10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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þ |
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Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended September 30, 2008
Commission File Number: 000-13818
POPULAR, INC.
(Exact name of registrant as specified in its charter)
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Puerto Rico
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66-0667416 |
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(State or other jurisdiction of
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(IRS Employer Identification Number) |
incorporation or organization) |
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Popular Center Building |
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209 Muñoz Rivera Avenue, Hato Rey |
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San Juan, Puerto Rico
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00918 |
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(Address of principal executive offices)
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(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 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):
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Large accelerated filer þ |
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Accelerated filer o |
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Non-accelerated filer o
(Do not check if a smaller reporting company) |
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Smaller reporting company o |
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 $6 par value 282,035,628 shares outstanding as of
November 4, 2008.
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 the Corporations 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 the Corporations 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, as well as general
business and economic conditions; changes in interest rates, as well as the magnitude of such
changes; the fiscal and monetary policies of the federal government and its agencies; the relative
strength or weakness of the consumer and commercial credit sectors and of the real estate markets;
the performance of the stock and bond markets; competition in the financial services industry;
possible legislative, tax or regulatory changes; and difficulties in combining the operations of
acquired entities.
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 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)
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(In thousands, except share information) |
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September 30, 2008 |
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December 31, 2007 |
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September 30, 2007 |
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ASSETS |
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Cash and due from banks |
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$ |
1,183,997 |
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$ |
818,825 |
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$ |
709,056 |
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Money market investments: |
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Federal funds sold |
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173,330 |
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737,815 |
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430,000 |
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Securities purchased under agreements to resell |
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121,613 |
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145,871 |
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180,394 |
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Time deposits with other banks |
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14,554 |
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123,026 |
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24,703 |
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309,497 |
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1,006,712 |
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635,097 |
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Investment securities available-for-sale, at fair value: |
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Pledged securities with creditors right to repledge |
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3,256,348 |
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4,249,295 |
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4,742,127 |
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Other investment securities available-for-sale |
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4,312,394 |
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4,265,840 |
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4,136,368 |
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Investment securities held-to-maturity, at amortized cost (market value as of
September 30, 2008 - $716,430; December 31, 2007 - $486,139; September
30, 2007 $280,072) |
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719,832 |
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484,466 |
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279,267 |
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Other investment securities, at lower of cost or realizable value (realizable
value as of September 30, 2008 - $273,836; December 31, 2007 -
$216,819; September 30, 2007 - $179,598) |
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229,158 |
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216,584 |
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179,376 |
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Trading account securities, at fair value: |
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Pledged securities with creditors right to repledge |
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390,181 |
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673,958 |
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569,357 |
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Other trading securities |
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54,217 |
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93,997 |
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92,801 |
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Loans held-for-sale measured at lower of cost or market value |
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245,134 |
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1,889,546 |
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423,303 |
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Loans held-in-portfolio: |
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Loans held-in-portfolio pledged with creditors right to repledge |
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149,610 |
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160,923 |
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Other loans |
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26,519,805 |
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28,053,956 |
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33,067,301 |
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Less Unearned income |
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183,770 |
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182,110 |
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330,723 |
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Allowance for loan losses |
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726,480 |
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548,832 |
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600,273 |
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25,609,555 |
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27,472,624 |
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32,297,228 |
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Premises and equipment, net |
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620,469 |
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588,163 |
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580,768 |
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Other real estate |
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72,605 |
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81,410 |
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133,508 |
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Accrued income receivable |
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197,549 |
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216,114 |
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290,916 |
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Servicing assets (at fair value on September 30, 2008 - $127,827; December 31,
2007 - $191,624; September 30, 2007 - $193,255) |
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132,484 |
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196,645 |
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196,992 |
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Other assets (See Note 9) |
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1,412,219 |
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1,456,994 |
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1,244,689 |
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Goodwill |
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608,172 |
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630,761 |
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668,807 |
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Other intangible assets |
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67,662 |
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69,503 |
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100,471 |
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Assets from discontinued operations (See Note 3) |
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968,669 |
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$ |
40,390,142 |
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$ |
44,411,437 |
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$ |
47,280,131 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Liabilities: |
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Deposits: |
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Non-interest bearing |
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$ |
4,065,720 |
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$ |
4,510,789 |
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$ |
3,975,383 |
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Interest bearing |
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23,845,677 |
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23,823,689 |
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22,626,132 |
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27,911,397 |
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28,334,478 |
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26,601,515 |
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Federal funds purchased and assets sold under agreements to repurchase |
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3,730,039 |
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5,437,265 |
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6,287,303 |
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Other short-term borrowings |
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507,011 |
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1,501,979 |
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1,414,897 |
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Notes payable |
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4,242,487 |
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4,621,352 |
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8,314,791 |
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Other liabilities |
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811,253 |
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934,372 |
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857,795 |
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Liabilities from discontinued operations (See Note 3) |
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180,373 |
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37,382,560 |
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40,829,446 |
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43,476,301 |
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Commitments and contingencies (See Note 17) |
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Minority interest in consolidated subsidiaries |
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109 |
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109 |
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109 |
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Stockholders equity: |
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Preferred stock, $25 liquidation value; 30,000,000 shares authorized;
7,475,000 Class A shares issued and outstanding in all periods presented;
16,000,000 Class B shares issued and outstanding at September 30, 2008 |
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586,875 |
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186,875 |
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186,875 |
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Common stock, $6 par value; 470,000,000
shares authorized in all periods
presented; 295,335,063 shares issued (December 31, 2007 293,651,398;
September 30, 2007 292,993,474) and 281,708,260 outstanding
(December 31, 2007 280,029,215; September 30, 2007 279,597,529) |
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1,772,010 |
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1,761,908 |
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1,757,961 |
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Surplus |
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564,021 |
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568,184 |
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536,129 |
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Retained earnings |
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384,062 |
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1,319,467 |
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1,689,384 |
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Accumulated other comprehensive loss, net of tax of ($22,374)
(December 31, 2007 ($15,438); September 30, 2007 ($56,551)) |
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(91,983 |
) |
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(46,812 |
) |
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(161,061 |
) |
Treasury stock at cost, 13,626,803 shares (December 31, 2007 13,622,183;
September 30, 2007 13,395,945) |
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(207,512 |
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(207,740 |
) |
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(205,567 |
) |
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3,007,473 |
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3,581,882 |
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3,803,721 |
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$ |
40,390,142 |
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$ |
44,411,437 |
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$ |
47,280,131 |
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The accompanying notes are an integral part of these unaudited consolidated financial statements.
4
POPULAR, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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Quarter ended |
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Nine months ended |
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September 30, |
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September 30, |
(In thousands, except per share information) |
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2008 |
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2007 |
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2008 |
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2007 |
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INTEREST INCOME: |
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Loans |
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$ |
457,905 |
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$ |
523,794 |
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$ |
1,421,937 |
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$ |
1,521,424 |
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Money market investments |
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3,447 |
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6,807 |
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13,651 |
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17,168 |
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Investment securities |
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84,790 |
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109,019 |
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261,649 |
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334,992 |
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Trading account securities |
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9,339 |
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10,163 |
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35,344 |
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27,244 |
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555,481 |
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649,783 |
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1,732,581 |
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1,900,828 |
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INTEREST EXPENSE: |
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Deposits |
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165,611 |
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196,825 |
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528,596 |
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552,657 |
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Short-term borrowings |
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37,233 |
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108,971 |
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137,824 |
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340,162 |
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Long-term debt |
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28,355 |
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12,341 |
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75,823 |
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39,667 |
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231,199 |
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318,137 |
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742,243 |
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932,486 |
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Net interest income |
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324,282 |
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331,646 |
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990,338 |
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968,342 |
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Provision for loan losses |
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252,160 |
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86,340 |
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602,561 |
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219,477 |
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Net interest income after provision for loan losses |
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72,122 |
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245,306 |
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387,777 |
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|
748,865 |
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Service charges on deposit accounts |
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52,433 |
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49,704 |
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155,319 |
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146,567 |
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Other service fees (See Note 18) |
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95,302 |
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89,863 |
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306,649 |
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265,712 |
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Net (loss) gain on sale and valuation adjustments of investment
securities |
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(9,132 |
) |
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(776 |
) |
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69,430 |
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112,842 |
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Trading account profit |
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6,669 |
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9,239 |
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38,547 |
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29,765 |
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Gain on sale of loans and valuation adjustments on loans held-for-sale |
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6,522 |
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6,975 |
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25,696 |
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40,224 |
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Other operating income |
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36,134 |
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21,920 |
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|
92,836 |
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87,968 |
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260,050 |
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422,231 |
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1,076,254 |
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1,431,943 |
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OPERATING EXPENSES: |
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Personnel costs: |
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Salaries |
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118,948 |
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116,169 |
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360,963 |
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357,706 |
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Pension, profit sharing and other benefits |
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29,282 |
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29,104 |
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98,552 |
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100,068 |
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148,230 |
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145,273 |
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|
459,515 |
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|
457,774 |
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Net occupancy expenses |
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26,510 |
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27,083 |
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81,218 |
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76,185 |
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Equipment expenses |
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26,305 |
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28,324 |
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84,312 |
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87,259 |
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Other taxes |
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13,301 |
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12,766 |
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39,905 |
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|
35,644 |
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Professional fees |
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31,780 |
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29,498 |
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88,964 |
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|
87,689 |
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Communications |
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12,574 |
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15,115 |
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38,137 |
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44,669 |
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Business promotion |
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16,216 |
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27,479 |
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51,064 |
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83,410 |
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Printing and supplies |
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3,269 |
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|
3,760 |
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|
10,763 |
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|
11,536 |
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Other operating expenses |
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40,764 |
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|
27,429 |
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|
113,722 |
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|
81,176 |
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Amortization of intangibles |
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3,966 |
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|
2,234 |
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|
8,948 |
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|
8,030 |
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|
322,915 |
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|
318,961 |
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|
976,548 |
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|
973,372 |
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(Loss) income from continuing operations before income tax |
|
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(62,865 |
) |
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|
103,270 |
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|
|
99,706 |
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|
|
458,571 |
|
Income tax expense |
|
|
148,308 |
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|
|
23,056 |
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|
152,467 |
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|
|
105,598 |
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(Loss) income from continuing operations |
|
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(211,173 |
) |
|
|
80,214 |
|
|
|
(52,761 |
) |
|
|
352,973 |
|
Loss from discontinued operations, net of tax (See Note 3) |
|
|
(457,370 |
) |
|
|
(44,211 |
) |
|
|
(488,242 |
) |
|
|
(123,373 |
) |
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NET (LOSS) INCOME |
|
$ |
(668,543 |
) |
|
$ |
36,003 |
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|
$ |
(541,003 |
) |
|
$ |
229,600 |
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NET (LOSS) INCOME APPLICABLE TO COMMON STOCK |
|
$ |
(679,772 |
) |
|
$ |
33,024 |
|
|
$ |
(561,213 |
) |
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$ |
220,665 |
|
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(LOSSES) EARNINGS PER COMMON SHARE BASIC AND DILUTED: |
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|
|
|
|
|
|
|
|
|
|
|
|
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(Losses) income from continuing operations |
|
$ |
(0.79 |
) |
|
$ |
0.28 |
|
|
$ |
(0.26 |
) |
|
$ |
1.23 |
|
Losses from discontinued operations |
|
|
(1.63 |
) |
|
|
(0.16 |
) |
|
|
(1.74 |
) |
|
|
(0.44 |
) |
|
Net (loss) income |
|
$ |
(2.42 |
) |
|
$ |
0.12 |
|
|
$ |
(2.00 |
) |
|
$ |
0.79 |
|
|
DIVIDENDS DECLARED PER COMMON SHARE |
|
$ |
0.08 |
|
|
$ |
0.16 |
|
|
$ |
0.40 |
|
|
$ |
0.48 |
|
|
The accompanying notes are an integral part of these unaudited consolidated financial statements.
5
POPULAR, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
(In thousands) |
|
2008 |
|
2007 |
|
Preferred stock: |
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
$ |
186,875 |
|
|
$ |
186,875 |
|
Issuance of preferred stock |
|
|
400,000 |
|
|
|
|
|
|
Balance at end of period |
|
|
586,875 |
|
|
|
186,875 |
|
|
Common stock: |
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
1,761,908 |
|
|
|
1,753,146 |
|
Common stock issued under the Dividend Reinvestment Plan |
|
|
10,102 |
|
|
|
4,755 |
|
Stock options exercised |
|
|
|
|
|
|
60 |
|
|
Balance at end of period |
|
|
1,772,010 |
|
|
|
1,757,961 |
|
|
Surplus: |
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
568,184 |
|
|
|
526,856 |
|
Common stock issued under the Dividend Reinvestment Plan |
|
|
5,072 |
|
|
|
7,835 |
|
Issuance cost of preferred stock |
|
|
(10,065 |
) |
|
|
|
|
Stock options expense on unexercised options, net of forfeitures |
|
|
830 |
|
|
|
1,289 |
|
Stock options exercised |
|
|
|
|
|
|
149 |
|
|
Balance at end of period |
|
|
564,021 |
|
|
|
536,129 |
|
|
Retained earnings: |
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
1,319,467 |
|
|
|
1,594,144 |
|
Net (loss) income |
|
|
(541,003 |
) |
|
|
229,600 |
|
Cumulative effect of accounting change-adoption of SFAS No. 159
in 2008 (2007-SFAS No. 156 and EITF 06-5) |
|
|
(261,831 |
) |
|
|
8,667 |
|
Cash dividends declared on common stock |
|
|
(112,361 |
) |
|
|
(134,092 |
) |
Cash dividends declared on preferred stock |
|
|
(20,210 |
) |
|
|
(8,935 |
) |
|
Balance at end of period |
|
|
384,062 |
|
|
|
1,689,384 |
|
|
Accumulated other comprehensive loss: |
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
(46,812 |
) |
|
|
(233,728 |
) |
Other comprehensive (loss) income, net of tax |
|
|
(45,171 |
) |
|
|
72,667 |
|
|
Balance at end of period |
|
|
(91,983 |
) |
|
|
(161,061 |
) |
|
Treasury stock at cost: |
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
(207,740 |
) |
|
|
(206,987 |
) |
Purchase of common stock |
|
|
(358 |
) |
|
|
(352 |
) |
Reissuance of common stock |
|
|
586 |
|
|
|
1,772 |
|
|
Balance at end of period |
|
|
(207,512 |
) |
|
|
(205,567 |
) |
|
Total stockholders equity |
|
$ |
3,007,473 |
|
|
$ |
3,803,721 |
|
|
Disclosure of changes in number of shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
|
September 30, |
|
|
2008 |
|
2007 |
|
2007 |
|
Preferred Stock: |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
7,475,000 |
|
|
|
7,475,000 |
|
|
|
7,475,000 |
|
New shares issued |
|
|
16,000,000 |
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
|
23,475,000 |
|
|
|
7,475,000 |
|
|
|
7,475,000 |
|
|
Common Stock Issued: |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
293,651,398 |
|
|
|
292,190,924 |
|
|
|
292,190,924 |
|
Issued under the Dividend Reinvestment Plan |
|
|
1,683,665 |
|
|
|
1,450,410 |
|
|
|
792,486 |
|
Stock options exercised |
|
|
|
|
|
|
10,064 |
|
|
|
10,064 |
|
|
Balance at end of period |
|
|
295,335,063 |
|
|
|
293,651,398 |
|
|
|
292,993,474 |
|
|
Treasury stock |
|
|
(13,626,803 |
) |
|
|
(13,622,183 |
) |
|
|
(13,395,945 |
) |
|
Common Stock outstanding |
|
|
281,708,260 |
|
|
|
280,029,215 |
|
|
|
279,597,529 |
|
|
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 |
|
Nine months ended |
|
|
September 30, |
|
September 30, |
(In thousands) |
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
Net (loss) income |
|
$ |
(668,543 |
) |
|
$ |
36,003 |
|
|
$ |
(541,003 |
) |
|
$ |
229,600 |
|
|
Other comprehensive (loss) income before tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment |
|
|
(1,690 |
) |
|
|
(966 |
) |
|
|
(2,882 |
) |
|
|
2,014 |
|
Adjustment of pension and postretirement benefit plans |
|
|
(36 |
) |
|
|
|
|
|
|
(110 |
) |
|
|
(519 |
) |
Unrealized (losses) gains on securities available-for-sale arising
during the period |
|
|
(13,611 |
) |
|
|
156,462 |
|
|
|
(36,048 |
) |
|
|
100,493 |
|
Reclassification adjustment for losses (gains) included in net income |
|
|
11,704 |
|
|
|
3 |
|
|
|
(14,669 |
) |
|
|
(80 |
) |
Unrealized net gains (losses) on cash flow hedges |
|
|
947 |
|
|
|
(2,065 |
) |
|
|
(1,160 |
) |
|
|
(1,117 |
) |
Reclassification adjustment for losses (gains) included in net income |
|
|
1,169 |
|
|
|
(164 |
) |
|
|
2,762 |
|
|
|
(289 |
) |
Cumulative effect of accounting change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(243 |
) |
|
|
|
|
(1,517 |
) |
|
|
153,270 |
|
|
|
(52,107 |
) |
|
|
100,259 |
|
Income tax (expense) benefit |
|
|
(18 |
) |
|
|
(39,514 |
) |
|
|
6,936 |
|
|
|
(27,592 |
) |
|
Total other comprehensive (loss) income, net of tax |
|
|
(1,535 |
) |
|
|
113,756 |
|
|
|
(45,171 |
) |
|
|
72,667 |
|
|
Comprehensive (loss) income |
|
$ |
(670,078 |
) |
|
$ |
149,759 |
|
|
$ |
(586,174 |
) |
|
$ |
302,267 |
|
|
Tax Effects Allocated to Each Component of Other Comprehensive (Loss) Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended |
|
Nine months ended |
|
|
September 30, |
|
September 30, |
(In thousands) |
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
Underfunding of pension and postretirement benefit plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
180 |
|
Unrealized losses (gains) on securities available-for-sale arising
during the period |
|
$ |
1,694 |
|
|
$ |
(40,302 |
) |
|
$ |
5,374 |
|
|
|
(28,280 |
) |
Reclassification adjustment for losses (gains) included in net income |
|
|
(959 |
) |
|
|
(1 |
) |
|
|
2,165 |
|
|
|
13 |
|
Unrealized net gains (losses) on cash flows hedges |
|
|
(297 |
) |
|
|
723 |
|
|
|
478 |
|
|
|
371 |
|
Reclassification adjustment for
losses (gains) included in net income |
|
|
(456 |
) |
|
|
66 |
|
|
|
(1,081 |
) |
|
|
124 |
|
|
Income tax (expense) benefit |
|
$ |
(18 |
) |
|
$ |
(39,514 |
) |
|
$ |
6,936 |
|
|
$ |
(27,592 |
) |
|
Disclosure of accumulated other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
|
September 30, |
(In thousands) |
|
2008 |
|
2007 |
|
2007 |
|
Foreign currency translation adjustment |
|
$ |
(37,470 |
) |
|
$ |
(34,588 |
) |
|
$ |
(34,687 |
) |
|
Underfunding of pension and postretirement benefit plans |
|
|
(51,249 |
) |
|
|
(51,139 |
) |
|
|
(69,779 |
) |
Tax effect |
|
|
20,108 |
|
|
|
20,108 |
|
|
|
27,214 |
|
|
Net of tax amount |
|
|
(31,141 |
) |
|
|
(31,031 |
) |
|
|
(42,565 |
) |
|
Unrealized (losses) gains on securities available-for-sale |
|
|
(23,625 |
) |
|
|
27,092 |
|
|
|
(111,830 |
) |
Tax effect |
|
|
1,589 |
|
|
|
(5,950 |
) |
|
|
28,879 |
|
|
Net of tax amount |
|
|
(22,036 |
) |
|
|
21,142 |
|
|
|
(82,951 |
) |
|
Unrealized losses on cash flows hedges |
|
|
(2,013 |
) |
|
|
(3,615 |
) |
|
|
(1,316 |
) |
Tax effect |
|
|
677 |
|
|
|
1,280 |
|
|
|
458 |
|
|
Net of tax amount |
|
|
(1,336 |
) |
|
|
(2,335 |
) |
|
|
(858 |
) |
|
|
Accumulated other comprehensive loss, net of tax |
|
$ |
(91,983 |
) |
|
$ |
(46,812 |
) |
|
$ |
(161,061 |
) |
|
The accompanying notes are an integral part of these unaudited consolidated financial statements.
7
POPULAR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
(In thousands) |
|
2008 |
2007 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(541,003 |
) |
|
$ |
229,600 |
|
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization of premises and equipment |
|
|
55,233 |
|
|
|
59,558 |
|
Provision for loan losses |
|
|
621,552 |
|
|
|
359,606 |
|
Amortization of intangibles |
|
|
8,948 |
|
|
|
8,030 |
|
Amortization and fair value adjustments of servicing assets |
|
|
53,679 |
|
|
|
34,941 |
|
Net gain on sale and valuation adjustments of investment securities |
|
|
(64,010 |
) |
|
|
(79,857 |
) |
Losses from changes in fair value related to instruments measured at fair value pursuant to
SFAS No. 159 |
|
|
179,482 |
|
|
|
|
|
Net gain on disposition of premises and equipment |
|
|
(23,643 |
) |
|
|
(5,293 |
) |
Net loss (gain) on sale of loans and valuation adjustments on loans held-for-sale |
|
|
54,527 |
|
|
|
(37,719 |
) |
Net amortization of premiums and accretion of discounts on investments |
|
|
16,034 |
|
|
|
15,801 |
|
Net amortization of premiums and deferred loan origination fees and costs |
|
|
40,650 |
|
|
|
70,645 |
|
Fair value adjustment of other assets held-for-sale |
|
|
103,702 |
|
|
|
|
|
Earnings from investments under the equity method |
|
|
(6,899 |
) |
|
|
(19,514 |
) |
Stock options expense |
|
|
830 |
|
|
|
1,339 |
|
Deferred
income taxes, net of valuation |
|
|
72,261 |
|
|
|
(94,581 |
) |
Net disbursements on loans held-for-sale |
|
|
(2,000,449 |
) |
|
|
(4,007,301 |
) |
Acquisitions of loans held-for-sale |
|
|
(268,718 |
) |
|
|
(474,269 |
) |
Proceeds from sale of loans held-for-sale |
|
|
1,289,738 |
|
|
|
3,475,817 |
|
Net decrease in trading securities |
|
|
1,604,345 |
|
|
|
1,003,078 |
|
Net decrease (increase) in accrued income receivable |
|
|
8,194 |
|
|
|
(42,675 |
) |
Net (increase) decrease in other assets |
|
|
(245,990 |
) |
|
|
30,507 |
|
Net (decrease) increase in interest payable |
|
|
(49,180 |
) |
|
|
4,586 |
|
Net increase in postretirement benefit obligation |
|
|
1,810 |
|
|
|
2,407 |
|
Net (decrease) increase in other liabilities |
|
|
(35,120 |
) |
|
|
18,645 |
|
|
Total adjustments |
|
|
1,416,976 |
|
|
|
323,751 |
|
|
Net cash provided by operating activities |
|
|
875,973 |
|
|
|
553,351 |
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Net decrease (increase) in money market investments |
|
|
697,215 |
|
|
|
(266,954 |
) |
Purchases of investment securities: |
|
|
|
|
|
|
|
|
Available-for-sale |
|
|
(3,875,390 |
) |
|
|
(67,920 |
) |
Held-to-maturity |
|
|
(4,958,286 |
) |
|
|
(17,026,831 |
) |
Other |
|
|
(166,641 |
) |
|
|
(47,786 |
) |
Proceeds from calls, paydowns, maturities and redemptions of investment securities: |
|
|
|
|
|
|
|
|
Available-for-sale |
|
|
2,377,740 |
|
|
|
1,066,304 |
|
Held-to-maturity |
|
|
4,724,818 |
|
|
|
16,844,551 |
|
Other |
|
|
154,067 |
|
|
|
17,071 |
|
Proceeds from sale of investment securities available-for-sale |
|
|
2,444,509 |
|
|
|
37,352 |
|
Proceeds from sale of other investment securities |
|
|
49,341 |
|
|
|
246,352 |
|
Net disbursements on loans |
|
|
(976,109 |
) |
|
|
(1,137,982 |
) |
Proceeds from sale of loans |
|
|
1,984,860 |
|
|
|
16,367 |
|
Acquisition of loan portfolios |
|
|
(4,505 |
) |
|
|
(22,312 |
) |
Assets acquired, net of cash |
|
|
|
|
|
|
(2,378 |
) |
Mortgage servicing rights purchased |
|
|
(3,628 |
) |
|
|
(25,596 |
) |
Acquisition of premises and equipment |
|
|
(112,196 |
) |
|
|
(69,607 |
) |
Proceeds from sale of premises and equipment |
|
|
49,366 |
|
|
|
29,501 |
|
Proceeds from sale of foreclosed assets |
|
|
87,280 |
|
|
|
113,776 |
|
|
Net cash provided by (used in) investing activities |
|
|
2,472,441 |
|
|
|
(296,092 |
) |
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Net (decrease) increase in deposits |
|
|
(400,901 |
) |
|
|
2,150,668 |
|
Net (decrease) increase in federal funds purchased and assets sold under agreements to
repurchase |
|
|
(1,707,225 |
) |
|
|
524,858 |
|
Net decrease in other short-term borrowings |
|
|
(994,969 |
) |
|
|
(2,619,228 |
) |
Payments of notes payable |
|
|
(1,312,938 |
) |
|
|
(1,245,332 |
) |
Proceeds from issuance of notes payable |
|
|
1,182,917 |
|
|
|
821,087 |
|
Dividends paid |
|
|
(154,877 |
) |
|
|
(142,898 |
) |
Proceeds from issuance of common stock |
|
|
15,174 |
|
|
|
12,836 |
|
Proceeds from issuance of preferred stock |
|
|
389,935 |
|
|
|
|
|
Treasury stock acquired |
|
|
(358 |
) |
|
|
(352 |
) |
|
Net cash used in financing activities |
|
|
(2,983,242 |
) |
|
|
(498,361 |
) |
|
Net increase (decrease) in cash and due from banks |
|
|
365,172 |
|
|
|
(241,102 |
) |
Cash and due from banks at beginning of period |
|
|
818,825 |
|
|
|
950,158 |
|
|
Cash and due from banks at end of period |
|
$ |
1,183,997 |
|
|
$ |
709,056 |
|
|
The accompanying notes are an integral part of these unaudited consolidated financial statements.
|
|
|
Note: |
|
The Consolidated Statements of Cash Flows for the nine months
ended September 30, 2008 and 2007 include 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 and Basis of Presentation
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 is a financial services provider with operations in Puerto Rico, the United
States, the Caribbean and Latin America. As the leading financial institution in Puerto Rico, the
Corporation offers 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, consumer lending, 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, and Popular Financial Holdings
(PFH). BPNA is a community bank providing a broad range of financial services and products. 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 and offers loan customers the option of being
referred to a trusted consumer lending partner for loan products. PFH operations were discontinued
in the third quarter of 2008. Disclosures on the discontinued operations as well as recent
restructuring plans in the BPNA and E-LOAN subsidiaries are included in Notes 3 and 27 of these
consolidated financial statements. The Corporation, through its transaction processing company,
EVERTEC, continues to use its expertise in technology as a competitive advantage in its expansion
throughout the United States, the Caribbean and Latin America, as well as internally servicing many
of its subsidiaries system infrastructures and transactional processing businesses. Note 25 to the
consolidated financial statements presents further information about the Corporations business
segments.
The unaudited 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. These unaudited 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 reclassifications have been
made to the prior period consolidated financial statements to conform to the 2008 presentation,
including retrospectively adjusting certain information of the consolidated statement of
operations to present in a separate line item the results of discontinued operations from prior
periods presented.
The statement of condition data as of December 31, 2007 was derived from audited financial
statements. 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 statements presented as of September 30, 2008,
December 31, 2007 and September 30, 2007 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, 2007, included in the Corporations 2007 Annual Report. The Corporations Form 10-K filed on
February 29, 2008 incorporates by reference the 2007 Annual Report.
Note 2 Recent Accounting Developments
SFAS No. 157 Fair Value Measurements
SFAS No. 157, issued in September 2006, defines fair value, establishes a framework of measuring
fair value and requires enhanced disclosures about fair value measurements. SFAS No. 157 requires
companies to disclose the fair value of its financial instruments according to a fair value
hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to
determine fair values. Financial assets carried at fair value will be classified and disclosed in
one of the three categories in accordance with the hierarchy. The three levels of the fair value
hierarchy are (1) quoted market prices for identical assets or liabilities in active markets, (2)
observable market-based inputs or unobservable inputs that are corroborated by market data, and (3)
unobservable inputs that are not corroborated by market data. SFAS No. 157 was effective for
financial statements issued for fiscal years beginning after November 15, 2007, and interim periods
within those fiscal years. In February 2008, the Financial Accounting Standards Board (FASB)
issued financial staff position FSP FAS No. 157-2 which defers for one year the effective date for
nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value on
a nonrecurring basis. The staff position also amends SFAS No. 157 to exclude SFAS No. 13
Accounting for Leases and its related
9
interpretive accounting pronouncements that address leasing transactions. The Corporation adopted
the provisions of SFAS No. 157 that were not deferred by FSP FAS No. 157-2, commencing in the first
quarter of 2008. The provisions of SFAS No. 157 are to be applied prospectively. Refer to Note 13
to these consolidated financial statements for the disclosures required for the quarter and nine
months ended September 30, 2008. The adoption of SFAS No. 157 in January 1, 2008 did not have an
impact in beginning retained earnings.
FSP No. 157-3 Determining the Fair Value of a Financial Asset When the Market for that Asset Is
Not Active
In October 2008, the FASB issued FASB Staff Position No. FAS 157-3, Determining the Fair Value of
a Financial Asset When the Market for That Asset Is Not Active (FSP 157-3). FSP 157-3 clarifies
the application of FAS 157 in a market that is not active. The FSP is intended to address the
following application issues: (a) how the reporting entitys own assumptions (that is, expected
cash flows and appropriately risk-adjusted discount rates) should be considered when measuring fair
value when relevant observable inputs do not exist; (b) how available observable inputs in a market
that is not active should be considered when measuring fair value; and (c) how the use of market
quotes (for example, broker quotes or pricing services for the same or similar financial assets)
should be considered when assessing the relevance of observable and unobservable inputs available
to measure fair value. FSP 157-3 is effective on issuance, including prior periods for which
financial statements have not been issued. The Corporation adopted FSP 157-3 for the quarter ended
September 30, 2008 and the effect of adoption on the consolidated financial statements was not
material.
SFAS No. 159 The Fair Value Option for Financial Assets and Liabilities Including an Amendment
of FASB Statement No. 115
In February 2007, the FASB issued SFAS No. 159, which provided companies with an option to report
selected financial assets and liabilities at fair value. The election to measure a financial asset
or liability at fair value can be made on an instrument-by-instrument basis and is irrevocable. The
difference between the carrying amount and the fair value at the election date is recorded as a
transition adjustment to beginning retained earnings. Subsequent changes in fair value are
recognized in earnings. The statement also establishes presentation and disclosure requirements
designed to facilitate comparisons between companies that choose different measurement attributes
for similar types of assets and liabilities. It also requires entities to display the fair value of
those assets and liabilities for which the company has chosen to use fair value on the face of the
balance sheet. The Corporation adopted the provisions of SFAS No. 159 in January 2008.
The Corporation elected the fair value option for approximately $1.2 billion of whole loans
held-in-portfolio by PFH at adoption date. Additionally, management adopted the fair value option
for approximately $287 million of loans and $287 million of bond certificates associated with PFHs
on-balance sheet securitizations that were outstanding as of December 31, 2007. These loans serve
as collateral for the bond certificates.
Refer to Note 12 to these consolidated financial statements for the impact of the initial adoption
of SFAS No. 159 to beginning retained earnings as of January 1, 2008 and additional disclosures as
of September 30, 2008.
FSP FIN No. 39-1 Amendment of FASB Interpretation No. 39
In April 2007, the FASB issued Staff Position FSP FIN No. 39-1, which defines right of setoff and
specifies what conditions must be met for a derivative contract to qualify for this right of
setoff. It also addresses the applicability of a right of setoff to derivative instruments and
clarifies the circumstances in which it is appropriate to offset amounts recognized for those
instruments in the statement of condition. In addition, this FSP permits the offsetting of fair
value amounts recognized for multiple derivative instruments executed with the same counterparty
under a master netting arrangement and fair value amounts recognized for the right to reclaim cash
collateral (a receivable) or the obligation to return cash collateral (a payable) arising from the
same master netting arrangement as the derivative instruments. The adoption of FSP FIN No. 39-1 in
January 2008 did not have a material impact on the Corporations consolidated financial statements
and disclosures. The Corporations policy is not to offset the fair value amounts recognized for
multiple derivative instruments executed with the same counterparty under a master netting
arrangement nor to offset the fair value amounts recognized for the right to reclaim cash
collateral (a receivable) or the obligation to return cash collateral (a payable) arising from the
same master netting arrangement as the derivative instruments.
10
SFAS No. 141-R Statement of Financial Accounting Standards No. 141(R), Business Combinations (a
revision of SFAS No. 141)
SFAS No. 141(R), issued in December 2007, will significantly change how entities apply the
acquisition method to business combinations. The most significant changes affecting how the
Corporation will account for business combinations under this statement include the following: the
acquisition date will be the date the acquirer obtains control; all (and only) identifiable assets
acquired, liabilities assumed, and noncontrolling interests in the acquiree will be stated at fair
value on the acquisition date; assets or liabilities arising from noncontractual contingencies will
be measured at their acquisition date at fair value only if it is more likely than not that they
meet the definition of an asset or liability on the acquisition date; adjustments subsequently made
to the provisional amounts recorded on the acquisition date will be made retroactively during a
measurement period not to exceed one year; acquisition-related restructuring costs that do not meet
the criteria in SFAS No. 146 Accounting for Costs Associated with Exit or Disposal Activities
will be expensed as incurred; transaction costs will be expensed as incurred; reversals of deferred
income tax valuation allowances and income tax contingencies will be recognized in earnings
subsequent to the measurement period; and the allowance for loan losses of an acquiree will not be
permitted to be recognized by the acquirer. Additionally, SFAS No. 141(R) will require new and
modified disclosures surrounding subsequent changes to acquisition-related contingencies,
contingent consideration, noncontrolling interests, acquisition-related transaction costs, fair
values and cash flows not expected to be collected for acquired loans, and an enhanced goodwill
rollforward. The Corporation will be required to prospectively apply SFAS No. 141(R) to all
business combinations completed on or after January 1, 2009. Early adoption is not permitted. For
business combinations in which the acquisition date was before the effective date, the provisions
of SFAS No. 141(R) will apply to the subsequent accounting for deferred income tax valuation
allowances and income tax contingencies and will require any changes in those amounts to be
recorded in earnings. Management will be evaluating the effects that SFAS No. 141(R) will have on
the financial condition, results of operations, liquidity, and the disclosures that will be
presented on the consolidated financial statements.
SFAS No. 160 Statement of Financial Accounting Standards No. 160, Noncontrolling Interest in
Consolidated Financial Statements, an amendment of ARB No. 51
In December 2007, the FASB issued SFAS No. 160, which amends ARB No. 51, to establish accounting
and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation
of a subsidiary. SFAS No. 160 will require entities to classify noncontrolling interests as a
component of stockholders equity on the consolidated financial statements and will require
subsequent changes in ownership interests in a subsidiary to be accounted for as an equity
transaction. Additionally, SFAS No. 160 will require entities to recognize a gain or loss upon the
loss of control of a subsidiary and to remeasure any ownership interest retained at fair value on
that date. This statement also requires expanded disclosures that clearly identify and distinguish
between the interests of the parent and the interests of the noncontrolling owners. SFAS No. 160 is
effective on a prospective basis for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008, except for the presentation and disclosure requirements,
which are required to be applied retrospectively. Early adoption is not permitted. Management will
be evaluating the effects, if any, that the adoption of this statement will have on its
consolidated financial statements.
SFAS No. 161 Disclosures about Derivative Instruments and Hedging Activities
In March 2008, the FASB issued SFAS No. 161, an amendment of SFAS No. 133. The standard requires
enhanced disclosures about derivative instruments and hedged items that are accounted for under
SFAS No. 133 and related interpretations. The standard will be effective for all of the
Corporations interim and annual financial statements for periods beginning after November 15,
2008, with early adoption permitted. The standard expands the disclosure requirements for
derivatives and hedged items and has no impact on how the Corporation accounts for these
instruments. Management will be evaluating the enhanced disclosure requirements.
SFAS No. 162 The Hierarchy of Generally Accepted Accounting Principles
SFAS No. 162, issued by the FASB in May 2008, identifies the sources of accounting principles and
the framework for selecting the principles to be used in the preparation of financial statements
that are presented in conformity with generally accepted accounting principles in the United
States. This statement is effective 60 days following the SECs approval of the Public Company
Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in
Conformity with Generally Accepted Accounting Principles. Management does not expect SFAS No. 162
to have a material impact on the Corporations consolidated financial statements. The Board does
not expect that this statement will result in a change in current accounting practice. However,
transition
11
provisions have been provided in the unusual circumstance that the application of the provisions of
this statement results in a change in accounting practice.
Staff Accounting Bulletin No. 109 (SAB 109) Written Loan Commitments Recorded at Fair Value
through Earnings
On November 5, 2007, the SEC issued Staff SAB 109, which requires that the fair value of a written
loan commitment that is marked-to-market through earnings should include the future cash flows
related to the loans servicing rights. However, the fair value measurement of a written loan
commitment still must exclude the expected net cash flows related to internally developed
intangible assets (such as customer relationship intangible assets).
SAB 109 applies to two types of loan commitments: (1) written mortgage loan commitments for loans
that will be held-for-sale when funded that are marked-to-market as derivatives under SFAS No. 133
(derivative loan commitments); and (2) other written loan commitments that are accounted for at
fair value through earnings under SFAS No. 159s fair-value election.
SAB 109 supersedes SAB 105, which applied only to derivative loan commitments and allowed the
expected future cash flows related to the associated servicing of the loan to be recognized only
after the servicing asset had been contractually separated from the underlying loan by sale or
securitization of the loan with servicing retained. SAB 109 will be applied prospectively to
derivative loan commitments issued or modified in fiscal quarters beginning after December 15,
2007. The implementation of SAB 109 did not have a material impact to the Corporations
consolidated financial statements, including disclosures.
FASB Staff Position (FSP) FAS 140-3, Accounting for Transfers of Financial Assets and Repurchase
Financing Transactions
The objective of FSP FAS 140-3, issued by the FASB in February 2008, is to provide implementation
guidance on whether the security transfer and contemporaneous repurchase financing involving the
transferred financial asset must be evaluated as one linked transaction or two separate de-linked
transactions.
Current practice records the transfer as a sale and the repurchase agreement as a financing. The
FSP FAS 140-3 requires the recognition of the transfer and the repurchase agreement as one linked
transaction, unless all of the following criteria are met: (1) the initial transfer and the
repurchase financing are not contractually contingent on one another; (2) the initial transferor
has full recourse upon default, and the repurchase agreements price is fixed and not at fair
value; (3) the financial asset is readily obtainable in the marketplace and the transfer and
repurchase financing are executed at market rates; and (4) the maturity of the repurchase financing
is before the maturity of the financial asset. The scope of this FSP is limited to transfers and
subsequent repurchase financings that are entered into contemporaneously or in contemplation of one
another.
FSP FAS 140-3 will be effective for the Corporation on January 1, 2009. Early adoption is
prohibited. The Corporation will be evaluating the potential impact of adopting this FSP.
FASB Staff Position (FSP) FAS 142-3, Determination of the Useful Life of Intangible Assets
FSP FAS 142-3, issued by the FASB in April 2008, amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of a recognized
intangible asset under FASB Statement No. 142 Goodwill and Other Intangible Assets. In developing
these assumptions, an entity should consider its own historical experience in renewing or extending
similar arrangements adjusted for entitys specific factors or, in the absence of that experience,
the assumptions that market participants would use about renewals or extensions adjusted for the
entity specific factors.
FSP FAS 142-3 shall be applied prospectively to intangible assets acquired after the effective
date. This FSP will be effective for the Corporation on January 1, 2009. Early adoption is
prohibited. The Corporation will be evaluating the potential impact of adopting this FSP.
12
FSP No. FAS 133-1 and FIN 45-4 Disclosures about Credit Derivatives and Certain Guarantees: An
Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the
Effective Date of FASB Statement No. 161
FSP FAS 133-1 and FIN 45-4 requires disclosures by sellers of credit derivatives and additional
disclosures about the current status of the payment/performance risk of financial guarantees. FSP
FAS 133-1 and FIN 45-4 are effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008. Accordingly, the Corporation will adopt the provisions
of FSP FAS 133-1 and FIN 45-4 in the first quarter 2009. The Corporation does not expect the
adoption of the provisions of FSP FAS 133-1 and FIN 45-4 to have any material impact on the
Corporations financial condition and results of operations.
Note 3 Discontinued Operations
On August 29, 2008, the Corporation announced that it had entered into an agreement to sell loans,
residual interests and servicing related assets of PFH and Popular, FS to Goldman Sachs Mortgage
Company, Goldman, Sachs & Co. and Litton Loan Servicing, LP. The transaction closed on November 3,
2008. This sale resulted in a reduction in assets, mostly accounted
at fair value, of over $900 million, and provided over $700
million in additional liquidity. In addition, on September 18, 2008, the Corporation announced the
consummation of the sale of manufactured housing loans of PFH to 21st Mortgage Corp. and
Vanderbilt Mortgage and Finance, Inc. The transaction provided approximately $198 million in cash
and resulted in a reduction in unpaid principal balance of loans held at PFH of approximately $309
million.
The above actions and past sales and restructuring plans executed at PFH in the past two years have
resulted in the discontinuance of the Corporations PFH operations, which were defined as a
reportable segment for managerial reporting. This includes exiting all business activities,
consisting of loan origination channels and loan servicing functions previously conducted at PFH.
As of September 30, 2008, the Corporation reclassified $789 million of net assets of the PFH
business to discontinued operations, substantially all of which were classified as held-for-sale as
of September 30, 2008.
The proceeds from the PFH asset sales will be used for repayment of the Corporations medium-term
notes due in 2009 as well as other debt maturities. The Corporation reported a net loss for the
discontinued operations of $457.3 million for the third quarter of 2008. The loss included
write-downs of assets held-for-sale to fair value, losses on the sale of loans, restructuring
charges and the recording of a valuation allowance on deferred tax assets of $171.2 million.
Assets and liabilities of discontinued operations, substantially all of which are classified as
held-for-sale, were estimated as follows as of September 30, 2008:
|
|
|
|
|
($ in millions) |
|
September 30, 2008 |
|
Loans |
|
$ |
626 |
Servicing
rights |
|
|
37 |
Servicing advances |
|
|
280 |
Residual interests |
|
|
4 |
Other |
|
|
22 |
|
Total assets |
|
$ |
969 |
|
|
|
|
|
Secured borrowings |
|
$ |
166 |
Other liabilities |
|
|
14 |
|
Total liabilities |
|
$ |
180 |
|
Net assets |
|
$ |
789 |
|
13
The following table provides financial information for the discontinued operations for the quarter
and nine months ended September 30, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended |
|
Nine months ended |
($ in millions) |
|
September 30, 2008 |
|
September 30, 2007 |
|
September 30, 2008 |
|
September 30, 2007 |
|
Net interest income |
|
$ |
1.6 |
|
|
$ |
28.5 |
|
|
$ |
30.7 |
|
|
$ |
118.1 |
|
Provision for loan losses |
|
|
10.5 |
|
|
|
61.8 |
|
|
|
19.0 |
|
|
|
140.1 |
|
Non-interest (loss) income, including fair
value adjustments on loans and MSRs |
|
|
(256.4 |
) |
|
|
(9.9 |
) |
|
|
(255.4 |
) |
|
|
(60.5 |
) |
Operating expenses, including reductions in
value of servicing advances and other
real estate |
|
|
126.3 |
|
|
|
28.0 |
|
|
|
193.0 |
|
|
|
110.0 |
|
Loss on
disposition during the period(1) |
|
|
(53.5 |
) |
|
|
|
|
|
|
(53.5 |
) |
|
|
|
|
|
Pre-tax loss from discontinued operations |
|
$ |
(445.1 |
) |
|
$ |
(71.2 |
) |
|
$ |
(490.2 |
) |
|
$ |
(192.5 |
) |
Income tax expense (benefit) |
|
|
12.2 |
|
|
|
(27.0 |
) |
|
|
(2.0 |
) |
|
|
(69.1 |
) |
|
Loss from discontinued operations, net of tax |
|
$ |
(457.3 |
) |
|
$ |
(44.2 |
) |
|
$ |
(488.2 |
) |
|
$ |
(123.4 |
) |
|
(1)
|
|
Loss
on disposition during the period is associated to the sale of
manufactured housing loans in September 2008, which included lower of
cost or market adjustments at reclassification from loans
held-in-portfolio to loans held-for-sale. |
|
As part of these actions at PFH, the Corporation entered into a restructuring plan (the PFH
Discontinuance Restructuring Plan) to eliminate employment positions, terminate contracts and
incur other costs associated with the sale. Further information on the restructuring plan is
provided in Note 20 to the consolidated financial statements.
Note 4 Restrictions on Cash and Due from Banks and Highly-Liquid 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 $630 million as of September 30, 2008 (December 31, 2007 $678
million; September 30, 2007 $588 million). Cash and due from banks as well as other short-term,
highly-liquid securities are used to cover the required average reserve balances.
In compliance with rules and regulations of the Securities and Exchange Commission, at September
30, 2008, the Corporation had securities with a market value of $275 thousand (December 31, 2007 -
securities with a market value of $273 thousand; September 30, 2007 securities with a market
value of $397 thousand); segregated in a special reserve bank account for the benefit of brokerage
customers of its broker-dealer subsidiary. These securities were classified in the consolidated
statement of condition within the other trading securities category.
As required by the Puerto Rico International Banking Center Regulatory Act, as of September 30,
2008, December 31, 2007, and September 30, 2007, the Corporation maintained separately for its two
international banking entities (IBEs), $600 thousand 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 September 30, 2008, the
Corporation maintained restricted cash of $1.9 million as collateral (December 31, 2007 $1.9
million; September 30, 2007 $1.9 million). 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 September 30, 2008, the Corporation had restricted cash of $3.2 million (December 31, 2007 -
$3.5 million) to support a letter of credit related to a service settlement agreement.
14
Note 5 Pledged Assets
Certain securities and loans were pledged to secure public and trust deposits, assets sold under
agreements to repurchase, other borrowings and credit facilities available. 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
|
September 30, |
(In thousands) |
|
2008 |
|
2007 |
|
2007 |
|
Investment securities available-for-sale, at fair value |
|
$ |
2,647,930 |
|
|
$ |
2,944,643 |
|
|
$ |
3,222,644 |
|
Investment securities held-to-maturity, at amortized cost |
|
|
|
|
|
|
339 |
|
|
|
340 |
|
Loans held-for-sale measured at lower of cost or market
value |
|
|
36,218 |
|
|
|
42,428 |
|
|
|
41,266 |
|
Loans held-in-portfolio |
|
|
7,686,937 |
|
|
|
8,489,814 |
|
|
|
11,482,585 |
|
|
Total pledged assets from continuing operations |
|
$ |
10,371,085 |
|
|
$ |
11,477,224 |
|
|
$ |
14,746,835 |
|
|
Pledged assets from discontinued operations (loans) (1) |
|
$ |
160,115 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Included as part of Assets from discontinued operations in the consolidated statement of
condition as of September 30, 2008. |
Pledged 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.
Note 6 Investment Securities Available-For-Sale
The amortized cost, gross unrealized gains and losses and approximate market value (or fair value
for certain investment securities where no market quotations are available) of investment
securities available-for-sale as of September 30, 2008, December 31, 2007 and September 30, 2007
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AS OF SEPTEMBER 30, 2008 |
|
|
|
|
|
|
Gross |
|
Gross |
|
|
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Market |
(In thousands) |
|
Cost |
|
Gains |
|
Losses |
|
Value |
|
U.S. Treasury securities |
|
$ |
458,990 |
|
|
$ |
5,219 |
|
|
|
|
|
|
$ |
464,209 |
|
Obligations of U.S. Government sponsored entities |
|
|
4,566,004 |
|
|
|
28,505 |
|
|
$ |
9,670 |
|
|
|
4,584,839 |
|
Obligations of Puerto Rico, States and political subdivisions |
|
|
104,227 |
|
|
|
165 |
|
|
|
2,691 |
|
|
|
101,701 |
|
Collateralized mortgage obligations |
|
|
1,588,249 |
|
|
|
2,281 |
|
|
|
37,687 |
|
|
|
1,552,843 |
|
Mortgage-backed securities |
|
|
855,377 |
|
|
|
5,225 |
|
|
|
10,084 |
|
|
|
850,518 |
|
Equity securities |
|
|
19,520 |
|
|
|
102 |
|
|
|
4,990 |
|
|
|
14,632 |
|
|
|
|
$ |
7,592,367 |
|
|
$ |
41,497 |
|
|
$ |
65,122 |
|
|
$ |
7,568,742 |
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AS OF DECEMBER 31, 2007 |
|
|
|
|
|
|
|
|
Gross |
|
Gross |
|
|
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Market |
(In thousands) |
|
Cost |
|
Gains |
|
Losses |
|
Value |
|
U.S. Treasury securities |
|
$ |
476,104 |
|
|
$ |
3 |
|
|
$ |
5,011 |
|
|
$ |
471,096 |
|
Obligations of U.S. Government sponsored entities |
|
|
5,450,028 |
|
|
|
52,971 |
|
|
|
5,885 |
|
|
|
5,497,114 |
|
Obligations of Puerto Rico, States and political subdivisions |
|
|
103,206 |
|
|
|
470 |
|
|
|
2,184 |
|
|
|
101,492 |
|
Collateralized mortgage obligations |
|
|
1,403,292 |
|
|
|
3,754 |
|
|
|
10,506 |
|
|
|
1,396,540 |
|
Mortgage-backed securities |
|
|
1,017,302 |
|
|
|
4,690 |
|
|
|
11,864 |
|
|
|
1,010,128 |
|
Equity securities |
|
|
33,299 |
|
|
|
690 |
|
|
|
36 |
|
|
|
33,953 |
|
Others |
|
|
4,812 |
|
|
|
|
|
|
|
|
|
|
|
4,812 |
|
|
|
|
$ |
8,488,043 |
|
|
$ |
62,578 |
|
|
$ |
35,486 |
|
|
$ |
8,515,135 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AS OF SEPTEMBER 30, 2007 |
|
|
|
|
|
|
|
|
Gross |
|
Gross |
|
|
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Market |
(In thousands) |
|
Cost |
|
Gains |
|
Losses |
|
Value |
|
U.S. Treasury securities |
|
$ |
497,893 |
|
|
$ |
41 |
|
|
$ |
22,114 |
|
|
$ |
475,820 |
|
Obligations of U.S. Government sponsored entities |
|
|
5,871,339 |
|
|
|
2,628 |
|
|
|
55,613 |
|
|
|
5,818,354 |
|
Obligations of Puerto Rico, States and political subdivisions |
|
|
109,289 |
|
|
|
420 |
|
|
|
2,871 |
|
|
|
106,838 |
|
Collateralized mortgage obligations |
|
|
1,479,951 |
|
|
|
3,216 |
|
|
|
13,798 |
|
|
|
1,469,369 |
|
Mortgage-backed securities |
|
|
969,023 |
|
|
|
3,190 |
|
|
|
22,738 |
|
|
|
949,475 |
|
Equity securities |
|
|
46,100 |
|
|
|
1,780 |
|
|
|
6,598 |
|
|
|
41,282 |
|
Others |
|
|
16,730 |
|
|
|
627 |
|
|
|
|
|
|
|
17,357 |
|
|
|
|
$ |
8,990,325 |
|
|
$ |
11,902 |
|
|
$ |
123,732 |
|
|
$ |
8,878,495 |
|
|
16
The table below shows the Corporations amortized cost, gross unrealized losses and market value 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 September 30, 2008,
December 31, 2007 and September 30, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AS OF SEPTEMBER 30, 2008 |
|
|
Less than 12 months |
|
|
|
|
|
|
|
Gross |
|
|
|
|
Amortized |
|
Unrealized |
|
Market |
(In thousands) |
|
Cost |
|
Losses |
|
Value |
|
Obligations of U.S. Government sponsored entities |
|
$ |
1,853,632 |
|
|
$ |
9,670 |
|
|
$ |
1,843,962 |
|
Obligations of Puerto Rico, States and political subdivisions |
|
|
50,204 |
|
|
|
453 |
|
|
|
49,751 |
|
Collateralized mortgage obligations |
|
|
896,593 |
|
|
|
14,019 |
|
|
|
882,574 |
|
Mortgage-backed securities |
|
|
257,872 |
|
|
|
2,388 |
|
|
|
255,484 |
|
Equity securities |
|
|
13,880 |
|
|
|
4,980 |
|
|
|
8,900 |
|
|
|
|
$ |
3,072,181 |
|
|
$ |
31,510 |
|
|
$ |
3,040,671 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 months or more |
|
|
|
|
|
|
|
Gross |
|
|
|
|
Amortized |
|
Unrealized |
|
Market |
(In thousands) |
|
Cost |
|
Losses |
|
Value |
|
Obligations of Puerto Rico, States and political subdivisions |
|
$ |
44,011 |
|
|
$ |
2,238 |
|
|
$ |
41,773 |
|
Collateralized mortgage obligations |
|
|
414,813 |
|
|
|
23,668 |
|
|
|
391,145 |
|
Mortgage-backed securities |
|
|
270,609 |
|
|
|
7,696 |
|
|
|
262,913 |
|
Equity securities |
|
|
29 |
|
|
|
10 |
|
|
|
19 |
|
|
|
|
$ |
729,462 |
|
|
$ |
33,612 |
|
|
$ |
695,850 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
Gross |
|
|
|
|
Amortized |
|
Unrealized |
|
Market |
(In thousands) |
|
Cost |
|
Losses |
|
Value |
|
Obligations of U.S. Government sponsored entities |
|
$ |
1,853,632 |
|
|
$ |
9,670 |
|
|
$ |
1,843,962 |
|
Obligations of Puerto Rico, States and political subdivisions |
|
|
94,215 |
|
|
|
2,691 |
|
|
|
91,524 |
|
Collateralized mortgage obligations |
|
|
1,311,406 |
|
|
|
37,687 |
|
|
|
1,273,719 |
|
Mortgage-backed securities |
|
|
528,481 |
|
|
|
10,084 |
|
|
|
518,397 |
|
Equity securities |
|
|
13,909 |
|
|
|
4,990 |
|
|
|
8,919 |
|
|
|
|
$ |
3,801,643 |
|
|
$ |
65,122 |
|
|
$ |
3,736,521 |
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AS OF DECEMBER 31, 2007 |
|
|
Less than 12 months |
|
|
|
|
|
|
Gross |
|
|
|
|
Amortized |
|
Unrealized |
|
Market |
(In thousands) |
|
Cost |
|
Losses |
|
Value |
|
Obligations of U.S. Government sponsored entities |
|
$ |
67,107 |
|
|
$ |
185 |
|
|
$ |
66,922 |
|
Obligations of Puerto Rico, States and political subdivisions |
|
|
2,600 |
|
|
|
2 |
|
|
|
2,598 |
|
Collateralized mortgage obligations |
|
|
349,084 |
|
|
|
2,453 |
|
|
|
346,631 |
|
Mortgage-backed securities |
|
|
99,328 |
|
|
|
667 |
|
|
|
98,661 |
|
Equity securities |
|
|
28 |
|
|
|
10 |
|
|
|
18 |
|
|
|
|
$ |
518,147 |
|
|
$ |
3,317 |
|
|
$ |
514,830 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 months or more |
|
|
|
|
|
|
Gross |
|
|
|
|
Amortized |
|
Unrealized |
|
Market |
(In thousands) |
|
Cost |
|
Losses |
|
Value |
|
U.S. Treasury securities |
|
$ |
466,111 |
|
|
$ |
5,011 |
|
|
$ |
461,100 |
|
Obligations of U.S. Government sponsored entities |
|
|
1,807,457 |
|
|
|
5,700 |
|
|
|
1,801,757 |
|
Obligations of Puerto Rico, States and political subdivisions |
|
|
65,642 |
|
|
|
2,182 |
|
|
|
63,460 |
|
Collateralized mortgage obligations |
|
|
430,034 |
|
|
|
8,053 |
|
|
|
421,981 |
|
Mortgage-backed securities |
|
|
656,879 |
|
|
|
11,197 |
|
|
|
645,682 |
|
Equity securities |
|
|
300 |
|
|
|
26 |
|
|
|
274 |
|
|
|
|
$ |
3,426,423 |
|
|
$ |
32,169 |
|
|
$ |
3,394,254 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
Gross |
|
|
|
|
Amortized |
|
Unrealized |
|
Market |
(In thousands) |
|
Cost |
|
Losses |
|
Value |
|
U.S. Treasury securities |
|
$ |
466,111 |
|
|
$ |
5,011 |
|
|
$ |
461,100 |
|
Obligations of U.S. Government sponsored entities |
|
|
1,874,564 |
|
|
|
5,885 |
|
|
|
1,868,679 |
|
Obligations of Puerto Rico, States and political subdivisions |
|
|
68,242 |
|
|
|
2,184 |
|
|
|
66,058 |
|
Collateralized mortgage obligations |
|
|
779,118 |
|
|
|
10,506 |
|
|
|
768,612 |
|
Mortgage-backed securities |
|
|
756,207 |
|
|
|
11,864 |
|
|
|
744,343 |
|
Equity securities |
|
|
328 |
|
|
|
36 |
|
|
|
292 |
|
|
|
|
$ |
3,944,570 |
|
|
$ |
35,486 |
|
|
$ |
3,909,084 |
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AS OF SEPTEMBER 30, 2007 |
|
|
Less than 12 months |
|
|
|
|
|
|
Gross |
|
|
|
|
Amortized |
|
Unrealized |
|
Market |
(In thousands) |
|
Cost |
|
Losses |
|
Value |
|
Obligations of U.S. Government sponsored entities |
|
$ |
106,914 |
|
|
$ |
3,960 |
|
|
$ |
102,954 |
|
Obligations of Puerto Rico, States and political subdivisions |
|
|
22,680 |
|
|
|
411 |
|
|
|
22,269 |
|
Collateralized mortgage obligations |
|
|
283,814 |
|
|
|
1,869 |
|
|
|
281,945 |
|
Mortgage-backed securities |
|
|
22,328 |
|
|
|
399 |
|
|
|
21,929 |
|
Equity securities |
|
|
22,638 |
|
|
|
6,572 |
|
|
|
16,066 |
|
|
|
|
$ |
458,374 |
|
|
$ |
13,211 |
|
|
$ |
445,163 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 months or more |
|
|
|
|
|
|
Gross |
|
|
|
|
Amortized |
|
Unrealized |
|
Market |
(In thousands) |
|
Cost |
|
Losses |
|
Value |
|
U.S. Treasury securities |
|
$ |
478,436 |
|
|
$ |
22,114 |
|
|
$ |
456,322 |
|
Obligations of U.S. Government sponsored entities |
|
|
5,212,523 |
|
|
|
51,653 |
|
|
|
5,160,870 |
|
Obligations of Puerto Rico, States and political subdivisions |
|
|
50,235 |
|
|
|
2,460 |
|
|
|
47,775 |
|
Collateralized mortgage obligations |
|
|
576,852 |
|
|
|
11,929 |
|
|
|
564,923 |
|
Mortgage-backed securities |
|
|
818,782 |
|
|
|
22,339 |
|
|
|
796,443 |
|
Equity securities |
|
|
300 |
|
|
|
26 |
|
|
|
274 |
|
|
|
|
$ |
7,137,128 |
|
|
$ |
110,521 |
|
|
$ |
7,026,607 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
Gross |
|
|
|
|
Amortized |
|
Unrealized |
|
Market |
(In thousands) |
|
Cost |
|
Losses |
|
Value |
|
U.S. Treasury securities |
|
$ |
478,436 |
|
|
$ |
22,114 |
|
|
$ |
456,322 |
|
Obligations of U.S. Government sponsored entities |
|
|
5,319,437 |
|
|
|
55,613 |
|
|
|
5,263,824 |
|
Obligations of Puerto Rico, States and political subdivisions |
|
|
72,915 |
|
|
|
2,871 |
|
|
|
70,044 |
|
Collateralized mortgage obligations |
|
|
860,666 |
|
|
|
13,798 |
|
|
|
846,868 |
|
Mortgage-backed securities |
|
|
841,110 |
|
|
|
22,738 |
|
|
|
818,372 |
|
Equity securities |
|
|
22,938 |
|
|
|
6,598 |
|
|
|
16,340 |
|
|
|
|
$ |
7,595,502 |
|
|
$ |
123,732 |
|
|
$ |
7,471,770 |
|
|
As of September 30, 2008, Obligations of Puerto Rico, States and political subdivisions
include approximately $48 million in Commonwealth of Puerto Rico Appropriation Bonds
(Appropriation Bonds) in the Corporations investment securities portfolios. The rating on these
bonds by Moodys Investors Service (Moodys) is Ba1, one notch below investment grade, while
Standard & Poors (S&P) rates them as investment grade. As of September 30, 2008, these
Appropriation Bonds represented approximately $2.2 million in net unrealized losses in the
Corporations investment securities portfolios. The Corporation is closely monitoring the political
and economic situation of the Island as part of its evaluation of its available-for-sale portfolio
for any declines in value that management may consider being other-than-temporary. Management has
the intent and ability to hold these investments for a reasonable period of time for a forecasted
recovery of fair value up to (or beyond) the cost of these investments.
The unrealized loss positions of available-for-sale securities as of September 30, 2008, except for the obligations of
the Puerto Rico government described above and certain equity securities which have recently
declined in value
19
during 2008, are primarily associated with collateralized mortgage obligations
and government sponsored-issued mortgage-backed securities. The vast majority of these securities
are rated the equivalent of AAA by the major rating agencies. The investment portfolio is
structured primarily with highly-liquid securities, which possess a large and efficient secondary
market. Management believes that the unrealized losses in these available-for-sale securities as of
September 30, 2008 are temporary and are substantially related to market interest rate fluctuations
and not to the deterioration in the creditworthiness of the issuers. Also, management has the
intent and ability to hold these investments for a
reasonable period of time for a forecasted recovery of fair value up to (or beyond) the cost of
these investments.
During the nine months ended September 30, 2008 and September 30, 2007, the
Corporation recognized through earnings approximately $9.1 million and $7.6 million, respectively,
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 market 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
December 31, 2007 |
|
September 30, 2007 |
(In thousands) |
|
Amortized Cost |
|
Market Value |
|
Amortized Cost |
|
Market Value |
|
Amortized Cost |
|
Market Value |
|
FNMA |
|
$ |
1,129,613 |
|
|
$ |
1,120,659 |
|
|
$ |
1,132,834 |
|
|
$ |
1,128,544 |
|
|
$ |
1,184,225 |
|
|
$ |
1,169,857 |
|
FHLB |
|
|
4,936,497 |
|
|
|
4,953,787 |
|
|
|
5,649,729 |
|
|
|
5,693,170 |
|
|
|
5,841,614 |
|
|
|
5,788,544 |
|
Freddie Mac |
|
|
828,800 |
|
|
|
815,104 |
|
|
|
918,976 |
|
|
|
913,609 |
|
|
|
954,598 |
|
|
|
944,533 |
|
|
Note 7 Investment Securities Held-to-Maturity
The amortized cost, gross unrealized gains
and losses and approximate market value (or fair value for certain investment securities where no
market quotations are available) of investment securities held-to-maturity as of September 30,
2008, December 31, 2007 and September 30, 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AS OF SEPTEMBER 30, 2008 |
|
|
|
|
|
|
Gross |
|
Gross |
|
|
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Market |
(In thousands) |
|
Cost |
|
Gains |
|
Losses |
|
Value |
|
Obligations of U.S. Government sponsored entities |
|
$ |
526,486 |
|
|
$ |
11 |
|
|
|
|
|
|
$ |
526,497 |
|
Obligations of Puerto Rico, States and political subdivisions |
|
|
184,671 |
|
|
|
171 |
|
|
$ |
3,618 |
|
|
|
181,224 |
|
Collateralized mortgage obligations |
|
|
251 |
|
|
|
|
|
|
|
14 |
|
|
|
237 |
|
Others |
|
|
8,424 |
|
|
|
50 |
|
|
|
2 |
|
|
|
8,472 |
|
|
|
|
$ |
719,832 |
|
|
$ |
232 |
|
|
$ |
3,634 |
|
|
$ |
716,430 |
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AS OF DECEMBER 31, 2007 |
|
|
|
|
|
|
Gross |
|
Gross |
|
|
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Market |
(In thousands) |
|
Cost |
|
Gains |
|
Losses |
|
Value |
|
Obligations of U.S. Government sponsored entities |
|
$ |
395,974 |
|
|
$ |
15 |
|
|
$ |
1,497 |
|
|
$ |
394,492 |
|
Obligations of Puerto Rico, States and political subdivisions |
|
|
76,464 |
|
|
|
3,108 |
|
|
|
26 |
|
|
|
79,546 |
|
Collateralized mortgage obligations |
|
|
310 |
|
|
|
|
|
|
|
17 |
|
|
|
293 |
|
Others |
|
|
11,718 |
|
|
|
94 |
|
|
|
4 |
|
|
|
11,808 |
|
|
|
|
$ |
484,466 |
|
|
$ |
3,217 |
|
|
$ |
1,544 |
|
|
$ |
486,139 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AS OF SEPTEMBER 30, 2007 |
|
|
|
|
|
|
Gross |
|
Gross |
|
|
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Market |
(In thousands) |
|
Cost |
|
Gains |
|
Losses |
|
Value |
|
Obligations of U.S. Government sponsored entities |
|
$ |
196,190 |
|
|
|
|
|
|
$ |
71 |
|
|
$ |
196,119 |
|
Obligations of Puerto Rico, States and political subdivisions |
|
|
71,465 |
|
|
$ |
1,400 |
|
|
|
148 |
|
|
|
72,717 |
|
Collateralized mortgage obligations |
|
|
331 |
|
|
|
|
|
|
|
18 |
|
|
|
313 |
|
Others |
|
|
11,281 |
|
|
|
|
|
|
|
358 |
|
|
|
10,923 |
|
|
|
|
$ |
279,267 |
|
|
$ |
1,400 |
|
|
$ |
595 |
|
|
$ |
280,072 |
|
|
The following table shows the Corporations amortized cost, gross unrealized losses and fair
value 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 September
30, 2008, December 31, 2007 and September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AS OF SEPTEMBER 30, 2008 |
|
|
Less than 12 months |
|
|
|
|
|
|
Gross |
|
|
|
|
Amortized |
|
Unrealized |
|
Market |
(In thousands) |
|
Cost |
|
Losses |
|
Value |
|
Obligations of Puerto Rico, States and political subdivisions |
|
$ |
48,644 |
|
|
$ |
3,618 |
|
|
$ |
45,026 |
|
|
|
|
$ |
48,644 |
|
|
$ |
3,618 |
|
|
$ |
45,026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 months or more |
|
|
|
|
|
|
Gross |
|
|
|
|
Amortized |
|
Unrealized |
|
Market |
(In thousands) |
|
Cost |
|
Losses |
|
Value |
|
Collateralized mortgage obligations |
|
$ |
251 |
|
|
$ |
14 |
|
|
$ |
237 |
|
Others |
|
|
1,000 |
|
|
|
2 |
|
|
|
998 |
|
|
|
|
$ |
1,251 |
|
|
$ |
16 |
|
|
$ |
1,235 |
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
Gross |
|
|
|
|
Amortized |
|
Unrealized |
|
Market |
(In thousands) |
|
Cost |
|
Losses |
|
Value |
|
Obligations of Puerto Rico, States and political subdivisions |
|
$ |
48,644 |
|
|
$ |
3,618 |
|
|
$ |
45,026 |
|
Collateralized mortgage obligations |
|
|
251 |
|
|
|
14 |
|
|
|
237 |
|
Others |
|
|
1,000 |
|
|
|
2 |
|
|
|
998 |
|
|
|
|
$ |
49,895 |
|
|
$ |
3,634 |
|
|
$ |
46,261 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AS OF DECEMBER 31, 2007 |
|
|
Less than 12 months |
|
|
|
|
|
|
Gross |
|
|
|
|
Amortized |
|
Unrealized |
|
Market |
(In thousands) |
|
Cost |
|
Losses |
|
Value |
|
Obligations of U.S. Government sponsored entities |
|
$ |
196,129 |
|
|
$ |
1,497 |
|
|
$ |
194,632 |
|
Obligations of Puerto Rico, States and political subdivisions |
|
|
1,883 |
|
|
|
26 |
|
|
|
1,857 |
|
Others |
|
|
1,250 |
|
|
|
1 |
|
|
|
1,249 |
|
|
|
|
$ |
199,262 |
|
|
$ |
1,524 |
|
|
$ |
197,738 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 months or more |
|
|
|
|
|
|
Gross |
|
|
|
|
Amortized |
|
Unrealized |
|
Market |
(In thousands) |
|
Cost |
|
Losses |
|
Value |
|
Collateralized mortgage obligations |
|
$ |
310 |
|
|
$ |
17 |
|
|
$ |
293 |
|
Others |
|
|
1,250 |
|
|
|
3 |
|
|
|
1,247 |
|
|
|
|
$ |
1,560 |
|
|
$ |
20 |
|
|
$ |
1,540 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
Gross |
|
|
|
|
Amortized |
|
Unrealized |
|
Market |
(In thousands) |
|
Cost |
|
Losses |
|
Value |
|
Obligations of U.S. Government sponsored entities |
|
$ |
196,129 |
|
|
$ |
1,497 |
|
|
$ |
194,632 |
|
Obligations of Puerto Rico, States and political subdivisions |
|
|
1,883 |
|
|
|
26 |
|
|
|
1,857 |
|
Collateralized mortgage obligations |
|
|
310 |
|
|
|
17 |
|
|
|
293 |
|
Others |
|
|
2,500 |
|
|
|
4 |
|
|
|
2,496 |
|
|
|
|
$ |
200,822 |
|
|
$ |
1,544 |
|
|
$ |
199,278 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AS OF SEPTEMBER 30, 2007 |
|
|
Less than 12 months |
|
|
|
|
|
|
Gross |
|
|
|
|
Amortized |
|
Unrealized |
|
Market |
(In thousands) |
|
Cost |
|
Losses |
|
Value |
|
Obligations of U.S. Government sponsored entities |
|
$ |
196,190 |
|
|
$ |
71 |
|
|
$ |
196,119 |
|
Obligations of Puerto Rico, States and political subdivisions |
|
|
1,545 |
|
|
|
24 |
|
|
|
1,521 |
|
Others |
|
|
6,225 |
|
|
|
354 |
|
|
|
5,871 |
|
|
|
|
$ |
203,960 |
|
|
$ |
449 |
|
|
$ |
203,511 |
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 months or more |
|
|
|
|
|
|
Gross |
|
|
|
|
Amortized |
|
Unrealized |
|
Market |
(In thousands) |
|
Cost |
|
Losses |
|
Value |
|
Obligations of Puerto Rico, States and political subdivisions |
|
$ |
23,460 |
|
|
$ |
124 |
|
|
$ |
23,336 |
|
Collateralized mortgage obligations |
|
|
331 |
|
|
|
18 |
|
|
|
313 |
|
Others |
|
|
1,250 |
|
|
|
4 |
|
|
|
1,246 |
|
|
|
|
$ |
25,041 |
|
|
$ |
146 |
|
|
$ |
24,895 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
Gross |
|
|
|
|
Amortized |
|
Unrealized |
|
Market |
(In thousands) |
|
Cost |
|
Losses |
|
Value |
|
Obligations of U.S. Government sponsored entities |
|
$ |
196,190 |
|
|
$ |
71 |
|
|
$ |
196,119 |
|
Obligations of Puerto Rico, States and political subdivisions |
|
|
25,005 |
|
|
|
148 |
|
|
|
24,857 |
|
Collateralized mortgage obligations |
|
|
331 |
|
|
|
18 |
|
|
|
313 |
|
Others |
|
|
7,475 |
|
|
|
358 |
|
|
|
7,117 |
|
|
|
|
$ |
229,001 |
|
|
$ |
595 |
|
|
$ |
228,406 |
|
|
Management believes that the unrealized losses in the held-to-maturity portfolio as of
September 30, 2008 are temporary and are substantially related to market interest rate fluctuations
and not to deterioration in the creditworthiness of the issuers. Management has the intent and
ability to hold these investments until maturity.
Note 8
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 (sales and securitizations).
Effective January 1, 2007,
under SFAS No. 156, the Corporation identified servicing rights related to residential mortgage
loans as a class of servicing rights and elected to apply fair value accounting to these mortgage
servicing rights (MSRs). These MSRs are segregated between loans serviced by PFH and by the
Corporations banking subsidiaries. Fair value determination is performed on a subsidiary basis,
with assumptions varying in accordance with the types of assets or markets served.
Classes of
mortgage servicing rights were determined based on the different markets or types of assets being
serviced. Under the fair value accounting method of SFAS No. 156, purchased MSRs and MSRs resulting
from asset transfers are capitalized and carried at fair value.
Effective January 1, 2007, upon
the remeasurement of the MSRs at fair value in accordance with SFAS No. 156, the Corporation
recorded a cumulative effect adjustment to increase the 2007 beginning balance of MSRs by $15.3
million, which resulted in a $9.6 million, net of tax, increase in the retained earnings account of
stockholders equity in 2007.
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 MSRs of PFH are included as part
of Assets from discontinued operations in the consolidated statement of condition as of September
30, 2008. The MSRs related to PFH operations were valued as of September 30, 2008 by allocating
a portion of the estimated fair value of the servicing related assets to be sold to Goldman Sachs,
which
23
was based on the purchase price terms under the agreement.
The changes in MSRs measured
using the fair value method for the nine months ended September 30, 2008 and September 30, 2007
were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential MSRs |
|
|
(In thousands) |
|
Banking subsidiaries |
|
PFH (2) |
|
Total |
|
Fair value at January 1, 2008 |
|
$ |
110,612 |
|
|
$ |
81,012 |
|
|
$ |
191,624 |
|
Purchases |
|
|
3,628 |
|
|
|
|
|
|
|
3,628 |
|
Servicing from securitizations or asset transfers |
|
|
22,033 |
|
|
|
|
|
|
|
22,033 |
|
Changes due to payments on loans (1) |
|
|
(8,136 |
) |
|
|
(20,298 |
) |
|
|
(28,434 |
) |
Changes in fair value due to changes in valuation model
inputs or assumptions |
|
|
(310 |
) |
|
|
(23,304 |
) |
|
|
(23,614 |
) |
|
Fair value as of September 30, 2008 |
|
$ |
127,827 |
|
|
$ |
37,410 |
|
|
$ |
165,237 |
|
|
|
|
|
(1) |
|
Represents changes due to collection / realization of expected cash flows over time. |
|
(2) |
|
MSRs for PFH are included as part of Assets from discontinued operations in the consolidated statement of
condition as of September 30, 2008. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential MSRs |
|
|
(In thousands) |
|
Banking subsidiaries |
|
PFH |
|
Total |
|
Fair value at January 1, 2007 |
|
$ |
91,431 |
|
|
$ |
84,038 |
|
|
$ |
175,469 |
|
Purchases |
|
|
3,345 |
|
|
|
22,251 |
|
|
|
25,596 |
|
Servicing from securitizations or asset transfers |
|
|
17,682 |
|
|
|
8,040 |
|
|
|
25,722 |
|
Changes due to payments on loans (1) |
|
|
(6,821 |
) |
|
|
(29,285 |
) |
|
|
(36,106 |
) |
Changes in fair value due to changes in valuation model
inputs or assumptions |
|
|
4,276 |
|
|
|
(1,636 |
) |
|
|
2,640 |
|
Other changes |
|
|
|
|
|
|
(66 |
) |
|
|
(66 |
) |
|
Fair value as of September 30, 2007 |
|
$ |
109,913 |
|
|
$ |
83,342 |
|
|
$ |
193,255 |
|
|
|
|
|
(1) |
|
Represents changes due to collection / realization of expected cash flows over time. |
Residential mortgage loans serviced for others were $20.0 billion as of September 30, 2008
(December 31, 2007 $20.5 billion; September 30, 2007 $18.1 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, representing changes due to collection /
realization of expected cash flows.
The section below includes information on assumptions used in the valuation model of the MSRs, originated and purchased.
Banking subsidiaries
The Corporations banking subsidiaries retain servicing responsibilities on the sale of wholesale
mortgage loans and under pooling / selling arrangements of mortgage loans into mortgage-backed
securities, primarily GNMA and FNMA securities. Substantially all mortgage loans securitized by
the banking subsidiaries have fixed rates. Under these servicing agreements, the banking
subsidiaries do not earn significant prepayment penalty fees on the underlying loans serviced.
24
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 September 30, 2008 and year ended December 31, 2007 were:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
December 31, 2007 |
|
Prepayment speed |
|
|
8.9 |
% |
|
|
9.5 |
% |
Weighted average life |
|
11.3 years |
|
|
10.6 years |
|
Discount rate (annual rate) |
|
|
11.1 |
% |
|
|
10.7 |
% |
|
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 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Originated MSRs |
(In thousands) |
|
September 30, 2008 |
|
December 31, 2007 |
|
Fair value of retained interests |
|
$ |
110,026 |
|
|
$ |
86,453 |
|
Weighted average life |
|
11.3 years |
|
|
12.5 years |
|
Weighted average prepayment speed (annual rate) |
|
|
8.8 |
% |
|
|
8.0 |
% |
Impact on fair value of 10% adverse change |
|
$ |
(3,972 |
) |
|
$ |
(1,983 |
) |
Impact on fair value of 20% adverse change |
|
$ |
(7,143 |
) |
|
$ |
(3,902 |
) |
Weighted average discount rate (annual rate) |
|
|
11.48 |
% |
|
|
10.83 |
% |
Impact on fair value of 10% adverse change |
|
$ |
(3,453 |
) |
|
$ |
(2,980 |
) |
Impact on fair value of 20% adverse change |
|
$ |
(6,072 |
) |
|
$ |
(5,795 |
) |
|
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) |
|
September 30, 2008 |
|
|
December 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of retained interests |
|
$ |
17,801 |
|
|
|
$ |
24,159 |
|
|
|
|
|
Weighted average life of collateral |
|
6.5 years |
|
|
|
12.4 years |
|
|
|
|
Weighted
average prepayment speed (annual rate) |
|
|
15.5 |
% |
|
|
|
8.0 |
% |
|
|
|
|
Impact on fair value of 10% adverse change |
|
$ |
(922 |
) |
|
|
$ |
(719 |
) |
|
|
|
|
Impact on fair value of 20% adverse change |
|
$ |
(1,638 |
) |
|
|
$ |
(1,407 |
) |
|
|
|
|
Weighted average discount rate (annual rate) |
|
|
12.3 |
% |
|
|
|
10.8 |
% |
|
|
|
|
Impact on fair value of 10% adverse change |
|
$ |
(713 |
) |
|
|
$ |
(956 |
) |
|
|
|
|
Impact on fair value of 20% adverse change |
|
$ |
(1,240 |
) |
|
|
$ |
(1,846 |
) |
|
|
|
|
|
|
|
|
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.
25
Popular Financial Holdings
As indicated previously, as of September 30, 2008, all of PFHs MSRs were part of the discontinued
operations. Given that their sale became effective on November 3, 2008, these financial statements
do not include sensitivity analyses for PFHs MSRs as of the end of the third quarter of 2008 since
they were not considered relevant.
Key economic assumptions used to estimate the fair value of MSRs derived from securitization
transactions and the sensitivity to immediate changes in those assumptions as of December 31,
2007 are presented below.
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007 |
|
|
Originated MSRs |
|
|
Fixed-rate |
|
ARM |
(In thousands) |
|
loans |
|
loans |
|
Carrying amount of retained interests (fair value) |
|
$ |
47,243 |
|
|
$ |
11,335 |
|
Weighted average life of collateral |
|
4.3 years |
|
|
2.6 years |
|
Weighted average prepayment speed (annual rate) |
|
|
20.7 |
% |
|
|
30.0 |
% |
Impact on fair value of 10% adverse change |
|
$ |
(192 |
) |
|
$ |
272 |
|
Impact on fair value of 20% adverse change |
|
$ |
(886 |
) |
|
$ |
688 |
|
Weighted average discount rate (annual rate) |
|
|
17.0 |
% |
|
|
17.0 |
% |
Impact on fair value of 10% adverse change |
|
$ |
(1,466 |
) |
|
$ |
(225 |
) |
Impact on fair value of 20% adverse change |
|
$ |
(2,846 |
) |
|
$ |
(441 |
) |
|
PFH, as servicer, collects prepayment penalties on a substantial portion of the underlying serviced
loans. As such, an adverse change in the prepayment assumptions with respect to the MSRs could be
partially offset by the benefit derived from the prepayment penalties estimated to be collected.
PFH also owns servicing rights purchased from other institutions. The fair value of purchased MSRs,
their related valuation assumptions and the sensitivity to immediate changes in those assumptions
as of December 31, 2007 are presented below.
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007 |
|
|
Purchased MSRs |
|
|
Fixed-rate |
|
ARM |
(In thousands) |
|
loans |
|
loans |
|
Carrying amount of retained interests (fair value) |
|
$ |
7,808 |
|
|
$ |
14,626 |
|
Weighted average life of collateral |
|
4.7 years |
|
|
3.4 years |
|
Weighted average prepayment speed (annual rate) |
|
|
18.3 |
% |
|
|
25.2 |
% |
Impact on fair value of 10% adverse change |
|
$ |
(329 |
) |
|
$ |
(719 |
) |
Impact on fair value of 20% adverse change |
|
$ |
(631 |
) |
|
$ |
(1,377 |
) |
Weighted average discount rate (annual rate) |
|
|
17.0 |
% |
|
|
17.0 |
% |
Impact on fair value of 10% adverse change |
|
$ |
(330 |
) |
|
$ |
(509 |
) |
Impact on fair value of 20% adverse change |
|
$ |
(633 |
) |
|
$ |
(981 |
) |
|
26
Note 9
Other Assets
The caption of other assets in the consolidated statements of condition consists of the following
major categories:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
|
September 30, |
(In thousands) |
|
2008 |
|
2007 |
|
2007 |
|
Net deferred tax assets (net of valuation allowance) |
|
$ |
663,260 |
|
|
$ |
525,369 |
|
|
$ |
420,288 |
|
Securitization advances and related assets (1) |
|
|
|
|
|
|
168,599 |
|
|
|
82,980 |
|
Bank-owned life insurance program |
|
|
222,298 |
|
|
|
215,171 |
|
|
|
212,698 |
|
Prepaid expenses |
|
|
153,698 |
|
|
|
188,237 |
|
|
|
187,725 |
|
Investments under the equity method |
|
|
117,766 |
|
|
|
89,870 |
|
|
|
85,806 |
|
Derivative assets |
|
|
50,335 |
|
|
|
76,958 |
|
|
|
64,981 |
|
Trade receivables from brokers and counterparties |
|
|
17,100 |
|
|
|
1,160 |
|
|
|
8,714 |
|
Others |
|
|
187,762 |
|
|
|
191,630 |
|
|
|
181,497 |
|
|
Total |
|
$ |
1,412,219 |
|
|
$ |
1,456,994 |
|
|
$ |
1,244,689 |
|
|
|
|
|
(1) |
|
Securitization advances and related assets are included as part of Assets from discontinued
operations as of September 30, 2008. Refer to Note 3 to the consolidated financial
statements. |
Note
10 Derivative Instruments and Hedging
Refer to Note 30 to the consolidated financial statements included in the 2007 Annual Report for a
complete description of the Corporations derivative activities. The following represents the major
changes that occurred in the Corporations derivative activities during the third quarter of 2008.
Cash Flow Hedges
Derivative financial instruments designated as cash flow hedges outstanding as of September 30,
2008 and December 31, 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2008 |
(In thousands) |
|
Notional amount |
|
Derivative assets |
|
Derivative liabilities |
|
Equity OCI |
|
Ineffectiveness |
|
Asset Hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward commitments |
|
$ |
139,500 |
|
|
$ |
1,137 |
|
|
$ |
439 |
|
|
$ |
426 |
|
|
|
|
|
|
Liability Hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
$ |
200,000 |
|
|
|
|
|
|
$ |
2,711 |
|
|
$ |
(1,762 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007 |
(In thousands) |
|
Notional amount |
|
Derivative assets |
|
Derivative liabilities |
|
Equity OCI |
|
Ineffectiveness |
|
Asset Hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward commitments |
|
$ |
142,700 |
|
|
$ |
169 |
|
|
$ |
509 |
|
|
$ |
(207 |
) |
|
|
|
|
|
Liability Hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
$ |
200,000 |
|
|
|
|
|
|
$ |
3,179 |
|
|
$ |
(2,066 |
) |
|
|
|
|
|
The Corporation utilizes forward contracts to hedge the sale of mortgage-backed securities with
duration terms over one month. Interest rate forward contracts 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 used to hedge a forecasted transaction and thus qualify
for cash flow hedge accounting in accordance with SFAS No. 133, as amended. Changes in the fair
value of the derivatives are recorded in other comprehensive income. The amount included in
accumulated other comprehensive income corresponding to these forward contracts is expected to be
reclassified to earnings in the next twelve months. The contracts outstanding as of September 30,
2008 have a maximum remaining maturity of 79 days.
27
The Corporation also has designated as cash flow hedges, interest rate swap contracts that convert
floating rate debt into fixed rate debt by minimizing the exposure to changes in cash flows due to
higher interest rates. These interest rate swap contracts have a maximum remaining maturity of 6.3
months.
28
Non-Hedging Activities
Financial instruments designated as non-hedging derivatives outstanding as of September 30, 2008
and December 31, 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2008 |
|
|
|
|
|
|
Fair Values |
(In thousands) |
|
Notional amount |
|
Derivative assets |
|
Derivative liabilities |
|
Forward contracts |
|
$ |
292,531 |
|
|
$ |
1,106 |
|
|
$ |
888 |
|
Interest rate swaps associated with: |
|
|
|
|
|
|
|
|
|
|
|
|
- bond certificates offered in an on-balance sheet
securitization |
|
|
63,369 |
|
|
|
|
|
|
|
2,532 |
|
- swaps with corporate clients |
|
|
1,003,508 |
|
|
|
29,280 |
|
|
|
|
|
- swaps offsetting position of corporate client swaps |
|
|
933,893 |
|
|
|
|
|
|
|
27,938 |
|
Foreign currency and exchange rate commitments w/ clients |
|
|
106 |
|
|
|
3 |
|
|
|
|
|
Foreign currency and exchange rate commitments w/
counterparty |
|
|
106 |
|
|
|
|
|
|
|
3 |
|
Interest rate caps |
|
|
128,300 |
|
|
|
612 |
|
|
|
|
|
Interest rate caps for benefit of corporate clients |
|
|
128,300 |
|
|
|
|
|
|
|
612 |
|
Indexed options on deposits |
|
|
208,557 |
|
|
|
19,151 |
|
|
|
|
|
Bifurcated embedded options |
|
|
182,507 |
|
|
|
|
|
|
|
18,402 |
|
Mortgage rate lock commitments |
|
|
101,434 |
|
|
|
6 |
|
|
|
558 |
|
|
Total |
|
$ |
3,042,611 |
|
|
$ |
50,158 |
|
|
$ |
50,933 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007 |
|
|
|
|
|
|
Fair Values |
(In thousands) |
|
Notional amount |
|
Derivative assets |
|
Derivative liabilities |
|
Forward contracts |
|
$ |
693,096 |
|
|
$ |
74 |
|
|
$ |
3,232 |
|
Interest rate swaps associated with: |
|
|
|
|
|
|
|
|
|
|
|
|
- short-term borrowings |
|
|
200,000 |
|
|
|
|
|
|
|
1,129 |
|
- bond certificates offered in an on-balance sheet
securitization |
|
|
185,315 |
|
|
|
|
|
|
|
2,918 |
|
- swaps with corporate clients |
|
|
802,008 |
|
|
|
|
|
|
|
24,593 |
|
- swaps offsetting position of corporate client swaps |
|
|
802,008 |
|
|
|
24,593 |
|
|
|
|
|
Credit default swap |
|
|
33,463 |
|
|
|
|
|
|
|
|
|
Foreign currency and exchange rate commitments w/ clients |
|
|
146 |
|
|
|
|
|
|
|
1 |
|
Foreign currency and exchange rate commitments w/
counterparty |
|
|
146 |
|
|
|
2 |
|
|
|
|
|
Interest rate caps |
|
|
150,000 |
|
|
|
27 |
|
|
|
|
|
Interest rate caps for benefit of corporate clients |
|
|
50,000 |
|
|
|
|
|
|
|
18 |
|
Indexed options on deposits |
|
|
211,267 |
|
|
|
45,954 |
|
|
|
|
|
Indexed options on S&P Notes |
|
|
31,152 |
|
|
|
5,962 |
|
|
|
|
|
Bifurcated embedded options |
|
|
218,327 |
|
|
|
|
|
|
|
50,227 |
|
Mortgage rate lock commitments |
|
|
148,501 |
|
|
|
258 |
|
|
|
386 |
|
|
Total |
|
$ |
3,525,429 |
|
|
$ |
76,870 |
|
|
$ |
82,504 |
|
|
Interest Rates Swaps
The Corporation has an interest rate swap outstanding with a notional amount of $63 million to
economically hedge the payments of certificates issued as part of a securitization. This swap is
marked-to-market quarterly and recognized as part of interest expense. The Corporation recognized
gains of $25 thousand for the third quarter and $0.4 million for the nine months ended September
30, 2008 due to changes in the fair value of this swap. The Corporation recognized losses of $3.8
million for the third quarter and $1.8 million for the nine months ended September 30, 2007 due to
changes in its fair value.
In addition, the Corporation also enters into interest rate swaps 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.
29
Interest Rate Caps
The Corporation enters into interest rate caps as an intermediary on behalf of its customers and
simultaneously takes offsetting positions with creditworthy counterparts under the same terms and
conditions thus minimizing its market and credit risks.
Forward Contracts
The Corporation has loan sales commitments to economically hedge the changes in fair value of
mortgage loans held-for-sale associated with interest rate lock commitments through both mandatory
and best efforts forward sales agreements. These contracts are entered into in order to optimize
the gain on sales of loans. These contracts are recognized at fair market value with changes
directly reported in income as part of gain on sale of loans. For the quarter and nine months ended
September 30, 2008, losses of $1.1 million and gains of $1.1 million, respectively, were recognized
due to changes in fair value of these forward sales commitments. For the quarter and nine months
ended September 30, 2007, losses of $3.7 million and $2.1 million, respectively, were recognized
due to changes in fair value of these forward sales commitments. Additionally, the Corporation has
forward commitments to hedge the changes in fair value of certain MBS securities classified as
trading securities. For the quarter and nine months ended September 30, 2008, the Corporation
recognized gains of $0.9 million and $2.3 million, respectively, due to changes in the fair value
of these forward commitments, which were recognized as part of trading gains and losses. For the
quarter and nine months ended September 30, 2007, losses of $0.5 million and $0.7 million,
respectively, were recognized due to changes in fair value of these forward commitments.
Mortgage Rate Lock Commitments
The Corporation has mortgage rate lock commitments to fund mortgage loans at interest rates
previously agreed for a specified period of time. The mortgage rate lock commitments are accounted
as derivatives pursuant to SFAS No. 133. These contracts are recognized at fair value with changes
directly reported in income as part of gain on sale of loans. For the quarter and nine months ended
September 30, 2008, gains of $0.1 million and losses of $0.4 million, respectively, were recognized
due to changes in fair value of these commitments. For the quarter and nine months ended September
30, 2007, the Corporation recognized gains of $1.9 million and $0.4 million, respectively, related
to these commitments.
Note
11 Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill for the nine months ended September 30, 2008 and
2007, allocated by reportable segments, were as follows (refer to Note 25 for the definition of the
Corporations reportable segments):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
Purchase |
|
|
|
|
|
|
|
|
Balance at |
|
Goodwill |
|
accounting |
|
|
|
|
|
Balance at |
(In thousands) |
|
January 1, 2008 |
|
acquired |
|
adjustments |
|
Other |
|
September 30, 2008 |
|
Banco Popular de Puerto Rico: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Banking |
|
$ |
35,371 |
|
|
|
|
|
|
$ |
(3,631 |
) |
|
|
|
|
|
$ |
31,740 |
|
Consumer and Retail Banking |
|
|
136,407 |
|
|
|
|
|
|
|
(17,796 |
) |
|
|
|
|
|
|
118,611 |
|
Other Financial Services |
|
|
8,621 |
|
|
$ |
153 |
|
|
|
3 |
|
|
$ |
12 |
|
|
|
8,789 |
|
Banco Popular North America: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banco Popular North America |
|
|
404,237 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
404,237 |
|
E-LOAN |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EVERTEC |
|
|
46,125 |
|
|
|
1,000 |
|
|
|
85 |
|
|
|
(2,415 |
) |
|
|
44,795 |
|
|
Total Popular, Inc. |
|
$ |
630,761 |
|
|
$ |
1,153 |
|
|
$ |
(21,339 |
) |
|
$ |
(2,403 |
) |
|
$ |
608,172 |
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
Balance at |
|
Goodwill |
|
|
|
|
|
Balance at |
(In thousands) |
|
January 1, 2007 |
|
acquired |
|
Other |
|
September 30, 2007 |
|
Banco Popular de Puerto Rico: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Banking |
|
$ |
14,674 |
|
|
|
|
|
|
|
|
|
|
$ |
14,674 |
|
Consumer and Retail Banking |
|
|
34,999 |
|
|
|
|
|
|
|
|
|
|
|
34,999 |
|
Other Financial Services |
|
|
4,391 |
|
|
|
|
|
|
|
|
|
|
|
4,391 |
|
Banco Popular North America: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banco Popular North America |
|
|
568,647 |
|
|
|
|
|
|
|
|
|
|
|
568,647 |
|
E-LOAN |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EVERTEC |
|
|
45,142 |
|
|
$ |
1,137 |
|
|
$ |
(183 |
) |
|
|
46,096 |
|
|
Total Popular, Inc. |
|
$ |
667,853 |
|
|
$ |
1,137 |
|
|
$ |
(183 |
) |
|
$ |
668,807 |
|
|
Purchase accounting adjustments consist of adjustments to the value of the assets acquired and
liabilities assumed resulting from the completion of appraisals or other valuations, adjustments to
initial estimates recorded for transaction costs, if any, and contingent consideration paid during
a contractual contingency period. The purchase accounting adjustments during the nine months ended
September 30, 2008 at the BPPR reportable segment were mostly related to the acquisition of
Citibanks retail branches in Puerto Rico (acquisition completed in December 2007). The reduction
in goodwill in the EVERTEC reportable segment during the nine months ended September 30, 2008 was
the result of the sale of substantially all assets of EVERTECs health processing division during
the third quarter of 2008.
During the third quarter of 2008, management completed the annual goodwill impairment tests
for the Corporation's significant reporting units (BPPR and BPNA). Based on the results of the
impairment tests, management concluded that goodwill at those reporting units is not impaired.
The first step of the goodwill impairment test required by SFAS No. 142, which is used to
identify potential impairment, compares the fair value of a reporting unit with its carrying
amount, including goodwill. The carrying amount of BPNA exceeded its fair value, thus the
second step of the goodwill impairment test was performed for that reporting unit. The second
step, which is used to measure the amount of impairment loss, if any, compares the implied fair
value of the reporting unit goodwill with the carrying amount of that goodwill. The implied fair
value of goodwill shall be determined in the same manner as the amount of goodwill recognized
in a business combination is determined. That is, an entity shall allocate the fair value of a
reporting unit to all of the assets and liabilities of that unit (including any unrecognized intangible
assets) as if the reporting unit had been acquired in a business combination and the fair value of
the reporting unit was the price paid to acquire the reporting unit. The excess of the fair value of a
reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of
goodwill. The fair value of the assets and liabilities reflects market conditions, thus volatility in
prices could have a material impact on the determination of the implied fair value of the reporting
unit goodwill at the impairment test date. Based on the results of the second step, management
concluded that there was no goodwill impairment to be recognized by BPNA. Management
monitors events or circumstances that could trigger a test for impairment between annual tests.
As of September 30, 2008, other than goodwill, the Corporation had $17 million of identifiable
intangibles with indefinite useful lives (December 31, 2007 $17 million; September 30, 2007 $65
million).
The following table reflects the components of other intangible assets subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
December 31, 2007 |
|
September 30, 2007 |
|
|
Gross |
|
Accumulated |
|
Gross |
|
Accumulated |
|
Gross |
|
Accumulated |
(In thousands) |
|
Amount |
|
Amortization |
|
Amount |
|
Amortization |
|
Amount |
|
Amortization |
|
Core deposits |
|
$ |
71,238 |
|
|
$ |
28,446 |
|
|
$ |
66,381 |
|
|
$ |
23,171 |
|
|
$ |
46,302 |
|
|
$ |
22,836 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
customer relationships |
|
|
12,898 |
|
|
|
7,105 |
|
|
|
13,421 |
|
|
|
5,753 |
|
|
|
15,021 |
|
|
|
5,192 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other intangibles |
|
|
7,534 |
|
|
|
5,663 |
|
|
|
5,118 |
|
|
|
3,763 |
|
|
|
6,074 |
|
|
|
3,509 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
91,670 |
|
|
$ |
41,214 |
|
|
$ |
84,920 |
|
|
$ |
32,687 |
|
|
$ |
67,397 |
|
|
$ |
31,537 |
|
|
During the quarter and nine months ended September 30, 2008, the Corporation recognized $4 million
and $9 million, respectively, in amortization expense related to other intangible assets with
definite lives (September 30, 2007 $2 million and $8 million in the quarter and nine months ended
September 30, 2007, respectively).
31
The following table presents the estimated aggregate annual amortization expense of the intangible
assets with definite lives for each of the following fiscal years:
|
|
|
|
|
|
|
(In thousands) |
2008 |
|
$ |
11,695 |
|
2009 |
|
|
10,228 |
|
2010 |
|
|
8,294 |
|
2011 |
|
|
6,939 |
|
2012 |
|
|
5,919 |
|
Note
12 Fair Value Option
As indicated in Note 2 to the consolidated financial statements, the Corporation elected to measure
at fair value certain loans and borrowings outstanding at January 1, 2008 pursuant to the fair
value option provided by SFAS No. 159. These financial instruments, all of which pertained to the
discontinued operations of Popular Financial Holdings, were as follows:
|
|
|
Approximately $1.2 billion of whole loans held-in-portfolio by PFH that were outstanding
as of December 31, 2007. These whole loans consist principally of first lien residential
mortgage loans and closed-end second lien loans that were originated through the exited
origination channels of PFH (e.g. asset acquisition, broker and retail channels), and home
equity lines of credit that had been originated by E-LOAN, but sold to PFH as part of the
Corporations 2007 U.S. reorganization whereby E-LOAN became a subsidiary of BPNA. Also, to
a lesser extent, the loan portfolio included mixed-use / multi-family loans (small
commercial category) and manufactured housing loans. |
|
|
|
|
Management believed upon adoption of the accounting standard that accounting for these loans
at fair value provided a more relevant and transparent measurement of the realizable value
of the assets and differentiated the PFH portfolio from the loan portfolios that the
Corporation continues to originate through channels other than PFH. |
|
|
|
|
Approximately $287 million of owned-in-trust loans and $287 million of bond
certificates associated with PFH securitization activities that were outstanding as of
December 31, 2007. The owned-in-trust loans are pledged as collateral for the bond
certificates as a financing vehicle through on-balance sheet securitization transactions.
These loan securitizations conducted by the Corporation did not meet the sale criteria
under SFAS No. 140; accordingly, the transactions are treated as on-balance sheet
securitizations for accounting purposes. Due to the terms of the transactions, particularly
the existence of an interest rate swap agreement and to a lesser extent clean up calls, the
Corporation was unable to recharacterize these loan securitizations as sales for accounting
purposes in 2007. The owned-in-trust loans include first lien residential mortgage loans,
closed-end second lien loans, mixed-use / multi-family loans (small commercial category)
and manufactured housing loans. The majority of the portfolio is comprised of first lien
residential mortgage loans. |
|
|
|
|
These owned-in-trust loans do not pose the same magnitude of risk to the Corporation as
those loans owned outright because certain of the potential losses related to
owned-in-trust loans are born by the bondholders and not the Corporation. Upon the
adoption of SFAS No. 159, the loans and related bonds are both measured at fair value, thus
their net position better portrays the credit risk born by the Corporation. |
Excluding the PFH loans elected for the fair value option as described above, PFHs reportable
segment held approximately $1.8 billion of additional loans at the time of fair value option
election on January 1, 2008. Of these remaining loans, at adoption date, $1.4 billion were
classified as loans held-for-sale and were not subject to the fair value option as the loans were
intended to be sold to an institutional buyer during the first quarter of 2008. These loans were
sold in March 2008. The remaining $0.4 billion in other loans held-in-portfolio at PFH as of that
same date consisted principally of a small portfolio of auto loans that was acquired from E-LOAN,
warehousing revolving
32
lines of credit with monthly advances and pay-downs, and construction credit agreements in which
the permanent financing will be provided by a lender other than PFH.
There were no other assets or liabilities elected for the fair value option after January 1, 2008.
Upon adoption of SFAS No. 159 the Corporation recognized a $262 million negative after-tax
adjustment ($409 million before tax) to beginning retained earnings due to the transitional
adjustment for electing the fair value option, as detailed in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect |
|
|
|
|
January 1, 2008 |
|
adjustment to |
|
January 1, 2008 |
|
|
(Carrying value |
|
January 1, 2008 |
|
fair value |
|
|
prior to |
|
retained earnings |
|
(Carrying value |
(In thousands) |
|
adoption) |
|
Gain (Loss) |
|
after adoption) |
|
Loans |
|
$ |
1,481,297 |
|
|
$ |
(494,180 |
) |
|
$ |
987,117 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable (bond certificates) |
|
$ |
(286,611 |
) |
|
$ |
85,625 |
|
|
$ |
(200,986 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax cumulative effect of adopting fair
value option accounting |
|
|
|
|
|
$ |
(408,555 |
) |
|
|
|
|
Net increase in deferred tax asset |
|
|
|
|
|
|
146,724 |
|
|
|
|
|
|
After-tax cumulative effect of adopting
fair value option accounting |
|
|
|
|
|
$ |
(261,831 |
) |
|
|
|
|
|
As of January 1, 2008, the Corporation eliminated $37 million in allowance for loan losses
associated to the loan portfolio elected for fair value option accounting and recognized it as part
of the cumulative effect adjustment.
The following table presents the differences as of September 30, 2008 between the aggregate fair
value, including accrued interest, and aggregate unpaid principal balance (UPB) of those loans /
notes payable for which the fair value option has been elected. Also, the table presents
information of non-accruing loans accounted under the fair value option.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate fair value |
|
Aggregate UPB |
|
|
|
|
as of |
|
as of |
|
Unrealized |
(In thousands) |
|
September 30, 2008 |
|
September 30, 2008 |
|
(loss) gain |
|
Loans |
|
$ |
583,812 |
|
|
$ |
1,145,717 |
|
|
$ |
(561,905 |
) |
|
Loans past due 90 days or more |
|
$ |
64,802 |
|
|
$ |
185,433 |
|
|
$ |
(120,631 |
) |
|
Non-accrual loans (1) |
|
$ |
64,802 |
|
|
$ |
185,433 |
|
|
$ |
(120,631 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable (bond certificates) |
|
$ |
(166,436 |
) |
|
$ |
(242,883 |
) |
|
$ |
76,447 |
|
|
|
|
|
(1) |
|
It is the Corporations policy to recognize interest income separately from other
changes in fair value. Interest income on these loans was included as part of Loss from
discontinued operations, net of tax in the consolidated statement of operations and is
based on the notes contractual rate. Interest income is reversed, if necessary, in
accordance with the Corporations non-accruing policy for each particular loan type. |
During the quarter and nine-months ended September 30, 2008, the Corporation recognized $137.2
million and $169.8 million, respectively, in losses attributable to changes in the fair value of
loans, including net losses attributable to changes in instrument-specific credit spreads. During
the quarter and nine months ended September 30, 2008, the Corporation recognized $3.4 million and
$9.6 million, respectively, in losses attributable to changes in the fair value of notes payable
(bond certificates). These losses were included in the caption Loss from discontinued operations,
net of tax in the consolidated statement of operations.
These financial instruments are included as part of Assets / Liabilities from discontinued
operations in the consolidated statement of condition as of September 30, 2008. PFH, which held
the SFAS No. 159 loan portfolio, was financed primarily by advances from its holding company,
Popular North America (PNA). In turn, PNA depended totally on the capital markets to raise
financing to meet its financial obligations. Given the mounting
pressure to address PNAs liquidity needs and the continuing problems with accessing the U.S.
capital markets given
33
the current unprecedented market conditions, management decided that the only
viable option available to permanently raise the liquidity required by PNA was to sell PFH assets.
This decision was taken in the third quarter of 2008.
Note
13 Fair Value Measurement
As discussed in Note 2 to the consolidated financial statements, effective January 1, 2008, the
Corporation adopted SFAS No. 157, which provides a framework for measuring fair value under
accounting principles generally accepted.
Under SFAS No. 157, fair value is defined as the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market participants at the
measurement date. A fair value measurement assumes that the transaction to sell the asset or
transfer the liability occurs in the principal market for the asset or liability or, in the absence
of a principal market, the most advantageous market for the asset or liability.
SFAS No. 157 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 classification of assets and liabilities within the
hierarchy is based on whether the inputs to the valuation methodology used for the fair value
measurement are observable or unobservable. Observable inputs reflect the assumptions market
participants would use in pricing the asset or liability based on market data obtained from
independent sources. Unobservable inputs reflect the Corporations estimates about assumptions that
market participants would use in pricing the asset or liability based on the best information
available. 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 price 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 fair value could significantly affect the results. In addition, the fair value
estimates are based on outstanding balances without attempting to estimate the value of anticipated
future business. Therefore, the estimated fair value may materially differ from the value that
could actually be realized on a sale.
34
Fair Value on a Recurring Basis
The following fair value hierarchy table presents information about the Corporations assets and
liabilities measured at fair value on a recurring basis at September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2008 |
|
|
Quoted prices |
|
|
|
|
|
|
|
|
in active |
|
Significant |
|
|
|
|
|
|
markets for |
|
other |
|
Significant |
|
Balance as |
|
|
identical assets |
|
observable |
|
unobservable |
|
of |
|
|
or liabilities |
|
inputs |
|
inputs |
|
September |
(In millions) |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
30, 2008 |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available-for-sale |
|
$ |
10 |
|
|
$ |
7,522 |
|
|
$ |
37 |
|
|
|
|
|
|
$ |
7,569 |
|
Trading account securities |
|
|
|
|
|
|
207 |
|
|
|
237 |
|
|
|
|
|
|
|
444 |
|
Derivatives |
|
|
|
|
|
|
51 |
|
|
|
|
|
|
|
|
|
|
|
51 |
|
Mortgage servicing rights |
|
|
|
|
|
|
|
|
|
|
128 |
|
|
|
|
|
|
|
128 |
|
Discontinued Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans measured at fair value (SFAS No. 159) |
|
|
|
|
|
|
|
|
|
|
584 |
|
|
|
|
|
|
|
584 |
|
Residual interests trading |
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
4 |
|
Mortgage servicing rights |
|
|
|
|
|
|
|
|
|
|
37 |
|
|
|
|
|
|
|
37 |
|
|
Total |
|
$ |
10 |
|
|
$ |
7,780 |
|
|
$ |
1,027 |
|
|
|
|
|
|
$ |
8,817 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives |
|
|
|
|
|
$ |
(52 |
) |
|
|
|
|
|
|
|
|
|
$ |
(52 |
) |
Discontinued Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable measured at fair value (SFAS No. 159) |
|
|
|
|
|
|
|
|
|
$ |
(166 |
) |
|
|
|
|
|
|
(166 |
) |
Derivatives |
|
|
|
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
(2 |
) |
|
Total |
|
|
|
|
|
$ |
(54 |
) |
|
$ |
(166 |
) |
|
|
|
|
|
$ |
(220 |
) |
|
35
The following tables present the changes in Level 3 assets and liabilities measured at fair value
on a recurring basis for the quarter and nine months ended September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended September 30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
unrealized |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
gains |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(losses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
included in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases, |
|
|
|
|
|
earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
sales, |
|
|
|
|
|
related to |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase |
|
issuances, |
|
|
|
|
|
assets and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (losses) |
|
(decrease) |
|
settlements, |
|
|
|
|
|
liabilities |
|
|
|
|
|
|
|
|
|
|
Gains |
|
included in |
|
in accrued |
|
paydowns |
|
Balance as |
|
still held as |
|
|
|
|
|
|
Balance |
|
(losses) |
|
other |
|
interest |
|
and |
|
of |
|
of |
|
|
|
|
|
|
as of June |
|
included in |
|
comprehensive |
|
receivable |
|
maturities |
|
September |
|
September |
|
|
|
|
(In millions) |
|
30, 2008 |
|
earnings |
|
income |
|
/ payable |
|
(net) |
|
30, 2008 |
|
30, 2008 |
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
available-for-sale |
|
$ |
39 |
|
|
|
|
|
|
$ |
(1 |
) |
|
|
|
|
|
$ |
(1 |
) |
|
$ |
37 |
|
|
|
|
|
|
|
(a |
) |
Trading account securities |
|
|
310 |
|
|
$ |
1 |
|
|
|
|
|
|
|
|
|
|
|
(74 |
) |
|
|
237 |
|
|
$ |
(1 |
) |
|
|
(b |
) |
Mortgage servicing rights |
|
|
130 |
|
|
|
(10 |
) |
|
|
|
|
|
|
|
|
|
|
8 |
|
|
|
128 |
|
|
|
(7 |
) |
|
|
(d |
) |
Discontinued Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans measured at fair
value (SFAS No. 159) |
|
|
845 |
|
|
|
(137 |
) |
|
|
|
|
|
$ |
(1 |
) |
|
|
(123 |
) |
|
|
584 |
|
|
|
(111 |
) |
|
|
(c |
) |
Residual interests trading |
|
|
35 |
|
|
|
(29 |
) |
|
|
|
|
|
|
|
|
|
|
(2 |
) |
|
|
4 |
|
|
|
(32 |
) |
|
|
(c |
) |
Mortgage servicing rights |
|
|
56 |
|
|
|
(19 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37 |
|
|
|
(12 |
) |
|
|
(c |
) |
Residual interests -
available-for-sale |
|
|
2 |
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c |
) |
|
Total |
|
$ |
1,417 |
|
|
$ |
(196 |
) |
|
$ |
(1 |
) |
|
$ |
(1 |
) |
|
$ |
(192 |
) |
|
$ |
1,027 |
|
|
$ |
(163 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable measured at
fair value (SFAS No. 159) |
|
$ |
(174 |
) |
|
$ |
(3 |
) |
|
|
|
|
|
|
|
|
|
$ |
11 |
|
|
$ |
(166 |
) |
|
$ |
(3 |
) |
|
|
(c |
) |
|
Total |
|
$ |
(174 |
) |
|
$ |
(3 |
) |
|
|
|
|
|
|
|
|
|
$ |
11 |
|
|
$ |
(166 |
) |
|
$ |
(3 |
) |
|
|
|
|
|
|
|
|
|
(a) |
|
Gains (losses) are included in Net (loss) gain on sale and valuation adjustments of
investment securities in the statement of operations. |
|
(b) |
|
Gains (losses) are included in Trading account profit (loss) in the statement of
operations. |
|
(c) |
|
Gains (losses) are included in Loss from discontinued operations, net of tax in the
statement of operations. |
|
(d) |
|
Gains (losses) are included in Other service fees in the statement of operations. |
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
unrealized |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
gains |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(losses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
included in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases, |
|
|
|
|
|
earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
sales, |
|
|
|
|
|
related to |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase |
|
issuances, |
|
|
|
|
|
assets and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (losses) |
|
(decrease) |
|
settlements, |
|
|
|
|
|
liabilities |
|
|
|
|
|
|
Balance |
|
Gains |
|
included in |
|
in accrued |
|
paydowns |
|
Balance as |
|
still held as |
|
|
|
|
|
|
as of |
|
(losses) |
|
other |
|
interest |
|
and |
|
of |
|
of |
|
|
|
|
|
|
January 1, |
|
included in |
|
comprehensive |
|
receivable |
|
maturities |
|
September |
|
September |
|
|
|
|
(In millions) |
|
2008 |
|
earnings |
|
income |
|
/ payable |
|
(net) |
|
30, 2008 |
|
30, 2008 |
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
available-for-sale |
|
$ |
39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(2 |
) |
|
$ |
37 |
|
|
|
|
|
|
|
(a |
) |
Trading account securities |
|
|
233 |
|
|
$ |
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
237 |
|
|
$ |
2 |
|
|
|
(b |
) |
Mortgage servicing rights |
|
|
111 |
|
|
|
(9 |
) |
|
|
|
|
|
|
|
|
|
|
26 |
|
|
|
128 |
|
|
|
(1 |
) |
|
|
(d |
) |
Discontinued Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans measured at fair
value (SFAS No. 159) |
|
|
987 |
|
|
|
(170 |
) |
|
|
|
|
|
|
(3 |
) |
|
|
(230 |
) |
|
|
584 |
|
|
|
(96 |
) |
|
|
(c |
) |
Residual Interest trading |
|
|
40 |
|
|
|
(32 |
) |
|
|
|
|
|
|
|
|
|
|
(4 |
) |
|
|
4 |
|
|
|
(43 |
) |
|
|
(c |
) |
Mortgage servicing rights |
|
|
81 |
|
|
|
(44 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37 |
|
|
|
(23 |
) |
|
|
(c |
) |
Residual Interest
available-for-sale |
|
|
4 |
|
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c |
) |
|
Total |
|
$ |
1,495 |
|
|
$ |
(255 |
) |
|
|
|
|
|
$ |
(3 |
) |
|
$ |
(210 |
) |
|
$ |
1,027 |
|
|
$ |
(161 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable measured at
fair value (SFAS No. 159) |
|
$ |
(201 |
) |
|
$ |
(9 |
) |
|
|
|
|
|
|
|
|
|
$ |
44 |
|
|
$ |
(166 |
) |
|
$ |
(9 |
) |
|
|
(c |
) |
|
Total |
|
$ |
(201 |
) |
|
$ |
(9 |
) |
|
|
|
|
|
|
|
|
|
$ |
44 |
|
|
$ |
(166 |
) |
|
$ |
(9 |
) |
|
|
|
|
|
|
|
|
(a) |
|
Gains (losses) are included in Net (loss) gain on sale and valuation adjustments of
investment securities in the statement of operations. |
|
(b) |
|
Gains (losses) are included in Trading account profit (loss) in the statement of
operations. |
|
(c) |
|
Gains (losses) are included in Loss from discontinued operations, net of tax in the
statement of operations. |
|
(d) |
|
Gains (losses) are included in Other service fees in the statement of operations. |
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 nine months ended September 30, 2008.
37
Gains and losses (realized and unrealized) included in earnings for the quarter and nine months
ended September 30, 2008 for Level 3 assets and liabilities included in the previous tables are
reported in the consolidated statement of operations as follows:
|
|
|
|
|
|
|
|
|
|
|
Quarter ended September 30, 2008 |
|
|
|
|
|
|
Change in unrealized gains |
|
|
|
|
|
|
or losses relating to assets / |
|
|
Total gains (losses) |
|
liabilities still held at |
(In millions) |
included in earnings |
reporting date |
|
Continuing Operations |
|
|
|
|
|
|
|
|
Interest income |
|
|
|
|
|
|
|
|
Other service fees |
|
$ |
(10 |
) |
|
$ |
(7 |
) |
Trading account loss |
|
|
1 |
|
|
|
(1 |
) |
Discontinued Operations (1) |
|
|
|
|
|
|
|
|
Interest income |
|
|
3 |
|
|
|
|
|
Other service fees |
|
|
(19 |
) |
|
|
(12 |
) |
Net loss on sale and valuation adjustments of investment securities |
|
|
(2 |
) |
|
|
|
|
Trading account loss |
|
|
(32 |
) |
|
|
(32 |
) |
Losses from changes in fair value related to instruments measured
at fair value pursuant to SFAS No. 159 |
|
|
(140 |
) |
|
|
(114 |
) |
|
Total |
|
$ |
(199 |
) |
|
$ |
(166 |
) |
|
|
|
|
(1) |
|
All income statement amounts for the discontinued operations disclosed in this table
are aggregated and included in the line item Loss from discontinued operations, net of
tax in the consolidated statement of operations. |
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2008 |
|
|
|
|
|
|
Change in unrealized gains |
|
|
|
|
|
|
or losses relating to assets / |
|
|
Total gains (losses) |
liabilities still held at |
(In millions) |
|
included in earnings |
|
reporting date |
|
Continuing Operations |
|
|
|
|
|
|
|
|
Interest income |
|
|
|
|
|
|
|
|
Other service fees |
|
$ |
(9 |
) |
|
$ |
(1 |
) |
Trading account loss |
|
|
4 |
|
|
|
2 |
|
Discontinued Operations (1) |
|
|
|
|
|
|
|
|
Interest income |
|
|
11 |
|
|
|
|
|
Other service fees |
|
|
(44 |
) |
|
|
(23 |
) |
Net loss on sale and valuation adjustments of investment securities |
|
|
(4 |
) |
|
|
|
|
Trading account loss |
|
|
(43 |
) |
|
|
(43 |
) |
Losses from changes in fair value related to instruments measured
at fair
value pursuant to SFAS No. 159 |
|
|
(179 |
) |
|
|
(105 |
) |
|
Total |
|
$ |
(264 |
) |
|
$ |
(170 |
) |
|
|
|
|
(1) |
|
All income statement amounts for the discontinued operations disclosed in this table
are aggregated and included in the line item Loss from discontinued operations, net of
tax in the consolidated statement of operations. |
38
Additionally, the Corporation may be required to measure certain assets at fair value on a
nonrecurring basis in accordance with generally accepted accounting principles. The adjustments to
fair value usually result from the application of lower of cost or market accounting,
identification of impaired loans requiring specific reserves under SFAS No. 114, or write-downs of
individual assets. The following table presents those financial assets that were subject to a fair
value measurement on a non-recurring basis during the nine months ended September 30, 2008 and
which are still included in the consolidated statement of condition as of September 30, 2008. The
amounts disclosed represent the aggregate of the fair value measurements of those assets as of the
end of the reporting period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted prices in |
|
|
|
|
|
|
|
|
active markets |
|
Significant other |
|
Significant |
|
|
|
|
for identical |
|
observable |
|
unobservable |
|
|
|
|
assets |
|
inputs |
|
inputs |
|
|
(In millions) |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans (1) |
|
|
|
|
|
|
|
|
|
$ |
474 |
|
|
$ |
474 |
|
Discontinued Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held-for-sale (2) |
|
|
|
|
|
|
|
|
|
|
42 |
|
|
|
42 |
|
Securitization advances |
|
|
|
|
|
|
|
|
|
|
280 |
|
|
|
280 |
|
|
|
|
(1) |
|
Relates primarily 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 SFAS No. 114 (as amended by SFAS No. 118). |
|
(2) |
|
Relates principally to loans transferred from loans held-in-portfolio to
loans held-for-sale. Their lower of cost or market adjustments were
principally determined based on negotiated price terms for the loans. |
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 all non-financial instruments. Accordingly, the aggregate fair value amounts of the
financial instruments presented in Note 13 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. The fair value of U.S. agency securities,
except for structured notes, is based on an active exchange market and is based on quoted
market prices for similar securities. The U.S. agency securities are classified as Level 2.
U.S. agency structured notes are priced based on a bonds theoretical value from similar
bonds defined by credit quality and market sector and for which the fair value incorporates
an option adjusted spread in deriving their fair value. These 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: 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-prepared pricing matrix with quoted prices from local brokers 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
|
39
|
|
|
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. |
|
|
|
|
Corporate securities and mutual funds: 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 are classified as Level 3. |
Derivatives
Interest rate swaps, interest rate caps and index 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 present value and option pricing models using observable
inputs. The derivatives are substantially classified as Level 2. Other derivatives that are
exchange-traded, such as futures and options, or that are liquid and have quoted prices, such as
forward contracts or TBAs, are also classified as Level 2.
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, prepayments 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.
Loans held-in-portfolio considered impaired under SFAS No. 114 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 SFAS No. 114 (as amended by SFAS No. 118).
Currently, the associated loans considered impaired as of June 30, 2008 are classified as Level 3.
Assets / Liabilities from discontinued operations
The fair value measurements of assets and liabilities associated to the discontinued operations are
mostly derived from the price indicators negotiated in a market transaction with Goldman Sachs, the
prospective buyer of substantially all of the assets of the discontinued business as indicated in
Note 3 to the consolidated financial statements.
40
Note 14 Borrowings
The composition of federal funds purchased and assets sold under agreements to repurchase was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
|
September 30, |
(In thousands) |
|
2008 |
|
2007 |
|
2007 |
|
Federal funds purchased |
|
$ |
139,951 |
|
|
$ |
303,492 |
|
|
$ |
690,332 |
|
Assets sold under
agreements to
repurchase |
|
|
3,590,088 |
|
|
|
5,133,773 |
|
|
|
5,596,971 |
|
|
|
|
$ |
3,730,039 |
|
|
$ |
5,437,265 |
|
|
$ |
6,287,303 |
|
|
Other short-term borrowings consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
|
September 30, |
(In thousands) |
|
2008 |
|
2007 |
|
2007 |
|
Advances with the FHLB paying interest monthly at
fixed rates (September 30, 2007 - 5.14% to 5.17%) |
|
|
|
|
|
$ |
72,000 |
|
|
$ |
172,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advances with the FHLB paying interest at maturity at
fixed rates ranging from 2.62% to 3.08% |
|
$ |
115,000 |
|
|
|
570,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advances under credit facilities with other institutions at
a fixed rate of 3.25% (September 30, 2007 5.25% to 5.96%) |
|
|
10,000 |
|
|
|
487,000 |
|
|
|
210,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper paying interest at
fixed rates (September 30, 2007 - 5.05% to 5.92%) |
|
|
|
|
|
|
7,329 |
|
|
|
249,041 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term notes purchased paying interest at maturity at
fixed rates ranging from 2.20% to 3.40% |
|
|
37,232 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term funds purchased at fixed rates ranging from 2.53% to 2.75% (September 30,
2007 5.13% to 5.82%) |
|
|
343,000 |
|
|
|
280,000 |
|
|
|
749,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
1,779 |
|
|
|
85,650 |
|
|
|
34,856 |
|
|
|
|
$ |
507,011 |
|
|
$ |
1,501,979 |
|
|
$ |
1,414,897 |
|
|
|
|
|
Note: |
|
Refer to the Corporations Form 10-K for the year ended December 31, 2007, for rates and maturity information corresponding to
the borrowings outstanding as of such date. |
41
Notes payable consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
|
September 30, |
(In thousands) |
|
2008 |
|
2007 |
|
2007 |
|
Advances with the FHLB: |
|
|
|
|
|
|
|
|
|
|
|
|
-with maturities ranging from 2009 through 2018 paying interest at fixed rates
ranging from 2.67% to 6.98% (September 30, 2007 2.51% to 6.98%) |
|
$ |
1,241,717 |
|
|
$ |
813,958 |
|
|
$ |
738,099 |
|
-maturing in 2008 paying interest monthly at a floating rate of 0.0075% over the
1-month LIBOR rate |
|
|
|
|
|
|
250,000 |
|
|
|
250,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advances under revolving lines of credit maturing in 2008 paying interest monthly
at a floating rate of 0.75% over the 1-month LIBOR rate |
|
|
|
|
|
|
|
|
|
|
317,926 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advances under revolving lines of credit with maturities ranging from 2008 to
2009 paying interest quarterly at floating rates ranging from 0.20% to 0.27%
(September 30, 2007 0.20% to 0.35%) over the 3-month LIBOR rate |
|
|
85,000 |
|
|
|
110,000 |
|
|
|
154,999 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term notes maturing in 2030 paying interest monthly at fixed rates ranging from
3.00% to 6.00% |
|
|
3,100 |
|
|
|
3,100 |
|
|
|
3,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term notes with maturities ranging from 2008 to 2013 paying interest semiannually
at fixed rates ranging from 3.88% to 7.00% (September 30, 2007 3.60% to
5.65%) |
|
|
1,579,509 |
|
|
|
2,038,259 |
|
|
|
2,014,323 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term notes with maturities ranging from 2008 to 2013 paying interest
monthly at a floating rate of 3.00% over the 10-year U.S. Treasury note rate |
|
|
4,642 |
|
|
|
6,805 |
|
|
|
7,502 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term notes maturing in 2009 paying interest quarterly at a floating rate of 0.40%
to 3.25% (September 30, 2007 0.35% to 0.40%) over the 3-month LIBOR rate |
|
|
449,880 |
|
|
|
199,706 |
|
|
|
349,610 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured borrowings paying interest
monthly at fixed rates ranging from 4.00% to 7.12% |
|
|
* |
|
|
|
59,241 |
|
|
|
2,381,081 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured borrowings paying interest
monthly at floating rates ranging from 0.06% to 3.51% over the 1-month
LIBOR rate |
|
|
* |
|
|
|
227,743 |
|
|
|
1,189,286 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes linked to the S&P 500 Index maturing in 2008 |
|
|
|
|
|
|
36,498 |
|
|
|
37,876 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Junior subordinated deferrable interest debentures with maturities
ranging from 2027 to 2034 with fixed interest rates ranging from
6.13% to 8.33% (Refer to Note 15) |
|
|
849,672 |
|
|
|
849,672 |
|
|
|
849,672 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
28,967 |
|
|
|
26,370 |
|
|
|
21,317 |
|
|
Total notes payable from continuing operations |
|
$ |
4,242,487 |
|
|
$ |
4,621,352 |
|
|
$ |
8,314,791 |
|
|
Notes payable from discontinued operations |
|
$ |
166,436 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Note: |
|
Refer to the Corporations Form 10-K for the year ended December 31, 2007, for rates and maturity information corresponding to the
borrowings outstanding as of such date. Key index rates as of September 30, 2008 and September 30, 2007, respectively, were as follows:
1-month LIBOR rate = 3.93% and 5.12%; 3-month LIBOR rate = 4.05% and 5.23%; 10-year U.S. Treasury note = 3.83% and 4.59%. |
|
* |
|
These secured borrowings are part of discontinued operations and, therefore, are included
in the line item Liabilities from discontinued
operations in the consolidated statement of condition as of September 30, 2008. |
42
Note 15 Trust Preferred Securities
As of September 30, 2008 and 2007, the Corporation had established four trusts for the purpose of
issuing trust preferred securities (the 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. The sole
assets of the trusts consisted of the junior subordinated debentures of the Corporation and the
related accrued interest receivable. These trusts are not consolidated by the Corporation under the
provisions of FIN No. 46(R).
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 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, including reference notes) |
|
|
|
|
|
|
|
|
|
|
Popular North |
|
|
|
|
|
BanPonce |
|
|
Popular Capital |
|
|
America Capital |
|
|
Popular Capital |
|
Issuer |
|
Trust I |
|
|
Trust I |
|
|
Trust I |
|
|
Trust II |
|
|
Issuance date |
|
February 1997 |
|
|
October 2003 |
|
|
September 2004 |
|
|
November 2004 |
|
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 $150,000. In 2003, the Corporation reacquired $6,000 of the
8.327% capital securities. |
|
(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. A capital treatment event would include
a change in the regulatory capital treatment of the capital securities as a result of the recent
accounting changes affecting the criteria for consolidation of variable interest entities such as
the trust under FIN 46(R). |
|
(g) |
|
Same as (f) above, except that the investment company event does not apply for early
redemption. |
The capital securities of Popular Capital Trust I and Popular Capital Trust II are traded on the
NASDAQ under the symbols BPOPN and BPOPM, respectively.
43
Note 16 Stockholders Equity
The Corporations authorized preferred stock may be issued in one or more series, and the shares of
each series shall have such rights and preferences as shall be fixed by the Board of Directors when
authorizing the issuance of that particular series.
On May 28, 2008, the Corporation issued 16,000,000 shares of Series B Preferred Stock at a purchase
price of $25.00 per share.
The Corporations preferred stock outstanding at September 30, 2008 consists of:
|
|
|
6.375% non-cumulative monthly income preferred stock, 2003 Series A. These shares of
preferred stock are perpetual, nonconvertible and are redeemable solely at the option of
the Corporation with the consent of the Board of Governors of the Federal Reserve System
beginning on March 31, 2008. The redemption price per share is $25.50 from March 31, 2008
through March 30, 2009, $25.25 from March 31, 2009 through March 30, 2010 and $25.00 from
March 31, 2010 and thereafter. |
|
|
|
|
8.25% non-cumulative monthly income preferred stock, 2008 Series B. These shares of
preferred stock are perpetual, nonconvertible and are redeemable, in whole or in part,
solely at the option of the Corporation with the consent of the Board of Governors of the
Federal Reserve System beginning on May 28, 2013. The redemption price per share is $25.50
from May 28, 2013 through May 28, 2014, $25.25 from May 28, 2014 through May 28, 2015 and
$25.00 from May 28, 2015 and thereafter. |
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 $374 million as of
September 30, 2008 (December 31, 2007 $374 million; September 30, 2007 $346 million). There
were no transfers between the statutory reserve account and the retained earnings account during
the quarter and nine months ended September 30, 2008 and 2007.
Note 17 Commitments and Contingencies
Commercial letters of credit and stand-by letters of credit amounted to $28 million and $175
million, respectively, as of September 30, 2008 (December 31, 2007 $26 million and $174 million;
September 30, 2007 $18 million and $196 million). There were also other commitments outstanding
and contingent liabilities, such as commitments to extend credit.
As of September 30, 2008, the Corporation recorded a liability of $563 thousand (December 31, 2007
- $636 thousand; September 30, 2007 $721 thousand), which represents the fair value of the
obligations undertaken in issuing the guarantees under stand-by letters of credit. The fair value
approximates the fee received from the customer for issuing such commitments. These fees are
deferred and are recognized over the commitment period. The liability was included as part of
other liabilities in the consolidated statements of condition. The contract amounts in stand-by
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 stand-by letters of credit are used by the customer as a credit enhancement and
typically expire without being drawn upon. The Corporations stand-by letters of credit are
generally secured, and in the event of nonperformance by the customers, the Corporation has rights
to the underlying collateral provided, which normally includes cash and marketable securities, real
estate, receivables and others. Management does not anticipate any material losses related to these
instruments.
Popular, Inc. at the holding company level (PIHC) fully and unconditionally guarantees certain
borrowing obligations issued by certain of its wholly-owned consolidated subsidiaries, which
aggregated to $2.3 billion as of September 30, 2008 (December 31, 2007 $2.9 billion and
September 30, 2007 $3.3 billion). In addition, as of
44
September 30, 2008, PIHC fully and
unconditionally guaranteed $824 million of capital securities (December 31, 2007 and September 30,
2007 $824 million) issued by four wholly-owned issuing trust entities that have been
deconsolidated pursuant to FIN No. 46R.
The Corporation is a defendant in a number of legal proceedings arising in the normal course of
business. Based on the opinion of legal counsel, management believes that the final disposition of
these matters will not have a material adverse effect on the Corporations financial position or
results of operations.
Note 18 Other Service Fees
The caption of other service fees in the consolidated statements of operations consists of the
following major categories:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended |
|
Nine months ended |
|
|
September 30, |
|
September 30, |
(In thousands) |
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
Credit card fees and discounts |
|
$ |
27,138 |
|
|
$ |
25,975 |
|
|
$ |
81,664 |
|
|
$ |
74,498 |
|
Debit card fees |
|
|
28,170 |
|
|
|
16,228 |
|
|
|
79,880 |
|
|
|
49,184 |
|
Processing fees |
|
|
13,044 |
|
|
|
11,674 |
|
|
|
38,587 |
|
|
|
35,463 |
|
Insurance fees |
|
|
12,378 |
|
|
|
14,410 |
|
|
|
38,254 |
|
|
|
40,624 |
|
Sale and administration of
investment products |
|
|
6,890 |
|
|
|
8,043 |
|
|
|
25,966 |
|
|
|
22,614 |
|
Mortgage servicing fees, net
of amortization and fair value
adjustments |
|
|
(1,407 |
) |
|
|
4,706 |
|
|
|
13,809 |
|
|
|
16,257 |
|
Other fees |
|
|
9,089 |
|
|
|
8,827 |
|
|
|
28,489 |
|
|
|
27,072 |
|
|
Total |
|
$ |
95,302 |
|
|
$ |
89,863 |
|
|
$ |
306,649 |
|
|
$ |
265,712 |
|
|
Note 19 Pension and Postretirement Benefits
The Corporation has noncontributory defined benefit pension plans and supplementary benefit pension
plans for regular employees of certain of its subsidiaries.
The components of net periodic pension cost for the quarters and nine months ended September 30,
2008 and 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plans |
|
Benefit Restoration Plans |
|
|
Quarters ended |
|
Nine months ended |
|
Quarters ended |
|
Nine months ended |
|
|
September 30, |
|
September 30, |
|
September 30, |
|
September 30, |
(In thousands) |
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
Service cost |
|
$ |
2,315 |
|
|
$ |
2,639 |
|
|
$ |
6,945 |
|
|
$ |
8,384 |
|
|
$ |
182 |
|
|
$ |
221 |
|
|
$ |
546 |
|
|
$ |
678 |
|
Interest cost |
|
|
8,611 |
|
|
|
7,958 |
|
|
|
25,833 |
|
|
|
23,890 |
|
|
|
461 |
|
|
|
419 |
|
|
|
1,383 |
|
|
|
1,258 |
|
Expected return on plan assets |
|
|
(10,169 |
) |
|
|
(10,532 |
) |
|
|
(30,507 |
) |
|
|
(31,589 |
) |
|
|
(420 |
) |
|
|
(369 |
) |
|
|
(1,260 |
) |
|
|
(1,105 |
) |
Amortization of prior service cost |
|
|
67 |
|
|
|
52 |
|
|
|
201 |
|
|
|
156 |
|
|
|
(13 |
) |
|
|
(13 |
) |
|
|
(39 |
) |
|
|
(39 |
) |
Amortization of net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
172 |
|
|
|
248 |
|
|
|
515 |
|
|
|
743 |
|
|
Net periodic cost |
|
$ |
824 |
|
|
$ |
117 |
|
|
$ |
2,472 |
|
|
$ |
841 |
|
|
$ |
382 |
|
|
$ |
506 |
|
|
$ |
1,145 |
|
|
$ |
1,535 |
|
One-time settlement gain |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24 |
) |
|
|
|
|
|
|
(24 |
) |
|
|
|
|
Curtailment gain |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(246 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(258 |
) |
|
Total cost |
|
$ |
824 |
|
|
$ |
117 |
|
|
$ |
2,472 |
|
|
$ |
595 |
|
|
$ |
358 |
|
|
$ |
506 |
|
|
$ |
1,121 |
|
|
$ |
1,277 |
|
|
For the nine months ended September 30, 2008, contributions made to the pension and restoration
plans amounted to approximately $1.3 million. The total contributions expected to be paid during
the year 2008 for the pension and restoration plans amount to approximately $1.8 million.
45
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 nine
months ended September 30, 2008 and 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters ended |
|
Nine months ended |
|
|
September 30, |
|
September 30, |
(In thousands) |
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
Service cost |
|
$ |
485 |
|
|
$ |
578 |
|
|
$ |
1,455 |
|
|
$ |
1,734 |
|
Interest cost |
|
|
1,967 |
|
|
|
1,889 |
|
|
|
5,901 |
|
|
|
5,667 |
|
Amortization of prior service cost |
|
|
(262 |
) |
|
|
(261 |
) |
|
|
(786 |
) |
|
|
(784 |
) |
|
Total net periodic cost |
|
$ |
2,190 |
|
|
$ |
2,206 |
|
|
$ |
6,570 |
|
|
$ |
6,617 |
|
|
For the nine months ended September 30, 2008, contributions made to the postretirement benefit plan
amounted to approximately $4.4 million. The total contributions expected to be paid during the year
2008 for the postretirement benefit plan amount to approximately $6.4 million.
Note 20 Restructuring Plans
PFH Discontinuance Restructuring Plan
As disclosed in Note 3 to the consolidated financial statements, on August 29, 2008, the
Corporation announced an agreement to sell loans and servicing assets of PFH and Popular, FS to
various Goldman Sachs affiliates. As disclosed in Note 27 to the consolidated financial statements,
the transaction closed on November 3, 2008. This sale resulted in a reduction in assets, mostly
accounted at fair value, of over $900 million, and provided over $700 million in additional
liquidity. In addition, on September 18, 2008, the Corporation announced the consummation of the
sale of manufactured housing loans of PFH to 21st Mortgage Corp. and Vanderbilt Mortgage
and Finance, Inc. The transaction provided approximately $198 million in cash and resulted in a
reduction in unpaid principal balance of loans held at PFH of approximately $309 million.
As part of the sale of the loans and servicing assets, the Corporation entered into a restructuring
plan (the PFH Discontinuance Restructuring Plan) to eliminate employment positions, terminate
contracts and incur other costs associated with the discontinuance of PFHs operations. It is
anticipated that this Plan will result in estimated combined charges for the Corporation of
approximately $14 million, of which $5.1 million was recognized during the third quarter of 2008.
The remainder costs consisting of severance bonuses and other employee benefits, lease and other
contract termination expenses will be recognized during the fourth quarter of 2008 and early 2009.
Full-time equivalent employees at the PFH reportable segment were 299 as of September 30, 2008,
compared with 934 as of September 30, 2007.
During the quarter ended September 30, 2008, the PFH Discontinuance Restructuring Plan resulted in
charges, on a pre-tax basis, broken down as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairments on |
|
Restructuring |
|
|
(In thousands) |
|
long-lived assets |
|
costs |
|
Total |
|
Quarter ended: |
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
$ |
3,916 |
(a) |
|
$ |
1,164 |
(b) |
|
$ |
5,080 |
|
|
Total |
|
$ |
3,916 |
|
|
$ |
1,164 |
|
|
$ |
5,080 |
|
|
|
|
|
(a) |
|
Fixed assets and prepaid expenses |
|
(b) |
|
Severance, retention bonuses and other employee
benefits |
The PFH Discontinuance Restructuring Plan charges incurred in the third quarter of 2008 are
included in the line item Loss from discontinued operations, net of tax in the consolidated
statement of operations.
46
PFH Branch Network Restructuring Plan
The Corporation closed Equity Ones consumer service branches during the first quarter of 2008 as
part of the initiatives to exit the subprime loan origination operations at PFH (the PFH Branch
Network Restructuring Plan). The PFH Branch Network Restructuring Plan followed the sale on March
1, 2008 of approximately $1.4 billion of PFH consumer and mortgage loans that were originated
through Equity Ones consumer branch network to American General Financial (American General).
American General hired certain of Equity Ones consumer services employees and retained certain
branch locations. During the quarter ended March 31, 2008, Equity One closed substantially all
branches not assumed by American General.
During the quarter and nine months ended September 30, 2008 and as part of this particular
restructuring plan, the Corporation incurred certain costs, on a pre-tax basis, as detailed in the
table below.
|
|
|
|
|
|
|
|
|
|
|
Quarter ended |
|
Nine months ended |
(In thousands) |
|
September 30, 2008 |
|
September 30, 2008 |
|
Personnel costs |
|
$ |
63 |
|
|
$ |
8,468 |
(a) |
Net occupancy expenses |
|
|
|
|
|
|
5,905 |
(b) |
Equipment expenses |
|
|
|
|
|
|
675 |
|
Communications |
|
|
|
|
|
|
590 |
|
Other operating expenses |
|
|
|
|
|
|
1,021 |
(c) |
|
Total restructuring charges |
|
$ |
63 |
|
|
$ |
16,659 |
|
|
|
|
|
(a) |
|
Severance, retention bonuses and other benefits |
|
(b) |
|
Lease terminations |
|
(c) |
|
Contract cancellations and branch closing costs |
Also, during the fourth quarter of 2007, and as disclosed in the 2007 Annual Report, the
Corporation recognized impairment charges on long-lived assets of $1.9 million, mainly associated
with leasehold improvements, furniture and equipment.
As of September 30, 2008, the PFH Branch Network Restructuring Plan has resulted in combined
charges for 2007 and 2008, broken down as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairments on |
|
Restructuring |
|
|
(In thousands) |
|
long-lived assets |
|
costs |
|
Total |
|
Quarter ended: |
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007 |
|
$ |
1,892 |
|
|
|
|
|
|
$ |
1,892 |
|
March 31, 2008 |
|
|
|
|
|
$ |
17,029 |
|
|
|
17,029 |
|
June 30, 2008 |
|
|
|
|
|
|
(433 |
) |
|
|
(433 |
) |
September 30, 2008 |
|
|
|
|
|
|
63 |
|
|
|
63 |
|
|
Total |
|
$ |
1,892 |
|
|
$ |
16,659 |
|
|
$ |
18,551 |
|
|
The PFH Branch Network Restructuring Plan costs are included in the line item Loss from
discontinued operations, net of tax in the consolidated statements of operations for 2008 and
2007.
47
The following table presents the changes during 2008 in the reserve for restructuring costs
associated with the PFH Branch Network Restructuring Plan.
|
|
|
|
|
|
|
Restructuring |
(In thousands) |
|
costs |
|
Balance at January 1, 2008 |
|
|
|
|
Charges in quarter ended March 31 |
|
$ |
17,029 |
|
Cash payments |
|
|
(4,728 |
) |
|
Balance at March 31, 2008 |
|
|
12,301 |
|
Charges in quarter ended June 30 |
|
|
412 |
|
Cash payments |
|
|
(7,913 |
) |
Reversals |
|
|
(845 |
) |
|
Balance at June 30, 2008 |
|
|
3,955 |
|
Charges in quarter ended September 30, |
|
|
63 |
|
Cash payments |
|
|
(1,615 |
) |
|
Balance as of September 30, 2008 |
|
$ |
2,403 |
|
|
E-LOAN Restructuring Plan
As indicated in the 2007 Annual Report, in November 2007, the Corporation began a restructuring
plan for its Internet financial services subsidiary E-LOAN (the E-LOAN Restructuring Plan). This
plan included a substantial reduction of marketing and personnel costs at E-LOAN and changes in
E-LOANs business model. The changes included concentrating marketing investment toward the
Internet and the origination of first mortgage loans that qualified for sale to government
sponsored entities (GSEs). Also, as a result of escalating credit costs in the current economic
environment and lower liquidity in the secondary markets for mortgage related products, in the
fourth quarter of 2007, the Corporation determined to hold back the origination by E-LOAN of home
equity lines of credit, closed-end second lien mortgage loans and auto loans. Refer to Note 27 to
these consolidated financial statements for disclosures on an additional restructuring plan at
E-LOAN that was approved by the Corporations Board of Directors subsequent to the quarter ended
September 30, 2008. The new restructuring plan further reduced the operations conducted at E-LOAN
by eliminating loan origination activities.
The E-LOAN Restructuring Plan resulted in charges recorded in the fourth quarter of 2007 amounting
to $231.9 million, which included $211.8 million in non-cash impairment losses related to its
goodwill and trademark intangible assets.
The cost-control plan initiative and changes in loan origination strategies incorporated as part of
the E-LOAN Restructuring Plan resulted in the elimination of over 400 positions between the fourth
quarter of 2007 and second quarter of 2008.
The following table presents the changes in restructuring costs reserves for 2008 associated with
the E-LOAN Restructuring Plan.
|
|
|
|
|
|
|
Restructuring |
(In thousands) |
|
costs |
|
Balance at January 1, 2008 |
|
$ |
8,808 |
|
Payments |
|
|
(4,628 |
) |
Reversals |
|
|
(301 |
) |
|
Balance at March 31, 2008 |
|
|
3,879 |
|
Payments |
|
|
(936 |
) |
|
Balance at June 30, 2008 |
|
|
2,943 |
|
Payments |
|
|
(460 |
) |
Reversals |
|
|
(1,036 |
) |
|
Balance as of September 30, 2008 |
|
$ |
1,447 |
|
|
The E-LOAN Restructuring Plan charges are part of the results of the BPNA reportable segment.
48
Note 21 Income Taxes
The reconciliation of unrecognized tax benefits, including accrued interest, was as follows:
|
|
|
|
|
(In millions) |
|
|
|
Balance as of January 1, 2008 |
|
$ |
22.2 |
|
Additions for tax positions January March 2008 |
|
|
1.4 |
|
|
Balance as of March 31, 2008 |
|
|
23.6 |
|
Additions for tax positions April June 2008 |
|
|
4.4 |
|
|
Balance as of June 30, 2008 |
|
|
28.0 |
|
Additions for tax positions July September 2008 |
|
|
1.1 |
|
|
Balance as of September 30, 2008 |
|
$ |
29.1 |
|
|
As of September 30, 2008, the related accrued interest approximated $4.1 million (September 30,
2007 $3.2 million). Management determined that as of September 30, 2008 and 2007 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 $27.8 million as of September
30, 2008 (September 30, 2007 $26.0 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
September 30, 2008, the following years remain subject to examination in the U.S. Federal
jurisdiction: 2006 and thereafter; and in the Puerto Rico jurisdiction, 2003 and thereafter. The
U.S. Internal Revenue Service (IRS) commenced an examination of the Corporations U.S. operations
tax return for 2006. As of September 30, 2008, the IRS has not proposed any adjustment as a result
of the audit. Although the outcomes of the tax audits are uncertain, the Corporation believes that
adequate amounts of tax and interest have been provided for any adjustments that are expected to
result from open years. The Corporation does not anticipate a significant change to the total
amount of unrecognized tax benefits within the next 12 months.
49
The following table presents the components of the Corporations deferred tax assets and
liabilities.
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
(In thousands) |
|
2008 |
|
2007 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Tax credits available for carryforward and other credits available |
|
$ |
76,669 |
|
|
$ |
20,132 |
|
Net operating losses carryforward available |
|
|
361,082 |
|
|
|
175,349 |
|
Deferred compensation |
|
|
2,960 |
|
|
|
4,993 |
|
Postretirement and pension benefits |
|
|
66,325 |
|
|
|
62,548 |
|
Difference in basis related to securitizations treated as sales for tax
and borrowings for books |
|
|
55,741 |
|
|
|
66,105 |
|
Deferred loan origination fees |
|
|
8,467 |
|
|
|
8,333 |
|
Allowance for loan losses |
|
|
297,467 |
|
|
|
214,544 |
|
Deferred gains |
|
|
15,910 |
|
|
|
16,355 |
|
Unearned income |
|
|
2,768 |
|
|
|
1,488 |
|
Unrealized losses on derivatives |
|
|
320 |
|
|
|
932 |
|
Intercompany deferred gains |
|
|
11,573 |
|
|
|
17,017 |
|
SFAS. No 159 - Fair value option |
|
|
172,975 |
|
|
|
|
|
Differences between assigned values and the tax basis of the
assets and liabilities recognized in purchase business combinations |
|
|
|
|
|
|
113 |
|
Other temporary differences |
|
|
19,326 |
|
|
|
14,204 |
|
|
Total gross deferred tax assets |
|
$ |
1,091,583 |
|
|
$ |
602,113 |
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Differences between assigned values and the tax basis of the
assets and liabilities recognized in purchase business combinations |
|
$ |
2,060 |
|
|
|
|
|
Deferred loan origination costs |
|
|
11,307 |
|
|
$ |
18,861 |
|
Accelerated depreciation |
|
|
9,421 |
|
|
|
10,346 |
|
Amortization of intangibles |
|
|
22,432 |
|
|
|
17,263 |
|
Unrealized net gain on trading and available-for-sale securities |
|
|
6,867 |
|
|
|
19,367 |
|
Other temporary differences |
|
|
15,837 |
|
|
|
16,266 |
|
|
Total gross deferred tax liabilities |
|
$ |
67,924 |
|
|
$ |
82,103 |
|
|
Gross deferred tax assets less liabilities |
|
$ |
1,023,659 |
|
|
$ |
520,010 |
|
Less: Valuation allowance |
|
|
(360,429 |
) |
|
|
(39 |
) |
|
Net deferred tax assets |
|
$ |
663,230 |
|
|
$ |
519,971 |
|
|
SFAS No.
109 Accounting for Income Taxes (SFAS No. 109) states that 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 all of the 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. SFAS No. 109 provides that 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.
SFAS No. 109 requires the consideration of all sources of taxable income available to realize the
deferred tax asset, including the future reversal of existing temporary differences, future taxable
income exclusive of reversing temporary differences and carryforwards, taxable income in
carryback years and tax-planning strategies.
The Corporations U.S. mainland
operations are in a cumulative loss position for the three-year
period ended September 30, 2008. For purposes of assessing the
realizability of the deferred tax
assets in the U.S. mainland, this cumulative taxable loss position is considered significant
negative evidence and has caused us to conclude that the Corporation will not be able to fully
realize the deferred tax assets in the future. However, management has also concluded that $322 million
of the U.S. deferred tax assets will be realized. In making this analysis, management evaluated
the factors that contributed to these losses in order to assess whether these factors were temporary
or indicative of a permanent decline in the earnings of the U.S. mainland operations. Based on the
analysis performed, management determined that the cumulative loss position was caused
primarily by a significant increase in credit losses in two of its main businesses due to the
unprecedented current credit market conditions, losses related to the PFH
50
discontinued business,
and restructuring charges. In assessing the realizability of the deferred tax assets, management has
considered all four sources of taxable income mentioned above, including its forecast of future
taxable income, which includes assumptions about the unprecedented deterioration in the
economy and in credit quality. The forecast includes cost reductions initiated in connection with
the reorganization of the U.S. mainland operations and two tax-planning strategies. The two
strategies considered in management's analysis include reducing the level of interest expense in
the U.S. operations by transferring debt to the Puerto Rico operations and the transfer of a
profitable line of business to the U.S. mainland operations. Based on the analysis as of September 30, 2008, and the weight of the evidence
available, management determined that the Corporations U.S. operations will not generate
sufficient taxable income in the foreseeable future to fully realize the deferred tax assets.
Accordingly, management concluded that it is more likely than not that the Corporation will
not be able to fully realize the benefit of these deferred tax assets and thus, a valuation allowance
for $360.4 million was recorded during the third quarter of 2008. Management will reassess the
realizability of the deferred tax assets during the fourth quarter of the year. If future events differ
from managements September 30, 2008 assessment, an additional or full valuation allowance
may need to be established which would likely have a material adverse effect on the
Corporation's results of operations, financial condition and capital position.
Note 22 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. Nevertheless, all outstanding award grants under the Stock Option
Plan continue to remain in effect as of September 30, 2008 under the original terms of the Stock
Option Plan.
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 provides 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.
51
The following table presents information on stock options outstanding as of September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
(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
|
|
1,485,205
|
|
$15.82
|
|
3.99
|
|
1,485,205
|
|
$15.82 |
$19.25 $27.20
|
|
1,527,145
|
|
$25.23
|
|
5.73
|
|
1,209,578
|
|
$25.04 |
|
$14.39 $27.20
|
|
3,012,350
|
|
$20.59
|
|
4.87
|
|
2,694,783
|
|
$19.96 |
|
The aggregate intrinsic value of options outstanding as of September 30, 2008 was $2.6 million
(September 30, 2007 $8.7 million). There was no intrinsic value of options exercisable as of
September 30, 2008 and 2007.
The following table summarizes the stock option activity and related information:
|
|
|
|
|
|
|
|
|
|
|
Options |
|
Weighted-Average |
(Not in thousands) |
|
Outstanding |
|
Exercise Price |
|
Outstanding at January 1, 2007 |
|
|
3,144,799 |
|
|
$ |
20.65 |
|
Granted |
|
|
|
|
|
|
|
|
Exercised |
|
|
(10,064 |
) |
|
|
15.83 |
|
Forfeited |
|
|
(19,063 |
) |
|
|
25.50 |
|
Expired |
|
|
(23,480 |
) |
|
|
20.08 |
|
|
Outstanding as of December 31, 2007 |
|
|
3,092,192 |
|
|
$ |
20.64 |
|
Granted |
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
Forfeited |
|
|
(30,620 |
) |
|
|
26.13 |
|
Expired |
|
|
(49,222 |
) |
|
|
20.67 |
|
|
Outstanding as of September 30, 2008 |
|
|
3,012,350 |
|
|
$ |
20.59 |
|
|
The stock options exercisable as of September 30, 2008 totaled 2,694,783 (September 30, 2007 -
2,395,158). There were no stock options exercised during the quarters ended September 30, 2008 and
2007. Thus, there was no intrinsic value of options exercised during the quarters ended September
30, 2008 and 2007. There were no stock options exercised during the nine-month period ended
September 30, 2008 (September 30, 2007 10,064). Thus, there was no intrinsic value of options
exercised during the nine-month period ended September 30, 2008 (September 30, 2007 $28
thousand).
There were no new stock option grants issued by the Corporation under the Stock Option Plan during
2007 and 2008.
The Corporation recognized $0.3 million of stock option expense, with a tax benefit of $0.1
million, for the quarter ended September 30, 2008 (September 30, 2007 $0.4 million, with a tax
benefit of $0.2 million). For the nine months ended September 30, 2008, the Corporation recognized
$0.8 million of stock option expense, with a tax benefit of $0.3 million (September 30, 2007 $1.3
million, with a tax benefit of $0.5 million). The total unrecognized compensation cost as of
September 30, 2008 related to non-vested stock option awards was $0.8 million and is expected to be
recognized over a weighted-average period of 1 year.
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
52
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 and related
information to members of management:
|
|
|
|
|
|
|
|
|
|
|
Restricted |
|
Weighted-Average |
(Not in thousands) |
|
Stock |
|
Grant Date Fair Value |
|
Non-vested at January 1, 2007 |
|
|
611,470 |
|
|
$ |
22.55 |
|
Granted |
|
|
|
|
|
|
|
|
Vested |
|
|
(304,003 |
) |
|
|
22.76 |
|
Forfeited |
|
|
(3,781 |
) |
|
|
19.95 |
|
|
Non-vested as of December 31, 2007 |
|
|
303,686 |
|
|
$ |
22.37 |
|
Granted |
|
|
|
|
|
|
|
|
Vested |
|
|
(50,649 |
) |
|
|
20.33 |
|
Forfeited |
|
|
(4,134 |
) |
|
|
19.95 |
|
|
Non-vested as of September 30, 2008 |
|
|
248,903 |
|
|
|
22.82 |
|
|
During the quarters and nine-month periods ended September 30, 2008 and 2007, 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 shares award consists of the
opportunity to receive shares of Popular, Inc.s common stock provided the Corporation achieves
certain performance goals during a 3-year performance cycle. The compensation cost associated with
the performance shares will be recorded ratably over a three-year performance period. The
performance shares will be granted at the end of the three-year period and will be vested at grant
date, except when the participants employment is terminated by the Corporation without cause. In
such case, the participant will receive a pro-rata amount of shares calculated as if the
Corporation would have met the performance goal for the performance period. As of September 30,
2008, 6,528 shares have been granted under this plan.
During the quarter ended September 30, 2008, the Corporation recognized $0.5 million of restricted
stock expense related to management incentive awards, with a tax benefit of $0.2 million (September
30, 2007 $33 thousand, with a tax benefit of $14 thousand). For the nine-month period ended
September 30, 2008, the Corporation recognized $1.7 million of restricted stock expense related to
management incentive awards, with a tax benefit of $0.6 million (September 30, 2007 $1.9 million,
with a tax benefit of $0.7 million). The fair market value of the restricted stock vested was $1.6
million at grant date and $0.8 million at vesting date. This triggers a shortfall of $0.8 million
that was recorded as an additional income tax expense since the Corporation does not have any
surplus due to windfalls. The fair market value of the restricted stock earned was $28 thousand.
During the quarter and nine-month period ended September 30, 2008, the Corporation recognized $12
thousand and $0.9 million, respectively, of performance shares expense, with a tax benefit of $5
thousands and $0.3 million, respectively. The total unrecognized compensation cost related to
non-vested restricted stock awards and performance shares to members of management as of September
30, 2008 was $9 million and is expected to be recognized over a weighted-average period of 2 years.
53
The following table summarizes the restricted stock under the Incentive Plan and related
information to members of the Board of Directors:
|
|
|
|
|
|
|
|
|
|
|
Restricted |
|
Weighted-Average |
(Not in thousands) |
|
Stock |
|
Grant Date Fair Value |
|
Non-vested at January 1, 2007 |
|
|
76,614 |
|
|
$ |
22.02 |
|
Granted |
|
|
38,427 |
|
|
|
15.89 |
|
Vested |
|
|
(115,041 |
) |
|
|
19.97 |
|
Forfeited |
|
|
|
|
|
|
|
|
|
Non-vested as of December 31, 2007 |
|
|
|
|
|
|
|
|
Granted |
|
|
50,815 |
|
|
|
11.08 |
|
Vested |
|
|
(50,815 |
) |
|
|
11.08 |
|
Forfeited |
|
|
|
|
|
|
|
|
|
Non-vested as of September 30, 2008 |
|
|
|
|
|
|
|
|
|
During the quarter ended September 30, 2008, the Corporation granted 5,467 (September 30, 2007 -
3,018) shares of restricted stock to members of the Board of Directors of Popular, Inc. and BPPR,
which became vested at grant date. During the quarter ended September 30, 2008, the Corporation
recognized $0.1 million of restricted stock expense related to these restricted stock grants, with
a tax benefit of $45 thousand (September 30, 2007 $0.1 million, with a tax benefit of $45
thousand). For the nine-month period ended September 30, 2008, the Corporation granted 50,815
(September 30, 2007 32,381) shares of restricted stock to members of the Board of Directors of
Popular Inc. and BPPR, which became vested at grant date. During the nine-month period ended
September 30, 2008, the Corporation recognized $0.3 million of restricted stock expense related to
these restricted stock grants, with a tax benefit of $0.1 million (September 30, 2007 $0.4
million, with a tax benefit of $0.2 million). The fair value at vesting date of the restricted
stock vested during 2008 for directors was $0.6 million.
Note 23 (Loss) Earnings per Common Share
The computation of (loss) earnings per common share (EPS) follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended |
|
Nine months ended |
|
|
September 30, |
|
September 30, |
(In thousands, except share information) |
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
Net (loss) income from continuing operations |
|
$ |
(211,173 |
) |
|
$ |
80,214 |
|
|
$ |
(52,761 |
) |
|
$ |
352,973 |
|
Net loss from discontinued operations |
|
|
(457,370 |
) |
|
|
(44,211 |
) |
|
|
(488,242 |
) |
|
|
(123,373 |
) |
Less: Preferred stock dividends |
|
|
11,229 |
|
|
|
2,979 |
|
|
|
20,210 |
|
|
|
8,935 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income applicable to common stock |
|
$ |
(679,772 |
) |
|
$ |
33,024 |
|
|
$ |
(561,213 |
) |
|
$ |
220,665 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares outstanding |
|
|
281,489,469 |
|
|
|
279,625,715 |
|
|
|
280,841,638 |
|
|
|
279,355,496 |
|
Average potential common shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78,016 |
|
|
Average common shares outstanding assuming dilution |
|
|
281,489,469 |
|
|
|
279,625,715 |
|
|
|
280,841,638 |
|
|
|
279,433,512 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted EPS from continuing operations |
|
$ |
(0.79 |
) |
|
$ |
0.28 |
|
|
$ |
(0.26 |
) |
|
$ |
1.23 |
|
Basic and diluted EPS from discontinued operations |
|
$ |
(1.63 |
) |
|
$ |
(0.16 |
) |
|
$ |
(1.74 |
) |
|
$ |
(0.44 |
) |
|
Basic and diluted EPS |
|
$ |
(2.42 |
) |
|
$ |
0.12 |
|
|
$ |
(2.00 |
) |
|
$ |
0.79 |
|
|
Potential common shares consist of common stock issuable under the assumed exercise of stock
options and under 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. Stock options 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 share. For the quarter and
nine-month period ended
54
September 30, 2008, there were 3,012,350 and 3,049,600 weighted average antidilutive stock options
outstanding, respectively (September 30, 2007 3,099,617 and 2,209,290).
Note 24 Supplemental Disclosure on the Consolidated Statements of Cash Flows
Additional disclosures on non-cash activities for the nine-month period are listed in the following
table:
|
|
|
|
|
|
|
|
|
(In thousands) |
|
September 30, 2008 |
|
September 30, 2007 |
|
Non-cash activities: |
|
|
|
|
|
|
|
|
Loans transferred to other real estate |
|
$ |
78,521 |
|
|
$ |
134,325 |
|
Loans transferred to other property |
|
|
32,725 |
|
|
|
26,907 |
|
|
Total loans transferred to foreclosed assets |
|
|
111,246 |
|
|
|
161,232 |
|
Transfers from loans held-in-portfolio to loans
held- for-sale |
|
|
690,222 |
|
|
|
|
|
Transfers from loans held-for-sale to loans
held-in- portfolio |
|
|
60,032 |
|
|
|
244,117 |
|
Loans securitized into investment securities (a) |
|
|
1,357,249 |
|
|
|
1,064,299 |
|
Recognition of mortgage servicing rights on
securitizations or asset transfers |
|
|
22,033 |
|
|
|
25,722 |
|
Business acquisitions: |
|
|
|
|
|
|
|
|
Fair value of assets acquired |
|
|
|
|
|
|
703 |
|
Goodwill and other intangible assets acquired |
|
|
|
|
|
|
2,401 |
|
Other liabilities assumed |
|
|
|
|
|
|
(726 |
) |
|
|
|
|
(a) |
|
Includes loans securitized into investment securities and
subsequently sold before quarter end. |
Note 25 Segment Reporting
The Corporations corporate structure consists of three reportable segments Banco Popular de
Puerto Rico, Banco Popular North America and EVERTEC. These reportable segments pertain only to the
continuing operations of Popular, Inc. As previously indicated in Note 3 to the consolidated
financial statements, the operations of Popular Financial Holdings that were considered a
reportable segment were classified as discontinued operations in the third quarter of 2008. Also, a
corporate group has been defined to support the reportable segments. The Corporation
retrospectively adjusted information in the statements of operations to
exclude results from discontinued operations from 2007 periods to conform to the 2008 presentation.
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 September 30, 2008, 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 segments 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, Popular Finance, and Popular Mortgage. These three
subsidiaries focus on auto and lease financing, small personal loans and
mortgage loan originations, respectively. This 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. |
55
|
|
|
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. |
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 branch network with presence in 5 states, while E-LOAN supports BPNAs deposit gathering through
its online platform. All direct lending activities at E-LOAN are being terminated as described in
Note 27 to the consolidated financial statements. Popular Insurance Agency, U.S.A. offers
investment and insurance services across the BPNA branch network. Popular Equipment Finance, Inc.
specializes in financing manufacturing, commercial and healthcare equipment in various markets. The
U.S. operations also include the mortgage business unit of Banco Popular, National Association.
Due to the significant losses in the E-LOAN operations during 2007, impacted in part by the
restructuring charges and impairment losses that resulted from the restructuring plan effected in
2007, management has determined to provide as additional disclosure the results of E-LOAN apart
from the other BPNA subsidiaries.
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; EVERTEC USA, Inc. incorporated in the United States; 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.
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
holding companies obtain funding in the capital markets to finance the Corporations growth,
including acquisitions. The Corporate group also includes the expenses of the four administrative
corporate areas that are identified as critical for the organization: Finance, Risk Management,
Legal and People, and Communications. These corporate administrative areas have the responsibility
of establishing policy, setting up controls and coordinating the activities of their corresponding
groups in each of the reportable segments.
The Corporation may periodically reclassify reportable segment results based on modifications to
its management reporting and profitability measurement methodologies and changes in organizational
alignment.
56
The accounting policies of the individual operating segments are the same as those of the
Corporation described in Note 1. Transactions between reportable segments are primarily conducted
at market rates, resulting in profits that are eliminated for reporting consolidated results of
operations.
2008
For the quarter ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banco Popular de |
|
Banco Popular |
|
|
|
|
|
Intersegment |
(In thousands) |
|
Puerto Rico |
|
North America |
|
EVERTEC |
|
Eliminations |
|
Net interest income (expense) |
|
$ |
238,373 |
|
|
$ |
89,424 |
|
|
$ |
(134 |
) |
|
|
|
|
Provision for loan losses |
|
|
128,917 |
|
|
|
123,243 |
|
|
|
|
|
|
|
|
|
Non-interest income |
|
|
120,329 |
|
|
|
52,486 |
|
|
|
63,350 |
|
|
$ |
(37,020 |
) |
Amortization of intangibles |
|
|
2,241 |
|
|
|
1,506 |
|
|
|
219 |
|
|
|
|
|
Depreciation expense |
|
|
10,292 |
|
|
|
3,525 |
|
|
|
3,569 |
|
|
|
(18 |
) |
Other operating expenses |
|
|
184,406 |
|
|
|
91,285 |
|
|
|
46,710 |
|
|
|
(36,616 |
) |
Income tax (benefit) expense |
|
|
(2,548 |
) |
|
|
61,394 |
|
|
|
4,231 |
|
|
|
(150 |
) |
|
Net income (loss) |
|
$ |
35,394 |
|
|
$ |
(139,043 |
) |
|
$ |
8,487 |
|
|
$ |
(236 |
) |
|
Segment Assets |
|
$ |
26,262,308 |
|
|
$ |
12,747,724 |
|
|
$ |
260,439 |
|
|
$ |
(241,376 |
) |
|
For the quarter ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Reportable |
|
|
|
|
|
|
|
|
|
Total |
(In thousands) |
|
Segments |
|
Corporate |
|
Eliminations |
|
Popular, Inc. |
|
Net interest income (expense) |
|
$ |
327,663 |
|
|
$ |
(3,670 |
) |
|
$ |
289 |
|
|
$ |
324,282 |
|
Provision for loan losses |
|
|
252,160 |
|
|
|
|
|
|
|
|
|
|
|
252,160 |
|
Non-interest
income (loss) |
|
|
199,145 |
|
|
|
(9,621 |
) |
|
|
(1,596 |
) |
|
|
187,928 |
|
Amortization of intangibles |
|
|
3,966 |
|
|
|
|
|
|
|
|
|
|
|
3,966 |
|
Depreciation expense |
|
|
17,368 |
|
|
|
584 |
|
|
|
|
|
|
|
17,952 |
|
Other operating expenses |
|
|
285,785 |
|
|
|
17,160 |
|
|
|
(1,948 |
) |
|
|
300,997 |
|
Income tax expense |
|
|
62,927 |
|
|
|
106,929 |
|
|
|
(21,548 |
) |
|
|
148,308 |
|
|
Net loss |
|
$ |
(95,398 |
) |
|
$ |
(137,964 |
) |
|
$ |
22,189 |
|
|
$ |
(211,173 |
) |
|
Segment Assets |
|
$ |
39,029,095 |
|
|
$ |
6,326,012 |
|
|
$ |
(5,933,634 |
) |
|
$ |
39,421,473 |
|
|
For the nine months ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banco Popular de |
|
Banco Popular |
|
|
|
|
|
Intersegment |
(In thousands) |
|
Puerto Rico |
|
North America |
|
EVERTEC |
|
Eliminations |
|
Net interest income (expense) |
|
$ |
726,256 |
|
|
$ |
277,227 |
|
|
$ |
(603 |
) |
|
|
|
|
Provision for loan losses |
|
|
339,151 |
|
|
|
263,370 |
|
|
|
|
|
|
|
|
|
Non-interest income |
|
|
483,087 |
|
|
|
135,583 |
|
|
|
198,922 |
|
|
$ |
(112,601 |
) |
Amortization of intangibles |
|
|
3,749 |
|
|
|
4,527 |
|
|
|
672 |
|
|
|
|
|
Depreciation expense |
|
|
31,296 |
|
|
|
10,793 |
|
|
|
10,849 |
|
|
|
(54 |
) |
Other operating expenses |
|
|
568,923 |
|
|
|
276,105 |
|
|
|
138,975 |
|
|
|
(111,428 |
) |
Income tax expense |
|
|
39,517 |
|
|
|
33,350 |
|
|
|
14,083 |
|
|
|
(436 |
) |
|
Net income (loss) |
|
$ |
226,707 |
|
|
$ |
(175,335 |
) |
|
$ |
33,740 |
|
|
$ |
(683 |
) |
|
57
For the nine months ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Reportable |
|
|
|
|
|
|
|
|
|
Total |
(In thousands) |
|
Segments |
|
Corporate |
|
Eliminations |
|
Popular, Inc. |
|
Net interest income (expense) |
|
$ |
1,002,880 |
|
|
$ |
(13,482 |
) |
|
$ |
940 |
|
|
$ |
990,338 |
|
Provision for loan losses |
|
|
602,521 |
|
|
|
40 |
|
|
|
|
|
|
|
602,561 |
|
Non-interest
income (loss) |
|
|
704,991 |
|
|
|
(7,251 |
) |
|
|
(9,263 |
) |
|
|
688,477 |
|
Amortization of intangibles |
|
|
8,948 |
|
|
|
|
|
|
|
|
|
|
|
8,948 |
|
Depreciation expense |
|
|
52,884 |
|
|
|
1,737 |
|
|
|
|
|
|
|
54,621 |
|
Other operating expenses |
|
|
872,575 |
|
|
|
47,949 |
|
|
|
(7,545 |
) |
|
|
912,979 |
|
Income tax expense |
|
|
86,514 |
|
|
|
86,627 |
|
|
|
(20,674 |
) |
|
|
152,467 |
|
|
Net income (loss) |
|
$ |
84,429 |
|
|
$ |
(157,086 |
) |
|
$ |
19,896 |
|
|
$ |
(52,761 |
) |
|
2007
For the quarter ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banco |
|
|
|
|
|
|
|
|
Banco Popular de |
|
Popular North |
|
|
|
|
|
Intersegment |
(In thousands) |
|
Puerto Rico |
|
America |
|
EVERTEC |
|
Eliminations |
|
Net interest income (expense) |
|
$ |
241,725 |
|
|
$ |
93,995 |
|
|
$ |
(74 |
) |
|
|
|
|
Provision for loan losses |
|
|
66,077 |
|
|
|
20,263 |
|
|
|
|
|
|
|
|
|
Non-interest income |
|
|
116,522 |
|
|
|
35,976 |
|
|
|
59,585 |
|
|
$ |
(34,840 |
) |
Amortization of intangibles |
|
|
190 |
|
|
|
1,810 |
|
|
|
234 |
|
|
|
|
|
Depreciation expense |
|
|
10,290 |
|
|
|
4,126 |
|
|
|
4,035 |
|
|
|
(19 |
) |
Other operating expenses |
|
|
172,267 |
|
|
|
107,568 |
|
|
|
43,157 |
|
|
|
(34,696 |
) |
Income tax expense (benefit) |
|
|
29,247 |
|
|
|
(2,696 |
) |
|
|
3,987 |
|
|
|
(48 |
) |
|
Net income (loss) |
|
$ |
80,176 |
|
|
$ |
(1,100 |
) |
|
$ |
8,098 |
|
|
$ |
(77 |
) |
|
Segment Assets |
|
$ |
26,137,863 |
|
|
$ |
13,818,525 |
|
|
$ |
224,834 |
|
|
$ |
(507,488 |
) |
|
For the quarter ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Reportable |
|
|
|
|
|
|
|
|
|
Total |
(In thousands) |
|
Segments |
|
Corporate |
|
Eliminations |
|
Popular, Inc. |
|
Net interest income (expense) |
|
$ |
335,646 |
|
|
$ |
(5,244 |
) |
|
$ |
1,244 |
|
|
$ |
331,646 |
|
Provision for loan losses |
|
|
86,340 |
|
|
|
|
|
|
|
|
|
|
|
86,340 |
|
Non-interest income |
|
|
177,243 |
|
|
|
1,663 |
|
|
|
(1,981 |
) |
|
|
176,925 |
|
Amortization of intangibles |
|
|
2,234 |
|
|
|
|
|
|
|
|
|
|
|
2,234 |
|
Depreciation expense |
|
|
18,432 |
|
|
|
601 |
|
|
|
|
|
|
|
19,033 |
|
Other operating expenses |
|
|
288,296 |
|
|
|
11,778 |
|
|
|
(2,380 |
) |
|
|
297,694 |
|
Income tax expense (benefit) |
|
|
30,490 |
|
|
|
(8,097 |
) |
|
|
663 |
|
|
|
23,056 |
|
|
Net income (loss) |
|
$ |
87,097 |
|
|
$ |
(7,863 |
) |
|
$ |
980 |
|
|
$ |
80,214 |
|
|
Segment Assets |
|
$ |
39,673,734 |
|
|
$ |
14,120,052 |
(a) |
|
$ |
(6,513,655 |
) |
|
$ |
47,280,131 |
|
|
|
|
|
(a) |
|
Includes $7,569 million in assets from PFH. |
58
For the nine months ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banco |
|
|
|
|
|
|
|
|
Banco Popular de |
|
Popular North |
|
|
|
|
|
Intersegment |
(In thousands) |
|
Puerto Rico |
|
America |
|
EVERTEC |
|
Eliminations |
|
Net interest income (expense) |
|
$ |
711,103 |
|
|
$ |
275,733 |
|
|
$ |
(547 |
) |
|
|
|
|
Provision for loan losses |
|
|
176,557 |
|
|
|
42,913 |
|
|
|
|
|
|
|
|
|
Non-interest income |
|
|
358,364 |
|
|
|
138,585 |
|
|
|
179,060 |
|
|
$ |
(103,974 |
) |
Amortization of intangibles |
|
|
1,508 |
|
|
|
5,821 |
|
|
|
701 |
|
|
|
|
|
Depreciation expense |
|
|
31,455 |
|
|
|
12,208 |
|
|
|
12,355 |
|
|
|
(55 |
) |
Other operating expenses |
|
|
525,259 |
|
|
|
320,325 |
|
|
|
131,782 |
|
|
|
(103,892 |
) |
Income tax expense |
|
|
87,629 |
|
|
|
10,206 |
|
|
|
11,736 |
|
|
|
(10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
247,059 |
|
|
$ |
22,845 |
|
|
$ |
21,939 |
|
|
$ |
(17 |
) |
|
For the nine months ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Reportable |
|
|
|
|
|
|
|
|
|
Total Popular, |
(In thousands) |
|
Segments |
|
Corporate |
|
Eliminations |
|
Inc. |
|
Net interest income (expense) |
|
$ |
986,289 |
|
|
$ |
(21,314 |
) |
|
$ |
3,367 |
|
|
$ |
968,342 |
|
Provision for loan losses |
|
|
219,470 |
|
|
|
7 |
|
|
|
|
|
|
|
219,477 |
|
Non-interest income |
|
|
572,035 |
|
|
|
129,711 |
|
|
|
(18,668 |
) |
|
|
683,078 |
|
Amortization of intangibles |
|
|
8,030 |
|
|
|
|
|
|
|
|
|
|
|
8,030 |
|
Depreciation expense |
|
|
55,963 |
|
|
|
1,783 |
|
|
|
|
|
|
|
57,746 |
|
Other operating expenses |
|
|
873,474 |
|
|
|
40,567 |
|
|
|
(6,445 |
) |
|
|
907,596 |
|
Income tax expense (benefit) |
|
|
109,561 |
|
|
|
(336 |
) |
|
|
(3,627 |
) |
|
|
105,598 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
291,826 |
|
|
$ |
66,376 |
|
|
$ |
(5,229 |
) |
|
$ |
352,973 |
|
|
The
Corporate groups financial results for the nine months ended
September 30, 2008 include an unfavorable impact to income taxes
due to the allocation of $116.3 million of the
$360.4 million valuation allowance on the deferred tax assets of
the U.S. mainland operations to Popular North America (PNA), holding company of the U.S. operations. PNA files a
consolidated tax return.
During the nine months ended September 30, 2008, the Corporate group realized net losses on sale
and valuation adjustments of investment securities, mainly marketable equity securities, of
approximately $9.1 million before tax (2007
$107.3 million in net gains before tax). These amounts are
included in non-interest income within the Corporate group.
Additional disclosures with respect to the Banco Popular de Puerto Rico reportable segment are as
follows:
2008
For the quarter ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Banco |
|
|
Commercial |
|
Consumer and |
|
Other Financial |
|
|
|
|
|
Popular de |
(In thousands) |
|
Banking |
|
Retail Banking |
|
Services |
|
Eliminations |
|
Puerto Rico |
|
Net interest income |
|
$ |
83,878 |
|
|
$ |
151,284 |
|
|
$ |
3,062 |
|
|
$ |
149 |
|
|
$ |
238,373 |
|
Provision for loan losses |
|
|
99,564 |
|
|
|
29,353 |
|
|
|
|
|
|
|
|
|
|
|
128,917 |
|
Non-interest income |
|
|
26,655 |
|
|
|
73,157 |
|
|
|
20,988 |
|
|
|
(471 |
) |
|
|
120,329 |
|
Amortization of intangibles |
|
|
76 |
|
|
|
2,011 |
|
|
|
154 |
|
|
|
|
|
|
|
2,241 |
|
Depreciation expense |
|
|
5,062 |
|
|
|
4,901 |
|
|
|
329 |
|
|
|
|
|
|
|
10,292 |
|
Other operating expenses |
|
|
45,892 |
|
|
|
123,290 |
|
|
|
15,297 |
|
|
|
(73 |
) |
|
|
184,406 |
|
Income tax (benefit) expense |
|
|
(20,683 |
) |
|
|
15,662 |
|
|
|
2,558 |
|
|
|
(85 |
) |
|
|
(2,548 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(19,378 |
) |
|
$ |
49,224 |
|
|
$ |
5,712 |
|
|
$ |
(164 |
) |
|
$ |
35,394 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Assets |
|
$ |
11,596,931 |
|
|
$ |
18,925,656 |
|
|
$ |
434,585 |
|
|
$ |
(4,694,864 |
) |
|
$ |
26,262,308 |
|
|
60
For the nine months ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Banco |
|
|
Commercial |
|
Consumer and |
|
Other Financial |
|
|
|
|
|
Popular de |
(In thousands) |
|
Banking |
|
Retail Banking |
|
Services |
|
Eliminations |
|
Puerto Rico |
|
Net interest income |
|
$ |
265,637 |
|
|
$ |
451,270 |
|
|
$ |
8,919 |
|
|
$ |
430 |
|
|
$ |
726,256 |
|
Provision for loan losses |
|
|
217,582 |
|
|
|
121,569 |
|
|
|
|
|
|
|
|
|
|
|
339,151 |
|
Non-interest income |
|
|
87,811 |
|
|
|
319,103 |
|
|
|
76,763 |
|
|
|
(590 |
) |
|
|
483,087 |
|
Amortization of intangibles |
|
|
137 |
|
|
|
3,155 |
|
|
|
457 |
|
|
|
|
|
|
|
3,749 |
|
Depreciation expense |
|
|
12,414 |
|
|
|
17,944 |
|
|
|
938 |
|
|
|
|
|
|
|
31,296 |
|
Other operating expenses |
|
|
148,165 |
|
|
|
370,195 |
|
|
|
50,794 |
|
|
|
(231 |
) |
|
|
568,923 |
|
Income tax (benefit) expense |
|
|
(27,088 |
) |
|
|
55,064 |
|
|
|
11,473 |
|
|
|
68 |
|
|
|
39,517 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
2,238 |
|
|
$ |
202,446 |
|
|
$ |
22,020 |
|
|
$ |
3 |
|
|
$ |
226,707 |
|
|
2007
For the quarter ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Banco |
|
|
Commercial |
|
Consumer and |
|
Other Financial |
|
|
|
|
|
Popular de |
(In thousands) |
|
Banking |
|
Retail Banking |
|
Services |
|
Eliminations |
|
Puerto Rico |
|
Net interest income |
|
$ |
95,607 |
|
|
$ |
143,108 |
|
|
$ |
2,842 |
|
|
$ |
168 |
|
|
$ |
241,725 |
|
Provision for loan losses |
|
|
21,248 |
|
|
|
44,829 |
|
|
|
|
|
|
|
|
|
|
|
66,077 |
|
Non-interest income |
|
|
22,200 |
|
|
|
70,807 |
|
|
|
23,633 |
|
|
|
(118 |
) |
|
|
116,522 |
|
Amortization of intangibles |
|
|
30 |
|
|
|
47 |
|
|
|
113 |
|
|
|
|
|
|
|
190 |
|
Depreciation expense |
|
|
3,563 |
|
|
|
6,395 |
|
|
|
332 |
|
|
|
|
|
|
|
10,290 |
|
Other operating expenses |
|
|
42,556 |
|
|
|
113,365 |
|
|
|
16,424 |
|
|
|
(78 |
) |
|
|
172,267 |
|
Income tax expense |
|
|
14,728 |
|
|
|
11,061 |
|
|
|
3,403 |
|
|
|
55 |
|
|
|
29,247 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
35,682 |
|
|
$ |
38,218 |
|
|
$ |
6,203 |
|
|
$ |
73 |
|
|
$ |
80,176 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Assets |
|
$ |
11,729,908 |
|
|
$ |
18,651,108 |
|
|
$ |
508,838 |
|
|
$ |
(4,751,991 |
) |
|
$ |
26,137,863 |
|
|
For the nine months ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Banco |
|
|
Commercial |
|
Consumer and |
|
Other Financial |
|
|
|
|
|
Popular de |
(In thousands) |
|
Banking |
|
Retail Banking |
|
Services |
|
Eliminations |
|
Puerto Rico |
|
Net interest income |
|
$ |
279,789 |
|
|
$ |
422,844 |
|
|
$ |
8,022 |
|
|
$ |
448 |
|
|
$ |
711,103 |
|
Provision for loan losses |
|
|
57,070 |
|
|
|
119,487 |
|
|
|
|
|
|
|
|
|
|
|
176,557 |
|
Non-interest income |
|
|
67,307 |
|
|
|
225,382 |
|
|
|
66,440 |
|
|
|
(765 |
) |
|
|
358,364 |
|
Amortization of intangibles |
|
|
470 |
|
|
|
705 |
|
|
|
333 |
|
|
|
|
|
|
|
1,508 |
|
Depreciation expense |
|
|
10,941 |
|
|
|
19,609 |
|
|
|
905 |
|
|
|
|
|
|
|
31,455 |
|
Other operating expenses |
|
|
130,909 |
|
|
|
345,292 |
|
|
|
49,315 |
|
|
|
(257 |
) |
|
|
525,259 |
|
Income tax expense |
|
|
42,128 |
|
|
|
37,783 |
|
|
|
7,731 |
|
|
|
(13 |
) |
|
|
87,629 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
105,578 |
|
|
$ |
125,350 |
|
|
$ |
16,178 |
|
|
$ |
(47 |
) |
|
$ |
247,059 |
|
|
61
Additional disclosures with respect to the Banco Popular North America reportable segment are as
follows:
2008
For the quarter ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
Banco Popular |
|
|
|
|
|
|
|
|
|
Banco Popular |
(In thousands) |
|
North America |
|
E-LOAN |
|
Eliminations |
|
North America |
|
Net interest income |
|
$ |
84,029 |
|
|
$ |
5,015 |
|
|
$ |
380 |
|
|
$ |
89,424 |
|
Provision for loan losses |
|
|
83,934 |
|
|
|
39,309 |
|
|
|
|
|
|
|
123,243 |
|
Non-interest income |
|
|
48,487 |
|
|
|
4,218 |
|
|
|
(219 |
) |
|
|
52,486 |
|
Amortization of intangibles |
|
|
1,056 |
|
|
|
450 |
|
|
|
|
|
|
|
1,506 |
|
Depreciation expense |
|
|
3,064 |
|
|
|
461 |
|
|
|
|
|
|
|
3,525 |
|
Other operating expenses |
|
|
76,203 |
|
|
|
15,078 |
|
|
|
4 |
|
|
|
91,285 |
|
Income tax
expense |
|
|
19,961 |
|
|
|
41,378 |
|
|
|
55 |
|
|
|
61,394 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(51,702 |
) |
|
$ |
(87,443 |
) |
|
$ |
102 |
|
|
$ |
(139,043 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Assets |
|
$ |
13,113,220 |
|
|
$ |
923,647 |
|
|
$ |
(1,289,143 |
) |
|
$ |
12,747,724 |
|
|
For the nine months ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
Banco Popular |
|
|
|
|
|
|
|
|
|
Banco Popular |
(In thousands) |
|
North America |
|
E-LOAN |
|
Eliminations |
|
North America |
|
Net interest income |
|
$ |
257,162 |
|
|
$ |
19,011 |
|
|
$ |
1,054 |
|
|
$ |
277,227 |
|
Provision for loan losses |
|
|
171,281 |
|
|
|
92,089 |
|
|
|
|
|
|
|
263,370 |
|
Non-interest income |
|
|
120,656 |
|
|
|
15,485 |
|
|
|
(558 |
) |
|
|
135,583 |
|
Amortization of intangibles |
|
|
3,178 |
|
|
|
1,349 |
|
|
|
|
|
|
|
4,527 |
|
Depreciation expense |
|
|
9,382 |
|
|
|
1,411 |
|
|
|
|
|
|
|
10,793 |
|
Other operating expenses |
|
|
223,173 |
|
|
|
52,922 |
|
|
|
10 |
|
|
|
276,105 |
|
Income tax expense |
|
|
19,358 |
|
|
|
13,822 |
|
|
|
170 |
|
|
|
33,350 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(48,554 |
) |
|
$ |
(127,097 |
) |
|
$ |
316 |
|
|
$ |
(175,335 |
) |
|
2007
For the quarter ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Banco |
|
|
Banco Popular |
|
|
|
|
|
|
|
|
|
Popular North |
(In thousands) |
|
North America |
|
E-LOAN |
|
Eliminations |
|
America |
|
Net interest income |
|
$ |
87,316 |
|
|
$ |
6,416 |
|
|
$ |
263 |
|
|
$ |
93,995 |
|
Provision for loan losses |
|
|
16,822 |
|
|
|
3,441 |
|
|
|
|
|
|
|
20,263 |
|
Non-interest income |
|
|
25,423 |
|
|
|
10,993 |
|
|
|
(440 |
) |
|
|
35,976 |
|
Amortization of intangibles |
|
|
1,112 |
|
|
|
698 |
|
|
|
|
|
|
|
1,810 |
|
Depreciation expense |
|
|
3,246 |
|
|
|
880 |
|
|
|
|
|
|
|
4,126 |
|
Other operating expenses |
|
|
72,901 |
|
|
|
34,655 |
|
|
|
12 |
|
|
|
107,568 |
|
Income tax expense (benefit) |
|
|
6,500 |
|
|
|
(9,129 |
) |
|
|
(67 |
) |
|
|
(2,696 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
12,158 |
|
|
$ |
(13,136 |
) |
|
$ |
(122 |
) |
|
$ |
(1,100 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Assets |
|
$ |
13,825,285 |
|
|
$ |
1,329,950 |
|
|
$ |
(1,336,710 |
) |
|
$ |
13,818,525 |
|
|
62
For the nine months ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Banco |
|
|
Banco Popular |
|
|
|
|
|
|
|
|
|
Popular North |
(In thousands) |
|
North America |
|
E-LOAN |
|
Eliminations |
|
America |
|
Net interest income |
|
$ |
261,229 |
|
|
$ |
13,857 |
|
|
$ |
647 |
|
|
$ |
275,733 |
|
Provision for loan losses |
|
|
36,457 |
|
|
|
6,456 |
|
|
|
|
|
|
|
42,913 |
|
Non-interest income |
|
|
73,809 |
|
|
|
65,837 |
|
|
|
(1,061 |
) |
|
|
138,585 |
|
Amortization of intangibles |
|
|
3,728 |
|
|
|
2,093 |
|
|
|
|
|
|
|
5,821 |
|
Depreciation expense |
|
|
9,737 |
|
|
|
2,471 |
|
|
|
|
|
|
|
12,208 |
|
Other operating expenses |
|
|
211,508 |
|
|
|
108,782 |
|
|
|
35 |
|
|
|
320,325 |
|
Income tax expense (benefit) |
|
|
26,812 |
|
|
|
(16,448 |
) |
|
|
(158 |
) |
|
|
10,206 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
46,796 |
|
|
$ |
(23,660 |
) |
|
$ |
(291 |
) |
|
$ |
22,845 |
|
|
A breakdown of intersegment eliminations, particularly revenues, by segment in which the revenues
are recorded follows:
INTERSEGMENT REVENUES*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended |
|
Nine months ended |
|
|
September 30, |
|
September 30, |
|
September 30, |
|
September 30, |
(In thousands) |
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
Banco Popular de Puerto Rico: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Banking |
|
$ |
158 |
|
|
$ |
459 |
|
|
$ |
848 |
|
|
$ |
401 |
|
Consumer and Retail Banking |
|
|
303 |
|
|
|
997 |
|
|
|
1,904 |
|
|
|
819 |
|
Other Financial Services |
|
|
(50 |
) |
|
|
(83 |
) |
|
|
(180 |
) |
|
|
(314 |
) |
Banco Popular North America: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banco Popular North America |
|
|
(456 |
) |
|
|
(1,481 |
) |
|
|
(2,737 |
) |
|
|
(1,309 |
) |
E-LOAN |
|
|
|
|
|
|
|
|
|
|
(627 |
) |
|
|
|
|
EVERTEC |
|
|
(36,975 |
) |
|
|
(34,732 |
) |
|
|
(111,809 |
) |
|
|
(103,571 |
) |
|
Total |
|
$ |
(37,020 |
) |
|
$ |
(34,840 |
) |
|
$ |
(112,601 |
) |
|
$ |
(103,974 |
) |
|
|
|
|
* |
|
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. |
63
A breakdown of revenues and selected balance sheet information by geographical area follows:
Geographic Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended |
|
Nine months ended |
|
|
September 30, |
|
September 30, |
|
September 30, |
|
September 30, |
(In thousands) |
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
Revenues (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Puerto Rico |
|
$ |
352,893 |
|
|
$ |
362,805 |
|
|
$ |
1,201,999 |
|
|
$ |
1,203,601 |
|
United States |
|
|
134,177 |
|
|
|
123,792 |
|
|
|
393,005 |
|
|
|
382,174 |
|
Other |
|
|
25,140 |
|
|
|
21,974 |
|
|
|
83,811 |
|
|
|
65,645 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated revenues |
|
$ |
512,210 |
|
|
$ |
508,571 |
|
|
$ |
1,678,815 |
|
|
$ |
1,651,420 |
|
|
|
|
|
(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 on sale of
loans and valuation adjustments on loans held-for-sale, and other operating income. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
|
September 30, |
(In thousands) |
|
2008 |
|
2007 |
|
2007 |
|
Selected Balance Sheet Information: (1) |
|
|
|
|
|
|
|
|
|
|
Puerto Rico |
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
24,817,377 |
|
|
$ |
26,017,716 |
|
|
$ |
25,154,194 |
|
Loans |
|
|
15,374,817 |
|
|
|
15,679,181 |
|
|
|
15,433,933 |
|
Deposits |
|
|
17,261,205 |
|
|
|
17,341,601 |
|
|
|
14,790,442 |
|
Mainland United States |
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
13,281,147 |
|
|
$ |
17,093,929 |
|
|
$ |
20,892,802 |
|
Loans |
|
|
10,519,632 |
|
|
|
13,517,728 |
|
|
|
17,194,818 |
|
Deposits |
|
|
9,429,980 |
|
|
|
9,737,996 |
|
|
|
10,535,551 |
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,322,949 |
|
|
$ |
1,299,792 |
|
|
$ |
1,233,135 |
|
Loans |
|
|
686,720 |
|
|
|
714,093 |
|
|
|
692,053 |
|
Deposits (2) |
|
|
1,220,212 |
|
|
|
1,254,881 |
|
|
|
1,275,522 |
|
|
|
|
|
(1) |
|
Does not include balance sheet information of the discontinued operations for the
period ended September 30, 2008. |
|
(2) |
|
Represents deposits from BPPR operations located in the U.S. and British Virgin
Islands. |
Note 26 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 September
30, 2008, December 31, 2007 and September 30, 2007, and the results of their operations and cash
flows for the periods ended September 30, 2008 and 2007.
PIBI is an operating subsidiary of PIHC and is the holding company of its wholly-owned
subsidiaries: ATH Costa Rica S.A., EVERTEC LATINOAMERICA, SOCIEDAD ANONIMA, T.I.I. Smart Solutions
Inc., Popular Insurance V.I., Inc. and PNA.
PNA is an operating subsidiary of PIBI and is the holding company of its wholly-owned
subsidiaries:
|
|
|
PFH, including its wholly-owned subsidiaries Equity One, Inc., Popular Financial
Management, LLC, Popular Housing Services, Inc., and Popular Mortgage Servicing, Inc.; |
|
|
|
|
Banco Popular North America (BPNA), including its wholly-owned subsidiaries Popular
Equipment Finance, Inc., Popular Insurance Agency, U.S.A., Popular FS, LLC and E-LOAN,
Inc.; |
|
|
|
|
Banco Popular, National Association (BP, N.A.), including its wholly-owned subsidiary
Popular |
64
|
|
|
Insurance, Inc.; and |
|
|
|
|
EVERTEC USA, Inc. |
PIHC, PIBI and PNA are authorized issuers of debt securities and preferred stock under a shelf
registration filed with the Securities and Exchange Commission.
PIHC fully and unconditionally guarantees all registered debt securities and preferred stock
issued by PNA.
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 September 30, 2008, BPPR could have
declared a dividend of approximately $92 million (December 31, 2007 $45 million; September 30,
2007 $219 million) without the approval of the Federal Reserve Board. As of September 30, 2008,
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, 2007 for further information on dividend
restrictions imposed by regulatory requirements and policies on the payment of dividends by BPPR,
BPNA and BP, N.A.
65
POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CONDITION
SEPTEMBER 30, 2008
(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 |
|
$ |
1,582 |
|
|
$ |
64 |
|
|
$ |
7,676 |
|
|
$ |
1,176,453 |
|
|
$ |
(1,778 |
) |
|
$ |
1,183,997 |
|
Money market investments |
|
|
68,540 |
|
|
|
39,415 |
|
|
|
15,739 |
|
|
|
309,393 |
|
|
|
(123,590 |
) |
|
|
309,497 |
|
Investment securities available-for-sale, at fair value |
|
|
|
|
|
|
9,562 |
|
|
|
|
|
|
|
7,559,180 |
|
|
|
|
|
|
|
7,568,742 |
|
Investment securities held-to-maturity, at amortized cost |
|
|
456,486 |
|
|
|
1,250 |
|
|
|
|
|
|
|
692,096 |
|
|
|
(430,000 |
) |
|
|
719,832 |
|
Other investment securities, at lower of cost or realizable value |
|
|
14,425 |
|
|
|
1 |
|
|
|
12,392 |
|
|
|
202,340 |
|
|
|
|
|
|
|
229,158 |
|
Trading account securities, at fair value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
444,398 |
|
|
|
|
|
|
|
444,398 |
|
Investment in subsidiaries |
|
|
2,428,180 |
|
|
|
201,659 |
|
|
|
1,548,408 |
|
|
|
|
|
|
|
(4,178,247 |
) |
|
|
|
|
Loans held-for-sale measured at lower of cost or market value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
245,134 |
|
|
|
|
|
|
|
245,134 |
|
|
Loans held-in-portfolio |
|
|
812,694 |
|
|
|
|
|
|
|
901,000 |
|
|
|
26,539,342 |
|
|
|
(1,733,231 |
) |
|
|
26,519,805 |
|
Less Unearned income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
183,770 |
|
|
|
|
|
|
|
183,770 |
|
Allowance for loan losses |
|
|
60 |
|
|
|
|
|
|
|
|
|
|
|
726,420 |
|
|
|
|
|
|
|
726,480 |
|
|
|
|
|
812,634 |
|
|
|
|
|
|
|
901,000 |
|
|
|
25,629,152 |
|
|
|
(1,733,231 |
) |
|
|
25,609,555 |
|
|
Premises and equipment, net |
|
|
22,558 |
|
|
|
|
|
|
|
129 |
|
|
|
597,782 |
|
|
|
|
|
|
|
620,469 |
|
Other real estate |
|
|
47 |
|
|
|
|
|
|
|
|
|
|
|
72,558 |
|
|
|
|
|
|
|
72,605 |
|
Accrued income receivable |
|
|
999 |
|
|
|
140 |
|
|
|
7,798 |
|
|
|
197,312 |
|
|
|
(8,700 |
) |
|
|
197,549 |
|
Servicing assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
132,484 |
|
|
|
|
|
|
|
132,484 |
|
Other assets |
|
|
26,579 |
|
|
|
66,295 |
|
|
|
64,644 |
|
|
|
1,297,650 |
|
|
|
(42,949 |
) |
|
|
1,412,219 |
|
Goodwill |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
608,172 |
|
|
|
|
|
|
|
608,172 |
|
Other intangible assets |
|
|
554 |
|
|
|
|
|
|
|
|
|
|
|
67,108 |
|
|
|
|
|
|
|
67,662 |
|
Assets from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
968,669 |
|
|
|
|
|
|
|
968,669 |
|
|
|
|
$ |
3,832,584 |
|
|
$ |
318,386 |
|
|
$ |
2,557,786 |
|
|
$ |
40,199,881 |
|
|
$ |
(6,518,495 |
) |
|
$ |
40,390,142 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,067,440 |
|
|
$ |
(1,720 |
) |
|
$ |
4,065,720 |
|
Interest bearing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,885,241 |
|
|
|
(39,564 |
) |
|
|
23,845,677 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,952,681 |
|
|
|
(41,284 |
) |
|
|
27,911,397 |
|
Federal funds purchased and assets sold under agreements
to repurchase |
|
|
|
|
|
|
|
|
|
$ |
39,951 |
|
|
|
3,774,114 |
|
|
|
(84,026 |
) |
|
|
3,730,039 |
|
Other short-term borrowings |
|
|
|
|
|
|
|
|
|
|
77,462 |
|
|
|
1,328,779 |
|
|
|
(899,230 |
) |
|
|
507,011 |
|
Notes payable |
|
$ |
778,300 |
|
|
|
|
|
|
|
2,187,762 |
|
|
|
2,110,425 |
|
|
|
(834,000 |
) |
|
|
4,242,487 |
|
Subordinated notes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
430,000 |
|
|
|
(430,000 |
) |
|
|
|
|
Other liabilities |
|
|
46,811 |
|
|
$ |
71 |
|
|
|
77,824 |
|
|
|
738,210 |
|
|
|
(51,663 |
) |
|
|
811,253 |
|
Liabilities of discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
180,373 |
|
|
|
|
|
|
|
180,373 |
|
|
|
|
|
825,111 |
|
|
|
71 |
|
|
|
2,382,999 |
|
|
|
36,514,582 |
|
|
|
(2,340,203 |
) |
|
|
37,382,560 |
|
|
Minority interest in consolidated subsidiaries |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
109 |
|
|
|
|
|
|
|
109 |
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock |
|
|
586,875 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
586,875 |
|
Common stock |
|
|
1,772,010 |
|
|
|
3,961 |
|
|
|
2 |
|
|
|
51,819 |
|
|
|
(55,782 |
) |
|
|
1,772,010 |
|
Surplus |
|
|
555,227 |
|
|
|
1,451,193 |
|
|
|
1,334,964 |
|
|
|
3,560,903 |
|
|
|
(6,338,266 |
) |
|
|
564,021 |
|
Retained earnings |
|
|
392,856 |
|
|
|
(1,085,414 |
) |
|
|
(1,151,358 |
) |
|
|
122,898 |
|
|
|
2,105,080 |
|
|
|
384,062 |
|
Accumulated other comprehensive loss, net of tax |
|
|
(91,983 |
) |
|
|
(51,425 |
) |
|
|
(8,821 |
) |
|
|
(50,053 |
) |
|
|
110,299 |
|
|
|
(91,983 |
) |
Treasury stock, at cost |
|
|
(207,512 |
) |
|
|
|
|
|
|
|
|
|
|
(377 |
) |
|
|
377 |
|
|
|
(207,512 |
) |
|
|
|
|
3,007,473 |
|
|
|
318,315 |
|
|
|
174,787 |
|
|
|
3,685,190 |
|
|
|
(4,178,292 |
) |
|
|
3,007,473 |
|
|
|
|
$ |
3,832,584 |
|
|
$ |
318,386 |
|
|
$ |
2,557,786 |
|
|
$ |
40,199,881 |
|
|
$ |
(6,518,495 |
) |
|
$ |
40,390,142 |
|
|
66
POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CONDITION
DECEMBER 31, 2007
(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 |
|
$ |
1,391 |
|
|
$ |
376 |
|
|
$ |
400 |
|
|
$ |
818,455 |
|
|
$ |
(1,797 |
) |
|
$ |
818,825 |
|
Money market investments |
|
|
46,400 |
|
|
|
300 |
|
|
|
151 |
|
|
|
1,083,212 |
|
|
|
(123,351 |
) |
|
|
1,006,712 |
|
Trading account securities, at fair value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
768,274 |
|
|
|
(319 |
) |
|
|
767,955 |
|
Investment securities available-for-sale, at fair value |
|
|
|
|
|
|
31,705 |
|
|
|
|
|
|
|
8,483,430 |
|
|
|
|
|
|
|
8,515,135 |
|
Investment securities held-to-maturity, at amortized cost |
|
|
626,129 |
|
|
|
1,250 |
|
|
|
|
|
|
|
287,087 |
|
|
|
(430,000 |
) |
|
|
484,466 |
|
Other investment securities, at lower of cost or
realizable value |
|
|
14,425 |
|
|
|
1 |
|
|
|
12,392 |
|
|
|
189,766 |
|
|
|
|
|
|
|
216,584 |
|
Investment in subsidiaries |
|
|
2,817,934 |
|
|
|
648,720 |
|
|
|
1,717,823 |
|
|
|
|
|
|
|
(5,184,477 |
) |
|
|
|
|
Loans held-for-sale measured at lower of cost or market
value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,889,546 |
|
|
|
|
|
|
|
1,889,546 |
|
|
Loans held-in-portfolio |
|
|
725,426 |
|
|
|
25,150 |
|
|
|
2,978,528 |
|
|
|
28,282,440 |
|
|
|
(3,807,978 |
) |
|
|
28,203,566 |
|
Less Unearned income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
182,110 |
|
|
|
|
|
|
|
182,110 |
|
Allowance for loan losses |
|
|
60 |
|
|
|
|
|
|
|
|
|
|
|
548,772 |
|
|
|
|
|
|
|
548,832 |
|
|
|
|
|
725,366 |
|
|
|
25,150 |
|
|
|
2,978,528 |
|
|
|
27,551,558 |
|
|
|
(3,807,978 |
) |
|
|
27,472,624 |
|
|
Premises and equipment, net |
|
|
23,772 |
|
|
|
|
|
|
|
131 |
|
|
|
564,260 |
|
|
|
|
|
|
|
588,163 |
|
Other real estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81,410 |
|
|
|
|
|
|
|
81,410 |
|
Accrued income receivable |
|
|
1,675 |
|
|
|
62 |
|
|
|
14,271 |
|
|
|
215,719 |
|
|
|
(15,613 |
) |
|
|
216,114 |
|
Servicing assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
196,645 |
|
|
|
|
|
|
|
196,645 |
|
Other assets |
|
|
40,740 |
|
|
|
60,814 |
|
|
|
47,210 |
|
|
|
1,336,674 |
|
|
|
(28,444 |
) |
|
|
1,456,994 |
|
Goodwill |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
630,761 |
|
|
|
|
|
|
|
630,761 |
|
Other intangible assets |
|
|
554 |
|
|
|
|
|
|
|
|
|
|
|
68,949 |
|
|
|
|
|
|
|
69,503 |
|
|
|
|
$ |
4,298,386 |
|
|
$ |
768,378 |
|
|
$ |
4,770,906 |
|
|
$ |
44,165,746 |
|
|
$ |
(9,591,979 |
) |
|
$ |
44,411,437 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,512,527 |
|
|
$ |
(1,738 |
) |
|
$ |
4,510,789 |
|
Interest bearing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,824,140 |
|
|
|
(451 |
) |
|
|
23,823,689 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,336,667 |
|
|
|
(2,189 |
) |
|
|
28,334,478 |
|
Federal funds purchased and assets sold under
agreements to repurchase |
|
|
|
|
|
|
|
|
|
$ |
168,892 |
|
|
|
5,391,273 |
|
|
|
(122,900 |
) |
|
|
5,437,265 |
|
Other short-term borrowings |
|
$ |
165,000 |
|
|
|
|
|
|
|
1,155,773 |
|
|
|
1,707,184 |
|
|
|
(1,525,978 |
) |
|
|
1,501,979 |
|
Notes payable |
|
|
480,117 |
|
|
|
|
|
|
|
2,754,339 |
|
|
|
3,669,216 |
|
|
|
(2,282,320 |
) |
|
|
4,621,352 |
|
Subordinated notes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
430,000 |
|
|
|
(430,000 |
) |
|
|
|
|
Other liabilities |
|
|
71,387 |
|
|
$ |
116 |
|
|
|
62,059 |
|
|
|
843,892 |
|
|
|
(43,082 |
) |
|
|
934,372 |
|
|
|
|
|
716,504 |
|
|
|
116 |
|
|
|
4,141,063 |
|
|
|
40,378,232 |
|
|
|
(4,406,469 |
) |
|
|
40,829,446 |
|
|
Minority interest in consolidated subsidiaries |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
109 |
|
|
|
|
|
|
|
109 |
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock |
|
|
186,875 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
186,875 |
|
Common stock |
|
|
1,761,908 |
|
|
|
3,961 |
|
|
|
2 |
|
|
|
51,619 |
|
|
|
(55,582 |
) |
|
|
1,761,908 |
|
Surplus |
|
|
563,183 |
|
|
|
851,193 |
|
|
|
734,964 |
|
|
|
2,709,595 |
|
|
|
(4,290,751 |
) |
|
|
568,184 |
|
Retained earnings |
|
|
1,324,468 |
|
|
|
(46,897 |
) |
|
|
(99,806 |
) |
|
|
1,037,153 |
|
|
|
(895,451 |
) |
|
|
1,319,467 |
|
Treasury stock, at cost |
|
|
(207,740 |
) |
|
|
|
|
|
|
|
|
|
|
(664 |
) |
|
|
664 |
|
|
|
(207,740 |
) |
Accumulated other comprehensive loss, net of tax |
|
|
(46,812 |
) |
|
|
(39,995 |
) |
|
|
(5,317 |
) |
|
|
(10,298 |
) |
|
|
55,610 |
|
|
|
(46,812 |
) |
|
|
|
|
3,581,882 |
|
|
|
768,262 |
|
|
|
629,843 |
|
|
|
3,787,405 |
|
|
|
(5,185,510 |
) |
|
|
3,581,882 |
|
|
|
|
$ |
4,298,386 |
|
|
$ |
768,378 |
|
|
$ |
4,770,906 |
|
|
$ |
44,165,746 |
|
|
$ |
(9,591,979 |
) |
|
$ |
44,411,437 |
|
|
67
POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CONDITION
SEPTEMBER 30, 2007
(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 |
|
$ |
890 |
|
|
$ |
1,079 |
|
|
$ |
15,567 |
|
|
$ |
692,595 |
|
|
$ |
(1,075 |
) |
|
$ |
709,056 |
|
Money market investments |
|
|
71,000 |
|
|
|
300 |
|
|
|
195 |
|
|
|
753,797 |
|
|
|
(190,195 |
) |
|
|
635,097 |
|
Investment securities available-for-sale, at fair value |
|
|
|
|
|
|
38,578 |
|
|
|
|
|
|
|
8,839,917 |
|
|
|
|
|
|
|
8,878,495 |
|
Investment securities held-to-maturity, at amortized cost |
|
|
626,189 |
|
|
|
1,250 |
|
|
|
|
|
|
|
81,828 |
|
|
|
(430,000 |
) |
|
|
279,267 |
|
Other investment securities, at lower of cost or realizable value |
|
|
14,425 |
|
|
|
1 |
|
|
|
12,392 |
|
|
|
152,558 |
|
|
|
|
|
|
|
179,376 |
|
Trading account securities, at fair value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
662,477 |
|
|
|
(319 |
) |
|
|
662,158 |
|
Investment in subsidiaries |
|
|
3,218,956 |
|
|
|
1,009,325 |
|
|
|
1,959,999 |
|
|
|
|
|
|
|
(6,188,280 |
) |
|
|
|
|
Loans held-for-sale measured at lower of cost or market value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
423,303 |
|
|
|
|
|
|
|
423,303 |
|
|
Loans held-in-portfolio |
|
|
378,107 |
|
|
|
21,550 |
|
|
|
3,084,479 |
|
|
|
33,213,737 |
|
|
|
(3,469,649 |
) |
|
|
33,228,224 |
|
Less Unearned income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
330,723 |
|
|
|
|
|
|
|
330,723 |
|
Allowance for loan losses |
|
|
60 |
|
|
|
|
|
|
|
|
|
|
|
600,213 |
|
|
|
|
|
|
|
600,273 |
|
|
|
|
|
378,047 |
|
|
|
21,550 |
|
|
|
3,084,479 |
|
|
|
32,282,801 |
|
|
|
(3,469,649 |
) |
|
|
32,297,228 |
|
|
Premises and equipment, net |
|
|
24,359 |
|
|
|
|
|
|
|
132 |
|
|
|
556,277 |
|
|
|
|
|
|
|
580,768 |
|
Other real estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
133,508 |
|
|
|
|
|
|
|
133,508 |
|
Accrued income receivable |
|
|
742 |
|
|
|
54 |
|
|
|
14,274 |
|
|
|
290,500 |
|
|
|
(14,654 |
) |
|
|
290,916 |
|
Servicing assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
196,992 |
|
|
|
|
|
|
|
196,992 |
|
Other assets |
|
|
42,374 |
|
|
|
60,592 |
|
|
|
59,188 |
|
|
|
1,154,630 |
|
|
|
(72,095 |
) |
|
|
1,244,689 |
|
Goodwill |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
668,807 |
|
|
|
|
|
|
|
668,807 |
|
Other intangible assets |
|
|
554 |
|
|
|
|
|
|
|
|
|
|
|
99,917 |
|
|
|
|
|
|
|
100,471 |
|
|
|
|
$ |
4,377,536 |
|
|
$ |
1,132,729 |
|
|
$ |
5,146,226 |
|
|
$ |
46,989,907 |
|
|
$ |
(10,366,267 |
) |
|
$ |
47,280,131 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,976,400 |
|
|
$ |
(1,017 |
) |
|
$ |
3,975,383 |
|
Interest bearing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,626,626 |
|
|
|
(494 |
) |
|
|
22,626,132 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,603,026 |
|
|
|
(1,511 |
) |
|
|
26,601,515 |
|
Federal funds purchased and assets sold under agreements
to repurchase |
|
|
|
|
|
|
|
|
|
$ |
265,332 |
|
|
|
6,211,672 |
|
|
|
(189,701 |
) |
|
|
6,287,303 |
|
Other short-term borrowings |
|
$ |
25,000 |
|
|
|
|
|
|
|
849,716 |
|
|
|
1,827,830 |
|
|
|
(1,287,649 |
) |
|
|
1,414,897 |
|
Notes payable |
|
|
486,494 |
|
|
|
|
|
|
|
2,920,305 |
|
|
|
7,090,311 |
|
|
|
(2,182,319 |
) |
|
|
8,314,791 |
|
Subordinated notes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
430,000 |
|
|
|
(430,000 |
) |
|
|
|
|
Other liabilities |
|
|
62,321 |
|
|
$ |
80 |
|
|
|
119,174 |
|
|
|
762,094 |
|
|
|
(85,874 |
) |
|
|
857,795 |
|
|
|
|
|
573,815 |
|
|
|
80 |
|
|
|
4,154,527 |
|
|
|
42,924,933 |
|
|
|
(4,177,054 |
) |
|
|
43,476,301 |
|
|
Minority interest in consolidated subsidiaries |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
109 |
|
|
|
|
|
|
|
109 |
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock |
|
|
186,875 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
186,875 |
|
Common stock |
|
|
1,757,961 |
|
|
|
3,961 |
|
|
|
2 |
|
|
|
51,619 |
|
|
|
(55,582 |
) |
|
|
1,757,961 |
|
Surplus |
|
|
531,128 |
|
|
|
851,193 |
|
|
|
734,964 |
|
|
|
2,571,595 |
|
|
|
(4,152,751 |
) |
|
|
536,129 |
|
Retained earnings |
|
|
1,694,385 |
|
|
|
330,750 |
|
|
|
269,284 |
|
|
|
1,566,766 |
|
|
|
(2,171,801 |
) |
|
|
1,689,384 |
|
Accumulated other comprehensive loss, net of tax |
|
|
(161,061 |
) |
|
|
(53,255 |
) |
|
|
(12,551 |
) |
|
|
(124,451 |
) |
|
|
190,257 |
|
|
|
(161,061 |
) |
Treasury stock, at cost |
|
|
(205,567 |
) |
|
|
|
|
|
|
|
|
|
|
(664 |
) |
|
|
664 |
|
|
|
(205,567 |
) |
|
|
|
|
3,803,721 |
|
|
|
1,132,649 |
|
|
|
991,699 |
|
|
|
4,064,865 |
|
|
|
(6,189,213 |
) |
|
|
3,803,721 |
|
|
|
|
$ |
4,377,536 |
|
|
$ |
1,132,729 |
|
|
$ |
5,146,226 |
|
|
$ |
46,989,907 |
|
|
$ |
(10,366,267 |
) |
|
$ |
47,280,131 |
|
|
68
POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED SEPTEMBER 30, 2008
(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 |
|
$ |
45,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(45,000 |
) |
|
|
|
|
Loans |
|
|
6,566 |
|
|
|
|
|
|
$ |
23,955 |
|
|
$ |
457,784 |
|
|
|
(30,400 |
) |
|
$ |
457,905 |
|
Money market investments |
|
|
1,016 |
|
|
$ |
322 |
|
|
|
105 |
|
|
|
3,462 |
|
|
|
(1,458 |
) |
|
|
3,447 |
|
Investment securities |
|
|
7,376 |
|
|
|
94 |
|
|
|
223 |
|
|
|
84,112 |
|
|
|
(7,015 |
) |
|
|
84,790 |
|
Trading account securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,339 |
|
|
|
|
|
|
|
9,339 |
|
|
|
|
|
59,958 |
|
|
|
416 |
|
|
|
24,283 |
|
|
|
554,697 |
|
|
|
(83,873 |
) |
|
|
555,481 |
|
|
INTEREST EXPENSE: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
166,021 |
|
|
|
(410 |
) |
|
|
165,611 |
|
Short-term borrowings |
|
|
191 |
|
|
|
|
|
|
|
4,101 |
|
|
|
42,196 |
|
|
|
(9,255 |
) |
|
|
37,233 |
|
Long-term debt |
|
|
9,265 |
|
|
|
|
|
|
|
30,223 |
|
|
|
18,364 |
|
|
|
(29,497 |
) |
|
|
28,355 |
|
|
|
|
|
9,456 |
|
|
|
|
|
|
|
34,324 |
|
|
|
226,581 |
|
|
|
(39,162 |
) |
|
|
231,199 |
|
|
Net interest income (loss) |
|
|
50,502 |
|
|
|
416 |
|
|
|
(10,041 |
) |
|
|
328,116 |
|
|
|
(44,711 |
) |
|
|
324,282 |
|
Provision for loan losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
252,160 |
|
|
|
|
|
|
|
252,160 |
|
|
Net interest income (loss) after provision for loan losses |
|
|
50,502 |
|
|
|
416 |
|
|
|
(10,041 |
) |
|
|
75,956 |
|
|
|
(44,711 |
) |
|
|
72,122 |
|
Service charges on deposit accounts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52,433 |
|
|
|
|
|
|
|
52,433 |
|
Other service fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95,172 |
|
|
|
130 |
|
|
|
95,302 |
|
Net (loss) gain on sale and valuation adjustments of investment
securities |
|
|
|
|
|
|
(9,147 |
) |
|
|
|
|
|
|
15 |
|
|
|
|
|
|
|
(9,132 |
) |
Trading account profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,669 |
|
|
|
|
|
|
|
6,669 |
|
Gain on sale of loans and valuation adjustments on loans
held-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,522 |
|
|
|
|
|
|
|
6,522 |
|
Other operating income (loss) |
|
|
94 |
|
|
|
3,474 |
|
|
|
(2,951 |
) |
|
|
37,244 |
|
|
|
(1,727 |
) |
|
|
36,134 |
|
|
|
|
|
50,596 |
|
|
|
(5,257 |
) |
|
|
(12,992 |
) |
|
|
274,011 |
|
|
|
(46,308 |
) |
|
|
260,050 |
|
|
OPERATING EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel costs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries |
|
|
5,149 |
|
|
|
92 |
|
|
|
|
|
|
|
113,708 |
|
|
|
(1 |
) |
|
|
118,948 |
|
Pension, profit sharing and other benefits |
|
|
1,168 |
|
|
|
16 |
|
|
|
|
|
|
|
28,098 |
|
|
|
|
|
|
|
29,282 |
|
|
|
|
|
6,317 |
|
|
|
108 |
|
|
|
|
|
|
|
141,806 |
|
|
|
(1 |
) |
|
|
148,230 |
|
Net occupancy expenses |
|
|
641 |
|
|
|
7 |
|
|
|
1 |
|
|
|
25,861 |
|
|
|
|
|
|
|
26,510 |
|
Equipment expenses |
|
|
1,020 |
|
|
|
|
|
|
|
|
|
|
|
25,285 |
|
|
|
|
|
|
|
26,305 |
|
Other taxes |
|
|
850 |
|
|
|
|
|
|
|
|
|
|
|
12,451 |
|
|
|
|
|
|
|
13,301 |
|
Professional fees |
|
|
6,941 |
|
|
|
3 |
|
|
|
(204 |
) |
|
|
26,636 |
|
|
|
(1,596 |
) |
|
|
31,780 |
|
Communications |
|
|
63 |
|
|
|
5 |
|
|
|
9 |
|
|
|
12,497 |
|
|
|
|
|
|
|
12,574 |
|
Business promotion |
|
|
373 |
|
|
|
|
|
|
|
|
|
|
|
15,843 |
|
|
|
|
|
|
|
16,216 |
|
Printing and supplies |
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
3,250 |
|
|
|
|
|
|
|
3,269 |
|
Other operating expenses |
|
|
(15,905 |
) |
|
|
(100 |
) |
|
|
(316 |
) |
|
|
57,436 |
|
|
|
(351 |
) |
|
|
40,764 |
|
Amortization of intangibles |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,966 |
|
|
|
|
|
|
|
3,966 |
|
|
|
|
|
319 |
|
|
|
23 |
|
|
|
(510 |
) |
|
|
325,031 |
|
|
|
(1,948 |
) |
|
|
322,915 |
|
|
Income (loss) before income tax and equity in losses of subsidiaries |
|
|
50,277 |
|
|
|
(5,280 |
) |
|
|
(12,482 |
) |
|
|
(51,020 |
) |
|
|
(44,360 |
) |
|
|
(62,865 |
) |
Income tax expense |
|
|
1,964 |
|
|
|
|
|
|
|
7,299 |
|
|
|
138,796 |
|
|
|
249 |
|
|
|
148,308 |
|
|
Income (loss) before equity in losses of subsidiaries |
|
|
48,313 |
|
|
|
(5,280 |
) |
|
|
(19,781 |
) |
|
|
(189,816 |
) |
|
|
(44,609 |
) |
|
|
(211,173 |
) |
Equity in undistributed losses of subsidiaries |
|
|
(259,486 |
) |
|
|
(243,789 |
) |
|
|
(225,347 |
) |
|
|
|
|
|
|
728,622 |
|
|
|
|
|
|
Net loss from continuing operations |
|
$ |
(211,173 |
) |
|
$ |
(249,069 |
) |
|
$ |
(245,128 |
) |
|
$ |
(189,816 |
) |
|
$ |
684,013 |
|
|
$ |
(211,173 |
) |
Net loss from discontinued operations, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(457,370 |
) |
|
|
|
|
|
|
(457,370 |
) |
Equity in undistributed losses of discontinued operations |
|
|
(457,370 |
) |
|
|
(457,370 |
) |
|
|
(457,370 |
) |
|
|
|
|
|
|
1,372,110 |
|
|
|
|
|
|
NET LOSS |
|
$ |
(668,543 |
) |
|
$ |
(706,439 |
) |
|
$ |
(702,498 |
) |
|
$ |
(647,186 |
) |
|
$ |
2,056,123 |
|
|
$ |
(668,543 |
) |
|
69
POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED SEPTEMBER 30, 2007
(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 |
|
$ |
69,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(69,800 |
) |
|
|
|
|
Loans |
|
|
4,800 |
|
|
$ |
31 |
|
|
$ |
40,827 |
|
|
$ |
523,436 |
|
|
|
(45,300 |
) |
|
$ |
523,794 |
|
Money market investments |
|
|
176 |
|
|
|
244 |
|
|
|
2 |
|
|
|
7,640 |
|
|
|
(1,255 |
) |
|
|
6,807 |
|
Investment securities |
|
|
10,093 |
|
|
|
307 |
|
|
|
223 |
|
|
|
105,742 |
|
|
|
(7,346 |
) |
|
|
109,019 |
|
Trading account securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,163 |
|
|
|
|
|
|
|
10,163 |
|
|
|
|
|
84,869 |
|
|
|
582 |
|
|
|
41,052 |
|
|
|
646,981 |
|
|
|
(123,701 |
) |
|
|
649,783 |
|
|
INTEREST EXPENSE: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
197,065 |
|
|
|
(240 |
) |
|
|
196,825 |
|
Short-term borrowings |
|
|
383 |
|
|
|
|
|
|
|
14,635 |
|
|
|
114,131 |
|
|
|
(20,178 |
) |
|
|
108,971 |
|
Long-term debt |
|
|
8,368 |
|
|
|
|
|
|
|
38,071 |
|
|
|
(313 |
) |
|
|
(33,785 |
) |
|
|
12,341 |
|
|
|
|
|
8,751 |
|
|
|
|
|
|
|
52,706 |
|
|
|
310,883 |
|
|
|
(54,203 |
) |
|
|
318,137 |
|
|
Net interest income (loss) |
|
|
76,118 |
|
|
|
582 |
|
|
|
(11,654 |
) |
|
|
336,098 |
|
|
|
(69,498 |
) |
|
|
331,646 |
|
Provision for loan losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86,340 |
|
|
|
|
|
|
|
86,340 |
|
|
Net interest income (loss) after provision for loan losses |
|
|
76,118 |
|
|
|
582 |
|
|
|
(11,654 |
) |
|
|
249,758 |
|
|
|
(69,498 |
) |
|
|
245,306 |
|
Service charges on deposit accounts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49,704 |
|
|
|
|
|
|
|
49,704 |
|
Other service fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90,582 |
|
|
|
(719 |
) |
|
|
89,863 |
|
Net (loss) gain on sale and valuation adjustments of investment
securities |
|
|
(1,025 |
) |
|
|
258 |
|
|
|
|
|
|
|
(9 |
) |
|
|
|
|
|
|
(776 |
) |
Trading account profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,239 |
|
|
|
|
|
|
|
9,239 |
|
Gain on sale of loans and valuation adjustment on loans
held-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,975 |
|
|
|
|
|
|
|
6,975 |
|
Other operating income (loss) |
|
|
68 |
|
|
|
2,296 |
|
|
|
(94 |
) |
|
|
20,090 |
|
|
|
(440 |
) |
|
|
21,920 |
|
|
|
|
|
75,161 |
|
|
|
3,136 |
|
|
|
(11,748 |
) |
|
|
426,339 |
|
|
|
(70,657 |
) |
|
|
422,231 |
|
|
OPERATING EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel costs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries |
|
|
3,882 |
|
|
|
99 |
|
|
|
|
|
|
|
112,598 |
|
|
|
(410 |
) |
|
|
116,169 |
|
Pension, profit sharing and other benefits |
|
|
978 |
|
|
|
15 |
|
|
|
|
|
|
|
28,227 |
|
|
|
(116 |
) |
|
|
29,104 |
|
|
|
|
|
4,860 |
|
|
|
114 |
|
|
|
|
|
|
|
140,825 |
|
|
|
(526 |
) |
|
|
145,273 |
|
Net occupancy expenses |
|
|
542 |
|
|
|
7 |
|
|
|
|
|
|
|
26,534 |
|
|
|
|
|
|
|
27,083 |
|
Equipment expenses |
|
|
388 |
|
|
|
|
|
|
|
1 |
|
|
|
27,935 |
|
|
|
|
|
|
|
28,324 |
|
Other taxes |
|
|
438 |
|
|
|
|
|
|
|
|
|
|
|
12,328 |
|
|
|
|
|
|
|
12,766 |
|
Professional fees |
|
|
2,718 |
|
|
|
(2 |
) |
|
|
(14 |
) |
|
|
27,426 |
|
|
|
(630 |
) |
|
|
29,498 |
|
Communications |
|
|
115 |
|
|
|
|
|
|
|
|
|
|
|
15,000 |
|
|
|
|
|
|
|
15,115 |
|
Business promotion |
|
|
989 |
|
|
|
|
|
|
|
|
|
|
|
26,490 |
|
|
|
|
|
|
|
27,479 |
|
Printing and supplies |
|
|
14 |
|
|
|
|
|
|
|
1 |
|
|
|
3,745 |
|
|
|
|
|
|
|
3,760 |
|
Other operating expenses |
|
|
(11,547 |
) |
|
|
(100 |
) |
|
|
95 |
|
|
|
39,378 |
|
|
|
(397 |
) |
|
|
27,429 |
|
Amortization of intangibles |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,234 |
|
|
|
|
|
|
|
2,234 |
|
|
|
|
|
(1,483 |
) |
|
|
19 |
|
|
|
83 |
|
|
|
321,895 |
|
|
|
(1,553 |
) |
|
|
318,961 |
|
|
Income (loss) before income tax and equity in earnings (losses)
of subsidiaries |
|
|
76,644 |
|
|
|
3,117 |
|
|
|
(11,831 |
) |
|
|
104,444 |
|
|
|
(69,104 |
) |
|
|
103,270 |
|
Income tax expense (benefit) |
|
|
1,755 |
|
|
|
|
|
|
|
(4,141 |
) |
|
|
25,166 |
|
|
|
276 |
|
|
|
23,056 |
|
|
Income (loss) before equity in earnings (losses) of subsidiaries |
|
|
74,889 |
|
|
|
3,117 |
|
|
|
(7,690 |
) |
|
|
79,278 |
|
|
|
(69,380 |
) |
|
|
80,214 |
|
Equity in undistributed earnings (losses) of subsidiaries |
|
|
5,325 |
|
|
|
(8,703 |
) |
|
|
(1,979 |
) |
|
|
|
|
|
|
5,357 |
|
|
|
|
|
|
Net income (loss) from continuing operations |
|
$ |
80,214 |
|
|
$ |
(5,586 |
) |
|
$ |
(9,669 |
) |
|
$ |
79,278 |
|
|
$ |
(64,023 |
) |
|
$ |
80,214 |
|
Net loss from discontinued operations, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(44,211 |
) |
|
|
|
|
|
|
(44,211 |
) |
Equity in undistributed losses of discontinued operations |
|
|
(44,211 |
) |
|
|
(44,211 |
) |
|
|
(44,211 |
) |
|
|
|
|
|
|
132,633 |
|
|
|
|
|
|
NET INCOME (LOSS) |
|
$ |
36,003 |
|
|
$ |
(49,797 |
) |
|
$ |
(53,880 |
) |
|
$ |
35,067 |
|
|
$ |
68,610 |
|
|
$ |
36,003 |
|
|
70
POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008
(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 |
|
$ |
134,900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(134,900 |
) |
|
|
|
|
Loans |
|
|
19,339 |
|
|
$ |
219 |
|
|
$ |
82,547 |
|
|
$ |
1,421,969 |
|
|
|
(102,137 |
) |
|
$ |
1,421,937 |
|
Money market investments |
|
|
1,573 |
|
|
|
727 |
|
|
|
300 |
|
|
|
14,724 |
|
|
|
(3,673 |
) |
|
|
13,651 |
|
Investment securities |
|
|
23,452 |
|
|
|
726 |
|
|
|
670 |
|
|
|
257,847 |
|
|
|
(21,046 |
) |
|
|
261,649 |
|
Trading account securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,344 |
|
|
|
|
|
|
|
35,344 |
|
|
|
|
|
179,264 |
|
|
|
1,672 |
|
|
|
83,517 |
|
|
|
1,729,884 |
|
|
|
(261,756 |
) |
|
|
1,732,581 |
|
|
INTEREST EXPENSE: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
529,405 |
|
|
|
(809 |
) |
|
|
528,596 |
|
Short-term borrowings |
|
|
2,800 |
|
|
|
|
|
|
|
18,474 |
|
|
|
148,459 |
|
|
|
(31,909 |
) |
|
|
137,824 |
|
Long-term debt |
|
|
25,832 |
|
|
|
|
|
|
|
97,258 |
|
|
|
47,759 |
|
|
|
(95,026 |
) |
|
|
75,823 |
|
|
|
|
|
28,632 |
|
|
|
|
|
|
|
115,732 |
|
|
|
725,623 |
|
|
|
(127,744 |
) |
|
|
742,243 |
|
|
Net interest income (loss) |
|
|
150,632 |
|
|
|
1,672 |
|
|
|
(32,215 |
) |
|
|
1,004,261 |
|
|
|
(134,012 |
) |
|
|
990,338 |
|
Provision for loan losses |
|
|
40 |
|
|
|
|
|
|
|
|
|
|
|
602,521 |
|
|
|
|
|
|
|
602,561 |
|
|
Net interest income (loss) after provision for loan losses |
|
|
150,592 |
|
|
|
1,672 |
|
|
|
(32,215 |
) |
|
|
401,740 |
|
|
|
(134,012 |
) |
|
|
387,777 |
|
Service charges on deposit accounts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
155,319 |
|
|
|
|
|
|
|
155,319 |
|
Other service fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
313,641 |
|
|
|
(6,992 |
) |
|
|
306,649 |
|
Net (loss) gain on sale and valuation adjustments of investment
securities |
|
|
|
|
|
|
(9,147 |
) |
|
|
|
|
|
|
78,577 |
|
|
|
|
|
|
|
69,430 |
|
Trading account profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,547 |
|
|
|
|
|
|
|
38,547 |
|
Gain on sale of loans and valuation adjustments on loans
held-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,696 |
|
|
|
|
|
|
|
25,696 |
|
Other operating (loss) income |
|
|
(17 |
) |
|
|
10,628 |
|
|
|
(4,992 |
) |
|
|
90,838 |
|
|
|
(3,621 |
) |
|
|
92,836 |
|
|
|
|
|
150,575 |
|
|
|
3,153 |
|
|
|
(37,207 |
) |
|
|
1,104,358 |
|
|
|
(144,625 |
) |
|
|
1,076,254 |
|
|
OPERATING EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel costs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries |
|
|
17,142 |
|
|
|
289 |
|
|
|
|
|
|
|
345,541 |
|
|
|
(2,009 |
) |
|
|
360,963 |
|
Pension, profit sharing and other benefits |
|
|
4,091 |
|
|
|
58 |
|
|
|
|
|
|
|
94,476 |
|
|
|
(73 |
) |
|
|
98,552 |
|
|
|
|
|
21,233 |
|
|
|
347 |
|
|
|
|
|
|
|
440,017 |
|
|
|
(2,082 |
) |
|
|
459,515 |
|
Net occupancy expenses |
|
|
1,884 |
|
|
|
22 |
|
|
|
3 |
|
|
|
79,309 |
|
|
|
|
|
|
|
81,218 |
|
Equipment expenses |
|
|
2,761 |
|
|
|
|
|
|
|
|
|
|
|
81,551 |
|
|
|
|
|
|
|
84,312 |
|
Other taxes |
|
|
1,750 |
|
|
|
|
|
|
|
|
|
|
|
38,155 |
|
|
|
|
|
|
|
39,905 |
|
Professional fees |
|
|
14,386 |
|
|
|
8 |
|
|
|
(24 |
) |
|
|
78,873 |
|
|
|
(4,279 |
) |
|
|
88,964 |
|
Communications |
|
|
258 |
|
|
|
14 |
|
|
|
27 |
|
|
|
37,838 |
|
|
|
|
|
|
|
38,137 |
|
Business promotion |
|
|
1,144 |
|
|
|
|
|
|
|
|
|
|
|
49,920 |
|
|
|
|
|
|
|
51,064 |
|
Printing and supplies |
|
|
61 |
|
|
|
|
|
|
|
|
|
|
|
10,702 |
|
|
|
|
|
|
|
10,763 |
|
Other operating expenses |
|
|
(42,645 |
) |
|
|
(301 |
) |
|
|
(195 |
) |
|
|
158,046 |
|
|
|
(1,183 |
) |
|
|
113,722 |
|
Amortization of intangibles |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,948 |
|
|
|
|
|
|
|
8,948 |
|
|
|
|
|
832 |
|
|
|
90 |
|
|
|
(189 |
) |
|
|
983,359 |
|
|
|
(7,544 |
) |
|
|
976,548 |
|
|
Income (loss) before income tax and equity in losses of subsidiaries |
|
|
149,743 |
|
|
|
3,063 |
|
|
|
(37,018 |
) |
|
|
120,999 |
|
|
|
(137,081 |
) |
|
|
99,706 |
|
Income tax expense (benefit) |
|
|
2,629 |
|
|
|
|
|
|
|
(1,073 |
) |
|
|
150,282 |
|
|
|
629 |
|
|
|
152,467 |
|
|
Income (loss) before equity in losses of subsidiaries |
|
|
147,114 |
|
|
|
3,063 |
|
|
|
(35,945 |
) |
|
|
(29,283 |
) |
|
|
(137,710 |
) |
|
|
(52,761 |
) |
Equity in undistributed losses of subsidiaries |
|
|
(199,875 |
) |
|
|
(291,506 |
) |
|
|
(265,535 |
) |
|
|
|
|
|
|
756,916 |
|
|
|
|
|
|
Net loss from continuing operations |
|
$ |
(52,761 |
) |
|
$ |
(288,443 |
) |
|
$ |
(301,480 |
) |
|
$ |
(29,283 |
) |
|
$ |
619,206 |
|
|
$ |
(52,761 |
) |
Net loss from discontinued operations, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(488,242 |
) |
|
|
|
|
|
|
(488,242 |
) |
Equity in undistributed losses of discontinued operations |
|
|
(488,242 |
) |
|
|
(488,242 |
) |
|
|
(488,242 |
) |
|
|
|
|
|
|
1,464,726 |
|
|
|
|
|
|
NET LOSS |
|
$ |
(541,003 |
) |
|
$ |
(776,685 |
) |
|
$ |
(789,722 |
) |
|
$ |
(517,525 |
) |
|
$ |
2,083,932 |
|
|
$ |
(541,003 |
) |
|
70
POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007
(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 |
|
$ |
159,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(159,200 |
) |
|
|
|
|
Loans |
|
|
14,339 |
|
|
$ |
31 |
|
|
$ |
117,001 |
|
|
$ |
1,520,272 |
|
|
|
(130,219 |
) |
|
$ |
1,521,424 |
|
Money market investments |
|
|
1,116 |
|
|
|
359 |
|
|
|
13 |
|
|
|
20,064 |
|
|
|
(4,384 |
) |
|
|
17,168 |
|
Investment securities |
|
|
27,456 |
|
|
|
1,503 |
|
|
|
670 |
|
|
|
327,127 |
|
|
|
(21,764 |
) |
|
|
334,992 |
|
Trading account securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,244 |
|
|
|
|
|
|
|
27,244 |
|
|
|
|
|
202,111 |
|
|
|
1,893 |
|
|
|
117,684 |
|
|
|
1,894,707 |
|
|
|
(315,567 |
) |
|
|
1,900,828 |
|
|
INTEREST EXPENSE: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
553,804 |
|
|
|
(1,147 |
) |
|
|
552,657 |
|
Short-term borrowings |
|
|
2,348 |
|
|
|
|
|
|
|
43,521 |
|
|
|
355,528 |
|
|
|
(61,235 |
) |
|
|
340,162 |
|
Long-term debt |
|
|
25,100 |
|
|
|
|
|
|
|
111,956 |
|
|
|
(2,499 |
) |
|
|
(94,890 |
) |
|
|
39,667 |
|
|
|
|
|
27,448 |
|
|
|
|
|
|
|
155,477 |
|
|
|
906,833 |
|
|
|
(157,272 |
) |
|
|
932,486 |
|
|
Net interest income (loss) |
|
|
174,663 |
|
|
|
1,893 |
|
|
|
(37,793 |
) |
|
|
987,874 |
|
|
|
(158,295 |
) |
|
|
968,342 |
|
Provision for loan losses |
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
219,470 |
|
|
|
|
|
|
|
219,477 |
|
|
Net interest income (loss) after provision for loan losses |
|
|
174,656 |
|
|
|
1,893 |
|
|
|
(37,793 |
) |
|
|
768,404 |
|
|
|
(158,295 |
) |
|
|
748,865 |
|
Service charges on deposit accounts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
146,567 |
|
|
|
|
|
|
|
146,567 |
|
Other service fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
268,703 |
|
|
|
(2,991 |
) |
|
|
265,712 |
|
Net gain (loss) on sale and valuation adjustments of investment
securities |
|
|
115,567 |
|
|
|
(8,249 |
) |
|
|
|
|
|
|
5,524 |
|
|
|
|
|
|
|
112,842 |
|
Trading account profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,765 |
|
|
|
|
|
|
|
29,765 |
|
Gain on sale of loans and valuation adjustment on loans
held-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,224 |
|
|
|
|
|
|
|
40,224 |
|
Other operating income (loss) |
|
|
9,830 |
|
|
|
13,506 |
|
|
|
(723 |
) |
|
|
67,044 |
|
|
|
(1,689 |
) |
|
|
87,968 |
|
|
|
|
|
300,053 |
|
|
|
7,150 |
|
|
|
(38,516 |
) |
|
|
1,326,231 |
|
|
|
(162,975 |
) |
|
|
1,431,943 |
|
|
OPERATING EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel costs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries |
|
|
15,500 |
|
|
|
293 |
|
|
|
|
|
|
|
343,137 |
|
|
|
(1,224 |
) |
|
|
357,706 |
|
Pension, profit sharing and other benefits |
|
|
4,295 |
|
|
|
52 |
|
|
|
|
|
|
|
96,075 |
|
|
|
(354 |
) |
|
|
100,068 |
|
|
|
|
|
19,795 |
|
|
|
345 |
|
|
|
|
|
|
|
439,212 |
|
|
|
(1,578 |
) |
|
|
457,774 |
|
Net occupancy expenses |
|
|
1,707 |
|
|
|
22 |
|
|
|
2 |
|
|
|
74,454 |
|
|
|
|
|
|
|
76,185 |
|
Equipment expenses |
|
|
1,061 |
|
|
|
|
|
|
|
3 |
|
|
|
86,195 |
|
|
|
|
|
|
|
87,259 |
|
Other taxes |
|
|
1,148 |
|
|
|
|
|
|
|
|
|
|
|
34,496 |
|
|
|
|
|
|
|
35,644 |
|
Professional fees |
|
|
8,495 |
|
|
|
17 |
|
|
|
107 |
|
|
|
81,319 |
|
|
|
(2,249 |
) |
|
|
87,689 |
|
Communications |
|
|
393 |
|
|
|
|
|
|
|
|
|
|
|
44,276 |
|
|
|
|
|
|
|
44,669 |
|
Business promotion |
|
|
2,152 |
|
|
|
|
|
|
|
|
|
|
|
81,258 |
|
|
|
|
|
|
|
83,410 |
|
Printing and supplies |
|
|
56 |
|
|
|
|
|
|
|
1 |
|
|
|
11,479 |
|
|
|
|
|
|
|
11,536 |
|
Other operating expenses |
|
|
(36,499 |
) |
|
|
(300 |
) |
|
|
328 |
|
|
|
118,812 |
|
|
|
(1,165 |
) |
|
|
81,176 |
|
Amortization of intangibles |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,030 |
|
|
|
|
|
|
|
8,030 |
|
|
|
|
|
(1,692 |
) |
|
|
84 |
|
|
|
441 |
|
|
|
979,531 |
|
|
|
(4,992 |
) |
|
|
973,372 |
|
|
Income (loss) before income tax and equity in earnings (losses)
of subsidiaries |
|
|
301,745 |
|
|
|
7,066 |
|
|
|
(38,957 |
) |
|
|
346,700 |
|
|
|
(157,983 |
) |
|
|
458,571 |
|
Income tax expense (benefit) |
|
|
31,001 |
|
|
|
|
|
|
|
(13,635 |
) |
|
|
87,737 |
|
|
|
495 |
|
|
|
105,598 |
|
|
Income (loss) before equity in earnings (losses) of subsidiaries |
|
|
270,744 |
|
|
|
7,066 |
|
|
|
(25,322 |
) |
|
|
258,963 |
|
|
|
(158,478 |
) |
|
|
352,973 |
|
Equity in undistributed earnings (losses) of subsidiaries |
|
|
82,229 |
|
|
|
(12,459 |
) |
|
|
10,573 |
|
|
|
|
|
|
|
(80,343 |
) |
|
|
|
|
|
Net income (loss) from continuing operations |
|
$ |
352,973 |
|
|
$ |
(5,393 |
) |
|
$ |
(14,749 |
) |
|
$ |
258,963 |
|
|
$ |
(238,821 |
) |
|
$ |
352,973 |
|
Net loss from discontinued operations, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(123,373 |
) |
|
|
|
|
|
|
(123,373 |
) |
Equity in undistributed losses of discontinued operations |
|
|
(123,373 |
) |
|
|
(123,373 |
) |
|
|
(123,373 |
) |
|
|
|
|
|
|
370,119 |
|
|
|
|
|
|
NET INCOME (LOSS) |
|
$ |
229,600 |
|
|
$ |
(128,766 |
) |
|
$ |
(138,122 |
) |
|
$ |
135,590 |
|
|
$ |
131,298 |
|
|
$ |
229,600 |
|
|
71
POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 (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 |
|
$ |
(541,003 |
) |
|
$ |
(776,685 |
) |
|
$ |
(789,722 |
) |
|
$ |
(517,525 |
) |
|
$ |
2,083,932 |
|
|
$ |
(541,003 |
) |
|
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in undistributed losses of subsidiaries |
|
|
688,117 |
|
|
|
779,748 |
|
|
|
753,777 |
|
|
|
|
|
|
|
(2,221,642 |
) |
|
|
|
|
Depreciation and amortization of premises and equipment |
|
|
1,735 |
|
|
|
|
|
|
|
2 |
|
|
|
53,496 |
|
|
|
|
|
|
|
55,233 |
|
Provision for loan losses |
|
|
40 |
|
|
|
|
|
|
|
|
|
|
|
621,512 |
|
|
|
|
|
|
|
621,552 |
|
Amortization of intangibles |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,948 |
|
|
|
|
|
|
|
8,948 |
|
Amortization and fair value adjustment of servicing assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53,679 |
|
|
|
|
|
|
|
53,679 |
|
Net loss (gain) on sale and valuation adjustment of
investment securities |
|
|
|
|
|
|
9,147 |
|
|
|
|
|
|
|
(73,157 |
) |
|
|
|
|
|
|
(64,010 |
) |
Losses from changes in fair value related to instruments
measured at fair value pursuant to SFAS No. 159 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
179,482 |
|
|
|
|
|
|
|
179,482 |
|
Net loss (gain) on disposition of premises and equipment |
|
|
57 |
|
|
|
|
|
|
|
|
|
|
|
(23,700 |
) |
|
|
|
|
|
|
(23,643 |
) |
Net gain on sale of loans and valuation adjustments on
loans held-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54,527 |
|
|
|
|
|
|
|
54,527 |
|
Net amortization of premiums and accretion of discounts
on investments |
|
|
(1,754 |
) |
|
|
|
|
|
|
|
|
|
|
17,788 |
|
|
|
|
|
|
|
16,034 |
|
Net amortization of premiums and deferred loan
origination fees and costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,650 |
|
|
|
|
|
|
|
40,650 |
|
Fair value adjustment of other assets held-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
103,702 |
|
|
|
|
|
|
|
103,702 |
|
Losses (earnings) from investments under the equity method |
|
|
112 |
|
|
|
(10,628 |
) |
|
|
4,991 |
|
|
|
(46 |
) |
|
|
(1,328 |
) |
|
|
(6,899 |
) |
Stock options expense |
|
|
296 |
|
|
|
|
|
|
|
|
|
|
|
534 |
|
|
|
|
|
|
|
830 |
|
Deferred
income taxes, net of valuation |
|
|
(339 |
) |
|
|
|
|
|
|
(1,072 |
) |
|
|
58,183 |
|
|
|
15,489 |
|
|
|
72,261 |
|
Net disbursements on loans held-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,000,449 |
) |
|
|
|
|
|
|
(2,000,449 |
) |
Acquisitions of loans held-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(268,718 |
) |
|
|
|
|
|
|
(268,718 |
) |
Proceeds from sale of loans held-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,289,738 |
|
|
|
|
|
|
|
1,289,738 |
|
Net decrease in trading securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,604,664 |
|
|
|
(319 |
) |
|
|
1,604,345 |
|
Net decrease (increase) in accrued income receivable |
|
|
676 |
|
|
|
(78 |
) |
|
|
(7,319 |
) |
|
|
8,033 |
|
|
|
6,882 |
|
|
|
8,194 |
|
Net decrease (increase) in other assets |
|
|
8,425 |
|
|
|
4,081 |
|
|
|
(21,518 |
) |
|
|
(237,322 |
) |
|
|
344 |
|
|
|
(245,990 |
) |
Net (decrease) increase in interest payable |
|
|
(3,681 |
) |
|
|
|
|
|
|
1,475 |
|
|
|
(40,092 |
) |
|
|
(6,882 |
) |
|
|
(49,180 |
) |
Net increase in postretirement benefit obligation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,810 |
|
|
|
|
|
|
|
1,810 |
|
Net increase (decrease) increase in other liabilities |
|
|
2,171 |
|
|
|
(47 |
) |
|
|
14,758 |
|
|
|
(36,511 |
) |
|
|
(15,491 |
) |
|
|
(35,120 |
) |
|
Total adjustments |
|
|
695,855 |
|
|
|
782,223 |
|
|
|
745,094 |
|
|
|
1,416,751 |
|
|
|
(2,222,947 |
) |
|
|
1,416,976 |
|
|
Net cash provided by (used in) operating activities |
|
|
154,852 |
|
|
|
5,538 |
|
|
|
(44,628 |
) |
|
|
899,226 |
|
|
|
(139,015 |
) |
|
|
875,973 |
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (increase) decrease in money market investments |
|
|
(22,140 |
) |
|
|
(39,115 |
) |
|
|
(115,588 |
) |
|
|
773,819 |
|
|
|
100,239 |
|
|
|
697,215 |
|
Purchases of investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale |
|
|
|
|
|
|
(181 |
) |
|
|
|
|
|
|
(3,875,209 |
) |
|
|
|
|
|
|
(3,875,390 |
) |
Held-to-maturity |
|
|
(577,103 |
) |
|
|
|
|
|
|
|
|
|
|
(4,381,183 |
) |
|
|
|
|
|
|
(4,958,286 |
) |
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(166,641 |
) |
|
|
|
|
|
|
(166,641 |
) |
Proceeds from calls, paydowns, maturities and
redemptions of investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,377,740 |
|
|
|
|
|
|
|
2,377,740 |
|
Held-to-maturity |
|
|
748,500 |
|
|
|
|
|
|
|
|
|
|
|
3,976,318 |
|
|
|
|
|
|
|
4,724,818 |
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
154,067 |
|
|
|
|
|
|
|
154,067 |
|
Proceeds from sale of investment securities
available-for- sale |
|
|
|
|
|
|
8,296 |
|
|
|
|
|
|
|
2,436,213 |
|
|
|
|
|
|
|
2,444,509 |
|
Proceeds from sale of other investment securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49,341 |
|
|
|
|
|
|
|
49,341 |
|
Net (disbursements) repayments on loans |
|
|
(687,353 |
) |
|
|
25,150 |
|
|
|
1,341,322 |
|
|
|
(916,687 |
) |
|
|
(738,541 |
) |
|
|
(976,109 |
) |
Proceeds from sale of loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,984,860 |
|
|
|
|
|
|
|
1,984,860 |
|
Acquisition of loan portfolios |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,505 |
) |
|
|
|
|
|
|
(4,505 |
) |
Capital contribution to subsidiary |
|
|
(1,512 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,512 |
|
|
|
|
|
Mortgage servicing rights purchased |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,628 |
) |
|
|
|
|
|
|
(3,628 |
) |
Acquisition of premises and equipment |
|
|
(578 |
) |
|
|
|
|
|
|
|
|
|
|
(111,618 |
) |
|
|
|
|
|
|
(112,196 |
) |
Proceeds from sale of premises and equipment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49,366 |
|
|
|
|
|
|
|
49,366 |
|
Proceeds from sale of foreclosed assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
87,280 |
|
|
|
|
|
|
|
87,280 |
|
|
Net cash (used in) provided by investing activities |
|
|
(540,186 |
) |
|
|
(5,850 |
) |
|
|
1,225,734 |
|
|
|
2,429,533 |
|
|
|
(636,790 |
) |
|
|
2,472,441 |
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(261,806 |
) |
|
|
(139,095 |
) |
|
|
(400,901 |
) |
Net decrease in federal funds purchased and
assets sold under agreements to repurchase |
|
|
|
|
|
|
|
|
|
|
(128,941 |
) |
|
|
(1,617,158 |
) |
|
|
38,874 |
|
|
|
(1,707,225 |
) |
Net decrease in other short-term borrowings |
|
|
(165,000 |
) |
|
|
|
|
|
|
(478,311 |
) |
|
|
(392,200 |
) |
|
|
40,542 |
|
|
|
(994,969 |
) |
Payments of notes payable |
|
|
(31,152 |
) |
|
|
|
|
|
|
(574,480 |
) |
|
|
(1,407,625 |
) |
|
|
700,319 |
|
|
|
(1,312,938 |
) |
Proceeds from issuance of notes payable |
|
|
335,297 |
|
|
|
|
|
|
|
7,902 |
|
|
|
841,718 |
|
|
|
(2,000 |
) |
|
|
1,182,917 |
|
Dividends paid to parent company |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(134,900 |
) |
|
|
134,900 |
|
|
|
|
|
72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PIBI |
|
|
|
|
|
All other |
|
|
|
|
|
|
Popular, Inc. |
|
Holding |
|
PNA |
|
Subsidiaries |
|
Elimination |
|
Popular, Inc. |
(In thousands) |
|
Holding Co. |
|
Co. |
|
Holding Co. |
|
and eliminations |
|
entries |
|
Consolidated |
|
Dividends paid |
|
|
(154,877 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(154,877 |
) |
Proceeds from issuance of common stock |
|
|
15,174 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,174 |
|
Proceeds from issuance of preferred stock |
|
|
386,142 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,793 |
|
|
|
389,935 |
|
Treasury stock acquired |
|
|
(59 |
) |
|
|
|
|
|
|
|
|
|
|
(299 |
) |
|
|
|
|
|
|
(358 |
) |
Capital contribution from parent |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,509 |
|
|
|
(1,509 |
) |
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
385,525 |
|
|
|
|
|
|
|
(1,173,830 |
) |
|
|
(2,970,761 |
) |
|
|
775,824 |
|
|
|
(2,983,242 |
) |
|
Net increase (decrease) in cash and due from banks |
|
|
191 |
|
|
|
(312 |
) |
|
|
7,276 |
|
|
|
357,998 |
|
|
|
19 |
|
|
|
365,172 |
|
Cash and due from banks at beginning of period |
|
|
1,391 |
|
|
|
376 |
|
|
|
400 |
|
|
|
818,455 |
|
|
|
(1,797 |
) |
|
|
818,825 |
|
|
Cash and due from banks at end of period |
|
$ |
1,582 |
|
|
$ |
64 |
|
|
$ |
7,676 |
|
|
$ |
1,176,453 |
|
|
$ |
(1,778 |
) |
|
$ |
1,183,997 |
|
|
73
POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All other |
|
|
|
|
|
|
Popular, Inc. |
|
PIBI |
|
PNA |
|
Subsidiaries |
|
Elimination |
|
Popular, Inc. |
(In thousands) |
|
Holding Co. |
|
Holding Co. |
|
Holding Co. |
|
and eliminations |
|
entries |
|
Consolidated |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
229,600 |
|
|
|
($128,766 |
) |
|
|
($138,122 |
) |
|
$ |
135,590 |
|
|
$ |
131,298 |
|
|
$ |
229,600 |
|
|
Adjustments to reconcile net income to net cash
provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in undistributed losses of subsidiaries |
|
|
41,144 |
|
|
|
135,832 |
|
|
|
112,800 |
|
|
|
|
|
|
|
(289,776 |
) |
|
|
|
|
Depreciation and amortization of premises and
equipment |
|
|
1,781 |
|
|
|
|
|
|
|
2 |
|
|
|
57,775 |
|
|
|
|
|
|
|
59,558 |
|
Provision for loan losses |
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
359,599 |
|
|
|
|
|
|
|
359,606 |
|
Amortization of intangibles |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,030 |
|
|
|
|
|
|
|
8,030 |
|
Amortization and fair value adjustments of
servicing assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,941 |
|
|
|
|
|
|
|
34,941 |
|
Net (gain) loss on sale and valuation adjustment of
investment securities |
|
|
(115,567 |
) |
|
|
8,249 |
|
|
|
|
|
|
|
27,461 |
|
|
|
|
|
|
|
(79,857 |
) |
Net gain on disposition of premises and equipment |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
(5,294 |
) |
|
|
|
|
|
|
(5,293 |
) |
Net gain on sale of loans and valuation adjustments
on loans held-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(37,719 |
) |
|
|
|
|
|
|
(37,719 |
) |
Net amortization of premiums and accretion of
discounts
on investments |
|
|
(5,525 |
) |
|
|
7 |
|
|
|
|
|
|
|
21,312 |
|
|
|
7 |
|
|
|
15,801 |
|
Net amortization of premiums and deferred loan
origination fees and costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70,645 |
|
|
|
|
|
|
|
70,645 |
|
(Earnings) losses from investments under the equity
method |
|
|
(4,580 |
) |
|
|
(13,506 |
) |
|
|
723 |
|
|
|
(927 |
) |
|
|
(1,224 |
) |
|
|
(19,514 |
) |
Stock options expense |
|
|
464 |
|
|
|
|
|
|
|
|
|
|
|
875 |
|
|
|
|
|
|
|
1,339 |
|
Deferred income taxes |
|
|
1,451 |
|
|
|
|
|
|
|
(13,635 |
) |
|
|
(114,112 |
) |
|
|
31,715 |
|
|
|
(94,581 |
) |
Net disbursements on loans held-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,007,301 |
) |
|
|
|
|
|
|
(4,007,301 |
) |
Acquisitions of loans held-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(474,269 |
) |
|
|
|
|
|
|
(474,269 |
) |
Proceeds from sale of loans held-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,475,817 |
|
|
|
|
|
|
|
3,475,817 |
|
Net decrease in trading securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,002,759 |
|
|
|
319 |
|
|
|
1,003,078 |
|
Net decrease (increase) in accrued income receivable |
|
|
316 |
|
|
|
(43 |
) |
|
|
(2,693 |
) |
|
|
(42,857 |
) |
|
|
2,602 |
|
|
|
(42,675 |
) |
Net decrease (increase) in other assets |
|
|
23,128 |
|
|
|
2,699 |
|
|
|
(4,220 |
) |
|
|
8,555 |
|
|
|
345 |
|
|
|
30,507 |
|
Net increase in interest payable |
|
|
375 |
|
|
|
|
|
|
|
6,436 |
|
|
|
377 |
|
|
|
(2,602 |
) |
|
|
4,586 |
|
Net increase in postretirement benefit obligation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,407 |
|
|
|
|
|
|
|
2,407 |
|
Net increase in other liabilities |
|
|
3,370 |
|
|
|
20 |
|
|
|
32,608 |
|
|
|
14,207 |
|
|
|
(31,560 |
) |
|
|
18,645 |
|
|
Total adjustments |
|
|
(53,635 |
) |
|
|
133,258 |
|
|
|
132,021 |
|
|
|
402,281 |
|
|
|
(290,174 |
) |
|
|
323,751 |
|
|
Net cash provided by (used in) operating activities |
|
|
175,965 |
|
|
|
4,492 |
|
|
|
(6,101 |
) |
|
|
537,871 |
|
|
|
(158,876 |
) |
|
|
553,351 |
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(increase) decrease in money market investments |
|
|
(62,300 |
) |
|
|
775 |
|
|
|
2,357 |
|
|
|
(334,854 |
) |
|
|
127,068 |
|
|
|
(266,954 |
) |
Purchases of investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale |
|
|
(6,808 |
) |
|
|
(2 |
) |
|
|
|
|
|
|
(793,475 |
) |
|
|
732,365 |
|
|
|
(67,920 |
) |
Held-to-maturity |
|
|
(2,749,665 |
) |
|
|
|
|
|
|
|
|
|
|
(14,277,166 |
) |
|
|
|
|
|
|
(17,026,831 |
) |
Other |
|
|
|
|
|
|
|
|
|
|
(928 |
) |
|
|
(46,858 |
) |
|
|
|
|
|
|
(47,786 |
) |
Proceeds from calls, paydowns, maturities and
redemptions of investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,801,852 |
|
|
|
(735,548 |
) |
|
|
1,066,304 |
|
Held-to-maturity |
|
|
2,559,000 |
|
|
|
900 |
|
|
|
|
|
|
|
14,284,651 |
|
|
|
|
|
|
|
16,844,551 |
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,071 |
|
|
|
|
|
|
|
17,071 |
|
Proceeds from sale of investment securities
available-for- sale |
|
|
5,783 |
|
|
|
16,605 |
|
|
|
|
|
|
|
14,964 |
|
|
|
|
|
|
|
37,352 |
|
Proceeds from sale of other investment securities |
|
|
245,484 |
|
|
|
2 |
|
|
|
865 |
|
|
|
1 |
|
|
|
|
|
|
|
246,352 |
|
Net repayments (disbursements) on loans |
|
|
89,556 |
|
|
|
(21,550 |
) |
|
|
(125,919 |
) |
|
|
(753,204 |
) |
|
|
(326,865 |
) |
|
|
(1,137,982 |
) |
Proceeds from sale of loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,367 |
|
|
|
|
|
|
|
16,367 |
|
Acquisition of loan portfolios |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22,312 |
) |
|
|
|
|
|
|
(22,312 |
) |
Capital contribution to subsidiary |
|
|
|
|
|
|
(300 |
) |
|
|
|
|
|
|
500 |
|
|
|
(200 |
) |
|
|
|
|
Assets acquired, net of cash |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,378 |
) |
|
|
|
|
|
|
(2,378 |
) |
Mortgage servicing rights purchased |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25,596 |
) |
|
|
|
|
|
|
(25,596 |
) |
Acquisition of premises and equipment |
|
|
(513 |
) |
|
|
|
|
|
|
|
|
|
|
(69,094 |
) |
|
|
|
|
|
|
(69,607 |
) |
Proceeds from sale of premises and equipment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,501 |
|
|
|
|
|
|
|
29,501 |
|
Proceeds from sale of foreclosed assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
113,776 |
|
|
|
|
|
|
|
113,776 |
|
|
Net cash provided by (used in) investing activities |
|
|
80,537 |
|
|
|
(3,570 |
) |
|
|
(123,625 |
) |
|
|
(46,254 |
) |
|
|
(203,180 |
) |
|
|
(296,092 |
) |
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,148,419 |
|
|
|
2,249 |
|
|
|
2,150,668 |
|
Net increase in federal funds purchased and
assets sold under agreements to repurchase |
|
|
|
|
|
|
|
|
|
|
105,503 |
|
|
|
549,555 |
|
|
|
(130,200 |
) |
|
|
524,858 |
|
Net decrease in other short-term borrowings |
|
|
(125,787 |
) |
|
|
|
|
|
|
(45,242 |
) |
|
|
(2,575,473 |
) |
|
|
127,274 |
|
|
|
(2,619,228 |
) |
Payments of notes payable |
|
|
|
|
|
|
|
|
|
|
(4,583 |
) |
|
|
(1,443,198 |
) |
|
|
202,449 |
|
|
|
(1,245,332 |
) |
Proceeds from issuance of notes payable |
|
|
298 |
|
|
|
|
|
|
|
89,293 |
|
|
|
731,496 |
|
|
|
|
|
|
|
821,087 |
|
Dividends paid to parent company |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(159,200 |
) |
|
|
159,200 |
|
|
|
|
|
74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All other |
|
|
|
|
|
|
Popular, Inc. |
|
PIBI |
|
PNA |
|
Subsidiaries |
|
Elimination |
|
Popular, Inc. |
(In thousands) |
|
Holding Co. |
|
Holding Co. |
|
Holding Co. |
|
and eliminations |
|
entries |
|
Consolidated |
|
Dividends paid |
|
|
(142,898 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(142,898 |
) |
Proceeds from issuance of common stock |
|
|
12,836 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,836 |
|
Treasury stock acquired |
|
|
(63 |
) |
|
|
|
|
|
|
|
|
|
|
(289 |
) |
|
|
|
|
|
|
(352 |
) |
Capital contribution from parent |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(200 |
) |
|
|
200 |
|
|
|
|
|
|
Net cash (used in) provided by financing activities |
|
|
(255,614 |
) |
|
|
|
|
|
|
144,971 |
|
|
|
(748,890 |
) |
|
|
361,172 |
|
|
|
(498,361 |
) |
|
Net increase (decrease) in cash and due from banks |
|
|
888 |
|
|
|
922 |
|
|
|
15,245 |
|
|
|
(257,273 |
) |
|
|
(884 |
) |
|
|
(241,102 |
) |
Cash and due from banks at beginning of period |
|
|
2 |
|
|
|
157 |
|
|
|
322 |
|
|
|
949,868 |
|
|
|
(191 |
) |
|
|
950,158 |
|
|
Cash and due from banks at end of period |
|
$ |
890 |
|
|
$ |
1,079 |
|
|
$ |
15,567 |
|
|
$ |
692,595 |
|
|
$ |
(1,075 |
) |
|
$ |
709,056 |
|
|
75
Note
27 Subsequent Events
Transaction with Goldman Sachs
On November 3, 2008, the Corporation completed the sale of the loan and servicing assets of PFH
to various Goldman Sachs affiliates. This transaction is described in Note 3 to the consolidated
financial statements.
Restructuring Plans
On October 17, 2008, the Board of Directors of Popular, Inc. approved two restructuring plans. The
restructuring plan for Banco Popular North America (the BPNA Restructuring Plan) contemplates the
following measures: closing, consolidation or sale of underperforming branches in all existing
markets; the shutting down, sale or downsizing of lending businesses that do not generate deposits
or fee income; and the reduction of general expenses associated with functions supporting the
aforementioned branch and balance sheet initiatives.
It is anticipated that the BPNA Restructuring Plan will result in estimated combined charges for
the Corporation of $36.6 million, to be recognized during the fourth quarter of 2008 and in 2009,
broken down as follows:
|
|
|
|
|
($ in millions) |
|
|
|
|
|
Severance, bonuses and other benefits |
|
$ |
14.4 |
|
Lease
contract terminations and write-off of leasehold improvements |
|
|
17.9 |
|
Other costs, mostly write-downs of core deposit intangibles |
|
|
4.3 |
|
|
Total |
|
$ |
36.6 |
|
|
As a result of the BPNA Restructuring Plan, the exiting and downsizing of certain business lines
and reductions in support functions, the Corporation expects an overall headcount reduction of 30%
or about 640 full-time equivalent positions.
The restructuring plan of E-LOAN (the E-LOAN 2008 Restructuring Plan) contemplates E-LOAN ceasing
to operate as a direct lender in the fourth quarter of 2008. E-LOAN will continue to market
deposit accounts under its name for the benefit of BPNA and offer loan customers the option of
being referred to a trusted consumer lending partner.
It is anticipated that the E-LOAN Restructuring Plan will result in estimated combined charges for
the Corporation of $13.6 million, to be recognized during the fourth quarter of 2008 and in 2009,
broken down as follows:
|
|
|
|
|
($ in millions) |
|
|
|
|
|
Severance, bonuses and other benefits |
|
$ |
6.1 |
|
Lease contract terminations and write-off of
leasehold improvements |
|
|
2.5 |
|
Other costs, principally write-downs of equipment
and other intangibles |
|
|
5.0 |
|
|
Total |
|
$ |
13.6 |
|
|
These estimates are preliminary as management is still in the process of evaluating the cost of
implementing the restructuring plans. Accordingly, no assurance can be given that the final charges
may not differ by a significant amount from these estimates.
BPNA and E-LOAN are part of the BPNA reportable segment.
76
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. and its subsidiaries (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
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 is a financial services provider with operations in Puerto Rico, the United
States, the Caribbean and Latin America. As the leading financial institution in Puerto Rico, the
Corporation offers 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, consumer lending, 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, and Popular Financial Holdings
(PFH). BPNA is a community bank providing a broad range of financial services and products. BPNA
operates branches in New York, California, Illinois, New Jersey, Florida and Texas. E-LOAN markets
deposit accounts under its name for the benefit of BPNA and offers loan customers the option of
being referred to a trusted consumer lending partner for loan products. PFH operations were
discontinued in the third quarter of 2008. Disclosures on the discontinued operations as well as
recent restructuring plans in the BPNA and E-LOAN subsidiaries are included in this MD&A. The
Corporation, through its transaction processing company, EVERTEC, continues to use its expertise in
technology as a competitive advantage in its expansion throughout the United States, the Caribbean
and Latin America, as well as internally servicing many of its subsidiaries system infrastructures
and transactional processing businesses. Note 25 to the consolidated financial statements presents
information about the Corporations business segments.
The Corporation reported a net loss of $668.5 million for the quarter ended September 30, 2008,
compared with a net income of $36.0 million in the same quarter of 2007. Table A provides selected
financial data and performance indicators for the quarter and nine-month periods ended September
30, 2008 and 2007.
The following items principally impacted financial results for the quarter ended September 30,
2008:
|
|
|
Losses of $457.3 million, net of tax, related to the discontinued operations of the
U.S.-based reporting segment Popular Financial Holdings. The losses included write-downs of
assets held-for-sale to fair value, losses on the sale of loans, restructuring charges and
an unfavorable impact to income tax due to the recording of a valuation allowance on
deferred tax assets of $171.2 million. |
|
|
|
|
Losses from continuing operations of $211.2 million, net of tax, primarily resulting
from a valuation allowance of $189.2 million against the Corporations deferred tax assets
related to U.S. operations which negatively impacted income tax expense and higher
provision for loan losses of $165.8 million as a result of higher credit losses,
particularly in real estate related loans. |
Financial results for the quarter and nine months ended September 30, 2008 and 2007 are summarized
in Table A. The Corporation retrospectively adjusted certain information, principally that
impacting the statement of operations, to present in a separate line item the results from
discontinued operations from prior periods presented in this Form 10-Q for comparability purposes.
The discussions in this MD&A pertain to Popular, Inc.s continuing operations, unless otherwise
indicated.
Net Loss from Continuing Operations:
Financial results for the quarter ended September 30, 2008 for Populars continuing operations were
principally impacted by the following items (on a pre-tax basis compared to the third quarter of
2007):
|
|
|
Higher income tax expense by $125.3 million, which includes a $189.2 million
adjustment to recognize a valuation allowance on a part of the deferred tax assets
related to the Corporations continuing U.S. operations. Given that the Corporation
files a consolidated U.S. tax return for its |
77
|
|
|
U.S. operations, the Corporation can
continue to benefit from the net operating losses carryforward
derived from the PFH reportable segment losses. Based on the internal assessment of
the realization of the U.S. deferred tax asset, during the third quarter of 2008,
management determined that it was appropriate to establish a valuation allowance of
$360.4 million, of which $189.2 million of the impact in income tax expense is
accounted as part of the Corporations continuing operations. Refer to the Income
Taxes section of this MD&A for further information on deferred tax assets. |
|
|
|
|
Higher provision for loan losses for the third quarter of 2008 by $165.8 million,
including $61.9 million in specific reserves for loans classified as impaired under
SFAS No. 114. The increase in provision for loan losses was driven principally by
higher net charge-offs and deteriorating credit quality trends. Details on credit
quality indicators are included in the Credit Risk Management and Loan Quality
Section in this MD&A. The current state of the economy and uncertainty in the
private and public sectors has had an adverse effect on the credit quality of the
Corporations loan portfolios. |
|
|
|
|
Lower net interest income by $7.4 million, and |
|
|
|
|
Higher operating expenses by $4.0 million. |
The above were partially offset by higher non-interest income by $11.0 million.
Banco Popular de Puerto Rico reportable segments net income amounted to $35.4 million for the
quarter ended September 30, 2008, compared to net income of $80.2 million for the same quarter in
2007. The Corporations banking business in Puerto Rico continues to feel the pressure of weak
economic conditions. The reduction in net income, when comparing the results for the 2008 and 2007
third quarters, was principally attributed to an increase in its provision for loan losses of $62.8
million. Revenues derived from deposit accounts and other service fees increased 7%. Management in
the Puerto Rico operations continues focusing on addressing credit-related challenges and on
implementing additional income opportunities and cost reduction initiatives to mitigate the
additional provision expense. The expense reduction efforts include (i) reducing headcount by
attrition (leveraging human resources through internal mobility), (ii) focusing on projects that
will result in immediate contributions to profitability, and (iii) rationalizing product lines that
consistently fail to deliver adequate returns on equity. Banco Popular de Puerto Rico will
consolidate its consumer-finance operations, Popular Finance, into its retail banking operations.
Popular Finance stopped originating loans on November 1, 2008. Some of Popular Finances 44
branches will continue to operate as customer-service operations. The remaining branches of Popular
Finance will be closed or sold. Employees at Popular Finance will be relocated to support other
business lines at the Puerto Rico operations.
EVERTEC, the Corporations processing business, continues to perform well, reporting net income of
$8.5 million in the third quarter of 2008, compared to $8.1 million in the same quarter of the
previous year, for an increase of approximately 5%.
Banco Popular North America (BPNA) reportable segment, which includes E-LOAN, reported a net loss
for the quarter ended September 30, 2008 of $139.0 million, compared to a net loss of $1.1 million
in the same quarter of 2007. Of the results for the quarter ended September 30, 2008, $51.7
million of those losses pertain to BPNA, while $87.4 million pertains to E-LOAN. These operations
were impacted by an increase of $103.0 million in the provision for loan losses compared to the
same quarter of 2007 and by $94.5 million valuation allowance established for part of the deferred
tax assets in the third quarter of 2008. The Corporation has concluded that an accelerated
downturn of the U.S. economy requires a leaner, more efficient U.S. business model. As such, the
Corporation is reducing the size of its banking operations in the U.S. mainland to a level suited
to present economic conditions. The objective of the restructuring plan for this reportable segment
is to improve profitability in the short term, increase liquidity and lower credit costs, and over
time achieve a greater integration with corporate functions in Puerto Rico. Refer to the
Subsequent Events section of this MD&A for information on the BPNA restructuring plan approved by
the Corporations Board of Directors in October 2008.
78
TABLE A
Financial Highlights
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Condition Highlights |
|
At September 30, |
|
Average for the nine months** |
(In thousands) |
|
2008 |
|
2007 |
|
Variance |
|
2008 |
|
2007 |
|
Variance |
|
Money market investments |
|
$ |
309,497 |
|
|
$ |
635,097 |
|
|
$ |
(325,600 |
) |
|
$ |
651,043 |
|
|
$ |
449,722 |
|
|
$ |
201,321 |
|
Investment and trading securities |
|
|
8,962,130 |
|
|
|
9,999,296 |
|
|
|
(1,037,166 |
) |
|
|
8,949,770 |
|
|
|
10,574,675 |
|
|
|
(1,624,905 |
) |
Loans |
|
|
26,581,169 |
* |
|
|
33,320,804 |
|
|
|
(6,739,635 |
) |
|
|
26,513,808 |
|
|
|
25,110,127 |
|
|
|
1,403,681 |
|
Total earning assets |
|
|
35,852,796 |
* |
|
|
43,955,197 |
|
|
|
(8,102,401 |
) |
|
|
36,114,621 |
|
|
|
36,134,524 |
|
|
|
(19,903 |
) |
Total assets |
|
|
40,390,142 |
|
|
|
47,280,131 |
|
|
|
(6,889,989 |
) |
|
|
41,391,639 |
|
|
|
47,168,015 |
|
|
|
(5,776,376 |
) |
Deposits |
|
|
27,911,397 |
|
|
|
26,601,515 |
|
|
|
1,309,882 |
|
|
|
27,268,864 |
|
|
|
24,972,662 |
|
|
|
2,296,202 |
|
Borrowings |
|
|
8,479,537 |
* |
|
|
16,016,991 |
|
|
|
(7,537,454 |
) |
|
|
7,519,439 |
|
|
|
9,750,011 |
|
|
|
(2,230,572 |
) |
Stockholders equity |
|
|
3,007,473 |
|
|
|
3,803,721 |
|
|
|
(796,248 |
) |
|
|
3,440,296 |
|
|
|
3,870,770 |
|
|
|
(430,474 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Highlights |
|
Third Quarter |
|
Nine months ended September 30, |
(In thousands, except per share information) |
|
2008 |
|
2007 |
|
Variance |
|
2008 |
|
2007 |
|
Variance |
|
Net interest income |
|
$ |
324,282 |
|
|
$ |
331,646 |
|
|
$ |
(7,364 |
) |
|
$ |
990,338 |
|
|
$ |
968,342 |
|
|
$ |
21,996 |
|
Provision for loan losses |
|
|
252,160 |
|
|
|
86,340 |
|
|
|
165,820 |
|
|
|
602,561 |
|
|
|
219,477 |
|
|
|
383,084 |
|
Non-interest income |
|
|
187,928 |
|
|
|
176,925 |
|
|
|
11,003 |
|
|
|
688,477 |
|
|
|
683,078 |
|
|
|
5,399 |
|
Operating expenses |
|
|
322,915 |
|
|
|
318,961 |
|
|
|
3,954 |
|
|
|
976,548 |
|
|
|
973,372 |
|
|
|
3,176 |
|
(Loss) income from continuing operations
before income tax |
|
|
(62,865 |
) |
|
|
103,270 |
|
|
|
(166,135 |
) |
|
|
99,706 |
|
|
|
458,571 |
|
|
|
(358,865 |
) |
Income tax expense |
|
|
148,308 |
|
|
|
23,056 |
|
|
|
125,252 |
|
|
|
152,467 |
|
|
|
105,598 |
|
|
|
46,869 |
|
(Loss) income from continuing operations, net
of income tax |
|
|
(211,173 |
) |
|
|
80,214 |
|
|
|
(291,387 |
) |
|
|
(52,761 |
) |
|
|
352,973 |
|
|
|
(405,734 |
) |
Loss from
discontinued operations, net of income tax |
|
|
(457,370 |
) |
|
|
(44,211 |
) |
|
|
(413,159 |
) |
|
|
(488,242 |
) |
|
|
(123,373 |
) |
|
|
(364,869 |
) |
Net (loss) income |
|
$ |
(668,543 |
) |
|
$ |
36,003 |
|
|
$ |
(704,546 |
) |
|
$ |
(541,003 |
) |
|
$ |
229,600 |
|
|
$ |
(770,603 |
) |
Net (loss) income applicable to common stock |
|
$ |
(679,772 |
) |
|
$ |
33,024 |
|
|
$ |
(712,796 |
) |
|
$ |
(561,213 |
) |
|
$ |
220,665 |
|
|
$ |
(781,878 |
) |
Earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and
diluted (losses) earnings from continuing operations |
|
$ |
(0.79 |
) |
|
$ |
0.28 |
|
|
$ |
(1.07 |
) |
|
$ |
(0.26 |
) |
|
$ |
1.23 |
|
|
$ |
(1.49 |
) |
Basic and diluted (losses) earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
from discontinued operations |
|
$ |
(1.63 |
) |
|
$ |
(0.16 |
) |
|
$ |
(1.47 |
) |
|
$ |
(1.74 |
) |
|
$ |
(0.44 |
) |
|
$ |
(1.30 |
) |
Basic and diluted (losses) earnings Total |
|
$ |
(2.42 |
) |
|
$ |
0.12 |
|
|
$ |
(2.54 |
) |
|
$ |
(2.00 |
) |
|
$ |
0.79 |
|
|
$ |
(2.79 |
) |
|
Selected Statistical Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter |
|
Nine months ended September 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
Common
Stock Data Market price |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High |
|
$ |
11.17 |
|
|
$ |
16.18 |
|
|
$ |
14.07 |
|
|
$ |
18.94 |
|
Low |
|
|
5.12 |
|
|
|
11.38 |
|
|
|
5.12 |
|
|
|
11.38 |
|
End |
|
|
8.29 |
|
|
|
12.28 |
|
|
|
8.29 |
|
|
|
12.28 |
|
Book value per share at period end |
|
|
8.59 |
|
|
|
12.94 |
|
|
|
8.59 |
|
|
|
12.94 |
|
Dividends declared per share |
|
|
0.08 |
|
|
|
0.16 |
|
|
|
0.40 |
|
|
|
0.48 |
|
Dividend payout ratio |
|
|
(6.65 |
%) |
|
|
135.35 |
% |
|
|
(23.85 |
%) |
|
|
60.71 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profitability Ratios Return on assets |
|
|
(6.55 |
%) |
|
|
0.30 |
% |
|
|
(1.75 |
%) |
|
|
0.65 |
% |
Return on common equity |
|
|
(93.32 |
) |
|
|
3.52 |
|
|
|
(24.57 |
) |
|
|
8.01 |
|
Net interest spread (taxable equivalent) |
|
|
3.42 |
|
|
|
3.27 |
|
|
|
3.44 |
|
|
|
3.22 |
|
Net interest margin (taxable equivalent) |
|
|
3.89 |
|
|
|
3.88 |
|
|
|
3.92 |
|
|
|
3.83 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalization Ratios Equity to assets |
|
|
8.54 |
% |
|
|
8.29 |
% |
|
|
8.31 |
% |
|
|
8.21 |
% |
Tangible equity to assets |
|
|
6.97 |
|
|
|
6.77 |
|
|
|
6.75 |
|
|
|
6.68 |
|
Internal capital generation |
|
|
(80.56 |
) |
|
|
(1.20 |
) |
|
|
(26.24 |
) |
|
|
2.98 |
|
Tier I
capital to risk adjusted assets |
|
|
9.09 |
|
|
|
10.73 |
|
|
|
9.09 |
|
|
|
10.73 |
|
Total
capital to risk adjusted assets |
|
|
10.35 |
|
|
|
11.98 |
|
|
|
10.35 |
|
|
|
11.98 |
|
Leverage ratio |
|
|
7.17 |
|
|
|
8.31 |
|
|
|
7.17 |
|
|
|
8.31 |
|
|
|
|
* |
|
Excludes assets / liabilities from discontinued operations as of September 30, 2008 as follows:
$626 million in loans, $630 million in earning assets, and $166 million in borrowings. These are
included as part of Assets / Liabilities from discontinued operations in the consolidated
statement of condition as of such date. |
|
** |
|
Excludes averages of assets / liabilities from discontinued operations. Averages for September
30, 2007 were retrospectively adjusted to conform to the September 30, 2008 presentation. |
79
The Corporation, like other financial institutions, is subject to a number of risks, many of which
are outside of managements control, though efforts are made to manage those risks while optimizing
returns. Among the risks to which the Corporation is subject are: (1) market risk, which is the
risk that changes in market rates and prices will adversely affect the Corporations financial
condition or results of operations, (2) liquidity risk, which is the risk that the Corporation will
have insufficient cash or access to cash to meet operating needs and financial obligations, (3)
credit risk, which is the risk that loan customers or other counterparties will be unable to
perform their contractual obligations, and (4) operational risk, which is the risk of loss
resulting from inadequate or failed internal processes, people and systems, or from external
events. In addition, the Corporation is subject to legal, compliance and reputational risks, among
others.
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.
The description of the Corporations business contained in Item 1 of the Corporations Form 10-K
for the year ended December 31, 2007, 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 III; readers
should consider.
Further discussion of operating results, financial condition and credit, market and liquidity risks
is presented in the narrative and tables included herein.
The shares of the Corporations common (BPOP) and preferred stock (BPOPO and BPOPP) are traded on
the National Association of Securities Dealers Automated Quotation (NASDAQ) system.
DISCONTINUED OPERATIONS
On August 29, 2008, the Corporation announced that it had entered into an agreement to sell loans,
residual interests and servicing related assets of PFH and Popular, FS to Goldman Sachs Mortgage
Company, Goldman, Sachs & Co. and Litton Loan Servicing, LP. The transaction closed on November 3,
2008. This sale resulted in a reduction in assets, mostly accounted at fair value, of over $900
million, and provided over $700 million in additional liquidity.
In addition, on September 18, 2008, the Corporation announced the consummation of the sale of
manufactured housing loans of PFH to 21st Mortgage Corp. and Vanderbilt Mortgage and
Finance, Inc. The transaction provided approximately $198 million in cash and resulted in a
reduction in unpaid principal balance of loans held at PFH of approximately $309 million.
The above actions and past sales and restructuring plans executed at PFH in the past two years have
resulted in the discontinuance of the Corporations PFH operations. This includes exiting all
business activities, consisting of loan origination channels and loan servicing functions
previously conducted at PFH. As of September 30, 2008, the Corporation reclassified $789 million of
net assets of the PFH business to discontinued operations, substantially all of which were
classified as held-for-sale as of September 30, 2008.
The proceeds from the PFH asset sales will be used for repayment of the Corporations medium-term
notes due in
80
2009 as well as other debt maturities. The Corporation reported a net loss for the discontinued
operations of $457.3 million in the third quarter of 2008. The loss included write-downs of assets
held-for-sale to fair value, losses on the sale of loans, restructuring charges and the recording
of a valuation allowance on deferred tax assets of $171.2 million.
Assets and liabilities of discontinued operations, substantially all of which are classified as
held-for-sale, were estimated as follows as of September 30, 2008:
|
|
|
|
|
($ in millions) |
|
September 30, 2008 |
|
Loans |
|
$ |
626 |
|
Servicing
rights |
|
|
37 |
|
Servicing advances |
|
|
280 |
|
Residual interests |
|
|
4 |
|
Other |
|
|
22 |
|
|
Total assets |
|
$ |
969 |
|
|
|
|
|
|
|
Secured borrowings |
|
$ |
166 |
|
Other liabilities |
|
|
14 |
|
|
Total liabilities |
|
$ |
180 |
|
|
Net assets |
|
$ |
789 |
|
|
The following table provides financial information for the discontinued operations for the quarter
and nine months ended September 30, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended |
|
Nine months ended |
($ in millions) |
|
September 30, 2008 |
|
September 30, 2007 |
|
September 30, 2008 |
|
September 30, 2007 |
|
Net interest income |
|
$ |
1.6 |
|
|
$ |
28.5 |
|
|
$ |
30.7 |
|
|
$ |
118.1 |
|
Provision for loan losses |
|
|
10.5 |
|
|
|
61.8 |
|
|
|
19.0 |
|
|
|
140.1 |
|
Non-interest (loss) income, including fair
value adjustments on loans and MSRs |
|
|
(256.4 |
) |
|
|
(9.9 |
) |
|
|
(255.4 |
) |
|
|
(60.5 |
) |
Operating expenses, including reductions in
value of servicing advances and other
real estate |
|
|
126.3 |
|
|
|
28.0 |
|
|
|
193.0 |
|
|
|
110.0 |
|
Loss on
disposition during the period(1) |
|
|
(53.5 |
) |
|
|
|
|
|
|
(53.5 |
) |
|
|
|
|
|
Pre-tax loss from discontinued operations |
|
$ |
(445.1 |
) |
|
$ |
(71.2 |
) |
|
$ |
(490.2 |
) |
|
$ |
(192.5 |
) |
Income tax expense (benefit) |
|
|
12.2 |
|
|
|
(27.0 |
) |
|
|
(2.0 |
) |
|
|
(69.1 |
) |
|
Loss from discontinued operations, net of tax |
|
$ |
(457.3 |
) |
|
$ |
(44.2 |
) |
|
$ |
(488.2 |
) |
|
$ |
(123.4 |
) |
|
|
|
|
(1) |
|
Loss on disposition during the period is associated to the sale
of manufactured housing loans in September 2008, which included lower
of cost or market adjustments at reclassification from loans
held-in-portfolio to loans held-for-sale. |
|
As part of these actions at PFH, the Corporation entered into a restructuring plan (the PFH
Discontinuance Restructuring Plan) to eliminate employment positions, terminate contracts and
incur other costs associated with the sale. Further information on the restructuring plan is
provided in the Restructuring Plans section in this MD&A.
As of September 30, 2008, on a pro-forma basis after giving effect to the sale of PFHs loan and
servicing assets described above, the Corporations capital
ratios are estimated as follows: Tier I
capital ratio of approximately 9.43%, total capital ratio of
approximately 10.69%, and leverage
ratio of approximately 7.15%. Refer to Table K for the Corporations regulatory capital ratios and
amounts of total risk-based capital, Tier I risk-based capital and
Tier I leverage at September 30,
2008.
81
SUBSEQUENT EVENTS
Transaction with Goldman Sachs
On November 3, 2008, the Corporation completed the sale of the loans and servicing assets of
PFH to various Goldman Sachs affiliates. Refer to the Discontinued Operations section of this MD&A
for further information.
Restructuring Plans
The Corporation has concluded that an accelerated downturn of the U.S. economy requires a leaner,
more efficient U.S. business model. As such, the Corporation is reducing the size of its banking
operations in the U.S. mainland to a level suited to present economic conditions. On October 17,
2008, the Board of Directors of Popular, Inc. approved two restructuring plans for the BPNA
reportable segment. The objective of the restructuring plans is to improve profitability in the
short term, increase liquidity and lower credit costs, and over time achieve a greater integration
with corporate functions in Puerto Rico.
The restructuring plan for Banco Popular North America (banking operations) (the BPNA
Restructuring Plan) contemplates the following measures: closing, consolidation or sale of
underperforming branches in all existing markets; the shutting down, sale or downsizing of lending
businesses that do not generate deposits or fee income; and the reduction of general expenses
associated with functions supporting the aforementioned branch and balance sheet initiatives.
It is anticipated that the BPNA Restructuring Plan will result in estimated combined charges for
the Corporation of $36.6 million, to be recognized during the fourth quarter of 2008 and in 2009,
broken down as follows:
|
|
|
|
|
($ in millions) |
|
|
|
|
|
Severance, bonuses and other benefits |
|
$ |
14.4 |
|
Lease contract terminations and write-off of
leasehold improvements |
|
|
17.9 |
|
Other costs, mostly write-downs of core deposit intangibles |
|
|
4.3 |
|
|
Total |
|
$ |
36.6 |
|
|
As a result of the BPNA Restructuring Plan, the exiting and downsizing of certain business lines
and reductions in support functions, the Corporation expects an overall headcount reduction of 30%
or about 640 full-time equivalent positions.
The BPNA Restructuring Plan is
expected to achieve annual expense savings at BPNA of
approximately $50 million and is expected to be rolled out in
the fourth quarter 2008 with an
estimated completion date of June 2009.
The restructuring plan of E-LOAN (the E-LOAN 2008 Restructuring Plan) contemplates E-LOAN ceasing
to operate as a direct lender in the fourth quarter of 2008. E-LOAN will continue to market
deposit accounts under its name for the benefit of BPNA and offer loan customers the option of
being referred to a trusted consumer lending partner. All operational and support functions will be
transferred to BPNA and EVERTEC by July 2009.
It is anticipated that the E-LOAN 2008 Restructuring Plan will result in estimated combined charges
for the Corporation of $13.6 million, to be recognized during the fourth quarter of 2008 and in
2009, broken down as follows:
|
|
|
|
|
($ in millions) |
|
|
|
|
|
Severance, bonuses and other benefits |
|
$ |
6.1 |
|
Lease contract terminations and write-off of
leasehold improvements |
|
|
2.5 |
|
Other costs, principally write-downs of equipment
and other intangibles |
|
|
5.0 |
|
|
Total |
|
$ |
13.6 |
|
|
82
Annualized expected savings from the E-LOAN 2008 Restructuring Plan are estimated at approximately
$37 million.
These estimates are preliminary as management is still in the process of evaluating the cost of
implementing the restructuring plans. Accordingly, no assurance can be given that the final charges
may not differ by a significant amount from these estimates.
Legislation
On October 3, 2008, Congress passed the Emergency Economic Stabilization Act of 2008 (EESA),
which provides the U.S. Secretary of the United States Treasury Department (Treasury) with broad
authority to deploy up to $750 billion into the financial system to help restore stability and
liquidity to U.S. markets. On October 24, 2008, Treasury announced plans to direct $250 billion of
this authority into preferred stock investments by Treasury in qualified financial institutions as
part of the Troubled Asset Relief Program (TARP) Capital
Purchase Program.
The program is voluntary and requires an institution to comply with a number of restrictions and
provisions, including limits on executive compensation, stock redemptions and declaration of
dividends. Applications must be submitted by November 14, 2008 and are subject to approval by the
Treasury. This program provides for a minimum investment of 1% of Risk-Weighted Assets, with a
maximum investment equal to the lesser of 3% of Total Risk-Weighted Assets or $25 billion. The
perpetual preferred stock investment will have a dividend rate of 5% per year, until the fifth
anniversary of the Treasury investment, and a dividend rate of 9%, thereafter. This program also
requires the Treasury to receive warrants for common stock equal to 15% of the capital invested by
the Treasury. Participation in the program is not automatic and subject to approval by the Treasury.
Furthermore, the EESA included a provision for an increase in the amount of deposits insured by the
Federal Deposit Insurance Corporation (FDIC) to $250,000. On October 14, 2008, the FDIC announced
a new program the Temporary Liquidity Guarantee Program that provides unlimited deposit
insurance on funds in noninterest-bearing transaction deposit accounts not otherwise covered by the
existing deposit insurance limit of $250,000.
RESTRUCTURING PLANS IN PLACE AS OF SEPTEMBER 30, 2008
PFH Discontinuance Restructuring Plan
As previously indicated in the Discontinued Operations section of this MD&A, in August 2008 the
Corporation entered into a new restructuring plan for its PFH operations to eliminate employment
positions, terminate contracts and incur other costs associated with the discontinuance of PFHs
operations It is anticipated that the PFH Discontinuance Restructuring Plan will result in
estimated combined charges for the Corporation of approximately $14 million, from which $5.1
million was recognized during the third quarter of 2008 and the remainder is expected to be
recognized during the fourth quarter of 2008 and 2009. The costs consist of severance bonuses and
other employee benefits, lease and contract termination expenses, and other costs, principally
consisting of software, equipment and fixed asset impairments. Full-time equivalent employees at
the PFH reportable segment were 299 as of September 30, 2008.
83
During the quarter ended September 30, 2008, the PFH Discontinuance Restructuring Plan resulted in
charges, on a pre-tax basis, broken down as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairments on |
|
Restructuring |
|
|
(In thousands) |
|
long-lived assets |
|
costs |
|
Total |
|
Quarter ended: |
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
$ |
3,916 |
(a) |
|
$ |
1,164 |
(b) |
|
$ |
5,080 |
|
|
Total |
|
$ |
3,916 |
|
|
$ |
1,164 |
|
|
$ |
5,080 |
|
|
|
|
|
(a) |
|
Fixed assets and prepaid expenses |
|
(b) |
|
Severance, retention bonuses and other employee
benefits |
The PFH Discontinuance Restructuring Plan charges incurred in the third quarter of 2008 are
included in the line item Loss from discontinued operations, net of tax in the consolidated
statement of operations.
PFH Branch Network Restructuring Plan
Given the disruption in the capital markets since the summer of 2007 and its impact on funding,
management of the Corporation concluded during the fourth quarter of 2007 that it would be
difficult to generate an adequate return on the capital invested at Equity Ones consumer service
branches.
The Corporation closed Equity Ones consumer service branches during the first quarter of 2008 as
part of the initiatives to exit the subprime loan origination operations at PFH (the PFH Branch
Network Restructuring Plan). The PFH Branch Network Restructuring Plan followed the sale on March
1, 2008 of approximately $1.4 billion of PFH consumer and mortgage loans that were originated
through Equity Ones consumer branch network to American General Financial (American General).
This company hired certain of Equity Ones consumer services employees and retained certain branch
locations. During the quarter ended March 31, 2008, Equity One closed substantially all branches
not assumed by American General.
During the quarter and nine months ended September 30, 2008 and as part of this particular
restructuring plan, the Corporation incurred certain costs, on a pre-tax basis, as detailed in the
table below.
|
|
|
|
|
|
|
|
|
|
|
Quarter ended |
|
Nine months ended |
(In thousands) |
|
September 30, 2008 |
|
September 30, 2008 |
|
Personnel costs |
|
$ |
63 |
|
|
$ |
8,468 |
(a) |
Net occupancy expenses |
|
|
|
|
|
|
5,905 |
(b) |
Equipment expenses |
|
|
|
|
|
|
675 |
|
Communications |
|
|
|
|
|
|
590 |
|
Other operating expenses |
|
|
|
|
|
|
1,021 |
(c) |
|
Total restructuring charges |
|
$ |
63 |
|
|
$ |
16,659 |
|
|
|
|
|
(a) |
|
Severance, retention bonuses and other benefits |
|
(b) |
|
Lease terminations |
|
(c) |
|
Contract cancellations and branch closing costs |
Also, during the fourth quarter of 2007 and as disclosed in the 2007 Annual Report, the Corporation
recognized impairment charges on long-lived assets of $1.9 million, mainly associated with
leasehold improvements, furniture and equipment.
84
As of September 30, 2008, the PFH Branch Network Restructuring Plan has resulted in combined
charges for 2007 and 2008, broken down as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairments on |
|
Restructuring |
|
|
(In thousands) |
|
long-lived assets |
|
costs |
|
Total |
|
Quarter ended: |
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007 |
|
$ |
1,892 |
|
|
|
|
|
|
$ |
1,892 |
|
March 31, 2008 |
|
|
|
|
|
$ |
17,029 |
|
|
|
17,029 |
|
June 30, 2008 |
|
|
|
|
|
|
(433 |
) |
|
|
(433 |
) |
September 30, 2008 |
|
|
|
|
|
|
63 |
|
|
|
63 |
|
|
Total |
|
$ |
1,892 |
|
|
$ |
16,659 |
|
|
$ |
18,551 |
|
|
The following table presents the changes during 2008 in the reserve for restructuring costs
associated with the PFH Branch Network Restructuring Plan.
|
|
|
|
|
|
|
Restructuring |
(In thousands) |
|
costs |
|
Balance at January 1, 2008 |
|
|
|
|
Charges in quarter ended March 31 |
|
$ |
17,029 |
|
Cash payments |
|
|
(4,728 |
) |
|
Balance at March 31, 2008 |
|
|
12,301 |
|
Charges in quarter ended June 30 |
|
|
412 |
|
Cash payments |
|
|
(7,913 |
) |
Reversals |
|
|
(845 |
) |
|
Balance at June 30, 2008 |
|
|
3,955 |
|
Charges in quarter ended September 30 |
|
|
63 |
|
Cash payments |
|
|
(1,615 |
) |
|
Balance as of September 30, 2008 |
|
$ |
2,403 |
|
|
The PFH Branch Network Restructuring Plan charges are included in the line item Loss from
discontinued operations, net of tax in the consolidated statements of operations for 2008 and
2007.
E-LOAN Restructuring Plan
As indicated in the 2007 Annual Report, in November 2007, the Corporation began a restructuring
plan for its Internet financial services subsidiary E-LOAN (the E-LOAN Restructuring Plan). This
plan included a substantial reduction of marketing and personnel costs at E-LOAN and changes in
E-LOANs business model. At that time, the changes included concentrating marketing investment
toward the Internet and the origination of first mortgage loans that qualify for sale to government
sponsored entities (GSEs). Also, as a result of escalating credit costs in the current economic
environment and lower liquidity in the secondary markets for mortgage related products, in the
fourth quarter of 2007, the Corporation determined to hold back the origination by E-LOAN of home
equity lines of credit, closed-end second lien mortgage loans and auto loans. The E-LOAN
Restructuring Plan resulted in charges recorded in the fourth quarter of 2007 amounting to $231.9
million, which included $211.8 million in non-cash impairment losses related to its goodwill and
trademark intangible assets.
The cost-control plan initiative and changes in loan origination strategies incorporated as part of
the plan resulted in the elimination of over 400 positions between the fourth quarter of 2007 and
first quarter of 2008. Full-time equivalent employees at E-LOAN were 300 as of September 30, 2008,
compared with 806 as of September 30, 2007.
85
The following table presents the changes in restructuring costs reserves for 2008 associated with
the E-LOAN Restructuring Plan.
|
|
|
|
|
|
|
Restructuring |
(In thousands) |
|
costs |
|
Balance at January 1, 2008 |
|
$ |
8,808 |
|
Payments |
|
|
(4,628 |
) |
Reversals |
|
|
(301 |
) |
|
Balance at March 31, 2008 |
|
|
3,879 |
|
Payments |
|
|
(936 |
) |
|
Balance at June 30, 2008 |
|
|
2,943 |
|
Payments |
|
|
(460 |
) |
Reversals |
|
|
(1,036 |
) |
|
Balance as of September 30, 2008 |
|
$ |
1,447 |
|
|
The Corporation does not expect to incur additional significant restructuring costs related to this
specific E-LOAN Restructuring Plan during the remainder of year 2008. The associated liability
outstanding as of September 30, 2008 is mostly related to lease terminations.
The E-LOAN Restructuring Plan charges are part of the results of the BPNA reportable segment. Refer
to Note 25 to the consolidated financial statements for disclosures on the financial results of
E-LOAN for the quarter and nine months ended September 30, 2008 and the comparable periods in 2007.
These costs related to E-LOAN do not consider the new restructuring plan approved in October 2008
which was disclosed in the Subsequent Events section of this MD&A and which eliminated loan
origination activities at E-LOAN.
SFAS No. 159 FAIR VALUE OPTION ELECTION
SFAS No. 159 provides entities the option to measure certain financial assets and financial
liabilities at fair value with changes in fair value recognized in earnings each period. SFAS No.
159 permits the fair value option election on an instrument-by-instrument basis at initial
recognition of an asset or liability or upon an event that gives rise to a new basis of accounting
for that instrument.
As indicated in Note 2 to the consolidated financial statements, the Corporation elected to measure
at fair value certain loans and borrowings outstanding at January 1, 2008 pursuant to the fair
value option provided by SFAS No. 159. All of these financial instruments pertained to the
operations of Popular Financial Holdings, and at the SFAS No. 159 adoption date included:
|
|
|
Approximately $1.2 billion of whole loans held-in-portfolio by PFH outstanding as of
December 31, 2007. These whole loans consisted principally of first lien residential
mortgage loans and closed-end second lien loans that were originated through the exited
origination channels of PFH (e.g. asset acquisition, broker and retail channels), and home
equity lines of credit that had been originated by E-LOAN but sold to PFH as part of the
Corporations 2007 U.S. reorganization. Also, to a lesser extent, the loan portfolio
included mixed-use / multi-family loans (small commercial category) and manufactured
housing loans. |
|
|
|
|
Approximately $287 million of owned-in-trust loans and $287 million of bond
certificates associated with PFH securitization activities that were outstanding as of
December 31, 2007. The owned-in-trust loans are pledged as collateral for the bond
certificates as a financing vehicle through on-balance sheet securitization transactions.
The owned-in-trust loans include first lien residential mortgage loans, closed-end second
lien loans, mixed-use / multi-family loans (small commercial category) and manufactured
housing loans. The majority of the portfolio is comprised of first lien residential
mortgage loans. |
86
Upon adoption of SFAS No. 159, the Corporation recognized a negative after-tax adjustment to
beginning retained earnings due to the transitional adjustment for electing the fair value option,
as detailed in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect |
|
|
|
|
January 1, |
|
adjustment to |
|
January 1, 2008 |
|
|
2008 (Carrying |
|
January 1, 2008 |
|
fair value |
|
|
value prior to |
|
retained earnings |
|
(Carrying value |
(In thousands) |
|
adoption) |
|
Gain (Loss) |
|
after adoption) |
|
Loans |
|
$ |
1,481,297 |
|
|
$ |
(494,180 |
) |
|
$ |
987,117 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable (bond certificates) |
|
$ |
(286,611 |
) |
|
$ |
85,625 |
|
|
$ |
(200,986 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax cumulative effect of adopting fair
value option accounting |
|
|
|
|
|
$ |
(408,555 |
) |
|
|
|
|
Net increase in deferred tax asset |
|
|
|
|
|
|
146,724 |
|
|
|
|
|
|
After-tax cumulative effect of adopting
fair value option accounting |
|
|
|
|
|
$ |
(261,831 |
) |
|
|
|
|
|
The fair value adjustments in the loan portfolios recorded upon adoption of SFAS No. 159 on January
1, 2008 were mainly the result of factors such as:
|
|
|
In general, the loan portfolio is, in the most part, considered subprime and due to
market conditions, considered distressed assets in a very illiquid market. |
|
|
|
|
There was a significant deterioration in the delinquency profile of the second-lien
closed-end mortgage loan portfolio |
|
|
|
|
Property values obtained on subprime loans in foreclosure were declining dramatically.
As property values do not justify initiating a foreclosure action, the loan in essence could
behave as an unsecured loan. |
|
|
|
|
A substantial share of PFHs closed-end second lien portfolio has combined
loan-to-values greater than 90%. |
|
|
|
|
The consumer loans measured at fair value also include home equity lines of credit that
although were considered prime based on FICO scores, the portfolio had deteriorated.
Similar to second lien closed-end loans, the HELOCs were also behaving as an unsecured
loan. |
|
|
|
|
Certain of the loan portfolios were trading at distressed levels based on the small
trading activity available for the products and the expected return by the investors rather
than the actual performance and fundamentals of these loans. |
Similar factors and continuing disruptions in the capital markets and credit deterioration
contributed to the further decline in value of the loan portfolio during 2008.
The following table presents the differences as of September 30, 2008 between the aggregate fair
value, including accrued interest, and aggregate unpaid principal balance (UPB) of those loans /
notes payable for which the fair value option was elected. The fair value of these assets as of
September 30, 2008 was determined based on the pricing terms of the sales agreement with Goldman
Sachs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate fair |
|
|
|
|
|
|
value as of |
|
Aggregate UPB as |
|
|
|
|
September 30, |
|
of September 30, |
|
Unrealized |
(In thousands) |
|
2008 |
|
2008 |
|
(loss) gain |
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage |
|
$ |
442,140 |
|
|
$ |
779,071 |
|
|
$ |
(336,931 |
) |
Consumer |
|
|
78,802 |
|
|
|
246,090 |
|
|
|
(167,288 |
) |
Commercial |
|
|
62,870 |
|
|
|
120,556 |
|
|
|
(57,686 |
) |
|
Total loans |
|
$ |
583,812 |
|
|
$ |
1,145,717 |
|
|
$ |
(561,905 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable (bond certificates) |
|
$ |
(166,436 |
) |
|
$ |
(242,883 |
) |
|
$ |
76,447 |
|
|
During the quarter and nine-months ended September 30, 2008, the Corporation recognized $137.2
million and $169.8 million, respectively, in losses attributable to changes in the fair value of
loans, including net losses attributable to changes in instrument-specific credit spreads. During
the quarter and nine months ended September 30,
2008, the Corporation recognized $3.4 million and $9.6 million, respectively, in losses
attributable to changes in
87
the fair value of notes payable (bond certificates). These losses were
included in the caption Loss from discontinued operations, net of tax in the consolidated
statement of operations.
These financial instruments are included as part of Assets / Liabilities from discontinued
operations in the consolidated statement of condition as of September 30, 2008. PFH, which held
the SFAS No. 159 loan portfolio, was financed primarily by advances from its holding company,
Popular North America (PNA). In turn, PNA depended totally on the capital markets to raise
financing to meet its financial obligations. Given the mounting pressure to address PNAs liquidity
needs and the continuing problems with accessing the U.S. capital markets given the current
unprecedented market conditions, management decided that the only viable option available to
permanently raise the liquidity required by PNA was to sell PFH assets. This decision was taken in
the third quarter of 2008.
The following table provides information on non-performing loans measured at fair value pursuant to
SFAS No. 159.
Non-Performing Loans Measured at Fair Value pursuant to SFAS No. 159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid principal |
|
|
|
|
Fair value as of |
|
balance as of |
|
|
(Dollars in thousands) |
|
September 30, 2008 |
|
September 30, 2008 |
|
Unrealized losses |
|
Commercial |
|
$ |
5,704 |
|
|
$ |
16,399 |
|
|
$ |
(10,695 |
) |
Mortgage |
|
|
58,693 |
|
|
|
160,356 |
|
|
|
(101,663 |
) |
Consumer |
|
|
405 |
|
|
|
8,678 |
|
|
|
(8,273 |
) |
|
Total non-performing loans
measured at fair value |
|
$ |
64,802 |
|
|
$ |
185,433 |
|
|
$ |
(120,631 |
) |
|
Loans past due 90 days or more |
|
$ |
64,802 |
|
|
$ |
185,433 |
|
|
$ |
(120,631 |
) |
|
RECENT ACCOUNTING PRONOUNCEMENTS AND INTERPRETATIONS
SFAS No. 157 Fair Value Measurements
SFAS No. 157, issued in September 2006, defines fair value, establishes a framework of measuring
fair value and requires enhanced disclosures about fair value measurements. SFAS No. 157 requires
companies to disclose the fair value of its financial instruments according to a fair value
hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to
determine fair values. Financial assets carried at fair value will be classified and disclosed in
one of the three categories in accordance with the hierarchy. The three levels of the fair value
hierarchy are (1) quoted market prices for identical assets or liabilities in active markets, (2)
observable market-based inputs or unobservable inputs that are corroborated by market data, and (3)
unobservable inputs that are not corroborated by market data. SFAS No. 157 was effective for
financial statements issued for fiscal years beginning after November 15, 2007, and interim periods
within those fiscal years. In February 2008, the Financial Accounting Standards Board (FASB)
issued financial staff position FSP FAS No. 157-2 which defers for one year the effective date for
nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value on
a nonrecurring basis. The staff position also amends SFAS No. 157 to exclude SFAS No. 13
Accounting for Leases and its related interpretive accounting pronouncements that address leasing
transactions. The Corporation adopted the provisions of SFAS No. 157 that were not deferred by FSP
FAS No. 157-2, commencing in the first quarter of 2008. The provisions of SFAS No. 157 are to be
applied prospectively. Refer to Note 13 to these consolidated financial statements for the
disclosures required for the nine-month period ended September 30, 2008. The adoption of SFAS No.
157 in January 1, 2008 did not have an impact in beginning retained earnings.
FSP No. 157-3 Determining the Fair Value of a Financial Asset When the Market for that Asset Is
Not Active
In October 2008, the FASB issued FASB Staff Position No. FAS 157-3, Determining the Fair Value of
a Financial Asset When the Market for That Asset Is Not Active (FSP 157-3). FSP 157-3 clarifies
the application of FAS 157 in a market that is not active. The FSP is intended to address the
following application issues: (a) how the reporting entitys own assumptions (that is, expected
cash flows and appropriately risk-adjusted discount rates) should be considered when measuring fair
value when relevant observable inputs do not exist; (b) how available observable inputs in a market
that is not active should be considered when measuring fair value; and (c) how the use of market
quotes (for example, broker quotes or pricing services for the same or similar financial assets)
should be considered when assessing the relevance of observable and unobservable inputs available
to measure fair value. FSP 157-3 is
88
effective on issuance, including prior periods for which
financial statements have not been issued. The Corporation adopted FSP 157-3 for the quarter ended
September 30, 2008 and the effect of adoption on the consolidated financial statements was not
material.
SFAS No. 159 The Fair Value Option for Financial Assets and Liabilities Including an Amendment
of FASB Statement No. 115
In February 2007, the FASB issued SFAS No. 159, which provides companies with an option to report
selected financial assets and liabilities at fair value. The election to measure a financial asset
or liability at fair value can be made on an instrument-by-instrument basis and is irrevocable. The
difference between the carrying amount and the fair value at the election date is recorded as a
transition adjustment to beginning retained earnings. Subsequent changes in fair value are
recognized in earnings. The statement also establishes presentation and disclosure requirements
designed to facilitate comparisons between companies that choose different measurement attributes
for similar types of assets and liabilities. It also requires entities to display the fair value of
those assets and liabilities for which the company has chosen to use fair value on the face of the
balance sheet.
The Corporation adopted the provisions of SFAS No. 159 in January 2008 as previously described in
the SFAS No. 159 Fair Value Option Election section in this MD&A and in Note 12 to the consolidated
financial statements.
FSP FIN No. 39-1 Amendment of FASB Interpretation No. 39
In April 2007, the FASB issued Staff Position FSP FIN No. 39-1, which defines right of setoff and
specifies what conditions must be met for a derivative contract to qualify for this right of
setoff. It also addresses the applicability of a right of setoff to derivative instruments and
clarifies the circumstances in which it is appropriate to offset amounts recognized for those
instruments in the statement of condition. In addition, this FSP permits the offsetting of fair
value amounts recognized for multiple derivative instruments executed with the same counterparty
under a master netting arrangement and fair value amounts recognized for the right to reclaim cash
collateral (a receivable) or the obligation to return cash collateral (a payable) arising from the
same master netting arrangement as the derivative instruments. The adoption of FSP FIN No. 39-1 in
January 2008 did not have a material impact on the Corporations consolidated financial statements
and disclosures. The Corporations policy is not to offset the fair value amounts recognized for
multiple derivative instruments executed with the same counterparty under a master netting
arrangement nor to offset the fair value amounts recognized for the right to reclaim cash
collateral (a receivable) or the obligation to return cash collateral (a payable) arising from the
same master netting arrangement as the derivative instruments.
SFAS No. 141-R Statement of Financial Accounting Standards No. 141(R), Business Combinations (a
revision of SFAS No. 141)
SFAS No. 141(R), issued in December 2007, will significantly change how entities apply the
acquisition method to business combinations. The most significant changes affecting how the
Corporation will account for business combinations under this statement include the following: the
acquisition date will be the date the acquirer obtains control; all (and only) identifiable assets
acquired, liabilities assumed, and noncontrolling interests in the acquiree will be stated at fair
value on the acquisition date; assets or liabilities arising from noncontractual contingencies will
be measured at their acquisition date at fair value only if it is more likely than not that they
meet the definition of an asset or liability on the acquisition date; adjustments subsequently made
to the provisional amounts recorded on the acquisition date will be made retroactively during a
measurement period not to exceed one year; acquisition-related restructuring costs that do not meet
the criteria in SFAS No. 146 Accounting for Costs Associated with Exit or Disposal Activities
will be expensed as incurred; transaction costs will be expensed as incurred; reversals of deferred
income tax valuation allowances and income tax contingencies will be recognized in earnings
subsequent to the measurement period; and the allowance for loan losses of an acquiree will not be
permitted to be recognized by the acquirer. Additionally, SFAS No. 141(R) will require new and
modified disclosures surrounding subsequent changes to acquisition-related contingencies,
contingent consideration, noncontrolling interests, acquisition-related transaction costs, fair
values and cash flows not expected to be collected for acquired loans, and an enhanced goodwill
rollforward. The Corporation will be required to prospectively apply SFAS No. 141(R) to all
business combinations completed on or after January 1, 2009. Early adoption is not permitted. For
business combinations in which the acquisition date was before the effective date, the provisions
of SFAS No. 141(R) will apply to the subsequent accounting for deferred income tax valuation
allowances and income tax contingencies and will require any changes in
those amounts to be recorded in earnings. Management will be evaluating the effects that SFAS No.
141(R) will have on the financial condition, results of operations, liquidity, and the disclosures
that will be presented on the consolidated financial statements.
89
SFAS No. 160 Statement of Financial Accounting Standards No. 160, Noncontrolling Interest in
Consolidated Financial Statements, an amendment of ARB No. 51
In December 2007, the FASB issued SFAS No. 160, which amends ARB No. 51, to establish accounting
and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation
of a subsidiary. SFAS No. 160 will require entities to classify noncontrolling interests as a
component of stockholders equity on the consolidated financial statements and will require
subsequent changes in ownership interests in a subsidiary to be accounted for as an equity
transaction. Additionally, SFAS No. 160 will require entities to recognize a gain or loss upon the
loss of control of a subsidiary and to remeasure any ownership interest retained at fair value on
that date. This statement also requires expanded disclosures that clearly identify and distinguish
between the interests of the parent and the interests of the noncontrolling owners. SFAS No. 160 is
effective on a prospective basis for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008, except for the presentation and disclosure requirements,
which are required to be applied retrospectively. Early adoption is not permitted. Management will
be evaluating the effects, if any, that the adoption of this statement will have on its
consolidated financial statements.
SFAS No. 161 Disclosures about Derivative Instruments and Hedging Activities
In March 2008, the FASB issued SFAS No. 161, an amendment of SFAS No. 133. The standard requires
enhanced disclosures about derivative instruments and hedged items that are accounted for under
SFAS No. 133 and related interpretations. The standard will be effective for all of the
Corporations interim and annual financial statements for periods beginning after November 15,
2008, with early adoption permitted. The standard expands the disclosure requirements for
derivatives and hedged items and has no impact on how the Corporation accounts for these
instruments. Management will be evaluating the enhanced disclosure requirements.
SFAS No. 162 The Hierarchy of Generally Accepted Accounting
Principles"
SFAS No. 162, issued by the FASB in May 2008, identifies the sources of accounting principles and
the framework for selecting the principles to be used in the preparation of financial statements
that are presented in conformity with generally accepted accounting principles in the United
States. This statement is effective 60 days following the SECs approval of the Public Company
Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in
Conformity with Generally Accepted Accounting Principles. Management does not expect SFAS No. 162
to have a material impact on the Corporations consolidated financial statements. The Board does
not expect that this statement will result in a change in current accounting practice. However,
transition provisions have been provided in the unusual circumstance that the application of the
provisions of this statement results in a change in accounting practice.
Staff Accounting Bulletin No. 109 (SAB 109) Written Loan Commitments Recorded at Fair Value
through Earnings
On November 5, 2007, the SEC issued Staff SAB 109, which requires that the fair value of a written
loan commitment that is marked-to-market through earnings should include the future cash flows
related to the loans servicing rights. However, the fair value measurement of a written loan
commitment still must exclude the expected net cash flows related to internally developed
intangible assets (such as customer relationship intangible assets).
SAB 109 applies to two types of loan commitments: (1) written mortgage loan commitments for loans
that will be held-for-sale when funded that are marked-to-market as derivatives under SFAS No. 133
(derivative loan commitments); and (2) other written loan commitments that are accounted for at
fair value through earnings under SFAS No. 159s fair-value election.
SAB 109 supersedes SAB 105, which applied only to derivative loan commitments and allowed the
expected future cash flows related to the associated servicing of the loan to be recognized only
after the servicing asset had been contractually separated from the underlying loan by sale or
securitization of the loan with servicing retained. SAB 109 will be applied prospectively to
derivative loan commitments issued or modified in fiscal quarters beginning after December 15,
2007. The implementation of SAB 109 did not have a material impact to the Corporations
consolidated
financial statements, including disclosures.
90
FASB Staff Position (FSP) FAS 140-3, Accounting for Transfers of Financial Assets and Repurchase
Financing Transactions
The objective of FSP FAS 140-3, issued by the FASB in February 2008, is to provide implementation
guidance on whether the security transfer and contemporaneous repurchase financing involving the
transferred financial asset must be evaluated as one linked transaction or two separate de-linked
transactions.
Current practice records the transfer as a sale and the repurchase agreement as a financing. The
FSP FAS 140-3 requires the recognition of the transfer and the repurchase agreement as one linked
transaction, unless all of the following criteria are met: (1) the initial transfer and the
repurchase financing are not contractually contingent on one another; (2) the initial transferor
has full recourse upon default, and the repurchase agreements price is fixed and not at fair
value; (3) the financial asset is readily obtainable in the marketplace and the transfer and
repurchase financing are executed at market rates; and (4) the maturity of the repurchase financing
is before the maturity of the financial asset. The scope of this FSP is limited to transfers and
subsequent repurchase financings that are entered into contemporaneously or in contemplation of one
another.
FSP FAS 140-3 will be effective for the Corporation on January 1, 2009. Early adoption is
prohibited. The Corporation will be evaluating the potential impact of adopting this FSP.
FASB Staff Position (FSP) FAS 142-3, Determination of the Useful Life of Intangible Assets
FSP FAS 142-3, issued by the FASB in April 2008, amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of a recognized
intangible asset under FASB Statement No. 142 Goodwill and Other Intangible Assets. In developing
these assumptions, an entity should consider its own historical experience in renewing or extending
similar arrangements adjusted for entity specific factors or, in the absence of that experience,
the assumptions that market participants would use about renewals or extensions adjusted for the
entity specific factors.
FSP FAS 142-3 shall be applied prospectively to intangible assets acquired after the effective
date. This FSP will be effective for the Corporation on January 1, 2009. Early adoption is
prohibited. The Corporation will be evaluating the potential impact of adopting this FSP.
FSP No. FAS 133-1 and FIN 45-4 Disclosures about Credit Derivatives and Certain Guarantees: An
Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the
Effective Date of FASB Statement No. 161
FSP FAS 133-1 and FIN 45-4 requires disclosures by sellers of credit derivatives and additional
disclosures about the current status of the payment/performance risk of financial guarantees. FSP
FAS 133-1 and FIN 45-4 are effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008. Accordingly, the Corporation will adopt the provisions
of FSP FAS 133-1 and FIN 45-4 in the first quarter 2009. The Corporation does not expect the
adoption of the provisions of FSP FAS 133-1 and FIN 45-4 to have any material impact on the
Corporations financial condition and 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 securities classification and related values, loans and
allowance for loan losses, retained interests on transfers of financial assets (valuations of
residual interests and mortgage servicing rights), income taxes, goodwill and other
intangible assets, and pension and postretirement benefit obligations. For a summary of the
Corporations previously identified critical accounting policies and estimates, refer to that
particular section in the MD&A included in Popular, Inc.s 2007 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, 2007 (the 2007 Annual Report).
91
Also, refer to Note 1 to the
consolidated financial statements included in the 2007 Annual Report for a summary of the
Corporations significant accounting policies.
Furthermore, commencing in the first quarter of 2008, management identified as critical accounting
policies and estimates the Fair Value Measurement of Financial Instruments as a result of the
adoption of SFAS No. 157 and SFAS No. 159.
As disclosed in the Corporation's 2007 Annual Report, management considers income taxes as a
critical accounting estimate. Given the magnitude of the valuation allowance recorded on
deferred tax assets as of September 30, 2008, this MD&A includes a discussion of the
Corporation's accounting policy with respect to this accounting aspect. Income taxes are
accounted for in accordance with Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes
(SFAS No. 109). The Corporation records income taxes
under the asset and liability method, whereby deferred tax assets and liabilities are recognized
based on the future tax consequences attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax basis, and
attributable to operating loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply in the years in which the temporary
differences are expected to be recovered or paid. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in earnings in the period when the changes are enacted.
SFAS No. 109 requires a reduction of the carrying amounts of deferred tax assets by a valuation
allowance if, based on the available evidence, it is more likely than not (defined by SFAS No.
109 as a likelihood of more than 50 percent) that such assets will not be realized. Accordingly,
the need to establish valuation allowances for deferred tax assets are assessed periodically by the
Corporation based on the SFAS No. 109 more-likely-than-not realization threshold criterion. In the
assessment for a valuation allowance, appropriate consideration is given to all positive and
negative evidence related to the realization of the deferred tax assets. This assessment considers,
among other matters, all sources of taxable income available to realize the deferred tax asset,
including the future reversal of existing temporary differences, the future taxable income
exclusive of reversing temporary differences and carryforwards, taxable income in carryback years
and tax-planning strategies. In making such assessments, significant weight is given to evidence
that can be objectively verified.
The valuation of deferred tax assets requires judgment in assessing the likely future tax
consequences of events that have been recognized in our financial statements or tax returns and
future profitability. Our accounting for deferred tax consequences represents our best estimate of
those future events. Changes in our current estimates, due to unanticipated events or otherwise,
could have a material impact on our financial condition and results of operations.
Fair Value Measurement of Financial Instruments
Effective January 1, 2008, the Corporation is required to determine the fair market values of its
financial instruments based on the fair value hierarchy established in SFAS No. 157, which requires
an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when
measuring fair value.
The Corporation currently measures at fair value on a recurring basis its trading assets,
available-for-sale securities, mortgage servicing rights and residual interests on a recurring
basis. From time to time, the Corporation may be required to record at fair value other assets on a
nonrecurring basis, such as loans held-for-sale, loans held-for-investment and certain other
assets. These nonrecurring fair value adjustments typically result from the application of
lower-of-cost-or-market accounting or write-downs of individual assets. Also, the Corporation
carries certain loans and borrowings at fair value upon the adoption of SFAS No. 159. These loans
and borrowings are part of the assets held-for-sale by PFH as of September 30, 2008 and are
included in the categories of Assets / Liabilities from discontinued operations in the
consolidated statement of condition.
The Corporation categorizes its assets and liabilities measured at fair value under the three-level
hierarchy as required by SFAS No. 157. The classification of assets and liabilities within the
hierarchy is based on whether the inputs to the
valuation methodology used for fair value measurement are observable or unobservable. Observable
inputs reflect the assumptions market participants would use in pricing the asset or liability
based on market data obtained from independent sources. Unobservable inputs reflect the
Corporations estimates about assumptions that market participants would use in pricing the asset
or liability based on the best information available. The hierarchy is broken down into three
levels based on the reliability of inputs as follows:
92
|
|
|
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- Valuations include 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. The fair value is estimated using modeling techniques such as
discounted cash flow analyses. These modeling techniques incorporate assessments regarding
assumptions that market participants would use in pricing the asset or the liability,
including assumptions about the risks inherent in a particular valuation technique, the
effect of a restriction on the sale or use of an asset, and the risk of nonperformance.
Assessments with respect to assumptions that market participants would make are inherently
difficult to determine and use of different assumptions could result in material changes to
these fair value measurements. |
Refer to Note 13 to the consolidated financial statements for information on the Corporations fair
value measurement disclosures required by SFAS No. 157, including assets and liabilities
categorized by the three levels of the hierarchy. As of September 30, 2008, approximately $7.8
billion or 95% out of the $8.2 billion of assets from continuing operations 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. Approximately 5% of the assets
from continuing operations measured at fair value on a recurring basis were classified as Level 3
since their valuation methodology considered significant unobservable inputs. The assets from
discontinued operations measured at fair value on a recurring basis amounting to $0.6 billion were
all classified as Level 3 in the hierarchy. Also, the bond certificates from discontinued
operations measured at fair value were classified as Level 3 in the hierarchy. Additionally, the
Corporation reported $796 million of financial assets that were measured at fair value on a
nonrecurring basis during the nine-month period ended September 30, 2008 that were still held as of
such date and were all classified as Level 3 in the hierarchy.
The estimate of fair value reflects the Corporations judgment regarding appropriate valuation
methods and assumptions. The amount of judgment involved in estimating the fair value of a
financial instrument is affected by a number of factors, such as type of instrument, the liquidity
of the market for the instrument, and the contractual characteristics of the instrument.
In determining fair value, 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.
If listed prices or quotes are not available, the Corporation employs valuation models that
primarily use market-based inputs including yield curves, interest rates, volatilities, and credit
curves, 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 the lack of market liquidity for certain types of loans
and securities, which results in diminished observability of both actual trades and assumptions
that would otherwise be available to value these instruments. When fair values are estimated based
on modeling techniques, such as discounted cash flow models, the Corporation considers 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.
These adjustments include, for example, amounts that reflect counterparty credit
quality, the Corporations creditworthiness, and constraints on liquidity.
93
As of September 30, 2008, the Corporations portfolio of trading and investment securities
available-for-sale amounted to $8.0 billion and represented 98% of the Corporations assets from
continuing operations measured at fair value on a recurring basis. As of September 30, 2008, net
unrealized gains on the trading portfolio approximated $11.8 million, while for securities
available-for-sale the unrealized net losses approximated $23.6 million. Fair values for most of
the Corporations trading and investment securities are classified under the Level 2 category.
Refer to Note 13 to the consolidated financial statements for more detailed information on the
significant security types, hierarchy levels and general description of the particular valuation
methodologies for trading and investment securities. Also, Note 6 provides a detail of the
Corporations investment securities available-for-sale, which represent a significant share of the
financial assets measured at fair value as of September 30, 2008.
The fair value of a loan is impacted by the nature of the asset and the market liquidity and
activity. When available, the Corporation uses observable market data, including recent closed
market transactions, to value loans. When this data is unobservable, the Corporation uses valuation
methodologies using current market interest rate data adjusted for factors such as credit risk.
When appropriate, loans are valued using collateral values as a practical expedient. As previously
indicated, the Corporation measured at fair value $584 million in loans as of September 30, 2008
pursuant to the SFAS No. 159 election which were classified as part of Assets from discontinued
operations. The loans measured at fair value pursuant to SFAS No. 159 were valued internally
utilizing the pricing terms of the sales agreement with Goldman Sachs as the best available fair
value indicator.
Mortgage servicing rights (MSRs), which amounted to $165 million as of September 30, 2008
including $37 million of MSRs from discontinued operations, do not trade in an active market with
readily observable prices. MSRs for the banking operations are priced using a discounted cash flow
model. The valuation model considers servicing fees, portfolio characteristics, prepayments
assumptions, delinquency rates, late charges, other ancillary revenues, cost to service and other
economic factors. Refer to the Critical Accounting Policies / Estimates section of the 2007 Annual
Report for information on the valuation methodologies followed by the Corporation with respect to
MSRs. Disclosure of the key economic assumptions used to measure MSRs and a sensitivity analysis to
adverse changes to these assumptions is included in Note 8 to the consolidated financial
statements. The MSRs related to PFH operations were valued as of September 30, 2008 by
allocating a portion of the estimated fair value of the servicing related assets to be sold to
Goldman Sachs, which was based on the price terms under the agreement. PFHs MSRs are included as
part of Assets from discontinued operations in the consolidated statement of condition.
NET INTEREST INCOME
Net interest income is the Corporations primary source of earnings. Tables B and C present the
different components of the Corporations net interest income from continuing operations, on a
taxable equivalent basis, for the quarter and nine months ended September 30, 2008, compared with
the same periods in 2007, 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 investments in
obligations of the U.S. Government, some U.S. Government agencies and sponsored entities of the
Puerto Rico Commonwealth and its agencies, and assets held by the Corporations international
banking entities, which are tax exempt under Puerto Rico laws. 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 respective quarter and nine-month
period. The taxable equivalent computation considers the interest expense disallowance required by
the Puerto Rico tax law.
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. Interest income for quarter and nine months ended September 30, 2008 included
favorable impacts of $3.5 million and $13.0 million, respectively, consisting principally of
amortization of loan origination costs and fees, amortization of net premiums on loans purchased,
and prepayment penalties and late payment charges. The favorable impact for the quarter and nine
month period ended September 30, 2007 was $6.8 million and
$19.0 million, respectively. The
negative variance in this category was mainly influenced by a lower amount of origination fees,
prepayment penalties and late fees.
94
TABLE B
Analysis of Levels & Yields on a Taxable Equivalent Basis for Continuing Operations
Quarter ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variance |
Average Volume |
|
Average Yields / Costs |
|
|
|
Interest |
|
|
|
|
|
Attributable to |
2008 |
|
2007 |
|
Variance |
|
2008 |
|
2007 |
|
Variance |
|
|
|
2008 |
|
2007 |
|
Variance |
|
Rate |
|
Volume |
|
|
|
|
|
($ in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
$ |
599 |
|
|
$ |
538 |
|
|
$ |
61 |
|
|
|
2.29 |
% |
|
|
5.27 |
% |
|
|
(2.98 |
%) |
|
Money market investments |
|
$ |
3,455 |
|
|
$ |
7,155 |
|
|
$ |
(3,700 |
) |
|
$ |
(4,414 |
) |
|
$ |
714 |
|
|
8,212 |
|
|
|
9,618 |
|
|
|
(1,406 |
) |
|
|
4.99 |
|
|
|
5.21 |
|
|
|
(0.22 |
) |
|
Investment securities |
|
|
102,537 |
|
|
|
125,251 |
|
|
|
(22,714 |
) |
|
|
(5,497 |
) |
|
|
(17,217 |
) |
|
539 |
|
|
|
660 |
|
|
|
(121 |
) |
|
|
7.83 |
|
|
|
6.28 |
|
|
|
1.55 |
|
|
Trading securities |
|
|
10,605 |
|
|
|
10,459 |
|
|
|
146 |
|
|
|
2,271 |
|
|
|
(2,125 |
) |
|
|
|
|
|
|
9,350 |
|
|
|
10,816 |
|
|
|
(1,466 |
) |
|
|
4.98 |
|
|
|
5.28 |
|
|
|
(0.30 |
) |
|
|
|
|
116,597 |
|
|
|
142,865 |
|
|
|
(26,268 |
) |
|
|
(7,640 |
) |
|
|
(18,628 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,936 |
|
|
|
15,085 |
|
|
|
851 |
|
|
|
5.91 |
|
|
|
7.76 |
|
|
|
(1.85 |
) |
|
Commercial * |
|
|
236,661 |
|
|
|
294,923 |
|
|
|
(58,262 |
) |
|
|
(74,132 |
) |
|
|
15,870 |
|
|
1,115 |
|
|
|
1,164 |
|
|
|
(49 |
) |
|
|
7.81 |
|
|
|
7.94 |
|
|
|
(0.13 |
) |
|
Leasing |
|
|
21,772 |
|
|
|
23,107 |
|
|
|
(1,335 |
) |
|
|
(383 |
) |
|
|
(952 |
) |
|
4,607 |
|
|
|
4,829 |
|
|
|
(222 |
) |
|
|
7.09 |
|
|
|
7.40 |
|
|
|
(0.31 |
) |
|
Mortgage |
|
|
81,706 |
|
|
|
89,299 |
|
|
|
(7,593 |
) |
|
|
(3,575 |
) |
|
|
(4,018 |
) |
|
4,785 |
|
|
|
4,572 |
|
|
|
213 |
|
|
|
10.24 |
|
|
|
10.63 |
|
|
|
(0.39 |
) |
|
Consumer |
|
|
122,883 |
|
|
|
122,106 |
|
|
|
777 |
|
|
|
(6,407 |
) |
|
|
7,184 |
|
|
|
|
|
|
|
26,443 |
|
|
|
25,650 |
|
|
|
793 |
|
|
|
6.98 |
|
|
|
8.21 |
|
|
|
(1.23 |
) |
|
|
|
|
463,022 |
|
|
|
529,435 |
|
|
|
(66,413 |
) |
|
|
(84,497 |
) |
|
|
18,084 |
|
|
|
|
|
|
$ |
35,793 |
|
|
$ |
36,466 |
|
|
$ |
(673 |
) |
|
|
6.46 |
% |
|
|
7.34 |
% |
|
|
(0.88 |
%) |
|
Total earning assets |
|
$ |
579,619 |
|
|
$ |
672,300 |
|
|
$ |
(92,681 |
) |
|
$ |
(92,137 |
) |
|
$ |
(544 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,108 |
|
|
$ |
4,579 |
|
|
$ |
529 |
|
|
|
1.77 |
% |
|
|
2.68 |
% |
|
|
(0.91 |
%) |
|
NOW and money market** |
|
$ |
22,771 |
|
|
$ |
30,980 |
|
|
$ |
(8,209 |
) |
|
$ |
(11,666 |
) |
|
$ |
3,457 |
|
|
5,561 |
|
|
|
5,684 |
|
|
|
(123 |
) |
|
|
1.43 |
|
|
|
2.03 |
|
|
|
(0.60 |
) |
|
Savings |
|
|
20,040 |
|
|
|
29,028 |
|
|
|
(8,988 |
) |
|
|
(6,050 |
) |
|
|
(2,938 |
) |
|
12,480 |
|
|
|
11,403 |
|
|
|
1,077 |
|
|
|
3.91 |
|
|
|
4.76 |
|
|
|
(0.85 |
) |
|
Time deposits |
|
|
122,800 |
|
|
|
136,817 |
|
|
|
(14,017 |
) |
|
|
(27,609 |
) |
|
|
13,592 |
|
|
|
|
|
|
|
23,149 |
|
|
|
21,666 |
|
|
|
1,483 |
|
|
|
2.85 |
|
|
|
3.60 |
|
|
|
(0.75 |
) |
|
|
|
|
165,611 |
|
|
|
196,825 |
|
|
|
(31,214 |
) |
|
|
(45,325 |
) |
|
|
14,111 |
|
|
|
|
|
|
|
4,886 |
|
|
|
8,371 |
|
|
|
(3,485 |
) |
|
|
3.03 |
|
|
|
5.16 |
|
|
|
(2.13 |
) |
|
Short-term borrowings |
|
|
37,233 |
|
|
|
108,971 |
|
|
|
(71,738 |
) |
|
|
(38,397 |
) |
|
|
(33,341 |
) |
|
2,235 |
|
|
|
948 |
|
|
|
1,287 |
|
|
|
5.05 |
|
|
|
5.17 |
|
|
|
(0.12 |
) |
|
Medium and long-term debt |
|
|
28,355 |
|
|
|
12,341 |
|
|
|
16,014 |
|
|
|
(327 |
) |
|
|
16,341 |
|
|
|
|
|
|
|
30,270 |
|
|
|
30,985 |
|
|
|
(715 |
) |
|
|
3.04 |
|
|
|
4.07 |
|
|
|
(1.03 |
) |
|
Total
interest bearing liabilities |
|
|
231,199 |
|
|
|
318,137 |
|
|
|
(86,938 |
) |
|
|
(84,049 |
) |
|
|
(2,889 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,106 |
|
|
|
3,980 |
|
|
|
126 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
demand deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,417 |
|
|
|
1,501 |
|
|
|
(84 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other sources of funds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
35,793 |
|
|
$ |
36,466 |
|
|
$ |
(673 |
) |
|
|
2.57 |
% |
|
|
3.46 |
% |
|
|
(0.89 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.89 |
% |
|
|
3.88 |
% |
|
|
0.01 |
% |
|
Net interest margin |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income on a
taxable equivalent basis |
|
|
348,420 |
|
|
|
354,163 |
|
|
|
(5,743 |
) |
|
$ |
(8,088 |
) |
|
$ |
2,345 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.42 |
% |
|
|
3.27 |
% |
|
|
0.15 |
% |
|
Net interest spread |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable equivalent adjustment |
|
|
24,138 |
|
|
|
22,517 |
|
|
|
1,621 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
324,282 |
|
|
$ |
331,646 |
|
|
$ |
(7,364 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. |
As shown in Table B, the decrease in average earning assets was mainly due to the Corporations
strategy of not reinvesting maturities of low yielding investments. Increases in both commercial
loans and consumer loans partially offset the reduction in the investments category. Construction
loans accounted for 54% of the increase in the commercial loans category. The performance of these
loans will continue to challenge the Corporation in the current economic environment; however the
performance of these loans is being closely monitored. The increase in the consumer loans category
was mainly due to a higher balance of home equity lines of credit (HELOCs) from the E-LOAN
subsidiary. E-LOAN discontinued the origination of these loans earlier this year as part of its
restructuring plan. The Corporations funding mix was also modified with a portion of borrowings
being replaced by brokered
95
certificates of deposits and the Corporation increasing its long-term
borrowings position in both BPPR and BPNA. Refer to the Financial Condition section of this MD&A for further discussion of variance
explanations.
The decrease in net interest income was mainly the result of the following factors:
|
|
|
The Federal Reserve (FED) lowered the federal funds target rate by 275 basis points
from September 30, 2007 to September 30, 2008. The reduction in market rates impacted the
yield of several of the Corporations earning assets during that period. These assets
include; commercial and construction loans of which 63% have floating or adjustable rates;
floating rate collateralized mortgage obligations, and HELOCs, as well as the origination
of loans in a low interest rate environment. |
|
|
|
|
Liquidity concerns during the second half of 2007 prompted the Corporation to enter
into certain financing agreements which limited the expected benefit of reduced market
rates in the overall cost of funds. The increase of $1.3 billion
in the quarterly average balance of brokered certificates
of deposit, which carry a higher rate than short-term borrowings, impacted negatively the
results for the third quarter of 2008. |
|
|
|
|
The previously mentioned reduction in the yield of floating rate HELOCs as well as
reductions made during 2007 in the uncollectible interest reserve for credit cards, which
generated a positive impact in income during the third quarter of 2007, contributed to the
reduction in yield of the consumer loan portfolio. |
Favorable items impacting net interest income include a lower cost for borrowings and interest
bearing deposits. The decreases in market rates impacted the variance in addition to reductions in
the rates paid for certain non-maturity deposits.
As shown in Table C, net interest income on a taxable equivalent basis for the nine month period
ended September 30, 2008 increased mainly due to a change in the mix of average earning assets. Low
yielding investments matured while the loan portfolio continued its growth. The dynamics of this
movement left earning assets in line with the third quarter of 2007 while the loan portfolio yield
is over 200 basis points higher than the investments.
96
TABLE C
Analysis of Levels & Yields on a Taxable Equivalent Basis for Continuing Operations
Nine-month period ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variance |
Average Volume |
|
Average Yields / Costs |
|
|
|
Interest |
|
|
|
|
|
Attributable to |
2008 |
|
2007 |
|
Variance |
|
2008 |
|
2007 |
|
Variance |
|
|
|
2008 |
|
2007 |
|
Variance |
|
Rate |
|
Volume |
|
|
|
|
|
($ in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
$ |
651 |
|
|
$ |
450 |
|
|
$ |
201 |
|
|
|
2.97 |
% |
|
|
5.38 |
% |
|
|
(2.41 |
%) |
|
Money market investments |
|
$ |
14,459 |
|
|
$ |
18,104 |
|
|
$ |
(3,645 |
) |
|
$ |
(9,992 |
) |
|
$ |
6,347 |
|
|
8,254 |
|
|
|
9,953 |
|
|
|
(1,699 |
) |
|
|
5.07 |
|
|
|
5.14 |
|
|
|
(0.07 |
) |
|
Investment securities |
|
|
313,800 |
|
|
|
383,929 |
|
|
|
(70,129 |
) |
|
|
(5,559 |
) |
|
|
(64,570 |
) |
|
696 |
|
|
|
621 |
|
|
|
75 |
|
|
|
7.35 |
|
|
|
6.10 |
|
|
|
1.25 |
|
|
Trading securities |
|
|
38,295 |
|
|
|
28,324 |
|
|
|
9,971 |
|
|
|
6,305 |
|
|
|
3,666 |
|
|
|
|
|
|
|
9,601 |
|
|
|
11,024 |
|
|
|
(1,423 |
) |
|
|
5.09 |
|
|
|
5.21 |
|
|
|
(0.12 |
) |
|
|
|
|
366,554 |
|
|
|
430,357 |
|
|
|
(63,803 |
) |
|
|
(9,246 |
) |
|
|
(54,557 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,714 |
|
|
|
14,795 |
|
|
|
919 |
|
|
|
6.25 |
|
|
|
7.79 |
|
|
|
(1.54 |
) |
|
Commercial * |
|
|
734,934 |
|
|
|
861,588 |
|
|
|
(126,654 |
) |
|
|
(175,918 |
) |
|
|
49,264 |
|
|
1,115 |
|
|
|
1,185 |
|
|
|
(70 |
) |
|
|
7.97 |
|
|
|
7.88 |
|
|
|
0.09 |
|
|
Leasing |
|
|
66,672 |
|
|
|
70,055 |
|
|
|
(3,383 |
) |
|
|
780 |
|
|
|
(4,163 |
) |
|
4,769 |
|
|
|
4,698 |
|
|
|
71 |
|
|
|
7.23 |
|
|
|
7.31 |
|
|
|
(0.08 |
) |
|
Mortgage |
|
|
258,495 |
|
|
|
257,448 |
|
|
|
1,047 |
|
|
|
(2,813 |
) |
|
|
3,860 |
|
|
4,916 |
|
|
|
4,432 |
|
|
|
484 |
|
|
|
10.23 |
|
|
|
10.52 |
|
|
|
(0.29 |
) |
|
Consumer |
|
|
376,719 |
|
|
|
349,092 |
|
|
|
27,627 |
|
|
|
(12,640 |
) |
|
|
40,267 |
|
|
|
|
|
|
|
26,514 |
|
|
|
25,110 |
|
|
|
1,404 |
|
|
|
7.23 |
|
|
|
8.18 |
|
|
|
(0.95 |
) |
|
|
|
|
1,436,820 |
|
|
|
1,538,183 |
|
|
|
(101,363 |
) |
|
|
(190,591 |
) |
|
|
89,228 |
|
|
|
|
|
|
$ |
36,115 |
|
|
$ |
36,134 |
|
|
$ |
(19 |
) |
|
|
6.67 |
% |
|
|
7.28 |
% |
|
|
(0.61 |
%) |
|
Total earning assets |
|
$ |
1,803,374 |
|
|
$ |
1,968,540 |
|
|
$ |
(165,166 |
) |
|
$ |
(199,837 |
) |
|
$ |
34,671 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,996 |
|
|
$ |
4,383 |
|
|
$ |
613 |
|
|
|
1.92 |
% |
|
|
2.61 |
% |
|
|
(0.69 |
%) |
|
NOW and money market ** |
|
$ |
71,919 |
|
|
$ |
85,622 |
|
|
$ |
(13,703 |
) |
|
$ |
(25,459 |
) |
|
$ |
11,756 |
|
|
5,606 |
|
|
|
5,741 |
|
|
|
(135 |
) |
|
|
1.56 |
|
|
|
1.99 |
|
|
|
(0.43 |
) |
|
Savings |
|
|
65,295 |
|
|
|
85,481 |
|
|
|
(20,186 |
) |
|
|
(13,049 |
) |
|
|
(7,137 |
) |
|
12,529 |
|
|
|
10,837 |
|
|
|
1,692 |
|
|
|
4.17 |
|
|
|
4.71 |
|
|
|
(0.54 |
) |
|
Time deposits |
|
|
391,382 |
|
|
|
381,554 |
|
|
|
9,828 |
|
|
|
(54,022 |
) |
|
|
63,850 |
|
|
|
|
|
|
|
23,131 |
|
|
|
20,961 |
|
|
|
2,170 |
|
|
|
3.05 |
|
|
|
3.53 |
|
|
|
(0.48 |
) |
|
|
|
|
528,596 |
|
|
|
552,657 |
|
|
|
(24,061 |
) |
|
|
(92,530 |
) |
|
|
68,469 |
|
|
|
|
|
|
|
5,549 |
|
|
|
8,804 |
|
|
|
(3,255 |
) |
|
|
3.32 |
|
|
|
5.17 |
|
|
|
(1.85 |
) |
|
Short-term borrowings |
|
|
137,824 |
|
|
|
340,162 |
|
|
|
(202,338 |
) |
|
|
(108,149 |
) |
|
|
(94,189 |
) |
|
1,971 |
|
|
|
946 |
|
|
|
1,025 |
|
|
|
5.14 |
|
|
|
5.60 |
|
|
|
(0.46 |
) |
|
Medium and long-term debt |
|
|
75,823 |
|
|
|
39,667 |
|
|
|
36,156 |
|
|
|
(3,511 |
) |
|
|
39,667 |
|
|
|
|
|
|
|
30,651 |
|
|
|
30,711 |
|
|
|
(60 |
) |
|
|
3.23 |
|
|
|
4.06 |
|
|
|
(0.83 |
) |
|
Total interest bearing liabilities |
|
|
742,243 |
|
|
|
932,486 |
|
|
|
(190,243 |
) |
|
|
(204,190 |
) |
|
|
13,947 |
|
|
4,137 |
|
|
|
4,012 |
|
|
|
125 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
bearing demand deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,327 |
|
|
|
1,411 |
|
|
|
(84 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other sources of funds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
36,115 |
|
|
$ |
36,134 |
|
|
$ |
(19 |
) |
|
|
2.75 |
% |
|
|
3.45 |
% |
|
|
(0.70 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.92 |
% |
|
|
3.83 |
% |
|
|
0.09 |
% |
|
Net interest margin |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income on a
taxable equivalent basis |
|
|
1,061,131 |
|
|
|
1,036,054 |
|
|
|
25,077 |
|
|
$ |
4,353 |
|
|
$ |
20,724 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.44 |
% |
|
|
3.22 |
% |
|
|
0.22 |
% |
|
Net interest spread |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable equivalent adjustment |
|
|
70,793 |
|
|
|
67,712 |
|
|
|
3,081 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
990,338 |
|
|
$ |
968,342 |
|
|
$ |
21,996 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. |
PROVISION FOR LOAN LOSSES
The provision for loan losses in the continuing operations totaled $252.2 million, or 148% of net
charge-offs, for the quarter ended September 30, 2008, compared with $86.3 million or 136%,
respectively, for the same quarter in 2007. The provision for loan losses for the quarter ended
September 30, 2008, when compared with the same quarter in 2007, reflects higher net charge-offs by
$107.1 million, mainly in construction loans by $53.9 million, consumer loans by $27.3 million,
commercial loans by $18.0 million, and mortgage loans by $7.8 million. Provision and net
charge-offs information for prior periods was retrospectively adjusted to exclude discontinued
operations from continuing operations for comparative purposes.
97
The current state of the economy and uncertainty in the private and public sectors has had an
adverse effect on the credit quality of the Corporations loan portfolios. The economic slowdown
could cause those adverse effects to continue, as delinquency rates may increase in the short-term,
until more sustainable economic growth resumes and property values stabilize.
The higher level of provision for the quarter ended September 30, 2008 was mainly attributable to
the continuing deterioration in the commercial and construction loan portfolios due to current
economic conditions and the slowdown in the United States housing sector. The allowance for loan
losses for commercial and construction credits has increased, particularly the specific reserves
for loans considered impaired. During the quarter ended September 30, 2008, the Corporation
recorded $61.9 million in specific reserves for loans classified as impaired under SFAS No. 114.
Further information on net charge-offs and non-performing assets is provided in the Credit Risk
Management and Loan Quality section of this MD&A.
NON-INTEREST INCOME
Non-interest income from continuing operations totaled $187.9 million for the quarter ended
September 30, 2008, an increase of 6%, compared with the same quarter in 2007. For the nine-month
period ended September 30, 2008, non-interest income from continuing operations totaled $688.5
million, an increase of 1% when compared to the same period of the previous year.
Refer to Table D for a breakdown of non-interest income by major categories for the quarters and
nine months ended September 30, 2008 and 2007.
TABLE D
Non-Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended September 30, |
|
Nine months ended September 30, |
(In thousands) |
|
2008 |
|
2007 |
|
$ Variance |
|
2008 |
|
2007 |
|
$ Variance |
|
Service charges on deposit accounts |
|
$ |
52,433 |
|
|
$ |
49,704 |
|
|
$ |
2,729 |
|
|
$ |
155,319 |
|
|
$ |
146,567 |
|
|
$ |
8,752 |
|
|
Other service fees: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit card fees and discounts |
|
|
27,138 |
|
|
|
25,975 |
|
|
|
1,163 |
|
|
|
81,664 |
|
|
|
74,498 |
|
|
|
7,166 |
|
Debit card fees |
|
|
28,170 |
|
|
|
16,228 |
|
|
|
11,942 |
|
|
|
79,880 |
|
|
|
49,184 |
|
|
|
30,696 |
|
Processing fees |
|
|
13,044 |
|
|
|
11,674 |
|
|
|
1,370 |
|
|
|
38,587 |
|
|
|
35,463 |
|
|
|
3,124 |
|
Insurance fees |
|
|
12,378 |
|
|
|
14,410 |
|
|
|
(2,032 |
) |
|
|
38,254 |
|
|
|
40,624 |
|
|
|
(2,370 |
) |
Sale and administration of investment products |
|
|
6,890 |
|
|
|
8,043 |
|
|
|
(1,153 |
) |
|
|
25,966 |
|
|
|
22,614 |
|
|
|
3,352 |
|
Mortgage servicing fees, net of fair value
adjustments |
|
|
(1,407 |
) |
|
|
4,706 |
|
|
|
(6,113 |
) |
|
|
13,809 |
|
|
|
16,257 |
|
|
|
(2,448 |
) |
Trust fees |
|
|
2,906 |
|
|
|
2,880 |
|
|
|
26 |
|
|
|
9,038 |
|
|
|
7,806 |
|
|
|
1,232 |
|
Other fees |
|
|
6,183 |
|
|
|
5,947 |
|
|
|
236 |
|
|
|
19,451 |
|
|
|
19,266 |
|
|
|
185 |
|
|
Total other service fees |
|
|
95,302 |
|
|
|
89,863 |
|
|
|
5,439 |
|
|
|
306,649 |
|
|
|
265,712 |
|
|
|
40,937 |
|
|
Net (loss) gain on sale and valuation adjustments
of investment securities |
|
|
(9,132 |
) |
|
|
(776 |
) |
|
|
(8,356 |
) |
|
|
69,430 |
|
|
|
112,842 |
|
|
|
(43,412 |
) |
Trading account profit |
|
|
6,669 |
|
|
|
9,239 |
|
|
|
(2,570 |
) |
|
|
38,547 |
|
|
|
29,765 |
|
|
|
8,782 |
|
Gain on sale of loans and valuation adjustments
on loans held-for-sale |
|
|
6,522 |
|
|
|
6,975 |
|
|
|
(453 |
) |
|
|
25,696 |
|
|
|
40,224 |
|
|
|
(14,528 |
) |
Other operating income |
|
|
36,134 |
|
|
|
21,920 |
|
|
|
14,214 |
|
|
|
92,836 |
|
|
|
87,968 |
|
|
|
4,868 |
|
|
Total non-interest income |
|
$ |
187,928 |
|
|
$ |
176,925 |
|
|
$ |
11,003 |
|
|
$ |
688,477 |
|
|
$ |
683,078 |
|
|
$ |
5,399 |
|
|
Major variance explanations in non-interest income for the quarter ended September 30, 2008, when
compared to the same quarter of the previous year, were as follows:
|
|
|
An increase in other operating income mostly related to $21.1 million in gains on the
sale of a New York real estate property by the U.S. banking subsidiary during this quarter,
which was partially offset by lower referral and escrow closing services income from E-LOAN
due to the downsizing of its operations in 2008 and from lower revenues derived from
investments accounted for under the equity method; |
|
|
|
|
Other service fees for the quarter ended September 30, 2008, increased by 6% when
compared to the same |
98
|
|
|
quarter of the previous year. A detail of other service fees by
category is shown in the Table D. There were higher debit card fees as a result of higher
revenues from merchants due in part to a change in the pricing structure for transactions
processed from a fixed charge per transaction to a variable rate based on the amount of the
transaction, as well as higher surcharging income from the use of Populars automated
teller machine network, which were partially offset by unfavorable changes in the fair
value of the servicing assets during this quarter; |
These variances were partially offset by:
|
|
|
Higher net loss on sale and valuation adjustments of investment securities, which
consisted of the following: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended September 30, |
|
Nine months ended September 30, |
(In thousands) |
|
2008 |
|
2007 |
|
$ Variance |
|
2008 |
|
2007 |
|
$ Variance |
|
Net gain (loss) on sale of investment securities |
|
$ |
15 |
|
|
$ |
(776 |
) |
|
$ |
791 |
|
|
$ |
78,577 |
|
|
$ |
120,443 |
|
|
$ |
(41,866 |
) |
Valuation adjustments of investment securities |
|
|
(9,147 |
) |
|
|
|
|
|
|
(9,147 |
) |
|
|
(9,147 |
) |
|
|
(7,601 |
) |
|
|
(1,546 |
) |
|
Total |
|
$ |
(9,132 |
) |
|
$ |
(776 |
) |
|
$ |
(8,356 |
) |
|
$ |
69,430 |
|
|
$ |
112,842 |
|
|
$ |
(43,412 |
) |
|
During the quarter ended September 30, 2008, the Corporation recorded other-than-temporary
impairments on investment securities held by the corporate group of $9.1 million, principally
associated to equity investments in a U.S. financial institution.
Major variance explanations in non-interest income for the nine months ended September 30, 2008,
when compared to the same period in 2007, were as follows:
|
|
|
Other service fees for the nine months ended September 30, 2008, increased by 15% when
compared to the same period of the previous year. Refer to Table D for a detail of other
service fees by major categories. Debit card fees were the principal driver of the increase
in other service fees due to similar factors described in the quarterly results. Also,
credit card fees increased due to higher merchant fees and credit card interchange fees due
to higher merchant sales volume; |
|
|
|
|
Trading account profits increased for the nine-month period ended September 30, 2008,
which was principally related to a gross gain of approximately $8.8 million on the sale of
approximately $232 million in principal balance of residential mortgage loans originated in
Puerto Rico from BPPRs portfolio, which were securitized into Fannie Mae mortgage-backed
securities and sold in the secondary markets in the second quarter of 2008. |
|
|
|
|
Service charges on deposit accounts also increased primarily in BPPR due to higher
account analysis fees in commercial accounts which price structure varies according to
transaction volume, compensating deposit balances and earnings credit given to the customer
which also varies with interest rates; |
|
|
|
|
Other operating income increased by $4.9 million. During the nine months ended September
30, 2008, the Corporation realized the $21.1 million gain on the sale of the New York real
estate property and also a $12.8 million gain on the sale of six retail bank branches of
BPNA in Houston, Texas to Prosperity Bank in January 2008. The impact of these two items
was offset in part by lower revenues derived from investments accounted for under the
equity method and lower other referral and escrow closing services income from E-LOAN due
to the downsizing of its operations, among the principal factors. |
The variances in those categories for the nine-month period were partially offset by:
|
|
|
Lower net gain on sale and valuation adjustments of investment securities by $43.4
million. The decrease in the net gain on sale of investment securities for the nine-month
period ended September 30, 2008, compared with the same period in 2007, was mostly related
to $118.7 million in realized gains on the sale of the Corporations interest in
Telecomunicaciones de Puerto Rico, Inc. (TELPRI) during the first quarter of 2007. This
was partially offset by $49.3 million in realized gains due to the redemption by Visa of
shares of common stock held by the Corporation during the first quarter of 2008 and by
$28.3 million in capital gains from sales of $2.4 billion in U.S. agency securities during
the second quarter of 2008. The proceeds from the sale of securities in the second quarter
of 2008 were reinvested primarily in U.S. agency securities, and to a
lesser extent in mortgage-backed securities with a longer average duration. |
99
|
|
|
Lower gain on sales of loans and unfavorable valuation adjustments on loans
held-for-sale, which are broken down as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended September 30, |
|
Nine months ended September 30, |
(In thousands) |
|
2008 |
|
2007 |
|
$ Variance |
|
2008 |
|
2007 |
|
$ Variance |
|
Gain on sales of loans |
|
$ |
6,877 |
|
|
$ |
10,227 |
|
|
$ |
(3,350 |
) |
|
$ |
25,923 |
|
|
$ |
46,161 |
|
|
$ |
(20,238 |
) |
Lower of cost or market valuation adjustment on
loans held-for-sale |
|
|
(355 |
) |
|
|
(3,252 |
) |
|
|
2,897 |
|
|
|
(227 |
) |
|
|
(5,937 |
) |
|
|
5,710 |
|
|
Total |
|
$ |
6,522 |
|
|
$ |
6,975 |
|
|
$ |
(453 |
) |
|
$ |
25,696 |
|
|
$ |
40,224 |
|
|
$ |
(14,528 |
) |
|
The decrease in gains on sales of loans for the nine months ended September 30, 2008, when
compared to the same period of the previous year, was primarily related to lower origination
volumes and lower yields at E-LOAN due to the weakness in the U.S. mainland mortgage and housing
market and to the downsizing of E-LOANs operations, partially offset by higher gain on the
sales of Small Business Administration (SBA) loans by the U.S. banking subsidiary and higher
gain on the sales of leases by the U.S. leasing subsidiary.
OPERATING EXPENSES
Refer to Table E for a breakdown of operating expenses of the continuing operations by major
categories.
TABLE E
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended September 30, |
|
Nine months ended September 30, |
(In thousands) |
|
2008 |
|
2007 |
|
$ Variance |
|
2008 |
|
2007 |
|
$ Variance |
|
Personnel costs |
|
$ |
148,230 |
|
|
$ |
145,273 |
|
|
$ |
2,957 |
|
|
$ |
459,515 |
|
|
$ |
457,774 |
|
|
$ |
1,741 |
|
Net occupancy expenses |
|
|
26,510 |
|
|
|
27,083 |
|
|
|
(573 |
) |
|
|
81,218 |
|
|
|
76,185 |
|
|
|
5,033 |
|
Equipment expenses |
|
|
26,305 |
|
|
|
28,324 |
|
|
|
(2,019 |
) |
|
|
84,312 |
|
|
|
87,259 |
|
|
|
(2,947 |
) |
Other taxes |
|
|
13,301 |
|
|
|
12,766 |
|
|
|
535 |
|
|
|
39,905 |
|
|
|
35,644 |
|
|
|
4,261 |
|
Professional fees |
|
|
31,780 |
|
|
|
29,498 |
|
|
|
2,282 |
|
|
|
88,964 |
|
|
|
87,689 |
|
|
|
1,275 |
|
Communications |
|
|
12,574 |
|
|
|
15,115 |
|
|
|
(2,541 |
) |
|
|
38,137 |
|
|
|
44,669 |
|
|
|
(6,532 |
) |
Business promotion |
|
|
16,216 |
|
|
|
27,479 |
|
|
|
(11,263 |
) |
|
|
51,064 |
|
|
|
83,410 |
|
|
|
(32,346 |
) |
Printing and supplies |
|
|
3,269 |
|
|
|
3,760 |
|
|
|
(491 |
) |
|
|
10,763 |
|
|
|
11,536 |
|
|
|
(773 |
) |
Other operating expenses |
|
|
40,764 |
|
|
|
27,429 |
|
|
|
13,335 |
|
|
|
113,722 |
|
|
|
81,176 |
|
|
|
32,546 |
|
Amortization
of intangibles |
|
|
3,966 |
|
|
|
2,234 |
|
|
|
1,732 |
|
|
|
8,948 |
|
|
|
8,030 |
|
|
|
918 |
|
|
Total |
|
$ |
322,915 |
|
|
$ |
318,961 |
|
|
$ |
3,954 |
|
|
$ |
976,548 |
|
|
$ |
973,372 |
|
|
$ |
3,176 |
|
|
Personnel expenses rose by 2%, compared with the same quarter of the previous year. The increase in
personnel costs is primarily a result of annual salary revisions and lower deferred salaries as a
result of lower volume of loan originations. Excluding PFH, FTEs were 10,744 as of September 30,
2008, a decrease of 503 from the same date in 2007. This reduction was mainly due to a reduction in
E-LOANs headcount as a result of the E-LOAN Restructuring Plan by 506 full-time equivalent
employees (FTEs), when compared to September 30, 2007.
Professional fees for the quarter ended September 30, 2008 increased when compared to the same
quarter of 2007 as a result of consulting and advisory services associated to the U.S. sale
transactions and valuation services. This was partially offset by lower loan origination costs,
such as appraisals and title recording fees, at E-LOAN, and temporary workforce services. For the
quarter ended September 30, 2008, other operating expenses increased when compared to the same
quarter of the previous year mainly due to higher FDIC insurance assessments, credit card
interchange and processing costs, repossessed property expenses, and losses on disposition of
assets, among others. There was also a higher amortization of intangibles for the quarter ended
September 30, 2008 mostly due to fair value revisions to core deposit intangibles on the
acquisition of the Citibank retail branches in Puerto Rico based on final analyses completed this
quarter.
Partially offsetting these increases in quarterly results were reductions in business promotion,
communication expenses, and equipment expenses. The reduction in business promotion for the quarter
resulted principally from the downsizing of E-LOANs operations and from cost control measures on
marketing expenditures. The decrease in
communication expenses for the quarter ended September 2008, compared with the same quarter in
2007, was
100
mainly due to lower telephone expenses, including savings derived from changes in
telephone communication technology. Equipment expenses also decreased primarily associated with
E-LOAN.
For the nine-month period ended September 30, 2008, operating expenses for the continuing
operations increased less than 1% compared with the same period of the previous year. Similar
factors as described for the quarterly results principally impacted the variances. In addition, net
occupancy expenses increased by 7% for the nine-month period ended September 30, 2008, when
compared to the same period of the previous year mainly due to higher electricity and rental
expenses. Increases in other taxes for the nine months ended September 30, 2008, when compared to
the same period of 2007, resulted from higher personal property taxes resulting from tax settlement
from previous years in certain Puerto Rico municipalities.
INCOME TAXES
Income tax expense from continuing operations amounted to $148.3 million for the quarter ended
September 30, 2008, compared with income tax expense of $23.1 million for the same quarter of 2007.
As previously indicated in the Overview section of this MD&A, during the quarter ended September
30, 2008, the Corporation recorded a valuation allowance on deferred tax assets of the U.S.
mainland operations of $360.4 million. The recording of this valuation increased income tax expense
by $189.2 million on the continuing operations and $171.2 million on the discontinued operations
for the quarter and year-to-date periods ended September 30, 2008. The deferred tax assets and full
valuation allowance pertains to the continuing operations for statement of condition purposes.
The components of the income tax expense (benefit) for the continuing operations for the quarter
ended September 30, 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Puerto Rico and other |
|
|
|
|
|
|
jurisdictions |
|
U.S. jurisdiction |
|
Consolidated |
|
|
|
|
|
|
% of pre-tax |
|
|
|
|
|
% of pre-tax |
|
|
|
|
|
% of pre-tax |
(In thousands) |
|
Amount |
|
income |
|
Amount |
|
loss |
|
Amount |
|
loss |
|
Computed income tax at
statutory rates |
|
$ |
13,356 |
|
|
|
39 |
% |
|
$ |
(33,989 |
) |
|
|
35 |
% |
|
$ |
(20,633 |
) |
|
|
33 |
% |
Benefits of net tax exempt
interest income |
|
|
(14,811 |
) |
|
|
(43 |
) |
|
|
(929 |
) |
|
|
1 |
|
|
|
(15,740 |
) |
|
|
25 |
|
Effect of income subject to
preferential tax rate |
|
|
66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66 |
|
|
|
|
|
Difference in tax rates due to
multiple jurisdictions |
|
|
1,456 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
1,456 |
|
|
|
(2 |
) |
Deferred tax valuation allowance |
|
|
|
|
|
|
|
|
|
|
189,232 |
|
|
|
(195 |
) |
|
|
189,232 |
|
|
|
(301 |
) |
|
State taxes and others |
|
|
(929 |
) |
|
|
(3 |
) |
|
|
(5,144 |
) |
|
|
5 |
|
|
|
(6,073 |
) |
|
|
10 |
|
|
Income tax expense (benefit) |
|
$ |
(862 |
) |
|
|
(3 |
%) |
|
$ |
149,170 |
|
|
|
(154 |
%) |
|
$ |
148,308 |
|
|
|
(235 |
%) |
|
Income tax expense for the continuing operations amounted to $152.5 million for the nine-month
period ended September 30, 2008, compared with $105.6 million for the same period in 2007. The
increase in income tax expense was primarily due to the impact on the recording of the valuation
allowance previously indicated, partially offset by lower pre-tax earnings, and higher exempt
interest income net of disallowance of expenses attributed to such exempt income.
The Corporations deferred tax assets as of September 30, 2008 amounted to $1.0 billion ($663
million, net of the valuation allowance) compared to $520 million as of December 31, 2007. Note
21 to the consolidated financial statements provides the composition of the net deferred tax assets
as of such dates. Of the deferred tax assets as of September 30, 2008, $322 million are related to
the Corporations U.S. mainland operations (net of the valuation
allowance) and $341 million pertain to the Puerto Rico
operations. Of the amount related to the U.S. operations, without considering the valuation
allowance, $358 million is attributable to net operating losses of such operations, which had an
expiration term of up to 20 years. The Corporation assessed the realization of the deferred tax
assets by weighting all available negative and positive evidence, including future profitability,
taxable income on carryback years and tax planning strategies. This evaluation was made in
accordance with SFAS No. 109 Accounting for Income Taxes (SFAS No. 109) which
requires the recognition of a valuation allowance for the deferred tax assets if it is more likely
than not (a
101
likelihood of more than 50%) that some portion or all of the deferred tax asset will not
be realized. The realization of the deferred tax assets is dependent upon the generation of enough
taxable income before the end of the expiration period.
The Corporations U.S.
mainland operations are in a cumulative loss position for the three-year
period ended September 30, 2008. For purposes of assessing the
realizability of the deferred tax
assets in the U.S. mainland, this cumulative taxable loss position is considered significant negative evidence
and has caused us to conclude that the Corporation will not be able to fully realize the deferred
tax assets in the future. However, management has also concluded that
$322 million of the U.S. deferred
tax assets will be realized. In making this analysis, management evaluated the factors that
contributed to these losses in order to assess whether these factors were temporary or indicative
of a permanent decline in the earnings of the U.S. mainland operations. Based on the analysis
performed, management determined that the cumulative loss position was caused primarily by a
significant increase in credit losses in two of its main businesses due to the unprecedented current
credit market conditions, losses related to the PFH discontinued business, and restructuring
charges. In assessing the realizability of the deferred tax assets, management has considered all
four sources of taxable income mentioned in SFAS No. 109 and described in the Critical
Accounting Policies / Estimates section of this MD&A, including its forecast of future taxable
income, which includes assumptions about the unprecedented deterioration in the economy and in
credit quality. The forecast includes cost reductions initiated in connection with the
reorganization of the U.S. mainland operations and two tax-planning strategies. The two strategies
considered in managements analysis include reducing the level of interest expense in the U.S.
operations by transferring such debt to the Puerto Rico operations and the transfer of a profitable
line of business to the U.S. mainland operations. Based on the analysis
as of September 30, 2008, and the weight of the evidence available, management determined that
the Corporations U.S. operations will not generate sufficient taxable income in the foreseeable
future to fully realize the deferred tax assets. Accordingly, management concluded that it is more
likely than not that the Corporation will not be able to fully realize the benefit of these deferred
tax assets and thus, a valuation allowance for $360.4 million was recorded during the third
quarter of 2008. Management will reassess the realizability of the deferred tax assets during the
fourth quarter of the year. If future events differ from managements September 30, 2008
assessment, an additional or full valuation allowance may need to be established which would
likely have a material adverse effect on the Corporation's results of operations, financial
condition and capital position.
Refer to Note 21 to the consolidated
financial statements for further information on the Corporations income taxes. Also, you can
refer to Item 1A. Risk Factors of this Form 10-Q for additional information.
REPORTABLE SEGMENT RESULTS
The Corporations reportable segments for managerial reporting purposes consist of Banco Popular de
Puerto Rico, EVERTEC and Banco Popular North America. These reportable segments pertain only to the
continuing operations of Popular, Inc. As previously indicated, the operations of PFH that were
considered a reportable segment were discontinued in the third quarter of 2008. Also, 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 25 to the consolidated financial
statements. Financial information for interim periods prior to 2008 was restated to conform to the
2008 presentation.
The Corporate group had a net loss of $138.0 million in the third quarter of 2008, compared with a
net loss of $7.9 million in the same quarter of 2007. The
Corporate group had net loss of $157.1
million for the nine months ended September 30, 2008, compared with net income of $66.4 million for
the same period in 2007. The Corporate group's financial results for
the quarter and nine months ended September 30, 2008 included an
unfavorable impact to income taxes due to an allocation (for segment
reporting purposes) of $116.3 million of the $360.4 million valuation
allowance on the deferred tax assets of the U.S. mainland operations
to Popular North America (PNA), holding company of the
U.S. operations. PNA files a consolidated tax return. During the nine months ended September 30, 2007, the Corporate group
realized net gains on the sale and valuation adjustment of investment securities approximating
$107.3 million, mainly due to gains on the sale of the Corporations interest in TELPRI during the
first quarter of 2007.
102
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 $35.4 million for the
quarter ended September 30, 2008, a decrease of $44.8 million, or 56%, when compared with the same
quarter in the previous year, primarily associated to an increase in the provision for loan losses.
The main factors that contributed to the variance in results for the quarter ended September 30,
2008, when compared to the third quarter of 2007, included:
|
|
|
lower net interest income by $3.4 million, or 1%, primarily due to a lower rate
environment in the latter part of 2007 and 2008. The lower market rates had a negative
impact in the average yield of commercial and construction loans, as well as on the yield
of floating rate collateralized mortgage obligations. In addition, the Corporations strategy
of not renewing low yielding investments contributed to a lower average balance in the
investments category. Furthermore, the acquisition of brokered certificates of deposit
during the latter part of 2007 prevented the Corporations cost of funds from fully
benefiting from the decreases in market rates. These unfavorable variances were partially
offset by a reduction in the cost of non-maturity deposits as well as a lower cost of
short-term borrowings. |
|
|
|
|
higher provision for loan losses by $62.8 million, or 95%, primarily associated with the
current economic conditions, including a recessionary cycle in Puerto Rico and
deteriorating credit quality trends in the commercial and construction loan portfolios.
During the quarter ended September 30, 2008, the Corporation recorded $32.7 million in
specific reserves for loans classified as impaired under SFAS No. 114 in the Puerto Rico
operations. The ratio of allowance for loan losses to loans held-in-portfolio for the Banco
Popular de Puerto Rico reportable segment was 3.00% as of September 30, 2008, compared with
2.22% as of September 30, 2007. The provision for loan losses represented 124% of net
charge-offs for the third quarter of 2008, compared with 136% of net charge-offs in the
same period of 2007. The annualized net charge-offs to average loans held-in-portfolio for
the Banco Popular de Puerto Rico operations was 2.60% for the quarter ended September 30,
2008, compared with 1.23% in the same quarter of the previous year. |
|
|
|
|
higher non-interest income by $3.8 million, or 3%, mainly due to a favorable variance in
the caption of other service fees during the third quarter of 2008, principally related to
increase fee income from debit cards and credit cards; partially offset by unfavorable
adjustments in the value of servicing rights primarily due to higher prepayment speed
assumption. Also, there were higher service charges on deposit accounts by $2.8 million;
partially offset by lower trading profits by $2.6 million, principally related to the
mortgage banking operations. |
|
|
|
|
higher operating expenses by $14.2 million, or 8%, primarily associated with higher
credit card interchange and processing costs, personnel costs, professional fees and
amortization of intangibles, among others. |
|
|
|
|
lower income taxes by $31.8 million, due to an income tax benefit of $2.5 million in the
third quarter of 2008 compared to an income tax expense of $29.2 million in the same
quarter of the previous year. The variance was due to lower income before taxes and higher
exempt interest income net of disallowance of expenses related to the exempt income. |
Net income for the nine months ended September 30, 2008 totaled $226.7 million, a decrease of $20.4
million, or 8%, compared with the same period in the previous year. These results reflected:
|
|
|
higher net interest income by $15.2 million, or 2%; |
|
|
|
|
higher provision for loan losses by $162.6 million, or 92%; |
|
|
|
|
higher non-interest income by $124.7 million, or 35%; |
|
|
|
|
higher operating expenses by $45.7 million, or 8%; and |
|
|
|
|
lower income tax expense by $48.1 million, or 55%. |
Factors similar to those described in the quarterly variances above were the contributors to the
variances in the nine-month periods. Also included in non-interest income for the nine months ended
September 30, 2008 was the gain on redemption of Visa stock amounting to approximately $40.9
million recognized in the first quarter of 2008, $28.3 million in gains on the sale of $2.4 billion
in U.S. agency securities during the second quarter of 2008, and higher trading profits by $8.8
million, principally due to the sale of mortgage-backed securities.
103
EVERTEC
EVERTECs net income for the quarter ended September 30, 2008 totaled $8.5 million, an increase of
5% compared with the results of the same quarter in the previous year.
The principal factors that contributed to the variance in results for the quarter ended September
30, 2008, when compared with the third quarter of 2007, included:
|
|
|
higher non-interest income by $3.8 million, or 6%, primarily due to higher transaction
processing fees mainly related to the automated teller machine (ATM) network and
point-of-sale (POS) terminals, higher cash processing fees, information technology (IT)
consulting services and business process outsourcing, among others. |
|
|
|
|
higher operating expenses by $3.1 million, or 6%, primarily due to higher personnel,
professional fees and other operating expenses; and |
|
|
|
|
higher income tax expense by $0.2 million or 6%. |
Net income for the nine months ended September 30, 2008 totaled $33.7 million, an increase of $11.8
million, or 54%, compared to $21.9 million for the same period in the previous year. These results
reflected:
|
|
|
higher non-interest income by $19.9 million, or 11%. The results for the nine months
ended September 30, 2008 included $7.6 million in gains on the redemption of Visa stock
held by ATH Costa Rica during the first quarter of 2008. Also, there were higher fees
related to the volume of transactions processed in the ATM network and POS terminals,
higher cash processing, item processing, payment processing, IT consulting services, and
business process outsourcing. |
|
|
|
|
higher operating expenses by $5.7 million, or 4%; and |
|
|
|
|
higher income tax expense by $2.3 million, or 20%. |
Banco Popular North America
Banco Popular North America reported a net loss of $139.0 million for the quarter ended September
30, 2008, compared to a net loss of $1.1 million for the third quarter of 2007. The main factors
that contributed to the quarterly variance in this reportable segment included:
|
|
|
lower net interest income by $4.6 million, or 5%; |
|
|
|
|
higher provision for loan losses by $103.0 million, primarily due to higher net
charge-offs in the construction, mortgage, consumer and commercial loan portfolios. During
the quarter ended September 30, 2008, the Corporation recorded $29.2 million in specific
reserves for commercial, construction and mortgage loans classified as impaired under SFAS
No. 114 in the Banco Popular North America reportable segment. Furthermore, the consumer
loan portfolio has been impacted by higher losses in home equity lines of credit and second
lien mortgage loans, which similar to first mortgage loans, have been unfavorably impacted
by the deterioration in the U.S. residential housing market. The increase in the provision
for loan losses considers inherent losses in the portfolios evidenced by an increase in
non-performing loans in this reportable segment by $211 million, when compared to September
30, 2007. The ratio of allowance for loan losses to loans held-in-portfolio for the Banco
Popular North America reportable segment was 2.37% as of September 30, 2008, compared with
0.97% as of September 30, 2007. The provision for loan losses represented 185% of net
charge-offs for the third quarter of 2008, compared with 137% of net charge-offs in the
same period of 2007. The annualized net charge-offs to average loans held-in-portfolio for
the Banco Popular North America operations was 2.60% for the quarter ended September 30,
2008, compared with 0.62% in the same quarter of the previous year. |
|
|
|
|
higher non-interest income by $16.5 million, or 46%, mainly due to gains of $21.1
million on the sale of a real estate property; |
|
|
|
|
lower operating expenses by $17.2 million, or 15%. E-LOANs expenses were reduced by
$20.2 million principally in business promotion, personnel costs, professional fees,
equipment expenses and net occupancy expenses. The reduction at E-LOAN was partially offset
by higher personnel costs by $1.3 million and other operating expenses at the banking
subsidiary, including higher FDIC assessments. |
104
|
|
|
income tax expense of $61.4 million in the third quarter of 2008, compared with income
tax benefit of $2.7 million in the third quarter of 2007. Although the BPNA reportable
segment had higher operating losses in the third quarter of 2008, the tax benefits were
offset by the recording of a $94.5 valuation allowance on deferred tax assets. |
Net loss for the nine months ended September 30, 2008 totaled $175.3 million, compared to net
income of $22.8 million for the same period in the previous year. These results reflected:
|
|
|
higher net interest income by $1.5 million, or less than 1%; |
|
|
|
|
higher provision for loan losses by $220.5 million; |
|
|
|
|
lower non-interest income of $3.0 million, or 2%, mainly due to lower gain on sale of
loans and valuation adjustments on loans held-for-sale by $27.1 million primarily related
to E-LOAN. This unfavorable variance was partially offset by the $12.8 million gain on the
sale of the Texas branches and $21.1 million gain in the sale of real estate. |
|
|
|
|
lower operating expenses by $46.9 million, or 14%; and |
|
|
|
|
income tax expense of $33.4 million for the nine months ended September 30, 2008,
compared to income tax expense of $10.2 million for the same period in the previous year. |
FINANCIAL CONDITION
Refer to the consolidated financial statements included in this report for the Corporations
consolidated statements of condition and to Table A for financial highlights on major line items of
the statements of condition. At September 30, 2008, total assets were $40.4 billion, which included
$969 million from the discontinued operations. Total assets at December 31, 2007 were $44.4 billion
and $47.3 billion at September 30, 2007. Assets from discontinued operations consisted mostly loans
and mortgage servicing related assets. Total liabilities for the discontinued operations were $180
million, mostly in the form of secured borrowings.
Investment securities
A breakdown of the Corporations investment securities available-for-sale and held-to-maturity is
provided in Table F. Notes 6 and 7 to the consolidated financial statements provide additional
information by contractual maturity categories and unrealized gains / losses with respect to the
Corporations available-for-sale and held-to-maturity investment securities portfolio. The
Corporation holds investment securities primarily for liquidity, yield enhancement and interest
rate risk management. The portfolio primarily includes very liquid, high quality debt securities.
TABLE F
Breakdown of Investment Securities Available-for-Sale and Held-to-Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
|
|
|
|
|
September 30, |
|
|
(In millions) |
|
2008 |
|
2007 |
|
Variance |
|
2007 |
|
Variance |
|
U.S. Treasury securities |
|
$ |
464.2 |
|
|
$ |
471.1 |
|
|
$ |
(6.9 |
) |
|
$ |
475.8 |
|
|
$ |
(11.6 |
) |
Obligations of U.S. Government sponsored entities |
|
|
5,111.3 |
|
|
|
5,893.1 |
|
|
|
(781.8 |
) |
|
|
6,014.6 |
|
|
|
(903.3 |
) |
Obligations of Puerto Rico, States and political
subdivisions |
|
|
286.4 |
|
|
|
178.0 |
|
|
|
108.4 |
|
|
|
178.3 |
|
|
|
108.1 |
|
Collateralized mortgage obligations |
|
|
1,553.1 |
|
|
|
1,396.8 |
|
|
|
156.3 |
|
|
|
1,469.7 |
|
|
|
83.4 |
|
Mortgage-backed securities |
|
|
850.5 |
|
|
|
1,010.1 |
|
|
|
(159.6 |
) |
|
|
949.5 |
|
|
|
(99.0 |
) |
Equity securities |
|
|
14.7 |
|
|
|
34.0 |
|
|
|
(19.3 |
) |
|
|
41.3 |
|
|
|
(26.6 |
) |
Others |
|
|
8.4 |
|
|
|
16.5 |
|
|
|
(8.1 |
) |
|
|
28.6 |
|
|
|
(20.2 |
) |
|
Total |
|
$ |
8,288.6 |
|
|
$ |
8,999.6 |
|
|
$ |
(711.0 |
) |
|
$ |
9,157.8 |
|
|
$ |
(869.2 |
) |
|
The vast majority of these investment securities, or approximately 97%, are rated the equivalent of
AAA by the major rating agencies. The mortgage-backed securities (MBS) and collateralized
mortgage obligations (CMOs) are investment grade securities, all of which are rated AAA by at
least one of the three major rating agencies as of September 30, 2008. All MBS held by the
Corporation and approximately 88% of the CMOs held as of September 30, 2008 are guaranteed by
government sponsored entities.
105
The decline in the Corporations available-for-sale and held-to-maturity investment portfolios from
the end of the third quarter of 2007 and year-end 2007 to September 30, 2008 was mainly associated
with maturities of securities.
Loan portfolio
A breakdown of the Corporations loan portfolio, the principal category of earning assets, at
period-end, is presented in Table G.
TABLE G
Loans Ending Balances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variance |
|
|
|
|
|
Variance |
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
|
|
|
|
September 30, 2008 |
|
|
|
|
|
|
|
|
|
|
Vs. |
|
|
|
|
|
Vs. |
|
|
September 30, |
|
December 31, |
|
December 31, |
|
September 30, |
|
September 30, |
(In thousands) |
|
2008(2) |
|
2007 |
|
2007 |
|
2007 |
|
2007 |
|
Loans held-in-portfolio, net of unearned: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
13,832,344 |
|
|
$ |
13,661,643 |
|
|
$ |
170,701 |
|
|
$ |
13,706,245 |
|
|
$ |
126,099 |
|
Construction |
|
|
2,134,250 |
|
|
|
1,941,372 |
|
|
|
192,878 |
|
|
|
1,757,589 |
|
|
|
376,661 |
|
Lease financing |
|
|
1,124,021 |
|
|
|
1,097,803 |
|
|
|
26,218 |
|
|
|
1,156,773 |
|
|
|
(32,752 |
) |
Mortgage (1) |
|
|
4,487,501 |
|
|
|
6,071,374 |
|
|
|
(1,583,873 |
) |
|
|
10,480,501 |
|
|
|
(5,993,000 |
) |
Consumer |
|
|
4,757,919 |
|
|
|
5,249,264 |
|
|
|
(491,345 |
) |
|
|
5,796,393 |
|
|
|
(1,038,474 |
) |
|
|
Total loans held-in-portfolio |
|
$ |
26,336,035 |
|
|
$ |
28,021,456 |
|
|
$ |
(1,685,421 |
) |
|
$ |
32,897,501 |
|
|
$ |
(6,561,466 |
) |
|
Loans held-for-sale measured at lower of
cost or market: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
24,920 |
|
|
$ |
24,148 |
|
|
$ |
772 |
|
|
$ |
63,228 |
|
|
$ |
(38,308 |
) |
Lease financing |
|
|
|
|
|
|
66,636 |
|
|
|
(66,636 |
) |
|
|
|
|
|
|
|
|
Mortgage |
|
|
220,214 |
|
|
|
1,363,426 |
|
|
|
(1,143,212 |
) |
|
|
360,075 |
|
|
|
(139,861 |
) |
Consumer |
|
|
|
|
|
|
435,336 |
|
|
|
(435,336 |
) |
|
|
|
|
|
|
|
|
|
Total loans held-for-sale measured at
lower of cost or market |
|
$ |
245,134 |
|
|
$ |
1,889,546 |
|
|
$ |
(1,644,412 |
) |
|
$ |
423,303 |
|
|
$ |
(178,169 |
) |
|
|
|
|
(1) |
|
Includes residential construction. |
|
(2) |
|
Loans from discontinued operations for the period ended September 30, 2008 are presented as part of Assets from discontinued
operations in the consolidated statement of condition. Refer to Note 3 to the consolidated financial statements for further information. |
The growth in the commercial and construction loan portfolio was principally attained at the BPPR
and BPNA segments. The growth in the construction loan portfolio included loans to builders and
developers of residential real estate and other commercial property.
The reduction in mortgage loans held-in-portfolio from December 31, 2007 to September 30, 2008 was
primarily due to the discontinued operations of PFH. As of December 31, 2007 the PFH reportable
segment had $1.4 billion in mortgage loans held-in-portfolio. Also, the decrease was due to the
securitization into FNMA mortgage-backed securities of approximately $307 million (UPB) of
residential mortgage loans by BPPR in the second quarter of 2008. As indicated previously in the
Non-Interest Income section of this MD&A, $232 million of these MBS were sold in the secondary
markets during the second quarter of 2008. The sale proceeds were reinvested in U.S. agency
securities. The objective of the sale was to reduce the Corporations level of mortgage loans
retained in portfolio and enhance its return on risk-weighted capital. The decrease in mortgage
loans held-for-sale was associated to the origination and pooling of loans by E-LOAN and the
mortgage banking subsidiary in the Puerto Rico operations. The reduction in mortgage loans
held-in-portfolio from September 30, 2007 to the same date in 2008 was influenced by similar
factors coupled with the impact of the recharacterization transaction completed by PFH in December
2007 which, at that time, resulted in a reduction of approximately $3.2 billion in loans. The PFH
reportable segment held $5.9 billion in mortgage loans held-in-portfolio at September 30, 2007.
The decrease in consumer loans held-in-portfolio from December 31, 2007 to September 30, 2008 was
mainly due to the impact of the reclassification of PFHs discontinued operations as well as the
sales of auto loan portfolios by E-LOAN during June 2008 and lower volume of personal loans in
Banco Popular de Puerto Rico operations. The PFH reportable segment held consumer loans
held-in-portfolio amounting to $242 million at December 31, 2007 and $1.0 billion at September 30,
2007.
106
The reduction in mortgage and consumer loans held-for-sale from the end of 2007 to September 30,
2008 was mainly due to the sale of $1.4 billion of PFHs loans to American General on March 1,
2008. The decrease in the lease financing portfolio held-for-sale from December 31, 2007 to
September 30, 2008 was principally due to the sale of approximately $66 million of lease financings
by Popular Equipment Finance, a subsidiary of BPNA, during the first quarter of 2008.
Other assets
Table H provides a breakdown of the Other Assets caption presented in the consolidated statements
of condition. The other assets related to the discontinued operations were disclosed separately.
TABLE H
Breakdown of Other Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variance |
|
|
|
|
|
Variance |
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
|
|
|
|
September 30, 2008 |
|
|
|
|
|
|
|
|
|
|
Vs. |
|
|
|
|
|
Vs. |
|
|
September 30, |
|
December 31, |
|
December 31, |
|
September 30, |
|
September 30, |
(In thousands) |
|
2008(1) |
|
2007 |
|
2007 |
|
2007 |
|
2007 |
|
Net deferred tax assets |
|
$ |
663,260 |
|
|
$ |
525,369 |
|
|
$ |
137,891 |
|
|
$ |
420,288 |
|
|
$ |
242,972 |
|
Securitization advances and related assets |
|
|
|
|
|
|
168,599 |
|
|
|
(168,599 |
) |
|
|
82,980 |
|
|
|
(82,980 |
) |
Bank-owned life insurance program |
|
|
222,298 |
|
|
|
215,171 |
|
|
|
7,127 |
|
|
|
212,698 |
|
|
|
9,600 |
|
Prepaid expenses |
|
|
153,698 |
|
|
|
188,237 |
|
|
|
(34,539 |
) |
|
|
187,725 |
|
|
|
(34,027 |
) |
Investments under the equity method |
|
|
117,766 |
|
|
|
89,870 |
|
|
|
27,896 |
|
|
|
85,806 |
|
|
|
31,960 |
|
Derivative assets |
|
|
50,335 |
|
|
|
76,958 |
|
|
|
(26,623 |
) |
|
|
64,981 |
|
|
|
(14,646 |
) |
Trade receivables from brokers and
counterparties |
|
|
17,100 |
|
|
|
1,160 |
|
|
|
15,940 |
|
|
|
8,714 |
|
|
|
8,386 |
|
Others |
|
|
187,762 |
|
|
|
191,630 |
|
|
|
(3,868 |
) |
|
|
181,497 |
|
|
|
6,265 |
|
|
Total |
|
$ |
1,412,219 |
|
|
$ |
1,456,994 |
|
|
$ |
(44,775 |
) |
|
$ |
1,244,689 |
|
|
$ |
167,530 |
|
|
|
|
|
(1) |
|
Other assets from discontinued operations for the period ended September 30, 2008 are presented as part of Assets from discontinued operations in
the consolidated statement of condition. Refer to Note 3 to the consolidated financial statements for further information on the discontinued operations.
Deferred tax assets, net of the valuation allowance, for statement of condition purposes are included as part of continuing operations as of September 30,
2008. |
Explanations for the principal variances in the continuing operations from December 31, 2007 and
September 30, 2007 to September 30, 2008 were:
|
|
|
Increase in net deferred tax assets was mostly due the net operating losses of the U.S.
operations recognized during the nine months ended September 30, 2008 and an increase
related to timing differences in the recognition of the provision for loan losses under
GAAP and actual net charge offs under the tax code, partially offset by the aforementioned
recording of the valuation allowance on deferred tax assets of the U.S. operations. Refer
to the Income Tax section of this MD&A for further information and to Note 21 to the
consolidated financial statements for a detail of deferred tax assets. |
|
|
|
|
Securitization advances and related assets as of December 31, 2007 and September 30,
2007 pertained to the PFH reportable segment that was discontinued in 2008. Related
balances outstanding as of September 30, 2008 are included as part of Assets from
discontinued operations in the consolidated statement of condition. |
Other assets from the discontinued operations amounted to $282 million at September 30, 2008,
compared to $204 million at December 31, 2007 and $108 million at September 30, 2007. These other
assets consisted principally of servicing advances. The increase in servicing advance requirements
was primarily as a result of slower prepayment rates and higher delinquency levels. The
Corporation, acting as a servicer in certain PFH securitization transactions, is required under
certain servicing agreements to advance its own funds to meet contractual remittance requirements
for investors, process foreclosures and pay property taxes and insurance premiums. Funds are also
advanced to maintain and market real estate properties on behalf of investors. As the servicer, the
Corporation is required to advance funds only to the extent that it believes the advances are
recoverable. The advances have the highest standing in terms of repayment priority over payments
made to bondholders of each securitization trust. The Corporation funds these advances from several
internal and external funding sources. As of September 30, 2008, the servicing advances were
held-for-sale and accounted at lower of cost or market value, with value indicators determined
based on the price terms stipulated in the agreement with the prospective third-party buyer
indicated in
107
Note 3 to the consolidated
financial statements. As of December 31, 2007 and September 30, 2007, the servicing advances were
accounted at cost and were deemed collectible in full.
Deposits, borrowings and capital
The composition of the Corporations financing to total assets at September 30, 2008 and December
31, 2007 is included in Table I as follows:
TABLE I
Financing to Total Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% increase (decrease) from |
|
% of total assets |
|
|
September 30, |
|
December 31, |
|
December 31, 2007 to |
|
September 30, |
|
December 31, |
(Dollars in millions) |
|
2008 |
|
2007 |
|
September 30, 2008 |
|
2008 |
|
2007 |
|
Non-interest bearing
deposits |
|
$ |
4,066 |
|
|
$ |
4,511 |
|
|
|
(9.9 |
%) |
|
|
10.0 |
% |
|
|
10.2 |
% |
Interest-bearing core
deposits |
|
|
15,978 |
|
|
|
15,553 |
|
|
|
2.7 |
|
|
|
39.6 |
|
|
|
35.0 |
|
Other interest-bearing
deposits |
|
|
7,868 |
|
|
|
8,271 |
|
|
|
(4.9 |
) |
|
|
19.5 |
|
|
|
18.6 |
|
Federal funds and
repurchase agreements |
|
|
3,730 |
|
|
|
5,437 |
|
|
|
(31.4 |
) |
|
|
9.2 |
|
|
|
12.2 |
|
Other short-term
borrowings |
|
|
507 |
|
|
|
1,502 |
|
|
|
(66.2 |
) |
|
|
1.3 |
|
|
|
3.4 |
|
Notes payable |
|
|
4,242 |
|
|
|
4,621 |
|
|
|
(8.2 |
) |
|
|
10.5 |
|
|
|
10.4 |
|
Others |
|
|
992 |
|
|
|
934 |
|
|
|
6.2 |
|
|
|
2.5 |
|
|
|
2.1 |
|
Stockholders equity |
|
|
3,007 |
|
|
|
3,582 |
|
|
|
(16.1 |
) |
|
|
7.4 |
|
|
|
8.1 |
|
|
A breakdown of the Corporations deposits at period-end is included in Table J.
TABLE J
Deposits Ending Balances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variance |
|
|
|
|
|
Variance |
|
|
September 30, |
|
December 31, |
|
September 30, 2008 Vs. |
|
September 30, |
|
September 30, 2008 Vs. |
(In thousands) |
|
2008 |
|
2007 |
|
December 31, 2007 |
|
2007 |
|
September 30, 2007 |
|
Demand deposits * |
|
$ |
4,731,724 |
|
|
$ |
5,115,875 |
|
|
$ |
(384,151 |
) |
|
$ |
4,641,736 |
|
|
$ |
89,988 |
|
Savings, NOW and money
market deposits |
|
|
9,884,674 |
|
|
|
9,804,605 |
|
|
|
80,069 |
|
|
|
9,328,094 |
|
|
|
556,580 |
|
Time deposits |
|
|
13,294,999 |
|
|
|
13,413,998 |
|
|
|
(118,999 |
) |
|
|
12,631,685 |
|
|
|
663,314 |
|
|
Total |
|
$ |
27,911,397 |
|
|
$ |
28,334,478 |
|
|
$ |
(423,081 |
) |
|
$ |
26,601,515 |
|
|
$ |
1,309,882 |
|
|
|
|
|
* |
|
Includes interest and non-interest bearing demand deposits. |
Brokered certificates of deposit totaled $3.1 billion at September 30, 2008 and December 31, 2007,
and represented 11% of total deposits. Brokered certificates of deposit amounted to $2.1 billion at
September 30, 2007, or 8% of total deposits. Brokered certificates of deposit, which are typically
sold through an intermediary to small retail investors, provide access to longer-term funds that
are available in the market area and provide the ability to raise additional funds without
pressuring retail deposit pricing. One of the strategies followed by management in response to the
unprecedented market disruptions during 2007 was the utilization of brokered certificates of
deposit to replace uncommitted lines of credit. Management reduced partially the overall
outstanding balance of brokered certificates of deposit during the quarter ended June 30, 2008 when
brokered certificates of deposit totaled $2.1 billion. This reduction was replaced with short-term
borrowings. During the quarter ended September 30, 2008, the Corporations banking subsidiary in
Puerto Rico increased brokered certificates of deposit to further strengthen its level of on-hand
liquidity amidst the recent financial industry developments of the third quarter.
The decrease in demand deposits from December 31, 2007 to September 30, 2008 was mostly related
with commercial checking accounts. The decrease in time deposits from December 31, 2007 to
September 30, 2008 was in part due to the sale of BPNAs Texas branches in early 2008, which had
approximately $125 million in deposits at the sale transaction date.
The increase in deposits from September 30, 2007 to the same date in 2008 was influenced
principally by the higher volume of brokered certificates of deposit as well as
deposits gathered through the acquisition of the
108
retail branches of Citibank in Puerto Rico,
principally in savings accounts, partially offset by reductions in the Banco Popular North America
reportable segment.
Core deposits have historically provided the Corporation with a sizable source of relatively stable
and low-cost funds. For purposes of defining core deposits, the Corporation excludes brokered
certificates of deposit with denominations under $100,000. The Corporations core deposits totaled
$20.0 billion, or 72% of total deposits, at September 30, 2008, compared to $20.1 billion and 71%
at December 31, 2007. Core deposits financed 56% of the Corporations earning assets from
continuing operations at September 30, 2008.
The distribution of certificates of deposit with denominations of $100 thousand and over at
September 30, 2008, including brokered certificates of deposit was as follows:
|
|
|
|
|
(In millions) |
|
|
|
|
|
3 months or less |
|
$ |
2,133,249 |
|
3 to 6 months |
|
|
868,620 |
|
6 to 12 months |
|
|
1,132,231 |
|
Over 12 months |
|
|
730,385 |
|
|
|
|
$ |
4,864,485 |
|
|
The aggregate amount of overdrafts in demand deposit accounts that were reclassified to loans was
$79 million as of September 30, 2008, $144 million as of December 31, 2007 and $135 million as of
September 30, 2007.
At September 30, 2008, borrowed funds from continuing operations totaled $8.5 billion. This figure
excludes $166 million in borrowings from the discontinued operations, which are included as part of
Liabilities from discontinued operations in the consolidated statement of condition as of
September 30, 2008. Borrowed funds amounted to $11.6 billion at December 31, 2007 and $16.0 billion
at September 30, 2007. Refer to Note 14 to the consolidated financial statements for additional
information on the Corporations borrowings as of such dates. The decline in borrowings from
December 31, 2007 to September 30, 2008 was principally impacted by the reduction in financing
requirements due to the sale of the PFH loan portfolio to American General, primarily in the form
of short-term debt. Also, the decrease was influenced by a general reduction in asset size given
the maturities of investment securities not replaced and sales of loan portfolios, including the
sale of manufactured housing loans by PFH in September 2008 and auto loans by E-LOAN during 2008.
The decrease in borrowings from September 30, 2007 to the same date in 2008 was also influenced by
the PFH recharacterization transaction effected in December 31, 2007, which reduced securitized
debt in the form of bond certificates to investors by approximately $3.1 billion.
Stockholders equity totaled $3.0 billion at September 30, 2008, compared with $3.6 billion at
December 31, 2007 and $3.8 billion at September 30, 2007. Stockholders equity decreased $574
million from the end of 2007 to September 30, 2008 as a result of the reduction in retained
earnings due to the net loss of $541.0 million recorded in the nine-month period ended September
30, 2008 and the $262 million negative after-tax adjustment to beginning retained earnings due to
the transitional adjustment for electing the fair value option, partially offset by the $400
million preferred stock offering during 2008. Similar factors influenced the reduction in
stockholders equity from September 30, 2007.
Refer to the consolidated statements of condition and of stockholders equity included in this Form
10-Q for information on the composition of stockholders equity at September 30, 2008, December 31,
2007 and September 30, 2007. Also, the disclosures of accumulated other comprehensive income
(loss), an integral component of stockholders equity, are included in the consolidated statements
of comprehensive income (loss).
Refer to the Liquidity section of this MD&A for further information of the Corporations funding
sources and liquidity position.
The average tangible equity amounted to $2.7 billion for the period ended September 30, 2008,
compared to $3.1 billion at December 31, 2007 and September 30, 2007. Total tangible equity was
$2.3 billion at September 30, 2008,
109
compared to $2.9 billion at December 31, 2007 and $3.0 billion
at September 30, 2007. The average tangible equity to average tangible assets ratio was 6.75% at
September 30, 2008, 6.64% at December 31, 2007, and 6.68% at September 30, 2007. Tangible equity
consists of total stockholders equity less goodwill and other intangibles.
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 at September 30, 2008, December 31, 2007, and September 30,
2007 are presented on Table K. As of such dates, BPPR, BPNA and Banco Popular, National Association
were all well-capitalized.
TABLE K
Capital Adequacy Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
|
September 30, |
(Dollars in thousands) |
|
2008 |
|
2007 |
|
2007 |
|
Risk-based capital |
|
|
|
|
|
|
|
|
|
|
|
|
Tier I capital |
|
$ |
2,835,195 |
|
|
$ |
3,361,132 |
|
|
$ |
3,833,675 |
|
Supplementary (Tier II) capital |
|
|
394,452 |
|
|
|
417,132 |
|
|
|
448,673 |
|
|
Total capital |
|
$ |
3,229,647 |
|
|
$ |
3,778,264 |
|
|
$ |
4,282,348 |
|
|
Risk-weighted assets |
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheet items |
|
$ |
28,203,551 |
|
|
$ |
30,294,418 |
|
|
$ |
32,849,909 |
|
Off-balance sheet items |
|
|
2,990,003 |
|
|
|
2,915,345 |
|
|
|
2,890,083 |
|
|
Total risk-weighted assets |
|
$ |
31,193,554 |
|
|
$ |
33,209,763 |
|
|
$ |
35,739,992 |
|
|
Average assets |
|
$ |
39,557,133 |
|
|
$ |
45,842,338 |
|
|
$ |
46,129,283 |
|
|
Ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
Tier I capital (minimum required 4.00%) |
|
|
9.09 |
% |
|
|
10.12 |
% |
|
|
10.73 |
% |
Total capital (minimum required 8.00%) |
|
|
10.35 |
|
|
|
11.38 |
|
|
|
11.98 |
|
Leverage ratio * |
|
|
7.17 |
|
|
|
7.33 |
|
|
|
8.31 |
|
|
|
|
|
* |
|
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 September 30, 2008, the capital adequacy minimum requirement for Popular, Inc. was (in
thousands): Total Capital of $2,495,484, Tier I Capital of $1,247,742, and Tier I Leverage of
$1,186,714 based on a 3% ratio or $1,582,285 based on a 4% ratio according to the Banks
classification.
While the Corporation remains
well-capitalized, its Tier I risk-based capital ratio decreased to
9.09% as of September 30, 2008
from 10.50% as of June 30, 2008. As previously indicated, during the third quarter of 2008,
Popular took a series of measures in an effort to improve liquidity and discontinue
PFH operations. Specifically, the corporation sold PFH's portfolio of manufactured housing loans
and, as described previously in this MD&A, will divest most of PFH's remaining assets in the
fourth quarter of 2008. The transactions and the associated losses
have impacted Populars
capital position.
As of September 30, 2008, on a pro-forma basis after giving effect to the sale of PFHs loan and
servicing assets described previously (completed on November 3, 2008), the Corporations capital ratios are estimated as follows:
Tier I capital ratio of approximately 9.43%, total capital ratio of
approximately 10.69%, and
leverage ratio of approximately 7.15%.
OFF-BALANCE SHEET FINANCING ENTITIES
The Corporation, through certain subsidiaries
of the discontinued business of PFH, conducted a program of asset securitizations
that involved the transfer of mortgage loans to a special purpose entity depositor, which in turn
transferred those mortgage loans to different securitization trusts, thus isolating those loans
from the Corporations assets. The securitization trusts that constituted qualified special
purpose entities (QSPEs) under the provisions of SFAS No. 140 and are associated with
securitizations that qualified for sale accounting under SFAS No. 140 are not consolidated in the
Corporations financial statements. The investors in these off-balance sheet securitizations have
no recourse to the Corporations assets or revenues. The Corporations creditors have no recourse
to any assets or revenues of the special purpose entity depositor, or the securitization trust
funds. As of September 30, 2008 and December 31, 2007, the Corporation had mortgage loans of
approximately $4.8 billion and $5.4 billion, respectively, in securitization transactions that
qualified for off-balance sheet treatment. These transactions had liabilities in the form of debt
securities payable to investors from the assets inside each securitization trust of approximately
$4.5 billion and $5.1 billion as of September 30, 2008 and December 31, 2007, respectively. The
Corporation retained servicing responsibilities and certain subordinated interests in these
securitizations in the form of residual interests. Their value is subject to credit,
prepayment and interest rate risks on the transferred financial assets. The servicing rights and
residual interests retained by the Corporation are recorded in the statement of condition as of
September 30, 2008 at fair value and are held-for-sale as of such date. The servicing assets and residual
interests are included in the line item Assets from discontinued operations in the consolidated statement of condition.
110
CREDIT RISK MANAGEMENT AND LOAN QUALITY
The allowance for loan losses is managements estimate of credit losses inherent in the loans
held-in-portfolio at the balance sheet date. 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 nine months ended September 30, 2008 and 2007.
TABLE L
Allowance for Loan Losses and Selected Loan Losses Statistics
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter |
|
Nine months ended September 30, |
(Dollars in thousands) |
|
2008 |
|
2007 |
|
Variance |
|
2008 |
|
2007 |
|
Variance |
|
Balance at beginning of period |
|
$ |
652,730 |
|
|
$ |
564,847 |
|
|
$ |
87,883 |
|
|
$ |
548,832 |
|
|
$ |
522,232 |
|
|
$ |
26,600 |
|
Provision for loan losses |
|
|
252,160 |
|
|
|
86,340 |
|
|
|
165,820 |
|
|
|
602,561 |
|
|
|
219,477 |
|
|
|
383,084 |
|
|
|
|
|
904,890 |
|
|
|
651,187 |
|
|
|
253,703 |
|
|
|
1,151,393 |
|
|
|
741,709 |
|
|
|
409,684 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses charged to the allowance: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
41,048 |
|
|
|
23,104 |
|
|
|
17,944 |
|
|
|
116,199 |
|
|
|
61,011 |
|
|
|
55,188 |
|
Construction |
|
|
52,339 |
|
|
|
|
|
|
|
52,339 |
|
|
|
57,529 |
|
|
|
|
|
|
|
57,529 |
|
Lease financing |
|
|
5,446 |
|
|
|
5,670 |
|
|
|
(224 |
) |
|
|
16,440 |
|
|
|
18,278 |
|
|
|
(1,838 |
) |
Mortgage |
|
|
11,907 |
|
|
|
4,235 |
|
|
|
7,672 |
|
|
|
30,842 |
|
|
|
8,643 |
|
|
|
22,199 |
|
Consumer |
|
|
71,861 |
|
|
|
44,414 |
|
|
|
27,447 |
|
|
|
188,715 |
|
|
|
124,633 |
|
|
|
64,082 |
|
|
|
|
|
182,601 |
|
|
|
77,423 |
|
|
|
105,178 |
|
|
|
409,725 |
|
|
|
212,565 |
|
|
|
197,160 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
4,507 |
|
|
|
4,517 |
|
|
|
(10 |
) |
|
|
10,991 |
|
|
|
11,456 |
|
|
|
(465 |
) |
Construction |
|
|
|
|
|
|
1,547 |
|
|
|
(1,547 |
) |
|
|
|
|
|
|
1,547 |
|
|
|
(1,547 |
) |
Lease financing |
|
|
1,200 |
|
|
|
1,503 |
|
|
|
(303 |
) |
|
|
2,706 |
|
|
|
6,011 |
|
|
|
(3,305 |
) |
Mortgage |
|
|
98 |
|
|
|
261 |
|
|
|
(163 |
) |
|
|
345 |
|
|
|
497 |
|
|
|
(152 |
) |
Consumer |
|
|
6,263 |
|
|
|
6,160 |
|
|
|
103 |
|
|
|
19,402 |
|
|
|
19,919 |
|
|
|
(517 |
) |
|
|
|
|
12,068 |
|
|
|
13,988 |
|
|
|
(1,920 |
) |
|
|
33,444 |
|
|
|
39,430 |
|
|
|
(5,986 |
) |
|
Net loans charged-off: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
36,541 |
|
|
|
18,587 |
|
|
|
17,954 |
|
|
|
105,208 |
|
|
|
49,555 |
|
|
|
55,653 |
|
Construction |
|
|
52,339 |
|
|
|
(1,547 |
) |
|
|
53,886 |
|
|
|
57,529 |
|
|
|
(1,547 |
) |
|
|
59,076 |
|
Lease financing |
|
|
4,246 |
|
|
|
4,167 |
|
|
|
79 |
|
|
|
13,734 |
|
|
|
12,267 |
|
|
|
1,467 |
|
Mortgage |
|
|
11,809 |
|
|
|
3,974 |
|
|
|
7,835 |
|
|
|
30,497 |
|
|
|
8,146 |
|
|
|
22,351 |
|
Consumer |
|
|
65,598 |
|
|
|
38,254 |
|
|
|
27,344 |
|
|
|
169,313 |
|
|
|
104,714 |
|
|
|
64,599 |
|
|
|
|
|
170,533 |
|
|
|
63,435 |
|
|
|
107,098 |
|
|
|
376,281 |
|
|
|
173,135 |
|
|
|
203,146 |
|
|
Write-downs related to loans
transferred to loans
held-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,617 |
|
|
|
|
|
|
|
3,617 |
|
Change in allowance for loan
losses from
discontinued operations (1) |
|
|
(7,877 |
) |
|
|
12,521 |
|
|
|
(20,398 |
) |
|
|
(45,015 |
) |
|
|
31,699 |
|
|
|
(76,714 |
) |
|
Balance at end of period |
|
$ |
726,480 |
|
|
$ |
600,273 |
|
|
$ |
126,207 |
|
|
$ |
726,480 |
|
|
$ |
600,273 |
|
|
$ |
126,207 |
|
|
Ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs to average
loans held-in-portfolio |
|
|
2.60 |
% |
|
|
1.00 |
% |
|
|
|
|
|
|
1.92 |
% |
|
|
0.94 |
% |
|
|
|
|
Provision to net charge-offs |
|
|
1.48 |
x |
|
|
1.36 |
x |
|
|
|
|
|
|
1.60 |
x |
|
|
1.27 |
x |
|
|
|
|
|
|
|
(1) |
|
A positive amount represents higher provision for losses recorded during the period
compared to net charge-offs and vice versa for a negative amount. |
111
Table M presents annualized net charge-offs to average loans held-in-portfolio for the quarters and
nine months ended September 30, 2008 and 2007 by loan category.
TABLE M
Annualized Net Charge-offs to Average Loans Held-in-Portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended September 30, |
|
Nine months ended September 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
Commercial |
|
|
1.06 |
% |
|
|
0.56 |
% |
|
|
1.03 |
% |
|
|
0.50 |
% |
Construction |
|
|
9.82 |
|
|
|
(0.37 |
) |
|
|
3.76 |
|
|
|
(0.13 |
) |
Lease financing |
|
|
1.52 |
|
|
|
1.43 |
|
|
|
1.66 |
|
|
|
1.38 |
|
Mortgage |
|
|
1.07 |
|
|
|
0.35 |
|
|
|
0.90 |
|
|
|
0.25 |
|
Consumer |
|
|
5.48 |
|
|
|
3.36 |
|
|
|
4.65 |
|
|
|
3.21 |
|
|
|
|
|
2.60 |
% |
|
|
1.00 |
% |
|
|
1.92 |
% |
|
|
0.94 |
% |
|
The increase in commercial loans net charge-offs for the quarter ended September 30, 2008 compared
to the same quarter in the previous year was mostly associated with continued deterioration in the
economic conditions in Puerto Rico which is experiencing a recessionary cycle. Also, the U.S.
mainland portfolio experienced deterioration as the U.S. economy is also facing economic
challenges. Credit deterioration trends have been reflected across all industry sectors. The ratio
of commercial loans net charge-offs to average commercial loans held-in-portfolio in the Banco
Popular de Puerto Rico reportable segment was 1.55% for the quarter ended September 30, 2008,
compared to 0.67% for the third quarter of 2007. Also, an increase was experienced in the Banco
Popular North America reportable segment, which had a ratio of 0.44% for the third quarter of 2008,
compared with 0.40% for the same quarter in the previous year. Commercial net charge-offs recorded
during the third quarter of 2008 were mainly related to credits with specific reserves under SFAS
No. 114.
The increase in construction loans net charge-offs for the quarter ended September 30, 2008,
compared to the same quarter in the previous year, was related to the Corporations Puerto Rico and
U.S. mainland operations. The construction loans charge-offs for the quarter ended September 30,
2008 included approximately $32 million in a $51 million syndicated commercial loan that was placed
in non-performing status during the quarter ended March 31, 2008 and for which the Corporation
established a specific reserve based on a third-party appraisal of value of the collateral less
estimated cost to sell at that time. This syndicated commercial loan is collateralized by a marina,
commercial real estate, and a high-end apartment complex in the U.S. Virgin Islands. A settlement
was reached with the borrower of which $9.8 million was collected by BPPR in September 2008. The
Corporation also recorded net charge-offs of $20.5 million during the quarter ended September 30,
2008 at BPNA. Management has identified construction loans considered impaired under SFAS No. 114
and established specific reserves based on the value of the collateral.
Mortgage loans net charge-offs as a percentage of average mortgage loans held-in-portfolio for the
continuing operations increased primarily in the U.S. mainland operations. The Banco Popular North
America reportable segment reported a ratio of mortgage loans net charge-offs to average mortgage
loans held-in-portfolio of 2.50% for the third quarter of 2008, compared with 0.96% for the same
quarter in the previous year. Deteriorating economic conditions in the U.S. mainland housing market
have impacted the mortgage industry delinquency rates. As a result of higher delinquency and net
charge-offs, BPNA recorded a higher provision for loan losses in the first nine months of 2008 to
cover for inherent losses in this portfolio. Refer to the Overview of Mortgage Loan Exposure
section in this MD&A for further information on the BPNAs mortgage loan portfolio. Mortgage loans
net charge-offs in the Banco Popular de Puerto Rico reportable segment amounted to $1.0 million for
the third quarter of 2008, compared to net recoveries of $0.2 million in the same quarter of the
previous year. The slowdown in the housing sector in Puerto Rico has begun to put pressure on home
prices and reduce sale activity. The ratio of mortgage loan net charge-offs to average mortgage
loans held-in-portfolio in the Banco Popular de Puerto Rico reportable segment was 0.15% for the
quarter ended September 30, 2008.
Consumer loans net charge-offs as a percentage of average consumer loans held-in-portfolio rose
mostly due to higher delinquencies in the U.S. mainland and in Puerto Rico. Consumer loans net
charge-offs in the BPNA reportable segment rose for the quarter ended September 30, 2008, when
compared with the same quarter in the previous year, by $22.8 million. The ratio of consumer loans
net charge-offs to average consumer loans held-in-
112
portfolio in the
Banco Popular North America reportable segment was 8.35% for the quarter ended September 30, 2008,
compared to 1.47% for the third quarter of 2007. This increase was principally related to home
equity lines of credit and second lien mortgage loans which are categorized by the Corporation as
consumer loans. A home equity line of credit is a loan secured by a primary residence or second
home to the extent of the excess of fair market value over the debt outstanding for the first
mortgage. The deterioration in the delinquency profile and the declines in property values have
negatively impacted charge-offs. E-LOAN represented approximately $16.8 million of that increase in
the net charge-offs in consumer loans held-in-
portfolio for the BPNA reportable segment. With the
downsizing of E-LOAN in late 2007, this subsidiary ceased originating these types of loans.
Consumer loans net charge-offs in the Banco Popular de Puerto Rico reportable segment rose for the
quarter ended September 30, 2008, when compared with the same quarter in the previous year, by $4.5
million. The ratio of consumer loans net charge-offs to average consumer loans held-in-portfolio in
the Banco Popular de Puerto Rico reportable segment was 4.41% for the quarter ended September 30,
2008, compared to 4.06% for the same quarter of 2007. The increase in Puerto Rico was primarily in
personal and auto loans.
Similar factors influenced the variances in net charge-offs for the nine-month period ended
September 30, 2008 compared to the same period in 2007.
NON-PERFORMING ASSETS
Non-performing assets include 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 N. For a summary of the Corporations policy for placing
loans on non-accrual status, refer to the sections of Loans and Allowance for Loan Losses in Note 1
to the audited consolidated financial statements included in Popular, Inc.s 2007 Annual Report.
TABLE N
Non-Performing Assets
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ Variance |
|
|
|
|
|
|
|
|
|
$ Variance |
|
|
|
|
|
|
As a |
|
|
|
|
|
As a |
|
September 30, |
|
|
|
|
|
As a |
|
September 30, |
|
|
|
|
|
|
percentage |
|
|
|
|
|
percentage |
|
2008 |
|
|
|
|
|
percentage |
|
2008 |
|
|
|
|
|
|
of loans |
|
|
|
|
|
of loans HIP |
|
Vs. |
|
|
|
|
|
of loans HIP |
|
Vs. |
|
|
September 30, |
|
HIP (1) |
|
December 31, |
|
(1) |
|
December 31, |
|
September 30, |
|
(1) |
|
September 30, |
(Dollars in thousands) |
|
2008 (2) |
|
by category |
|
2007 |
|
by category |
|
2007 |
|
2007 |
|
by category |
|
2007 |
|
Commercial |
|
$ |
440,466 |
|
|
|
3.2 |
% |
|
$ |
266,790 |
|
|
|
2.0 |
% |
|
$ |
173,676 |
|
|
$ |
259,930 |
|
|
|
1.9 |
% |
|
$ |
180,536 |
|
Construction |
|
|
235,241 |
|
|
|
11.0 |
|
|
|
95,229 |
|
|
|
4.9 |
|
|
|
140,012 |
|
|
|
68,323 |
|
|
|
3.9 |
|
|
|
166,918 |
|
Lease financing |
|
|
12,736 |
|
|
|
1.1 |
|
|
|
10,182 |
|
|
|
0.9 |
|
|
|
2,554 |
|
|
|
12,954 |
|
|
|
1.1 |
|
|
|
(218 |
) |
Mortgage |
|
|
281,914 |
|
|
|
6.3 |
|
|
|
349,381 |
|
|
|
5.8 |
|
|
|
(67,467 |
) |
|
|
614,596 |
|
|
|
5.9 |
|
|
|
(332,682 |
) |
Consumer |
|
|
58,026 |
|
|
|
1.2 |
|
|
|
49,090 |
|
|
|
0.9 |
|
|
|
8,936 |
|
|
|
52,630 |
|
|
|
0.9 |
|
|
|
5,396 |
|
|
Total non-performing loans |
|
|
1,028,383 |
|
|
|
3.9 |
% |
|
|
770,672 |
|
|
|
2.8 |
% |
|
|
257,711 |
|
|
|
1,008,433 |
|
|
|
3.1 |
% |
|
|
19,950 |
|
Other real estate |
|
|
72,605 |
|
|
|
|
|
|
|
81,410 |
|
|
|
|
|
|
|
(8,805 |
) |
|
|
133,508 |
|
|
|
|
|
|
|
(60,903 |
) |
|
Total non-performing assets |
|
$ |
1,100,988 |
|
|
|
|
|
|
$ |
852,082 |
|
|
|
|
|
|
$ |
248,906 |
|
|
$ |
1,141,941 |
|
|
|
|
|
|
$ |
(40,953 |
) |
|
Accruing loans past due 90
days or more |
|
$ |
125,679 |
|
|
|
|
|
|
$ |
109,569 |
|
|
|
|
|
|
$ |
16,110 |
|
|
$ |
108,841 |
|
|
|
|
|
|
$ |
16,838 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing assets to
total assets |
|
|
2.73 |
% |
|
|
|
|
|
|
1.92 |
% |
|
|
|
|
|
|
|
|
|
|
2.42 |
% |
|
|
|
|
|
|
|
|
Allowance for loan losses
to loans held-
in-portfolio |
|
|
2.76 |
|
|
|
|
|
|
|
1.96 |
|
|
|
|
|
|
|
|
|
|
|
1.82 |
|
|
|
|
|
|
|
|
|
Allowance for loan losses to
non-performing assets |
|
|
65.98 |
|
|
|
|
|
|
|
64.41 |
|
|
|
|
|
|
|
|
|
|
|
52.57 |
|
|
|
|
|
|
|
|
|
Allowance for loan losses
to non-performing loans |
|
|
70.64 |
|
|
|
|
|
|
|
71.21 |
|
|
|
|
|
|
|
|
|
|
|
59.53 |
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
HIP = held-in-portfolio |
|
(2) |
|
Amounts as of September 30, 2008 exclude assets from discontinued operations. Non-performing loans and other real estate from discontinued operations amounted to $75 million and $18
million, respectively, as of September 30, 2008. |
113
The allowance for loan losses increased from December 31, 2007 to September 30, 2008 by $178
million. The increase is mainly the result of additional reserves for specific commercial and
construction loans considered impaired, as well as for certain troubled debt restructured mortgage
loans, and higher reserves for Populars U.S. mainland consumer loan portfolio (mainly home equity
lines of credit).
During the quarter ended September 30, 2008, the Corporation recorded $61.9 million in specific
reserves for loans classified as impaired under SFAS No. 114. As of September 30, 2008, there were
$753 million of SFAS No. 114 impaired loans in the Corporations continuing operations with a
related specific allowance for loan losses of $131 million, compared with impaired loans of $318
million and a specific allowance of $56 million as of September 30, 2007, including $23 million of
impaired loans from the PFH reportable segment as of the end of the third quarter of 2007. The
allowance for loan losses for commercial and construction credits has been increased based on
proactive identification of risk and thorough borrower analysis.
Historically, the Corporations loss experience with real estate construction loans has been
relatively low due the sufficiency of the underlying real estate collateral. In the current
stressed housing market, the value of the collateral securing the loan has become one of the most
important factors in determining the amount of loss incurred and the appropriate level of allowance
for loan losses. Management has increased the allowance for loan losses for construction mainly
through specific reserves for the loans considered impaired under SFAS No. 114.
Non-performing commercial and construction loans increased from December 31, 2007 to September 30,
2008 primarily in the Banco Popular de Puerto Rico reportable segment by $245 million and in the Banco
Popular North America reportable segment by $84 million.
The reduction in non-performing mortgage loans held-in-portfolio from December 31, 2007 to
September 30, 2008 was associated in part to the reclassification of $65 million in non-performing
mortgage loans of PFHs reportable segment to Assets from discontinued operations in the
consolidated statement of condition as of September 30, 2008. PFH reportable segment had $179
million in non-performing mortgage loans as of December 31, 2007. This was offset in part by
increases in non-performing mortgage loans in both the Banco Popular de Puerto Rico and Banco Popular
North America reportable segments. Mortgage loans net charge-offs in the Puerto Rico operations for
the nine months ended September 30, 2008 amounted to approximately $1.8 million. Banco Popular de
Puerto Rico reportable segments mortgage loan portfolio averaged approximately $2.8 billion for
the nine months ended September 30, 2008. Mortgage loans net charge-offs in the Banco Popular North
America reportable segment amounted to $28.7 million for the nine months ended September 30, 2008,
an increase of $21.5 million compared to the results for the nine-month period ended September 30,
2007. This increase was related to the slowdown in the United States housing sector. The declines
in residential real estate values, coupled with the reduced ability of certain homeowners to
refinance or repay their residential real estate obligations, have led to higher delinquencies and
losses in residential real estate loans.
Refer to the Overview of Mortgage Loan Exposure section later in this MD&A for further information
on BPNAs mortgage loan portfolio.
The increase in non-performing consumer
loans as of September 30, 2008, when compared to December
31, 2007, was principally associated with the Banco Popular North America reportable segment. E-LOAN
reported an increase of $14 million. The increase in the U.S. mainland non-performing consumer
loans is mainly attributed to the home equity lines of credit and second lien mortgage loans which
are categorized by the Corporation as consumer loans. With the downsizing of E-LOAN in late 2007,
this subsidiary ceased originating these types of loans.
Other real estate, which represents real estate property acquired through foreclosure, increased by
$9 million from December 31, 2007 to September 30, 2008. This increase was principally due to an
increase in the Banco Popular North America reportable segment by $18 million. This increase was
partially offset by $18 million in other real estate pertaining to PFHs discontinued operations
which are presented as part of Assets from discontinued operations as of September 30, 2008. At
December 31, 2007, the PFH reportable segment had $32 million in other real estate which is
included as part of Table P. With the slowdown in the housing market, there is a continued economic
deterioration in certain geographic areas, which also has a softening effect on the market for
resale of repossessed real estate properties. Defaulted loans have increased, and these loans move
through the default process
114
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 units on hand.
Accruing loans past due 90 days or more are composed 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. Under SFAS No. 140, servicers of loans
underlying Ginnie Mae mortgage-backed securities must report as their own assets the defaulted
loans that they have the option to purchase, 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.
The allowance for loan losses, which represents managements estimate of credit losses inherent in
the loan portfolio, is maintained at a sufficient level to provide for these estimated loan losses
based on evaluations of inherent risks in the loan portfolios. The Corporations management
evaluates the adequacy of the allowance for loan losses on a monthly basis. In this evaluation,
management considers current economic conditions and the resulting impact on Populars loan
portfolio, the composition of the portfolio by loan type and risk characteristics, historical loss
experience, loss volatility, results of periodic credit reviews of individual loans, regulatory
requirements and loan impairment measurement, among other factors. The increase in the
Corporations allowance level as of September 30, 2008 reflects the prevailing negative economic
outlook, and specific reserves for commercial, construction and troubled debt restructured mortgage
loans considered impaired under SFAS No. 114.
The Corporations methodology to determine its allowance for loan losses is based on SFAS No. 114,
Accounting by Creditors for Impairment of a Loan (as amended by SFAS No. 118) and SFAS No. 5,
Accounting for Contingencies. Under SFAS No. 114, commercial and construction loans over a
predetermined amount are identified for evaluation on an individual basis, and specific reserves
are calculated based on impairment analyses. SFAS No. 5 provides for the recognition of a loss
contingency for a group of homogeneous loans, which are not individually evaluated under SFAS No.
114, when it is probable that a loss has been incurred and the amount can be reasonably estimated.
To determine the allowance for loan losses under SFAS No. 5, the Corporation uses historical net
charge-offs and volatility experience segregated by loan type and legal entity. Refer to the 2007
Annual Report for additional information on the Corporations methodology for assessing the
adequacy of the allowance for loan losses.
Under SFAS No. 114, the Corporation considers a commercial loan to be impaired when the loan
amounts to $250,000 or more and interest and / or principal is past due 90 days or more, or, when
the loan amounts to $500,000 or more and based on current information and events, management
considers that the debtor will be unable to pay all amounts due according to the contractual terms
of the loan agreement. Also, in the third quarter of 2008, the Corporation considered certain
mortgage loans that had been negotiated under troubled debt restructurings for evaluation under
SFAS No. 114.
The Corporations recorded investment in impaired commercial loans and the related valuation
allowance calculated under SFAS No. 114 as of September 30, 2008, December 31, 2007 and September
30, 2007 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008 |
|
December 31, 2007 |
|
September 30, 2007 |
|
|
Recorded |
|
Valuation |
|
Recorded |
|
Valuation |
|
Recorded |
|
Valuation |
(In millions) |
|
Investment |
|
Allowance |
|
Investment |
|
Allowance |
|
Investment |
|
Allowance |
|
Impaired loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance required |
|
$ |
494.5 |
|
|
$ |
131.1 |
|
|
$ |
174.0 |
|
|
$ |
54.0 |
|
|
$ |
196.5 |
|
|
$ |
56.4 |
|
No valuation allowance required |
|
|
258.9 |
|
|
|
|
|
|
|
147.7 |
|
|
|
|
|
|
|
121.7 |
|
|
|
|
|
|
Total impaired loans |
|
$ |
753.4 |
|
|
$ |
131.1 |
|
|
$ |
321.7 |
|
|
$ |
54.0 |
|
|
$ |
318.2 |
|
|
$ |
56.4 |
|
|
With respect to the $258.9 million portfolio of impaired commercial loans (including construction)
for which no allowance for loan losses was required as of September 30, 2008, management followed
SFAS No. 114 guidance. As prescribed by SFAS No. 114, when a loan is impaired, the measurement of
the impairment may be based on: (1) the
115
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 $258.9 million impaired commercial
loans 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 September 30, 2008.
Average impaired loans during the third quarter of 2008 and 2007 were $718 million and $297
million, respectively. The Corporation recognized interest income on impaired loans of $2.2 million
and $2.1 million for the quarters ended September 30, 2008 and September 30, 2007 and $5.8 million
and $6.3 million for the nine months ended on those same dates, respectively.
In
addition to the non-performing loans included in Table N, there were $144 million of
loans as of September 30, 2008, which in managements opinion are currently subject to potential
future classification as non-performing and are considered impaired under SFAS No. 114. As of
December 31, 2007 and September 30, 2007, these potential problem loans approximated $50 million
and $65 million, respectively.
Under standard industry practice, closed-end consumer loans are not customarily placed on
non-accrual status prior to being charged-off. Excluding the closed-end consumer loans from
non-accruing, adjusted non-performing assets would have been $1.0 billion as of September 30, 2008,
$803 million as of December 31, 2007 and $1.1 billion as of September 30, 2007.
Commitments to extend credit, which include credit card lines, commercial lines of credit, and
other unused credit commitments, amounted to $7.3 billion as of September 30, 2008. Commercial
letters of credit and stand-by letters of credit amounted to $28 million and $175 million,
respectively, as of September 30, 2008.
The
Corporation maintains a reserve of approximately $10.7 million for potential losses associated
with unfunded loan commitments related to commercial and consumer lines of credit. 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.
Geographical and government risk
As explained in the 2007 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 25 to the consolidated financial statements.
As of September 30, 2008, the Corporation had $1 billion of credit facilities granted to or
guaranteed by the Puerto Rico Government and its political subdivisions, of which $215 million are
uncommitted lines of credit. Of these total credit facilities granted, $962 million in loans were
outstanding as of September 30, 2008. 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 the central Government. The Corporation also has loans to various municipalities 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. The full faith and credit obligations of the municipalities have a first lien on
the basic property taxes.
Furthermore, as of September 30, 2008, the Corporation had outstanding $286 million in Obligations
of Puerto Rico, States and Political Subdivisions as part of its investment portfolio. Refer to
Notes 6 and 7 to the consolidated
116
financial statements for additional information. Of that total, $264 million is exposed to the
creditworthiness of the Puerto Rico Government and its municipalities. Of that portfolio, $48
million are in the form of Puerto Rico Commonwealth Appropriation Bonds, which are currently rated
Ba1, one notch below investment grade, by Moodys, while Standard & Poors Rating Services rates
them as investment grade.
Overview of Mortgage Loan Exposure
Given the instability in the residential housing sector, primarily in subprime mortgage loans,
Table O provides information on the Corporations mortgage loan exposure (for loans
held-in-portfolio, and excluding loans held-for-sale measured at lower of cost or market and loans
measured at fair value) as of September 30, 2008. Subprime mortgage loans refer to mortgage loans
made to individuals with a FICO® score of 660 or below. FICO® scores are used
as an indicator of the probability of default for loans.
TABLE O
Mortgage Loans Exposure
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
Prime loans |
|
Subprime loans |
|
Total |
|
Banco Popular de Puerto Rico |
|
$ |
1,016 |
|
|
$ |
1,191 |
|
|
$ |
2,207 |
|
Banco Popular North America: |
|
|
|
|
|
|
|
|
|
|
|
|
- Banco Popular North America |
|
|
465 |
|
|
|
1,174 |
|
|
|
1,639 |
|
- E-LOAN |
|
|
69 |
|
|
|
11 |
|
|
|
80 |
|
|
Sub-total |
|
$ |
1,550 |
|
|
$ |
2,376 |
|
|
$ |
3,926 |
|
Others not classified as prime or subprime loans |
|
|
|
|
|
|
|
|
|
|
561 |
|
|
Total |
|
|
|
|
|
|
|
|
|
$ |
4,487 |
|
|
Mortgage loans held-in-portfolio that are considered subprime under the above definition for the
Banco Popular de Puerto Rico reportable segment approximated 43% of its total mortgage loans
held-in-portfolio as of September 30, 2008 and 42% as of December 31, 2007. The Corporation,
however, believes that the particular characteristics of BPPRs subprime portfolio limit its
exposure under current market conditions. BPPRs subprime loans are fixed-rate fully amortizing,
full-documentation loans that do not have the level of layered risk associated with subprime loans
offered by certain major U.S. mortgage loan originators. While deteriorating economic conditions
have impacted the mortgage delinquency rates in Puerto Rico increasing the levels of non-accruing
mortgage loans, BPPR has not to date experienced significant increases in losses. The annualized
ratio of mortgage loans net charge-offs to average mortgage loans held-in-portfolio was 0.09% for
the nine months ended September 30, 2008, compared with 0.04% for the year ended December 31, 2007.
BPNAs mortgage loans held-in-portfolio considered subprime under the above definition, excluding
E-LOAN, approximated 72% of its total mortgage loans held-in-portfolio as of September 30, 2008,
compared with 71% as of December 31, 2007. This portfolio has principally two products either 7/1
ARMs (fixed-rate interest until end of year seven in which interest rate begins to reset annually
until maturity) or 30-year fixed-rate mortgages that do not have the level of layered risk
associated with subprime loans offered by certain major U.S. mortgage loan originators. For
example, BPNAs subprime mortgage loan portfolio has minimal California market exposure, loans are
underwritten to the fully indexed rate, and there are no interest-only, piggybacks or option ARM
loans (Refer to the Glossary included in the 2007 Annual Report for general descriptions of these
loan types). Furthermore, the loans are 100% owner occupied. Also, the first interest rate reset on
the 7/1 ARMs is not until 2012. Deteriorating economic conditions in the U.S. mainland housing
market have impacted the mortgage industry delinquency rates. The non-accruing loans to loans
held-in-portfolio ratio for BPNAs subprime mortgage loans was 6.27% as of September 30, 2008,
compared with 3.67% as of December 31, 2007. The annualized ratio of mortgage loans net charge-offs
to average mortgage loans held-in-portfolio for this subprime portfolio was 2.87% for the nine
months ended September 30, 2008, compared with 1.28% for the year ended December 31, 2007. As a
result of higher delinquency and net charge-offs, BPNA recorded a higher provision for
loan losses in the first nine months of 2008 to cover for inherent losses in this portfolio. The
average loan-to-value (LTV) for BPNAs subprime mortgage loans held-in-portfolio as of September
30, 2008 was 86%. Effective late December 2007, BPNA launched several initiatives designed to
reduce the overall credit exposure in the portfolio that involve the purchase, by either the
borrower or BPNA, of private mortgage insurance. BPNA will not originate subprime mortgage loans
with a loan-to-value higher
than 85% without private mortgage insurance. This insurance is a
117
financial guaranty in which an
insurer assumes a portion of the lenders risk in making a mortgage loan, normally the top portion
of the mortgage (i.e. the top 10% of a loan).
Item 3. Quantitative and Qualitative Disclosures About Market Risk
MARKET RISK
Market risk is the risk of loss arising from volatility in the fair value of financial instruments
or other assets due to changes in interest rates, currency exchange rates, prices, market
volatilities and liquidity. The financial results and capital levels of Popular, Inc. are
constantly exposed to market risk.
Interest rate risk (IRR), a component of market risk, is the exposure to adverse changes in net
interest income due to changes in interest rates, which can be affected by the shape and the slope
of the yield curves to which the financial products of the Corporation are related. Management
considers IRR a predominant market risk in terms of its potential impact on profitability or market
value. IRR may occur for one or more reasons, such as the maturity or repricing of assets and
liabilities at different times, changes in credit spreads, changes in short and long-term market
interest rates, or the maturity of assets or liabilities may be shortened or lengthened as interest
rates change. Depending on the duration and repricing characteristics of the Corporations assets,
liabilities and off-balance sheet items, changes in interest rates could either increase or
decrease the level of net interest income. In addition, interest rates may have an indirect impact
on loan demand, credit losses, loan origination volume, the value of the Corporations investment
securities holdings, including residual interests, gains and losses on sales of securities and
loans, the value of mortgage servicing rights, and other sources of earnings.
The techniques for measuring the potential impact of the Corporations exposure to market risk from
changing interest rates, which were described in the 2007 Annual Report, have remained
substantially constant from the end of 2007.
The Corporation maintains a formal asset and liability management process to quantify, monitor and
control interest rate risk and to assist management in maintaining stability in the net interest
margin under varying interest rate environments. Management employs a variety of measurement
techniques including the use of an earnings simulation model to analyze the net interest income
sensitivity to changing interest rates. Sensitivity analysis is calculated on a monthly basis 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. Simulations
are processed using various interest rate scenarios to determine potential changes to the future
earnings of the Corporation. The asset and liability management group also performs validation
procedures on various assumptions used as part of the sensitivity analysis as well as validations
of results on a monthly basis. 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-related products, estimates on the duration of the Corporations
deposits and interest rate scenarios.
Computations of the prospective effects of hypothetical interest rate changes are based on many
assumptions, including relative levels of market interest rates, interest rate spreads, loan
prepayments and deposit decay. Thus, they should not be relied upon as indicative of actual
results. Furthermore, the computations 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 actually may occur in the future.
Based on the results of the sensitivity analyses as of September 30, 2008, the Corporations net
interest income for the next twelve months is estimated to increase by $55.1 million in a
hypothetical 200 basis points rising rate scenario, and the change for the same period, utilizing a
similar hypothetical decline in the rate scenario, is an estimated decrease of $51.1 million. Both
hypothetical rate scenarios consider the gradual change to be achieved during a twelve-month period
from the prevailing rates as of September 30, 2008.
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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, as a result, could have a positive or negative effect in the Corporations net
interest income. Refer to Note 10 to the consolidated financial statements for further information
on the Corporations derivative instruments.
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 income (loss) in the consolidated statements of condition, except for
highly-inflationary environments in which the effects are included in other operating income in the
consolidated statements of operations. As of September 30, 2008, the Corporation had approximately
$37 million in an unfavorable foreign currency translation adjustment as part of accumulated other
comprehensive loss, compared with an unfavorable adjustment of
$35 million as of December 31, 2007 and September 30, 2007.
Recent Market Developments
The global and U.S. economies are experiencing a significant slowdown in business activity as a
result of, among other factors, disruptions in the financial system in the past year and declines
in home prices. Dramatic declines in the housing market during the past year, with falling home
prices and increasing foreclosures and unemployment, have resulted in significant write-downs of
asset values by financial institutions, including government-sponsored entities and major
commercial and investment banks. These write-downs, initially of mortgage-backed securities but
spreading to credit default swaps and other derivative securities have caused many financial
institutions to seek additional capital, to merge with larger and stronger institutions and, in
some cases, to fail.
Because of this crisis, the governments of major world economic powers, including the United
States, have taken extraordinary steps to stabilize the financial system. For example, the U.S.
Government has passed the EESA, which provides the U.S. Treasury
Department the ability to purchase or insure troubled assets held by financial institutions. In
addition, the Treasury Department has the ability to purchase equity stakes in financial
institutions. Other extraordinary measures taken by U.S. governmental agencies include increasing
deposit insurance limits, providing financing to money market mutual funds, and purchasing
commercial paper. It is not clear at this time what impact these measures, as well as other
extraordinary measures previously announced or announced in the future, will have on us or the
financial markets as a whole. Management will continue to monitor the effects of these programs as
they relate to the Corporation and its future operations. Refer to the Subsequent Events section of
this MD&A for additional information on the legislation.
LIQUIDITY
For a financial institution, such as the Corporation, liquidity risk may arise whenever the
institution cannot generate enough cash from either assets or liabilities to meet its obligations
when they become due, without incurring material losses. Cash requirements for a financial
institution are primarily made up of deposit withdrawals, contractual loan funding, the repayment
of borrowings as they mature and the ability to fund new and existing investments as opportunities
arise. 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 markets on which it depends are subject to loss of liquidity. The objective of
effective liquidity management is to ensure that the Corporation remains sufficiently liquid to
meet all of its financial obligations, finance expected future growth and maintain a reasonable
safety margin for cash commitments under both normal operating conditions and under unpredictable
circumstances of industry or market stress.
Liquidity is managed 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.
As of September 30, 2008, the following events impacted the Corporations funding activities and
strategy from those described in the MD&A included in Popular, Inc.s 2007 Annual Report for the
year ended December 31, 2007:
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During the second quarter of 2008, the Corporation completed the public offering of $400
million of 8.25%
Non-cumulative Monthly Income Preferred Stock, Series B, which qualifies in its entirety as
Tier I capital for risk-based capital ratios. Net proceeds were used for general corporate
purposes, including funding subsidiaries and increasing Populars liquidity and capital. |
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During the third quarter and early fourth quarter of 2008, Popular, Inc. issued an
aggregate principal amount of $350 million of notes in private offerings to certain
institutional investors. The notes mature in 2011 subject to specific provisions under the
note indentures. Refer to the forms 8-K filed with the SEC on September 16, 2008 and
October 1, 2008 for specific terms on the notes. The proceeds
from the issuances, coupled
with the proceeds from the sale of the PFH assets, will be used for general corporate
purposes, including the repayment of medium-term notes due in 2009. |
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There were reductions in short-term borrowings in the normal course of business related
in part to lower volume of investment securities and loans, including reductions from the
sales by PFH. |
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Brokered certificates of deposit increased to $3.1 billion as of September 30, 2008,
compared to a reduced level of $2.1 billion as of June 30, 2008. Brokered certificates of
deposit at December 31, 2007 amounted to $3.1 billion. Although management reduced reliance
on brokered certificates of deposit during the second quarter of 2008 and financed the
reduction with short-term borrowings, during the quarter ended September 30, 2008, the
Corporations banking subsidiary in Puerto Rico increased its use of brokered certificates
of deposit to further strengthen its level of on-hand liquidity amidst the recent financial
industry developments in the third quarter of 2008. This coincided with a substantial
reduction in unsecured short-term borrowings. |
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The Corporation repaid $500 million in medium-term notes upon their maturity in April
2008. |
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On August 28, 2008, the Corporation announced that its Board of Directors declared a
quarterly cash dividend of $0.08 cents per common share. The new dividend payment rate
represents a reduction of 50 percent from its previous quarterly dividend payment rate. The
reduction will help preserve $90 million of capital a year. The dividend payment is
reviewed on a quarterly basis. |
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As indicated previously, in August 2008, the Corporation announced that it entered into
an agreement with Goldman Sachs to sell a substantial amount of the assets remaining at
PFH. The transaction closed on November 3, 2008 and provided over $700 million in
additional liquidity to the bank holding companies. |
The securities issuances described above, the reduction in the dividend payment as well as the
sales of PFH assets substantially improves the Corporations liquidity position. Management
believes that the measures that have been taken will provide sufficient liquidity for the
Corporation to meet the repayment of debt maturities during 2008 and 2009 and other operational
needs.
The Corporations core deposit base and various secured borrowing facilities provide additional
liquidity.
Other than as described above, there have been no significant changes in the Corporations
aggregate contractual obligations since the end of 2007.
Refer to Note 14 to the consolidated financial statements for the composition of the Corporations
borrowings as of September 30, 2008. Also, refer to Note 17 to the consolidated financial
statements for the Corporations involvement in certain commitments as of September 30, 2008.
Liquidity, Funding and Capital Resources
Sources of
liquidity include both the retail deposit base and that available with other third-party
providers. The former include access to stable base of core deposits and those available in the
national markets (brokered deposits). The latter include unsecured and secured credit lines and
anticipated debt offerings in the capital markets. In addition to these, asset sales could be a
source of liquidity to the Corporation. Even if some of these alternatives may not be available
temporarily, it is expected that in the normal course of business, our funding sources are
adequate.
The following sections provide further information on the Corporations major funding activities
and needs, as well as the risks involved in these activities. A more detailed description of the
Corporations borrowings, including its terms, is included in Note 14 to the consolidated financial
statements. Also, the consolidated statements of cash
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flows in the accompanying consolidated
financial statements provide information on the Corporations cash inflows and outflows.
Banking Subsidiaries
Primary sources of funding for the Corporations banking subsidiaries (BPPR, BPNA and BP,N.A., or
the banking subsidiaries) include retail and commercial deposits, purchased funds, institutional
borrowings and, to a lesser extent, loan sales. The principal uses of funds for the banking
subsidiaries include loan and investment portfolio growth, repayment of obligations as they become
due, dividend payments to the holding company, and operational needs. In addition, the
Corporations banking subsidiaries maintain borrowing facilities with the Federal Home Loan Banks
(FHLB) and at the discount window of the Federal Reserve Bank of New York (FED), and have a
considerable amount of collateral that can be used to raise funds under these facilities.
Borrowings from the FHLB or the FED discount window require the Corporation to post securities or
whole loans as collateral. The banking subsidiaries must maintain their FHLB memberships to
continue accessing this source of funding.
The Corporations ability to compete successfully in the marketplace for deposits depends on
various factors, including pricing, service, convenience and financial stability as reflected by
operating results and credit ratings (by nationally recognized credit rating agencies). Although a
downgrade in the credit rating of the Corporation may impact its ability to raise deposits or the
rate 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 and this
is expected to mitigate the effect of a downgrade in credit ratings.
The Corporations banking subsidiaries have the ability to borrow funds from the FHLB at
competitive prices. As of September 30, 2008, the banking subsidiaries had short-term and long-term
credit facilities authorized with the FHLB aggregating $2.1 billion based on assets pledged with
the FHLB at that date, compared with $2.6 billion as of December 31, 2007. Outstanding borrowings
under these credit facilities totaled $1.4 billion as of September 30, 2008, compared with $1.7
billion as of December 31, 2007. Such advances are collateralized by securities and mortgage loans,
do not have restrictive covenants and, in the most, part do not have any callable features. Refer to
Note 14 to the consolidated financial statements for additional information.
As of September 30, 2008, the banking subsidiaries had a borrowing capacity at the FED discount
window of approximately $3.3 billion, of which $2.9 billion remained unused as of that date. This
compares to a borrowing capacity at the FED discount window of
$3.0 billion as of December 31, 2007,
which was unused at that date. This facility is a collateralized source of credit that is highly
reliable even under difficult market conditions. The amount available under this line is dependent
upon the balance of loans and securities pledged as collateral.
Bank Holding Companies
The principal sources of funding for the holding companies have included dividends received from
its banking and non-banking subsidiaries, asset sales and proceeds from the issuance of medium-term
notes, junior subordinated debentures and equity. Banking laws place certain restrictions on the
amount of dividends a bank may make to its parent company. Such restrictions have not had, and are
not expected to have, any material effect on the Corporations ability to meet its cash
obligations. The principal uses of these funds include the repayment of maturing debt, dividend
payments to shareholders and subsidiary funding through capital or debt.
The Corporations bank holding companies (BHCs, Popular, Inc., Popular North America and Popular
International Bank, Inc.) have borrowed in the money markets and the corporate debt market
primarily to finance their non-banking subsidiaries.
The BHCs have additional sources of liquidity available, in the form of credit facilities available
from affiliate banking subsidiaries and third-party providers, as well as dividends that can be
paid by the subsidiaries and assets that could be sold or financed. Other potential sources of
funding include the issuance of shares of common or preferred stock, or hybrid securities.
The principal source of income for the PIHC consists of dividends from BPPR. As members subject to
the
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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 September 30, 2008, BPPR could have declared a dividend of approximately $92 million
without the approval of the Federal Reserve Board. As of September 30, 2008, BPNA was required to
obtain the approval of the Federal Reserve Board to be able 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, 2007 for further information on dividend restrictions imposed
by regulatory requirements and policies on the payment of dividends by BPPR, BPNA and BP, N.A.
Risks to Liquidity
The importance of the Puerto Rico market for the Corporation is an additional risk factor that
could affect its financing activities. In the case of an extended economic slowdown in Puerto Rico,
the credit quality of the Corporation could be affected and, as a result of higher credit costs,
profitability may decrease. The substantial integration of Puerto Rico with the U.S. economy may
mitigate the impact of a recession in Puerto Rico, but a U.S. recession, concurrently with a
slowdown in Puerto Rico, may make a recovery in the local economic cycle more challenging.
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 a 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 and is confident that it has adequate alternatives to rely on
under a scenario where some primary funding sources are temporarily unavailable.
The BHCs have raised a considerable amount of liquidity in recent quarters through a combination of
senior debt and preferred securities offerings, and asset sales, including the recent sale of PFHs
assets. As a result of these transactions, management understands that the BHCs now have enough
liquidity resources to meet all obligations due in 2009.
Maintaining adequate credit ratings on Populars debt obligations is an important factor for
liquidity because the credit ratings impact the Corporations ability to borrow, the cost at which
it can raise financing and access to funding sources. The credit ratings are based on the financial
strength, credit quality and concentrations in the loan portfolio, the level and volatility of
earnings, capital adequacy, the quality of management, the liquidity of the balance sheet, the
availability of a significant base of core retail and commercial deposits, and the Corporations
ability to access a broad array of wholesale funding sources, among other factors. Changes in the
credit rating of the Corporation or any of its subsidiaries to a level below investment grade may
affect the Corporations ability to raise funds in the capital markets. The Corporations
counterparties are sensitive to the risk of a rating downgrade. In the event of a downgrade, it may
be expected that the cost of borrowing funds in the institutional market would increase. In
addition, the ability of the Corporation to raise new funds or renew maturing debt may be more
difficult.
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Credit ratings are an important factor in accessing the credit markets. Even though the
Corporations senior debt
ratings is currently several notches above the investment-grade threshold with each of the rating
agencies, the possibility of ratings downgrades can affect our ability to raise unsecured financing
at competitive rates.
The Corporation and BPPRs debt ratings and outlook as of September 30, 2008 were as follows:
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Popular, Inc. |
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BPPR |
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Short-term |
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Long-term |
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Short-term |
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Long-term |
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debt |
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debt |
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Outlook |
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debt |
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debt |
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Fitch Ratings |
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F-2 |
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A- |
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Negative |
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F-1 |
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A- |
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Moodys |
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P-2 |
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A3 |
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Negative |
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P-1 |
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A2 |
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S&P |
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A-2 |
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BBB+ |
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Negative |
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A-2 |
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A- |
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Refer to the Corporations Form 10-K for more detailed information on the ratings agencies
perspective on Populars outlook. Ratings and outlook have remained similar to those reported as of
December 31, 2007, except for Moodys that changed their outlook to negative in May 2008 and S&P
that revised their outlook from stable to negative in October 2008. The recent S&P outlook revision
results from several factors, including reduced profitability, trends in credit quality, and lower
capital ratios. At the same time, S&P reaffirmed the listed counterparty credit ratings on Popular.
The ratings above are subject to revisions or withdrawal at any time by the assigning rating
agency. Each rating should be evaluated independently of any other rating.
Some of the Corporations borrowings and deposits are subject to rating triggers, contractual
provisions that accelerate the maturity of the underlying obligations in the case of a change in
rating. Therefore, the need for the Corporation to raise funding in the marketplace could increase
more than usual in the case of a rating downgrade. The amount of obligations subject to rating
triggers that could accelerate the maturity of the underlying obligations was $313 million as of
September 30, 2008.
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 September 30, 2008 that 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 various lawsuits arising in the ordinary
course of business. Management believes, based on the opinion of legal counsel, that the aggregate
liabilities, if any, arising from such actions will not have a material adverse effect on the
financial position and results of operations of the Corporation.
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Item 1A. Risk Factors
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 2007 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 2007 Form 10-K.
The risks described in our 2007 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
Current levels of market volatility are unprecedented.
The capital and credit markets have been experiencing volatility and disruption for more than 12
months. In recent months, the volatility and disruption has reached unprecedented levels. The
markets have produced downward pressure on stock prices and credit availability for certain
issuers, often without regard to those issuers underlying financial strength. If current levels of
market disruption and volatility continue or worsen, there can be no assurance that we will not
experience an adverse effect, which may be material, on our ability to access capital and on our
business, financial condition and results of operations.
Current market developments may adversely affect our industry, business and results of operations.
Dramatic declines in the housing market, with falling home prices and increasing foreclosures and
unemployment, have resulted in significant write-downs of asset values by financial institutions,
including government-sponsored entities and major commercial and investment banks, and also in
sales of those assets at significantly discounted prices. These write-downs, initially of
mortgage-backed securities but spreading to credit default swaps and other derivative securities
have caused many financial institutions to seek additional capital, to merge with larger and
stronger institutions and, in some cases, to fail. Reflecting concern about the stability of the
financial markets generally and the strength of counterparties, many lenders and institutional
investors have reduced, and in some cases, ceased to provide funding to borrowers including other
financial institutions. The resulting lack of available credit, lack of confidence in the financial
sector, increased volatility in the financial markets and reduced business activity could
materially and adversely affect our business, financial condition and results of operations.
The soundness of other financial institutions could adversely affect us.
Financial services institutions are interrelated as a result of trading, clearing, counterparty, or
other relationships. We have exposure to many different industries and counterparties, and we
routinely execute transactions with counterparties in the financial services industry, including
brokers and dealers, commercial banks, investment banks, mutual and hedge funds, and other
institutional clients. Many of these transactions expose us to credit risk in the event of default
of our counterparty or client. In addition, our credit risk may be exacerbated when the collateral
held by us cannot be realized or is liquidated at prices not sufficient to recover the full amount
of the loan or derivative exposure due us. There is no assurance that any such losses would not
materially and adversely affect our results of operations or earnings.
There can be no assurance that the recently enacted Emergency Economic Stabilization Act of 2008
will help stabilize the U.S. financial system.
In response to the financial crises affecting the banking system and financial markets and the
going concern threats to the ability of investment banks and other financial institutions, the U.S.
Congress adopted the Emergency Economic Stabilization Act of 2008 (EESA), signed into law on
October 3, 2008. The U.S. Treasury and banking regulators are implementing a number of programs
under this legislation to address capital and liquidity issues in the banking system. There can be
no assurance, however, as to the actual impact that EESA will have on the financial markets,
including the extreme levels of volatility and limited credit availability currently being
experienced. If EESA and other measures are not effective in helping to stabilize the financial
markets, a continuation or worsening
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of current
financial market conditions could result or could materially and adversely affect our business,
financial condition, results of operations, access to credit or the trading price of our common
stock.
The U.S. governments plan to purchase large amounts of illiquid, mortgage-backed and other
securities from financial institutions may not be effective and/or may not be available to us.
A primary feature of the EESA is the establishment of a troubled asset relief program (TARP).TARP
gave the United States Treasury Department (Treasury) authority to deploy up to $750 billion into
the financial system with an objective of improving liquidity in capital markets. On October 24,
2008, Treasury announced plans to direct $250 billion of this authority into preferred stock
investments in certain qualifying financial institutions. The general terms of this preferred stock
program are as follows for a participating financial
institution:
Pay 5% dividends on the Treasurys preferred stock for the first five years, and then 9%
dividends thereafter,
Can not increase common stock dividends for three years while Treasury is an investor,
Can not redeem the Treasury preferred stock for three years unless the participating financial
institution raises high-quality equity capital,
Must receive Treasurys consent to buy back their own
stock,
Treasury receives warrants entitling Treasury to buy participating financial institutions common
stock equal to 15% of Treasurys total investment in the
participating financial institution, and
Participating bank executives must agree to certain compensation restrictions, and restrictions
on the amount of executive compensation which is tax deductible.
The terms related to this Treasury preferred stock investment could reduce investment
returns to participating financial institutions shareholders by restricting dividends to common shareholders, diluting existing
shareholders interests, and restricting capital management practices.
The FDIC may increase premium assessments to maintain adequate funding of the Deposit Insurance
Fund. The behavior of depositors in regard to the level of FDIC insurance could cause our existing
customers to reduce the amount of deposits held at the Bank, and could cause new customers to open
deposit accounts at the Bank.
The Federal Deposit Insurance Corporation (FDIC) insures deposits at FDIC insured financial
institutions up to certain limits. The FDIC charges insured financial institutions premiums to
maintain the Deposit Insurance Fund. Current economic conditions have increased expectations for
bank failures, in which case the FDIC would take control of failed banks and ensure payment of
deposits up to insured limits using the resources of the Deposit Insurance Fund. In such case, the
FDIC may increase premium assessments to maintain adequate funding of the Deposit Insurance Fund.
The Emergency Economic Stabilization Act of 2008 included a provision for an increase in the amount
of deposits insured by the FDIC to $250,000. On October 14, 2008, the FDIC announced a new program
the Temporary Liquidity Guarantee Program that provides unlimited deposit insurance on funds in
noninterest-bearing transaction deposit accounts not otherwise covered by the existing deposit
insurance limit of $250,000. All eligible institutions will be covered under the program for the
first 30 days without incurring any costs. After the initial period, participating institutions
will be assessed a 10 basis point surcharge on the additional insured deposits.
The behavior of depositors in regard to the level of FDIC insurance could cause our existing
customers to reduce the amount of deposits held at the BPPR, BPNA and BP, National Association (the
Banks), and could cause new customers to open deposit accounts at the Banks. The level and
composition of the Banks deposit portfolios directly impacts the Banks funding costs and net
interest margin.
Weakness in the economy and in the real estate market in Puerto Rico has adversely impacted and may
continue to adversely impact us.
A significant portion of our financial activities and credit exposure is concentrated in Puerto
Rico (the Island) and the Islands economy has been deteriorating.
This decline in the Islands economy has resulted in, among other things, a downturn in our loan
originations, an
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increase in the level of our non-performing assets and loan loss provisions,
particularly in our construction loan portfolio, an increase in the rate of foreclosure loss on
mortgage loans and a reduction in the value of our loans and loan servicing portfolio, all of which
have adversely affected our profitability. If the decline in economic activity continues, there
could be further adverse effects on our profitability.
The current state of the economy and uncertainty in the private and public sectors has had an
adverse effect on the credit quality of our loan portfolios. The continuation of the economic
slowdown could cause those adverse effects to continue, as delinquency rates may increase in the
short-term, until more sustainable growth resumes. Also, a potential reduction in consumer spending
may also impact growth in our other interest and non-interest revenue sources.
A prolonged economic slowdown, a continuing decline in the real estate market in the U.S. mainland,
and ongoing disruptions in the capital markets have harmed and could continue to harm the results
of operations of Popular, Inc.
The residential mortgage loan origination business has historically been cyclical, enjoying periods
of strong growth and profitability followed by periods of shrinking volumes and industry-wide
losses. Bust cycles in the housing sector affect our business by decreasing the volume of loans
originated and increasing the level of credit losses related to its mortgage loans.
The housing market in the U.S. is undergoing a correction of historic proportions. After a period
of several years of booming housing markets, fueled by liberal credit conditions and rapidly rising
property values, since early 2007 the sector has been in the midst of a substantial dislocation.
This dislocation has had a significant impact on some of our U.S-based business segments and has
the potential to affect its ongoing financial results and condition. The general level of property
values in the U.S., as measured by several indices widely followed by the market, has declined.
These declines are the result of ongoing market adjustments that are aligning property values with
income levels and home inventories. The supply of homes in the market has increased substantially,
and additional property value decreases may be required to clear the overhang of excess inventory
in the U.S. market. Declining property values could impact the credit quality of our U.S. mortgage
loan portfolio because the value of the homes underlying the loans is a primary source of repayment
in the event of foreclosure. It is possible that in the event of foreclosure in a loan from this
portfolio, the current market value of the underlying collateral is insufficient to cover the loan
amount owed.
Any sustained period of increased delinquencies, foreclosures or losses could harm our ability to
sell loans, the prices we receive for loans sold, or the values of its mortgage loans
held-for-sale. In addition, any material decline in real estate values would weaken our collateral
loan-to-value ratios and increase the possibility of loss if a borrower defaults. In such event, we
will be subject to the risk of loss on such mortgage assets arising from borrower defaults.
A prolonged economic downturn or recession would likely result in an increase in delinquencies,
defaults and foreclosures and in a reduction of the loan origination activity which would adversely
affect our financial results. Many economists are predicting that a U.S. recession started in the
second half of 2008.
A period of reduced economic growth or a recession has historically resulted in a reduction in
lending activity and an increase in the rate of defaults in commercial loans, consumer loans and
residential mortgages. A recession may have a significant adverse impact on the net interest income
and fee income. We may also experience significant losses on the loan portfolio due to a higher
level of defaults on commercial loans, consumer loans and residential mortgages.
Financial results are constantly exposed to market risk.
Market risk refers to the probability of variations in the net interest income or the market value
of assets and liabilities due to interest rate volatility. Despite the varied nature of market
risks, the primary source of this risk to us is the impact of changes in interest rates on net
interest income.
Net interest income is the difference between the revenue generated on earning assets and the
interest cost of funding those assets. Depending on the duration and repricing characteristics of
the assets, liabilities and off-balance sheet items, changes in interest rates could either
increase or decrease the level of net interest income. For any given period, the pricing structure
of the assets and liabilities is matched when an equal amount of such assets and
126
liabilities mature
or reprice in that period. Any mismatch of interest-earning assets and interest-bearing liabilities
is known as a gap
position. A positive gap denotes asset sensitivity, which means that an increase in interest rates
could have a positive effect on net interest income, while a decrease in interest rates could have
a negative effect on net interest income. As of September 30, 2008, the Corporation had a positive
gap position.
The Board of Governors of the Federal Reserve, which influences interest rates, has changed
interbank borrowing rates four times during the first nine months of 2008 by an aggregate 225
basis-point decrease. In October 2008, further rate decreases totaling 100 basis-points were
announced. The Board of Governors of the Federal Reserve has also expressed concerns about a
variety of economic conditions, as well as possible further reductions of interest rates in future
periods. Many of the Corporations commercial loans are variable-rate and, accordingly, rate
decreases may result in lower interest income to Popular in the near term; however, depositors will
continue to expect reasonable rates of interest on their accounts, potentially compressing net
interest margins further. The future outlook on interest rates and their impact on Populars
interest income, interest expense and net interest income is uncertain.
Reductions in our credit ratings or those of any of our subsidiaries would increase the cost of
borrowing funds and make our ability to raise new funds or renew maturing debt more difficult.
Credit ratings are an important component of our liquidity profile. Among other factors, credit
ratings are based on the financial strength, the credit quality of and concentrations in our loan
portfolio, the level and volatility of earnings, capital adequacy, the quality of management, the
liquidity of our balance sheet, the availability of a significant base of core retail and
commercial deposits, and the ability to access a broad array of wholesale funding sources.
In December 2007, Moodys Investor Service (Moodys) downgraded by one notch to A3 the senior
debt rating of Popular, Inc. and reduced the short-term rating to P-2 due to concerns about
funding challenges at the bank holding company as well as the profitability of the U.S. business.
The funding challenges were mitigated with the completion of the sale of certain PFH consumer and
mortgage loans to American General Financial on March 1, 2008. On September 3, 2008, Moodys
affirmed the ratings of Popular, Inc. and its subsidiaries. The bank holding company continues to
be rated A3 for senior debt and the lead bank, Banco Popular de Puerto Rico, is rated C+ for
bank financial strength and A2 for long-term deposits. The outlook is negative. The rating
affirmation followed our announcement of a sale of the majority of the assets remaining at PFH to
various affiliates of The Goldman Sachs Group, Inc.
Moodys outlook could return to stable if our 2009 holding company liquidity needs were fully
resolved without any additional weakness in our capital position and/or our near-term earnings. On
the other hand, a downgrade of our ratings would result if the bank holding companys liquidity
does not strengthen as anticipated. In addition, further weakness in our capital position or
earnings would be the source of negative rating pressure. The latter could arise from an inability
to strengthen the profitability of our remaining U.S. mainland franchise or from unexpected
deterioration in our core Puerto Rico business.
After the end of the third quarter of 2007, Fitch Ratings reduced the short-term credit rating of
Popular, Inc. to F-2 from F-1, and placed its long-term senior debt rating of A- on negative
rating watch. Fitch Ratings mentioned that the rating actions reflected credit quality pressures
from our sub-prime loan exposure as well as a more difficult environment for bank holding company
funding. In both cases, Fitch Ratings maintained that it believes that both situations are
challenging but manageable. In January 2008, Fitch Ratings announced that it was affirming our
senior debt rating at A- as well as removing the rating from negative watch. The outlook was
maintained negative. Management actions related to bank holding company liquidity were
highlighted by the agency as underlying the removal of the watch, but U.S. business profitability
concerns may keep the ratings outlook negative until these challenges are resolved.
On October 22, 2008, Standard & Poors Rating Services (S&P) revised its outlook on Popular Inc.
to negative from stable. At the same time, S&P affirmed Popular, Inc.s debt BBB+ for long-term
debt and A-2 for short-term obligations. The outlook revision results from several factors,
including reduced profitability, deterioration in credit quality, and lower capital ratios. S&P is
concerned about increased delinquency levels, notably in the mortgage and construction loan
portfolios, as they see pressure on home prices and reduced sale activity. Furthermore, capital
ratios declined in the third quarter, hurt by losses on asset sales and impairments on deferred tax
assets. S&P expects net earnings to remain under pressure in the near term amid a weak economic
environment. S&P
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considers liquidity to be adequate. The ratings also reflect the banks strong
competitive position in Puerto Rico, its diversified loan portfolio, and adequate capital ratios.
Changes in our credit ratings or the credit ratings of any of our subsidiaries to a level below
investment grade would adversely affect our ability to raise funds in the capital markets and
adversely affect our cost of funds and related margins and liquidity. Our counterparties are also
sensitive to the risk of a ratings downgrade.
Our ability to compete successfully in the marketplace for deposits depends on various factors,
including service, convenience and financial stability as reflected by the operating results and
credit ratings by nationally recognized credit agencies. Our ratings are subject to change at any
time at the sole discretion of the rating agencies without previous notice. A downgrade in credit
ratings may impact the ability to raise deposits, but we believe that the impact should not be
material. Deposits at all of our banking subsidiaries are federally insured (subject to limitations
established by the FDIC), which is expected to mitigate the effect of a downgrade in the credit
ratings.
Our income tax provision and other tax liabilities may be insufficient if taxing authorities are
successful in asserting tax positions that are contrary to our position. Additionally, continued
loss from U.S. operations in future reporting periods may require us to adjust further the
valuation allowance against our deferred tax assets.
From time to time, we are audited by various federal, state and local authorities regarding income
tax matters. Significant judgment is required to determine our provision for income taxes and our
liabilities for federal, state, local and other taxes. Our audits are in various stages of
completion; however, no outcome for a particular audit can be determined with certainty prior to
the conclusion of the audit, appeal and, in some cases, litigation process. Although we believe our
approach to determining the appropriate tax treatment is supportable and in accordance with
Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, and FASB
Interpretation No. 48, Accounting for Uncertainty in Income Taxes, it is possible that the final
tax authority will take a tax position that is materially different than that which is reflected in
our income tax provision and other tax reserves. As each audit is conducted, adjustments, if any,
are appropriately recorded in our Consolidated Financial Statements in the period determined. Such
differences could have a material adverse effect on our income tax provision or benefit, or other
tax reserves, in the reporting period in which such determination is made and, consequently, on our
results of operations, financial position and/or cash flows for such period.
We evaluate our deferred tax assets for
recoverability based on all available evidence. This process involves significant management judgment about assumptions that are
subject to change from period to period based on changes in tax laws or variances between our
future projected operating performance and our actual results. We are required to establish a
valuation allowance for deferred tax assets if we determine, based on
available evidence at the time the determination is made, that it is more likely than not that some
portion or all of the deferred tax assets will not be realized. In determining the
more-likely-than-not criterion, we evaluate all positive and negative evidence as of the end of
each reporting period. Future adjustments, either increases or decreases, to our deferred tax asset
valuation allowance will be determined based upon changes in the expected realization of our net
deferred tax assets. The realization of our deferred tax assets ultimately depends on the existence
of sufficient taxable income in either the carryback or carryforward periods under the tax law.
During the third quarter of 2008, we recorded a valuation allowance of $360.4 million related to
our U.S. mainland operations. Due to significant estimates utilized in establishing the valuation
allowance and the potential for changes in facts and circumstances, it is reasonably possible that
we will be required to record further adjustments to the valuation allowance in future reporting
periods. Such a charge could have a material adverse effect on our results of operations, financial
condition and capital position.
Our share price will fluctuate.
The market price of our common stock could be subject to significant fluctuations due to a change
in sentiment in the market regarding our operations or business prospects. Risk factors may include
the following:
operating results that may be worse than the expectations of management, securities
analysts and investors;
developments in our business or in the financial sector generally;
regulatory changes affecting our industry generally or our business and operations;
the operating and securities price performance of companies that investors consider to
be comparable to us;
128
announcements of strategic developments, acquisitions and other material events by us
or our competitors;
changes in the credit, mortgage and real estate markets, including the markets for
mortgage-related securities; and
changes in global financial markets and global economies and general market conditions,
such as interest or foreign exchange rates, stock, commodity, credit or asset valuations
or volatility.
Stock markets, in general, and our common stock, in particular, have over the past year
experienced, and continue to be experiencing, significant price and volume volatility and the
market price of our common stock may continue to be subject to similar market fluctuations that may
be unrelated to our operating performance or prospects. Increased volatility could result in a
decline in the market price of our common stock.
You may not receive dividends on the common stock.
Holders of our common stock are only entitled to receive such dividends as our board of
directors may declare out of funds legally available for such payments. Although we have
historically declared cash dividends on our common stock, we are not required to do so, and we have
reduced the amount of cash dividends payable on our common stock. Any reduction of, or the
elimination of, our common stock dividend in the future could adversely affect the market price of
our common stock.
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 maximum number of shares of common stock issuable under this Plan is 10,000,000.
The following table sets forth the details of purchases of Common Stock during the quarter ended
September 30, 2008 under the 2004 Omnibus Incentive Plan.
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Not in thousands |
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Total Number of Shares |
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Maximum Number of Shares |
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Total Number of Shares |
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Average Price Paid |
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Purchased as Part of Publicly |
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that May Yet be Purchased |
Period |
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Purchased |
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per Share |
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Announced Plans or Programs |
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Under the Plans or Programs (a) |
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July 1 July 31 |
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8,525,349 |
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August 1 August 31 |
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5,468 |
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$ |
6.97 |
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5,468 |
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8,519,881 |
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September 1 September 30 |
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8,519,881 |
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Total September 30, 2008 |
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5,468 |
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$ |
6.97 |
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5,468 |
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8,519,881 |
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(a) |
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Includes shares forfeited. |
Item 5.
Other Information
Mr. Roberto R. Herencia will retire as
Executive Vice President of the
Corporation and President of Banco Popular North America (BPNA), the
Corporations principal U.S.-based banking subsidiary, effective December 31, 2008. On
November 6, 2008, the Board of Directors of the Corporation approved the principal
terms of a Resignation and Transition Agreement (the Agreement) with Mr. Herencia.
Pursuant to the terms of the Agreement, Mr. Herencia will receive a severance
payment equal to $3,289,432. Of this amount, 85% will be paid on November 12, 2008,
with the remainder payable in a lump sum amount in early January 2009.
Under the terms of the Agreement,
all restricted stock awards previously granted
to Mr. Herencia will vest immediately upon resignation and all stock options exercisable
as of December 31, 2008 will remain exercisable through the earlier of (1) the expiration
date or (2) June 30, 2009, in the case of stock options issued under the Corporations
2001 Stock Option Plan or (3) March 31, 2009, for stock options issued under the
Corporations 2004 Omnibus Incentive Plan. With respect to performance share awards,
Mr. Herencia will be entitled to a payment in the form of common stock of the applicable
target award pro-rated for the period of time employed during the performance cycle. In
addition, Mr. Herencia will receive continuation of certain medical benefits through
December 31, 2009 as well as continued participation in BPNAs preferred mortgage
loan interest rate program for employees. The Corporation estimates that the aggregate
value of severance benefits payable to Mr. Herencia under the Agreement are equal to
$3,568,878 or 2.99 times his average annual compensation over the past five years.
Mr. Herencia will receive these benefits in consideration for agreeing to certain
covenants in the Agreement including non-solicitation, non-disparagement, cooperation
and confidentiality covenants for the benefit of the Corporation, as well as general release
of claims. Mr. Herencia will report to Richard Carrion,
Chairman of the Board, President and CEO of the Corporation until the effective date of
his resignation, at which time David H. Chafey, Jr., Senior Executive Vice President of
the Corporation and President of Banco Popular de Puerto Rico, will also assume the
position of President of BPNA. Mr. Chafey has not, as of the date of this report, been
awarded any additional compensation for assuming this position.
The
Agreement is attached as Exhibit 10.1 to this Quarterly Report on Form 10-Q.
Item 6. Exhibits
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Exhibit No. |
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Exhibit Description |
10.1
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Resignation and Transition
Agreement, dated as of November 6, 2008, between the
Corporation, BPPR, BPNA and Roberto R. Herencia. |
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10.2
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Asset Purchase Agreement by and
among Goldman Sachs Mortgage Company, Goldman, Sachs & Co.,
Litton Loan Servicing, LP and Popular Mortgage Servicing, Inc.,
Equity One, Inc., Equity One, Incorporated, Equity One Consumer Loan
Company, Inc., E-LOAN Auto Fund Two, LLC, Popular Financial Services,
LLC, Popular FS, LLC, and Popular, Inc. and Popular North America,
Inc.*
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12.1
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Computation of the ratios of earnings to fixed charges and preferred stock
dividends. |
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31.1
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Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2
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Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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32.1
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Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. |
32.2
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Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. |
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* |
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Confidential portions of this exhibit have been omitted and
filed separately with the Securities and Exchange Commission under a
confidential treatment request. |
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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.
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POPULAR, INC.
(Registrant)
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Date: November 10, 2008
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By:
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/s/ Jorge A. Junquera
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Jorge A. Junquera
Senior Executive Vice President & |
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Chief Financial Officer |
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Date: November 10, 2008
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By:
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/s/ Ileana González Quevedo
Ileana González Quevedo
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Senior Vice President & Corporate Comptroller |
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130