|
|
5 |
|
|
|
8 |
|
|
|
12,249 |
|
|
|
|
|
|
|
12,386 |
|
Business promotion |
|
|
269 |
|
|
|
|
|
|
|
|
|
|
|
9,677 |
|
|
|
|
|
|
|
9,946 |
|
Printing and supplies |
|
|
27 |
|
|
|
|
|
|
|
|
|
|
|
2,990 |
|
|
|
|
|
|
|
3,017 |
|
FDIC deposit insurance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,331 |
|
|
|
|
|
|
|
36,331 |
|
Other operating expenses |
|
|
(10,517 |
) |
|
|
(100 |
) |
|
|
111 |
|
|
|
49,868 |
|
|
|
(394 |
) |
|
|
38,968 |
|
Amortization of intangibles |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,433 |
|
|
|
|
|
|
|
2,433 |
|
|
Total operating expenses |
|
|
4,541 |
|
|
|
28 |
|
|
|
60 |
|
|
|
327,552 |
|
|
|
(1,536 |
) |
|
|
330,645 |
|
|
Income (loss) before income tax and equity in losses of subsidiaries |
|
|
31,735 |
|
|
|
5,072 |
|
|
|
(20,263 |
) |
|
|
(154,609 |
) |
|
|
(33,125 |
) |
|
|
(171,190 |
) |
Income tax (benefit) expense |
|
|
(1,483 |
) |
|
|
14 |
|
|
|
1,984 |
|
|
|
4,940 |
|
|
|
(62 |
) |
|
|
5,393 |
|
|
Income (loss) before equity in losses of subsidiaries |
|
|
33,218 |
|
|
|
5,058 |
|
|
|
(22,247 |
) |
|
|
(159,549 |
) |
|
|
(33,063 |
) |
|
|
(176,583 |
) |
Equity in undistributed losses of subsidiaries |
|
|
(209,801 |
) |
|
|
(190,825 |
) |
|
|
(176,929 |
) |
|
|
|
|
|
|
577,555 |
|
|
|
|
|
|
Loss from continuing operations |
|
|
(176,583 |
) |
|
|
(185,767 |
) |
|
|
(199,176 |
) |
|
|
(159,549 |
) |
|
|
544,492 |
|
|
|
(176,583 |
) |
Loss from discontinued operations, net of income tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,599 |
) |
|
|
|
|
|
|
(6,599 |
) |
Equity in undistributed losses of discontinued operations |
|
|
(6,599 |
) |
|
|
(6,599 |
) |
|
|
(6,599 |
) |
|
|
|
|
|
|
19,797 |
|
|
|
|
|
|
NET LOSS |
|
$ |
(183,182 |
) |
|
$ |
(192,366 |
) |
|
$ |
(205,775 |
) |
|
$ |
(166,148 |
) |
|
$ |
564,289 |
|
|
$ |
(183,182 |
) |
|
88
POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2010
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All other |
|
|
|
|
|
|
Popular, Inc. |
|
PIBI |
|
PNA |
|
subsidiaries |
|
Elimination |
|
Popular, Inc. |
(In thousands) |
|
Holding Co. |
|
Holding Co. |
|
Holding Co. |
|
and eliminations |
|
entries |
|
Consolidated |
|
INTEREST AND DIVIDEND INCOME: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend income from subsidiaries |
|
$ |
87,400 |
|
|
$ |
7,500 |
|
|
|
|
|
|
|
|
|
|
$ |
(94,900 |
) |
|
|
|
|
Loans |
|
|
3,084 |
|
|
|
|
|
|
|
|
|
|
$ |
739,601 |
|
|
|
(2,722 |
) |
|
$ |
739,963 |
|
Money market investments |
|
|
50 |
|
|
|
222 |
|
|
$ |
1 |
|
|
|
2,935 |
|
|
|
(273 |
) |
|
|
2,935 |
|
Investment securities |
|
|
13,440 |
|
|
|
17 |
|
|
|
161 |
|
|
|
126,913 |
|
|
|
(12,690 |
) |
|
|
127,841 |
|
Trading account securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,177 |
|
|
|
|
|
|
|
13,177 |
|
|
Total interest and dividend income |
|
|
103,974 |
|
|
|
7,739 |
|
|
|
162 |
|
|
|
882,626 |
|
|
|
(110,585 |
) |
|
|
883,916 |
|
|
INTEREST EXPENSE: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
183,811 |
|
|
|
(222 |
) |
|
|
183,589 |
|
Short-term borrowings |
|
|
38 |
|
|
|
|
|
|
|
122 |
|
|
|
33,409 |
|
|
|
(2,758 |
) |
|
|
30,811 |
|
Long-term debt |
|
|
59,746 |
|
|
|
|
|
|
|
15,325 |
|
|
|
59,582 |
|
|
|
(13,030 |
) |
|
|
121,623 |
|
|
Total interest expense |
|
|
59,784 |
|
|
|
|
|
|
|
15,447 |
|
|
|
276,802 |
|
|
|
(16,010 |
) |
|
|
336,023 |
|
|
Net interest income (loss) |
|
|
44,190 |
|
|
|
7,739 |
|
|
|
(15,285 |
) |
|
|
605,824 |
|
|
|
(94,575 |
) |
|
|
547,893 |
|
Provision for loan losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
442,458 |
|
|
|
|
|
|
|
442,458 |
|
|
Net interest income (loss) after provision for loan losses |
|
|
44,190 |
|
|
|
7,739 |
|
|
|
(15,285 |
) |
|
|
163,366 |
|
|
|
(94,575 |
) |
|
|
105,435 |
|
Service charges on deposit accounts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101,257 |
|
|
|
|
|
|
|
101,257 |
|
Other service fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
207,648 |
|
|
|
(2,603 |
) |
|
|
205,045 |
|
Net gain on sale and valuation adjustments of investment securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
478 |
|
|
|
|
|
|
|
478 |
|
Trading account profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,241 |
|
|
|
|
|
|
|
2,241 |
|
Loss on sale of loans, including adjustments to indemnity reserves,
and valuation adjustments on loans held-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21,533 |
) |
|
|
|
|
|
|
(21,533 |
) |
FDIC loss share income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,334 |
|
|
|
|
|
|
|
23,334 |
|
Fair value adjustment of equity appreciation instrument |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,394 |
|
|
|
|
|
|
|
24,394 |
|
Other operating income (loss) |
|
|
1,216 |
|
|
|
11,561 |
|
|
|
(1,474 |
) |
|
|
28,427 |
|
|
|
(1,222 |
) |
|
|
38,508 |
|
|
Total non-interest income (loss) |
|
|
1,216 |
|
|
|
11,561 |
|
|
|
(1,474 |
) |
|
|
366,246 |
|
|
|
(3,825 |
) |
|
|
373,724 |
|
|
OPERATING EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel costs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries |
|
|
10,963 |
|
|
|
191 |
|
|
|
|
|
|
|
194,224 |
|
|
|
(381 |
) |
|
|
204,997 |
|
Pension and other benefits |
|
|
1,570 |
|
|
|
28 |
|
|
|
|
|
|
|
52,387 |
|
|
|
(18 |
) |
|
|
53,967 |
|
|
Total personnel costs |
|
|
12,533 |
|
|
|
219 |
|
|
|
|
|
|
|
246,611 |
|
|
|
(399 |
) |
|
|
258,964 |
|
Net occupancy expenses |
|
|
1,407 |
|
|
|
18 |
|
|
|
1 |
|
|
|
56,508 |
|
|
|
|
|
|
|
57,934 |
|
Equipment expenses |
|
|
1,440 |
|
|
|
|
|
|
|
|
|
|
|
47,359 |
|
|
|
|
|
|
|
48,799 |
|
Other taxes |
|
|
824 |
|
|
|
|
|
|
|
|
|
|
|
23,939 |
|
|
|
|
|
|
|
24,763 |
|
Professional fees |
|
|
6,952 |
|
|
|
7 |
|
|
|
6 |
|
|
|
55,549 |
|
|
|
(1,240 |
) |
|
|
61,274 |
|
Communications |
|
|
233 |
|
|
|
11 |
|
|
|
5 |
|
|
|
21,865 |
|
|
|
|
|
|
|
22,114 |
|
Business promotion |
|
|
442 |
|
|
|
|
|
|
|
|
|
|
|
18,057 |
|
|
|
|
|
|
|
18,499 |
|
Printing and supplies |
|
|
40 |
|
|
|
|
|
|
|
|
|
|
|
4,982 |
|
|
|
|
|
|
|
5,022 |
|
FDIC deposit insurance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,711 |
|
|
|
|
|
|
|
32,711 |
|
Other operating expenses |
|
|
(23,088 |
) |
|
|
(199 |
) |
|
|
216 |
|
|
|
98,766 |
|
|
|
(950 |
) |
|
|
74,745 |
|
Amortization of intangibles |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,504 |
|
|
|
|
|
|
|
4,504 |
|
|
Total operating expenses |
|
|
783 |
|
|
|
56 |
|
|
|
228 |
|
|
|
610,851 |
|
|
|
(2,589 |
) |
|
|
609,329 |
|
|
Income (loss) before income tax and equity in losses of subsidiaries |
|
|
44,623 |
|
|
|
19,244 |
|
|
|
(16,987 |
) |
|
|
(81,239 |
) |
|
|
(95,811 |
) |
|
|
(130,170 |
) |
Income tax (benefit) expense |
|
|
(1,639 |
) |
|
|
1,801 |
|
|
|
|
|
|
|
10,369 |
|
|
|
182 |
|
|
|
10,713 |
|
|
Income (loss) before equity in losses of subsidiaries |
|
|
46,262 |
|
|
|
17,443 |
|
|
|
(16,987 |
) |
|
|
(91,608 |
) |
|
|
(95,993 |
) |
|
|
(140,883 |
) |
Equity in undistributed losses of subsidiaries |
|
|
(187,145 |
) |
|
|
(176,118 |
) |
|
|
(152,994 |
) |
|
|
|
|
|
|
516,257 |
|
|
|
|
|
|
NET LOSS |
|
$ |
(140,883 |
) |
|
$ |
(158,675 |
) |
|
$ |
(169,981 |
) |
|
$ |
(91,608 |
) |
|
$ |
420,264 |
|
|
$ |
(140,883 |
) |
|
89
POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2009
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All other |
|
|
|
|
|
|
Popular, Inc. |
|
PIBI |
|
PNA |
|
subsidiaries |
|
Elimination |
|
Popular, Inc. |
(In thousands) |
|
Holding Co. |
|
Holding Co. |
|
Holding Co. |
|
and eliminations |
|
entries |
|
Consolidated |
|
INTEREST AND DIVIDEND INCOME: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend income from subsidiaries |
|
$ |
73,625 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(73,625 |
) |
|
|
|
|
Loans |
|
|
5,761 |
|
|
|
|
|
|
$ |
39 |
|
|
$ |
783,546 |
|
|
|
(5,334 |
) |
|
$ |
784,012 |
|
Money market investments |
|
|
91 |
|
|
$ |
592 |
|
|
|
2,156 |
|
|
|
5,515 |
|
|
|
(2,840 |
) |
|
|
5,514 |
|
Investment securities |
|
|
21,474 |
|
|
|
48 |
|
|
|
447 |
|
|
|
141,363 |
|
|
|
(14,031 |
) |
|
|
149,301 |
|
Trading account securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,411 |
|
|
|
|
|
|
|
21,411 |
|
|
Total interest and dividend income |
|
|
100,951 |
|
|
|
640 |
|
|
|
2,642 |
|
|
|
951,835 |
|
|
|
(95,830 |
) |
|
|
960,238 |
|
|
INTEREST EXPENSE: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
279,235 |
|
|
|
(2,744 |
) |
|
|
276,491 |
|
Short-term borrowings |
|
|
97 |
|
|
|
|
|
|
|
27 |
|
|
|
42,604 |
|
|
|
(5,394 |
) |
|
|
37,334 |
|
Long-term debt |
|
|
25,950 |
|
|
|
|
|
|
|
40,356 |
|
|
|
39,162 |
|
|
|
(14,601 |
) |
|
|
90,867 |
|
|
Total interest expense |
|
|
26,047 |
|
|
|
|
|
|
|
40,383 |
|
|
|
361,001 |
|
|
|
(22,739 |
) |
|
|
404,692 |
|
|
Net interest income (loss) |
|
|
74,904 |
|
|
|
640 |
|
|
|
(37,741 |
) |
|
|
590,834 |
|
|
|
(73,091 |
) |
|
|
555,546 |
|
Provision for loan losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
721,973 |
|
|
|
|
|
|
|
721,973 |
|
|
Net interest income (loss) after provision for loan losses |
|
|
74,904 |
|
|
|
640 |
|
|
|
(37,741 |
) |
|
|
(131,139 |
) |
|
|
(73,091 |
) |
|
|
(166,427 |
) |
Service charges on deposit accounts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
107,204 |
|
|
|
|
|
|
|
107,204 |
|
Other service fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
203,304 |
|
|
|
(2,334 |
) |
|
|
200,970 |
|
Net gain (loss) on sale and valuation adjustments of investment
securities |
|
|
950 |
|
|
|
(6,589 |
) |
|
|
|
|
|
|
235,490 |
|
|
|
|
|
|
|
229,851 |
|
Trading account profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,662 |
|
|
|
|
|
|
|
23,662 |
|
Loss on sale of loans and valuation adjustments on loans
held-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(27,266 |
) |
|
|
|
|
|
|
(27,266 |
) |
Other operating income (loss) |
|
|
683 |
|
|
|
8,359 |
|
|
|
(3,499 |
) |
|
|
21,726 |
|
|
|
(1,120 |
) |
|
|
26,149 |
|
|
Total non-interest income (loss) |
|
|
1,633 |
|
|
|
1,770 |
|
|
|
(3,499 |
) |
|
|
564,120 |
|
|
|
(3,454 |
) |
|
|
560,570 |
|
|
OPERATING EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel costs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries |
|
|
11,712 |
|
|
|
189 |
|
|
|
|
|
|
|
200,501 |
|
|
|
|
|
|
|
212,402 |
|
Pension, profit sharing and other benefits |
|
|
4,295 |
|
|
|
35 |
|
|
|
|
|
|
|
64,765 |
|
|
|
|
|
|
|
69,095 |
|
|
Total personnel costs |
|
|
16,007 |
|
|
|
224 |
|
|
|
|
|
|
|
265,266 |
|
|
|
|
|
|
|
281,497 |
|
Net occupancy expenses |
|
|
1,288 |
|
|
|
15 |
|
|
|
2 |
|
|
|
51,160 |
|
|
|
|
|
|
|
52,465 |
|
Equipment expenses |
|
|
1,574 |
|
|
|
|
|
|
|
3 |
|
|
|
49,729 |
|
|
|
|
|
|
|
51,306 |
|
Other taxes |
|
|
1,843 |
|
|
|
|
|
|
|
|
|
|
|
24,417 |
|
|
|
|
|
|
|
26,260 |
|
Professional fees |
|
|
6,991 |
|
|
|
7 |
|
|
|
(61 |
) |
|
|
47,679 |
|
|
|
(2,667 |
) |
|
|
51,949 |
|
Communications |
|
|
216 |
|
|
|
9 |
|
|
|
13 |
|
|
|
23,975 |
|
|
|
|
|
|
|
24,213 |
|
Business promotion |
|
|
506 |
|
|
|
|
|
|
|
|
|
|
|
17,350 |
|
|
|
|
|
|
|
17,856 |
|
Printing and supplies |
|
|
35 |
|
|
|
|
|
|
|
|
|
|
|
5,772 |
|
|
|
|
|
|
|
5,807 |
|
FDIC deposit insurance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,448 |
|
|
|
|
|
|
|
45,448 |
|
Other operating expenses |
|
|
(23,455 |
) |
|
|
(200 |
) |
|
|
18 |
|
|
|
97,677 |
|
|
|
(838 |
) |
|
|
73,202 |
|
Amortization of intangibles |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,839 |
|
|
|
|
|
|
|
4,839 |
|
|
Total operating expenses |
|
|
5,005 |
|
|
|
55 |
|
|
|
(25 |
) |
|
|
633,312 |
|
|
|
(3,505 |
) |
|
|
634,842 |
|
|
Income (loss) before income tax and equity in losses of subsidiaries |
|
|
71,532 |
|
|
|
2,355 |
|
|
|
(41,215 |
) |
|
|
(200,331 |
) |
|
|
(73,040 |
) |
|
|
(240,699 |
) |
Income tax (benefit) expense |
|
|
(1,226 |
) |
|
|
29 |
|
|
|
356 |
|
|
|
(20,914 |
) |
|
|
215 |
|
|
|
(21,540 |
) |
|
Income (loss) before equity in losses of subsidiaries |
|
|
72,758 |
|
|
|
2,326 |
|
|
|
(41,571 |
) |
|
|
(179,417 |
) |
|
|
(73,255 |
) |
|
|
(219,159 |
) |
Equity in undistributed losses of subsidiaries |
|
|
(291,917 |
) |
|
|
(411,819 |
) |
|
|
(379,390 |
) |
|
|
|
|
|
|
1,083,126 |
|
|
|
|
|
|
Loss from continuing operations |
|
|
(219,159 |
) |
|
|
(409,493 |
) |
|
|
(420,961 |
) |
|
|
(179,417 |
) |
|
|
1,009,871 |
|
|
|
(219,159 |
) |
Loss from discontinued operations, net of income tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,545 |
) |
|
|
|
|
|
|
(16,545 |
) |
Equity in undistributed losses of discontinued operations |
|
|
(16,545 |
) |
|
|
(16,545 |
) |
|
|
(16,545 |
) |
|
|
|
|
|
|
49,635 |
|
|
|
|
|
|
NET LOSS |
|
$ |
(235,704 |
) |
|
$ |
(426,038 |
) |
|
$ |
(437,506 |
) |
|
$ |
(195,962 |
) |
|
$ |
1,059,506 |
|
|
$ |
(235,704 |
) |
|
90
POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2010 (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PIBI |
|
|
|
|
|
All other |
|
|
|
|
|
|
Popular, Inc. |
|
Holding |
|
PNA |
|
subsidiaries |
|
Elimination |
|
Popular, Inc. |
(In thousands) |
|
Holding Co. |
|
Co. |
|
Holding Co. |
|
and eliminations |
|
entries |
|
Consolidated |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(140,883 |
) |
|
$ |
(158,675 |
) |
|
$ |
(169,981 |
) |
|
$ |
(91,608 |
) |
|
$ |
420,264 |
|
|
$ |
(140,883 |
) |
|
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in undistributed losses of subsidiaries |
|
|
187,145 |
|
|
|
176,118 |
|
|
|
152,994 |
|
|
|
|
|
|
|
(516,257 |
) |
|
|
|
|
Depreciation and amortization of premises and equipment |
|
|
389 |
|
|
|
|
|
|
|
2 |
|
|
|
30,368 |
|
|
|
|
|
|
|
30,759 |
|
Provision for loan losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
442,458 |
|
|
|
|
|
|
|
442,458 |
|
Amortization of intangibles |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,504 |
|
|
|
|
|
|
|
4,504 |
|
Fair value adjustment of mortgage servicing rights |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,577 |
|
|
|
|
|
|
|
9,577 |
|
Net amortization of premiums (accretion of discounts) |
|
|
10,216 |
|
|
|
|
|
|
|
138 |
|
|
|
(28,668 |
) |
|
|
(325 |
) |
|
|
(18,639 |
) |
Net gain on sale and valuation adjustment of
investment securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(478 |
) |
|
|
|
|
|
|
(478 |
) |
Fair value
change in equity appreciation instrument |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,394 |
) |
|
|
|
|
|
|
(24,394 |
) |
FDIC loss share income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23,334 |
) |
|
|
|
|
|
|
(23,334 |
) |
Net loss (gain) on disposition of premises and equipment |
|
|
23 |
|
|
|
|
|
|
|
|
|
|
|
(2,094 |
) |
|
|
|
|
|
|
(2,071 |
) |
Net loss on sale of loans and valuation adjustments on
loans held-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,533 |
|
|
|
|
|
|
|
21,533 |
|
Net amortization of deferred loan origination fees and
costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,140 |
|
|
|
|
|
|
|
2,140 |
|
(Earnings) losses from investments under the equity
method |
|
|
(1,216 |
) |
|
|
(11,561 |
) |
|
|
1,474 |
|
|
|
(2,355 |
) |
|
|
(855 |
) |
|
|
(14,513 |
) |
Net loss on sale and subsequent write-downs on
foreclosed assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,429 |
|
|
|
|
|
|
|
8,429 |
|
Deferred income taxes, net of valuation |
|
|
(222 |
) |
|
|
|
|
|
|
|
|
|
|
(15,711 |
) |
|
|
181 |
|
|
|
(15,752 |
) |
Net disbursements on loans held-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(312,489 |
) |
|
|
|
|
|
|
(312,489 |
) |
Acquisitions of loans held-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(133,798 |
) |
|
|
|
|
|
|
(133,798 |
) |
Proceeds from sale of loans held-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,867 |
|
|
|
|
|
|
|
35,867 |
|
Net decrease in trading securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
396,940 |
|
|
|
|
|
|
|
396,940 |
|
Net (increase) decrease in accrued income receivable |
|
|
(11 |
) |
|
|
122 |
|
|
|
21 |
|
|
|
10,712 |
|
|
|
(115 |
) |
|
|
10,729 |
|
Net (increase) decrease in other assets |
|
|
(8,995 |
) |
|
|
5,602 |
|
|
|
1,703 |
|
|
|
33,768 |
|
|
|
(9,143 |
) |
|
|
22,935 |
|
Net increase (decrease) in interest payable |
|
|
522 |
|
|
|
|
|
|
|
(54 |
) |
|
|
(18,149 |
) |
|
|
115 |
|
|
|
(17,566 |
) |
Net increase in postretirement benefit obligation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,627 |
|
|
|
|
|
|
|
1,627 |
|
Net (decrease) increase in other liabilities |
|
|
(7,234 |
) |
|
|
1,798 |
|
|
|
(1,539 |
) |
|
|
6,611 |
|
|
|
9,676 |
|
|
|
9,312 |
|
|
Total adjustments |
|
|
180,617 |
|
|
|
172,079 |
|
|
|
154,739 |
|
|
|
443,064 |
|
|
|
(516,723 |
) |
|
|
433,776 |
|
|
Net cash provided by (used in) operating activities |
|
|
39,734 |
|
|
|
13,404 |
|
|
|
(15,242 |
) |
|
|
351,456 |
|
|
|
(96,459 |
) |
|
|
292,893 |
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease (increase) in money market investments |
|
|
|
|
|
|
50,241 |
|
|
|
(61 |
) |
|
|
(1,344,605 |
) |
|
|
(50,189 |
) |
|
|
(1,344,614 |
) |
Purchases of investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(542,506 |
) |
|
|
|
|
|
|
(542,506 |
) |
Held-to-maturity |
|
|
(26,927 |
) |
|
|
|
|
|
|
|
|
|
|
(10,204 |
) |
|
|
|
|
|
|
(37,131 |
) |
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,076 |
) |
|
|
|
|
|
|
(13,076 |
) |
Proceeds from calls, paydowns, maturities and
redemptions of investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
818,380 |
|
|
|
|
|
|
|
818,380 |
|
Held-to-maturity |
|
|
86,928 |
|
|
|
250 |
|
|
|
|
|
|
|
13,538 |
|
|
|
(60,000 |
) |
|
|
40,716 |
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83,272 |
|
|
|
|
|
|
|
83,272 |
|
Proceeds from sale of investment securities
available-for- sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,484 |
|
|
|
|
|
|
|
19,484 |
|
Net
(disbursements) repayments on loans |
|
|
(257,000 |
) |
|
|
|
|
|
|
|
|
|
|
1,047,971 |
|
|
|
233,875 |
|
|
|
1,024,846 |
|
Proceeds from sale of loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,878 |
|
|
|
|
|
|
|
10,878 |
|
Acquisition of loan portfolios |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(87,471 |
) |
|
|
|
|
|
|
(87,471 |
) |
Capital contribution to subsidiary |
|
|
(845,000 |
) |
|
|
(245,000 |
) |
|
|
(245,000 |
) |
|
|
|
|
|
|
1,335,000 |
|
|
|
|
|
Cash received from acquisitions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
261,311 |
|
|
|
|
|
|
|
261,311 |
|
Mortgage servicing rights purchased |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(364 |
) |
|
|
|
|
|
|
(364 |
) |
Acquisition of premises and equipment |
|
|
(826 |
) |
|
|
|
|
|
|
|
|
|
|
(26,335 |
) |
|
|
|
|
|
|
(27,161 |
) |
Proceeds from sale of premises and equipment |
|
|
156 |
|
|
|
|
|
|
|
|
|
|
|
9,470 |
|
|
|
|
|
|
|
9,626 |
|
Proceeds from sale of foreclosed assets |
|
|
74 |
|
|
|
|
|
|
|
|
|
|
|
68,984 |
|
|
|
|
|
|
|
69,058 |
|
|
Net cash (used in) provided by investing activities |
|
|
(1,042,595 |
) |
|
|
(194,509 |
) |
|
|
(245,061 |
) |
|
|
308,727 |
|
|
|
1,458,686 |
|
|
|
285,248 |
|
|
91
POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS CONTINUED
FOR THE SIX MONTHS ENDED JUNE 30, 2010 (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PIBI |
|
|
|
|
|
All other |
|
|
|
|
|
|
Popular, Inc. |
|
Holding |
|
PNA |
|
subsidiaries |
|
Elimination |
|
Popular, Inc. |
(In thousands) |
|
Holding Co. |
|
Co. |
|
Holding Co. |
|
and eliminations |
|
entries |
|
Consolidated |
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,252,761 |
) |
|
|
50,542 |
|
|
|
(1,202,219 |
) |
Net decrease in
assets sold under agreements to repurchase |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(325,596 |
) |
|
|
|
|
|
|
(325,596 |
) |
Net (decrease) increase in other short-term borrowings |
|
|
(22,725 |
) |
|
|
|
|
|
|
19,300 |
|
|
|
233,237 |
|
|
|
(235,875 |
) |
|
|
(6,063 |
) |
Payments of notes payable and subordinated notes |
|
|
(75,000 |
) |
|
|
|
|
|
|
(4,000 |
) |
|
|
(172,780 |
) |
|
|
62,000 |
|
|
|
(189,780 |
) |
Proceeds
from issuance of notes payable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
111,101 |
|
|
|
|
|
|
|
111,101 |
|
Net proceeds from issuance of depository shares |
|
|
1,100,740 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,618 |
|
|
|
1,102,358 |
|
Dividends paid to parent company |
|
|
|
|
|
|
(63,900 |
) |
|
|
|
|
|
|
(31,000 |
) |
|
|
94,900 |
|
|
|
|
|
Treasury stock acquired |
|
|
(503 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(503 |
) |
Capital contribution from parent |
|
|
|
|
|
|
245,000 |
|
|
|
245,000 |
|
|
|
845,000 |
|
|
|
(1,335,000 |
) |
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
1,002,512 |
|
|
|
181,100 |
|
|
|
260,300 |
|
|
|
(592,799 |
) |
|
|
(1,361,815 |
) |
|
|
(510,702 |
) |
|
Net (decrease) increase in cash and due from banks |
|
|
(349 |
) |
|
|
(5 |
) |
|
|
(3 |
) |
|
|
67,384 |
|
|
|
412 |
|
|
|
67,439 |
|
Cash and due from banks at beginning of period |
|
|
1,174 |
|
|
|
300 |
|
|
|
738 |
|
|
|
677,606 |
|
|
|
(2,488 |
) |
|
|
677,330 |
|
|
Cash and due from banks at end of period |
|
$ |
825 |
|
|
$ |
295 |
|
|
$ |
735 |
|
|
$ |
744,990 |
|
|
$ |
(2,076 |
) |
|
$ |
744,769 |
|
|
92
POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2009 (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PIBI |
|
|
|
|
|
All other |
|
|
|
|
|
|
Popular, Inc. |
|
Holding |
|
PNA |
|
subsidiaries |
|
Elimination |
|
Popular, Inc. |
(In thousands) |
|
Holding Co. |
|
Co. |
|
Holding Co. |
|
and eliminations |
|
entries |
|
Consolidated |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(235,704 |
) |
|
$ |
(426,038 |
) |
|
$ |
(437,506 |
) |
|
$ |
(195,962 |
) |
|
$ |
1,059,506 |
|
|
$ |
(235,704 |
) |
|
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in undistributed losses of subsidiaries |
|
|
308,462 |
|
|
|
428,364 |
|
|
|
395,935 |
|
|
|
|
|
|
|
(1,132,761 |
) |
|
|
|
|
Depreciation and amortization of premises and equipment |
|
|
1,164 |
|
|
|
|
|
|
|
2 |
|
|
|
32,437 |
|
|
|
|
|
|
|
33,603 |
|
Provision for loan losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
721,973 |
|
|
|
|
|
|
|
721,973 |
|
Amortization of intangibles |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,839 |
|
|
|
|
|
|
|
4,839 |
|
Fair value adjustment of mortgage servicing rights |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,505 |
|
|
|
|
|
|
|
10,505 |
|
Net amortization of premiums (accretion of discounts) |
|
|
319 |
|
|
|
|
|
|
|
|
|
|
|
7,807 |
|
|
|
|
|
|
|
8,126 |
|
Net (gain) loss on sale and valuation adjustment of
investment securities |
|
|
(950 |
) |
|
|
6,589 |
|
|
|
|
|
|
|
(235,490 |
) |
|
|
|
|
|
|
(229,851 |
) |
Gains from changes in fair value related to instruments
measured at fair value pursuant to fair value option |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,141 |
) |
|
|
|
|
|
|
(1,141 |
) |
Net loss (gain) on disposition of premises and equipment |
|
|
2,959 |
|
|
|
|
|
|
|
|
|
|
|
(1,188 |
) |
|
|
|
|
|
|
1,771 |
|
Net loss on sale of loans and valuation adjustments on
loans held-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,472 |
|
|
|
|
|
|
|
32,472 |
|
Net amortization of deferred loan origination fees and
costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,374 |
|
|
|
|
|
|
|
4,374 |
|
(Earnings) losses from investments under the equity
method |
|
|
(683 |
) |
|
|
(8,359 |
) |
|
|
3,499 |
|
|
|
33 |
|
|
|
(870 |
) |
|
|
(6,380 |
) |
Net loss on sale and subsequent write-downs on
foreclosed assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,585 |
|
|
|
|
|
|
|
8,585 |
|
Stock options expense |
|
|
47 |
|
|
|
|
|
|
|
|
|
|
|
(2 |
) |
|
|
|
|
|
|
45 |
|
Deferred income taxes, net of valuation |
|
|
(1,669 |
) |
|
|
|
|
|
|
1,576 |
|
|
|
(74,105 |
) |
|
|
215 |
|
|
|
(73,983 |
) |
Net disbursements on loans held-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(685,500 |
) |
|
|
|
|
|
|
(685,500 |
) |
Acquisitions of loans held-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(209,814 |
) |
|
|
|
|
|
|
(209,814 |
) |
Proceeds from sale of loans held-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43,875 |
|
|
|
|
|
|
|
43,875 |
|
Net decrease in trading securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
911,066 |
|
|
|
|
|
|
|
911,066 |
|
Net (increase) decrease in accrued income receivable |
|
|
(1,076 |
) |
|
|
330 |
|
|
|
1,550 |
|
|
|
20,677 |
|
|
|
(1,928 |
) |
|
|
19,553 |
|
Net decrease (increase) in other assets |
|
|
6,952 |
|
|
|
5,791 |
|
|
|
(799 |
) |
|
|
79,886 |
|
|
|
(45,612 |
) |
|
|
46,218 |
|
Net increase (decrease) in interest payable |
|
|
383 |
|
|
|
|
|
|
|
(5,228 |
) |
|
|
(27,216 |
) |
|
|
1,928 |
|
|
|
(30,133 |
) |
Net increase in postretirement benefit obligation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,404 |
|
|
|
|
|
|
|
2,404 |
|
Net (decrease) increase in other liabilities |
|
|
(242 |
) |
|
|
(20 |
) |
|
|
(20,375 |
) |
|
|
35,754 |
|
|
|
45,938 |
|
|
|
61,055 |
|
|
Total adjustments |
|
|
315,666 |
|
|
|
432,695 |
|
|
|
376,160 |
|
|
|
682,231 |
|
|
|
(1,133,090 |
) |
|
|
673,662 |
|
|
Net cash provided by (used in) operating activities |
|
|
79,962 |
|
|
|
6,657 |
|
|
|
(61,346 |
) |
|
|
486,269 |
|
|
|
(73,584 |
) |
|
|
437,958 |
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease (increase) in money market investments |
|
|
77,965 |
|
|
|
(6,571 |
) |
|
|
449,938 |
|
|
|
(157,090 |
) |
|
|
(521,235 |
) |
|
|
(156,993 |
) |
Purchases of investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale |
|
|
(249,603 |
) |
|
|
|
|
|
|
|
|
|
|
(3,713,375 |
) |
|
|
|
|
|
|
(3,962,978 |
) |
Held-to-maturity |
|
|
(25,770 |
) |
|
|
|
|
|
|
|
|
|
|
(2,558 |
) |
|
|
|
|
|
|
(28,328 |
) |
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22,243 |
) |
|
|
|
|
|
|
(22,243 |
) |
Proceeds from calls, paydowns, maturities and
redemptions of investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale |
|
|
9,704 |
|
|
|
|
|
|
|
|
|
|
|
837,240 |
|
|
|
|
|
|
|
846,944 |
|
Held-to-maturity |
|
|
1,500 |
|
|
|
|
|
|
|
|
|
|
|
1,633 |
|
|
|
|
|
|
|
3,133 |
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,988 |
|
|
|
|
|
|
|
24,988 |
|
Proceeds from sale of investment securities
available-for- sale |
|
|
175,692 |
|
|
|
|
|
|
|
|
|
|
|
3,571,875 |
|
|
|
|
|
|
|
3,747,567 |
|
Proceeds from sale of other investment securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44,425 |
|
|
|
|
|
|
|
44,425 |
|
Net repayments on loans |
|
|
773,986 |
|
|
|
|
|
|
|
8,500 |
|
|
|
684,285 |
|
|
|
(796,000 |
) |
|
|
670,771 |
|
Proceeds from sale of loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
304,468 |
|
|
|
|
|
|
|
304,468 |
|
Acquisition of loan portfolios |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18,260 |
) |
|
|
|
|
|
|
(18,260 |
) |
Capital contribution to subsidiary |
|
|
(665,000 |
) |
|
|
(665,000 |
) |
|
|
(315,000 |
) |
|
|
|
|
|
|
1,645,000 |
|
|
|
|
|
Transfer of shares of a subsidiary |
|
|
(42,971 |
) |
|
|
|
|
|
|
42,971 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage servicing rights purchased |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(727 |
) |
|
|
|
|
|
|
(727 |
) |
Acquisition of premises and equipment |
|
|
(156 |
) |
|
|
|
|
|
|
|
|
|
|
(37,585 |
) |
|
|
|
|
|
|
(37,741 |
) |
Proceeds from sale of premises and equipment |
|
|
153 |
|
|
|
|
|
|
|
|
|
|
|
8,647 |
|
|
|
|
|
|
|
8,800 |
|
Proceeds from sale of foreclosed assets |
|
|
47 |
|
|
|
|
|
|
|
|
|
|
|
76,287 |
|
|
|
|
|
|
|
76,334 |
|
|
Net cash provided by (used in) investing activities |
|
|
55,547 |
|
|
|
(671,571 |
) |
|
|
186,409 |
|
|
|
1,602,010 |
|
|
|
327,765 |
|
|
|
1,500,160 |
|
|
93
POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS CONTINUED
FOR THE SIX MONTHS ENDED JUNE 30, 2009 (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PIBI |
|
|
|
|
|
All other |
|
|
|
|
|
|
Popular, Inc. |
|
Holding |
|
PNA |
|
subsidiaries |
|
Elimination |
|
Popular, Inc. |
(In thousands) |
|
Holding Co. |
|
Co. |
|
Holding Co. |
|
and eliminations |
|
entries |
|
Consolidated |
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,075,560 |
) |
|
|
441,838 |
|
|
|
(633,722 |
) |
Net decrease in federal funds purchased and
assets sold under agreements to repurchase |
|
|
(44,471 |
) |
|
|
|
|
|
|
|
|
|
|
(643,411 |
) |
|
|
77,952 |
|
|
|
(609,930 |
) |
Net decrease in other short-term borrowings |
|
|
(18,248 |
) |
|
|
|
|
|
|
(500 |
) |
|
|
(780,361 |
) |
|
|
796,000 |
|
|
|
(3,109 |
) |
Payments of notes payable |
|
|
|
|
|
|
|
|
|
|
(797,880 |
) |
|
|
(6,192 |
) |
|
|
|
|
|
|
(804,072 |
) |
Proceeds from issuance of notes payable |
|
|
|
|
|
|
|
|
|
|
1,031 |
|
|
|
60,000 |
|
|
|
|
|
|
|
61,031 |
|
Dividends paid to parent company |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(73,625 |
) |
|
|
73,625 |
|
|
|
|
|
Dividends paid |
|
|
(71,438 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(71,438 |
) |
Treasury stock acquired |
|
|
(13 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13 |
) |
Capital contribution from parent |
|
|
|
|
|
|
665,000 |
|
|
|
665,000 |
|
|
|
315,000 |
|
|
|
(1,645,000 |
) |
|
|
|
|
|
Net cash (used in) provided by financing activities |
|
|
(134,170 |
) |
|
|
665,000 |
|
|
|
(132,349 |
) |
|
|
(2,204,149 |
) |
|
|
(255,585 |
) |
|
|
(2,061,253 |
) |
|
Net increase (decrease) in cash and due from banks |
|
|
1,339 |
|
|
|
86 |
|
|
|
(7,286 |
) |
|
|
(115,870 |
) |
|
|
(1,404 |
) |
|
|
(123,135 |
) |
Cash and due from banks at beginning of period |
|
|
2 |
|
|
|
89 |
|
|
|
7,668 |
|
|
|
777,994 |
|
|
|
(766 |
) |
|
|
784,987 |
|
|
Cash and due from banks at end of period |
|
$ |
1,341 |
|
|
$ |
175 |
|
|
$ |
382 |
|
|
$ |
662,124 |
|
|
$ |
(2,170 |
) |
|
$ |
661,852 |
|
|
94
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This report includes managements discussion and analysis (MD&A) of the consolidated financial
position and financial performance of Popular, Inc. (the Corporation or Popular). All
accompanying tables, financial statements and notes included elsewhere in this report should be
considered an integral part of this analysis.
OVERVIEW
The Corporation is a diversified, publicly owned financial holding company subject to the
supervision and regulation of the Board of Governors of the Federal Reserve System. The Corporation
has operations in Puerto Rico, the United States, the Caribbean and Latin America. In Puerto Rico,
the Corporation provides retail and commercial banking services through its principal banking
subsidiary, Banco Popular de Puerto Rico (BPPR), as well as auto and equipment leasing and
financing, mortgage loans, investment banking, broker-dealer and insurance services through
specialized subsidiaries. In the United States, the Corporation operates Banco Popular North
America (BPNA), including its wholly-owned subsidiary E-LOAN. BPNA is a community bank providing
a broad range of financial services and products to the communities it serves. BPNA operates
branches in New York, California, Illinois, New Jersey and Florida. E-LOAN markets deposit accounts
under its name for the benefit of BPNA. The Corporation, through its subsidiary EVERTEC, provides
transaction processing services throughout the Caribbean and Latin America, as well as internally
services many of Populars subsidiaries system infrastructures and transactional processing
businesses. The Overview section that follows provides a description of two significant
transactions that impacted or will impact the Corporations current and future operations, namely
the Westernbank FDIC-assisted transaction and the agreement to sell 51% of EVERTEC business group.
The Corporation reported a net loss of $55.8 million for the quarter ended June 30, 2010, compared
with a net loss of $183.2 million for the quarter ended June 30, 2009. For the six months ended
June 30, 2010, the Corporations net loss totaled $140.9 million, compared to a net loss of $235.7
million for the same period in 2009. Table A provides selected financial data and performance
indicators for the quarters ended June 30, 2010 and 2009.
Significant Events for the Second Quarter of 2010:
|
|
|
During the second quarter of 2010, the Corporation completed the issuance of $1.15
billion of capital through the sale and subsequent conversion of depositary shares
representing interests in shares of contingent convertible perpetual non-cumulative
preferred stock into common stock. This transaction resulted in the issuance of over 383
million additional shares of common stock in May 2010 upon conversion. The net proceeds
from the public offering amounted to approximately $1.1 billion, after deducting the
underwriting discount and estimated offering expenses. This transaction further
strengthened the Corporations capital base to facilitate the FDIC-assisted transaction of
Westernbank. |
|
|
|
|
On April 30, 2010, BPPR acquired certain assets and assumed certain liabilities of
Westernbank Puerto Rico from the Federal Deposit Insurance Corporation (FDIC) (herein the
Westernbank FDIC-assisted transaction). As a result of the Westernbank FDIC-assisted
transaction, the Corporations total assets as of April 30, 2010 increased by $8.4 billion,
principally consisting of a loan portfolio with an estimated fair value of $4.3 billion
($8.6 billion unpaid principal balance prior to purchase accounting adjustments) and a $3.3
billion FDIC loss share indemnification asset. Liabilities with a fair value of
approximately $8.4 billion were recognized at the acquisition date, including $2.4 billion
of assumed deposits, a $5.8 billion five-year promissory note issued to the FDIC at a fixed
annual interest rate of 2.50% and an equity appreciation instrument issued to the FDIC with
an estimated fair value of $52.5 million as of April 30, 2010. The indemnification asset
represents the portion of estimated losses covered by loss sharing agreements between BPPR
and the FDIC. The loss sharing agreements afford the Corporation significant protection
against future losses in the acquired loan and other real estate portfolio. The Corporation
recorded goodwill of $106 million as part of the transaction. Refer to the Westernbank
FDIC-assisted transaction section in this MD&A and Notes 2, 3 and 10 to the consolidated
financial statements for additional information on the transaction, including the
accounting for assets acquired and liabilities assumed as well as information on the
breakdown and accounting of the acquired loan portfolio. |
95
|
|
|
The Corporation entered into an agreement, dated as of June 30, 2010, as amended as of August 5, 2010 and August 8, 2010, to sell a 51%
interest in Populars transaction processing and technology business, including EVERTEC,
and the merchant acquiring business of BPPR. The expected after-tax book gain on the sale
is estimated at $600 million. The net cash proceeds to be received by Popular after paying
for transaction costs and taxes are estimated at approximately $600 million. As indicated in Note 1 to the accompanying financial statements, as a condition to closing,
EVERTEC must transfer its operations in Venezuela to another one of the Corporation's
subsidiaries for an amount equal to the net book value of the Venezuela operations and the
transaction consideration will be reduced by an amount that the Corporation's management
currently expects to approximate $32 million, which is considered in the estimated gain and net
cash proceeds previously disclosed.
The closing of
the EVERTEC transaction is currently expected to be completed in the third quarter of 2010 and is
subject to various conditions and regulatory approvals. The
EVERTEC transaction will further boost the Corporations capital and will complete the
Corporations capital plan. |
Reconciliation of loss per common share:
The following table provides a reconciliation of loss per common share for the quarters and
six months ended June 30, 2010 and June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended |
|
Six months ended |
(In thousands, except per share information) |
|
June 30, 2010 |
|
June 30, 2009 |
|
June 30, 2010 |
|
June 30, 2009 |
|
Net loss from continuing operations |
|
$ |
(55,828 |
) |
|
$ |
(176,583 |
) |
|
$ |
(140,883 |
) |
|
$ |
(219,159 |
) |
Net loss from discontinued operations |
|
|
|
|
|
|
(6,599 |
) |
|
|
|
|
|
|
(16,545 |
) |
Preferred stock dividends |
|
|
|
|
|
|
(22,915 |
) |
|
|
|
|
|
|
(45,831 |
) |
Deemed dividend on preferred stock |
|
|
(191,667 |
) |
|
|
|
|
|
|
(191,667 |
) |
|
|
|
|
Preferred stock discount accretion |
|
|
|
|
|
|
(1,713 |
) |
|
|
|
|
|
|
(3,475 |
) |
|
Net loss applicable to common stock |
|
$ |
(247,495 |
) |
|
$ |
(207,810 |
) |
|
$ |
(332,550 |
) |
|
$ |
(285,010 |
) |
|
Average common shares outstanding |
|
|
853,010,208 |
|
|
|
281,888,394 |
|
|
|
746,598,082 |
|
|
|
281,861,563 |
|
Average potential common shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares outstanding assuming dilution |
|
|
853,010,208 |
|
|
|
281,888,394 |
|
|
|
746,598,082 |
|
|
|
281,861,563 |
|
|
Basic and diluted loss per common share from continuing operations |
|
$ |
(0.29 |
) |
|
$ |
(0.71 |
) |
|
$ |
(0.45 |
) |
|
$ |
(0.95 |
) |
Basic and diluted loss per common share from discontinued
operations |
|
|
|
|
|
$ |
(0.03 |
) |
|
|
|
|
|
$ |
(0.06 |
) |
|
Total basic and diluted loss per common share |
|
$ |
(0.29 |
) |
|
$ |
(0.74 |
) |
|
$ |
(0.45 |
) |
|
$ |
(1.01 |
) |
|
As indicated earlier, depositary shares representing an interest in contingent convertible
perpetual non-cumulative preferred stock, Series D (the Preferred Stock) were converted into
common stock upon shareholder approval of a charter amendment to increase the Corporations
authorized shares of common stock in May 2010. This approval triggered the conversion of the
Preferred Stock into approximately 383 million shares of common stock. Accordingly, the conversion
resulted in a non-cash beneficial conversion of $191.7 million, representing the intrinsic value
between the conversion rate of $3.00 and the common stock closing price of $3.50 on April 13, 2010,
the date the Preferred Stock was offered. The conversion was recorded as a deemed dividend to the
preferred shareholders reducing retained earnings (with no impact in consolidated net income or
loss), with a corresponding offset to surplus (paid in capital), and thus did not affect total
shareholders equity or the book value of the common stock. However, the deemed dividend on
preferred stock increased the net loss attributable to common shareholders and affected the
calculation of basic and diluted net loss per common share for the quarter and six months ended
June 30, 2010.
The discussion that follows provides highlights of the Corporations results of operations for the
quarter ended June 30, 2010 compared to the results of operations for the same quarter in 2009. It
also provides some highlights with respect to the Corporations financial condition, credit
quality, capital and liquidity.
96
Financial highlights:
|
|
|
Net interest income for the second quarter of 2010 declined $4.1 million, compared with
the second quarter of 2009. The net interest margin on a taxable equivalent basis declined
from 3.49% for the quarter ended June 30, 2009 to 3.42% for the quarter ended June 30,
2010, principally due to a higher volume of money market investments by $0.9 billion at low
yields, resulting mostly from the excess liquidity derived from the previously mentioned
capital issuance. The BPPR Westernbank operations which consists of the assets acquired and
liabilities assumed in the Westernbank FDIC-assisted transaction contributed with net
interest income of $16.7 million for the quarter ended June 30, 2010. |
|
|
|
|
The provision for loan losses for the quarter ended June 30, 2010 decreased by $147.2
million compared with the same quarter in the previous year. The decrease in the provision
for loan losses for 2010 as compared with the quarter and six months ended June 30, 2009
was mainly related to lower provisions required for the commercial and construction loan
portfolios, U.S. mainland non-conventional residential mortgage loans, home equity lines of
credit and closed-end second mortgages. The deteriorated conditions of the Puerto Rico and
U.S. economies that prevailed during 2009, declines in property values, and slowdown in
consumer spending, negatively impacted the Corporations net charge-offs and non-performing
assets levels, thus demanding substantial reserve increases during 2009, when compared with
2010. Also, the decrease of approximately $2.1 billion in loans held-in-portfolio,
excluding loans covered under the loss sharing agreements with the FDIC, since June 30,
2009, particularly in the commercial, construction and consumer loan portfolios,
contributed to the lower level of provision for loan losses for the second quarter of 2010.
The ratio of allowance for loan losses to loans held-in-portfolio, excluding covered loans
was 5.68% as of June 30, 2010, compared with 5.32% as of December 31, 2009, and 4.66% as of
June 30, 2009. |
|
|
|
|
During the six months ended June 30, 2010, the Corporation experienced improved delinquency
levels in certain portfolios, such as home equity lines of credit and closed-end second
mortgages at E-LOAN and some consumer loan portfolios in Puerto Rico. Management recognizes
that the Puerto Rico and U.S. mainland economies remain fragile, unemployment is still
elevated and real estate markets continue to be unstable. Therefore, it may be early to
expect that this recent favorable experience on non-perfoming loans
in certain portfolios is indicative of a sustainable longer-term trend. Management
continues reinforcing loan management and workout teams. |
|
|
|
|
Non-interest income for the quarter ended June 30, 2010 decreased $10.0 million,
compared with the quarter ended June 30, 2009, mostly driven by lower net gains on the sale
and valuation adjustments of investment securities by $53.3 million. Non-interest income
for the second quarter of 2009 included $52.3 million in gains from the sale of equity
securities by the BPPR and EVERTEC reportable segments. This variance was principally
offset by a $24.4 million favorable change in the fair value of the equity appreciation
instrument issued to the FDIC from $52.5 million as of April 30, 2010 to $28.1 million as
of June 30, 2010. The reduction in the estimated fair value of the equity appreciation
instrument was primarily due to a decrease in the price of the Corporations common stock
and the passage of time towards the May 7, 2011 expiration date. Also, during the second
quarter of 2010, the Corporation recognized $23.3 million for the two-month accretion of
the FDIC loss share indemnification asset. The estimated fair value of the FDIC loss share
indemnification asset was determined by discounting the projected cash flows related to the
loss sharing agreements based on expected reimbursements, primarily for credit losses on
covered assets. The time value of money incorporated into the present value computation is
accreted into earnings over the life of the loss sharing agreements. |
|
|
|
|
Operating expenses for the quarter ended June 30, 2010 decreased by $2.2 million
compared with the same quarter of the previous year. Increases in operating expenses from
the BPPR Westernbank operations of $20.6 million for the quarter ended June 30, 2010 were
partially offset by lower personnel costs and other operating expenses from the rest of the
Corporation that resulted mostly from the downsizing of the U.S. operations and cost
control initiatives, as well as lower FDIC deposit insurance expense in the second quarter
of 2010. |
97
|
|
|
Income tax expense amounted to $20.0 million for the quarter ended June 30, 2010,
compared with income tax expense of $5.4 million for the quarter ended June 30, 2009. Refer
to the Income Taxes section in this MD&A for a discussion of the tax variance and a
reconciliation of the effective tax rate for the quarters ended June 30, 2010 and 2009. |
|
|
|
|
Total assets amounted to $42.4 billion as of June 30, 2010, compared with $34.7 billion
as of December 31, 2009 and $36.5 billion as of June 30, 2009. The increase in total
assets, when compared to December 31, 2009, was principally in loans held-in-portfolio by
$2.8 million, mainly due to the loan portfolio acquired in the Westernbank FDIC-assisted
transaction, partially offset by reductions in the Corporations originated loan portfolio.
Also, the increase in total assets was related to the $3.3 million FDIC loss share
indemnification asset and a $1.4 million increase in money market investments, principally
related to the proceeds from the capital issuance. The decline in the Corporations loan
portfolio, excluding the impact of the increase due to the covered loans acquired, was
influenced by high levels of loan charge-offs and the impact of exiting origination
channels at BPNA as part of the restructuring activities undertaken during 2009. Also, the
decline in loan originations reflects weak economic environments in the markets where the
Corporation operates. |
|
|
|
|
Refer to Table Q in the Financial Condition section of this MD&A for the percentage
allocation of the composition of the Corporations financing to total assets. Deposits
totaled $27.1 billion as of June 30, 2010, compared with $25.9 billion as of December 31,
2009 and $26.9 billion as of June 30, 2009. The increase in deposits was associated with
the Westernbank FDIC-assisted transaction, partially offset by lower volume of brokered
certificates of deposits and reductions due to the effect of closure, sale and
consolidation of branches in the U.S. mainland operations, and the attrition impact due to
the reduction in the pricing of deposits, including internet deposits. Borrowed funds
amounted to $10.5 billion as of June 30, 2010, compared with $5.3 billion as of December
31, 2009 and $5.6 billion as of June 30, 2009. The increase
in borrowings from December 31, 2009 to June 30, 2010 was related to the note payable issued to the FDIC in the Westernbank
FDIC-assisted transaction, which had a carrying amount of $5.7 billion as of June 30, 2010,
partially offset by the impact of deleveraging strategies. |
Popular, Inc.s capital ratios continued to exceed all well-capitalized regulatory benchmarks as
of June 30, 2010. Refer to Table J in this MD&A for information on the regulatory capital position
of the Corporation. The capital issuance described previously executed during the second quarter of
2010 strengthened the capital and liquidity position of the parent holding company. Refer to the
Statement of Condition and Liquidity Risk sections of this MD&A for variance explanations, capital
position and funding sources.
As indicated in previous filings with the SEC, in late 2008, the Corporation discontinued the
operations of Popular Financial Holdings (PFH) by selling assets and closing service branches and
other units. The loss from discontinued operations, net of taxes, for the quarter and six months
ended June 30, 2009 was $6.6 million and $16.5 million, respectively. This loss was primarily
related to salary and other expenses incurred in providing loan portfolio servicing to affiliated
companies and other costs for employees that were retained for a transition period, as well as
adjustments to indemnity reserves on loans sold in prior periods. The results of PFH are presented
as part of Loss from discontinued operations, net of income tax in Table A. The discussions in
this MD&A pertain to Popular, Inc.s continuing operations, unless otherwise indicated.
98
TABLE
A
Financial Highlights
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Condition Highlights |
|
As of June 30, |
|
Average for the six months |
(In thousands) |
|
2010 |
|
2009 |
|
Variance |
|
2010 |
|
2009* |
|
Variance |
|
Money market investments |
|
$ |
2,444,209 |
|
|
$ |
951,647 |
|
|
$ |
1,492,562 |
|
|
$ |
1,557,657 |
|
|
$ |
1,325,160 |
|
|
$ |
232,497 |
|
Investment and trading securities |
|
|
7,244,708 |
|
|
|
8,268,625 |
|
|
|
(1,023,917 |
) |
|
|
7,186,905 |
|
|
|
8,324,541 |
|
|
|
(1,137,636 |
) |
Loans |
|
|
26,646,656 |
|
|
|
24,848,909 |
|
|
|
1,797,747 |
|
|
|
24,393,338 |
|
|
|
25,432,055 |
|
|
|
(1,038,717 |
) |
Total earning assets |
|
|
36,335,573 |
|
|
|
34,069,181 |
|
|
|
2,266,392 |
|
|
|
33,137,900 |
|
|
|
35,081,756 |
|
|
|
(1,943,856 |
) |
Total assets |
|
|
42,443,652 |
|
|
|
36,498,792 |
|
|
|
5,944,860 |
|
|
|
36,882,521 |
|
|
|
37,738,595 |
|
|
|
(856,074 |
) |
Deposits |
|
|
27,113,573 |
|
|
|
26,913,485 |
|
|
|
200,088 |
|
|
|
26,165,729 |
|
|
|
27,204,865 |
|
|
|
(1,039,136 |
) |
Borrowings |
|
|
10,545,858 |
|
|
|
5,587,225 |
|
|
|
4,958,633 |
|
|
|
6,910,018 |
|
|
|
6,357,331 |
|
|
|
552,687 |
|
Stockholders equity |
|
|
3,603,448 |
|
|
|
2,899,701 |
|
|
|
703,747 |
|
|
|
2,820,039 |
|
|
|
3,057,332 |
|
|
|
(237,293 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Highlights |
|
Second Quarter |
|
Six months ended June 30, |
(In thousands, except per share information) |
|
2010 |
|
2009 |
|
Variance |
|
2010 |
|
2009 |
|
Variance |
|
Net interest income |
|
$ |
278,976 |
|
|
$ |
283,060 |
|
|
$ |
(4,084 |
) |
|
$ |
547,893 |
|
|
$ |
555,546 |
|
|
$ |
(7,653 |
) |
Provision for loan losses |
|
|
202,258 |
|
|
|
349,444 |
|
|
|
(147,186 |
) |
|
|
442,458 |
|
|
|
721,973 |
|
|
|
(279,515 |
) |
Non-interest income |
|
|
215,858 |
|
|
|
225,839 |
|
|
|
(9,981 |
) |
|
|
373,724 |
|
|
|
560,570 |
|
|
|
(186,846 |
) |
Operating expenses |
|
|
328,416 |
|
|
|
330,645 |
|
|
|
(2,229 |
) |
|
|
609,329 |
|
|
|
634,842 |
|
|
|
(25,513 |
) |
|
Loss from continuing operations before
income tax |
|
|
(35,840 |
) |
|
|
(171,190 |
) |
|
|
135,350 |
|
|
|
(130,170 |
) |
|
|
(240,699 |
) |
|
|
110,529 |
|
Income tax expense (benefit) |
|
|
19,988 |
|
|
|
5,393 |
|
|
|
14,595 |
|
|
|
10,713 |
|
|
|
(21,540 |
) |
|
|
32,253 |
|
|
Loss from continuing operations, net of
income tax |
|
|
(55,828 |
) |
|
|
(176,583 |
) |
|
|
120,755 |
|
|
|
(140,883 |
) |
|
|
(219,159 |
) |
|
|
78,276 |
|
Loss from discontinued operations, net of
income tax |
|
|
|
|
|
|
(6,599 |
) |
|
|
6,599 |
|
|
|
|
|
|
|
(16,545 |
) |
|
|
16,545 |
|
|
Net loss |
|
$ |
(55,828 |
) |
|
$ |
(183,182 |
) |
|
$ |
127,354 |
|
|
$ |
(140,883 |
) |
|
$ |
(235,704 |
) |
|
$ |
94,821 |
|
|
Net loss applicable to common stock |
|
$ |
(247,495 |
) |
|
$ |
(207,810 |
) |
|
$ |
(39,685 |
) |
|
$ |
(332,550 |
) |
|
$ |
(285,010 |
) |
|
$ |
(47,540 |
) |
|
Net loss per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
basic and diluted |
|
$ |
(0.29 |
) |
|
$ |
(0.71 |
) |
|
$ |
0.42 |
|
|
$ |
(0.45 |
) |
|
$ |
(0.95 |
) |
|
$ |
0.50 |
|
Net loss from discontinued operations
basic and diluted |
|
|
|
|
|
$ |
(0.03 |
) |
|
$ |
0.03 |
|
|
|
|
|
|
$ |
(0.06 |
) |
|
$ |
0.06 |
|
|
Total net loss per common share basic
and diluted |
|
$ |
(0.29 |
) |
|
$ |
(0.74 |
) |
|
$ |
0.45 |
|
|
$ |
(0.45 |
) |
|
$ |
(1.01 |
) |
|
$ |
0.56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter |
|
Six months ended June 30, |
Selected Statistical Information |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
Common Stock Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market price |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High |
|
$ |
4.02 |
|
|
$ |
3.66 |
|
|
$ |
4.02 |
|
|
$ |
5.52 |
|
Low |
|
|
2.64 |
|
|
|
2.19 |
|
|
|
1.75 |
|
|
|
1.47 |
|
End |
|
|
2.68 |
|
|
|
2.20 |
|
|
|
2.68 |
|
|
|
2.20 |
|
Book value per common share at period end |
|
|
3.47 |
|
|
|
5.01 |
|
|
|
3.47 |
|
|
|
5.01 |
|
Dividends declared per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.02 |
|
|
Profitability Ratios |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on assets |
|
|
(0.56 |
%) |
|
|
(1.98 |
%) |
|
|
(0.77 |
%) |
|
|
(1.26 |
%) |
Return on common equity |
|
|
(7.75 |
) |
|
|
(53.48 |
) |
|
|
(10.80 |
) |
|
|
(35.08 |
) |
Net interest spread (taxable equivalent) |
|
|
3.16 |
|
|
|
3.04 |
|
|
|
3.22 |
|
|
|
2.97 |
|
Net interest margin (taxable equivalent) |
|
|
3.42 |
|
|
|
3.49 |
|
|
|
3.55 |
|
|
|
3.42 |
|
|
Capitalization Ratios |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average equity to average assets |
|
|
8.08 |
% |
|
|
8.10 |
% |
|
|
7.65 |
% |
|
|
8.10 |
% |
Tier I capital to risk-weighted assets |
|
|
12.56 |
|
|
|
10.73 |
|
|
|
12.56 |
|
|
|
10.73 |
|
Total capital to risk-weighted assets |
|
|
13.86 |
|
|
|
12.02 |
|
|
|
13.86 |
|
|
|
12.02 |
|
Leverage ratio |
|
|
8.79 |
|
|
|
8.26 |
|
|
|
8.79 |
|
|
|
8.26 |
|
|
|
|
|
* |
|
Excludes discontinued operations. |
As a financial services company, the Corporations earnings are significantly affected by
general business and economic conditions. Lending and deposit activities and fee income generation
are influenced by the level of business spending and investment, consumer income, spending and
savings, capital market activities, competition, customer preferences, interest rate conditions and
prevailing market rates on competing products. The Corporation continuously monitors general
business and economic conditions, industry-related indicators and trends, competition, interest
rate volatility, credit quality indicators, loan and deposit demand, operational and systems
efficiencies, revenue enhancements and changes in the regulation of financial services companies.
The Corporation operates in a highly regulated environment and may be adversely affected by changes
in federal and local laws and regulations. Also,
competition with other financial institutions could adversely affect its profitability.
99
The description of the Corporations business contained in Item 1 of the Corporations Form 10-K
for the year ended December 31, 2009, while not all inclusive, discusses additional information
about the business of the Corporation and risk factors, many beyond the Corporations control that,
in addition to the other information in this Form 10-Q, including Item 1A of Part II, readers
should consider.
The Corporations common stock is traded on the National Association of Securities Dealers
Automated Quotations (NASDAQ) system under the symbol BPOP.
WESTERNBANK FDIC-ASSISTED TRANSACTION
As indicated previously, on April 30, 2010, BPPR entered into a purchase and assumption
agreement with the FDIC to acquire certain assets and assume certain deposits and liabilities of
Westernbank Puerto Rico, a Puerto Rico state-chartered bank headquartered in Mayaguez, Puerto Rico
(Westernbank). Westernbank was a wholly-owned commercial bank subsidiary of W Holding Company,
Inc. and operated through a network of 45 branches located throughout Puerto Rico. On May 1, 2010,
Westernbanks branches reopened as branches of BPPR; however, the physical branch locations and
leases were not immediately acquired by BPPR. BPPR has an option, which was extended until August
30, 2010, to acquire, at fair market value, any bank premises that were owned by, or any leases
relating to bank premises held by, Westernbank (including ATM locations). BPPR is currently
reviewing the bank premises and related leases of Westernbank, and expects to reduce the number of
branches due to bank synergies. Currently, all former Westernbank banking facilities and equipment
used by the Corporation are leased from the FDIC on a month-to-month basis. The integration of
Westernbanks operation is expected to be substantially completed by the end of the third quarter
of 2010.
The following table presents balances recorded by the Corporation at the time of the Westernbank
FDIC-assisted transaction on April 30, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book value prior |
|
|
|
|
|
|
|
|
|
|
|
|
to purchase |
|
|
|
|
|
|
|
|
|
As recorded by |
|
|
accounting |
|
Fair value |
|
Additional |
|
Popular, Inc. on |
(In thousands) |
|
adjustments |
|
adjustments |
|
consideration |
|
April 30, 2010 |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and money market investments |
|
$ |
358,132 |
|
|
|
|
|
|
|
|
|
|
$ |
358,132 |
|
Investment in Federal Home Loan Bank stock |
|
|
58,610 |
|
|
|
|
|
|
|
|
|
|
|
58,610 |
|
Covered loans |
|
|
8,510,748 |
|
|
$ |
(4,293,756 |
) |
|
|
|
|
|
|
4,216,992 |
|
Non-covered loans |
|
|
43,996 |
|
|
|
|
|
|
|
|
|
|
|
43,996 |
|
FDIC loss share indemnification asset |
|
|
|
|
|
|
3,322,561 |
|
|
|
|
|
|
|
3,322,561 |
|
Covered other real estate owned |
|
|
125,947 |
|
|
|
(52,712 |
) |
|
|
|
|
|
|
73,235 |
|
Core deposit intangible |
|
|
|
|
|
|
24,415 |
|
|
|
|
|
|
|
24,415 |
|
Receivable from FDIC (associated to the Note
payable issued to the FDIC) |
|
|
|
|
|
|
|
|
|
$ |
111,101 |
|
|
|
111,101 |
|
Other assets |
|
|
44,926 |
|
|
|
|
|
|
|
|
|
|
|
44,926 |
|
|
Total assets |
|
$ |
9,142,359 |
|
|
$ |
(999,492 |
) |
|
$ |
111,101 |
|
|
$ |
8,253,968 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
$ |
2,380,170 |
|
|
$ |
11,465 |
|
|
|
|
|
|
$ |
2,391,635 |
|
Note payable issued to the FDIC (including a
premium of $11,612 resulting from the fair value
adjustment) |
|
|
|
|
|
|
|
|
|
$ |
5,769,696 |
|
|
|
5,769,696 |
|
Equity appreciation instrument |
|
|
|
|
|
|
|
|
|
|
52,500 |
|
|
|
52,500 |
|
Contingent liability on unfunded loan commitments |
|
|
|
|
|
|
132,442 |
|
|
|
|
|
|
|
132,442 |
|
Accrued expenses and other liabilities |
|
|
13,925 |
|
|
|
|
|
|
|
|
|
|
|
13,925 |
|
|
Total liabilities |
|
$ |
2,394,095 |
|
|
$ |
143,907 |
|
|
$ |
5,822,196 |
|
|
$ |
8,360,198 |
|
|
Excess of assets acquired over liabilities assumed |
|
$ |
6,748,264 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate fair value adjustments |
|
|
|
|
|
$ |
(1,143,399 |
) |
|
|
|
|
|
|
|
|
|
Aggregate additional consideration, net |
|
|
|
|
|
|
|
|
|
$ |
5,711,095 |
|
|
|
|
|
|
Goodwill on acquisition |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
106,230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
The assets acquired and liabilities assumed were recorded at their estimated fair values as of
the April 30, 2010 transaction date. These fair value estimates are considered preliminary, and
are subject to change for up to one year after the closing date of the acquisition as additional
information relative to closing date fair values may become available.
The Corporation refers to the loans acquired in the Westernbank FDIC-assisted transaction, except
credit cards, as covered loans as the Corporation will be reimbursed by the FDIC for a
substantial portion of any future losses on such loans under the terms of the loss sharing
agreements. Foreclosed other real estate properties are also covered under the loss sharing
agreements. Pursuant to the terms of the loss sharing agreements, the FDICs obligation to
reimburse BPPR for losses with respect to assets covered by such agreements (collectively, covered
assets) begins with the first dollar of loss incurred. On a combined basis, the FDIC will
reimburse BPPR for 80% of all qualifying losses with respect to the covered assets. BPPR will
reimburse the FDIC for 80% of qualifying recoveries with respect to losses for which the FDIC
reimbursed BPPR. The loss sharing agreement applicable to single-family residential mortgage loans
provides for FDIC loss sharing and BPPR reimbursement to the FDIC to last for ten years, and the
loss sharing agreement applicable to commercial and other assets provides for FDIC loss sharing and
BPPR reimbursement to the FDIC to last for five years, with additional recovery sharing for three
years thereafter.
In June 2020, approximately ten years following the acquisition date, BPPR may be required to make
a payment to the FDIC in the event that losses on covered assets under the loss sharing agreements
have been less than originally estimated as determined pursuant to a formula established under the
agreements that is described in Note 2 to the accompanying consolidated financial statements.
The FDIC has certain rights to withhold loss sharing payments if BPPR does not perform its
obligations under the loss sharing agreements in accordance with their terms and to withdraw the
loss share protection if certain significant transactions are effected without FDIC consent.
Covered loans under loss sharing agreements with the FDIC are reported in loans exclusive of the
estimated FDIC loss share indemnification asset. The covered loans acquired in the Westernbank
transaction are, and will continue to be, reviewed for collectability, based on the expectations of
cash flows on these loans. As a result, if there is a decrease in expected cash flows due to an
increase in estimated credit losses compared to the estimate made at the April 30, 2010 acquisition
date, the Corporation will record a charge to the provision for loan losses and an allowance for
loan losses will be established. A related credit to income and an increase in the FDIC loss share
indemnification asset will be recognized at the same time, measured based on the loss share
percentages described above.
As part of the consideration for the transaction, the FDIC received an equity appreciation
instrument in which BPPR agreed to make a cash payment to the holder thereof equal to the product
of (a) 50 million and (b) the amount by which the average volume weighted price of the
Corporations common stock over the two NASDAQ trading days immediately prior to the date on which
the equity appreciation instrument is exercised exceeds $3.43 (Popular, Inc.s 20-day trailing
average common stock price on April 27, 2010). The equity appreciation instrument is exercisable by
the holder thereof, in whole or in part, up to May 7, 2011. As of April 30, 2010, the fair value of
the equity appreciation instrument was estimated at $52.5 million, compared with $28.1 million as
of June 30, 2010, which resulted in $24.4 million being recognized in earnings during the second
quarter of 2010. The equity appreciation instrument is recorded as a liability and any subsequent
changes in its estimated fair value are recognized in earnings, adding volatility to the
Corporations results of operations.
SUBSEQUENT EVENTS
Subsequent events are events and transactions that occur after the balance sheet date but before
financial statements are issued. The effects of subsequent events and transactions are recognized
in the financial statements when they provide additional evidence about conditions that existed at
the balance sheet date. The Corporation has evaluated
101
events and transactions occurring subsequent to June 30, 2010. Such evaluation resulted in no
adjustments to the consolidated financial statements for the quarter and six months ended June 30,
2010.
In July 2010, the Corporation prepaid $2 billion of the outstanding balance of the Note payable
issued to the FDIC as part of the Westernbank FDIC-assisted transaction. Also, in July 2010, the
Corporation repurchased $175 million in term notes, which had a contractual maturity of September
2011.
REGULATORY REFORM
On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer
Protection Act (the Dodd-Frank Act). The Dodd-Frank Act implements sweeping changes in the
regulation of financial institutions and will fundamentally change the system of oversight
described under Item 1. BusinessRegulation and Supervision in our Annual Report on Form 10-K
for the year ended December 31, 2009. The implications for our business practices, the regulatory
and competitive environment in which we operate and our financial performance will depend to a
large extent on the content of required future rulemaking by the Federal Reserve Board, the SEC and
other agencies under the Dodd-Frank Act, as well as the development of market practices and
structures under the regime established by the legislation. Among the numerous provisions of the
Dodd-Frank Act that could have an effect on us are:
|
|
|
Heightened supervision of systemically important financial institutions and financial
market utilities. The Dodd-Frank Act creates a new systemic risk oversight body, the
Financial Stability Oversight Council, that will, among other things, make recommendations
to the Federal Reserve Board as to supervisory requirements and prudential standards
applicable to systemically important financial institutions and entities that are
designated as financial market utilities (defined to include persons that manage or
operate a multilateral system for the purpose of transferring, clearing or settling
payments, securities or other transactions among financial institutions, including
repurchase agreements). The legislation will also subject these institutions to heightened
risk-based capital, leverage, liquidity and risk-management requirements, including
periodic stress tests, as well as limitations on credit exposures. |
|
|
|
|
Increased fees to banking regulators. The Dodd-Frank Act requires the Federal Reserve
Board to assess fees against large banking entities such as us to cover the cost of
examining and supervising these entities. The FDIC will also collect fees from entities it
examines to cover the cost of the examination. In addition, the FDIC is required to amend
its regulations regarding the assessment for federal deposit insurance to base such
assessments on the average total consolidated assets of the insured depository institution
(rather than on the amount of its deposits) during the assessment period, less the average
tangible equity of the institution during the assessment period. The Dodd-Frank Act also
eliminates the ceiling on the size of the Deposit Insurance Fund currently 1.5% of
estimated insured deposits, and raises the statutorily required floor for the Deposit
Insurance Fund from 1.15% of estimated insured deposits to 1.35% of estimated insured
deposits, or a comparable percentage of the revised assessment base required by the Act.
These provisions generally will require an increase in the level of assessments for
institutions such as the Corporation with assets exceeding $10 billion. |
|
|
|
|
Increased capital requirements. The Collins Amendment provisions of the Dodd-Frank
Act will subject us at a company-wide level to the same leverage and risk-based capital
requirements that apply to depository institutions specifically, and direct banking
regulators to develop enhanced capital requirements. In addition, these provisions will
exclude all trust preferred securities and cumulative preferred stock from Tier 1 capital,
subject to phase-out from Tier 1 qualification for securities issued before May 19, 2010,
with the phase-out commencing on January 1, 2013 and to be implemented incrementally over
a three-year period commencing on that date. A number of other governments and regulators,
including the U.S. Treasury and the Basel Committee on Banking Supervision, have also
called for increased capital requirements and increased quality of capital. |
|
|
|
|
Interest on deposits. The Dodd-Frank Act repeals the federal prohibition on the payment
of interest on demand deposits, thereby permitting depository institutions to pay interest
on business transaction and other accounts. |
|
|
|
|
Derivatives regulation. The Dodd-Frank Act contains provisions designed to increase
transparency in over-the-counter derivatives markets by requiring that all swaps (except
those with non-financial end users) be executed and cleared through regulated facilities.
In addition, the derivatives push-out provisions of the Dodd-Frank Act will essentially
prevent us from conducting significant swaps-related activities through the Corporation or
another insured depository institution subsidiary, subject to exceptions for certain
interest rate and currency swaps and for hedging or risk mitigation activities directly
related to the banks business. These activities may be conducted elsewhere within the
Corporation, subject to compliance with Sections 23A and 23B of the Federal Reserve Act and
any other requirements imposed by the SEC, CFTC or Federal Reserve Board. |
|
|
|
|
Increased costs for consumer lending activities. The Dodd-Frank Act includes a number
of provisions that may reduce the revenues generated by, or increase the cost of
conducting, our consumer lending businesses. These include provisions which: (1) amend
the Truth-in-Lending Act with respect to mortgage originations, including originator
compensation, minimum repayment standards and prepayment considerations; (2) restrict
variable-rate lending by requiring the borrowers ability to repay to be determined for
variable-rate loans by using the maximum rate that will apply during the first five years
of a variable-rate loan term, and making more loans subject to provisions for higher cost
loans, new disclosures, and certain other revisions; and (3) direct the Federal Reserve
Board to issue rules which are expected to limit debit card interchange fees. |
|
|
|
|
Executive compensation. The Dodd-Frank Act requires the SEC, the Federal Reserve Board
and other agencies to jointly issue rules requiring enhanced reporting and regulation of
incentive-based compensation structures at regulated entities, including bank holding
companies, banks, registered broker-dealers and registered investment advisors. In
addition, the Federal Reserve Board has issued guidance designed to ensure that incentive
compensation at banking institutions does not encourage excessive risk-taking. |
|
|
|
|
Transactions with affiliates. The Dodd-Frank Act significantly expands the coverage and
scope of the regulations that limit affiliate transactions within a banking organization,
including coverage of the credit exposure on derivative transactions, repurchase and
reverse repurchase agreements, securities borrowing and lending transactions and
transactions with sponsored hedge funds and private equity funds. |
|
|
|
|
Expanded standards of care. The Dodd-Frank Act provides for expanded standards of care
by market participants in dealing with clients and customers, including by providing the
SEC with authority to adopt rules establishing fiduciary duties for broker-dealers and
directing the SEC to examine and improve sales practices and disclosure by broker-dealers
and investment advisers. |
The specific impact of the Dodd-Frank Act on our businesses and the markets in which we operate
will depend on the manner in which the relevant agencies develop and implement the required rules
and the reaction of market participants to these regulatory developments. We anticipate that the
process of rulemaking and the development of related market practices and structures will take
several years.
Although we cannot predict how regulatory implementation of the Dodd-Frank Act will
occur, the related findings of various regulatory and commission studies, the interpretations
issued as part of the rulemaking process and the final regulations that are issued with respect to
various elements of the new law may cause changes that impact the profitability of our business activities and require that we change
certain of our business practices, and could expose us to additional costs (including increased
compliance costs). These changes may also require us to invest significant management attention
and resources to make any necessary changes.
ADOPTION OF NEW ACCOUNTING STANDARDS AND ISSUED BUT NOT YET EFFECTIVE ACCOUNTING STANDARDS
FASB Accounting Standards Update 2009-16, Transfers and Servicing (Accounting Standards
Codification (ASC) Topic 860) Accounting for Transfers of Financial Assets (ASU 2009-16)
ASU 2009-16 amends previous guidance relating to transfers of financial assets and eliminates the
concept of a qualifying special-purpose entity, removes the exception for guaranteed mortgage
securitizations when a transferor has not surrendered control over the transferred financial
assets, changes the requirements for derecognizing financial assets, and includes additional
disclosures requiring more information about transfers of financial assets in which entities have
continuing exposure to the risks related to the transferred financial assets. Among the most
significant amendments and additions to this guidance are changes to the conditions for sales of
financial assets which objective is to determine whether a transferor and its consolidated
affiliates included in the financial statements have surrendered control over transferred financial
assets or third-party beneficial interests; and the addition of the meaning of the term
participating interest which represents a proportionate (pro rata) ownership interest in an entire
financial asset. The requirements for sale accounting must be applied only to a financial asset in
its entirety, a pool of financial assets in its entirety, or participating interests as defined in
ASC Subparagraph 860-10-40-6A. This guidance has been applied as of the beginning of the first
annual reporting period that began after November 15, 2009, for interim periods within that first
annual reporting period and will be applied for interim and annual reporting periods thereafter.
Earlier application was prohibited. The recognition and measurement provisions have been applied to
transfers that have occurred on or after the effective date. On and after the effective date,
existing qualifying special-purpose entities have been evaluated for consolidation in accordance
with the applicable consolidation guidance in the Codification. The Corporation adopted this new
authoritative accounting guidance effective January 1, 2010. The Corporation evaluated transfers of
financial assets executed during the six months ended June 30, 2010 pursuant to the new accounting
guidance, principally consisting of guaranteed mortgage securitizations (Government National
Mortgage Association (GNMA) and Federal National Mortgage Association (FNMA) mortgage-backed
securities, and determined that the adoption of ASU 2009-16 did not have a significant impact on
the Corporations accounting for such transactions or results of operations or financial condition
for such period.
A securitization of a financial asset, a participating interest in a financial asset, or a pool of
financial assets in which the Corporation (and its consolidated affiliates) (a) surrenders control
over the transferred assets and (b) receives cash or other proceeds is accounted for as a sale.
Control is considered to be surrendered only if all three of the following conditions are met: (1)
the assets have been legally isolated; (2) the transferee has the ability to pledge or exchange the
assets; and (3) the transferor no longer maintains effective control over the assets. When the
Corporation transfers financial assets and the transfer fails any one of the above criteria, the
Corporation is prevented from derecognizing the transferred financial assets and the transaction is
accounted for as a secured borrowing.
The Corporation recognizes and initially measures at fair value a servicing asset or servicing
liability each time it undertakes an obligation to service a financial asset by entering into a
servicing contract in either of the following situations: (1) a transfer of an entire financial
asset, a group of entire financial assets, or a participating interest in an entire financial asset
that meets the requirements for sale accounting; or (2) an acquisition or assumption of a servicing
obligation of financial assets that do not pertain to the Corporation or its consolidated
subsidiaries. Upon adoption of ASU 2009-16, the Corporation does not recognize either a servicing
asset or a servicing liability if it transfers or securitizes financial assets in a transaction
that does not meet the requirements for sale accounting and is accounted for as a secured
borrowing.
102
Refer to Note 11 to the consolidated financial statements for disclosures on transfers of financial
assets and servicing assets retained as part of guaranteed mortgage securitizations.
FASB Accounting Standards Update 2009-17, Consolidations (ASC Topic 810) Improvements to
Financial Reporting by Enterprises Involved with Variable Interest Entities (ASU 2009-17) and
FASB Accounting Standards Update 2010-10, Consolidation (ASC Topic 810): Amendments for Certain
Investment Funds (ASU 2010-10)
ASU 2009-17 amends the guidance applicable to variable interest entities (VIE) and changes how a
reporting entity determines when an entity that is insufficiently capitalized or is not controlled
through voting (or similar rights) should be consolidated. This guidance replaces a
quantitative-based risks and rewards calculation for determining which entity, if any, has both (a)
a controlling financial interest in a variable interest entity with an approach focused on
identifying which entity has the power to direct the activities of a variable interest entity that
most significantly impact the entitys economic performance and (b) the obligation to absorb losses
of the entity or the right to receive benefits from the entity that could potentially be
significant to the variable interest entity. This guidance requires reconsideration of whether an
entity is a variable interest entity when any changes in facts or circumstances occur such that the
holders of the equity investment at risk, as a group, lose the power to direct the activities of
the entity that most significantly impact the entitys economic performance. It also requires
ongoing assessments of whether a variable interest holder is the primary beneficiary of a variable
interest entity. The amendments to the consolidated guidance affect all entities that were within
the scope of the original guidance, as well as qualifying special-purpose entities (QSPEs) that
were previously excluded from the guidance. ASU 2009-17 requires a reporting entity to provide
additional disclosures about its involvement with variable interest entities and any significant
changes in risk exposure due to that involvement. The Corporation adopted this new authoritative
accounting guidance effective January 1, 2010. The new accounting guidance on variable interest
entities did not have an effect on the Corporations consolidated statement of condition or results
of operations upon adoption.
The principal variable interest entities evaluated by the Corporation during the six months ended
June 30, 2010 included: (1) GNMA and FNMA guaranteed mortgage securitizations and for which
management has concluded that the Corporation is not the primary beneficiary (refer to Note 20 to
the consolidated financial statements) and (2) the trust preferred securities for which management
believes that the Corporation does not possess a significant variable interest on the trusts (refer
to Note 17 to the consolidated financial statements).
Additionally, the Corporation has variable interests in certain investments that have the
attributes of investment companies, as well as limited partnership investments in venture capital
companies. However, in January 2010, the FASB issued ASU 2010-10, Consolidation (ASC Topic 810),
Amendments for Certain Investment Funds, which deferred the effective date of the provisions of ASU
2009-17 for a reporting entitys interest in an entity that has all the attributes of an investment
company; or for which it is industry practice to apply measurement principles for financial
reporting purposes that are consistent with those followed by investment companies. The deferral
allows asset managers that have no obligation to fund potentially significant losses of an
investment entity to continue to apply the previous accounting guidance to investment entities that
have the attributes of entities subject to ASC Topic 946 (the Investment Company Guide). The FASB
also decided to defer the application of ASU 2009-17 for money market funds subject to Rule 2a-7 of
the Investment Company Act of 1940. Asset managers would continue to apply the applicable existing
guidance to those entities that qualify for the deferral. ASU 2010-10 did not defer the disclosure
requirements in ASU 2009-17.
The Corporation was not required to consolidate existing variable interest entities for which it
has a variable interest as of June 30, 2010. Refer to Note 20 to the consolidated financial
statements for required disclosures associated with the guaranteed mortgage securitizations in
which the Corporation holds a variable interest.
FASB Accounting Standards Update 2010-06, Fair Value Measurements and Disclosures (ASC Topic 820) -
Improving Disclosures about Fair Value Measurements (ASU 2010-06)
ASU 2010-06, issued in January 2010, revises two disclosure requirements concerning fair value
measurements and clarifies two others. It requires separate presentation of significant transfers
into and out of Levels 1 and 2 of the fair
103
value hierarchy and disclosure of the reasons for such transfers. It will also require the
presentation of purchases, sales, issuances and settlements within Level 3 on a gross basis rather
than a net basis. The amendments also clarify that disclosures should be disaggregated by class of
asset or liability and that disclosures about inputs and valuation techniques should be provided
for both recurring and non-recurring fair value measurements. ASU 2010-06 has been effective for
interim and annual reporting periods beginning after December 15, 2009, except for the disclosures
about purchases, sales, issuances, and settlements in the rollforward of activity in Level 3 fair
value measurements, which are effective for interim and annual reporting periods beginning after
December 15, 2010. This guidance impacts disclosures only and will not have an effect on the
Corporations consolidated statements of condition or results of operations. The Corporations
disclosures about fair value measurements are presented in Note 21 to the consolidated financial
statements.
FASB Accounting Standards Update 2010-11, Derivatives and Hedging (ASC Topic 815): Scope Exception
Related to Embedded Credit Derivatives (ASU 2010-11)
ASU 2010-11 clarifies the type of embedded credit derivative that is exempt from embedded
derivative bifurcation requirements. The type of credit derivative that qualifies for the exemption
is related only to the subordination of one financial instrument to another. As a result, entities
that have contracts containing an embedded credit derivative feature in a form other than such
subordination may need to separately account for the embedded credit derivative feature. The
amendments in ASU 2010-11 are effective for each reporting entity at the beginning of its first
fiscal quarter beginning after June 15, 2010. Early adoption is permitted at the beginning of each
entitys first fiscal quarter beginning after March 5, 2010. The Corporation does not expect that
the adoption of this standard will have a significant effect, if any, on its consolidated financial
statements.
FASB Accounting Standards Update 2010-18, Receivables (ASC Topic 310): Effect of a Loan
Modification When the Loan is Part of a Pool That is Accounted for as a Single Asset (ASU
2010-18)
The amendments in ASU 2010-18, issued in April 2010, affect any entity that acquires loans subject
to ASC Subtopic 310-30, that accounts for some or all of those loans within pools, and that
subsequently modifies one or more of those loans after acquisition. ASC Subtopic 310-30 provides
guidance on accounting for acquired loans that have evidence of credit deterioration upon
acquisition. As a result of the amendments in ASU 2010-18, modifications of loans that are
accounted for within a pool under ASC Subtopic 310-30 do not result in the removal of those loans
from the pool even if the modification of those loans would otherwise be considered a troubled debt
restructuring. An entity will continue to be required to consider whether the pool of assets in
which the loan is included is impaired if expected cash flows for the pool change. The amendments
in ASU 2010-18 do not affect the accounting for loans under the scope of Subtopic 310-30 that are
not accounted for within pools. Loans accounted for individually under Subtopic 310-30 continue to
be subject to the troubled debt restructuring accounting provisions within ASC Subtopic 310-40,
ReceivablesTroubled Debt Restructurings by Creditors. The amendments in ASU 2010-18 are effective
for modifications of loans accounted for within pools under Subtopic 310-30 occurring in the first
interim or annual period ending on or after July 15, 2010. The amendments are to be applied
prospectively. Early application is permitted. Upon initial adoption of the guidance in ASU
2010-18, an entity may make a one-time election to terminate accounting for loans as a pool under
Subtopic 310-30. This election may be applied on a pool-by-pool basis and does not preclude an
entity from applying pool accounting to subsequent acquisitions of loans with credit deterioration.
The Corporation elected to early adopt the provisions of this statement, effective with the closing
of the Westernbank FDIC-assisted transaction on April 30, 2010. As a result, the accounting for
modified loans follows the guidelines of ASU 2010-18; however, the adoption of these provisions did
not have a significant impact on the Corporations result of operations or financial position as of
June 30, 2010.
FASB Accounting Standards Update 2010-20, Receivables (ASC Topic 310): Disclosure about the Credit
Quality of Financing Receivables and the Allowance for Credit Losses (ASU 2010-20)
ASU 2010-20, issued in July 2010, expands disclosure requirements about the credit quality of
financing receivables and allowance for credit losses. The objective of this ASU is for an entity
to provide disclosures that facilitate financial statement users evaluation of the
following: (1) the nature of credit risk inherent in the entitys portfolio of financing
receivables; (2) how that risk is analyzed and assessed in arriving at the allowance for credit
losses; and (3) the changes and reasons for those changes in the allowance for credit losses.
Disclosures should be provided on a disaggregated basis on two defined levels: (1) portfolio
segment; and (2) class of financing receivable. The ASU
104
2010-20 makes changes to existing disclosure requirements and includes additional disclosure
requirements about financing receivables, including: the credit quality indicators of financing
receivables at the end of the reporting period by class of financing receivables; the aging of past
due financing receivables at the end of the reporting period by class of financing receivables; and
the nature and extent of troubled debt restructurings that occurred during the period by class of
financing receivables and their effect on the allowance for credit losses. The disclosure
requirements as of the end of a reporting period are effective for interim and annual reporting
periods ending on or after December 15, 2010. The disclosures about activity that occurs during a
reporting period are effective for interim and annual reporting periods beginning on or after
December 15, 2010. This guidance impacts disclosures only and will not have an effect on the
Corporations consolidated statements of condition or results of operations.
CRITICAL ACCOUNTING POLICIES / ESTIMATES
The accounting and reporting policies followed by the Corporation and its subsidiaries conform to
generally accepted accounting principles in the United States of America and general practices
within the financial services industry. Various elements of the Corporations accounting policies,
by their nature, are inherently subject to estimation techniques, valuation assumptions and other
subjective assessments. These estimates are made under facts and circumstances at a point in time
and changes in those facts and circumstances could produce actual results that differ from those
estimates.
Management has discussed the development and selection of the critical accounting policies and
estimates with the Corporations Audit Committee. The Corporation has identified as critical
accounting policies those related to Fair Value Measurement of Financial Instruments, Loans and
Allowance for Loan Losses, Income Taxes, Goodwill and Pension and Postretirement Benefit
Obligations. For a summary of these critical accounting policies and estimates, refer to that
particular section in the MD&A included in Popular, Inc.s 2009 Financial Review and Supplementary
Information to Stockholders, incorporated by reference in Popular, Inc.s Annual Report on Form
10-K for the year ended December 31, 2009 (the 2009 Annual Report). Also, refer to Note 1 to the
consolidated financial statements included in the 2009 Annual Report for a summary of the
Corporations significant accounting policies. As a result of the Westernbank FDIC-assisted
transaction, during the quarter ended June 30, 2010, management determined to incorporate
Acquisition Accounting for Loans and Related Indemnification Asset as part of the Corporations
critical accounting policies / estimates due to the significance of the assets involved and
significant judgment to various accounting, reporting and disclosure matters.
Acquisition Accounting for Loans and Related Indemnification Asset
Beginning in 2009, the Corporation accounts for its acquisitions under ASC Topic No. 805, Business
Combinations, which requires the use of the purchase method of accounting. All identifiable assets
acquired, including loans, are recorded at fair value. No allowance for loan losses related to the
acquired loans is recorded on the acquisition date as the fair value of the loans acquired
incorporates assumptions regarding credit risk. Loans acquired are recorded at fair value in
accordance with the fair value methodology prescribed in ASC Topic 820, exclusive of the
shared-loss agreements with the FDIC. These fair value estimates associated with the loans include
estimates related to expected prepayments and the amount and timing of expected principal, interest
and other cash flows.
Because the FDIC has agreed to reimburse the Corporation for losses related to the acquired loans
in the Westernbank FDIC-assisted transaction, an indemnification asset was recorded at fair value
at the acquisition date. The indemnification asset is recognized at the same time as the
indemnified loans, and measured on the same basis, subject to collectability or contractual
limitations. The loss share indemnification asset on the acquisition date reflects the
reimbursements expected to be received from the FDIC, using an appropriate discount rate, which
reflects counterparty credit risk and other uncertainties.
The initial valuation of these loans and related indemnification asset requires management to make
subjective judgments concerning estimates about how the acquired loans will perform in the future
using valuation methods, including discounted cash flow analysis and independent third-party
appraisals. Factors that may significantly affect the initial valuation include, among others,
market-based and industry data related to expected changes in interest rates, assumptions related
to probability and severity of credit losses, estimated timing of credit losses including the
timing of foreclosure and liquidation of collateral, expected prepayment rates, required or
anticipated loan modifications, unfunded loan commitments, the specific terms and provisions of any
loss share agreements, and
specific industry and market conditions that may impact discount rates and independent third-party
appraisals.
105
Over the life of the acquired loans that are accounted under ASC Subtopic 310-30, the Corporation
continues to estimate cash flows expected to be collected on individual loans or on pools of loans
sharing common risk characteristics. The Corporation evaluates at each balance sheet date whether
the present value of its loans determined using the effective interest rates has decreased and if
so, recognizes a provision for loan loss in its consolidated statement of operations and an
allowance for loan losses in its consolidated statement of condition. For any increases in cash
flows expected to be collected, the Corporation adjusts the amount of accretable yield recognized
on a prospective basis over the loans or pools remaining life.
The loss share indemnification asset continues to be measured on the same basis as the related
indemnified loans. Because the acquired loans are subject to the accounting prescribed by ASC Topic
310, subsequent changes to the basis of the shared loss agreements also follow that model.
Deterioration in the credit quality of the loans (immediately recorded as an adjustment to the
allowance for loan losses) would immediately increase the basis of the loss share indemnification
asset, with the partial offset based on the loss sharing agreement recorded through the
consolidated statement of operations. Increases in the credit quality or cash flows of loans
(reflected as an adjustment to yield and accreted into income over the remaining life of the loans)
decrease the basis of the loss share indemnification asset, with such decrease being accreted into
income over 1) the same period or 2) the life of the shared loss agreements, whichever is shorter.
Loss assumptions used in the basis of the indemnified loans are consistent with the loss
assumptions used to measure the indemnification asset. Fair value accounting incorporates into the
fair value of the indemnification asset an element of the time value of money, which is accreted
back into income over the life of the shared loss agreements. Upon the determination of an incurred
loss, the loss share indemnification asset will be reduced by the amount owed by the FDIC. A
corresponding claim receivable is recorded until cash is received from the FDIC.
These evaluations of estimated cash flows expected to be collected subsequent to acquisition
require the continued usage of key assumptions and estimates, similar to the initial estimate of
fair value. Given the current economic environment, the Corporation must apply judgment to develop
its estimates of cash flows considering the impact of home price and property value changes,
changing loss severities and prepayment speeds. Decreases in the expected cash flows will generally
result in a charge to the provision for credit losses resulting in an increase to the allowance for
loan losses. Increases in the expected cash flows will generally result in an increase in interest
income over the remaining life of the loan, or pool of loans. The amount of cash flows expected to
be collected and, accordingly, the adequacy of the allowance for loan losses due to certain
decreases in expected cash flow, is particularly sensitive to changes in loan credit quality.
The amount that the Corporation realizes on these loans and related indemnification assets could
differ materially from the carrying value reflected in these financial statements, based upon the
timing and amount of collections on the acquired loans in future periods. The Corporations losses
on these assets may be mitigated to the extent covered under the specific terms and provisions of
any loss share agreements.
Refer to Notes 2, 3 and 10 to the accompanying consolidated financial statements for further
discussions on the Westernbank FDIC-assisted transaction and loans acquired.
NET INTEREST INCOME
Net interest income, on a taxable equivalent basis, is presented with its different components
on Tables B and C for the quarter and six months ended June 30, 2010 as compared with the same
periods in 2009, segregated by major categories of interest earning assets and interest bearing
liabilities.
The interest earning assets include the investment securities and loans that are exempt from income
tax, principally in Puerto Rico. The main sources of tax-exempt interest income are certain
investments in obligations of the U.S. Government, its agencies and sponsored entities, and certain
obligations of the Commonwealth of Puerto Rico and its agencies. Assets held by the Corporations
international banking entities, which previously were tax exempt under Puerto Rico law, have a
temporary 5% tax rate. To facilitate the comparison of all interest related to these assets, the
interest income has been converted to a taxable equivalent basis, using the applicable statutory
income tax rates at
each quarter. The taxable equivalent computation considers the interest expense disallowance
required by the Puerto Rico tax law.
106
Average outstanding securities balances are based upon amortized cost excluding any unrealized
gains or losses on securities available-for-sale. Non-accrual loans have been included in the
respective average loans and leases categories. Loan fees collected and costs incurred in the
origination of loans are deferred and amortized over the term of the loan as an adjustment to
interest yield. Prepayment penalties, late fees collected and the amortization of premiums /
discounts on purchased loans are also included as part of the loan yield. Interest income for
quarter and six months ended June 30, 2010 included a favorable impact of $4.9 million and $8.8
million, respectively, related to these items, compared to a favorable impact of $6.8 million and $12.3 million for the
quarter and six months ended June 30, 2009, respectively.
TABLE B
Analysis of Levels & Yields on a Taxable Equivalent Basis for Continuing Operations
Quarter ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variance |
Average Volume |
|
Average Yields / Costs |
|
|
|
Interest |
|
Attributable to |
2010 |
|
2009 |
|
Variance |
|
2010 |
|
2009 |
|
Variance |
|
|
|
2010 |
|
2009 |
|
Variance |
|
Rate |
|
Volume |
($ in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
$ |
2,216 |
|
|
$ |
1,283 |
|
|
$ |
933 |
|
|
|
0.34 |
% |
|
|
0.74 |
% |
|
|
(0.40 |
%) |
|
Money market investments |
|
$ |
1,894 |
|
|
$ |
2,381 |
|
|
$ |
(487 |
) |
|
$ |
(878 |
) |
|
$ |
391 |
|
|
6,688 |
|
|
|
7,535 |
|
|
|
(847 |
) |
|
|
4.40 |
|
|
|
4.69 |
|
|
|
(0.29 |
) |
|
Investment securities |
|
|
73,500 |
|
|
|
88,341 |
|
|
|
(14,841 |
) |
|
|
(4,220 |
) |
|
|
(10,621 |
) |
|
434 |
|
|
|
741 |
|
|
|
(307 |
) |
|
|
7.01 |
|
|
|
6.47 |
|
|
|
0.54 |
|
|
Trading securities |
|
|
7,584 |
|
|
|
11,945 |
|
|
|
(4,361 |
) |
|
|
929 |
|
|
|
(5,290 |
) |
|
|
|
|
|
|
9,338 |
|
|
|
9,559 |
|
|
|
(221 |
) |
|
|
3.56 |
|
|
|
4.30 |
|
|
|
(0.74 |
) |
|
Total money market, investment and trading securities |
|
|
82,978 |
|
|
|
102,667 |
|
|
|
(19,689 |
) |
|
|
(4,169 |
) |
|
|
(15,520 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,562 |
|
|
|
15,383 |
|
|
|
(1,821 |
) |
|
|
4.94 |
|
|
|
4.93 |
|
|
|
0.01 |
|
|
Commercial * |
|
|
167,116 |
|
|
|
189,207 |
|
|
|
(22,091 |
) |
|
|
361 |
|
|
|
(22,452 |
) |
|
639 |
|
|
|
746 |
|
|
|
(107 |
) |
|
|
8.68 |
|
|
|
8.30 |
|
|
|
0.38 |
|
|
Leasing |
|
|
13,880 |
|
|
|
15,486 |
|
|
|
(1,606 |
) |
|
|
696 |
|
|
|
(2,302 |
) |
|
4,588 |
|
|
|
4,499 |
|
|
|
89 |
|
|
|
6.01 |
|
|
|
6.48 |
|
|
|
(0.47 |
) |
|
Mortgage |
|
|
68,964 |
|
|
|
72,882 |
|
|
|
(3,918 |
) |
|
|
(5,335 |
) |
|
|
1,417 |
|
|
3,894 |
|
|
|
4,410 |
|
|
|
(516 |
) |
|
|
10.31 |
|
|
|
9.91 |
|
|
|
0.40 |
|
|
Consumer |
|
|
100,056 |
|
|
|
109,116 |
|
|
|
(9,060 |
) |
|
|
1,535 |
|
|
|
(10,595 |
) |
|
|
|
|
|
|
22,683 |
|
|
|
25,038 |
|
|
|
(2,355 |
) |
|
|
6.19 |
|
|
|
6.19 |
|
|
|
|
|
|
Sub-total loans |
|
|
350,016 |
|
|
|
386,691 |
|
|
|
(36,675 |
) |
|
|
(2,743 |
) |
|
|
(33,932 |
) |
|
2,748 |
|
|
|
|
|
|
|
2,748 |
|
|
|
6.08 |
|
|
|
|
|
|
|
6.08 |
|
|
Covered loans |
|
|
41,719 |
|
|
|
|
|
|
|
41,719 |
|
|
|
|
|
|
|
41,719 |
|
|
|
|
|
|
|
25,431 |
|
|
|
25,038 |
|
|
|
393 |
|
|
|
6.17 |
|
|
|
6.19 |
|
|
|
(0.02 |
) |
|
Total loans |
|
|
391,735 |
|
|
|
386,691 |
|
|
|
5,044 |
|
|
|
(2,743 |
) |
|
|
7,787 |
|
|
|
|
|
|
$ |
34,769 |
|
|
$ |
34,597 |
|
|
$ |
172 |
|
|
|
5.47 |
% |
|
|
5.67 |
% |
|
|
(0.20 |
%) |
|
Total earning assets |
|
$ |
474,713 |
|
|
$ |
489,358 |
|
|
$ |
(14,645 |
) |
|
$ |
(6,912 |
) |
|
$ |
(7,733 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,194 |
|
|
$ |
4,837 |
|
|
$ |
357 |
|
|
|
0.80 |
% |
|
|
1.12 |
% |
|
|
(0.32 |
%) |
|
NOW and money market** |
|
$ |
10,338 |
|
|
$ |
13,463 |
|
|
$ |
(3,125 |
) |
|
$ |
(3,850 |
) |
|
$ |
725 |
|
|
5,970 |
|
|
|
5,562 |
|
|
|
408 |
|
|
|
0.93 |
|
|
|
0.96 |
|
|
|
(0.03 |
) |
|
Savings |
|
|
13,850 |
|
|
|
13,282 |
|
|
|
568 |
|
|
|
(484 |
) |
|
|
1,052 |
|
|
10,999 |
|
|
|
12,288 |
|
|
|
(1,289 |
) |
|
|
2.42 |
|
|
|
3.32 |
|
|
|
(0.90 |
) |
|
Time deposits |
|
|
66,427 |
|
|
|
101,707 |
|
|
|
(35,280 |
) |
|
|
(24,727 |
) |
|
|
(10,553 |
) |
|
|
|
|
|
|
22,163 |
|
|
|
22,687 |
|
|
|
(524 |
) |
|
|
1.64 |
|
|
|
2.27 |
|
|
|
(0.63 |
) |
|
Total deposits |
|
|
90,615 |
|
|
|
128,452 |
|
|
|
(37,837 |
) |
|
|
(29,061 |
) |
|
|
(8,776 |
) |
|
|
|
|
|
|
2,346 |
|
|
|
2,898 |
|
|
|
(552 |
) |
|
|
2.66 |
|
|
|
2.30 |
|
|
|
0.36 |
|
|
Short-term borrowings |
|
|
15,552 |
|
|
|
16,631 |
|
|
|
(1,079 |
) |
|
|
2,446 |
|
|
|
(3,525 |
) |
|
6,378 |
|
|
|
3,046 |
|
|
|
3,332 |
|
|
|
4.50 |
|
|
|
5.65 |
|
|
|
(1.15 |
) |
|
Medium and long-term debt |
|
|
71,578 |
|
|
|
42,903 |
|
|
|
28,675 |
|
|
|
14,658 |
|
|
|
14,017 |
|
|
|
|
|
|
|
30,887 |
|
|
|
28,631 |
|
|
|
2,256 |
|
|
|
2.31 |
|
|
|
2.63 |
|
|
|
(0.32 |
) |
|
Total interest bearing liabilities |
|
|
177,745 |
|
|
|
187,986 |
|
|
|
(10,241 |
) |
|
|
(11,957 |
) |
|
|
1,716 |
|
|
4,620 |
|
|
|
4,289 |
|
|
|
331 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing demand deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(738 |
) |
|
|
1,677 |
|
|
|
(2,415 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other sources of funds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
34,769 |
|
|
$ |
34,597 |
|
|
$ |
172 |
|
|
|
2.05 |
% |
|
|
2.18 |
% |
|
|
(0.13 |
%) |
|
Total source of funds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.42 |
% |
|
|
3.49 |
% |
|
|
(0.07 |
%) |
|
Net interest margin |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income on a
taxable equivalent basis |
|
|
296,968 |
|
|
|
301,372 |
|
|
|
(4,404 |
) |
|
$ |
5,045 |
|
|
$ |
(9,449 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.16 |
% |
|
|
3.04 |
% |
|
|
0.12 |
% |
|
Net interest spread |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable equivalent adjustment |
|
|
17,992 |
|
|
|
18,312 |
|
|
|
(320 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
278,976 |
|
|
$ |
283,060 |
|
|
$ |
(4,084 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note: |
|
The changes that are not due solely to volume or rate are allocated to volume and rate based
on the proportion of the change in each category. |
|
* |
|
Includes commercial construction loans. |
|
** |
|
Includes interest bearing demand deposits corresponding to certain government entities in Puerto
Rico. |
107
The decrease in net interest margin for the quarter ended June 30, 2010 compared with the same
period in 2009 was driven mostly by:
|
|
|
the excess liquidity from the capital issuance described in the Overview section, the
proceeds of which were temporarily invested in money market investments with the Federal
Reserve earning a very low interest rate, which reduced the yield on earning assets; |
|
|
|
|
Reduction in the yield on mortgage loans primarily due to interest reversals related to
loss mitigation programs and also an adjustment for troubled debt restructurings in the
non-conventional mortgage loan portfolio in the U.S. operations; |
|
|
|
|
the FDIC loss share indemnification asset of $3.3 billion, which is a
non-interest earning asset being funded with interest bearing liabilities, mainly through
the FDIC note at a 2.50% average cost. The accretion of the FDIC loss share indemnification
asset is recognized in non-interest income. The FDIC loss share indemnification asset
accreted a per-annum rate of approximately 4.21% for May and June 2010, which resulted in
non-interest income of $23.3 million for the second quarter of 2010. |
|
|
|
|
the conversion of $935 million of Series C preferred stock to trust
preferred securities in August 2009 contributed to an increase of $17.1 million in interest
expense for the quarter ended June 30, 2010 (these payments were characterized as dividends
prior to the exchange). This negative effect was partially offset by the conversion of
certain trust preferred securities into common stock, also in August 2009, which reduced
the quarterly interest expense by $7.4 million. |
|
|
|
|
Rating downgrades that occurred during 2009 also contributed to the increase in the
average cost of certain long-term debt for the Corporation; and |
|
|
|
|
Increase in non-performing loans throughout the different loan portfolios, which
balances are depicted in Table K of this MD&A. |
The above variances were partially offset by the following factors which contributed favorably
to the Corporations net interest margin:
|
|
|
A decrease in deposit costs associated to both a low interest rate scenario and
management actions to reduce deposits costs, principally in certificates of deposits and
money market accounts, as well as lower costs on brokered certificates of deposit; and |
|
|
|
|
Higher yield in the category of consumer loans, mainly reflected in the credit cards
portfolio, in part due to revisions made to the spread charged over the prime rate for
different risk categories. |
Most loan categories decreased in volume, mainly commercial and construction loans, due to lower
origination activity and loan charge-offs. The Corporation continues a deleveraging strategy in its
U.S. mainland operations. As a result, 53% of the combined reduction in commercial and construction
loans took place within the U.S. mainland operations. The consumer loan portfolio shows a decrease
due to the slowdown in the auto and consumer loan origination activity in Puerto Rico, and the
run-off of E-LOANs home equity lines of credit (HELOCs) and closed-end second mortgages. On the
positive side, the covered loans acquired in the Westernbank FDIC-assisted transaction, that
contributed $2.7 billion in average loan volume during the second quarter of 2010, net of fair
value adjustments, mitigated the decrease in the volume of earning assets. The covered loans, which
are segregated in a separate line in Table B, contributed $42 million to the Corporations interest
income during the quarter ended June 30, 2010. Investment securities decreased in average volume as
a result of maturities and of prepayments on mortgage-related investment securities, which funds
were not reinvested due in part to deleveraging strategies.
Also affecting net interest income is the increase in the volume of medium and long-term debt,
particularly the note payable issued to the FDIC. Despite the deposits acquired on the
FDIC-assisted transaction, the Corporations deposit volume has declined, mainly time deposits, due
to deleveraging in the U.S. operations, which was driven by a reduction in the earning assets
funded by such deposits.
As shown in Table C, net interest income on a taxable equivalent basis for the six months ended
June 30, 2010 had a positive variance of 13 basis points mostly due to a lower cost of funds,
mainly deposits associated to both a lower interest rate scenario and management actions to reduce
the cost of deposits, partially offset by the decrease in volume of earning assets, mainly
commercial loans. The decrease in the taxable equivalent adjustment for the six months ended June
30, 2010, compared with the previous year, relates to a lower benefit associated to the decrease in
yield and volume of exempt investments.
108
TABLE C
Analysis of Levels & Yields on a Taxable Equivalent Basis for Continuing Operations
Six-month ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variance |
Average Volume |
|
Average Yields / Costs |
|
|
|
Interest |
|
Attributable to |
2010 |
|
2009 |
|
Variance |
|
2010 |
|
2009 |
|
Variance |
|
|
|
2010 |
|
2009 |
|
Variance |
|
Rate |
|
Volume |
|
|
|
|
|
($ in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
$ |
1,558 |
|
|
$ |
1,325 |
|
|
$ |
233 |
|
|
|
0.38 |
% |
|
|
0.84 |
% |
|
|
(0.46 |
%) |
|
Money market investments |
|
$ |
2,936 |
|
|
$ |
5,517 |
|
|
$ |
(2,581 |
) |
|
$ |
(2,121 |
) |
|
$ |
(460 |
) |
|
6,744 |
|
|
|
7,592 |
|
|
|
(848 |
) |
|
|
4.44 |
|
|
|
4.72 |
|
|
|
(0.28 |
) |
|
Investment securities |
|
|
149,674 |
|
|
|
179,093 |
|
|
|
(29,419 |
) |
|
|
(6,625 |
) |
|
|
(22,794 |
) |
|
443 |
|
|
|
733 |
|
|
|
(290 |
) |
|
|
6.96 |
|
|
|
6.74 |
|
|
|
0.22 |
|
|
Trading securities |
|
|
15,301 |
|
|
|
24,506 |
|
|
|
(9,205 |
) |
|
|
777 |
|
|
|
(9,982 |
) |
|
|
|
|
|
|
8,745 |
|
|
|
9,650 |
|
|
|
(905 |
) |
|
|
3.84 |
|
|
|
4.34 |
|
|
|
(0.50 |
) |
|
Total money market, investments
and trading securities |
|
|
167,911 |
|
|
|
209,116 |
|
|
|
(41,205 |
) |
|
|
(7,969 |
) |
|
|
(33,236 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,854 |
|
|
|
15,578 |
|
|
|
(1,724 |
) |
|
|
4.95 |
|
|
|
4.99 |
|
|
|
(0.04 |
) |
|
Commercial * |
|
|
340,158 |
|
|
|
385,399 |
|
|
|
(45,241 |
) |
|
|
(7,277 |
) |
|
|
(37,964 |
) |
|
648 |
|
|
|
844 |
|
|
|
(196 |
) |
|
|
8.70 |
|
|
|
8.39 |
|
|
|
0.31 |
|
|
Leasing |
|
|
28,199 |
|
|
|
35,377 |
|
|
|
(7,178 |
) |
|
|
1,261 |
|
|
|
(8,439 |
) |
|
4,569 |
|
|
|
4,516 |
|
|
|
53 |
|
|
|
6.19 |
|
|
|
6.68 |
|
|
|
(0.49 |
) |
|
Mortgage |
|
|
141,379 |
|
|
|
150,925 |
|
|
|
(9,546 |
) |
|
|
(11,281 |
) |
|
|
1,735 |
|
|
3,940 |
|
|
|
4,494 |
|
|
|
(554 |
) |
|
|
10.31 |
|
|
|
9.94 |
|
|
|
0.37 |
|
|
Consumer |
|
|
201,455 |
|
|
|
222,307 |
|
|
|
(20,852 |
) |
|
|
2,309 |
|
|
|
(23,161 |
) |
|
|
|
|
|
|
23,011 |
|
|
|
25,432 |
|
|
|
(2,421 |
) |
|
|
6.22 |
|
|
|
6.28 |
|
|
|
(0.06 |
) |
|
Sub-total loans |
|
|
711,191 |
|
|
|
794,008 |
|
|
|
(82,817 |
) |
|
|
(14,988 |
) |
|
|
(67,829 |
) |
|
1,382 |
|
|
|
|
|
|
|
1,382 |
|
|
|
6.07 |
|
|
|
|
|
|
|
6.07 |
|
|
Covered loans |
|
|
41,719 |
|
|
|
|
|
|
|
41,719 |
|
|
|
|
|
|
|
41,719 |
|
|
|
|
|
|
|
24,393 |
|
|
|
25,432 |
|
|
|
(1,039 |
) |
|
|
6.21 |
|
|
|
6.28 |
|
|
|
(0.07 |
) |
|
Total loans |
|
|
752,910 |
|
|
|
794,008 |
|
|
|
(41,098 |
) |
|
|
(14,988 |
) |
|
|
(26,110 |
) |
|
|
|
|
|
$ |
33,138 |
|
|
$ |
35,082 |
|
|
$ |
(1,944 |
) |
|
|
5.59 |
% |
|
|
5.75 |
% |
|
|
(0.16 |
%) |
|
Total earning assets |
|
$ |
920,821 |
|
|
$ |
1,003,124 |
|
|
$ |
(82,303 |
) |
|
$ |
(22,957 |
) |
|
$ |
(59,346 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,003 |
|
|
$ |
4,832 |
|
|
$ |
171 |
|
|
|
0.83 |
% |
|
|
1.22 |
% |
|
|
(0.39 |
%) |
|
NOW and money market** |
|
$ |
20,581 |
|
|
$ |
29,170 |
|
|
$ |
(8,589 |
) |
|
$ |
(9,217 |
) |
|
$ |
628 |
|
|
5,750 |
|
|
|
5,570 |
|
|
|
180 |
|
|
|
0.91 |
|
|
|
1.02 |
|
|
|
(0.11 |
) |
|
Savings |
|
|
25,976 |
|
|
|
28,250 |
|
|
|
(2,274 |
) |
|
|
(3,013 |
) |
|
|
739 |
|
|
10,912 |
|
|
|
12,553 |
|
|
|
(1,641 |
) |
|
|
2.53 |
|
|
|
3.52 |
|
|
|
(0.99 |
) |
|
Time deposits |
|
|
137,032 |
|
|
|
219,071 |
|
|
|
(82,039 |
) |
|
|
(54,914 |
) |
|
|
(27,125 |
) |
|
|
|
|
|
|
21,665 |
|
|
|
22,955 |
|
|
|
(1,290 |
) |
|
|
1.71 |
|
|
|
2.43 |
|
|
|
(0.72 |
) |
|
Total deposits |
|
|
183,589 |
|
|
|
276,491 |
|
|
|
(92,902 |
) |
|
|
(67,144 |
) |
|
|
(25,758 |
) |
|
|
|
|
|
|
2,410 |
|
|
|
3,124 |
|
|
|
(714 |
) |
|
|
2.58 |
|
|
|
2.41 |
|
|
|
0.17 |
|
|
Short-term borrowings |
|
|
30,811 |
|
|
|
37,334 |
|
|
|
(6,523 |
) |
|
|
1,745 |
|
|
|
(8,268 |
) |
|
4,500 |
|
|
|
3,233 |
|
|
|
1,267 |
|
|
|
5.45 |
|
|
|
5.67 |
|
|
|
(0.22 |
) |
|
Medium and long-term debt |
|
|
121,623 |
|
|
|
90,867 |
|
|
|
30,756 |
|
|
|
29,906 |
|
|
|
850 |
|
|
|
|
|
|
|
28,575 |
|
|
|
29,312 |
|
|
|
(737 |
) |
|
|
2.37 |
|
|
|
2.78 |
|
|
|
(0.41 |
) |
|
Total interest bearing
liabilities |
|
|
336,023 |
|
|
|
404,692 |
|
|
|
(68,669 |
) |
|
|
(35,493 |
) |
|
|
(33,176 |
) |
|
4,501 |
|
|
|
4,250 |
|
|
|
251 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing
demand deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62 |
|
|
|
1,520 |
|
|
|
(1,458 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other sources of funds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
33,138 |
|
|
$ |
35,082 |
|
|
$ |
(1,944 |
) |
|
|
2.04 |
% |
|
|
2.33 |
% |
|
|
(0.29 |
%) |
|
Total source of funds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.55 |
% |
|
|
3.42 |
% |
|
|
0.13 |
% |
|
Net interest margin |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income on a
taxable equivalent basis |
|
|
584,798 |
|
|
|
598,432 |
|
|
|
(13,634 |
) |
|
$ |
12,536 |
|
|
$ |
(26,170 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.22 |
% |
|
|
2.97 |
% |
|
|
0.25 |
% |
|
Net interest spread |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable equivalent adjustment |
|
|
36,905 |
|
|
|
42,886 |
|
|
|
(5,981 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
547,893 |
|
|
$ |
555,546 |
|
|
$ |
(7,653 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note: The changes that are not due solely to volume or rate are allocated to volume and rate based on the proportion of the change in each category. |
|
* |
|
Includes commercial construction loans. |
|
** |
|
Includes interest bearing demand deposits corresponding to certain government entities in Puerto Rico. |
109
PROVISION FOR LOAN LOSSES
The provision for loan losses totaled $202.3 million, or 100% of net charge-offs, for the
quarter ended June 30, 2010, compared with $349.4 million, or 134% of net charge-offs, for the
second quarter of 2009. For the six months ended June 30, 2010, the provision for loan losses
totaled $442.5 million, or 104% of net charge-offs, compared with $722.0 million, or 157% of net
charge-offs, for the six months ended June 30, 2009.
As indicated in the Overview section, the decrease in the provision for loan losses for the quarter
and first six months of 2010, as compared with the quarter and six months ended June 30, 2009, was
mainly related to lower provisions required for the commercial and construction loan portfolios,
U.S. mainland non-conventional residential mortgage loans, home equity lines of credit and
closed-end second mortgages. Also, the reduction in the provision for loan losses was related to
the overall loan portfolio reduction, excluding the covered loans of the Westernbank FDIC-assisted
transaction. As indicated previously, the covered loans were recognized at fair value upon
acquisition and did not required the establishment of an allowance for loan losses during the
second quarter of 2010. Refer to the Credit Risk Management and Loan Quality section of this MD&A
for a discussion on net charge-offs, non-performing assets and the allowance for loan losses.
NON-INTEREST INCOME
Refer to Table D for a breakdown on non-interest income by major categories for the quarters
and six months ended June 30, 2010 and 2009.
TABLE
D
Non-Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters ended June 30, |
|
Six months ended June 30, |
(In thousands) |
|
2010 |
|
2009 |
|
Variance |
|
2010 |
|
2009 |
|
Variance |
|
Service charges on deposit accounts |
|
$ |
50,679 |
|
|
$ |
53,463 |
|
|
$ |
(2,784 |
) |
|
$ |
101,257 |
|
|
$ |
107,204 |
|
|
$ |
(5,947 |
) |
|
Other service fees: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debit card fees |
|
|
29,176 |
|
|
|
27,508 |
|
|
|
1,668 |
|
|
|
55,769 |
|
|
|
53,881 |
|
|
|
1,888 |
|
Credit card fees and discounts |
|
|
26,013 |
|
|
|
23,449 |
|
|
|
2,564 |
|
|
|
49,310 |
|
|
|
47,454 |
|
|
|
1,856 |
|
Processing fees |
|
|
14,170 |
|
|
|
13,727 |
|
|
|
443 |
|
|
|
28,132 |
|
|
|
27,135 |
|
|
|
997 |
|
Insurance fees |
|
|
12,084 |
|
|
|
12,547 |
|
|
|
(463 |
) |
|
|
23,074 |
|
|
|
24,551 |
|
|
|
(1,477 |
) |
Sale and administration of investment products |
|
|
10,245 |
|
|
|
9,694 |
|
|
|
551 |
|
|
|
17,412 |
|
|
|
17,023 |
|
|
|
389 |
|
Trust fees |
|
|
3,651 |
|
|
|
3,121 |
|
|
|
530 |
|
|
|
6,634 |
|
|
|
6,104 |
|
|
|
530 |
|
Mortgage servicing fees, net of fair value
adjustments |
|
|
2,822 |
|
|
|
6,552 |
|
|
|
(3,730 |
) |
|
|
14,181 |
|
|
|
13,432 |
|
|
|
749 |
|
Other fees |
|
|
5,564 |
|
|
|
5,839 |
|
|
|
(275 |
) |
|
|
10,533 |
|
|
|
11,390 |
|
|
|
(857 |
) |
|
Total other service fees |
|
|
103,725 |
|
|
|
102,437 |
|
|
|
1,288 |
|
|
|
205,045 |
|
|
|
200,970 |
|
|
|
4,075 |
|
|
Net gain on sale and valuation adjustments
of investment securities |
|
|
397 |
|
|
|
53,705 |
|
|
|
(53,308 |
) |
|
|
478 |
|
|
|
229,851 |
|
|
|
(229,373 |
) |
Trading account profit |
|
|
2,464 |
|
|
|
16,839 |
|
|
|
(14,375 |
) |
|
|
2,241 |
|
|
|
23,662 |
|
|
|
(21,421 |
) |
Loss on sale of loans, including adjustments
to indemnity reserves, and valuation
adjustments on loans held-for-sale |
|
|
(9,311 |
) |
|
|
(13,453 |
) |
|
|
4,142 |
|
|
|
(21,533 |
) |
|
|
(27,266 |
) |
|
|
5,733 |
|
FDIC loss share income |
|
|
23,334 |
|
|
|
|
|
|
|
23,334 |
|
|
|
23,334 |
|
|
|
|
|
|
|
23,334 |
|
Fair value change in equity appreciation instrument |
|
|
24,394 |
|
|
|
|
|
|
|
24,394 |
|
|
|
24,394 |
|
|
|
|
|
|
|
24,394 |
|
Other operating income |
|
|
20,176 |
|
|
|
12,848 |
|
|
|
7,328 |
|
|
|
38,508 |
|
|
|
26,149 |
|
|
|
12,359 |
|
|
Total non-interest income |
|
$ |
215,858 |
|
|
$ |
225,839 |
|
|
$ |
(9,981 |
) |
|
$ |
373,724 |
|
|
$ |
560,570 |
|
|
$ |
(186,846 |
) |
|
The decrease in non-interest income for the quarter and six months ended June 30, 2010, when
compared with the same periods of the previous year, was mostly impacted by $52.3 million in gains
resulting from the sale of equity securities in the second quarter of 2009 by the BPPR and EVERTEC
reportable segments and by $182.7 million in gains derived from the sale of $3.4 billion in
investment securities available-for-sale by BPPR during the first quarter of 2009, partially offset
by $6.6 million in other-than-temporary impairments related to equity securities recorded during
the first quarter of 2009.
The decrease in trading account profit by $14.4 million for the quarter ended June 30, 2010, when
compared with the
same quarter of 2009, was mostly related to higher unrealized losses on trading derivatives by $7.2
million and higher realized losses on closed derivative positions by $2.4 million in the
Corporations mortgage banking business.
110
Also, there were lower realized gains by $31.0 million as
a result of a lower volume of mortgage-backed securities sold, which was partially offset by $25.8
million in higher unrealized gains on outstanding mortgage-backed securities.
The decrease in trading account by $21.4 million for the six months ended June 30, 2010, when
compared with the same period of the previous year, was mostly related to higher unrealized losses
on trading derivatives by $9.2 million, partially offset by $4.7 million in lower realized losses
on closed derivative positions in the Corporations mortgage banking business. Also, there were
lower realized gains by $38.0 million as a result of a lower volume of mortgage-backed securities
sold, which was partially offset by $19.2 million in higher unrealized gains on outstanding
mortgage-backed securities.
Service charges on deposit accounts for the quarter and six-month period ended June 30, 2010
decreased by $2.8 million and $5.9 million, respectively, when compared with the same periods in
2009, mostly in the BPNA reportable segment related to lower non-sufficient funds fees because of
lower volume of customer accounts due to closure and sale of branches and reduced fees from money
services clients. The decrease in BPNAs service charges was partially offset by $1.5 million in
service charges on deposit accounts from BPPRs Westernbank operations.
The unfavorable variances in the non-interest income categories explained above were partially
offset by higher gains on sale of loans, partially offset by
adjustments to indemnity reserves related to loan sale agreements. The following table sets forth the
Corporations provisioning to increase the indemnity reserves.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters ended June 30, |
|
Six months ended June 30, |
|
|
|
|
|
|
|
|
|
|
(Favorable) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
unfavorable |
|
|
|
|
|
|
|
|
|
(Favorable) |
|
|
|
|
|
|
|
|
|
|
impact in |
|
|
|
|
|
|
|
|
|
unfavorable |
(In thousands) |
|
2010 |
|
2009 |
|
earnings |
|
2010 |
|
2009 |
|
impact in earnings |
|
BPPR reportable segment |
|
$ |
12,016 |
|
|
|
|
|
|
$ |
12,016 |
|
|
$ |
27,716 |
|
|
|
|
|
|
$ |
27,716 |
|
BPNA reportable segment |
|
|
4,176 |
|
|
$ |
12,962 |
|
|
|
(8,786 |
) |
|
|
5,086 |
|
|
$ |
30,360 |
|
|
|
(25,274 |
) |
|
Total indemnity
reserve adjustments |
|
$ |
16,192 |
|
|
$ |
12,962 |
|
|
$ |
3,230 |
|
|
$ |
32,802 |
|
|
$ |
30,360 |
|
|
$ |
2,442 |
|
|
The
increase in provisioning for the indemnity reserve in the BPPR reportable segment for the quarter and six
months ended June 30, 2010 was associated to mortgage loans that had been previously sold with
credit recourse by the BPPR reportable segment. This indemnity reserve adjustment was driven by
increased foreclosure rates, repurchases, delinquency trends and loss severity levels experienced
during 2010. The decrease in provisioning for the indemnity reserves at the BPNA reportable segment corresponded
principally to lower volume of disbursements, reduced loss severities and the expiration of
indemnification terms under standard representation and warranty arrangements, including a
reduction of $12.0 million related to loans previously sold by E-LOAN and $14.8 million related to
loans sold by Popular Equipment Finance during the first half of 2009.
Also, non-interest income for the quarter ended June 30, 2010 was positively impacted by $23.3
million derived from the two-month accretion of the FDIC loss share indemnification asset. The
estimated fair value of the FDIC loss share indemnification asset was determined by discounting the
projected cash flows related to the loss sharing agreements based on expected reimbursements,
primarily for credit losses on covered assets. The time value of money incorporated into the
present value computation is accreted into earnings over the life of the loss sharing agreements.
Furthermore, the Corporation recognized non-interest income of $24.4 million during the quarter
ended June 30, 2010 as a result of a decrease in the fair value of the equity appreciation
instrument issued to the FDIC. The equity appreciation instrument is classified as a liability in
the consolidated statement of condition. The decrease in value was associated to the decline in
value in the Corporations common stock since the equity appreciation instrument
111
was
issued to June 30, 2010, as well as the passage of time towards the May 7, 2011 expiration date.
In addition, other operating income increased by $7.3 million and $12.4 million, respectively, for
the quarter and six months ended June 30, 2010, when compared with the same periods of the previous
year, mostly as a result of higher derivative gains, including lower unfavorable credit adjustments,
by $4.7 million and $6.9 million for the comparative periods, respectively; and higher revenues
from investments accounted for under the equity method by $1.7 million and $5.9 million,
respectively.
OPERATING EXPENSES
Table E provides a breakdown of operating expenses by major categories.
TABLE
E
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters ended June 30, |
|
Six months ended June 30, |
(In thousands) |
|
2010 |
|
2009 |
|
Variance |
|
2010 |
|
2009 |
|
Variance |
|
Personnel costs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries |
|
$ |
109,124 |
|
|
$ |
107,079 |
|
|
$ |
2,045 |
|
|
$ |
204,997 |
|
|
$ |
212,402 |
|
|
$ |
(7,405 |
) |
Pension and other benefits |
|
|
28,908 |
|
|
|
29,127 |
|
|
|
(219 |
) |
|
|
53,967 |
|
|
|
69,095 |
|
|
|
(15,128 |
) |
|
Total personnel costs |
|
|
138,032 |
|
|
|
136,206 |
|
|
|
1,826 |
|
|
|
258,964 |
|
|
|
281,497 |
|
|
|
(22,533 |
) |
Net occupancy expenses |
|
|
29,058 |
|
|
|
26,024 |
|
|
|
3,034 |
|
|
|
57,934 |
|
|
|
52,465 |
|
|
|
5,469 |
|
Equipment expenses |
|
|
25,346 |
|
|
|
25,202 |
|
|
|
144 |
|
|
|
48,799 |
|
|
|
51,306 |
|
|
|
(2,507 |
) |
Other taxes |
|
|
12,459 |
|
|
|
13,084 |
|
|
|
(625 |
) |
|
|
24,763 |
|
|
|
26,260 |
|
|
|
(1,497 |
) |
Professional fees |
|
|
34,225 |
|
|
|
27,048 |
|
|
|
7,177 |
|
|
|
61,274 |
|
|
|
51,949 |
|
|
|
9,325 |
|
Communications |
|
|
11,342 |
|
|
|
12,386 |
|
|
|
(1,044 |
) |
|
|
22,114 |
|
|
|
24,213 |
|
|
|
(2,099 |
) |
Business promotion |
|
|
10,204 |
|
|
|
9,946 |
|
|
|
258 |
|
|
|
18,499 |
|
|
|
17,856 |
|
|
|
643 |
|
Printing and supplies |
|
|
2,653 |
|
|
|
3,017 |
|
|
|
(364 |
) |
|
|
5,022 |
|
|
|
5,807 |
|
|
|
(785 |
) |
FDIC deposit insurance |
|
|
17,393 |
|
|
|
36,331 |
|
|
|
(18,938 |
) |
|
|
32,711 |
|
|
|
45,448 |
|
|
|
(12,737 |
) |
Other operating expenses |
|
|
45,249 |
|
|
|
38,968 |
|
|
|
6,281 |
|
|
|
74,745 |
|
|
|
73,202 |
|
|
|
1,543 |
|
Amortization of intangibles |
|
|
2,455 |
|
|
|
2,433 |
|
|
|
22 |
|
|
|
4,504 |
|
|
|
4,839 |
|
|
|
(335 |
) |
|
Total operating expenses |
|
$ |
328,416 |
|
|
$ |
330,645 |
|
|
$ |
(2,229 |
) |
|
$ |
609,329 |
|
|
$ |
634,842 |
|
|
$ |
(25,513 |
) |
|
Operating expenses for BPPRs Westernbank operations amounted to $20.6 million for the quarter
and six months ended June 30, 2010, and consisted principally of $8.6 million in personnel costs,
$3.8 million in professional fees, $2.0 million in net occupancy expenses, $1.1 million in
equipment expenses and $3.3 million in the category of other operating expenses. These costs
included acquisition and integration costs. There are approximately 376 former employees of
Westernbank occupying permanent positions with Popular and approximately 1,000 working on temporary
positions. The Corporation expects to substantially reduce Westernbanks personnel costs after
achievement of branch and operational synergies and the completion of system conversions.
Excluding the aforementioned operating expenses from BPPRs Westernbank operations, the
Corporations operating expenses for the quarter ended June 30, 2010 amounted to $307.8 million, a
decrease of $22.8 million compared with the second quarter of 2009. The decrease consisted
principally of a reduction of $6.8 million in personnel costs and $20.9 million in FDIC deposit
insurance premiums. Operating expenses for the quarter ended June 30, 2009 included the $16.7
million FDIC deposit insurance special assessment. The reduction in personnel costs was
principally due to a decrease in health insurance and postretirement benefit plan costs, as well as
lower salaries primarily in the BPNA reportable segment resulting from the downsizing of the U.S.
operations and cost control initiatives. BPNA, including E-LOAN, contributed with a reduction of
335 full-time equivalent employees (FTEs) from June 30, 2009 to June 30, 2010. The category of
other operating expenses, excluding the BPPRs Westernbank operations, included other real estate
expenses, gains or losses on the sale of other real estate properties and write-downs in the fair
value of the commercial and residential mortgage properties amounting to approximately $14.4
million for the quarter ended June 30, 2010, compared with $3.7 million for the same quarter in
2009. The increase was principally due to write-downs in the value of commercial other real estate
properties in the BPPR reportable segment during the second quarter of 2010 resulting from updated
appraisals. This increase in the category of other operating expenses was partially offset by lower
losses on the disposition of assets and lower sundry operational losses.
Excluding the aforementioned operating expenses from BPPRs Westernbank operations, the
Corporations operating expenses for the six months ended June 30, 2010 amounted to $588.7 million,
a decrease of $46.1 million
112
compared with the six months ended June 30, 2009. Similar factors as described in the quarterly results
influenced also the year-to-date variances. Excluding the impact of BPPRs Westernbank operations,
personnel costs decreased by $31.1 million, which consisted primarily from a reduction in salaries
in the BPNA reportable segment by $16.5 million and lower pension and savings plan costs in the
Corporation by $10.5 million. In 2009, BPPRs pension plan was frozen with regards to all future
benefit accruals after April 30, 2009. Also, effective in March 2009, the Corporation temporarily
suspended its matching contributions to the Puerto Rico and U.S. subsidiaries savings and
investment plans. Furthermore, postretirement benefit plan and health insurance costs declined by
approximately $3.8 million and $1.7 million, respectively, for the six months ended June 30, 2010,
compared to the same period of 2009. The reduction in operating expenses was also influenced by
lower FDIC deposit insurance premiums, which is shown in Table E. The category of other operating
expenses, excluding the BPPRs Westernbank operations, included other real estate property
expenses, gains or losses on sale and write-downs in the fair value of the repossessed real estate
properties amounting to approximately $19.1 million for the six months ended June 30, 2010,
compared with $9.7 million for the same period in 2009. The increase was principally due to the
aforementioned write-downs in the value of certain commercial OREO properties in the BPPR
reportable segment. This increase in the category of other operating expenses was partially offset
by lower losses on the disposition of assets and sundry operational losses, and lower provisions
for reserves on unused loan commitments.
INCOME TAXES
Income tax expense amounted to $20.0 million for the quarter ended June 30, 2010, compared
with income tax expense of $5.4 million for the same quarter of 2009. The increase in income tax
expense was primarily due to higher income before tax on the BPPR reportable segment and lower
exempt interest income net of disallowance of expenses attributed to such exempt income. In
addition, there was an increase in non-deductible interest expense related to the trust preferred
securities issued to the U.S. Treasury in August 2009, as to
which the Corporation agreed with the
U.S. Treasury not to deduct interest payments for tax purposes. These trust preferred securities
are described in Note 17 to the consolidated financial statements.
The components of income tax for the quarter ended June 30, 2010 and 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended |
|
|
June 30, 2010 |
|
June 30, 2009 |
|
|
|
|
|
|
% of pre-tax |
|
|
|
|
|
% of pre-tax |
(In thousands) |
|
Amount |
|
income |
|
Amount |
|
income |
|
Computed income tax at statutory rates |
|
$ |
(14,676 |
) |
|
|
40.95 |
% |
|
$ |
(70,103 |
) |
|
|
40.95 |
% |
Benefits of net tax exempt interest income |
|
|
(2,331 |
) |
|
|
6.50 |
|
|
|
(11,094 |
) |
|
|
6.48 |
|
Effect of income subject to preferential tax rate |
|
|
(693 |
) |
|
|
1.93 |
|
|
|
(12,508 |
) |
|
|
7.31 |
|
Deferred tax asset valuation allowance |
|
|
28,449 |
|
|
|
(79.38 |
) |
|
|
84,916 |
|
|
|
(49.60 |
) |
Non-deductible expenses |
|
|
6,984 |
|
|
|
(19.49 |
) |
|
|
|
|
|
|
|
|
Difference in tax rates due to multiple jurisdictions |
|
|
2,226 |
|
|
|
(6.21 |
) |
|
|
8,218 |
|
|
|
(4.80 |
) |
State taxes and others |
|
|
29 |
|
|
|
(0.07 |
) |
|
|
5,964 |
|
|
|
(3.49 |
) |
|
Income tax expense |
|
$ |
19,988 |
|
|
|
(55.77 |
%) |
|
$ |
5,393 |
|
|
|
(3.15 |
%) |
|
Although the Corporation reported a net loss before income tax of $35.8 million, it recognized
an income tax expense for the quarter ended June 30, 2010 of $20.0 million. This is in part the
result of having the BPPR and the EVERTEC reportable segments recognizing net income before taxes
for the second quarter of 2010 of $41.8 million and $19.1 million and an income tax expense of
$16.2 million and $7.3 million, respectively, while the BPNA reportable segment had a net loss
before income tax of $57.0 million, with minimal income tax. The Corporation does not recognize a
tax benefit on the loss of the BPNA reportable segment because a full valuation allowance on BPNA
reportable segment deferred tax assets is being recognized since 2009. In addition, for tax
purposes, the Corporation is not allowed to file consolidated tax returns for its Puerto Rico and
U.S. operations as they are under different tax jurisdictions, and thus cannot benefit from the
losses of its U.S. operations to offset taxes in its Puerto Rico operations.
113
Income tax expense amounted to $10.7 million for the six-month period ended June 30, 2010, compared
with an income tax benefit of $21.5 million for the same period in 2009. The variance was
principally due to lower net exempt interest income and a reduction in income subject to a lower
preferential tax rate on capital gains applicable to Puerto Rico corporations as compared to the
same period of 2009 and an increase in non-deductible interest expense related to the trust
preferred securities issued to the U.S. Treasury.
Also, in 2009 a temporary five-percent special surtax was imposed on all corporations doing
business in Puerto Rico, resulting in an income tax benefit as a consequence of adjusting the
deferred tax assets to reflect the increase in tax rate.
The components of income tax for the six months ended June 30, 2010 and 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended |
|
|
|
|
|
|
June 30, 2010 |
|
June 30, 2009 |
|
|
|
|
|
|
% of pre-tax |
|
|
|
|
|
% of pre-tax |
(In thousands) |
|
Amount |
|
income |
|
Amount |
|
income |
|
Computed income tax at statutory rates |
|
$ |
(53,305 |
) |
|
|
40.95 |
% |
|
$ |
(98,567 |
) |
|
|
40.95 |
% |
Benefits of net tax exempt interest income |
|
|
(12,036 |
) |
|
|
9.25 |
|
|
|
(26,856 |
) |
|
|
11.16 |
|
Effect of income subject to preferential tax rate |
|
|
(1,106 |
) |
|
|
0.85 |
|
|
|
(59,273 |
) |
|
|
24.63 |
|
Deferred tax asset valuation allowance |
|
|
61,728 |
|
|
|
(47.42 |
) |
|
|
145,229 |
|
|
|
(60.34 |
) |
Non-deductible expenses |
|
|
13,882 |
|
|
|
(10.66 |
) |
|
|
|
|
|
|
|
|
Difference in tax rates due to multiple jurisdictions |
|
|
6,321 |
|
|
|
(4.86 |
) |
|
|
22,476 |
|
|
|
(9.34 |
) |
State taxes and others |
|
|
(4,771 |
) |
|
|
3.66 |
|
|
|
(4,549 |
) |
|
|
1.89 |
|
|
Income tax expense (benefit) |
|
$ |
10,713 |
|
|
|
(8.23 |
%) |
|
$ |
(21,540 |
) |
|
|
8.95 |
% |
|
Refer to Note 27 to the consolidated financial statements for a breakdown of the Corporations
deferred tax assets as of June 30, 2010.
REPORTABLE SEGMENT RESULTS
The Corporations reportable segments for managerial reporting purposes consist of Banco Popular de
Puerto Rico, EVERTEC and Banco Popular North America. A Corporate group has been defined to support
the reportable segments. For managerial reporting purposes, the costs incurred by the Corporate
group are not allocated to the reportable segments. For a description of the Corporations
reportable segments, including additional financial information and the underlying management
accounting process, refer to Note 29 to the consolidated financial statements.
The Corporate group had a net loss of $33.8 million for the second quarter of 2010, compared with a
net loss of $27.1 million for the quarter ended June 30, 2009, and a net loss of $52.4 million for
the six months ended June 30, 2010 and $46.3 million for the same period in the previous year. The
variance in the year-to-date results for the corporate group was principally due to higher net
interest expense by $22.7 million, mostly due to interest expense related to the trust preferred
securities issued to the U.S. Treasury in exchange for preferred stock and higher funding cost on
term notes. This
was partially offset by losses of $5.6 million related to other-than-temporary impairments on
equity securities recorded during the six-month period ended June 30, 2009.
Highlights on the earnings results for the reportable segments are discussed below.
Banco Popular de Puerto Rico
The Banco Popular de Puerto Rico reportable segment reported net income of $25.5 million for the
quarter ended June 30, 2010, compared with $6.8 million for the same quarter of 2009. The principal
factors that contributed to the variance in the financial results for the second quarter of 2010,
when compared with the same quarter of the previous year, included the following:
114
|
|
|
higher net interest income by $15.2 million, or 7%, primarily due to approximately $16.7
million in net interest income derived from the assets acquired and liabilities assumed in
the Westernbank FDIC-assisted transaction, including the impact of the note payable issued
to the FDIC. The BPPR reportable segments net interest yield was adversely impacted by
funding the FDIC loss share indemnification asset, a non-interest earning asset, with interest bearing liabilities. The FDIC loss share indemnification asset
accreted at a per-annum rate of approximately 4.21% for May and June 2010, which resulted
in non-interest income of $23.3 million for the second quarter of 2010. In general, BPPR
had a reduction in the cost of interest bearing deposits, mainly time deposits, partially offset by a
reduction in the yield on earning assets, principally commercial loans, investment
securities and money markets. The BPPR reportable segment had a net interest margin of
3.69% for the quarter ended June 30, 2010, compared with 3.77% for the same quarter in
2009. |
|
|
|
|
lower provision for loan losses by $59.4 million, or 33%. The provision for loan losses
represented 120% of net charge-offs for the second quarter of 2010, compared with 131% of
net charge-offs for the same quarter of 2009. The ratio of allowance for loan losses to
loans held-in-portfolio, excluding covered loans, for the BPPR reportable segment was 4.68%
as of June 30, 2010, when compared with 4.26% as of the same date in 2009. Non-performing
loans in this reportable segment totaled $1.7 billion as of June 30, 2010, compared with
$1.3 billion at the same date in 2009, mainly related to construction, commercial and
mortgage loans. Low absorption rates and high inventory continue to affect the local
housing market which, coupled with a deteriorated economic environment may result in
additional declines in real estate values in Puerto Rico, and may have a direct impact in the
levels of net charge-offs and non-accruing commercial, construction and mortgage loan
portfolios. The consumer loan portfolio continues to reflect stable performance in terms of
delinquency levels. Refer to the Credit Risk Management and Loan Quality section of this
MD&A for certain credit quality indicators corresponding to the BPPR reportable segment. |
|
|
|
|
lower non-interest income by $15.6 million, or 8%, mainly due to a reduction in gains on
sale of securities by $44.9 million due to gains on the sale of equity securities in the
second quarter of 2009 and lower trading account profit by $14.4 million associated with
the mortgage banking business, which is described in the Non-Interest Income section of
this MD&A. Also, there were higher net losses in the category of loans sold due to higher
adjustments in indemnity reserves for loans sold by approximately $12.0 million, offset by
higher gains on securitization transactions of mortgage loans by $5.0 million. These
unfavorable variances were partially offset by $23.3 million in FDIC loss share income
(accretion of indemnification asset) and $24.4 million income related to the decrease in
the fair value of the equity appreciation instrument issued to the FDIC. |
|
|
|
|
higher operating expenses by $26.5 million, or 13%, mainly due to higher personnel
costs, professional fees and other operating expenses. The BPPR Westernbank operations
accounted for $20.6 million in expenses during the quarter, which are expected to decrease
as the Corporation completes the integration of Westernbank. Higher other operating
expenses were mostly due to losses associated with write-downs in other real estate
property. Refer to the Operating Expenses section of this MD&A. |
|
|
|
|
higher income tax expense by $13.8 million, mainly due to higher income before tax on
the BPPR reportable segment and lower exempt interest income, net of disallowance of
expenses attributed to such exempt income. |
Net income for the six months ended June 30, 2010 totaled $52.6 million, compared with $186.6
million for the same period in the previous year. These results reflected:
|
|
|
higher net interest income by $18.4 million, or 4%; |
|
|
|
|
lower provision for loan losses by $102.4 million, or 31%; |
|
|
|
|
lower non-interest income by $215.7 million, or 43%, which was mainly due to lower net
gains on sale of investments securities, principally related to transactions that are
described in the Non-Interest Income section of this MD&A; |
|
|
|
|
higher operating expenses by $21.3 million, or 5%, principally related to the
Westernbank FDIC-assisted transaction; and |
|
|
|
|
income tax expense of $17.3 million for the six months ended June 30, 2010, compared to
an income tax benefit of $0.7 million for the same period in the previous year. The
variance was principally due to lower net exempt interest income and a reduction in income
subject to a lower preferential tax rate on capital gains applicable to Puerto Rico
corporations for the six months ended June 30, 2010 as compared with the same period of
2009. Also, the year 2009 included a temporary five-percent special surtax imposed on all |
115
|
|
|
corporations doing business in Puerto Rico, resulting in an income tax benefit as a
consequence of adjusting the deferred tax assets to reflect the increase in tax rate in the
first quarter of 2009. |
Banco Popular North America
Banco Popular North America reportable segment, which includes the operations of E-LOAN, reported a
net loss of $57.8 million for the second quarter of 2010, a decrease of $116.4 million, or 67%,
when compared with the net loss of $174.2 million for the quarter ended June 30, 2009. The
principal factors that contributed to the variance in results for the quarter ended June 30, 2010,
when compared with the same quarter in the previous year, included:
|
|
|
lower net interest income by $5.5 million, or 7%, which was mainly due to a reduction in
average earning assets by $1.7 billion, principally in loans by $1.5 billion, with a
corresponding reduction in funding sources, primarily in interest bearing deposits by $1.5
billion. The impact of these unfavorable variances was partially offset by a higher net
interest yield due to a higher reduction in the average costs of deposits, including
internet deposits, compared to the reduction in loan yields. |
|
|
|
|
lower provision for loan losses by $87.8 million, or 52%, prompted by credit quality
indicators that reflect signs of stabilization in the U.S. operations. This decrease in the
provision for loan losses was mainly the result of higher amounts provisioned during 2009
particularly for commercial and construction loans, U.S. mainland non-conventional
residential mortgage loans, home equity lines of credit and closed-end second mortgages,
combined with specific reserves recorded for loans considered impaired. Substantial
reserve increases were recorded during 2009 as a result of the deteriorated conditions of
the U.S. economy, declines in property values, and the slowdown in consumer spending. The
U.S. real estate market has shown some improvement and stabilization in collateral values
during 2010. The decrease of approximately $1.5 billion in loans held-in-portfolio since
June 30, 2009, particularly in the commercial, construction consumer and mortgage loan
portfolios, also contributed to the lower level of provision for loan losses for the
quarter ended June 30, 2010. Net charge-offs for the BPNA reportable segment for the second
quarter of 2010 decreased $21.2 million, or 17%, compared with the quarter ended June 30,
2009, primarily in the consumer loan portfolio. The provision for loan losses represented
80% of net charge-offs for the quarter ended June 30, 2010, compared with 138% of net
charge-offs for the same period of the previous year. The allowance for loan losses to
loans held-in-portfolio in this reportable segment was 7.57% as of June 30, 2010, compared
with 5.32% as of June 30, 2009. Refer to the Credit Risk Management and Loan Quality
section of this MD&A for certain credit quality indicators corresponding to the BPNA
reportable segment. |
|
|
|
|
higher non-interest income by $10.2 million, mainly due to lower provisioning in
indemnity reserves on loans sold in previous periods; and |
|
|
|
|
lower operating expenses by $23.9 million, or 26%. This variance was principally the
result of lower personnel costs, mainly salaries as a result of downsizing of U.S.
operations; and lower other operating expenses, as a result of lower FDIC deposit insurance
expenses. |
Net loss for the six months ended June 30, 2010 totaled $162.0 million, compared with a net loss of
$387.7 million for the same period in the previous year. These results reflected:
|
|
|
lower net interest income by $3.2 million, or 2%, mostly as a result of the same factors
discussed for the quarter; |
|
|
|
|
lower provision for loan losses by $177.2 million, or 46%, mostly as a result of the
same factors discussed for the quarter; |
|
|
|
|
higher non-interest income by $23.0 million principally due to reductions in the
provisioning for indemnity reserves on loans previously sold, which considers factors such
as reduced volume of disbursements and loss severities and expiration of indemnity terms. |
|
|
|
|
lower operating expenses by $38.6 million, or 22%, mainly in personnel costs due to
restructuring and staff reductions and lower FDIC deposit insurance assessments; and |
|
|
|
|
income tax expense of $1.6 million for the six months ended June 30, 2010, compared with
an income tax benefit of $8.2 million for the same period in the previous year. |
EVERTEC
For the quarter ended June 30, 2010, the EVERTEC reportable segment had net income of $11.8
million, compared with $18.1 million for the same quarter in the previous year. The principal
factors that contributed to the variance in results for the quarter ended June 30, 2010, when
compared with the quarter ended June 30, 2009, included:
116
|
|
|
lower non-interest income by $5.1 million, or 7%, primarily due to gains on sale of
equity securities of $7.9
million during the second quarter of 2009, partially offset by higher revenues derived from
business process outsourcing, which are mainly related to services provided to BPNA on
E-LOANs internet deposits platform and electronic benefit transfer fees; |
|
|
|
|
higher operating expenses by $0.9 million, or 2%, primarily due to higher professional
services and net occupancy expenses; and |
|
|
|
|
higher income tax expense by $0.3 million, in part due to higher taxable income. |
Net income for the six months ended June 30, 2010 totaled $22.0 million, a decrease of $6.0
million, or 21%, compared with the same period in the previous year. These results reflected:
|
|
|
lower non-interest income by $4.4 million, or 3%, which
was mainly due to gains on sale of equity securities during 2009; |
|
|
|
|
lower operating expenses by $0.8 million, or 1%; and |
|
|
|
|
higher income tax expense by $2.3 million, or 19%, mostly due to higher taxable income. |
As discussed in the Overview section of this MD&A, the Corporation has entered into an agreement to
sell a 51% interest in EVERTEC.
FINANCIAL CONDITION
Assets
As of June 30, 2010, the Corporations total assets were $42.4 billion, compared with $34.7 billion
as of December 31, 2009 and $36.5 billion as of June 30, 2009. Refer to the consolidated financial
statements included in this report for the Corporations consolidated statements of condition as of
such dates. The increase in total assets from December 31, 2009 to June 30, 2010 was due to the
Westernbank FDIC-assisted transaction, which as of the April 30, 2010 transaction date added $8.4
billion in total assets, net of fair value adjustments, to the Corporations financial condition.
Investment securities
Table F provides a breakdown of the Corporations portfolio of investment securities
available-for-sale (AFS) and held-to-maturity (HTM) on a combined basis as of June 30, 2010,
December 31, 2009 and June 30, 2009. Also, Notes 8 and 9 to the consolidated financial statements
provide additional information with respect to the Corporations investment securities AFS and HTM.
TABLE
F
Breakdown of Investment Securities Available-for-Sale and Held-to-Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
|
|
|
|
June 30, |
|
|
(In millions) |
|
2010 |
|
2009 |
|
Variance |
|
2009 |
|
Variance |
|
U.S. Treasury securities |
|
$ |
166.5 |
|
|
$ |
56.2 |
|
|
$ |
110.3 |
|
|
$ |
30.8 |
|
|
$ |
135.7 |
|
Obligations of U.S. Government sponsored entities |
|
|
1,749.5 |
|
|
|
1,647.9 |
|
|
|
101.6 |
|
|
|
1,781.4 |
|
|
|
(31.9 |
) |
Obligations of Puerto Rico, States and political
subdivisions |
|
|
236.4 |
|
|
|
262.8 |
|
|
|
(26.4 |
) |
|
|
382.3 |
|
|
|
(145.9 |
) |
Collateralized mortgage obligations federal agencies |
|
|
1,445.0 |
|
|
|
1,600.2 |
|
|
|
(155.2 |
) |
|
|
1,673.7 |
|
|
|
(228.7 |
) |
Collateralized mortgage obligations private label |
|
|
102.2 |
|
|
|
117.8 |
|
|
|
(15.6 |
) |
|
|
136.7 |
|
|
|
(34.5 |
) |
Mortgage-backed securities |
|
|
2,979.7 |
|
|
|
3,210.2 |
|
|
|
(230.5 |
) |
|
|
3,542.8 |
|
|
|
(563.1 |
) |
Equity securities |
|
|
8.7 |
|
|
|
7.8 |
|
|
|
0.9 |
|
|
|
8.2 |
|
|
|
0.5 |
|
Others |
|
|
2.6 |
|
|
|
4.8 |
|
|
|
(2.2 |
) |
|
|
10.6 |
|
|
|
(8.0 |
) |
|
Total investment securities AFS and HTM |
|
$ |
6,690.6 |
|
|
$ |
6,907.7 |
|
|
$ |
(217.1 |
) |
|
$ |
7,566.5 |
|
|
$ |
(875.9 |
) |
|
The portfolio of investment securities consists primarily of very liquid, high quality
securities. The reduction in investment securities from December 31, 2009 and June 30, 2009 to June
30, 2010 was mostly impacted by maturities and prepayments. The cash proceeds from these activities
were not fully reinvested as part of a strategy to deleverage the balance sheet. The Westernbank
FDIC-assisted transaction did not contribute significantly to the Corporations portfolio of
investment securities, as the Corporation only acquired $59 million in FHLB stock as part of the
transaction, which were redeemed prior to June 30, 2010.
117
As of June 30, 2010, there were investment securities AFS and HTM with a fair value of $401 million
in an unrealized loss position. The unrealized losses on these particular securities approximated
$11 million as of June 30, 2010. These figures compare with securities of $1.8 billion with
unrealized losses of $31 million as of December 31, 2009. Management performed its quarterly
analysis of all debt securities in an unrealized loss position as of June 30, 2010. Based on the
analyses performed, management concluded that no individual debt security was
other-than-temporarily impaired as of such date. As of June 30, 2010, the Corporation does not have
the intent to sell debt securities in an unrealized loss position and it is not more likely than
not that the Corporation will have to sell those investment securities prior to recovery of their
amortized cost basis. Notes 8 and 9 to the consolidated financial statements provide additional
information by investment categories of the unrealized gains / losses with respect to the
Corporations available-for-sale and held-to-maturity investment securities portfolio.
Loans
Refer to Table G, for a breakdown of the Corporations loan portfolio, the principal category of
earning assets. Included in Table G are $101 million of loans held-for-sale as of June 30, 2010,
compared with $91 million as of December 31, 2009 and $243 million as of June 30, 2009. Loans
covered under the FDIC loss sharing agreements, which were acquired in April 30, 2010, are
presented in a separate line item in Table G. Because of the loss protection provided by the FDIC,
the risks of the covered loans are significantly different, thus the Corporation has determined to
segregate them in the information included in table.
Excluding the acquired covered loans, all loan portfolios as of June 30, 2010, except for mortgage
loans, declined compared with December 31, 2009 and June 30, 2009. This generally reflects weak
loan demand, the high level of loan charge-offs as a result of the downturn in the real estate
market and continued weakened economy, and the exiting or downsizing of certain loan origination
channels due to strategic decisions.
TABLE G
Loans Ending Balances (including loans held-for-sale)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variance |
|
|
|
|
|
Variance |
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
|
|
|
|
June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
Vs. |
|
|
|
|
|
Vs. |
|
|
June 30, |
|
December 31, |
|
December 31, |
|
June 30, |
|
June 30, |
(In thousands) |
|
2010 |
|
2009 |
|
2009 |
|
2009 [2] |
|
2009 |
|
Loans not covered under FDIC loss sharing
agreements: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
11,788,669 |
|
|
$ |
12,666,955 |
|
|
$ |
(878,286 |
) |
|
$ |
13,119,330 |
|
|
$ |
(1,330,661 |
) |
Construction |
|
|
1,496,155 |
|
|
|
1,724,373 |
|
|
|
(228,218 |
) |
|
|
2,033,448 |
|
|
|
(537,293 |
) |
Lease financing |
|
|
636,913 |
|
|
|
675,629 |
|
|
|
(38,716 |
) |
|
|
730,396 |
|
|
|
(93,483 |
) |
Mortgage [1] |
|
|
4,786,933 |
|
|
|
4,691,145 |
|
|
|
95,788 |
|
|
|
4,646,521 |
|
|
|
140,412 |
|
Consumer |
|
|
3,858,969 |
|
|
|
4,045,807 |
|
|
|
(186,838 |
) |
|
|
4,319,214 |
|
|
|
(460,245 |
) |
|
Total non-covered loans |
|
$ |
22,567,639 |
|
|
$ |
23,803,909 |
|
|
$ |
(1,236,270 |
) |
|
$ |
24,848,909 |
|
|
$ |
(2,281,270 |
) |
Loans covered under FDIC loss sharing agreements [3] |
|
|
4,079,017 |
|
|
|
|
|
|
|
4,079,017 |
|
|
|
|
|
|
|
4,079,017 |
|
|
Total loans |
|
$ |
26,646,656 |
|
|
$ |
23,803,909 |
|
|
$ |
2,842,747 |
|
|
$ |
24,848,909 |
|
|
$ |
1,797,747 |
|
|
|
|
|
[1] |
|
Includes residential construction loans. |
|
[2] |
|
Loans disclosed exclude the discontinued operations of PFH. |
|
[3] |
|
Refer to Note 10 to the consolidated financial statements for the composition of the loans covered under FDIC loss sharing agreements. |
|
|
The explanations for loan portfolio variances discussed below exclude the impact of the
acquired covered loans.
As of June 30, 2010, the commercial and construction loan portfolios decreased $1.1 billion when
compared to December 31, 2009. The decrease in these portfolios was both reflected in the BPPR and
BPNA reportable segments and was impacted by lower new loan origination activity, portfolio run-off
associated with exited origination channels in the U.S. operations, and loan charge-offs during the
six months ended June 30, 2010. The decline in commercial and construction loans from June 30, 2009
to June 30, 2010 was influenced by similar factors as described above.
The decrease in the consumer loan portfolio from December 31, 2009 to June 30, 2010 by
approximately $187 million, or 5%, was mostly reflected in personal and auto loans in Puerto Rico
and home equity lines of credit and closed-end second mortgages in E-LOAN. Net charge-offs in the
consumer loan portfolio amounted to $110.8 million for the six months ended June 30, 2010. Also,
portfolio run-off exceeded the volume of new personal and
118
auto loan originations in the BPPR reportable segment due to current weak economic conditions. Furthermore,
the run-off of Popular Finances loan portfolio contributed to such decrease. Popular Finances
operations were closed in late 2008. Also, there were reductions in the consumer loan portfolio of
the BPNA reportable segment, primarily due to loan charge-offs and the run-off of its auto,
closed-end second mortgages and home equity lines of credit portfolios, which represent business
lines exited in prior years. Consumer loans as of June 30, 2010 decreased significantly from June
30, 2009 as a result of similar factors. Consumer loans as of June 30, 2010 include $45 million in
credit cards pertaining to BPPRs Westernbank operations and which are not covered by the FDIC
under the loss sharing agreements.
The decline in the lease financing portfolio from December 31, 2009 to June 30, 2010 was mostly at
the BPPR reportable segment by $24 million, which as well as the other loan portfolios continues to
reflect the general slowdown in originations. The Corporations U.S. operations are no longer
originating lease financing and as such, the outstanding portfolio in those operations is running
off.
The mortgage loan portfolio as of June 30, 2010 increased $96 million from December 31, 2009. The
BPPR reportable segment showed an increase of $195 million, while the BPNA reportable segment
experienced a reduction of $110 million. The reduction at BPNA resulted principally from the
discontinuance of the non-conventional mortgage loan origination business in the Corporations U.S.
mainland operations. The Corporations mortgage loan origination subsidiary in Puerto Rico, Popular
Mortgage, continued its efforts to originate loans despite the oversupply of housing developments,
the decline in the volume of sales and the weak economic conditions in the Island. There is a
reduction from June 30, 2009 in BPNA due to high volume of net charge-offs in the non-conventional
mortgage loan portfolio and run-off of the portfolio.
The covered loans were initially recorded at fair value. Their carrying value approximated $4.1
billion as of June 30, 2010, of which approximately 66% pertained to commercial and construction
loans, 31% to mortgage loans and 3% to consumer loans. The unpaid principal balance on the covered
loans approximated $8.4 billion as of June 30, 2010. Note 10 to the consolidated financial
statements presents the carrying amount of the covered loans broken down by major loan type
categories. A substantial amount of the covered loans, or approximately $3.8 billion of their
carrying value as of June 30, 2010, is accounted for under ASC Subtopic 310-30.
Under ASC Subtopic 310-30, the covered loans acquired from the FDIC were aggregated into pools
based on similar characteristics, including factors such as loan type, interest rate type, accruing
status, and amortization type. Each loan pool is accounted for as a single asset with a single
composite interest rate and an aggregate expectation of cash flows. Under ASC Subtopic 310-30, the
difference between the undiscounted cash flows expected at
acquisition and the fair value of the
loans, or the accretable yield, is recognized as interest income using the effective yield method
over the estimated life of the loan if the timing and amount of the future cash flows of the pool
is reasonably estimable. The non-accretable difference represents the difference between
undiscounted contractually required principal and interest and the undiscounted cash flows expected
to be collected. The non-accretable difference was established in purchase accounting to absorb
losses expected at the acquisition date on such loans. Amounts absorbed by the non-accretable
difference do not affect the statement of operations or the allowance for loan losses. Loans
charged-off against the non-accretable difference established in purchase accounting are not
reported as charge-offs. Subsequent to the acquisition date, increases in cash flows over those
expected at the acquisition date are recognized as interest income prospectively. Decreases in
expected cash flows after the acquisition date are recognized by recording an allowance for loan
losses. The loans under ASC Subtopic 310-30 will be reviewed each reporting period to determine
whether any changes occurred in expected cash flows that would result in a reclassification from
non-accretable difference to accretable yield or in the establishment of an allowance for loan
losses.
119
The following table presents acquired loans accounted for pursuant to ASC Subtopic 310-30 as
of the April 30, 2010 acquisition date:
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Contractually-required principal and interest |
|
$ |
10,995,387 |
|
Non-accretable difference |
|
|
5,789,480 |
|
|
Cash flows expected to be collected |
|
|
5,205,907 |
|
Accretable yield |
|
|
1,303,908 |
|
|
Fair value of loans accounted for under ASC Subtopic 310-30 |
|
$ |
3,901,999 |
[1] |
|
|
|
|
[1] |
|
Reflects a difference of $11.4 million compared with the amounts disclosed
in the Form 8-K/A filed on July 16, 2010, which included the financial
statements and exhibits pertaining to the Westernbank FDIC-assisted transaction
at the acquisition date. The Corporation reassessed the classification of
certain acquired loans and, due to their revolving characteristics,
reclassified the loans for accounting purposes from ASC Subtopic 310-30 to ASC
Subtopic 310-20. The reclassification did not impact the fair value of the
loans. |
|
|
The cash flows expected to be collected consider the estimated remaining life of the underlying
loans and include the effects of estimated prepayments.
Changes in the carrying amount and the accretable yield for the acquired loans in the Westernbank
FDIC-assisted transaction as of and for the quarter ended June 30, 2010, and which are accounted
pursuant to the ASC Subtopic 310-30, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying amount |
(In thousands) |
|
Accretable yield |
|
of loans |
|
Balance at beginning of period |
|
|
|
|
|
|
|
|
Additions [1] |
|
$ |
1,303,908 |
|
|
$ |
3,901,999 |
|
Accretion |
|
|
(38,998 |
) |
|
|
38,998 |
|
Payments received, net |
|
|
|
|
|
|
(130,169 |
) |
|
Balance at end of period |
|
$ |
1,264,910 |
|
|
$ |
3,810,828 |
|
|
|
|
|
[1] |
|
Represents the estimated fair value of the loans at the date of
acquisition. There were no reclassifications from non-accretable difference to
accretable yield from April 30, 2010 to June 30, 2010. |
|
|
As indicated in Note 3 to the consolidated financial statements, the Corporation accounts for
lines of credit with revolving privileges under the accounting guidance of ASC Subtopic 310-20,
which requires that any differences between the contractually required loan payment receivable in
excess of the initial investment in the loans be accreted into interest income using the effective
yield method over the life of the loan, if the loan is accruing interest. The following table
presents acquired loans accounted for under ASC Subtopic 310-20 as of the April 30, 2010
acquisition date:
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Fair value of loans accounted under ASC Subtopic 310-20 |
|
$ |
358,989 |
[1] |
|
Gross contractual amounts receivable (principal and interest) |
|
$ |
1,007,880 |
|
|
Estimate of contractual cash flows not expected to be collected |
|
$ |
614,653 |
|
|
|
|
|
[1] |
|
Reflects a difference of $11.4 million compared with the amounts
disclosed in the Form 8-K/A filed on July 16, 2010, which included the
financial statements and exhibits pertaining to the Westernbank FDIC-assisted
transaction at the acquisition date. The Corporation reassessed the
classification of certain acquired loans and, due to their revolving
characteristics, reclassified the loans for accounting purposes from ASC
Subtopic 310-30 to ASC Subtopic 310-20. The reclassification did not impact the
fair value of the loans. |
|
|
The cash flows expected to be collected consider the estimated remaining life of the underlying
loans and include the effects of estimated prepayments.
As of June 30, 2010, acquired loans accounted pursuant to the guidance of ASC Subtopic 310-20 had a
carrying amount of approximately $313 million.
120
FDIC loss share indemnification asset
As part of the loan portfolio fair value estimation in the Westernbank FDIC-assisted transaction,
the Corporation established the FDIC loss share indemnification asset, which represents the present
value of the estimated losses on loans to be reimbursed by the FDIC. The FDIC loss share
indemnification asset amounted to $3.3 billion as of June 30, 2010 and is presented in a separate
line item in the consolidated statement of condition. The estimated losses were based on the same
cash flow estimates used in determining the fair value of the loans. The FDIC loss share receivable
will be reduced as losses are recognized on loans and loss sharing payments are received from the
FDIC. Expected losses in excess of acquisition date estimates will increase the FDIC loss
indemnification asset. Conversely, if expected losses are less than acquisition date estimates, the
portion of the FDIC loss share indemnification asset no longer expected to result in a payment from
the FDIC will be amortized to earnings using the effective interest method. Covered loans under the
loss sharing agreements are reported exclusive of the estimated FDIC loss share indemnification
asset.
Other assets
Table H provides a breakdown of the principal categories that comprise the caption of Other
assets in the consolidated statements of condition as of June 30, 2010, December 31, 2009 and June
30, 2009.
TABLE
H
Breakdown of Other Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variance |
|
|
|
|
|
Variance |
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
|
|
|
|
June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
Vs. |
|
|
|
|
|
Vs. |
|
|
June 30, |
|
December 31, |
|
December 31, |
|
June 30, |
|
June 30, |
(In thousands) |
|
2010 |
|
2009 |
|
2009 |
|
2009 |
|
2009 |
|
Net deferred tax assets
(net of valuation allowance) |
|
$ |
347,396 |
|
|
$ |
363,967 |
|
|
$ |
(16,571 |
) |
|
$ |
390,467 |
|
|
$ |
(43,071 |
) |
Bank-owned life insurance program |
|
|
235,499 |
|
|
|
232,387 |
|
|
|
3,112 |
|
|
|
228,675 |
|
|
|
6,824 |
|
Prepaid FDIC insurance assessment |
|
|
179,130 |
|
|
|
206,308 |
|
|
|
(27,178 |
) |
|
|
|
|
|
|
179,130 |
|
Other prepaid expenses |
|
|
161,963 |
|
|
|
130,762 |
|
|
|
31,201 |
|
|
|
136,634 |
|
|
|
25,329 |
|
Investments under the equity method |
|
|
98,234 |
|
|
|
99,772 |
|
|
|
(1,538 |
) |
|
|
91,558 |
|
|
|
6,676 |
|
Derivative assets |
|
|
79,571 |
|
|
|
71,822 |
|
|
|
7,749 |
|
|
|
76,019 |
|
|
|
3,552 |
|
Trade receivables from brokers and
counterparties |
|
|
73,110 |
|
|
|
1,104 |
|
|
|
72,006 |
|
|
|
66,943 |
|
|
|
6,167 |
|
Others |
|
|
227,169 |
|
|
|
216,037 |
|
|
|
11,132 |
|
|
|
224,553 |
|
|
|
2,616 |
|
|
Total other assets |
|
$ |
1,402,072 |
|
|
$ |
1,322,159 |
|
|
$ |
79,913 |
|
|
$ |
1,214,849 |
|
|
$ |
187,223 |
|
|
The
increase in other assets from December 31, 2009 to June 30, 2010
was primarily due to higher trade receivables
from brokers and counterparties, which were mostly related to higher mortgage-backed securities sold
by Popular Mortgage prior to quarter-end, with settlement date in July 2010. When compared to June
30, 2009, the major variance was reflected in the prepaid FDIC insurance assessment, which
represents the unamortized balance of the FDIC insurance premiums prepaid in 2009, which correspond
to years 2010 through 2012.
Deposits and Borrowings
Deposits
A breakdown of the Corporations deposits at period-end is included in Table I.
TABLE I
Deposits Ending Balances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variance |
|
|
|
|
|
Variance |
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
|
|
|
|
June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
Vs. |
|
|
|
|
|
Vs. |
|
|
June 30, |
|
December 31, |
|
December 31, |
|
June 30, |
|
June 30, |
(In thousands) |
|
2010 |
|
2009 |
|
2009 |
|
2009 |
|
2009 |
|
Demand deposits * |
|
$ |
5,419,347 |
|
|
$ |
5,066,282 |
|
|
$ |
353,065 |
|
|
$ |
5,115,351 |
|
|
$ |
303,996 |
|
Savings, NOW and money
market deposits |
|
|
10,600,396 |
|
|
|
9,635,347 |
|
|
|
965,049 |
|
|
|
9,605,716 |
|
|
|
994,680 |
|
Time deposits |
|
|
11,093,830 |
|
|
|
11,223,265 |
|
|
|
(129,435 |
) |
|
|
12,192,418 |
|
|
|
(1,098,588 |
) |
|
Total deposits |
|
$ |
27,113,573 |
|
|
$ |
25,924,894 |
|
|
$ |
1,188,679 |
|
|
$ |
26,913,485 |
|
|
$ |
200,088 |
|
|
|
|
|
* |
|
Includes interest and non-interest bearing demand deposits. |
|
|
121
Brokered certificates of deposit, which are included as time deposits, amounted to $2.0
billion as of June 30, 2010, compared with $2.7 billion as of December 31, 2009 and June 30, 2009.
The increase in demand and saving deposits from December 31, 2009 to June 30, 2010 was principally
related to the deposits assumed in the Westernbank FDIC-assisted transaction. The BPPR Westernbank
operations had demand and savings deposits of $298 million and $865 million, respectively, as of
June 30, 2010. The decrease in time deposits from December 31, 2009 to June 30, 2010, was
influenced by the decrease in brokered certificates of deposit and a decrease in the BPNA
reportable segment by $409 million, partially offset by $1.1 billion in deposits from BPPRs
Westernbank operations.
The increase in demand and savings accounts from June 30, 2009 to June 30, 2010 was principally
related to the deposits assumed in the Westernbank FDIC-assisted transaction, which as of June 30,
2010 approximated $1.2 billion. This increase was partially offset by a reduction in brokered
certificates of deposit of $767 million. Also, there was a reduction in other time deposits of $1.1
billion in the BPNA reportable segment and $370 million in the BPPR reportable segment, excluding
the impact of the aforementioned time deposits of BPPRs Westernbank operations. The decrease at
BPNA was impacted by the closure and sale of branches of BPNA. In addition, there were reduced
levels of deposits gathered through E-LOANs internet platform, in part influenced by the effect of
a reduction in the pricing of these deposits and strategic actions taken that reduced BPNAs asset
base considerably. The decline in the BPPR reportable segment, excluding the assumed deposits from
Westernbank, pertained to both retail and commercial accounts.
Borrowings
The Corporations borrowings amounted to $10.5 billion as of June 30, 2010, compared with $5.3
billion as of December 31, 2009 and $5.6 billion as of June 30, 2009. The increase in borrowings
from the end of 2009 to June 30, 2010 was related to the note payable issued to the FDIC in
relation to the FDIC-assisted transaction, which has a carrying amount of $5.7 billion as of
quarter end. The note payable issued to the FDIC is collateralized by the covered loans (other than
certain consumer loans) and other real estate acquired in the agreement with the FDIC and all
proceeds derived from such assets, including cash inflows from claims to the FDIC under the loss
sharing agreements. As of June 30, 2010, the carrying amount of loans and other real estate
property that serves as collateral on the note amounted to approximately $4.0 billion. The entire
outstanding principal balance of the note payable to the FDIC is due five years from issuance
(April 30, 2015), or such date as such amount may become due and payable pursuant to the terms of
the note. Borrowings under the note bear interest at the per annum rate of 2.50% and is paid
monthly. The Corporation may prepay the note in whole or in part without any penalty subject to
certain notification requirements indicated in the agreement. As a subsequent event, on July 26,
2010, the Corporation prepaid $2.0 billion of the note payable to the FDIC from funds unrelated to
the assets securing the note.
The increase in borrowings from June 30, 2009 to the same date in 2010 was also due to the
aforementioned note payable issued to the FDIC, partially offset by a $644 million reduction in
repurchase agreements.
In March 2010, the SECs Division of Corporation Finance sent a letter to certain public companies
requesting information about repurchase agreements, securities lending transactions or other
transactions involving the obligation to repurchase the transferred assets. The letter requests
several disclosures with respect to such transfers that are recorded as sales. In this regard, the
Corporation records all its repurchase transactions as collateralized borrowings rather than as
sales transactions.
In August 2009, the Corporation issued junior subordinated debentures with an aggregate liquidation
amount of $936 million as part of the exchange agreement with the U.S. Treasury. As of June 30,
2010, the outstanding book balance of these debentures was $434 million since it is reported net of
a discount amounting to $502 million. The discount resulted from the recording of the debentures at
fair value because of the accounting treatment of the exchange. The aforementioned increase in
junior subordinated debentures was partially offset by the reduction in previously outstanding
junior subordinated debentures of $410 million, associated with the exchange of trust preferred
securities
for common stock. Refer to the 2009 Annual Report for information on the exchange transactions.
122
Refer to Note 16 to the consolidated financial statements for detailed information on the
Corporations borrowings as of June 30, 2010, December 31, 2009 and June 30, 2009. Also, refer to
the Liquidity Risk section in this MD&A for additional information on the Corporations funding
sources as of June 30, 2010.
Other liabilities
The increase in other liabilities from $983 million as of December 31, 2009 to $1.2 billion as of
June 30, 2010 included two items directly associated to the Westernbank FDIC-assisted transaction.
Such items included: (1) the equity appreciation instrument described in the Westernbank
FDIC-assisted transaction section in this MD&A with a fair value of $28.1 million as of June 30,
2010, and a $132.4 million contingent liability for unfunded loan commitments recorded at the April
30, 2010 acquisition date pertaining primarily to commercial and construction loans and commercial
revolving lines of credit. Losses incurred on loan disbursements made under these unfunded loan
commitments may be covered by the FDIC loss sharing agreements provided that the Corporation
complies with specific requirements under such agreements.
Stockholders Equity
Stockholders equity totaled $3.6 billion as of June 30, 2010, compared with $2.5 billion as of
December 31, 2009 and $2.9 billion as of June 30, 2009. Refer to the consolidated statements of
condition and of stockholders equity for information on the composition of stockholders equity.
Also, the disclosures of accumulated other comprehensive income (loss), an integral component of
stockholders equity, are included in the consolidated statements of comprehensive loss. The
increase in stockholders equity from December 31, 2009 to June 30, 2010 was due to the
aforementioned issuance of depositary shares and conversion to common stock during the second
quarter of 2010, which contributed with $1.15 billion in additional capital. The increase from the
new capital issuance was partially offset by the net loss recorded during 2009 and the six months
ended June 30, 2010.
Included within surplus in stockholders equity as of June 30, 2010 and December 31, 2009 was $402
million corresponding to a statutory reserve fund applicable exclusively to Puerto Rico banking
institutions. This statutory reserve fund totaled $392 million as of June 30, 2009. The Banking Act
of the Commonwealth of Puerto Rico requires that a minimum of 10% of BPPRs net income for the year
be transferred to a statutory reserve account until such statutory reserve equals the total of
paid-in capital on common and preferred stock. Any losses incurred by a bank must first be charged
to retained earnings and then to the reserve fund. Amounts credited to the reserve fund may not be
used to pay dividends without the prior consent of the Puerto Rico Commissioner of Financial
Institutions. The failure to maintain sufficient statutory reserves would preclude BPPR from paying
dividends. As of June 30, 2010 and 2009 and December 31, 2009, BPPR was in compliance with the
statutory reserve requirement.
123
REGULATORY CAPITAL
The Corporation continues to exceed the well-capitalized guidelines under the federal banking
regulations. The regulatory capital ratios and amounts of total risk-based capital, Tier 1
risk-based capital and Tier 1 leverage as of June 30, 2010, December 31, 2009, and June 30, 2009
are presented on Table J. As of such dates, BPPR and BPNA were well-capitalized.
TABLE
J
Capital Adequacy Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
June 30, |
(Dollars in thousands) |
|
2010 |
|
2009 |
|
2009 |
|
Risk-based capital |
|
|
|
|
|
|
|
|
|
|
|
|
Tier I capital |
|
$ |
3,415,928 |
|
|
$ |
2,563,915 |
|
|
$ |
2,993,330 |
|
Supplementary (Tier II) capital |
|
|
352,077 |
|
|
|
346,527 |
|
|
|
358,856 |
|
|
Total capital |
|
$ |
3,768,005 |
|
|
$ |
2,910,442 |
|
|
$ |
3,352,186 |
|
|
Risk-weighted assets |
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheet items |
|
$ |
23,864,562 |
|
|
$ |
23,182,230 |
|
|
$ |
24,735,838 |
|
Off-balance sheet items |
|
|
3,329,739 |
|
|
|
2,964,649 |
|
|
|
3,154,444 |
|
|
Total risk-weighted assets |
|
$ |
27,194,301 |
|
|
$ |
26,146,879 |
|
|
$ |
27,890,282 |
|
|
Average assets |
|
$ |
38,854,546 |
|
|
$ |
34,197,244 |
|
|
$ |
36,217,245 |
|
|
Ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
Tier I
capital (minimum required 4.00%) |
|
|
12.56 |
% |
|
|
9.81 |
% |
|
|
10.73 |
% |
Total
capital (minimum required 8.00%) |
|
|
13.86 |
|
|
|
11.13 |
|
|
|
12.02 |
|
Leverage ratio * |
|
|
8.79 |
|
|
|
7.50 |
|
|
|
8.26 |
|
|
|
|
|
* |
|
All banks are required to have a minimum Tier I leverage ratio of 3% or
4% of adjusted quarterly average assets, depending on the banks
classification. |
|
|
|
As of June 30, 2010, the capital adequacy minimum requirement for Popular, Inc.
was (in thousands): Total Capital of $2,175,544, Tier I Capital of
$1,087,772,
and Tier I Leverage of $1,165,636 based on a 3% ratio or $1,554,182 based on a
4% ratio according to the Banks classification. |
|
|
In accordance with the Federal Reserve Board guidance, the trust preferred securities
represent restricted core capital elements and qualify as Tier 1 Capital, subject to quantitative
limits. The aggregate amount of restricted core capital elements that may be included in the Tier 1
Capital of a banking organization must not exceed 25% of the sum of all core capital elements
(including cumulative perpetual preferred stock and trust preferred securities). As of June 30,
2010, the Corporations restricted core capital elements did not exceed the 25% limitation. Thus,
all trust preferred securities were allowed as Tier 1 capital. As of December 31, 2009, there were
$7 million of the outstanding trust preferred securities which were disallowed as Tier 1 capital.
Amounts of restricted core capital elements in excess of this limit generally may be included in
Tier 2 capital, subject to further limitations. The Federal Reserve Board revised the quantitative
limit which would limit restricted core capital elements included in the Tier 1 capital of a bank
holding company to 25% of the sum of core capital elements (including restricted core capital
elements), net of goodwill less any associated deferred tax liability. The new limit would be
effective on March 31, 2011. Furthermore, the Dodd-Frank Wall Street Reform and Consumer Protection
Act, recently passed in July 2010, has a provision to effectively phase out the use of trust
preferred securities as Tier 1 capital throughout a five-year period. As of June 30, 2010, the
Corporation had $427 million in trust preferred securities (capital securities) that are subject to
the phase-out. As of June 30, 2010, the remaining $935 million in trust preferred securities
corresponded to capital securities issued to the U.S. Treasury pursuant to the Emergency Economic
Stabilization Act of 2008 that are exempt from the phase-out provisions of the Act.
The Corporations tangible common equity ratio was 6.67% as of June 30, 2010 and 5.40% as of
December 31, 2009. The Corporations Tier 1 common equity to risk-weighted assets ratio was 9.22%
as of June 30, 2010, compared with 6.39% as of December 31, 2009.
The tangible common equity ratio and tangible book value per common share are non-GAAP measures.
Management and many stock analysts use the tangible common equity ratio and tangible book value per
common share in
conjunction with more traditional bank capital ratios to compare the capital adequacy of banking
124
organizations with significant amounts of goodwill or other intangible assets, typically stemming
from the use of the purchase accounting method of accounting for mergers and acquisitions. Neither
tangible common equity nor tangible assets or related measures should be considered in isolation or
as a substitute for stockholders equity, total assets or any other measure calculated in
accordance with accounting principles generally accepted in the United States of America (GAAP).
Moreover, the manner in which the Corporation calculates its tangible common equity, tangible
assets and any other related measures may differ from that of other companies reporting measures
with similar names.
The table that follows provides a reconciliation of total stockholders equity to tangible common
equity and total assets to tangible assets as of June 30, 2010 and December 31, 2009.
|
|
|
|
|
|
|
|
|
(In thousands, except share or per share information) |
|
June 30, 2010 |
|
December 31, 2009 |
|
Total stockholders equity |
|
$ |
3,603,448 |
|
|
$ |
2,538,817 |
|
Less: Preferred stock |
|
|
(50,160 |
) |
|
|
(50,160 |
) |
Less: Goodwill |
|
|
(710,579 |
) |
|
|
(604,349 |
) |
Less: Other intangibles |
|
|
(63,720 |
) |
|
|
(43,803 |
) |
|
Total tangible common equity |
|
$ |
2,778,989 |
|
|
$ |
1,840,505 |
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
42,443,652 |
|
|
$ |
34,736,325 |
|
Less: Goodwill |
|
|
(710,579 |
) |
|
|
(604,349 |
) |
Less: Other intangibles |
|
|
(63,720 |
) |
|
|
(43,803 |
) |
|
Total tangible assets |
|
$ |
41,669,353 |
|
|
$ |
34,088,173 |
|
|
|
|
|
|
|
|
|
|
|
Tangible common equity to tangible assets |
|
|
6.67 |
% |
|
|
5.40 |
% |
Common shares outstanding at end of period |
|
|
1,022,695,797 |
|
|
|
639,540,105 |
|
Tangible book value per common share |
|
$ |
2.72 |
|
|
$ |
2.88 |
|
|
The Tier 1 common equity to risk-weighted assets ratio is another non-GAAP measure. Ratios
calculated based upon Tier 1 common equity have become a focus of regulators and investors, and
management believes ratios based on Tier 1 common equity assist investors in analyzing the
Corporations capital position. In connection with the Supervisory Capital Assessment Program
(SCAP), the Federal Reserve Board began supplementing its assessment of the capital adequacy of a
bank holding company based on a variation of Tier 1 capital, known as Tier 1 common equity.
Because Tier 1 common equity is not formally defined by GAAP or, unlike Tier 1 capital, codified in
the federal banking regulations, this measure is considered to be a non-GAAP financial measure.
Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied and
are not audited. To mitigate these limitations, the Corporation has procedures in place to
calculate these measures using the appropriate GAAP or regulatory components. Although these
non-GAAP financial measures are frequently used by stakeholders in the evaluation of a company,
they have limitations as analytical tools, and should not be considered in isolation, or as a
substitute for analyses of results as reported under GAAP.
125
The table below reconciles the Corporations total common stockholders equity (GAAP) as of
June 30, 2010 and December 31, 2009 to Tier 1 common equity as defined by the Federal Reserve
Board, FDIC and other bank regulatory agencies (non-GAAP).
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
(In thousands) |
|
2010 |
|
2009 |
|
Common stockholders equity |
|
$ |
3,553,288 |
|
|
$ |
2,488,657 |
|
Less: Unrealized gains on available-for-sale securities, net of tax [1] |
|
|
(191,673 |
) |
|
|
(91,068 |
) |
Less: Disallowed deferred tax assets [2] |
|
|
(183,759 |
) |
|
|
(179,655 |
) |
Less: Intangible assets: |
|
|
|
|
|
|
|
|
Goodwill |
|
|
(710,579 |
) |
|
|
(604,349 |
) |
Other disallowed intangibles |
|
|
(34,880 |
) |
|
|
(18,056 |
) |
Less: Aggregate adjusted carrying value of all non-financial equity investments |
|
|
(1,785 |
) |
|
|
(2,343 |
) |
Add: Pension liability adjustment, net of tax and accumulated net gains (losses)
on cash flow hedges [3] |
|
|
75,669 |
|
|
|
78,488 |
|
|
Total Tier 1 common equity |
|
$ |
2,506,281 |
|
|
$ |
1,671,674 |
|
|
|
|
|
[1] |
|
In accordance with regulatory risk-based capital guidelines,
Tier 1 capital excludes net unrealized gains (losses) on
available-for-sale debt securities and net unrealized gains
on available-for-sale equity securities with readily
determinable fair values. In arriving at Tier 1 capital,
institutions are required to deduct net unrealized losses on
available-for-sale equity securities with readily
determinable fair values, net of tax. |
|
[2] |
|
Approximately $186 million of the Corporations $347 million of net
deferred tax assets as of June 30, 2010 ($186 million and $364
million, respectively, as of December 31, 2009), were included without
limitation in regulatory capital pursuant to the risk-based capital
guidelines, while approximately $184 million of such assets as of June
30, 2010 ($180 million as of December 31, 2009) exceeded the
limitation imposed by these guidelines and, as disallowed deferred
tax assets, were deducted in arriving at Tier 1 capital. The
remaining $23 million of the Corporations other net deferred tax
assets as of June 30, 2010 ($2 million as of December 31, 2009)
represented primarily the following items (a) the deferred tax effects
of unrealized gains and losses on available-for-sale debt securities,
which are permitted to be excluded prior to deriving the amount of net
deferred tax assets subject to limitation under the guidelines; (b)
the deferred tax asset corresponding to the pension liability
adjustment recorded as part of accumulated other comprehensive income;
and (c) the deferred tax liability associated with goodwill and other
intangibles. |
|
[3] |
|
The Federal Reserve Bank has granted interim capital relief for the impact of pension liability adjustment. |
|
|
CREDIT RISK MANAGEMENT AND LOAN QUALITY
Non-performing assets include primarily past-due loans that are no longer accruing interest,
renegotiated loans, and real estate property acquired through foreclosure. A summary, including
certain credit quality metrics, is presented in Table K.
The Corporations non-accruing and charge-off policies by major categories of loan portfolios are
as follows:
|
|
|
Commercial and construction loans recognition of interest income on commercial and
construction loans is discontinued when the loans are 90 days or more in arrears on
payments of principal or interest, or when other factors indicate that the collection of
principal and interest is doubtful. The impaired portions on these loans are charged-off at
no longer than 365 days past due. |
|
|
|
|
Lease financing recognition of interest income for lease financing is ceased when
loans are 90 days or more in arrears. Leases are charged-off when they are 120 days in
arrears. |
|
|
|
|
Mortgage loans recognition of interest income on mortgage loans is generally
discontinued when loans are 90 days or more in arrears on payments of principal or
interest. The impaired portion of a mortgage loan is charged-off when the loan is 180 days
past due. |
|
|
|
|
Consumer loans recognition of interest income on closed-end consumer loans and
home-equity lines of credit is discontinued when the loans are 90 days or more in arrears
on payments of principal or interest. Income is generally recognized on open-end consumer
loans, except for home equity lines of credit, until the loans are charged-off. Closed-end
consumer loans are charged-off when they are 120 days in arrears. Open-end consumer loans are charged-off when they are 180 days in arrears. |
126
|
|
|
Troubled debt restructurings (TDRs) Loans classified as TDRs are reported in
non-accrual status if the loan was in non-accruing status at the time of the modification.
The TDR loan should continue in non-accrual status until the borrower has demonstrated a
willingness and ability to make the restructured loan payments (at least six months of
sustained performance after classified as a TDR). |
|
|
|
|
Acquired covered loans from the Westernbank FDIC-assisted transaction that are restructured
after acquisition are not considered restructured loans for purposes of the Corporations
accounting and disclosure if the loans are accounted for in pools pursuant to ASC Subtopic
310-30. |
|
|
|
|
As previously indicated in this MD&A and notes to the accompanying financial statements,
covered loans acquired in the Westernbank FDIC-assisted transaction, except for lines of
credit with revolving privileges, are accounted for by the Corporation in accordance with
ASC Subtopic 310-30. Under ASC Subtopic 310-30, the acquired loans were aggregated into
pools based on similar characteristics. Each loan pool is accounted for as a single asset
with a single composite interest rate and an aggregate expectation of cash flows. The
covered loans which are accounted for under ASC Subtopic 310-30 by the Corporation are not
considered non-performing and will continue to have an accretable yield as long as there is
a reasonable expectation about the timing and amount of cash flows expected to be
collected. Also, loans charged-off against the non-accretable difference established in
purchase accounting are not reported as charge-offs. Charge-offs will be recorded only to
the extent that losses exceed the purchase accounting estimates. |
|
|
|
|
Lines of credit with revolving privileges that were acquired as part of the Westernbank
FDIC-assisted transaction are accounted under the guidance of ASC Subtopic 310-20, which
requires that any differences between the contractually required loan payment receivable in
excess of the Corporations initial investment in the loans be accreted into interest
income using the effective yield method over the life of the loan. Loans accounted for
under ASC Subtopic 310-20 are placed on non-accrual status when past due in accordance with
the Corporations non-accruing policy and any accretion of discount is discontinued. |
The non-performing assets acquired in the FDIC-assisted transaction were written-down to their
estimated fair value on their acquisition date, incorporating an estimate of future expected credit
losses. To the extent actual or projected cash flows are less than originally estimated at the
acquisition date, provisions for loan losses on the acquired loan portfolio will be recognized;
however, these provisions would be mostly offset by a corresponding increase in the FDIC loss share
indemnification asset if the loans are covered under the loss sharing agreements, measured based on
the loss share percentages. The increase in the indemnification asset will impact non-interest
income, while the decrease in the expected cash flows on the loans will impact the provision for
loan losses in the consolidated statement of operations.
Because of the application of ASC Subtopic 310-30 to the Westernbank acquired loans and the loss
protection provided by the FDIC which limits the risks on the covered loans, the Corporation has
determined to provide certain quality metrics in this MD&A that exclude such covered loans to
facilitate the comparison between loan portfolios and across quarters or year-to-date periods.
127
TABLE
K
Non-Performing Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a |
|
|
|
|
|
As a |
|
|
|
|
|
|
As a percentage |
|
|
|
|
|
percentage |
|
|
|
|
|
percentage |
|
|
June 30, |
|
of loans HIP |
|
December 31, |
|
of loans HIP |
|
June 30, |
|
of loans HIP |
(Dollars in thousands) |
|
2010 |
|
by category [2] |
|
2009 |
|
by category |
|
2009 |
|
by category |
|
Commercial |
|
$ |
801,378 |
|
|
|
6.8 |
% |
|
$ |
836,728 |
|
|
|
6.6 |
% |
|
$ |
686,150 |
|
|
|
5.2 |
% |
Construction |
|
|
843,806 |
|
|
|
56.4 |
|
|
|
854,937 |
|
|
|
49.6 |
|
|
|
767,029 |
|
|
|
37.7 |
|
Lease financing |
|
|
7,548 |
|
|
|
1.2 |
|
|
|
9,655 |
|
|
|
1.4 |
|
|
|
11,825 |
|
|
|
1.6 |
|
Mortgage |
|
|
613,838 |
|
|
|
13.1 |
|
|
|
510,847 |
|
|
|
11.1 |
|
|
|
441,773 |
|
|
|
9.9 |
|
Consumer |
|
|
63,021 |
|
|
|
1.6 |
|
|
|
64,185 |
|
|
|
1.6 |
|
|
|
71,413 |
|
|
|
1.7 |
|
|
Total non-performing loans,
excluding covered loans |
|
|
2,329,591 |
|
|
|
10.4 |
% |
|
|
2,276,352 |
|
|
|
9.6 |
% |
|
|
1,978,190 |
|
|
|
8.0 |
% |
Other real estate owned (OREO),
excluding covered OREO |
|
|
142,372 |
|
|
|
|
|
|
|
125,483 |
|
|
|
|
|
|
|
105,553 |
|
|
|
|
|
|
Total non-performing assets,
excluding covered assets |
|
|
2,471,963 |
|
|
|
|
|
|
|
2,401,835 |
|
|
|
|
|
|
|
2,083,743 |
|
|
|
|
|
Covered loans and OREO [1] |
|
|
174,008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing assets |
|
$ |
2,645,971 |
|
|
|
|
|
|
$ |
2,401,835 |
|
|
|
|
|
|
$ |
2,083,743 |
|
|
|
|
|
|
Accruing loans past due 90 days
or more [3] |
|
$ |
275,263 |
|
|
|
|
|
|
$ |
239,559 |
|
|
|
|
|
|
$ |
180,730 |
|
|
|
|
|
|
Ratios excluding covered loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing assets to total
assets |
|
|
6.44 |
% |
|
|
|
|
|
|
6.91 |
% |
|
|
|
|
|
|
5.71 |
% |
|
|
|
|
Allowance for loan losses to loans
held-in-portfolio |
|
|
5.68 |
|
|
|
|
|
|
|
5.32 |
|
|
|
|
|
|
|
4.66 |
|
|
|
|
|
Allowance for loan losses to
non-performing loans |
|
|
54.82 |
|
|
|
|
|
|
|
55.40 |
|
|
|
|
|
|
|
57.94 |
|
|
|
|
|
|
Ratios including covered loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing assets to total
assets |
|
|
6.23 |
% |
|
|
|
|
|
|
6.91 |
% |
|
|
|
|
|
|
5.71 |
% |
|
|
|
|
Allowance for loan losses to loans
held-in-portfolio |
|
|
4.81 |
|
|
|
|
|
|
|
5.32 |
|
|
|
|
|
|
|
4.66 |
|
|
|
|
|
Allowance for loan losses to
non-performing loans |
|
|
52.61 |
|
|
|
|
|
|
|
55.40 |
|
|
|
|
|
|
|
57.94 |
|
|
|
|
|
|
|
|
|
HIP = held-in-portfolio |
|
[1] |
|
The amount consists of $98 million in non-performing covered loans accounted for under ASC Subtopic 310-20 and $76 million in covered OREO. It excludes covered loans accounted for
under ASC Subtopic 310-30 as they are considered to be performing due to the application of the accretion method, in which these loans will accrete interest income over the remaining
life of the loans using estimated cash flow analyses. |
|
[2] |
|
Loans held-in-portfolio used in the computation exclude $4.1 billion in covered loans as of June 30, 2010. |
|
[3] |
|
The carrying value of covered loans accounted for under ASC
Sub-topic 310-30 that are contractually 90 days or more past due
was $85 million as of June 30, 2010. This amount is
excluded from the above table as the covered loans accretable yield interest recognition is independent from the underlying contractual loan delinquency status. |
|
|
As of June 30, 2010, non-performing loans secured by real estate, excluding covered loans,
amounted to $1.5 billion, or 16.63% of total loans secured by real estate, excluding covered loans,
in the Puerto Rico operations and $638 million or 10.60%, respectively, in the U.S. mainland
operations. These figures compare to $1.3 billion or 14.92% in the Puerto Rico operations and $697
million or 10.69% in the U.S. mainland operations as of December 31, 2009.
In addition to the non-performing loans included in Table K, as of June 30, 2010, there were $304
million of performing loans, excluding covered loans, which in managements opinion are currently
subject to potential future classification as non-performing and are considered impaired, compared
with $248 million as of December 31, 2009 and $202 million as of June 30, 2009.
128
Table L summarizes the detail of the changes in the allowance for loan losses, including
charge-offs and recoveries by loan category, for the quarters and six months ended June 30, 2010
and 2009.
TABLE L
Allowance for Loan Losses and Selected Loan Losses Statistics
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter |
|
Six months ended June 30, |
(Dollars in thousands) |
|
2010 |
|
2009 |
|
Variance |
|
2010 |
|
2009 |
|
Variance |
|
Balance at beginning of period |
|
$ |
1,277,036 |
|
|
$ |
1,057,125 |
|
|
$ |
219,911 |
|
|
$ |
1,261,204 |
|
|
$ |
882,807 |
|
|
$ |
378,397 |
|
Provision for loan losses |
|
|
202,258 |
|
|
|
349,444 |
|
|
|
(147,186 |
) |
|
|
442,458 |
|
|
|
721,973 |
|
|
|
(279,515 |
) |
Losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
83,249 |
|
|
|
74,809 |
|
|
|
8,440 |
|
|
|
170,201 |
|
|
|
123,636 |
|
|
|
46,565 |
|
Construction |
|
|
55,891 |
|
|
|
76,687 |
|
|
|
(20,796 |
) |
|
|
108,298 |
|
|
|
121,495 |
|
|
|
(13,197 |
) |
Lease financing |
|
|
4,258 |
|
|
|
5,203 |
|
|
|
(945 |
) |
|
|
9,748 |
|
|
|
11,149 |
|
|
|
(1,401 |
) |
Mortgage |
|
|
27,926 |
|
|
|
25,170 |
|
|
|
2,756 |
|
|
|
56,528 |
|
|
|
56,763 |
|
|
|
(235 |
) |
Consumer |
|
|
62,793 |
|
|
|
92,693 |
|
|
|
(29,900 |
) |
|
|
133,183 |
|
|
|
176,091 |
|
|
|
(42,908 |
) |
|
Total losses |
|
|
234,117 |
|
|
|
274,562 |
|
|
|
(40,445 |
) |
|
|
477,958 |
|
|
|
489,134 |
|
|
|
(11,176 |
) |
|
Recoveries: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
12,111 |
|
|
|
4,931 |
|
|
|
7,180 |
|
|
|
19,946 |
|
|
|
12,422 |
|
|
|
7,524 |
|
Construction |
|
|
2,335 |
|
|
|
153 |
|
|
|
2,182 |
|
|
|
3,304 |
|
|
|
153 |
|
|
|
3,151 |
|
Lease financing |
|
|
1,167 |
|
|
|
1,083 |
|
|
|
84 |
|
|
|
2,723 |
|
|
|
2,071 |
|
|
|
652 |
|
Mortgage |
|
|
1,776 |
|
|
|
537 |
|
|
|
1,239 |
|
|
|
3,004 |
|
|
|
982 |
|
|
|
2,022 |
|
Consumer |
|
|
14,450 |
|
|
|
7,528 |
|
|
|
6,922 |
|
|
|
22,335 |
|
|
|
14,965 |
|
|
|
7,370 |
|
|
Total recoveries |
|
|
31,839 |
|
|
|
14,232 |
|
|
|
17,607 |
|
|
|
51,312 |
|
|
|
30,593 |
|
|
|
20,719 |
|
|
Net loans charged-off: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
71,138 |
|
|
|
69,878 |
|
|
|
1,260 |
|
|
|
150,255 |
|
|
|
111,214 |
|
|
|
39,041 |
|
Construction |
|
|
53,556 |
|
|
|
76,534 |
|
|
|
(22,978 |
) |
|
|
104,994 |
|
|
|
121,342 |
|
|
|
(16,348 |
) |
Lease financing |
|
|
3,091 |
|
|
|
4,120 |
|
|
|
(1,029 |
) |
|
|
7,025 |
|
|
|
9,078 |
|
|
|
(2,053 |
) |
Mortgage |
|
|
26,150 |
|
|
|
24,633 |
|
|
|
1,517 |
|
|
|
53,524 |
|
|
|
55,781 |
|
|
|
(2,257 |
) |
Consumer |
|
|
48,343 |
|
|
|
85,165 |
|
|
|
(36,822 |
) |
|
|
110,848 |
|
|
|
161,126 |
|
|
|
(50,278 |
) |
|
Total net loans charged-off |
|
|
202,278 |
|
|
|
260,330 |
|
|
|
(58,052 |
) |
|
|
426,646 |
|
|
|
458,541 |
|
|
|
(31,895 |
) |
|
Balance at end of period |
|
$ |
1,277,016 |
|
|
$ |
1,146,239 |
|
|
$ |
130,777 |
|
|
$ |
1,277,016 |
|
|
$ |
1,146,239 |
|
|
$ |
130,777 |
|
|
Ratios excluding covered loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annualized net charge-offs to average loans
held-in-portfolio |
|
|
3.58 |
% |
|
|
4.19 |
% |
|
|
|
|
|
|
3.72 |
% |
|
|
3.65 |
% |
|
|
|
|
Provision for loan losses to net charge-offs |
|
|
1.00 |
x |
|
|
1.34 |
x |
|
|
|
|
|
|
1.04 |
x |
|
|
1.57 |
x |
|
|
|
|
Ratios including covered loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annualized net charge-offs to average loans
held-in-portfolio |
|
|
3.19 |
% |
|
|
4.19 |
% |
|
|
|
|
|
|
3.51 |
% |
|
|
3.65 |
% |
|
|
|
|
Provision for loan losses to net charge-offs |
|
|
1.00 |
x |
|
|
1.34 |
x |
|
|
|
|
|
|
1.04 |
x |
|
|
1.57 |
x |
|
|
|
|
|
|
|
|
Note: |
|
There was no need to record an allowance for loan losses on the covered loans as of June 30, 2010 considering that cash flows expected to be collected on
the covered loans are not less than anticipated as of the April 30, 2010 acquisition date. |
129
Table M presents annualized net charge-offs to average loans held-in-portfolio by loan
category for the quarters and six months ended June 30, 2010 and 2009.
TABLE
M
Annualized Net Charge-offs to Average Loans Held-in-Portfolio, excluding covered loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters ended June 30, |
|
Six months ended June 30, |
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
Commercial |
|
|
2.37 |
% |
|
|
2.11 |
% |
|
|
2.46 |
% |
|
|
1.66 |
% |
Construction |
|
|
13.79 |
|
|
|
14.46 |
|
|
|
13.02 |
|
|
|
11.25 |
|
Lease financing |
|
|
1.93 |
|
|
|
2.25 |
|
|
|
2.17 |
|
|
|
2.49 |
|
Mortgage |
|
|
2.31 |
|
|
|
2.27 |
|
|
|
2.37 |
|
|
|
2.55 |
|
Consumer |
|
|
4.97 |
|
|
|
7.73 |
|
|
|
5.63 |
|
|
|
7.17 |
|
|
Total annualized net charge-offs to average loans held-in-portfolio |
|
|
3.58 |
% |
|
|
4.19 |
% |
|
|
3.72 |
% |
|
|
3.65 |
% |
|
|
|
|
Note: |
|
Average loans held-in-portfolio exclude covered loans acquired in the Westernbank FDIC-assisted transaction which were recorded at fair value on date of
acquisition, and thus, considered a credit discount component. The Westernbank acquired loan portfolio did not impact net charge-offs for the quarter and six months ended
June 30, 2010. |
|
|
Commercial loans
As shown in Table K, the level of non-performing commercial loans as of June 30, 2010, compared to
December 31, 2009, decreased on a consolidated basis from
December 31, 2009, mainly in the BPNA
reportable segment. This decrease was attributed in part to certain commercial real estate loans
which were paid off during the second quarter of 2010. As shown in the next table, the level of
non-performing commercial loans in the Puerto Rico operations as of
June 30, 2010 has remained high, when compared with the end of
2009, due to continued weak economic conditions. The level of
non-performing commercial loans in the United States operations has shown improved performance from
December 31, 2009. As compared to December 31, 2009, the percentage of non-performing commercial
loans to commercial loans held-in-portfolio as of June 30, 2010 increased in the BPPR reportable
segment influenced by the significant loan portfolio reduction and sustained high level of
delinquencies.
The substantial increase in non-performing commercial loans from June 30, 2009 to the same date in
2010 was due to the downturn in the U.S. economy and Puerto Ricos recessionary economy,
principally during 2009. The table that follows provides information on commercial non-performing
loans as of June 30, 2010, June 30, 2009 and December 31, 2009, and net charge-offs information for
the quarter and six months ended June 30, 2010 and June 30, 2009 for the BPPR and BPNA reportable
segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the quarters ended |
|
For the six months ended |
|
|
June 30, |
|
December 31, |
|
June 30, |
|
June 30, |
|
June 30, |
(Dollars in thousands) |
|
2010 |
|
2009 |
|
2009 |
|
2010 |
|
2009 |
|
BPPR Reportable Segment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing commercial loans |
|
$ |
520,853 |
|
|
$ |
516,184 |
|
|
$ |
448,302 |
|
|
$ |
520,853 |
|
|
$ |
448,302 |
|
Non-performing commercial loans to commercial loans
HIP, both excluding covered loans |
|
|
7.72 |
% |
|
|
7.25 |
% |
|
|
6.21 |
% |
|
|
7.72 |
% |
|
|
6.21 |
% |
Commercial loan net charge-offs |
|
$ |
31,838 |
|
|
|
|
|
|
$ |
41,539 |
|
|
$ |
64,538 |
|
|
$ |
56,152 |
|
Commercial loan net charge-offs (annualized) to
average commercial loans HIP, excluding covered loans |
|
|
1.85 |
% |
|
|
|
|
|
|
2.27 |
% |
|
|
1.85 |
% |
|
|
1.52 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BPNA Reportable Segment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing commercial loans |
|
$ |
280,524 |
|
|
$ |
320,477 |
|
|
$ |
237,849 |
|
|
$ |
280,524 |
|
|
$ |
237,849 |
|
Non-performing commercial loans to commercial loans HIP |
|
|
5.57 |
% |
|
|
5.79 |
% |
|
|
4.07 |
% |
|
|
5.57 |
% |
|
|
4.07 |
% |
Commercial loan net charge-offs |
|
$ |
39,300 |
|
|
|
|
|
|
$ |
28,340 |
|
|
$ |
85,718 |
|
|
$ |
55,064 |
|
Commercial loan net charge-offs (annualized) to
average commercial loans HIP |
|
|
3.07 |
% |
|
|
|
|
|
|
1.92 |
% |
|
|
3.26 |
% |
|
|
1.84 |
% |
|
There were 3 commercial loan relationships greater than $10 million in non-accrual status with
an outstanding debt of approximately $33 million as of June 30, 2010, compared with 5 commercial
loan relationships with an outstanding debt of approximately $100 million as of December 31, 2009,
and 6 commercial loan relationships with an outstanding debt of $78 million as of June 30, 2009.
130
The Corporations commercial loan net charge-offs for the quarter ended June 30, 2010 slightly
increased when compared with the quarter ended June 30, 2009. This increase was the net result of a
decrease in the BPPR reportable segment offset by an increase in the BPNA reportable segment.
Despite the positive variance when compared to the quarter ended June 30, 2009, the commercial loan
portfolio at the BPPR reportable segment has continued to reflect high delinquency levels during
2010 due to the prolonged recession in Puerto Rico. However, during the six months ended June 30,
2010, certain commercial loan segments in the U.S. mainland, particularly small business
portfolios, have shown improved performance in terms of delinquencies and losses.
The allowance for loan losses corresponding to commercial loans held-in-portfolio represented 4.06%
of that portfolio, excluding covered loans, as of June 30, 2010, compared with 3.46% as of December
31, 2009. The ratio of allowance to non-performing loans in the commercial loan category was 59.71%
as of June 30, 2010, compared with 52.31% as of December 31, 2009.
The Corporations commercial loan portfolio secured by real estate (CRE), excluding construction
and covered loans, amounted to $7.2 billion as of June 30, 2010, of which $3.3 billion was secured
with owner occupied properties, compared with $7.5 billion and $3.4 billion, respectively, as of
December 31, 2009. CRE non-performing loans amounted to $582 million or 8.04% of CRE loans as of
June 30, 2010, compared to $557 million or 7.41%, respectively, as of December 31, 2009. The CRE
non-performing loans ratios for the Corporations Puerto Rico and U.S. mainland operations were
9.61% and 6.18%, respectively, as of June 30, 2010, compared with 8.29% and 6.39%, respectively, as
of December 31, 2009.
As of June 30, 2010, the Corporations commercial loan portfolio, excluding covered loans, included
a total of $207 million of loan modifications for the BPPR reportable segment and $2 million for
the BPNA reportable segment, which were considered TDRs since they involved granting a concession
to borrowers under financial difficulties. The outstanding commitments for these commercial loan
TDRs amounted to $1 million in the BPPR reportable segment and no commitments outstanding in the
BPNA reportable segment as of June 30, 2010. The commercial loan TDRs were evaluated for impairment
resulting in a specific reserve of $40 million for the BPPR reportable segment and $0.4 million for
the BPNA reportable segment as of June 30, 2010.
Construction loans
As shown in Table K, non-performing construction loans decreased $11 million from December 31, 2009
to June 30, 2010, resulting from a decrease in the BPNA reportable segment offset by an increase in
the BPPR reportable segment. The ratio of non-performing construction loans to construction loans
held-in-portfolio, excluding covered loans, increased from 49.6% as of December 31, 2009 to 56.4%
as of June 30, 2010, after considering a reduction of $229 million in construction loans
held-in-portfolio, excluding covered loans, at both reportable segments. The ratio of
non-performing construction loans to construction loans held-in-portfolio was 37.7% as of June 30,
2009.
There were 23 construction loan relationships greater than $10 million in non-performing status
with an outstanding debt of $568 million as of June 30, 2010, mostly related to the Puerto Rico
operations, compared with 22 construction loan relationships with an outstanding debt of $544
million as of December 31, 2009. As of June 30, 2009, there were 22 construction loan relationships
with an outstanding debt of $568 million in non-performing status. The construction loans in
non-performing status for both reportable segments are primarily residential real estate
construction loans which have been adversely impacted by general market conditions, decreases in
property values, oversupply in certain areas and reduced absorption rates.
The decrease in construction loans net charge-offs for the quarter ended June 30, 2010, compared
with the same quarter in the previous year, was principally related to the BPPR reportable segment
due in part to a particular credit relationship charged-off during the second quarter of 2009. The
construction loan portfolio is currently considered one of the higher-risk portfolios of the
Corporation as it continues to be adversely impacted by depressed economic and housing market
conditions, particularly in Puerto Rico.
131
Management has identified construction loans considered impaired and has established specific
reserves based on the value of the collateral. The allowance for loan losses corresponding to
construction loans, excluding covered loans, represented 21.97% of that portfolio, excluding
covered loans, as of June 30, 2010, compared with 19.79% as of December 31, 2009. The ratio of
allowance to non-performing loans in the construction loans category was 38.94% as of June 30,
2010, compared with 39.92% as of December 31, 2009.
The BPPR reportable segments construction loan portfolio, excluding covered loans, totaled $973
million as of June 30, 2010, compared with $1.1 billion as of December 31, 2009 and $1.3 billion as
of June 30, 2009. The allowance for loan losses corresponding to the construction loan portfolio
for the BPPR reportable segment totaled $238 million or 24.50% of construction loans
held-in-portfolio, excluding covered loans, as of June 30, 2010 compared to $215 million or 19.86%,
respectively, as of December 31, 2009. The table that follows provides information on construction
non-performing loans as of June 30, 2010, June 30, 2009 and December 31, 2009, and net charge-offs
information for the quarter and six months ended June 30, 2010 and June 30, 2009 for the BPPR
reportable segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the quarters ended |
|
For the six months ended |
|
|
June 30, |
|
December 31, |
|
June 30, |
|
June 30, |
|
June 30, |
(Dollars in thousands) |
|
2010 |
|
2009 |
|
2009 |
|
2010 |
|
2009 |
|
BPPR Reportable Segment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing construction loans |
|
$ |
629,282 |
|
|
$ |
604,610 |
|
|
$ |
586,048 |
|
|
$ |
629,282 |
|
|
$ |
586,048 |
|
Non-performing construction
loans to construction loans HIP,
excluding covered loans |
|
|
64.68 |
% |
|
|
55.86 |
% |
|
|
44.51 |
% |
|
|
64.65 |
% |
|
|
44.51 |
% |
Construction loan net charge-offs |
|
$ |
31,477 |
|
|
|
|
|
|
$ |
47,985 |
|
|
$ |
58,134 |
|
|
$ |
71,886 |
|
Construction loans net
charge-offs (annualized) to
average construction loans HIP,
excluding covered loans |
|
|
12.54 |
% |
|
|
|
|
|
|
13.92 |
% |
|
|
11.27 |
% |
|
|
10.22 |
% |
|
The BPNA reportable segment construction loan portfolio totaled $523 million as of June 30,
2010, compared with $642 million as of December 31, 2009 and $717 million as of June 30, 2009. The
allowance for loan losses corresponding to the construction loan portfolio for the BPNA reportable
segment totaled $90 million or 17.26% of construction loans held-in-portfolio as of June 30, 2010
compared to $126 million or 19.67%, respectively, as of December 31, 2009. The table that follows
provides the credit quality information for the BPNA reportable segments construction loan
portfolio.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the quarters ended |
|
For the six months ended |
|
|
June 30, |
|
December 31, |
|
June 30, |
|
June 30, |
|
June 30, |
(Dollars in thousands) |
|
2010 |
|
2009 |
|
2009 |
|
2010 |
|
2009 |
|
BPNA Reportable Segment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing construction loans |
|
$ |
214,524 |
|
|
$ |
250,327 |
|
|
$ |
180,981 |
|
|
$ |
214,524 |
|
|
$ |
180,981 |
|
Non-performing construction loans to construction loans HIP |
|
|
41.04 |
% |
|
|
38.99 |
% |
|
|
25.25 |
% |
|
|
41.04 |
% |
|
|
25.25 |
% |
Construction loan net charge-offs |
|
$ |
22,080 |
|
|
|
|
|
|
$ |
28,549 |
|
|
$ |
46,860 |
|
|
$ |
49,455 |
|
Construction loan net charge-offs (annualized) to average
construction loans HIP |
|
|
16.09 |
% |
|
|
|
|
|
|
15.48 |
% |
|
|
16.13 |
% |
|
|
13.19 |
% |
|
The construction loan portfolio, excluding covered loans, included a total of $277 million
worth of loan modifications for the BPPR reportable segment and $92 million for the BPNA reportable
segment, which were considered TDRs as of June 30, 2010. The outstanding commitments for these
construction loan TDRs as of June 30, 2010 amounted to $48 million for the BPPR reportable segment
and $1 million for the BPNA reportable segment. These construction loan TDRs were individually
evaluated for impairment resulting in a reserve of $65 million for the BPPR reportable segment and
$17 million for the BPNA reportable segment as of June 30, 2010.
In the current stressed housing market, the value of the collateral securing the loan has become
the most important factor in determining the amount of loss incurred and the appropriate level of
the allowance for loan losses. The likelihood of losses that are equal to the entire recorded
investment for a real estate loan is remote. However, in some cases during recent quarters
declining real estate values have resulted in the determination that the estimated value of the
collateral was insufficient to cover all of the recorded investment in the loans.
132
Mortgage loans
Non-performing mortgage loans held-in-portfolio increased $103 million from December 31, 2009 to
June 30, 2010, principally associated with the BPPR reportable segment, partially offset by a
reduction in the BPNA reportable segment. Non-performing mortgage loans increased by $172
million from June 30, 2009 to June 30, 2010.
As shown in Table M, the increase in the ratio of mortgage loan net charge-offs to average mortgage
loans held-in-portfolio for the quarter ended June 30, 2010, compared with the same quarter in the
previous year, was mainly due to higher losses in the BPPR reportable segment. Deteriorated
economic conditions in Puerto Rico have continued to adversely impact mortgage delinquency rates,
increasing the level of loan modifications, non-performing mortgage loans and credit losses. The
slowdown in the housing sector in Puerto Rico has put pressure on home prices and reduced sales
activity, thus increasing the level of losses.
The BPPR reportable segments mortgage loan portfolio totaled $3.3 billion as of June 30, 2010,
compared with $3.1 billion as of December 31, 2009 and $2.9 billion as of June 30, 2009. The
allowance for loan losses corresponding to the mortgage loan portfolio for the BPPR reportable
segment totaled $35 million or 1.05% of mortgage loans held-in-portfolio, excluding covered loans,
as of June 30, 2010 compared to $25 million or 0.79%, respectively, as of December 31, 2009. The
table that follows provides information on mortgage non-performing loans as of June 30, 2010, June
30, 2009 and December 31, 2009, and net charge-offs information for the quarter and six months
ended June 30, 2010 and June 30, 2009 for the BPPR reportable segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the quarters ended |
|
For the six months ended |
|
|
June 30, |
|
December 31, |
|
June 30, |
|
June 30, |
|
June 30, |
(Dollars in thousands) |
|
2010 |
|
2009 |
|
2009 |
|
2010 |
|
2009 |
|
BPPR Reportable Segment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing mortgage loans |
|
$ |
421,153 |
|
|
$ |
311,918 |
|
|
$ |
267,342 |
|
|
$ |
421,153 |
|
|
$ |
267,342 |
|
Non-performing mortgage
loans to mortgage loans HIP,
excluding covered loans |
|
|
12.64 |
% |
|
|
9.95 |
% |
|
|
9.36 |
% |
|
|
12.64 |
% |
|
|
9.36 |
% |
Mortgage loan net charge-offs |
|
$ |
5,852 |
|
|
|
|
|
|
$ |
979 |
|
|
$ |
9,442 |
|
|
$ |
2,986 |
|
Mortgage loans net
charge-offs (annualized) to
average mortgage loans HIP,
excluding covered loans |
|
|
0.75 |
% |
|
|
|
|
|
|
0.14 |
% |
|
|
0.61 |
% |
|
|
0.22 |
% |
|
The BPNA reportable segment mortgage loan portfolio totaled $1.4 billion as of June 30, 2010,
compared with $1.5 billion as of December 31, 2009 and $1.6 billion as of June 30, 2009. The volume
of loan modifications and loans in the process of foreclosure continue to reflect the difficult
economic conditions and languishing real estate values in the U.S. mainland.
The following table presents the credit quality indicators for the BPNA reportable segments
mortgage loan portfolio.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the quarters ended |
|
For the six months ended |
|
|
June 30, |
|
December 31, |
|
June 30, |
|
June 30, |
|
June 30, |
(Dollars in thousands) |
|
2010 |
|
2009 |
|
2009 |
|
2010 |
|
2009 |
|
BPNA Reportable Segment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing mortgage loans |
|
$ |
191,680 |
|
|
$ |
197,748 |
|
|
$ |
173,248 |
|
|
$ |
191,680 |
|
|
$ |
173,248 |
|
Non-performing mortgage loans to mortgage loans HIP |
|
|
14.14 |
% |
|
|
13.49 |
% |
|
|
10.92 |
% |
|
|
14.14 |
% |
|
|
10.92 |
% |
Mortgage loan net charge-offs |
|
$ |
20,298 |
|
|
|
|
|
|
$ |
23,655 |
|
|
$ |
44,082 |
|
|
$ |
52,795 |
|
Mortgage loan net charge-offs (annualized) to
average mortgage loans HIP |
|
|
5.83 |
% |
|
|
|
|
|
|
5.85 |
% |
|
|
6.22 |
% |
|
|
6.42 |
% |
|
BPNAs non-conventional mortgage loan portfolio outstanding as of June 30, 2010 amounted to
approximately $968 million with a related allowance for loan losses of $131 million, which
represents 13.56% of that particular loan portfolio, compared with $1.1 billion with a related
allowance for loan losses of $118 million or 11.16%, respectively, as of December 31, 2009. The
Corporation is no longer originating non-conventional mortgage loans at BPNA. Net charge-offs for
BPNAs non-conventional mortgage loan portfolio totaled $19 million for the quarter ended June 30,
2010, resulting in a ratio of 7.61% of annualized net charge-offs to average non-conventional
mortgage loans held-in-portfolio for the quarter ended June 30, 2010, compared with $23 million and
7.83%, respectively, for the quarter ended June 30, 2009.
133
BPNAs non-conventional mortgage loan portfolio reported, on a cumulative basis, a total of $204
million worth of loan modifications considered TDRs as of June 30, 2010, compared with $187 million
as of December 31, 2009. Although the criteria for specific impairment excludes large groups of
smaller-balance homogeneous loans that are collectively evaluated for impairment (e.g. mortgage
loans), it specifically requires its application to modifications considered TDRs. These mortgage
loan TDRs were evaluated for impairment resulting in a specific allowance for loan losses of $59
million as of June 30, 2010, compared with a specific allowance for loan losses of $52 million as
of December 31, 2009 for the BPNA reportable segment.
Consumer loans
Non-performing consumer loans remained relatively stable from December 31, 2009 to June 30, 2010,
primarily as a result of a decrease of $2.9 million in the BPNA reportable segment, partially
offset by an increase of $1.8 million in the BPPR reportable segment. The decrease in the BPNA
reportable segment was primarily associated with home equity lines of credit and closed-end second
mortgages, which are categorized by the Corporation as consumer loans. These portfolios have
experienced improvements in delinquency levels, specifically as compared to 2009.
Non-performing consumer loans, excluding covered loans, decreased by $8 million from June 30, 2009
to June 30, 2010. This variance was the result of a decrease of $16 million in the BPNA reportable
segment offset by an increase of $8 million in the BPPR reportable segment. The decrease in the
BPNA reportable segment was mainly attributed to the improved performance in E-LOANs consumer loan
portfolios. The increase in non-performing loans from June 30, 2009 to June 30, 2010 for the BPPR
reportable segment was principally in auto loans due to current economic conditions.
Consumer loans net charge-offs as a percentage of average consumer loans held-in-portfolio
decreased mostly due to lower delinquencies in certain portfolios in the U.S. mainland and in
Puerto Rico. The decrease in the ratio of consumer loans net charge-offs to average consumer loans
held-in-portfolio in the BPPR reportable segment was mainly attributed to personal loans and credit
cards.
The table that follows provides information on consumer non-performing loans as of June 30, 2010,
June 30, 2009 and December 31, 2009, and net charge-offs information for the quarter and six months
ended June 30, 2010 and June 30, 2009 for the BPPR reportable segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the quarters ended |
|
For the six months ended |
|
|
June 30, |
|
December 31, |
|
June 30, |
|
June 30, |
|
June 30, |
(Dollars in thousands) |
|
2010 |
|
2009 |
|
2009 |
|
2010 |
|
2009 |
|
BPPR Reportable Segment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing consumer loans |
|
$ |
38,480 |
|
|
$ |
36,695 |
|
|
$ |
30,403 |
|
|
$ |
38,480 |
|
|
$ |
30,403 |
|
Non-performing consumer loans
to consumer loans HIP,
excluding covered loans |
|
|
1.29 |
% |
|
|
1.19 |
% |
|
|
0.94 |
% |
|
|
1.29 |
% |
|
|
0.94 |
% |
Consumer loans net charge-offs |
|
$ |
30,805 |
|
|
|
|
|
|
$ |
44,942 |
|
|
$ |
65,969 |
|
|
$ |
88,133 |
|
Consumer loan net charge-offs
(annualized) to average
consumer loans HIP, excluding
covered loans |
|
|
4.12 |
% |
|
|
|
|
|
|
5.50 |
% |
|
|
4.38 |
% |
|
|
5.32 |
% |
|
The following table presents the credit quality indicators for the BPNA reportable segments
consumer loan portfolio.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the quarters ended |
|
For the six months ended |
|
|
June 30, |
|
December 31, |
|
June 30, |
|
June 30, |
|
June 30, |
(Dollars in thousands) |
|
2010 |
|
2009 |
|
2009 |
|
2010 |
|
2009 |
|
BPNA Reportable Segment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing consumer loans |
|
$ |
24,541 |
|
|
$ |
27,490 |
|
|
$ |
41,010 |
|
|
$ |
24,541 |
|
|
$ |
41,010 |
|
Non-performing consumer loans to consumer loans HIP |
|
|
2.79 |
% |
|
|
2.83 |
% |
|
|
3.73 |
% |
|
|
2.79 |
% |
|
|
3.73 |
% |
Consumer loan net charge-offs |
|
$ |
17,538 |
|
|
|
|
|
|
$ |
40,222 |
|
|
$ |
44,879 |
|
|
$ |
72,992 |
|
Consumer loan net charge-offs (annualized) to
average consumer loans HIP |
|
|
7.78 |
% |
|
|
|
|
|
|
14.10 |
% |
|
|
9.70 |
% |
|
|
12.37 |
% |
|
134
As previously explained, the decrease in non-performing consumer loans for the BPNA reportable
segment was attributed in part to E-LOANs home equity lines of credit and closed-end second
mortgages. As of June 30, 2010, approximately $14 million or 2.98% of E-LOANs home equity lines of
credit and closed-end second mortgages were in non-performing status, compared with $16 million or
2.89% as of December 31, 2009, and $29 million or 4.61%, respectively, as of June 30, 2009. These
loan portfolios showed signs of improved performance during the second quarter of 2010 due to
significant charge-offs recorded in previous quarters improving the quality of the remaining
portfolio, combined with aggressive collection efforts and loan modification programs. Combined net
charge-offs for E-LOANs home equity lines of credit and closed-end second mortgages amounted to
approximately $12 million or 9.69% of those particular average loan portfolios for the quarter
ended June 30, 2010, compared with $29 million or 17.76%,
respectively, for the quarter ended June 30, 2009. With the downsizing of E-LOAN, this subsidiary ceased originating these types
of loans. Home equity lending includes both home equity loans and lines of credit. This type of
lending, which is secured by a first or second mortgage on the borrowers residence, allows
customers to borrow against the equity in their home. Real estate market values as of the time the
loan or line is granted directly affect the amount of credit extended and, in addition, changes in
these values impact the severity of losses. E-LOANs portfolio of home equity lines of credit and
closed-end second mortgages outstanding as of June 30, 2010 totaled $484 million with a related
allowance for loan losses of $87 million, representing 17.97% of that particular portfolio.
E-LOANs portfolio of home equity lines of credit and closed-end second mortgages outstanding as of
December 31, 2009 totaled $539 million with a related allowance for loan losses of $95 million,
representing 17.59% of that particular portfolio.
Other real estate
Other real estate represents real estate property acquired through foreclosure.
Other real
estate not covered under loss sharing agreements with the FDIC increased by $17 million
from December 31, 2009 to June 30, 2010, and included commercial and residential properties. With
the slowdown in the real estate market caused primarily by a persistent economic deterioration in
certain geographical areas, there has been a softening effect on the market for resale of
repossessed real estate properties. Defaulted loans have increased, and these loans move through
the foreclusure process to the other real estate classification. The combination of increased flow
of defaulted loans from the loan portfolio to other real estate owned and the slowing of the
liquidation market has resulted in an increase in the number of other real estate units on hand.
The increase was partially offset by write-downs recorded in the fair value of the properties based
on re-appraisals, which magnitude for the quarter ended June 30, 2010 was explained in the
Operating Expenses section of this MD&A.
Other real estate covered under loss sharing agreements with the FDIC amounted to $76 million as of
June 30, 2010 and is disclosed in a separate line item in the statement of condition in the
accompanying consolidated financial statements. As part of the Westernbank FDIC-assisted
transaction, the Corporation acquired that portfolio of other real estate properties, which were
recognized at fair value less estimated costs to sell at the April 30, 2010 transaction date.
Accruing loans past due 90 days or more
Accruing loans past due 90 days or more disclosed in Table K consist primarily of credit cards, FHA
/ VA and other insured mortgage loans, and delinquent mortgage loans included in the Corporations
financial statements pursuant to GNMAs buy-back option program. Servicers of loans underlying GNMA
mortgage-backed securities must report as their own assets the defaulted loans that they have the
option to repurchase, even when they elect not to exercise that option. Also, accruing loans past
due 90 days or more include residential conventional loans purchased from other financial
institutions that, although delinquent, the Corporation has received timely payment from the
sellers / servicers, and, in some instances, have partial guarantees under recourse agreements.
However, residential conventional loans purchased from other financial institutions, which are in
the process of foreclosure, are classified as non-performing mortgage loans.
Allowance for Loan Losses
Refer to the 2009 Annual Report for a detailed description of the Corporations accounting
policy for determining the allowance for loan losses and for the Corporations definition of
impaired loans.
135
As indicated previously in this MD&A, the covered loans were recognized at fair value as of the
April 30, 2010 acquisition date, which included the impact of expected credit losses and therefore,
no allowance for credit losses was recorded as of such date. To the extent credit deterioration
occurs after the date of acquisition, the Corporation would record an allowance for loan losses.
Also, the Corporation would record an increase in the FDIC loss share indemnification asset for the
expected reimbursement from the FDIC under the loss sharing agreements. Management determined that
there was no need to record an allowance for loan losses on the covered loans as of June 30,
2010 considering that cash flows expected to be collected on the covered loans are not less
than anticipated at April 30, 2010.
Tables N to P set forth information concerning the composition of the Corporations allowance for
loan losses (ALLL) as of June 30, 2010, December 31, 2009, and June 30, 2009 by loan category and
by whether the allowance and related provisions were calculated individually pursuant to the
requirements for specific impairment or through a general valuation allowance.
TABLE N
Composition of Allowance for Loan Losses as of June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
Lease |
|
|
|
|
|
|
(Dollars in thousands) |
|
Commercial |
|
Construction |
|
Financing |
|
Mortgage |
|
Consumer |
|
Total |
|
Specific ALLL |
|
$ |
132,753 |
|
|
$ |
188,949 |
|
|
|
|
|
|
$ |
61,737 |
|
|
|
|
|
|
$ |
383,439 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans [1] |
|
|
644,575 |
|
|
|
816,471 |
|
|
|
|
|
|
|
278,025 |
|
|
|
|
|
|
|
1,739,071 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specific ALLL to impaired loans |
|
|
20.60 |
% |
|
|
23.14 |
% |
|
|
|
|
|
|
22.21 |
% |
|
|
|
|
|
|
22.05 |
% |
|
General ALLL |
|
$ |
345,712 |
|
|
$ |
139,593 |
|
|
$ |
16,799 |
|
|
$ |
118,175 |
|
|
$ |
273,298 |
|
|
$ |
893,577 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held-in-portfolio,
excluding impaired loans [1] |
|
|
11,141,660 |
|
|
|
679,145 |
|
|
|
636,913 |
|
|
|
4,410,630 |
|
|
|
3,858,969 |
|
|
|
20,727,317 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General ALLL to loans
held-in-portfolio, excluding
impaired loans |
|
|
3.10 |
% |
|
|
20.55 |
% |
|
|
2.64 |
% |
|
|
2.68 |
% |
|
|
7.08 |
% |
|
|
4.31 |
% |
|
Total ALLL |
|
$ |
478,465 |
|
|
$ |
328,542 |
|
|
$ |
16,799 |
|
|
$ |
179,912 |
|
|
$ |
273,298 |
|
|
$ |
1,277,016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans held-in-portfolio [1] |
|
|
11,786,235 |
|
|
|
1,495,616 |
|
|
|
636,913 |
|
|
|
4,688,655 |
|
|
|
3,858,969 |
|
|
|
22,466,388 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ALLL to loans held-in-portfolio |
|
|
4.06 |
% |
|
|
21.97 |
% |
|
|
2.64 |
% |
|
|
3.84 |
% |
|
|
7.08 |
% |
|
|
5.68 |
% |
|
|
|
|
[1] |
|
Excludes covered loans from the Westernbank FDIC-assisted transaction. |
136
TABLE O
Composition of Allowance for Loan Losses as of December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease |
|
|
|
|
|
|
(Dollars in thousands) |
|
Commercial |
|
Construction |
|
Financing |
|
Mortgage |
|
Consumer |
|
Total |
|
Specific ALLL |
|
$ |
108,769 |
|
|
$ |
162,907 |
|
|
|
|
|
|
$ |
52,211 |
|
|
|
|
|
|
$ |
323,887 |
|
Impaired loans |
|
|
645,513 |
|
|
|
841,361 |
|
|
|
|
|
|
|
186,747 |
|
|
|
|
|
|
|
1,673,621 |
|
Specific ALLL to impaired
loans |
|
|
16.85 |
% |
|
|
19.36 |
% |
|
|
|
|
|
|
27.96 |
% |
|
|
|
|
|
|
19.35 |
% |
|
General ALLL |
|
$ |
328,940 |
|
|
$ |
178,412 |
|
|
$ |
18,558 |
|
|
$ |
102,400 |
|
|
$ |
309,007 |
|
|
$ |
937,317 |
|
Loans held-in-portfolio,
excluding impaired loans |
|
|
12,018,546 |
|
|
|
883,012 |
|
|
|
675,629 |
|
|
|
4,416,498 |
|
|
|
4,045,807 |
|
|
|
22,039,492 |
|
General ALLL to loans
held-in-portfolio,
excluding impaired loans |
|
|
2.74 |
% |
|
|
20.20 |
% |
|
|
2.75 |
% |
|
|
2.32 |
% |
|
|
7.64 |
% |
|
|
4.25 |
% |
|
Total ALLL |
|
$ |
437,709 |
|
|
$ |
341,319 |
|
|
$ |
18,558 |
|
|
$ |
154,611 |
|
|
$ |
309,007 |
|
|
$ |
1,261,204 |
|
Total loans
held-in-portfolio |
|
|
12,664,059 |
|
|
|
1,724,373 |
|
|
|
675,629 |
|
|
|
4,603,245 |
|
|
|
4,045,807 |
|
|
|
23,713,113 |
|
ALLL to loans
held-in-portfolio |
|
|
3.46 |
% |
|
|
19.79 |
% |
|
|
2.75 |
% |
|
|
3.36 |
% |
|
|
7.64 |
% |
|
|
5.32 |
% |
|
TABLE P
Composition of Allowance for Loan Losses as of June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009 |
|
|
|
|
|
|
|
|
|
|
Lease |
|
|
|
|
|
|
(Dollars in thousands) |
|
Commercial |
|
Construction |
|
Financing |
|
Mortgage |
|
Consumer |
|
Total |
|
Specific ALLL |
|
$ |
85,608 |
|
|
$ |
197,898 |
|
|
|
|
|
|
$ |
29,584 |
|
|
|
|
|
|
$ |
313,090 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans |
|
|
522,678 |
|
|
|
781,910 |
|
|
|
|
|
|
|
140,299 |
|
|
|
|
|
|
|
1,444,887 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specific ALLL to
impaired loans |
|
|
16.38 |
% |
|
|
25.31 |
% |
|
|
|
|
|
|
21.09 |
% |
|
|
|
|
|
|
21.67 |
% |
|
General ALLL |
|
$ |
239,004 |
|
|
$ |
145,910 |
|
|
$ |
29,934 |
|
|
$ |
102,331 |
|
|
$ |
315,970 |
|
|
$ |
833,149 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
held-in-portfolio,
excluding impaired
loans |
|
|
12,555,829 |
|
|
|
1,251,537 |
|
|
|
730,396 |
|
|
|
4,304,199 |
|
|
|
4,319,214 |
|
|
|
23,161,175 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General ALLL to loans
held-in-portfolio,
excluding impaired
loans |
|
|
1.90 |
% |
|
|
11.66 |
% |
|
|
4.10 |
% |
|
|
2.38 |
% |
|
|
7.32 |
% |
|
|
3.60 |
% |
|
Total ALLL |
|
$ |
324,612 |
|
|
$ |
343,808 |
|
|
$ |
29,934 |
|
|
$ |
131,915 |
|
|
$ |
315,970 |
|
|
$ |
1,146,239 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
held-in-portfolio |
|
|
13,078,507 |
|
|
|
2,033,447 |
|
|
|
730,396 |
|
|
|
4,444,498 |
|
|
|
4,319,214 |
|
|
|
24,606,062 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ALLL to loans
held-in-portfolio |
|
|
2.48 |
% |
|
|
16.91 |
% |
|
|
4.10 |
% |
|
|
2.97 |
% |
|
|
7.32 |
% |
|
|
4.66 |
% |
|
The increase in the allowance for loan losses from December 31, 2009 to June 30, 2010 was
primarily attributable to increased reserves for commercial and mortgage loans, partially offset by
a decline in the reserve for consumer and construction loans. The increase in the allowance for
loan losses for the commercial loan portfolio as of June 30, 2010 was associated with both
reportable segments. In the BPNA reportable segment, the increase was mainly attributed to BPNAs
commercial real estate portfolio considering this market has remained under stress. The increase in
the allowance for loan losses for mortgage loans from December 31, 2009 to June 30, 2010 was
influenced by the increasing level of delinquent mortgages, increasing loan modifications and high
loss severity, particularly in Puerto Rico. The decrease in the allowance for loan losses for the construction loan portfolio as of
137
June 30, 2010 was principally associated with a reduction in the BPNA reportable segment.
Notwithstanding, the construction loan portfolio continues to maintain the highest allowance
coverage mainly due to the continued deterioration in the economic and housing market conditions,
particularly in Puerto Rico. The reduction in the allowance for loan losses for the consumer loan
portfolio was mainly driven by recent improved performance trends in certain portfolios at both
reportable segments, including decreased levels of delinquencies and charge-offs, combined with
portfolio reductions in the Puerto Rico and U.S. mainland operations.
The Corporations recorded investment in commercial, construction and mortgage loans that were
considered impaired and the related valuation allowance were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
December 31, 2009 |
|
June 30, 2009 |
|
|
Recorded |
|
Valuation |
|
Recorded |
|
Valuation |
|
Recorded |
|
Valuation |
(In millions) |
|
Investment |
|
Allowance |
|
Investment |
|
Allowance |
|
Investment |
|
Allowance |
|
Impaired loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance required |
|
$ |
1,349.5 |
|
|
$ |
383.4 |
|
|
$ |
1,263.3 |
|
|
$ |
323.9 |
|
|
$ |
1,034.4 |
|
|
$ |
313.1 |
|
No valuation allowance required |
|
|
389.6 |
|
|
|
|
|
|
|
410.3 |
|
|
|
|
|
|
|
410.5 |
|
|
|
|
|
|
Total impaired loans |
|
$ |
1,739.1 |
|
|
$ |
383.4 |
|
|
$ |
1,673.6 |
|
|
$ |
323.9 |
|
|
$ |
1,444.9 |
|
|
$ |
313.1 |
|
|
With respect to the $390 million portfolio of impaired commercial and construction loans for
which no allowance for loan losses was required as of June 30, 2010, management followed the
guidance for specific impairment of a loan. When a loan is impaired, the measurement of the
impairment may be based on: (1) the present value of the expected future cash flows of the impaired
loan discounted at the loans original effective interest rate; (2) the observable market price of
the impaired loan; or (3) the fair value of the collateral if the loan is collateral dependent. A
loan is collateral dependent if the repayment of the loan is expected to be provided solely by the
underlying collateral. The $390 million impaired commercial and construction loans with no
valuation allowance were collateral dependent loans in which management performed a detailed
analysis based on the fair value of the collateral less estimated costs to sell and determined that
the collateral was deemed adequate to cover any losses as of June 30, 2010.
Average impaired loans during the quarters ended June 30, 2010 and 2009 were $1.7 billion and $1.3
billion, respectively. The Corporation recognized interest income on impaired loans of $4.7 million
and $2.7 million for the quarters ended June 30, 2010 and 2009, respectively, and $9.2 million and
$6.9 million, respectively, for the year-to-date periods ended June 30, 2010 and June 30, 2009.
The following tables set forth an analysis of the activity in the specific reserves for impaired
loans, excluding covered loans, for the quarters ended June 30, 2010 and June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the quarter ended June 30, 2010 |
|
|
Commercial |
|
Construction |
|
Mortgage |
|
|
(In thousands) |
|
Loans |
|
Loans |
|
Loans |
|
Total |
|
Specific ALLL as of March 31, 2010 |
|
$ |
120,419 |
|
|
$ |
160,395 |
|
|
$ |
64,791 |
|
|
$ |
345,605 |
|
Provision for impaired loans |
|
|
46,520 |
|
|
|
82,934 |
|
|
|
1,075 |
|
|
|
130,529 |
|
Less: Charge-offs |
|
|
34,186 |
|
|
|
54,380 |
|
|
|
4,129 |
|
|
|
92,695 |
|
|
Specific ALLL as of June 30, 2010 |
|
$ |
132,753 |
|
|
$ |
188,949 |
|
|
$ |
61,737 |
|
|
$ |
383,439 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the quarter ended June 30, 2009 |
|
|
Commercial |
|
Construction |
|
Mortgage |
|
|
(In thousands) |
|
Loans |
|
Loans |
|
Loans |
|
Total |
|
Specific ALLL as of March 31, 2009 |
|
$ |
79,927 |
|
|
$ |
177,208 |
|
|
$ |
22,061 |
|
|
$ |
279,196 |
|
Provision for impaired loans |
|
|
31,402 |
|
|
|
97,093 |
|
|
|
12,726 |
|
|
|
141,221 |
|
Less: Charge-offs |
|
|
25,721 |
|
|
|
76,403 |
|
|
|
5,203 |
|
|
|
107,327 |
|
|
Specific ALLL as of June 30, 2009 |
|
$ |
85,608 |
|
|
$ |
197,898 |
|
|
$ |
29,584 |
|
|
$ |
313,090 |
|
|
138
For the quarter ended June 30, 2010, total charge-offs for individually evaluated impaired
loans amounted to approximately $92.7 million, of which $49.4 million pertained to the BPPR
reportable segment and $43.3 million to the BPNA reportable segment. Most of these charge-offs
were related to the commercial and construction portfolios. The reduction in construction loan
charge-offs from June 30, 2009 to June 30, 2010 was associated to a particular credit which was
charged off during the second quarter of 2009.
Due to the weakened economic conditions, the Corporations credit quality will continue under
stress in 2010, principally in commercial real estate, construction and mortgage portfolios,
primarily in Puerto Rico. The sustained economic downturn could result in further deterioration in
property values, particularly in Puerto Rico.
Other commitments to extend credit
Commercial letters of credit and standby letters of credit amounted to $16 million and $142
million, respectively, as of June 30, 2010; $13 million and $134 million, respectively, as of
December 31, 2009; and $18 million and $168 million, respectively, as of June 30, 2009. In
addition, the Corporation has commitments to originate mortgage loans amounting to $46 million as
of June 30, 2010, $48 million as of December 31, 2009 and $59 million as of June 30, 2009.
Commitments to extend credit, which include credit card lines, commercial lines of credit, and
other unused credit commitments, amounted to $6.3 billion as of June 30, 2010, $7.0 billion as of
December 31, 2009 and $7.2 billion as of June 30, 2009
excluding the commitments to extend credit that pertain to the
lending relationships of the
Westernbank operations.
As of June 30, 2010, the Corporation maintained a reserve of approximately $10 million for
potential losses associated with unfunded loan commitments related to commercial and consumer lines
of credit unrelated to the acquired lending relationships from the Westernbank FDIC-assisted
transaction, compared to $15 million as of December 31, 2009. The estimated reserve is principally
based on the expected draws on these facilities using historical trends and the application of the
corresponding reserve factors determined under the Corporations allowance for loan losses
methodology. The decrease in the reserve for unfunded commitments from December 31, 2009 to June
30, 2010 was primarily related to decreasing trends in funding rates in BPPRs commercial and
construction portfolios, and E-LOANs home equity lines of credit. This reserve for unfunded
exposures remains separate and distinct from the allowance for loan losses and is reported as part
of other liabilities in the consolidated statement of condition.
As of
June 30, 2010, the commitments to extend credit related to the
Westernbank operations approximated $0.2 billion. The acquired commitments to extend credit are covered under
the loss sharing agreements with the FDIC, subject to FDIC approvals, limitations on the timing for
such disbursements, and servicing guidelines, among various considerations. On the April 30, 2010
acquisition date, the Corporation recorded a contingent liability for such commitments at fair
value, which was estimated at $132 million. As of June 30, 2010, that contingent liability remained
at that level and is recorded as part of other liabilities in the
consolidated statement of condition.
Geographical and government risk
As explained in the 2009 Annual Report, the Corporation is exposed to geographical and government
risk. The Corporations assets and revenue composition by geographical area and by business
segment reporting are presented in Note 29 to the consolidated financial statements.
A significant portion of the Corporations financial activities and credit exposure is concentrated
in Puerto Rico. Since 2006, the Puerto Rico economy has been experiencing recessionary conditions.
Based on information published by the Puerto Rico Planning Board (the Planning Board), the Puerto
Rico real gross national product decreased 3.7% during the fiscal year ended June 30, 2009. The
unemployment rate in Puerto Rico has reached a high at close to 17%. The Puerto Rico economic
environment continues to be challenging. Among the primary reasons are a construction industry that
is at a standstill and the fiscal tightening by the Puerto Rico government, coupled with a
continued deleveraging by a weak financial sector. The government has made progress in reaching
fiscal balance, and it recently approved a 2011 budget with projected deficit of $1 billion. This
is in line with the
139
multi-year plan to reach fiscal balance by 2013. Several major projects are
under consideration by the Puerto Rico Government in areas such as energy and road infrastructure.
These are to be structured as public/private partnerships and are expected to boost the economy as
they are awarded and construction commences. There are also various hotel projects under
development. Another positive development is the remaining disbursements under the American
Recovery and Reinvestment Act of 2009 (ARRA), of which
$2.9 billion or close to 44% has been
disbursed to date. The Puerto Rican economy is still vulnerable, but the government has made
progress in addressing the budget deficit while the banking sector has been substantially
recapitalized and consolidated through FDIC-assisted transactions.
The current state of the economy and uncertainty in the private and public sectors has resulted in,
among other things, a downturn in the Corporations loan originations; deterioration in the credit
quality of the Corporations loan portfolios as reflected in high levels of non-performing assets,
loan loss provisions and charge-offs, particularly in the Corporations construction and commercial
loan portfolios; an increase in the rate of foreclosures on mortgage loans; and a reduction in the
value of the Corporations loans and loan servicing portfolio, all of which have adversely affected
its profitability. The persistent economic slowdown would cause those adverse effects to continue,
as delinquency rates may increase in the short-term, until sustainable growth resumes. Also, a
potential reduction in consumer spending may also impact growth in the Corporations other interest
and non-interest revenues.
As of June 30, 2010, the Corporation had $972 million of credit facilities granted to or guaranteed
by the Puerto Rico Government and its political subdivisions, of
which $215 million were
uncommitted lines of credit. Of these total credit facilities granted, $754 million were
outstanding as of June 30, 2010. A substantial portion of the Corporations credit exposure to the
Government of Puerto Rico is either collateralized loans or obligations that have a specific source
of income or revenues identified for their repayment. Some of these obligations consist of senior
and subordinated loans to public corporations that obtain revenues from rates charged for services
or products, such as water and electric power utilities. Public corporations have varying degrees
of independence from the central Government and many receive appropriations or other payments from
it. The Corporation also has loans to various municipalities in Puerto Rico for which the good
faith, credit and unlimited taxing power of the applicable municipality has been pledged to their
repayment. These municipalities are required by law to levy special property taxes in such amounts
as shall be required for the payment of all of its general obligation bonds and loans. Another
portion of these loans consists of special obligations of various municipalities that are payable
from the basic real and personal property taxes collected within such municipalities.
Furthermore, as of June 30, 2010, the Corporation had outstanding $236 million in obligations of
Puerto Rico, States and political subdivisions as part of its investment securities portfolio.
Refer to Notes 8 and 9 to the consolidated financial statements for additional information. Of that
total, $232 million was exposed to the creditworthiness of the Puerto Rico Government and its
municipalities.
As further detailed in Notes 8 and 9 to the consolidated financial statements, a substantial
portion of the Corporations investment securities represented exposure to the U.S. Government in
the form of U.S. Treasury securities and obligations of U.S. Government sponsored entities, as well
as mortgage-backed securities guaranteed by GNMA. In addition, $376 million of residential
mortgages and $306 million in commercial loans were insured or guaranteed by the U.S. Government or
its agencies as of June 30, 2010.
REGULATORY RISK
As an institution organized under the laws of Puerto Rico, the Corporation is subject to regulations imposed by the U.S. Treasury Office of Foreign Assets
Control, or OFAC. OFAC regulations impose restrictions on financial transactions by persons subject to those regulations with or involving targeted countries
and persons, including Cuba, Burma/Myanmar, Iran and Sudan and persons and entities identified on OFACs list of Specially Designated Nationals and
Blocked Persons, or the SDN List. The Corporation has no business operations, subsidiaries or affiliated entities in the countries targeted by the OFAC
regulations and it has procedures in place designed to identify its involvement in transactions involving targeted countries and persons or entities on the SDN
List. However, EVERTEC processes merchant transactions for financial institutions that are not subject to the OFAC regulations.
OFF-BALANCE SHEET ACTIVITIES AND CONTRACTUAL OBLIGATIONS
In the ordinary course of business, the Corporation engages in financial transactions that are not
recorded on the balance sheet, or may be recorded on the balance sheet in amounts that are
different than the full contract or notional amount of the transaction. As a provider of financial
services, the Corporation routinely enters into commitments with off-balance sheet risk to meet the
financial needs of its customers which may include loan commitments and standby letters of credit.
These commitments are subject to the same credit policies and approval process used for on-balance
sheet instruments. These instruments involve, to varying degrees, elements of credit and interest
rate risk in excess of the amount recognized in the statement of financial position. Other types of
off-balance sheet arrangements that the Corporation enters in the ordinary course of business
include derivatives, operating leases and provision of guarantees,
indemnifications, and representation and warranties.
140
The Corporation has various financial obligations, including contractual obligations and commercial
commitments, which require future cash payments on debt and lease agreements. Also, in the normal
course of business, the Corporation enters into contractual arrangements whereby it commits to
future purchases of products or services from third parties. Obligations that are legally binding
agreements, whereby the Corporation agrees to purchase products or services with a specific minimum
quantity defined at a fixed, minimum or variable price over a specified period of time, are defined
as purchase obligations.
There were no significant changes in other contractual obligations, such as purchase obligations,
capital leases, and operating leases, or pension and postretirement liabilities, and uncertain tax
positions as of June 30, 2010, when compared with December 31, 2009. Refer to Note 19 to the
consolidated financial statements for information on commitments and guarantees.
The Liquidity Section of this MD&A provides a breakdown of the Corporations borrowings and
certificates of deposit by year of maturity.
As previously indicated, the Corporation also enters into derivative contracts under which it is
required either to receive or pay cash, depending on fluctuations in interest rates. These
contracts are carried at fair value on the consolidated statements of condition with the fair value
representing the net present value of the expected future cash receipts and payments based on
market rates of interest as of the statement of condition date. The fair value of the contract
changes daily as interest rates change. The Corporation may also be required to post additional
collateral on margin calls on the derivatives and repurchase transactions. Refer to Note 14 to the
consolidated financial statements for a description of the Corporations derivative activities.
Under the Corporations repurchase agreements, Popular is required to deposit cash or qualifying
securities to meet margin requirements. To the extent that the value of securities previously
pledged as collateral declines as a result of changes in interest rates, the Corporation will be
required to deposit additional cash or securities to meet its margin requirements, thereby
adversely affecting its liquidity.
The Corporation also utilizes lending-related financial instruments in the normal course of
business to accommodate the financial needs of its customers. The Corporations exposure to credit
losses in the event of nonperformance by the other party to the financial instrument for
commitments to extend credit, standby letters of credit and commercial letters of credit is
represented by the contractual notional amount of these instruments. The Corporation uses credit
procedures and policies in making those commitments and conditional obligations as it does in
extending loans to customers. Since many of the commitments may expire without being drawn upon,
the total contractual amounts are not representative of the Corporations actual future credit
exposure or liquidity requirements for these commitments.
Refer to the Credit Risk Management and Loan Quality section of this MD&A for a discussion on
contractual amounts as they relate to commitments to extend credit.
As described in Note 2 to the consolidated financial statements, as part of the Westernbank
FDIC-assisted transaction, BPPR has agreed to make a true-up payment to the FDIC on the true up
measurement date of the final shared loss month, or upon the final disposition of all covered
assets under the loss sharing agreements in the event losses on the loss sharing agreements fail to
reach expected levels. The estimated fair value of such true up payment is recorded as a reduction
in the fair value of the FDIC loss share indemnification asset.
The Corporation is a defendant in a number of legal proceedings arising in the ordinary course of
business. Based on the opinion of legal counsel, management believes that the final disposition of
these matters (except for the matters described in the Legal Proceedings section in Note 19 to the
consolidated financial statements which are in very early stages and as to which the outcome cannot
be predicted) will not have a material adverse effect on the Corporations business, results of
operations, financial condition and liquidity.
141
Guarantees associated with loans sold / serviced
The Corporation securitized mortgage loans into guaranteed mortgage-backed securities subject to
limited, and in certain instances, lifetime credit recourse on the loans that serve as collateral
for the mortgage-backed securities. Also, from time to time, the Corporation may have sold, in bulk
sale transactions, residential mortgage loans subject to credit recourse or to certain
representations and warranties from the Corporation to the purchaser. These representations and
warranties may relate, for example, to borrower creditworthiness, loan documentation, collateral,
prepayment and early payment defaults. The Corporation may be required to repurchase the loans
under the credit recourse agreements or breach of representations and warranties.
As of June 30, 2010, the Corporation serviced $4.2 billion, compared with $4.5 billion as of
December 31, 2009, in residential mortgage loans subject to credit recourse provisions, principally
loans associated with FNMA and Freddie Mac programs. In the event of any customer default, pursuant
to the credit recourse provided, the Corporation may be required to repurchase the loan or
reimburse for the incurred loss. The maximum potential amount of future payments that the
Corporation would be required to make under the recourse arrangements in the event of
nonperformance by the borrowers is equivalent to the total outstanding balance of the residential
mortgage loans serviced with recourse and interest, if applicable. During the six months ended June 30, 2010, the Corporation
repurchased approximately $60 million in mortgage loans subject to the credit recourse provisions.
In the event of nonperformance by the borrower, the Corporation has rights to the underlying
collateral securing the mortgage loan. The Corporation suffers losses on these loans when the
proceeds from a foreclosure sale of the property underlying a defaulted mortgage loan are less than
the outstanding principal balance of the loan plus any uncollected interest advanced and the costs
of holding and disposing of the related property. The losses associated to these credit recourse
arrangements, which pertain to residential mortgage loans in Puerto Rico, have not been
significant. As of June 30, 2010, the Corporations liability established to cover the estimated
credit loss exposure related to loans sold or serviced with credit recourse amounted to $37
million, compared with $16 million as of December 31, 2009.
When the Corporation sells or securitizes mortgage loans, it generally makes customary
representations and warranties regarding the characteristics of the loans sold. The Corporations
mortgage operations in Puerto Rico group conforming mortgage loans into pools which are exchanged
for FNMA and GNMA mortgage-backed securities, which are generally sold to private investors, or may
sell the loans directly to FNMA or other private investors for cash. To the extent the loans do not
meet specified characteristics, the Corporation may be required to repurchase such loans or
indemnify for losses. Quality review procedures are performed by the Corporation as required under
the government agency programs to ensure that asset guideline qualifications are met. The
Corporation has not recorded any specific contingent liability in the consolidated financial
statements for these customary representation and warranties related to loans sold by the
Corporations mortgage operations in Puerto Rico, and management believes that, based on historical
data, the probability of payments and expected losses under these representations and warranty
arrangements is not significant.
Servicing agreements relating to the mortgage-backed securities programs of FNMA and GNMA, and to
mortgage loans sold or serviced to certain other investors, including FHLMC, require the
Corporation to advance funds to make scheduled payments of principal, interest, taxes and
insurance, if such payments have not been received from the borrowers. As of June 30, 2010, the
Corporation serviced $17.9 billion in mortgage loans, including the loans serviced with credit
recourse, compared with $17.7 billion as of December 31, 2009. The Corporation generally recovers
funds advanced pursuant to these arrangements from the mortgage owner, from liquidation proceeds
when the mortgage loan is foreclosed or, in the case of FHA/VA loans, under the applicable FHA and
VA insurance and guarantee programs. However, in the interim, the Corporation must absorb the cost
of the funds it advances during the time the advance is outstanding. The Corporation must also bear
the costs of attempting to collect on delinquent and defaulted mortgage loans. In addition, if a
defaulted loan is not cured, the mortgage loan would be canceled as part of the foreclosure
proceedings and the Corporation would not receive any future servicing income with respect to that
loan. As of June 30, 2010, the outstanding balance of funds advanced by the Corporation under such
mortgage loan servicing agreements was approximately $26 million, compared with $14 million as of
December 31, 2009. To the extent the mortgage loans underlying the Corporations servicing
portfolio experience increased delinquencies, the Corporation would be required to dedicate
additional cash resources to comply with its obligation to advance funds as well as incur
additional administrative costs related to increases in collection efforts.
As of June 30, 2010, the Corporation established reserves for customary representations and
warranties related to
loans sold by its U.S. subsidiary E-LOAN. Loans had been sold to investors on a servicing released
basis subject to
142
certain representations and warranties. Although the risk of loss or default was
generally assumed by the investors, the Corporation is required to make certain representations
relating to borrower creditworthiness, loan documentation and collateral, which if not complied,
may result in requiring the Corporation to repurchase the loans or indemnify investors for any
related losses associated to these loans. The loans had been sold prior to 2009. As of June 30,
2010, the Corporations reserve for estimated losses from such representation and warranty
arrangements amounted to $33 million, which was included as part of other liabilities in the
consolidated statement of condition, compared with $33 million as of December 31, 2009. E-LOAN is
no longer originating and selling loans since the subsidiary ceased these activities during 2008.
On a quarterly basis, the Corporation reassesses its estimate for expected losses associated to
E-LOANs customary representation and warranty arrangements. The analysis incorporates expectations
on future disbursements based on quarterly repurchases and make-whole events. The analysis also
considers factors such as the average length-time between the loans funding date and the loan
repurchase date as observed in the historical loan data. During the six months ended June 30, 2010,
E-LOAN charged-off approximately $6.2 million against this representation and warranty reserve
associated with loan repurchases and indemnification or make-whole events. Make-whole events are
typically defaulted loans which the investor attempts to recover through the collateral or
guarantees, and the seller is obligated to cover any impaired or unrecovered portion of the loan.
During 2008, the Corporation provided indemnifications for the breach of certain representations or
warranties in connection with certain sales of assets by the discontinued operations of PFH. These
sales were on a non-credit recourse basis. The agreements primarily include indemnification for
breaches of certain key representations and warranties, some of which expire within a definite time
period; others survive until the expiration of the applicable statute of limitations, and others do
not expire. Certain of the indemnifications are subject to a cap or maximum aggregate liability
defined as a percentage of the purchase price. The indemnifications agreements outstanding as of
June 30, 2010 are related principally to make-whole arrangements. As of June 30, 2010, the
Corporations reserve related to PFHs indemnity arrangements amounted to $7 million, compared with
$9 million as of December 31, 2009. During the six months ended June 30, 2010, the Corporation
recorded charge-offs with respect to the PFHs representation and warranty arrangements amounting
to approximately $1.6 million. The reserve balance as of June 30, 2010 contemplates historical
indemnity payments. Certain indemnification provisions, which included, for example, reimbursement
of premiums on early loan payoffs and repurchase obligations for defaulted loans within a
short-term period, expired during 2009. Popular, Inc. Holding Company and Popular North America
have agreed to guarantee certain obligations of PFH with respect to the indemnification
obligations.
During 2009, the Corporation sold a lease portfolio of approximately $0.3 billion. As of June 30,
2010, the reserve established to provide for any losses on the breach of certain representations
and warranties included in the associated sale agreements amounted to $3 million, compared with $6
million as of December 31, 2009. This reserve is included as part of other liabilities in the
consolidated statement of condition.
FAIR VALUE MEASUREMENT OF FINANCIAL INSTRUMENTS
The Corporation currently measures at fair value on a recurring basis its trading assets,
available-for-sale securities, derivatives, mortgage servicing rights, and the equity appreciation
instrument. Occasionally, the Corporation may be required to record at fair value other assets on a
nonrecurring basis, such as loans held-for-sale, impaired loans held-in-portfolio that are
collateral dependent and certain other assets. These nonrecurring fair value adjustments typically
result from the application of lower of cost or fair value accounting or write-downs of individual
assets.
The Corporation categorizes its assets and liabilities measured at fair value under the three-level
hierarchy. The level within the hierarchy is based on whether the inputs to the valuation
methodology used for fair value measurement are observable. The hierarchy is broken down into three
levels based on the reliability of inputs as follows:
|
|
|
Level 1- Unadjusted quoted prices in active markets for identical assets or liabilities
that the Corporation has the ability to access at the measurement date. No significant
degree of judgment for these valuations is needed, as they are based on quoted prices that
are readily available in an active market. |
|
|
|
|
Level 2- Quoted prices other than those included in Level 1 that are observable either
directly or indirectly. Level 2 inputs include quoted prices for similar assets or
liabilities in active markets, quoted prices for identical or similar assets or liabilities
in markets that are not active, and other inputs that are observable or that can be
corroborated by observable market data for substantially the full term of the financial
instrument. |
143
|
|
|
Level 3- Unobservable inputs that are supported by little or no market activity and that
are significant to the fair value measurement of the financial asset or liability.
Unobservable inputs reflect the Corporations own assumptions about what market
participants would use to price the asset or liability, including assumptions about risk.
The inputs are developed based on the best available information, which might include the
Corporations own data such as internally-developed models and discounted cash flow
analyses. |
The Corporation requires the use of observable inputs when available, in order to minimize the use
of unobservable inputs to determine fair value. The amount of judgment involved in estimating the
fair value of a financial instrument depends upon the availability of quoted market prices or
observable market parameters. In addition, it may be affected on other factors such as the type of
instrument, the liquidity of the market for the instrument, transparency around the inputs to the
valuation, as well as the contractual characteristics of the instrument.
If listed prices or quotes are not available, the Corporation employs valuation models that
primarily use market-based inputs including yield curves, interest rate curves, volatilities,
credit curves, and discount, prepayment and delinquency rates, among other considerations. When
market observable data is not available, the valuation of financial instruments becomes more
subjective and involves substantial judgment. The need to use unobservable inputs generally results
from diminished observability of both actual trades and assumptions resulting from the lack of
market liquidity for those types of loans or securities. When fair values are estimated based on
modeling techniques such as discounted cash flow models, the Corporation uses assumptions such as
interest rates, prepayment speeds, default rates, loss severity rates and discount rates. Valuation
adjustments are limited to those necessary to ensure that the financial instruments fair value is
adequately representative of the price that would be received or paid in the marketplace.
Refer to Note 21 to the consolidated financial statements for information on the Corporations fair
value measurement disclosures required by the applicable accounting standard. As of June 30, 2010,
approximately $6.8 billion, or 95%, of the assets measured at fair value on a recurring basis used
market-based or market-derived valuation inputs in their valuation methodology and, therefore, were
classified as Level 1 or Level 2. The majority of instruments measured at fair value are classified
as Level 2, including U.S. Treasury securities, obligations of U.S. Government sponsored entities,
obligations of Puerto Rico, States and political subdivisions, most mortgage-backed securities
(MBS) and collateralized mortgage obligations (CMOs), and derivative instruments. U.S. Treasury
securities are valued based on yields that are interpolated from the constant maturity treasury
curve. Obligations of U.S. Government sponsored entities are priced based on an active exchange
market and on quoted prices for similar securities. Obligations of Puerto Rico, States and
political subdivisions are valued based on trades, bid price or spread, two sided markets, quotes,
benchmark curves, market data feeds, discount and capital rates and trustee reports. MBS and CMOs
are priced based on a bonds theoretical value from similar bonds defined by credit quality and
market sector. Refer to the Derivatives section below for a description of the valuation techniques
used to value these instruments.
As of June 30, 2010, the remaining 5% of assets measured at fair value on a recurring basis were
classified as Level 3 since their valuation methodology considered significant unobservable inputs.
The financial assets measured as Level 3 included mostly tax exempt GNMA mortgage-backed securities
and mortgage servicing rights (MSRs). GNMA tax exempt mortgage-backed securities are priced using
a local demand price matrix prepared from local dealer quotes, and other local investments such as
corporate securities and local mutual funds which are priced by local dealers. MSRs, on the other
hand, are priced internally using a discounted cash flow model which considers servicing fees,
portfolio characteristics, prepayment assumptions, delinquency rates, late charges, other ancillary
revenues, cost to service and other economic factors. Additionally, the Corporation reported $612
million of financial assets that were measured at fair value on a nonrecurring basis as of June 30,
2010, all of which were classified as Level 3 in the hierarchy.
Broker quotes used for fair value measurements inherently reflect any lack of liquidity in the
market since they represent an exit price from the perspective of the market participants.
Financial assets that were fair valued using broker quotes amounted to $159 million as of June 30,
2010, of which $152 million were Level 3 assets and $7 million were Level 2 assets. These assets
consisted principally of tax-exempt GNMA mortgage-backed securities. Fair value for these
securities is based on an internally-prepared matrix derived from an average of two indicative
local broker quotes. The main input used in the matrix pricing is non-binding local broker quotes
obtained from limited trade activity. Therefore, these securities are classified as Level 3.
144
During the quarter and six months ended June 30, 2010, $79 million of tax-exempt FNMA
mortgage-backed securities were transferred out of Level 3 and into Level 2 as a result of a change
in valuation methodology from an internally-developed matrix pricing to pricing them based on a
bonds theoretical value from similar bonds defined by credit quality and market sector. Their fair
value incorporates an option adjusted spread. Pursuant to the Corporations policy, these transfers
were recognized as of the end of the reporting period. There were no transfers in and / or out of
Level 1 during the quarter and six months ended June 30, 2010. Refer to Note 21 to the
consolidated financial statements for a description of the Corporations valuation methodologies
used for the assets and liabilities measured at fair value as of June 30, 2010. Also, refer to the
Critical Accounting Policies / Estimates in the 2009 Annual Report for additional information on
the accounting guidance and the Corporations policies or procedures related to fair value
measurements.
Trading Account Securities and Investment Securities Available-for-Sale
The majority of the values for trading account securities and investment securities
available-for-sale are obtained from third-party pricing services and are validated with alternate
pricing sources when available. Securities not priced by a secondary pricing source are documented
and validated internally according to their significance to the Corporations financial statements.
Management has established materiality thresholds according to the investment class to monitor and
investigate material deviations in prices obtained from the primary pricing service provider and
the secondary pricing source used as support for the valuation results. During the quarter and six
months ended June 30, 2010, the Corporation did not adjust any prices obtained from pricing service
providers or broker dealers.
Inputs are evaluated to ascertain that they consider current market conditions, including the
relative liquidity of the market. When a market quote for a specific security is not available, the
pricing service provider generally uses observable data to derive an exit price for the instrument,
such as benchmark yield curves and trade data for similar products. To the extent trading data is
not available, the pricing service provider relies on specific information including dialogue with
brokers, buy side clients, credit ratings, spreads to established benchmarks and transactions on
similar securities, to draw correlations based on the characteristics of the evaluated instrument.
If for any reason the pricing service provider cannot observe data required to feed its model, it
discontinues pricing the instrument. During the quarter and six months ended June 30, 2010, none of
the Corporations investment securities were subject to pricing discontinuance by the pricing
service providers. The pricing methodology and approach of our primary pricing service providers is
concluded to be consistent with the fair value measurement guidance.
Furthermore, management assesses the fair value of its portfolio of investment securities at least
on a quarterly basis, which includes analyzing changes in fair value that have resulted in losses
that may be considered other-than-temporary. Factors considered include, for example, the nature of
the investment, severity and duration of possible impairments, industry reports, sector credit
ratings, economic environment, creditworthiness of the issuers and any guarantees.
Securities are classified in the fair value hierarchy according to product type, characteristics
and market liquidity. At the end of each period, management assesses the valuation hierarchy for
each asset or liability measured. The fair value measurement analysis performed by the Corporation
includes validation procedures and review of market changes, pricing methodology, assumption and
level hierarchy changes, and evaluation of distressed transactions.
As of June 30, 2010, the Corporations portfolio of trading and investment securities
available-for-sale amounted to $6.9 billion and represented 96% of the Corporations assets
measured at fair value on a recurring basis. As of June 30, 2010, net unrealized gains on the
trading and available-for-sale investment securities portfolios approximated $26 million and $221
million, respectively. Fair values for most of the Corporations trading and investment securities
available-for-sale are classified as Level 2. Trading and investment securities available-for-sale
classified as Level 3, which are the securities that involved the highest degree of judgment,
represent only 2% of the Corporations total portfolio of trading and investment securities
available-for-sale.
Mortgage Servicing Rights
Mortgage servicing rights (MSRs), which amounted to $172 million as of June 30, 2010, do not
trade in an active, open market with readily observable prices. Fair value is estimated based upon
discounted net cash flows calculated from a combination of loan level data and market assumptions.
The valuation model combines loans with common
145
characteristics that impact servicing cash flows (e.g. investor, remittance cycle, interest rate,
product type, etc.) in order to project net cash flows. Market valuation assumptions include
prepayment speeds, discount rate, cost to service, escrow account earnings, and contractual
servicing fee income, among other considerations. Prepayment speeds are derived from market data
that is more relevant to the U.S. mainland loan portfolios and, thus, are adjusted for the
Corporations loan characteristics and portfolio behavior since prepayment rates in Puerto Rico
have been historically lower. Other assumptions are, in the most part, directly obtained from
third-party providers. Disclosure of two of the key economic assumptions used to measure MSRs,
which are prepayment speed and discount rate, and a sensitivity analysis to adverse changes to
these assumptions, is included in Note 11 to the consolidated financial statements.
Derivatives
Derivatives, such as interest rate swaps, interest rate caps and indexed options, are traded in
over-the-counter active markets. These derivatives are indexed to an observable interest rate
benchmark, such as LIBOR or equity indexes, and are priced using an income approach based on
present value and option pricing models using observable inputs. Other derivatives are liquid and
have quoted prices, such as forward contracts or to be announced securities (TBAs). All of
these derivatives held by the Corporation are classified as Level 2. Valuations of derivative
assets and liabilities reflect the values associated with counterparty risk and nonperformance
risk, respectively. The non-performance risk, which measures the Corporations own credit risk, is
determined using internally-developed models that consider the net realizable value of the
collateral posted, remaining term, and the creditworthiness or credit standing of the Corporation.
The counterparty risk is also determined using internally-developed models which incorporate the
creditworthiness of the entity that bears the risk, net realizable value of the collateral
received, and available public data or internally-developed data to determine their probability of
default. To manage the level of credit risk, the Corporation employs procedures for credit
approvals and credit limits, monitors the counterparties credit condition, enters into master
netting agreements whenever possible and, when appropriate, requests additional collateral. During
the quarter and six months ended June 30, 2010, inclusion of credit risk in the fair value of the
derivatives resulted in a net loss of $0.2 million and $1.6 million, respectively, recorded in the
other operating income and interest expense captions of the consolidated statement of operations,
which consisted of a loss of $1.4 million and $0.9 million, respectively, resulting from the
Corporations own credit standing adjustment and a gain of $1.2 million and a loss of $0.7 million,
respectively, from the assessment of the counterparties credit risk.
Equity appreciation instrument
The fair value of the equity appreciation instrument issued to the FDIC was estimated by
determining a call option value using the Black-Scholes Option Pricing Model. The principal
variables in determining the fair value of the equity appreciation instrument include the implied
volatility determined based on the one-year historical daily volatility of the Corporations common
stock, the exercise price of the instrument, the price of the call option, and the risk-free rate.
The equity appreciation instrument is classified as Level 2. The Corporation recognized
non-interest income of $24.4 million during the quarter ended June 30, 2010 as a result of a
decrease in the fair value of the equity appreciation instrument. The carrying amount of the equity
appreciation instrument, which is recorded as other liability in the consolidated statement of
condition, amounted to $28.1 million as of June 30, 2010.
Loans held-in-portfolio considered impaired under ASC Subsection 310-10-35 that are collateral dependent
The impairment is based on the fair value of the collateral, which is derived from appraisals that
take into consideration prices in observed transactions involving similar assets in similar
locations, size and supply and demand. Continued deterioration of the housing markets and the
economy in general have adversely impacted and continue to affect the market activity related to
real estate properties. These collateral dependent impaired loans are classified as Level 3 and are
reported as a nonrecurring fair value measurement.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
MARKET RISK
The financial results and capital levels of Popular, Inc. are constantly exposed to market risk.
Market risk represents the risk of loss due to adverse movements in market rates or prices, which
include interest rates, foreign exchange rates and equity prices; the failure to meet financial
obligations coming due because of the inability to liquidate assets or obtain adequate funding; and
the inability to easily unwind or offset specific exposures without significantly lowering prices
because of inadequate market depth or market disruptions.
146
While the Corporation is exposed to various business risks, the risks relating to interest rate
risk and liquidity are major risks that can materially impact future results of operations and
financial condition due to their complexity and dynamic nature.
The Asset Liability Management Committee (ALCO) and the Corporate Finance Group are responsible
for planning and executing the Corporations market, interest rate risk, funding activities and
strategy, and for implementing the policies and procedures approved by the Corporations risk
management committee. In addition, a Market Risk Manager, who is part of the risk management group,
has been appointed to enhance and strengthen controls surrounding interest, liquidity, and market
risks, and independently monitor and report adherence with established market and liquidity
policies. The ALCO meets on a monthly basis and reviews various asset and liability sensitivities,
ratios and portfolio information, including but not limited to, the Corporations liquidity
positions, projected sources and uses of funds, interest rate risk positions and economic
conditions.
Interest rate risk (IRR), a component of market risk, is considered by management as a
predominant market risk in terms of its potential impact on profitability or market value. The
techniques for measuring the potential impact of the Corporations exposure to market risk from
changing interest rates that were described in the 2009 Annual Report are the same as those applied
by the Corporation as of June 30, 2010.
Net interest income simulation analysis performed by legal entity and on a consolidated basis is a
tool used by the Corporation in estimating the potential change in net interest income resulting
from hypothetical changes in interest rates. Sensitivity analysis is calculated using a simulation
model which incorporates actual balance sheet figures detailed by maturity and interest yields or
costs. It also incorporates assumptions on balance sheet growth and expected changes in its
composition, estimated prepayments in accordance with projected interest rates, pricing and
maturity expectations on new volumes and other non-interest related data. It is a dynamic process,
emphasizing future performance under diverse economic conditions.
Management assesses interest rate risk using various interest rate scenarios that differ in
magnitude and direction, the speed of change and the projected shape of the yield curve. For
example, the types of interest rate scenarios processed include most likely economic scenarios,
flat or unchanged rates, yield curve twists, +/- 200 and + 400 basis points parallel ramps and +/-
200 basis points parallel shocks. Management also performs analyses to isolate and measure basis
and prepayment risk exposures. The asset and liability management group also evaluates the accuracy
of assumptions used and results obtained in the monthly sensitivity analyses. Due to the importance
of critical assumptions in measuring market risk, the risk models incorporate third-party developed
data for critical assumptions such as prepayment speeds on mortgage loans and mortgage-backed
securities, estimates on the duration of the Corporations deposits and interest rate scenarios.
The Corporation runs net interest income simulations under interest rate scenarios in which the
yield curve is assumed to rise and decline gradually by the same amount. The rising rate scenarios
considered in these market risk disclosures reflect gradual parallel changes of 200 and 400 basis
points during the twelve-month period ending June 30, 2011. Under a 200 basis points rising rate
scenario, projected net interest income increases by $74.4 million, while under a 400 basis points
rising rate scenario, projected net interest income increases by
$139.9 million, when compared
against the Corporations flat or unchanged interest rates forecast scenario. Given the fact that
as of June 30, 2010 some market interest rates continued to be close to zero, management has
focused on measuring the risk on net interest income in rising rate scenarios. These interest rate
simulations exclude the impact on loans accounted pursuant to ASC Subtopic 310-30, whose yields are
based on managements current expectation of future cash flows.
Simulation analyses are based on many assumptions, including relative levels of market interest
rates, interest rate spreads, loan prepayments and deposit decay. They should not be relied upon as
indicative of actual results. Further, the estimates do not contemplate actions that management
could take to respond to changes in interest rates. By their nature, these forward-looking
computations are only estimates and may be different from what may actually occur in the future.
The Corporation estimates the sensitivity of economic value of equity (EVE) to changes in
interest rates. EVE is equal to the estimated present value of the Corporations assets minus the
estimated present value of the liabilities.
This sensitivity analysis is a useful tool to measure long-term IRR because it captures the impact
of up or down rate changes in expected cash flows, including principal and interest, from all
future periods.
147
EVE sensitivity calculated using interest rate shock scenarios is estimated on a quarterly basis.
The shock scenarios consist of +/- 200 basis points parallel shocks. Management has defined limits
for the increases / decreases in EVE resulting from the shock scenarios. As of June 30, 2010, the
Corporation was in compliance with these limits.
The Corporation maintains an overall interest rate risk management strategy that incorporates the
use of derivative instruments to minimize significant unplanned fluctuations in net interest income
or market value that are caused by interest rate volatility. The market value of these derivatives
is subject to interest rate fluctuations and counterparty credit risk adjustments which could have
a positive or negative effect in the Corporations earnings. Refer to Note 14 to the consolidated
financial statements for further information on the Corporations derivative instruments.
FDIC-assisted transaction
The Corporations total assets increased significantly from December 31, 2009 to June 30, 2010
because of the acquired loans in the Westernbank FDIC-assisted transaction. Management believes
that the transaction will improve the Corporations net interest income, as it will generate more
interest earned on the acquired loans than it will pay in interest on deposits and borrowings
related to the acquisition with limited exceptions. The loans were initially recorded at estimated
fair values. The estimated fair values of the acquired loans reflect an estimate of expected losses
related to these assets. As a result, operating losses may be affected if loan losses exceed the
losses reflected in the fair value of these assets at the acquisition date. In addition, to the
extent that the stated interest rate on the acquired covered loans was not considered a market rate
of interest at the acquisition date, appropriate adjustments to the acquisition-date fair value
were recorded. These adjustments mitigate the risk associated with the acquisition of loans earning
a below-market rate of return. As expressed in previous sections of this report, most of the
covered loans will have an accretable yield. The accretable yield is the amount by which the
undiscounted expected cash flows exceed the estimated fair value. The accretable yield includes the
future interest expected to be collected over the remaining life of the acquired loans and the
purchase premium or discount. The remaining life includes the effects of estimated prepayments,
expected credit losses and adjustments to market liquidity and prevailing interest rates at
acquisition date. For covered loans accounted for under ASC Subtopic 310-30, the Corporation is
required to periodically evaluate its estimate of cash flows expected to be collected. These
evaluations, performed quarterly, will require the continued usage of key assumptions and
estimates, similar to the initial estimate of fair value. Given the current economic environment,
management must apply judgment to develop its estimates of cash flows for those covered loans given
the impact of home price and property value changes, changing loss severities and prepayment
speeds. Decreases in the expected cash flows will generally result in a charge to the provision for
credit losses resulting in an increase to the allowance for loan losses. Increases in the expected
cash flows will generally result in an increase in interest income over the remaining life of the
loan, or pool of loans.
As indicated in the Westerbank FDIC-assisted transaction section in this MD&A, the equity
appreciation instrument issued to the FDIC is recognized at fair value and added $24.4 million to
the non-interest income for the quarter ended June 30, 2010. The fair value of the equity
appreciation instrument is estimated by determining a call option value using the Black-Scholes
Option Pricing Model, and the value depends largely on variations of the Corporations common stock
price and its volatility.
Foreign Exchange
The Corporation conducts business in certain Latin American markets through several of its
processing and information technology services and products subsidiaries. Also, it holds interests
in Consorcio de Tarjetas Dominicanas, S.A. (CONTADO) and Centro Financiero BHD, S.A. (BHD) in
the Dominican Republic. Although not significant, some of these businesses are conducted in the
countrys foreign currency. The resulting foreign currency translation adjustment, from operations
for which the functional currency is other than the U.S. dollar, is reported in accumulated other
comprehensive loss in the consolidated statements of condition, except for highly-inflationary
environments in which the effects would be included in the consolidated statements of operations.
As of June 30, 2010, the Corporation had approximately $41 million in an unfavorable foreign
currency translation adjustment as part of accumulated other comprehensive loss, compared to an
unfavorable adjustment of $41 million as of December 31, 2009 and $40 million as of June 30, 2009.
148
EVERTEC, Inc. operates in Venezuela through its wholly-owned subsidiary EVERTEC Venezuela.
On January 7, 2010, Venezuelas National Consumer Price Index (NCPI) for December 2009 was
released. The cumulative three-year inflation rates for both of Venezuelas inflation indices were
over 100 percent. The Corporation began considering Venezuelas economy as highly inflationary as of
January 1, 2010, and the financial statements of EVERTEC Venezuela were remeasured as if the
functional currency was the reporting currency as of such date. ASC Section 830-10-45-11 defines a
highly inflationary economy as one with a cumulative inflation rate of approximately 100 percent or
more over a three-year period. Under ASC Topic 830, if a countrys economy is classified as highly
inflationary, the functional currency of the foreign entity operating in that country must be
remeasured to the functional currency of the reporting entity. The unfavorable impact of
remeasuring the financial statements of EVERTEC Venezuela as of June 30, 2010, was approximately $2.5 million. Total assets for EVERTEC Venezuela
remeasured approximated $4.8 million as of June 30, 2010.
LIQUIDITY
The objective of effective liquidity management is to ensure that the Corporation has sufficient
liquidity to meet all of its financial obligations, finance expected future growth and maintain a
reasonable safety margin for cash commitments under both normal and stressed market conditions. An
institutions liquidity may be pressured if, for example, its credit rating is downgraded, it
experiences a sudden and unexpected substantial cash outflow, or some other event causes
counterparties to avoid exposure to the institution. An institution is also exposed to liquidity
risk if the markets on which it depends are subject to temporary disruptions.
The Corporation obtains liquidity from both sides of the balance sheet as well as from
off-balance-sheet activities. Liquid assets can be quickly and easily converted to cash at a
reasonable cost, or are timed to mature when management anticipates a need for additional
liquidity. The Corporations investment portfolio, including money markets such as fed funds sold
and loans that can be pledged at the Federal Home Loan Bank (FHLB) and the investment portfolio
currently not pledged to other counterparties in the repo market, are used to manage Populars
liquidity needs. The Corporation also has established a collateralized borrowing facility at the
Discount Window with the Federal Reserve Bank of New York (Fed) that can be used under stress
scenarios. On the liability side, diversified sources of deposits and secured credit facilities
provide liquidity to Populars operations. Even if some of these alternatives may not be available
temporarily, it is expected that in the normal course of business, the Corporations funding
sources are adequate.
Factors that the Corporation does not control, such as the economic outlook of its principal
markets and regulatory changes, could affect its ability to obtain funding. In order to prepare for
the possibility of such scenario, management has adopted contingency plans for raising financing
under stress scenarios when important sources of funds that are usually fully available are
temporarily unavailable. These plans call for using alternate funding mechanisms such as the
pledging of certain asset classes and accessing secured credit lines and loan facilities put in
place with the FHLB and the Fed. The Corporation has a substantial amount of assets available for
raising funds through these channels.
Deposits, including customer deposits, brokered certificates of deposit, and public funds
deposits, continue to be the most significant source of funds for the Corporation, funding 64% of
the Corporations total assets as of June 30, 2010 and 75% as of December 31, 2009. The decrease in
the ratio of deposits to total assets from the end of 2009 to June 30, 2010 was directly related to
the aforementioned Westernbank FDIC-assisted transaction. As shown in the Westernbank FDIC-assisted
Transaction section of this MD&A, the acquired loans (book value prior to purchase accounting
adjustments) exceeded substantially the assumed liabilities, and as such, the Corporation funded
the acquisition by issuing a promissory note payable to the FDIC. The FDIC retained substantially
all of Westernbanks brokered certificates of deposit, which for former Westernbank entity
represented a major funding source for its earning assets.
In addition to traditional deposits, the Corporation maintains borrowing arrangements. As of June
30, 2010, these borrowings consisted primarily of the Note payable issued to the FDIC as part of
the Westernbank FDIC-assisted
149
transaction, FHLB borrowings, securities sold under agreement to repurchase, junior
subordinated deferrable interest debentures, and term notes. Refer to Note 16 to the consolidated
financial statements for the composition of the Corporations borrowings as of June 30, 2010 and
December 31, 2009. The significant variance in the Corporations borrowings composition from
December 31, 2009 to June 30, 2010 is directly related to the $5.7 billion carrying value of the
note payable issued to the FDIC.
The composition of the Corporations financing to total assets as of June 30, 2010 and December 31,
2009 is included in Table Q.
TABLE Q
Financing to Total Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% increase (decrease) from |
|
% of total assets |
|
|
June 30, |
|
December 31, |
|
December 31, 2009 to |
|
June 30, |
|
December 31, |
(Dollars in millions) |
|
2010 |
|
2009 |
|
June 30, 2010 |
|
2010 |
|
2009 |
|
Non-interest bearing deposits |
|
$ |
4,793 |
|
|
$ |
4,495 |
|
|
|
6.6 |
% |
|
|
11.3 |
% |
|
|
13.0 |
% |
Interest-bearing core deposits |
|
|
16,256 |
|
|
|
14,983 |
|
|
|
8.5 |
|
|
|
38.3 |
|
|
|
43.1 |
|
Other interest-bearing deposits |
|
|
6,064 |
|
|
|
6,447 |
|
|
|
(5.9 |
) |
|
|
14.3 |
|
|
|
18.6 |
|
Repurchase agreements |
|
|
2,307 |
|
|
|
2,633 |
|
|
|
(12.4 |
) |
|
|
5.4 |
|
|
|
7.6 |
|
Other short-term borrowings |
|
|
1 |
|
|
|
7 |
|
|
|
(85.7 |
) |
|
|
|
|
|
|
|
|
Notes payable |
|
|
8,237 |
|
|
|
2,649 |
|
|
|
210.9 |
|
|
|
19.4 |
|
|
|
7.6 |
|
Others |
|
|
1,183 |
|
|
|
983 |
|
|
|
20.3 |
|
|
|
2.8 |
|
|
|
2.8 |
|
Stockholders equity |
|
|
3,603 |
|
|
|
2,539 |
|
|
|
41.9 |
|
|
|
8.5 |
|
|
|
7.3 |
|
|
Liquidity is managed by the Corporation at the level of the holding companies that own the
banking and non-banking subsidiaries. Also, it is managed at the level of the banking and
non-banking subsidiaries.
The following sections provide further information on the Corporations major funding activities
and needs, as well as the risks involved in these activities.
Banking Subsidiaries
Primary sources of funding for the Corporations banking subsidiaries (BPPR and BPNA), or the
banking subsidiaries, include retail and commercial deposits, brokered deposits, collateralized
borrowings and, to a lesser extent, loan sales. Also, BPNA has received capital contributions in
order to maintain its well-capitalized status. During the six months ended June 30, 2010, the BHCs
made capital contributions to BPNA and BPPR amounting to $245 million and $600 million,
respectively. The capital contribution to BPPR was done to strengthen its regulatory capital ratios
upon executing the Westernbank FDIC-assisted transaction. In addition, the Corporations banking
subsidiaries maintain borrowing facilities with the FHLB and at the Discount Window of the Fed, and
have a considerable amount of collateral pledged that can be used to quickly raise funds under
these facilities.
The principal uses of funds for the banking subsidiaries include loan originations, investment
portfolio purchases, repayment of outstanding obligations (including deposits), and operational
expenses. Also, the banking subsidiaries assume liquidity risk related to collateral posting
requirements for some derivative transactions and recourse obligations; off-balance sheet
activities mainly in connection with contractual commitments; recourse provisions; servicing
advances; derivatives, credit card licensing agreements and support to several mutual funds
administered by BPPR.
The bank operating subsidiaries maintain sufficient funding capacity to address large increases in
funding requirements such as deposit outflows. This capacity is comprised mainly of available
liquidity derived from secured funding sources, as well as on-balance sheet liquidity in the form
of cash balances maintained at the Fed and unused secured lines held at the Fed and FHLB, in
addition to liquid unpledged securities.
150
As indicated previously, during the quarter ended June 30, 2010, BPPR issued a promissory note
payable to the FDIC as part of the consideration paid in the Westernbank FDIC-assisted transaction.
The carrying amount of the note was $5.7 billion as of June 30, 2010. The note payable issued to
the FDIC is collateralized by the loans covered under the loss sharing agreements (other than
certain consumer loans) and other real estate acquired in the agreement with the FDIC and all
proceeds derived from such assets, including cash inflows from claims to the FDIC under the loss
sharing agreements. As of June 30, 2010, the carrying amount of loans and other real estate
property that serves as collateral on the note amounted to approximately $4.0 billion. The entire
outstanding principal balance of the note payable issued to the FDIC is due five years from
issuance (April 30, 2015), or such date as such amount may become due and payable pursuant to the
terms of the note payable to the FDIC. As indicated in the subsequent events section of this MD&A,
on July 26, 2010, BPPR prepaid $2 billion of the outstanding balance of the note. Funds for the
repayment were principally obtained from excess liquidity maintained in money markets with the Fed,
and to a lesser extent, a combination of proceeds from sales of investment securities which were in
an unrealized gain position, FHLB advances and repurchase agreements. Management expects to replace
some of these short-term funding sources with brokered certificates of deposit. The note payable
issued to the FDIC was selected for partial repayment because it resulted in more favorable
economics for the Corporation than prepaying other of its liabilities, which entailed prepayment
penalties. This FDIC obligation was also of sufficient size to permit the Corporation to deploy its
excess liquidity.
The Corporations ability to compete successfully in the marketplace for deposits, excluding
brokered deposits, depends on various factors, including pricing, service, convenience and
financial stability as reflected by operating results, credit ratings (by nationally recognized
credit rating agencies), and importantly, FDIC deposit insurance. Although a downgrade in the
credit rating of the Corporation may impact its ability to raise retail and commercial deposits or
the rate that it is required to pay on such deposits, management does not believe that the impact
should be material. Deposits at all of the Corporations banking subsidiaries are federally insured
(subject to FDIC limits) and this is expected to mitigate the effect of a downgrade in the credit
ratings.
Deposits are a key source of funding as they tend to be less volatile than institutional borrowings
and their cost is less sensitive to changes in market rates. Refer to Table I for a breakdown of
deposits by major types. Core deposits are generated from a large base of consumer, corporate and
institutional customers. As indicated in the glossary, for purposes of defining core deposits, the
Corporation excludes brokered deposits with denominations under $100,000. Core deposits have
historically provided the Corporation with a sizable source of relatively stable and low-cost
funds. Core deposits totaled $21.0 billion, or 78% of total deposits, as of June 30, 2010, compared
with $19.5 billion, or 75% of total deposits, as of December 31, 2009. Core deposits financed 58%
of the Corporations earning assets as of June 30, 2010, compared to 60% as of December 31, 2009.
Certificates of deposit with denominations of $100,000 and over as of June 30, 2010 totaled $4.6
billion, or 17% of total deposits, compared to $4.7 billion, or 18%, as of December 31, 2009. Their
distribution by maturity as of June 30, 2010 was as follows:
|
|
|
|
|
(In thousands) |
|
|
|
|
|
3 months or less |
|
$ |
1,906,520 |
|
3 to 6 months |
|
|
611,516 |
|
6 to 12 months |
|
|
850,293 |
|
Over 12 months |
|
|
1,249,189 |
|
|
|
|
$ |
4,617,518 |
|
|
The Corporations banking subsidiaries have the ability to borrow funds from the FHLB at
competitive prices. As of June 30, 2010 and December 31, 2009, the banking subsidiaries had credit
facilities authorized with the FHLB aggregating $1.7 billion and $1.9 billion, respectively, based
on assets pledged with the FHLB at those dates. Outstanding borrowings under these credit
facilities totaled $1.1 billion as of June 30, 2010 and December 31, 2009. Such advances are
collateralized by securities and mortgage loans, do not have restrictive covenants and do not have
any callable features. Refer to Note 16 to the consolidated financial statements for additional
information on the terms of FHLB advances outstanding.
As of June 30, 2010, the banking subsidiaries had a borrowing capacity at the Feds Discount Window
of approximately $3.2 billion, which remained unused as of that date. This compares to a borrowing
capacity at the Fed
151
discount window of $2.9 billion as of December 31, 2009, which was also unused. This facility is a
collateralized source of credit that is highly reliable even under difficult market conditions. The
amount available under this borrowing facility is dependent upon the balance of loans and
securities pledged as collateral and the haircuts assigned to such collateral.
As of June 30, 2010, management believes that the banking subsidiaries had sufficient current and
projected liquidity sources to meet its anticipated cash flow obligations, as well as special needs
and off-balance sheet commitments, during the foreseeable future and have sufficient liquidity
resources to address a stress event.
Westernbank FDIC-assisted transaction and Impact on Liquidity
Apart from the impact of the note payable issued to the FDIC that was described above, the
Corporations liquidity is also impacted by the loan payment performance and reimbursements on the
loss sharing agreements.
In the short-term, it is likely that there will be a significant amount of the covered loans
acquired in the FDIC-assisted transaction that will experience deterioration in payment
performance, or will be determined to have inadequate collateral values to repay the loans. In such
instances, the Corporation will likely no longer receive payments from the borrowers, which will
impact cash flows. The loss sharing agreements will not fully offset the financial effects of such
a situation. However, if a loan is subsequently charged off or written down after we exhaust our
best efforts at collection, the loss sharing agreements will cover 80% of the loss associated with
the covered loans.
The effects of the loss sharing agreements on cash flows and operating results in the long-term
will be similar to the short-term effects described above. The long-term effects that we may
experience will depend primarily on the ability of the borrowers whose loans are covered by the
loss sharing agreements to make payments over time. As the loss sharing agreements are in effect
for a period of ten years for one-to-four family loans and five years for commercial, construction
and consumer loans, changing economic conditions will likely impact the timing of future
charge-offs and the resulting reimbursements from the FDIC. Management believes that any recapture
of interest income and recognition of cash flows from the borrowers or received from the FDIC (as
part of the FDIC loss share receivable) may be recognized unevenly over this period, as management
exhausts its collection efforts under the Corporations normal practices.
Bank Holding Companies
The principal sources of funding for the holding companies include cash on hand, investment
securities, dividends received from banking and non-banking subsidiaries (subject to regulatory
limits), asset sales, credit facilities available from affiliate banking subsidiaries and proceeds
from new borrowings or stock issuances. The principal source of cash flows for the parent holding
company during the second quarter of 2010 was the aforementioned capital issuance, which was
completed primarily to strengthen the Corporations regulatory capital ratios in preparation for
the Westernbank FDIC-assisted transaction. The principal use of these funds
include capitalizing its banking
subsidiaries, the repayment of maturing debt, and interest payments to holders of senior debt and
trust preferred securities. The Corporation suspended the payment of dividends to common and
preferred stockholders during 2009 as a result of dividend restrictions imposed by regulators and
in order to conserve capital.
The Corporations bank holding companies (BHCs, Popular, Inc., Popular North America, Inc.
and Popular International Bank, Inc.) have in the past borrowed in the money markets and in the
corporate debt market primarily to finance their non-banking subsidiaries. However, the cash needs
of the Corporations non-banking subsidiaries other than to repay indebtedness are now minimal
given that the PFH business was discontinued. These sources of funding have become more difficult
to obtain and costly due to disrupted market conditions and the reductions in the Corporations
credit ratings. The Corporations principal credit ratings are at a level below investment grade
which affects the Corporations ability to raise funds in the capital markets.
A principal use of liquidity at the BHCs is to ensure its subsidiaries are adequately capitalized.
Operating losses at the BPNA banking subsidiary have required the
BHCs to contribute equity capital to BPNA to ensure that it meets the regulatory guidelines for well-capitalized institutions. In the event
that additional capital contributions were necessary, management believes that the BHCs currently
have enough liquidity resources to meet potential capital needs from BPNA in the ordinary course of
business. As indicated previously, the BHCs made substantial capital contributions to the banking
subsidiaries during the six months ended June 30, 2010.
152
Refer to Note 31 to the consolidated financial statements which presents a statement of
condition, of operations and of cash flows for the three BHCs. The loans held-in-portfolio in such
financial statements are principally associated with intercompany transactions. The investment
securities held-to-maturity at the parent holding company, amounting to $396 million as of June 30,
2010, consisted principally of $370 million of subordinated notes from BPPR. Currently, subject to
regulatory approval by the Fed, BPPR may, at any time, partially redeem these notes at a redemption
price of 100% of the principal amount. During the six months ended June 30, 2010, BPPR redeemed $60
million of such securities. The parent holding company used the funds to capitalize BPNA.
The maturities of the bank holding companies outstanding notes payable as of June 30, 2010 and
December 31, 2009 are shown in the table below. These borrowings are principally unsecured senior
debt (term notes) and junior subordinated debentures (trust preferred securities).
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
(In thousands) |
|
2010 |
|
2009 |
|
Year |
|
|
|
|
|
|
|
|
2010 |
|
|
|
|
|
$ |
2,000 |
|
2011 |
|
$ |
178,674 |
[1] |
|
|
353,675 |
|
2012 |
|
|
374,320 |
|
|
|
274,183 |
|
2013 |
|
|
3,000 |
|
|
|
3,000 |
|
2014 |
|
|
|
|
|
|
|
|
Later years |
|
|
439,800 |
|
|
|
439,800 |
|
No stated maturity |
|
|
936,000 |
[2] |
|
|
936,000 |
[2] |
|
Subtotal |
|
$ |
1,931,794 |
|
|
$ |
2,008,658 |
|
Less: Discount |
|
|
(502,113 |
) [2] |
|
|
(512,350 |
) [2] |
|
Total |
|
$ |
1,429,681 |
|
|
$ |
1,496,308 |
|
|
|
|
|
[1] |
|
Includes $175 million in term notes based on their contractual maturity. These term notes were
repurchased in July 2010. |
|
[2] |
|
Amounts are related to junior subordinated debentures associated with the trust preferred
securities that were issued to the U.S. Treasury in August 2009. |
|
|
The reduction in the maturity of unsecured senior debt from the 2011 maturity classification
was the result of two events: (1) the exercise of a put option by the holder of $75 million in term
notes during the quarter ended March 31, 2010 and (2) the extension of the maturity of $100 million
in term notes from September 2011 to March 2012 based on modifications negotiated with the note
holders during the quarter ended March 31, 2010. These term notes have a fixed interest rate of 13%
as of June 30, 2010.
Included in the table above are $175 million in term notes with interest that adjusted in the event
of senior debt rating downgrades. These floating rate term notes had an interest rate of 9.75% over
the 3-month LIBOR and were to mature in September 2011. These floating rate term notes were
repurchased by the Corporation from holders of record in July 2010 and cancelled.
The Corporation no longer has outstanding any term notes with rating triggers or in which the
holders have the right to require the Corporation to purchase the notes prior to its contractual
maturity.
The repayment of the BHCs obligations represents a potential cash need which is expected to be met
with internal liquidity resources, new borrowings, or estimated cash inflows of $600 million to be
derived from the sale of the 51% interest in the EVERTEC business group, which subject to various
conditions and regulatory approvals, is expected to be completed in the third quarter of 2010.
The BHCs liquidity position continues to be adequate with sufficient cash on hand, marketable
securities and other sources of liquidity which are expected to be enough to meet all BHCs
obligations during the foreseeable future.
The Corporations short-term and long-term debt ratings and outlook by major rating agencies as of
June 30, 2010 are presented in the table below.
153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2010 |
|
|
Popular, Inc. |
|
|
Short-term |
|
Long-term |
|
|
|
|
debt |
|
debt |
|
Outlook |
|
Fitch |
|
|
B |
|
|
|
B |
|
|
Positive |
Moodys |
|
|
|
|
|
Ba1 |
|
Negative |
S&P |
|
|
C |
|
|
|
B |
|
|
Positive |
|
As indicated previously, as of June 30, 2010, the Corporation had $175 million in senior debt
issued by the BHCs with interest that adjusted in the event of senior debt rating downgrades. That
debt was repaid in July 2010. The Corporations banking subsidiaries currently do not use
borrowings that are rated by the major rating agencies, as these banking subsidiaries are funded
primarily with deposits and secured borrowings. The banking subsidiaries did have $18 million in
deposits as of June 30, 2010 that are subject to rating triggers. As of June 30, 2010, the
Corporation had repurchase agreements amounting to $245 million that were subject to rating
triggers or the maintenance of well-capitalized regulatory capital ratios, and were collateralized
with securities with a fair value of $262 million.
Some of the Corporations derivative instruments include financial covenants tied to the banks
well-capitalized status and credit ratings. These agreements could require exposure
collateralization, early termination or both. The fair value of derivative instruments in a
liability position subject to financial covenants approximated $79 million as of June 30, 2010,
with the Corporation providing collateral totaling $93 million to cover the net liability position
with counterparties on these derivative instruments.
In addition, certain mortgage servicing and custodial agreements that BPPR has with third parties
include rating covenants. Based on BPPRs failure to maintain the required credit ratings, the
third parties could have the right to require the institution to engage a substitute cash custodian
for escrow deposits and/or increase collateral levels securing the recourse obligations. Also, as
discussed in the Contractual Obligations and Commercial Commitments section of this MD&A, the
Corporation services residential mortgage loans subject to credit recourse provisions. Certain
contractual agreements require the Corporation to post collateral to secure such recourse
obligations if the institutions required credit ratings are not maintained. Collateral pledged by
the Corporation to secure recourse obligations approximated $173 million as of June 30, 2010. The
Corporation could be required to post additional collateral under the agreements. Management
expects that it would be able to meet additional collateral requirements if and when needed. The
requirements to post collateral under certain agreements or the loss of escrow deposits could
reduce the Corporations liquidity resources and impact its operating results.
|
|
|
Item 4. |
|
Controls and Procedures |
Disclosure Controls and Procedures
The Corporations management, with the participation of the Corporations Chief Executive Officer
and Chief Financial Officer, has evaluated the effectiveness of the Corporations disclosure
controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act) as of the end of the period covered by this report. Based on such evaluation, the
Corporations Chief Executive Officer and Chief Financial Officer have concluded that, as of the
end of such period, the Corporations disclosure controls and procedures are effective in
recording, processing, summarizing and reporting, on a timely basis, information required to be
disclosed by the Corporation in the reports that it files or submits under the Exchange Act and
such information is accumulated and communicated to management, as appropriate, to allow timely
decisions regarding required disclosures.
Internal Control Over Financial Reporting
There have been no changes in the Corporations internal control over financial reporting (as such
term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the
quarter ended on June 30, 2010 that
154
have materially affected, or are reasonably likely to materially affect, the Corporations internal
control over financial reporting.
Part II Other Information
|
|
|
Item 1. |
|
Legal Proceedings |
The Corporation and its subsidiaries are defendants in a number of legal proceedings arising
in the ordinary course of business. Based on the opinion of legal counsel, management believes that
the final disposition of these matters, except for the matters described below which are each in
early stages and management cannot currently predict their outcome, will not have a material
adverse effect on the Corporations business, results of operations, financial condition and
liquidity.
Between May 14, 2009 and September 9, 2009, five putative class actions and two derivative claims
were filed in the United States District Court for the District of Puerto Rico and the Puerto Rico
Court of First Instance, San Juan Part, against Popular, Inc., certain of its directors and
officers, among others. The five class actions have now been consolidated into two separate
actions: a securities class action captioned Hoff v. Popular, Inc., et al. (consolidated with Otero
v. Popular, Inc., et al.) and an Employee Retirement Income Security Act (ERISA) class action
entitled In re Popular, Inc. ERISA Litigation (comprised of the consolidated cases of Walsh v.
Popular, Inc. et al.; Montañez v. Popular, Inc., et al.; and Dougan v. Popular, Inc., et al.).
On October 19, 2009, plaintiffs in the Hoff case filed a consolidated class action complaint which
includes as defendants the underwriters in the May 2008 offering of Series B Preferred Stock, among
others. The consolidated action purports to be on behalf of purchasers of Populars securities
between January 24, 2008 and February 19, 2009 and alleges that the defendants violated Section
10(b) of the Exchange Act, and Rule 10b-5 promulgated thereunder, and Section 20(a) of the Exchange
Act by issuing a series of allegedly false and/or misleading statements and/or omitting to disclose
material facts necessary to make statements made by the Corporation not false and misleading. The
consolidated action also alleges that the defendants violated Section 11, Section 12(a)(2) and
Section 15 of the Securities Act by making allegedly untrue statements and/or omitting to disclose
material facts necessary to make statements made by the Corporation not false and misleading in
connection with the May 2008 offering of Series B Preferred Stock. The consolidated securities
class action complaint seeks class certification, an award of compensatory damages and reasonable
costs and expenses, including counsel fees. On January 11, 2010, Popular, the underwriter
defendants and the individual defendants moved to dismiss the consolidated securities class action
complaint. On August 2, 2010, the U.S. District Court for the District of Puerto Rico granted the
motion to dismiss filed by the underwriter defendants on statute of limitations grounds. The Court
also dismissed the Section 11 claim brought against Populars directors on statute of limitations
grounds and the Section 12(a)(2) claim brought against Popular because plaintiffs lacked standing.
The Court declined to dismiss the claims brought against Popular and certain of its officers under
Section 10(b) of the Exchange Act (and Rule 10b-5 promulgated thereunder), Section 20(a) of the
Exchange Act, and Sections 11 and 15 of the Securities Act, holding that plaintiffs had adequately
alleged that defendants made materially false and misleading statements with the requisite state of
mind.
On November 30, 2009, plaintiffs in the ERISA case filed a consolidated class action complaint. The
consolidated complaint purports to be on behalf of employees participating in the Popular, Inc.
U.S.A. 401(k) Savings and Investment Plan and the Popular, Inc. Puerto Rico Savings and Investment
Plan from January 24, 2008 to the date of the Complaint to recover losses pursuant to Sections 409
and 502(a)(2) of the ERISA against Popular, certain directors, officers and members of plan
committees, each of whom is alleged to be a plan fiduciary. The consolidated complaint alleges that
the defendants breached their alleged fiduciary obligations by, among other things, failing to
eliminate Popular stock as an investment alternative in the plans. The complaint seeks to recover
alleged losses to the plans and equitable relief, including injunctive relief and a constructive
trust, along with costs and attorneys fees. On December 21, 2009, and in compliance with a
scheduling order issued by the Court, Popular and the individual defendants submitted an answer to
the amended complaint. Shortly thereafter, on December 31, 2009, Popular and the individual
defendants filed a motion to dismiss the consolidated class action complaint or, in the
alternative, for judgment on the pleadings. On May 5, 2010, a magistrate judge issued a report and
recommendation in which he recommended that the motion to dismiss be denied except with respect to
Banco Popular de Puerto Rico, as to which he recommended that the motion be granted. On May 19,
2010, Popular filed objections to the
155
magistrate judges report and recommendation. On June 21, 2010, plaintiffs filed a response to
these objections. On July 9, 2010, with leave of the Court, Popular filed a reply to plaintiffs
response.
The derivative actions (García v. Carrión, et al. and Díaz v. Carrión, et al.) have been brought
purportedly for the benefit of nominal defendant Popular, Inc. against certain executive officers
and directors and allege breaches of fiduciary duty, waste of assets and abuse of control in
connection with our issuance of allegedly false and misleading financial statements and financial
reports and the offering of the Series B Preferred Stock. The derivative complaints seek a judgment
that the action is a proper derivative action, an award of damages and restitution, and costs and
disbursements, including reasonable attorneys fees, costs and expenses. On October 9, 2009, the
Court coordinated for purposes of discovery the García action and the consolidated securities class
action. On October 15, 2009, Popular and the individual defendants moved to dismiss the García
complaint for failure to make a demand on the Board of Directors prior to initiating litigation. On
November 20, 2009, and pursuant to a stipulation among the parties, plaintiffs filed an amended
complaint, and on December 21, 2009, Popular and the individual defendants moved to dismiss the
García amended complaint. The Díaz case, filed in the Puerto Rico Court of First Instance, San
Juan, has been removed to the U.S. District Court for the District of Puerto Rico. On October 13,
2009, Popular and the individual defendants moved to consolidate the García and Díaz actions. On
October 26, 2009, plaintiff moved to remand the Díaz case to the Puerto Rico Court of First
Instance and to stay defendants consolidation motion pending the outcome of the remand
proceedings. At a scheduling conference held on January 14, 2010, the Court stayed discovery in
both the Hoff and García matters pending resolution of their respective motions to dismiss.
On April 13, 2010, the Puerto Rico Court of First Instance in San Juan granted summary judgment
dismissing a separate complaint brought by plaintiff in the García action that sought to enforce an
alleged right to inspect the books and records of the Corporation in support of the pending
derivative action. The Court held that the plaintiff had not propounded a proper purpose under
Puerto Rico law for such inspection. On April 28, 2010, the plaintiff in that action moved for
reconsideration of the Courts dismissal. On May 4, 2010, the Court denied plaintiffs request for
reconsideration. On June 7, 2010, plaintiff filed an appeal before the Puerto Rico Court of
Appeals. On June 11, 2010, Popular and the individual defendants moved to dismiss the appeal. On
June 22, 2010, the Court of Appeals dismissed the appeal. On July 6, 2010, plaintiff moved for
reconsideration of the Courts dismissal. On July 16, 2010, the Court of Appeals denied plaintiffs
request for reconsideration.
At this early stage, it is not possible for management to assess the probability of an adverse
outcome, or reasonably estimate the amount of any potential loss. It is possible that the ultimate
resolution of these matters, if unfavorable, may be material to the Corporations results of
operations.
In addition to the other information set forth in this report, you should carefully consider the
factors discussed under Part IItem 1ARisk Factors in our 2009 Form 10-K, as supplemented and
updated by the discussion below. These factors could materially adversely affect our business,
financial condition, liquidity, results of operations and capital position, and could cause our
actual results to differ materially from our historical results or the results contemplated by the
forward-looking statements contained in this report. Also refer to the discussion in
Part IItem 2Managements Discussion and Analysis of Financial Condition and Results of
Operations in this report for additional information that may supplement or update the discussion
of risk factors in our 2009 Form 10-K.
The risks described in our 2009 Form 10-K and in this report are not the only risks facing us.
Additional risks and uncertainties not currently known to us or that we currently deem to be
immaterial also may materially adversely affect our business, financial condition or results of
operations.
156
Risks Related to the FDIC-assisted Transaction
We entered into an FDIC-assisted transaction involving Westernbank Puerto Rico (the FDIC-assisted
transaction), which could present additional risks to our business.
On April 30, 2010, Popular, Inc.s banking subsidiary, Banco Popular of Puerto Rico (BPPR),
acquired certain assets and assumed certain liabilities of Puerto Rico-based Westernbank Puerto
Rico (Westernbank) from the Federal Deposit Insurance Corporation (the FDIC) in an assisted
transaction (herein, the FDIC-assisted transaction). Although this transaction provides for FDIC
assistance to BPPR to mitigate certain risks, such as sharing exposure to loan losses (80% of the
losses in substantially all the acquired portfolio will be borne by the FDIC) and providing
indemnification against certain liabilities of the former Westernbank, we are still subject to some
of the same risks we would face in acquiring another bank in a negotiated transaction. Such risks
include risks associated with maintaining customer relationships and failure to realize the
anticipated acquisition benefits in the amounts and within the timeframes we expect. In addition,
because the FDIC-assisted transaction was structured in a manner that did not allow bidders the
time and access to information normally associated with preparing for and evaluating a negotiated
transaction, we may face additional risks in the FDIC-assisted transaction.
The success of the FDIC-assisted transaction will depend on a number of uncertain factors.
The success of the FDIC-assisted transaction will depend on a number of factors, including,
without limitation:
|
|
|
our ability to integrate the business and operations of the former Westernbank into
BPPRs current operations; |
|
|
|
our ability to limit the outflow of deposits held by our new customers in the acquired
branches and to successfully retain and manage interest-earning assets (i.e., loans)
acquired in the FDIC-assisted transaction; |
|
|
|
our ability to attract new deposits and to generate new interest-earning assets in the
areas previously served by the former Westernbank branches; |
|
|
|
our ability to control the incremental non-interest expense from the former Westernbank
branches and other units in a manner that enables us to maintain a favorable overall
efficiency ratio; |
|
|
|
our ability to collect on the loans acquired and satisfy the standard requirements
imposed in the loss sharing agreements; and |
|
|
|
our ability to earn acceptable levels of interest and non-interest income, including fee
income, from the acquired branches. |
The FDIC-assisted transaction increases BPPRs commercial real estate and construction loan
portfolio, which have a greater credit risk than residential mortgage loans.
With the acquisition of most of the former Westernbanks loan portfolio, the commercial real estate
loan and construction loan portfolios represent a larger portion of BPPRs total loan portfolio
than prior to the FDIC-assisted transaction. This type of lending is generally considered to have
more complex credit risks than traditional single-family residential or consumer lending, because
the principal is concentrated in a limited number of loans with repayment dependent on the
successful operation or completion of the related real estate or construction project.
Consequently, these loans are more sensitive to the current adverse conditions in the real estate
market and the general economy. These loans are generally less predictable, more difficult to
evaluate and monitor, and their collateral may be more difficult to dispose of in a market decline.
Furthermore, since these loans are to Puerto Rico based borrowers, the Corporations credit
exposure concentration in Puerto Rico increased as a result of the acquisition. Although, the
negative economic aspects of these risks are substantially reduced as a result of the FDIC loss
sharing agreements, changes in national and local economic conditions could lead to higher loan
charge-offs in connection with the FDIC-assisted transaction all of which would not be supported by
the loss sharing agreements with the FDIC.
We acquired significant portfolios of loans in the FDIC-assisted transaction. Although these loan
portfolios will be initially accounted for at fair value, there is no assurance that the loans we
acquired will not become impaired, which may result in additional charge-offs to this portfolio.
The fluctuations in national, regional and local economic conditions, including those related to
local residential, commercial real estate and construction markets, may increase
157
the level of charge-offs that we make to our loan portfolio, and consequently, reduce our net
income, and may also increase the level of charge-offs on the loan portfolio that we have acquired
and correspondingly reduce our net income. These fluctuations are not predictable, cannot be
controlled and may have a material adverse impact on our operations and financial condition even if
other favorable events occur.
Although we have entered into loss sharing agreements with the FDIC which provide that 80% of
losses related to specified loan portfolios that we have acquired in connection with the
FDIC-assisted transaction will be borne by the FDIC, we are not protected for all losses resulting
from charge-offs with respect to those specified loan portfolios. Additionally, the loss sharing
agreements have limited terms; therefore, any charge-off of related losses that we experience after
the term of the loss sharing agreements will not be reimbursed by the FDIC and will negatively
impact our results of operations. The loss sharing agreements also impose standard requirements on
us which must be satisfied in order to retain loss share protections. The FDIC has the right to
refuse or delay payment for loan losses if the loss sharing agreements are not managed in
accordance with their terms.
Our decisions regarding the fair value of assets acquired could be inaccurate and our estimated
loss share indemnification asset in the FDIC-assisted transaction may be inadequate, which could
materially and adversely affect our business, financial condition, results of operations, and
future prospects.
Management makes various assumptions and judgments about the collectibility of acquired loan
portfolios, including the creditworthiness of borrowers and the value of the real estate and other
assets serving as collateral for the repayment of secured loans. In the FDIC-assisted transaction,
we may record a loss share indemnification asset that we consider adequate to absorb future losses
which may occur in the acquired loan portfolio. In determining the size of the loss share
indemnification asset, we analyze the loan portfolio based on historical loss experience, volume
and classification of loans, volume and trends in delinquencies and nonaccruals, local economic
conditions, and other pertinent information. If our assumptions are incorrect, our current
indemnification asset may be insufficient to cover future loan losses, and increased loss reserves
may be needed to respond to different economic conditions or adverse developments in the acquired
loan portfolio. However, in the event expected losses from the Westernbank portfolio were to
increase more than originally expected, the related increase in loss reserves would be largely
offset by higher than expected indemnity payments from the FDIC. Any increase in future loan losses
could have a negative effect on our operating results.
Our ability to obtain reimbursement under the loss sharing agreements on covered assets depends on
our compliance with the terms of the loss sharing agreements.
Management must certify to the FDIC on a monthly and quarterly basis our compliance with the terms
of the FDIC loss share agreements as a prerequisite to obtaining reimbursement from the FDIC for
realized losses on covered assets. The required terms of the agreements are extensive and failure
to comply with any of the guidelines could result in a specific asset or group of assets
permanently losing their loss sharing coverage. Under the terms of the FDIC loss share agreements, the assignment or transfer of the loss
sharing agreements to another entity generally requires the written consent of the FDIC.
No assurances can be given that we will manage the covered assets in such a way as to always
maintain loss share coverage on all such assets.
Goodwill recorded on the FDIC-assisted transaction may increase or decrease during a one year
period following the FDIC-assisted transaction acquisition date.
The
goodwill recorded in connection with the Westernbank FDIC-assisted
transaction is preliminary and subject to revision for a period of one
year following the April 30, 2010 acquisition date. Adjustments may be recorded based on
additional information received after the acquisition date that may affect the fair value of assets
acquired and liabilities assumed. Downward adjustments in the values of assets acquired or
increases in values of liabilities assumed on the date of acquisition would increase the
preliminary goodwill recorded.
158
Risks Related to the EVERTEC Sale Transaction
We entered into a definitive agreement to sell a 51% interest in our merchant acquiring and
processing business and may not be able to generate gains on sale or related increase in
shareholders equity commensurate with desirable levels. Moreover, the loss of income from the sale
of the 51% interest could have an adverse effect on the Corporations earnings and future growth.
On July 1, 2010, we announced that we entered into an agreement and plan of merger pursuant to
which Popular will sell a 51% majority interest in the Corporations merchant acquiring and
processing business and will retain a 49% interest. The transaction is currently expected to close
in the third quarter of 2010 and is subject to regulatory approval. The Corporation is subject to
market forces that may make completion of the sale unsuccessful or may hinder the ability to do so
within a desirable time frame.
We may suffer the loss of income from the sold portion of the merchant acquiring and processing and
technology business and such loss of income could have an adverse effect on our future earnings and
growth.
Risk Related to Regulatory Reform
Recently adopted financial reform legislation will impose significant new limitations on our business activities and subject us to increased regulation and additional costs.
On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer
Protection Act (the Dodd-Frank Act). The Dodd-Frank Act implements significant changes in the
regulation of financial institutions and will fundamentally change the system of oversight
described under Item 1. BusinessRegulation and Supervision and Regulation in our Annual Report
on Form 10-K for the year ended December 31, 2009. Although we cannot predict how regulatory
implementation of the Dodd-Frank Act will occur, the related findings of various regulatory and
commission studies, the interpretations issued as part of the rulemaking process and the final
regulations that are issued with respect to various elements of the new law may cause changes that
impact the profitability of our business activities and require that we change certain of our
business practices, and could expose us to additional costs (including increased compliance costs).
These changes may also require us to invest significant management attention and resources to make
any necessary changes.
|
|
|
Item 2. |
|
Unregistered Sales of Equity Securities and Use of Proceeds |
Issuer Purchases of Equity Securities
In April 2004, the Corporations shareholders adopted the Popular, Inc. 2004 Omnibus Incentive
Plan. The Corporation has to date used shares purchased in the market to make grants under the
Plan. The maximum number of shares of common stock that may be granted under this Plan is
10,000,000.
The following table sets forth the details of purchases of Common Stock during the quarter ended
June 30, 2010 under the 2004 Omnibus Incentive Plan.
Not in
thousands |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of Shares |
|
Maximum Number of Shares |
|
|
Total Number of Shares |
|
Average Price Paid |
|
Purchased as Part of Publicly |
|
that May Yet be Purchased |
Period |
|
Purchased |
|
per Share |
|
Announced Plans or Programs |
|
Under the Plans or Programs [a] |
|
April 1 April 30 |
|
|
563,043 |
|
|
|
3.96 |
|
|
|
563,043 |
|
|
|
6,804,993 |
|
May 1 May 31 |
|
|
207,261 |
|
|
|
3.15 |
|
|
|
207,261 |
|
|
|
6,774,016 |
|
June 1 June 30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,774,016 |
|
|
Total June 30, 2010 |
|
|
770,304 |
|
|
|
3.74 |
|
|
|
770,304 |
|
|
|
6,774,016 |
|
|
|
|
|
[a] |
|
Includes shares forfeited. |
Item 6. Exhibits
|
|
|
Exhibit No. |
|
Exhibit Description |
|
2.1
|
|
Purchase and Assumption Agreement; Whole Bank; All Deposits, among the Federal
Deposit Insurance Corporation, receiver of Westernbank, Mayaguez Puerto Rico, the
Federal Deposit Insurance Corporation and Banco Popular de Puerto Rico, dated as of
April 30, 2010. The Purchase and Assumption Agreement includes as Exhibit 4.15A the
Single Family Shared-Loss Agreement and as Exhibit 4.15B the Commercial Shared-Loss
Agreement (incorporated by reference to Exhibit 2.1 of the Corporations Current Report
on Form 8-K dated April 30, 2010 and filed on May 6, 2010). |
|
|
|
2.2
|
|
Agreement and Plan of Merger dated as of June 30, 2010, among Popular, Inc., AP
Carib Holdings Ltd., Carib Acquisition, Inc. and EVERTEC, Inc. (incorporated by
reference to Exhibit 2.1 of the Corporations Current Report on Form 8-K dated July 1,
2010 and filed on July 8, 2010). |
|
|
|
3.1
|
|
Composite Certificate of Incorporation of the Corporation, as currently in
effect. |
159
|
|
|
Exhibit No. |
|
Exhibit Description |
|
4.1
|
|
Purchase Money Note, issued on April 30, 2010 (incorporated by reference to
Exhibit 4.1 of the Corporations Current Report on Form 8-K dated April 30, 2010 and
filed on May 6, 2010). |
|
|
|
4.2
|
|
Value Appreciation Instrument, issued on April 30, 2010 (incorporated by
reference to Exhibit 4.2 of the Corporations Current Report on Form 8-K dated April 30,
2010 and filed on May 6, 2010). |
|
|
|
10.1
|
|
IP Purchase and Sale Agreement, dated as of June 30, 2010, between Popular, Inc.
and EVERTEC, Inc. (incorporated by reference to Exhibit 10.1 of the Corporations
Current Report on Form 8-K dated July 1, 2010 and filed on July 8, 2010). |
|
|
|
12.1
|
|
Computation of the ratios of earnings to fixed charges and preferred stock
dividends. |
|
|
|
31.1
|
|
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
31.2
|
|
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.1
|
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.2
|
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. |
160
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
POPULAR, INC.
(Registrant)
|
|
|
|
|
|
|
|
Date: August 9, 2010 |
By: |
/s/ Jorge A. Junquera
|
|
|
|
Jorge A. Junquera |
|
|
|
Senior Executive Vice President &
Chief Financial Officer |
|
|
|
|
|
Date: August 9, 2010 |
By: |
/s/ Ileana Gonzalez Quevedo
|
|
|
|
Ileana Gonzalez Quevedo |
|
|
|
Senior Vice President & Corporate Comptroller |
|
|
161