POPULAR, INC.
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 June 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 definition of accelerated filer, large
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
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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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 281,738,612 shares outstanding as of August
5, 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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June 30, 2008 |
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December 31, 2007 |
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June 30, 2007 |
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ASSETS |
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Cash and due from banks |
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$ |
887,619 |
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$ |
818,825 |
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$ |
762,085 |
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Money market investments: |
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Federal funds sold |
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710,000 |
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737,815 |
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345,400 |
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Securities purchased under agreements to resell |
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170,497 |
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145,871 |
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212,138 |
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Time deposits with other banks |
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17,299 |
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123,026 |
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17,449 |
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897,796 |
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1,006,712 |
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574,987 |
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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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3,418,708 |
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4,249,295 |
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3,421,716 |
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Other investment securities available-for-sale |
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4,283,619 |
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4,265,840 |
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5,552,752 |
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Investment securities held-to-maturity, at amortized cost (market value as
of June 30, 2008 - $231,210; December 31, 2007 - $486,139; June 30, 2007 -
$429,536) |
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232,483 |
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484,466 |
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429,479 |
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Other investment securities, at lower of cost or realizable value
(realizable value as of June 30, 2008 - $299,827; December 31, 2007 -
$216,819; June 30, 2007 - $160,372) |
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240,731 |
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216,584 |
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160,150 |
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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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417,437 |
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673,958 |
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355,484 |
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Other trading securities |
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82,051 |
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93,997 |
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321,374 |
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Loans held-for-sale measured at lower of cost or market value |
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337,552 |
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1,889,546 |
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605,990 |
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Loans measured at fair value pursuant to SFAS No. 159: |
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Loans measured at fair value pledged with creditors right to repledge |
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45,758 |
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Other loans measured at fair value |
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799,134 |
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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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195,661 |
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Other loans |
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26,636,004 |
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28,053,956 |
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32,274,058 |
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Less Unearned income |
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186,770 |
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182,110 |
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323,864 |
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Allowance for loan losses |
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652,730 |
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548,832 |
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564,847 |
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25,796,504 |
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27,472,624 |
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31,581,008 |
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Premises and equipment, net |
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633,450 |
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588,163 |
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587,505 |
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Other real estate |
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102,809 |
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81,410 |
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112,858 |
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Accrued income receivable |
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163,274 |
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216,114 |
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249,746 |
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Servicing assets (at fair value on June 30, 2008 - $186,155; December 31,
2007 - $191,624; June 30, 2007 - $197,873) |
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190,778 |
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196,645 |
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201,861 |
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Other assets (See Note 8) |
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2,455,842 |
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1,456,994 |
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1,297,600 |
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Goodwill |
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628,826 |
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630,761 |
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668,469 |
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Other intangible assets |
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64,223 |
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69,503 |
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102,299 |
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$ |
41,678,594 |
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$ |
44,411,437 |
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$ |
46,985,363 |
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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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$ |
4,482,287 |
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$ |
4,510,789 |
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$ |
4,280,195 |
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Interest bearing |
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22,633,441 |
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23,823,689 |
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21,105,800 |
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27,115,728 |
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28,334,478 |
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25,385,995 |
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Federal funds purchased and assets sold under agreements to repurchase |
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4,738,677 |
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5,437,265 |
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5,655,936 |
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Other short-term borrowings |
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1,337,210 |
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1,501,979 |
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3,384,105 |
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Notes payable at cost |
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3,750,647 |
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4,621,352 |
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8,068,638 |
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Notes payable at fair value pursuant to SFAS No. 159 |
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173,725 |
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Other liabilities |
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856,504 |
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934,372 |
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793,500 |
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37,972,491 |
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40,829,446 |
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43,288,174 |
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Commitments and contingencies (See Note 16) |
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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 June 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; 294,620,193 shares issued (December 31, 2007 - 293,651,398;
June 30, 2007 - 292,722,761) and 280,983,132 outstanding
(December 31, 2007 - 280,029,215; June 30, 2007 - 279,326,816) |
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1,767,721 |
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1,761,908 |
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1,756,337 |
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Surplus |
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563,100 |
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568,184 |
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533,152 |
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Retained earnings |
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1,086,373 |
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1,319,467 |
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1,701,100 |
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Accumulated other comprehensive loss, net of tax of ($22,392)
(December 31, 2007 - ($15,438); June 30, 2007 - ($96,065)) |
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(90,448 |
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(46,812 |
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(274,817 |
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Treasury stock at cost, 13,637,061 shares (December 31, 2007 - 13,622,183;
June 30, 2007 - 13,395,945) |
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(207,627 |
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(207,740 |
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(205,567 |
) |
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3,705,994 |
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3,581,882 |
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3,697,080 |
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$ |
41,678,594 |
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$ |
44,411,437 |
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$ |
46,985,363 |
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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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Six months ended |
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June 30, |
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June 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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$ |
497,418 |
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$ |
656,485 |
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$ |
1,058,535 |
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$ |
1,300,599 |
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Money market investments |
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3,476 |
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5,752 |
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10,204 |
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10,361 |
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Investment securities |
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83,128 |
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113,063 |
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177,533 |
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228,554 |
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Trading account securities |
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16,133 |
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9,611 |
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34,826 |
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18,992 |
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600,155 |
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784,911 |
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1,281,098 |
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1,558,506 |
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INTEREST EXPENSE: |
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Deposits |
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168,045 |
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182,730 |
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362,985 |
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355,832 |
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Short-term borrowings |
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42,502 |
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119,466 |
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107,647 |
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244,275 |
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Long-term debt |
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51,723 |
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111,298 |
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115,392 |
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232,000 |
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262,270 |
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413,494 |
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586,024 |
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832,107 |
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Net interest income |
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337,885 |
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371,417 |
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695,074 |
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726,399 |
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Provision for loan losses |
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190,640 |
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115,167 |
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358,862 |
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211,513 |
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Net interest income after provision for loan losses |
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147,245 |
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256,250 |
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336,212 |
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514,886 |
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Service charges on deposit accounts |
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51,799 |
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48,392 |
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102,886 |
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96,863 |
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Other service fees (See Note 17) |
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110,079 |
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89,590 |
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215,546 |
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177,439 |
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Net gain on sale and valuation adjustments of investment securities |
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27,763 |
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1,175 |
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75,703 |
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82,946 |
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Trading account profit (loss) |
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16,711 |
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10,377 |
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21,175 |
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(3,787 |
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Losses from changes in fair value related to instruments measured
at fair value pursuant to SFAS No. 159 |
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(35,922 |
) |
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(38,942 |
) |
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(Loss) gain on sale of loans and valuation adjustments on loans
held-for- sale |
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(1,453 |
) |
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28,294 |
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67,292 |
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|
31,728 |
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Other operating income |
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24,595 |
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25,547 |
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57,887 |
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70,362 |
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340,817 |
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459,625 |
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837,759 |
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970,437 |
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OPERATING EXPENSES: |
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Personnel costs: |
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Salaries |
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125,423 |
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126,950 |
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262,132 |
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263,429 |
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Pension, profit sharing and other benefits |
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36,462 |
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37,338 |
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74,932 |
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79,234 |
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161,885 |
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164,288 |
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337,064 |
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342,663 |
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Net occupancy expenses |
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26,362 |
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26,501 |
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61,354 |
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58,515 |
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Equipment expenses |
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30,724 |
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32,245 |
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62,722 |
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64,641 |
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Other taxes |
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13,879 |
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11,835 |
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27,022 |
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|
23,682 |
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Professional fees |
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31,627 |
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38,642 |
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68,252 |
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|
74,629 |
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Communications |
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13,145 |
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16,973 |
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|
28,448 |
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|
|
34,035 |
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Business promotion |
|
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18,251 |
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30,369 |
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|
|
35,467 |
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|
|
58,741 |
|
Printing and supplies |
|
|
3,899 |
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|
4,549 |
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|
|
8,174 |
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|
8,825 |
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Other operating expenses |
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|
45,471 |
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|
|
32,838 |
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|
86,763 |
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|
|
64,854 |
|
Amortization of intangibles |
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2,490 |
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|
|
2,813 |
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|
4,982 |
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|
|
5,796 |
|
|
|
|
|
347,733 |
|
|
|
361,053 |
|
|
|
720,248 |
|
|
|
736,381 |
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(Loss) income before income tax |
|
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(6,916 |
) |
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|
98,572 |
|
|
|
117,511 |
|
|
|
234,056 |
|
Income tax (benefit) expense |
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(31,166 |
) |
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|
23,622 |
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(10,029 |
) |
|
|
40,459 |
|
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NET INCOME |
|
$ |
24,250 |
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$ |
74,950 |
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|
$ |
127,540 |
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|
$ |
193,597 |
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NET INCOME APPLICABLE TO COMMON STOCK |
|
$ |
18,247 |
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|
$ |
71,972 |
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$ |
118,559 |
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$ |
187,641 |
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BASIC EARNINGS PER COMMON SHARE (EPS) |
|
$ |
0.06 |
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$ |
0.26 |
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$ |
0.42 |
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|
$ |
0.67 |
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DILUTED EPS |
|
$ |
0.06 |
|
|
$ |
0.26 |
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|
$ |
0.42 |
|
|
$ |
0.67 |
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DIVIDENDS DECLARED PER COMMON SHARE |
|
$ |
0.16 |
|
|
$ |
0.16 |
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|
$ |
0.32 |
|
|
$ |
0.32 |
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|
The accompanying notes are an integral part of these unaudited consolidated financial statements.
5
POPULAR, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
(UNAUDITED)
|
|
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|
|
|
|
|
|
|
|
Six months ended June 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 |
|
|
5,813 |
|
|
|
3,131 |
|
Stock options exercised |
|
|
|
|
|
|
60 |
|
|
Balance at end of period |
|
|
1,767,721 |
|
|
|
1,756,337 |
|
|
Surplus: |
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
568,184 |
|
|
|
526,856 |
|
Common stock issued under the Dividend Reinvestment Plan |
|
|
4,307 |
|
|
|
5,290 |
|
Issuance cost of preferred stock |
|
|
(9,950 |
) |
|
|
|
|
Stock options expense on unexercised options, net of forfeitures |
|
|
559 |
|
|
|
857 |
|
Stock options exercised |
|
|
|
|
|
|
149 |
|
|
Balance at end of period |
|
|
563,100 |
|
|
|
533,152 |
|
|
Retained earnings: |
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
1,319,467 |
|
|
|
1,594,144 |
|
Net income |
|
|
127,540 |
|
|
|
193,597 |
|
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 |
|
|
(89,822 |
) |
|
|
(89,352 |
) |
Cash dividends declared on preferred stock |
|
|
(8,981 |
) |
|
|
(5,956 |
) |
|
Balance at end of period |
|
|
1,086,373 |
|
|
|
1,701,100 |
|
|
Accumulated other comprehensive loss: |
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
(46,812 |
) |
|
|
(233,728 |
) |
Other comprehensive loss, net of tax |
|
|
(43,636 |
) |
|
|
(41,089 |
) |
|
Balance at end of period |
|
|
(90,448 |
) |
|
|
(274,817 |
) |
|
Treasury stock at cost: |
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
(207,740 |
) |
|
|
(206,987 |
) |
Purchase of common stock |
|
|
(358 |
) |
|
|
(352 |
) |
Reissuance of common stock |
|
|
471 |
|
|
|
1,772 |
|
|
Balance at end of period |
|
|
(207,627 |
) |
|
|
(205,567 |
) |
|
Total stockholders equity |
|
$ |
3,705,994 |
|
|
$ |
3,697,080 |
|
|
Disclosure of changes in number of shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
June 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 |
|
|
968,795 |
|
|
|
1,450,410 |
|
|
|
521,773 |
|
Stock options exercised |
|
|
|
|
|
|
10,064 |
|
|
|
10,064 |
|
|
Balance at end of period |
|
|
294,620,193 |
|
|
|
293,651,398 |
|
|
|
292,722,761 |
|
|
Treasury stock |
|
|
(13,637,061 |
) |
|
|
(13,622,183 |
) |
|
|
(13,395,945 |
) |
|
Common Stock outstanding |
|
|
280,983,132 |
|
|
|
280,029,215 |
|
|
|
279,326,816 |
|
|
The accompanying notes are an integral part of these unaudited consolidated financial statements.
6
POPULAR, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended |
|
Six months ended |
|
|
June 30, |
|
June 30, |
(In thousands) |
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
Net income |
|
$ |
24,250 |
|
|
$ |
74,950 |
|
|
$ |
127,540 |
|
|
$ |
193,597 |
|
|
Other comprehensive loss before tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment |
|
|
(1,411 |
) |
|
|
1,200 |
|
|
|
(1,192 |
) |
|
|
2,980 |
|
Adjustment of pension and postretirement benefit plans |
|
|
(37 |
) |
|
|
|
|
|
|
(74 |
) |
|
|
(519 |
) |
Unrealized losses on securities available-for-sale arising during the period |
|
|
(149,927 |
) |
|
|
(95,452 |
) |
|
|
(22,437 |
) |
|
|
(55,969 |
) |
Reclassification adjustment for gains included in net income |
|
|
(27,685 |
) |
|
|
(1 |
) |
|
|
(26,373 |
) |
|
|
(83 |
) |
Unrealized net gains (losses) on cash flow hedges |
|
|
2,963 |
|
|
|
1,840 |
|
|
|
(2,107 |
) |
|
|
948 |
|
Reclassification adjustment for losses (gains) included in net income |
|
|
92 |
|
|
|
(286 |
) |
|
|
1,593 |
|
|
|
(125 |
) |
Cumulative effect of accounting change |
|
|
|
|
|
|
(243 |
) |
|
|
|
|
|
|
(243 |
) |
|
|
|
|
(176,005 |
) |
|
|
(92,942 |
) |
|
|
(50,590 |
) |
|
|
(53,011 |
) |
Income tax benefit |
|
|
41,838 |
|
|
|
22,060 |
|
|
|
6,954 |
|
|
|
11,922 |
|
|
Total other comprehensive loss, net of tax |
|
|
(134,167 |
) |
|
|
(70,882 |
) |
|
|
(43,636 |
) |
|
|
(41,089 |
) |
|
Comprehensive (loss) income |
|
($ |
109,917 |
) |
|
$ |
4,068 |
|
|
$ |
83,904 |
|
|
$ |
152,508 |
|
|
Tax Effects Allocated to Each Component of Other Comprehensive Loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended |
|
Six months ended |
|
|
June 30, |
|
June 30, |
(In thousands) |
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
Underfunding of pension and postretirement benefit plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
180 |
|
Unrealized losses on securities available-for-sale arising during the period |
|
$ |
38,943 |
|
|
$ |
22,615 |
|
|
$ |
3,680 |
|
|
|
12,022 |
|
Reclassification adjustment for gains included in net income |
|
|
4,025 |
|
|
|
|
|
|
|
3,124 |
|
|
|
14 |
|
Unrealized net gains (losses) on cash flows hedges |
|
|
(1,094 |
) |
|
|
(669 |
) |
|
|
775 |
|
|
|
(352 |
) |
Reclassification adjustment for (gains) losses included in net income |
|
|
(36 |
) |
|
|
114 |
|
|
|
(625 |
) |
|
|
58 |
|
|
Income tax benefit |
|
$ |
41,838 |
|
|
$ |
22,060 |
|
|
$ |
6,954 |
|
|
$ |
11,922 |
|
|
Disclosure of accumulated other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
June 30, |
(In thousands) |
|
2008 |
|
2007 |
|
2007 |
|
Foreign currency translation adjustment |
|
($ |
35,780 |
) |
|
($ |
34,588 |
) |
|
($ |
33,721 |
) |
|
Underfunding of pension and postretirement benefit plans |
|
|
(51,213 |
) |
|
|
(51,139 |
) |
|
|
(69,779 |
) |
Tax effect |
|
|
20,108 |
|
|
|
20,108 |
|
|
|
27,214 |
|
|
Net of tax amount |
|
|
(31,105 |
) |
|
|
(31,031 |
) |
|
|
(42,565 |
) |
|
Unrealized (losses) gains on securities available-for-sale |
|
|
(21,718 |
) |
|
|
27,092 |
|
|
|
(268,295 |
) |
Tax effect |
|
|
854 |
|
|
|
(5,950 |
) |
|
|
69,182 |
|
|
Net of tax amount |
|
|
(20,864 |
) |
|
|
21,142 |
|
|
|
(199,113 |
) |
|
Unrealized (losses) gains on cash flows hedges |
|
|
(4,129 |
) |
|
|
(3,615 |
) |
|
|
913 |
|
Tax effect |
|
|
1,430 |
|
|
|
1,280 |
|
|
|
(331 |
) |
|
Net of tax amount |
|
|
(2,699 |
) |
|
|
(2,335 |
) |
|
|
582 |
|
|
Accumulated other comprehensive loss, net of tax |
|
($ |
90,448 |
) |
|
($ |
46,812 |
) |
|
($ |
274,817 |
) |
|
The accompanying notes are an integral part of these unaudited consolidated financial statements.
7
POPULAR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, |
(In thousands) |
|
2008 |
|
2007 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
127,540 |
|
|
$ |
193,597 |
|
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization of premises and equipment |
|
|
37,318 |
|
|
|
39,973 |
|
Provision for loan losses |
|
|
358,862 |
|
|
|
211,513 |
|
Amortization of intangibles |
|
|
4,982 |
|
|
|
5,796 |
|
Amortization and fair value adjustments of servicing assets |
|
|
25,122 |
|
|
|
22,606 |
|
Net gain on sale and valuation adjustments of investment securities |
|
|
(75,703 |
) |
|
|
(82,946 |
) |
Losses from changes in fair value related to instruments measured at fair value
pursuant to SFAS No. 159 |
|
|
38,942 |
|
|
|
|
|
Net gain on disposition of premises and equipment |
|
|
(3,111 |
) |
|
|
(4,851 |
) |
Net gain on sale of loans and valuation adjustments on loans held-for-sale |
|
|
(67,292 |
) |
|
|
(31,728 |
) |
Net amortization of premiums and accretion of discounts on investments |
|
|
12,656 |
|
|
|
11,235 |
|
Net amortization of premiums and deferred loan origination fees and costs |
|
|
28,951 |
|
|
|
47,938 |
|
Earnings from investments under the equity method |
|
|
(6,899 |
) |
|
|
(16,590 |
) |
Stock options expense |
|
|
559 |
|
|
|
907 |
|
Deferred income taxes |
|
|
(83,836 |
) |
|
|
(48,112 |
) |
Net disbursements on loans held-for-sale |
|
|
(1,509,819 |
) |
|
|
(3,087,103 |
) |
Acquisitions of loans held-for-sale |
|
|
(185,053 |
) |
|
|
(403,712 |
) |
Proceeds from sale of loans held-for-sale |
|
|
1,006,208 |
|
|
|
2,833,030 |
|
Net decrease in trading securities |
|
|
732,067 |
|
|
|
645,680 |
|
Net decrease (increase) in accrued income receivable |
|
|
42,301 |
|
|
|
(1,506 |
) |
Net increase in other assets |
|
|
(264,170 |
) |
|
|
(16,261 |
) |
Net decrease in interest payable |
|
|
(53,440 |
) |
|
|
(14,013 |
) |
Net increase in postretirement benefit obligation |
|
|
203 |
|
|
|
1,824 |
|
Net decrease in other liabilities |
|
|
(24,429 |
) |
|
|
(52,071 |
) |
|
Total adjustments |
|
|
14,419 |
|
|
|
61,609 |
|
|
Net cash provided by operating activities |
|
|
141,959 |
|
|
|
255,206 |
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Net decrease (increase) in money market investments |
|
|
108,916 |
|
|
|
(206,843 |
) |
Purchases of investment securities: |
|
|
|
|
|
|
|
|
Available-for-sale |
|
|
(3,427,660 |
) |
|
|
(65,385 |
) |
Held-to-maturity |
|
|
(3,631,141 |
) |
|
|
(12,293,611 |
) |
Other |
|
|
(136,775 |
) |
|
|
(16,935 |
) |
Proceeds from calls, paydowns, maturities and redemptions of investment securities: |
|
|
|
|
|
|
|
|
Available-for-sale |
|
|
1,851,899 |
|
|
|
810,710 |
|
Held-to-maturity |
|
|
3,884,838 |
|
|
|
11,957,964 |
|
Other |
|
|
112,628 |
|
|
|
5,445 |
|
Proceeds from sale of investment securities available-for-sale |
|
|
2,406,504 |
|
|
|
28,981 |
|
Proceeds from sale of other investment securities |
|
|
49,330 |
|
|
|
246,352 |
|
Net disbursements on loans |
|
|
(596,548 |
) |
|
|
(362,569 |
) |
Proceeds from sale of loans |
|
|
1,715,330 |
|
|
|
3,549 |
|
Acquisition of loan portfolios |
|
|
(6,669 |
) |
|
|
(784 |
) |
Assets acquired, net of cash |
|
|
|
|
|
|
(1,633 |
) |
Mortgage servicing rights purchased |
|
|
(2,986 |
) |
|
|
(23,988 |
) |
Acquisition of premises and equipment |
|
|
(98,028 |
) |
|
|
(49,652 |
) |
Proceeds from sale of premises and equipment |
|
|
19,743 |
|
|
|
21,951 |
|
Proceeds from sale of foreclosed assets |
|
|
51,684 |
|
|
|
80,278 |
|
|
Net cash provided by investing activities |
|
|
2,301,065 |
|
|
|
133,830 |
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Net (decrease) increase in deposits |
|
|
(1,198,512 |
) |
|
|
936,810 |
|
Net decrease in federal funds purchased and
assets sold under agreements to repurchase |
|
|
(698,588 |
) |
|
|
(106,509 |
) |
Net decrease in other short-term borrowings |
|
|
(164,769 |
) |
|
|
(650,020 |
) |
Payments of notes payable |
|
|
(1,243,674 |
) |
|
|
(773,731 |
) |
Proceeds from issuance of notes payable |
|
|
630,186 |
|
|
|
103,249 |
|
Dividends paid |
|
|
(98,685 |
) |
|
|
(95,223 |
) |
Proceeds from issuance of common stock |
|
|
10,120 |
|
|
|
8,667 |
|
Proceeds from issuance of preferred stock |
|
|
390,050 |
|
|
|
|
|
Treasury stock acquired |
|
|
(358 |
) |
|
|
(352 |
) |
|
Net cash used in financing activities |
|
|
(2,374,230 |
) |
|
|
(577,109 |
) |
|
Net increase (decrease) in cash and due from banks |
|
|
68,794 |
|
|
|
(188,073 |
) |
Cash and due from banks at beginning of period |
|
|
818,825 |
|
|
|
950,158 |
|
|
Cash and due from banks at end of period |
|
$ |
887,619 |
|
|
$ |
762,085 |
|
|
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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 full service 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 to the communities it serves. BPNA operates branches in New York, California, Illinois,
New Jersey, Florida and Texas. E-LOAN offers online consumer direct lending and provides an online
platform to raise deposits for BPNA. As described in Note 19 to the consolidated financial
statements, E-LOAN restructured its business operations during the fourth quarter of 2007 and the
beginning of 2008. PFH, after certain restructuring events discussed also in Note 19 to the
consolidated financial statements, exited the branch network loan origination business during the
first quarter of 2008, but continues to operate a mortgage loan servicing unit, a small scale
origination / refinancing unit and to carry a maturing loan portfolio. 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 24 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.
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 June 30, 2008, December
31, 2007 and June 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.
9
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 12 to these consolidated financial statements for the
disclosures required for the quarter and six months ended June 30, 2008. The adoption of SFAS No.
157 in January 1, 2008 did not have an impact in beginning retained earnings.
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. 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 11 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 June 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.
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
10
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 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.
11
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, for the six months ended June 30, 2008.
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.
Note 3 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 $665 million as of June 30, 2008 (December 31, 2007 $678 million;
June 30, 2007 $603 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 June 30,
2008, the Corporation had securities with a market value of $274 thousand (December 31, 2007 -
securities with a market value of $273 thousand; June 30, 2007 securities with a market value of
$445 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.
12
As required by the Puerto Rico International Banking Center Regulatory Act, as of June 30, 2008,
December 31, 2007, and June 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 June 30, 2008, the
Corporation maintained restricted cash of $1.9 million as collateral (December 31, 2007 $1.9
million; June 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 June 30, 2008, the Corporation had restricted cash of $3.5 million (December 31, 2007 $3.5
million) to support a letter of credit related to a service settlement agreement.
Note 4 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
June 30, |
(In thousands) |
|
2008 |
|
2007 |
|
2007 |
|
Investment securities available-for-sale, at fair value |
|
$ |
2,716,718 |
|
|
$ |
2,944,643 |
|
|
$ |
3,264,299 |
|
Investment securities held-to-maturity, at amortized cost |
|
|
|
|
|
|
339 |
|
|
|
501 |
|
Loans held-for-sale measured at lower of cost or market
value |
|
|
36,613 |
|
|
|
42,428 |
|
|
|
|
|
Loans measured at fair value pursuant to SFAS No. 159 |
|
|
167,646 |
|
|
|
|
|
|
|
|
|
Loans held-in-portfolio |
|
|
7,727,951 |
|
|
|
8,489,814 |
|
|
|
9,062,900 |
|
|
|
|
$ |
10,648,928 |
|
|
$ |
11,477,224 |
|
|
$ |
12,327,700 |
|
|
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 5 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 June 30, 2008, December 31, 2007 and June 30, 2007 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AS OF JUNE 30, 2008 |
|
|
|
|
|
|
Gross |
|
Gross |
|
|
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Market |
(In thousands) |
|
Cost |
|
Gains |
|
Losses |
|
Value |
|
U.S. Treasury securities |
|
$ |
461,404 |
|
|
$ |
542 |
|
|
$ |
1,195 |
|
|
$ |
460,751 |
|
Obligations of U.S. Government sponsored entities |
|
|
4,588,854 |
|
|
|
27,677 |
|
|
|
10,781 |
|
|
|
4,605,750 |
|
Obligations of Puerto Rico, States and political subdivisions |
|
|
126,775 |
|
|
|
243 |
|
|
|
1,836 |
|
|
|
125,182 |
|
Collateralized mortgage obligations |
|
|
1,626,202 |
|
|
|
3,487 |
|
|
|
21,079 |
|
|
|
1,608,610 |
|
Mortgage-backed securities |
|
|
889,613 |
|
|
|
5,743 |
|
|
|
11,318 |
|
|
|
884,038 |
|
Equity securities |
|
|
28,607 |
|
|
|
441 |
|
|
|
13,642 |
|
|
|
15,406 |
|
Others |
|
|
2,590 |
|
|
|
|
|
|
|
|
|
|
|
2,590 |
|
|
|
|
$ |
7,724,045 |
|
|
$ |
38,133 |
|
|
$ |
59,851 |
|
|
$ |
7,702,327 |
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 JUNE 30, 2007 |
|
|
|
|
|
|
Gross |
|
Gross |
|
|
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Market |
(In thousands) |
|
Cost |
|
Gains |
|
Losses |
|
Value |
|
U.S. Treasury securities |
|
$ |
500,193 |
|
|
|
|
|
|
$ |
37,616 |
|
|
$ |
462,577 |
|
Obligations of U.S. Government sponsored entities |
|
|
6,016,206 |
|
|
|
|
|
|
|
174,448 |
|
|
|
5,841,758 |
|
Obligations of Puerto Rico, States and political subdivisions |
|
|
117,372 |
|
|
$ |
170 |
|
|
|
3,754 |
|
|
|
113,788 |
|
Collateralized mortgage obligations |
|
|
1,544,362 |
|
|
|
6,122 |
|
|
|
18,435 |
|
|
|
1,532,049 |
|
Mortgage-backed securities |
|
|
991,440 |
|
|
|
1,529 |
|
|
|
32,771 |
|
|
|
960,198 |
|
Equity securities |
|
|
55,250 |
|
|
|
1,173 |
|
|
|
11,074 |
|
|
|
45,349 |
|
Others |
|
|
17,940 |
|
|
|
809 |
|
|
|
|
|
|
|
18,749 |
|
|
|
|
$ |
9,242,763 |
|
|
$ |
9,803 |
|
|
$ |
278,098 |
|
|
$ |
8,974,468 |
|
|
14
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 June 30, 2008,
December 31, 2007 and June 30, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AS OF JUNE 30, 2008 |
|
|
Less than 12 months |
|
|
|
|
|
|
Gross |
|
|
|
|
Amortized |
|
Unrealized |
|
Market |
(In thousands) |
|
Cost |
|
Losses |
|
Value |
|
U.S. Treasury securities |
|
$ |
277,645 |
|
|
$ |
1,195 |
|
|
$ |
276,450 |
|
Obligations of U.S. Government sponsored entities |
|
|
2,104,165 |
|
|
|
10,781 |
|
|
|
2,093,384 |
|
Obligations of Puerto Rico, States and political subdivisions |
|
|
31,745 |
|
|
|
112 |
|
|
|
31,633 |
|
Collateralized mortgage obligations |
|
|
923,625 |
|
|
|
10,626 |
|
|
|
912,999 |
|
Mortgage-backed securities |
|
|
277,464 |
|
|
|
3,388 |
|
|
|
274,076 |
|
Equity securities |
|
|
27,268 |
|
|
|
13,634 |
|
|
|
13,634 |
|
|
|
|
$ |
3,641,912 |
|
|
$ |
39,736 |
|
|
$ |
3,602,176 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 months or more |
|
|
|
|
|
|
Gross |
|
|
|
|
Amortized |
|
Unrealized |
|
Market |
(In thousands) |
|
Cost |
|
Losses |
|
Value |
|
Obligations of Puerto Rico, States and political subdivisions |
|
$ |
49,012 |
|
|
$ |
1,724 |
|
|
$ |
47,288 |
|
Collateralized mortgage obligations |
|
|
218,656 |
|
|
|
10,453 |
|
|
|
208,203 |
|
Mortgage-backed securities |
|
|
276,775 |
|
|
|
7,930 |
|
|
|
268,845 |
|
Equity securities |
|
|
29 |
|
|
|
8 |
|
|
|
21 |
|
|
|
|
$ |
544,472 |
|
|
$ |
20,115 |
|
|
$ |
524,357 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
Unrealized |
Market |
(In thousands) |
|
Cost |
|
Losses |
|
Value |
|
U.S. Treasury securities |
|
$ |
277,645 |
|
|
$ |
1,195 |
|
|
$ |
276,450 |
|
Obligations of U.S. Government sponsored entities |
|
|
2,104,165 |
|
|
|
10,781 |
|
|
|
2,093,384 |
|
Obligations of Puerto Rico, States and political subdivisions |
|
|
80,757 |
|
|
|
1,836 |
|
|
|
78,921 |
|
Collateralized mortgage obligations |
|
|
1,142,281 |
|
|
|
21,079 |
|
|
|
1,121,202 |
|
Mortgage-backed securities |
|
|
554,239 |
|
|
|
11,318 |
|
|
|
542,921 |
|
Equity securities |
|
|
27,297 |
|
|
|
13,642 |
|
|
|
13,655 |
|
|
|
|
$ |
4,186,384 |
|
|
$ |
59,851 |
|
|
$ |
4,126,533 |
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AS OF JUNE 30, 2007 |
|
|
Less than 12 months |
|
|
|
|
|
|
Gross |
|
|
|
|
Amortized |
|
Unrealized |
|
Market |
(In thousands) |
|
Cost |
|
Losses |
|
Value |
|
Obligations of U.S. Government sponsored entities |
|
$ |
475,542 |
|
|
$ |
13,283 |
|
|
$ |
462,259 |
|
Obligations of Puerto Rico, States and political subdivisions |
|
|
21,652 |
|
|
|
473 |
|
|
|
21,179 |
|
Collateralized mortgage obligations |
|
|
189,570 |
|
|
|
2,077 |
|
|
|
187,493 |
|
Mortgage-backed securities |
|
|
39,132 |
|
|
|
873 |
|
|
|
38,259 |
|
Equity securities |
|
|
53,683 |
|
|
|
11,047 |
|
|
|
42,636 |
|
|
|
|
$ |
779,579 |
|
|
$ |
27,753 |
|
|
$ |
751,826 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 months or more |
|
|
|
|
|
|
Gross |
|
|
|
|
Amortized |
|
Unrealized |
|
Market |
(In thousands) |
|
Cost |
|
Losses |
|
Value |
|
U.S. Treasury securities |
|
$ |
500,193 |
|
|
$ |
37,616 |
|
|
$ |
462,577 |
|
Obligations of U.S. Government sponsored entities |
|
|
5,540,664 |
|
|
|
161,165 |
|
|
|
5,379,499 |
|
Obligations of Puerto Rico, States and political subdivisions |
|
|
69,136 |
|
|
|
3,281 |
|
|
|
65,855 |
|
Collateralized mortgage obligations |
|
|
647,337 |
|
|
|
16,358 |
|
|
|
630,979 |
|
Mortgage-backed securities |
|
|
869,343 |
|
|
|
31,898 |
|
|
|
837,445 |
|
Equity securities |
|
|
310 |
|
|
|
27 |
|
|
|
283 |
|
|
|
|
$ |
7,626,983 |
|
|
$ |
250,345 |
|
|
$ |
7,376,638 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
Gross |
|
|
|
|
Amortized |
|
Unrealized |
|
Market |
(In thousands) |
|
Cost |
|
Losses |
|
Value |
|
U.S. Treasury securities |
|
$ |
500,193 |
|
|
$ |
37,616 |
|
|
$ |
462,577 |
|
Obligations of U.S. Government sponsored entities |
|
|
6,016,206 |
|
|
|
174,448 |
|
|
|
5,841,758 |
|
Obligations of Puerto Rico, States and political subdivisions |
|
|
90,788 |
|
|
|
3,754 |
|
|
|
87,034 |
|
Collateralized mortgage obligations |
|
|
836,907 |
|
|
|
18,435 |
|
|
|
818,472 |
|
Mortgage-backed securities |
|
|
908,475 |
|
|
|
32,771 |
|
|
|
875,704 |
|
Equity securities |
|
|
53,993 |
|
|
|
11,074 |
|
|
|
42,919 |
|
|
|
|
$ |
8,406,562 |
|
|
$ |
278,098 |
|
|
$ |
8,128,464 |
|
|
As of June 30, 2008, Obligations of Puerto Rico, States and political subdivisions include
approximately $55 million in Commonwealth of Puerto Rico Appropriation Bonds (Appropriation
Bonds) in the Corporations available-for-sale and
held-to-maturity 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 June 30,
2008, these Appropriation Bonds represented approximately $1.6 million in net unrealized losses in
the Corporations investment securities available-for-sale portfolio. 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 June 30, 2008, except for the
obligations of the Puerto Rico government described above and certain equity securities which have
recently declined in value during 2008, are primarily associated with U.S. Agency and government
sponsored-issued mortgage-backed securities and
17
collateralized mortgage obligations. 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 June 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 six months ended June 30, 2008, the Corporation recognized through earnings
approximately $2.9 million in losses considered other-than-temporary on residual interests
classified as available-for-sale. During the six months ended June 30, 2007, the Corporation
recognized through earnings approximately $30.7 million in losses in residual interests classified
as available-for-sale and $7.6 million in losses in equity securities 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),
when the aggregate amortized cost of such securities exceeds 10% of stockholders equity. This
information excludes securities of the U.S. Government agencies and corporations. Investments in
obligations issued by a state of the U.S. and its political subdivisions and agencies, which are
payable and secured by the same source of revenue or taxing authority, other than the U.S.
Government, are considered securities of a single issuer.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008 |
|
December 31, 2007 |
|
June 30, 2007 |
(In thousands) |
|
Amortized Cost |
|
Market Value |
|
Amortized Cost |
|
Market Value |
|
Amortized Cost |
|
Market Value |
|
FNMA |
|
$ |
1,137,288 |
|
|
$ |
1,131,842 |
|
|
$ |
1,132,834 |
|
|
$ |
1,128,544 |
|
|
$ |
1,261,541 |
|
|
$ |
1,238,499 |
|
FHLB |
|
|
4,506,509 |
|
|
|
4,521,314 |
|
|
|
5,649,729 |
|
|
|
5,693,170 |
|
|
|
6,069,496 |
|
|
|
5,897,748 |
|
Freddie Mac |
|
|
816,570 |
|
|
|
810,182 |
|
|
|
918,976 |
|
|
|
913,609 |
|
|
|
1,011,125 |
|
|
|
996,046 |
|
|
Note 6 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 June 30, 2008, December 31, 2007 and June 30, 2007 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AS OF JUNE 30, 2008 |
|
|
|
|
|
|
Gross |
|
Gross |
|
|
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Market |
(In thousands) |
|
Cost |
|
Gains |
|
Losses |
|
Value |
|
Obligations of U.S. Government sponsored entities |
|
$ |
34,084 |
|
|
|
|
|
|
$ |
8 |
|
|
$ |
34,076 |
|
Obligations of Puerto Rico, States and political subdivisions |
|
|
185,852 |
|
|
$ |
280 |
|
|
|
1,566 |
|
|
|
184,566 |
|
Collateralized mortgage obligations |
|
|
267 |
|
|
|
|
|
|
|
15 |
|
|
|
252 |
|
Others |
|
|
12,280 |
|
|
|
38 |
|
|
|
2 |
|
|
|
12,316 |
|
|
|
|
$ |
232,483 |
|
|
$ |
318 |
|
|
$ |
1,591 |
|
|
$ |
231,210 |
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 JUNE 30, 2007 |
|
|
|
|
|
|
Gross |
|
Gross |
|
|
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Market |
(In thousands) |
|
Cost |
|
Gains |
|
Losses |
|
Value |
|
Obligations of U.S. Government sponsored entities |
|
$ |
340,323 |
|
|
$ |
13 |
|
|
$ |
36 |
|
|
$ |
340,300 |
|
Obligations of Puerto Rico, States and political subdivisions |
|
|
72,406 |
|
|
|
441 |
|
|
|
374 |
|
|
|
72,473 |
|
Collateralized mortgage obligations |
|
|
354 |
|
|
|
|
|
|
|
19 |
|
|
|
335 |
|
Others |
|
|
16,396 |
|
|
|
39 |
|
|
|
7 |
|
|
|
16,428 |
|
|
|
|
$ |
429,479 |
|
|
$ |
493 |
|
|
$ |
436 |
|
|
$ |
429,536 |
|
|
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 June 30, 2008,
December 31, 2007 and June 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AS OF JUNE 30, 2008 |
|
|
Less than 12 months |
|
|
|
|
|
|
Gross |
|
|
|
|
Amortized |
|
Unrealized |
|
Market |
(In thousands) |
|
Cost |
|
Losses |
|
Value |
|
Obligations of U.S. Government sponsored entities |
|
$ |
34,085 |
|
|
$ |
8 |
|
|
$ |
34,077 |
|
Obligations of Puerto Rico, States and political subdivisions |
|
|
41,694 |
|
|
|
1,566 |
|
|
|
40,128 |
|
|
|
|
$ |
75,779 |
|
|
$ |
1,574 |
|
|
$ |
74,205 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 months or more |
|
|
|
|
|
|
Gross |
|
|
|
|
Amortized |
|
Unrealized |
|
Market |
(In thousands) |
|
Cost |
|
Losses |
|
Value |
|
Collateralized mortgage obligations |
|
$ |
267 |
|
|
$ |
15 |
|
|
$ |
252 |
|
Others |
|
|
1,000 |
|
|
|
2 |
|
|
|
998 |
|
|
|
|
$ |
1,267 |
|
|
$ |
17 |
|
|
$ |
1,250 |
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
Gross |
|
|
|
|
Amortized |
|
Unrealized |
|
Market |
(In thousands) |
|
Cost |
|
Losses |
|
Value |
|
Obligations of U.S. Government sponsored entities |
|
$ |
34,085 |
|
|
$ |
8 |
|
|
$ |
34,077 |
|
Obligations of Puerto Rico, States and political subdivisions |
|
|
41,694 |
|
|
|
1,566 |
|
|
|
40,128 |
|
Collateralized mortgage obligations |
|
|
267 |
|
|
|
15 |
|
|
|
252 |
|
Others |
|
|
1,000 |
|
|
|
2 |
|
|
|
998 |
|
|
|
|
$ |
77,046 |
|
|
$ |
1,591 |
|
|
$ |
75,455 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 JUNE 30, 2007 |
|
|
Less than 12 months |
|
|
|
|
|
|
Gross |
|
|
|
|
Amortized |
|
Unrealized |
|
Market |
(In thousands) |
|
Cost |
|
Losses |
|
Value |
|
Obligations of U.S. Government sponsored entities |
|
$ |
240,336 |
|
|
$ |
36 |
|
|
$ |
240,300 |
|
Obligations of Puerto Rico, States and political subdivisions |
|
|
20,995 |
|
|
|
223 |
|
|
|
20,772 |
|
Others |
|
|
250 |
|
|
|
2 |
|
|
|
248 |
|
|
|
|
$ |
261,581 |
|
|
$ |
261 |
|
|
$ |
261,320 |
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 months or more |
|
|
|
|
|
|
Gross |
|
|
|
|
Amortized |
|
Unrealized |
|
Market |
(In thousands) |
|
Cost |
|
Losses |
|
Value |
|
Obligations of Puerto Rico, States and political subdivisions |
|
$ |
24,545 |
|
|
$ |
151 |
|
|
$ |
24,394 |
|
Collateralized mortgage obligations |
|
|
354 |
|
|
|
19 |
|
|
|
335 |
|
Others |
|
|
1,250 |
|
|
|
5 |
|
|
|
1,245 |
|
|
|
|
$ |
26,149 |
|
|
$ |
175 |
|
|
$ |
25,974 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
Gross |
|
|
Amortized |
|
Unrealized |
|
Market |
(In thousands) |
|
Cost |
|
Losses |
|
Value |
|
Obligations of U.S. Government sponsored entities |
|
$ |
240,336 |
|
|
$ |
36 |
|
|
$ |
240,300 |
|
Obligations of Puerto Rico, States and political subdivisions |
|
|
45,540 |
|
|
|
374 |
|
|
|
45,166 |
|
Collateralized mortgage obligations |
|
|
354 |
|
|
|
19 |
|
|
|
335 |
|
Others |
|
|
1,500 |
|
|
|
7 |
|
|
|
1,493 |
|
|
|
|
$ |
287,730 |
|
|
$ |
436 |
|
|
$ |
287,294 |
|
|
Management believes that the unrealized losses in the held-to-maturity portfolio as of June 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 7 Mortgage Servicing Rights and Residual Interests on Transfers of Mortgage Loans
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 served. 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.
At the end of each quarter, 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.
21
The changes in MSRs measured using the fair value method for the six months ended June 30, 2008 and
June 30, 2007 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential MSRs |
|
|
(In thousands) |
|
Banking subsidiaries |
|
PFH |
|
Total |
|
Fair value at January 1, 2008 |
|
$ |
110,612 |
|
|
$ |
81,012 |
|
|
$ |
191,624 |
|
Purchases |
|
|
2,986 |
|
|
|
|
|
|
|
2,986 |
|
Servicing from securitizations or asset transfers |
|
|
15,521 |
|
|
|
|
|
|
|
15,521 |
|
Changes due to payments on loans (1) |
|
|
(5,618 |
) |
|
|
(13,180 |
) |
|
|
(18,798 |
) |
Changes in fair value due to changes in valuation model
inputs or assumptions |
|
|
6,390 |
|
|
|
(11,568 |
) |
|
|
(5,178 |
) |
|
Fair value as of June 30, 2008 |
|
$ |
129,891 |
|
|
$ |
56,264 |
|
|
$ |
186,155 |
|
|
|
|
|
(1) |
|
Represents changes due to collection / realization of expected cash flows over time. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential MSRs |
|
|
(In thousands) |
|
Banking subsidiaries |
|
PFH |
|
Total |
|
Fair value at January 1, 2007 |
|
$ |
91,431 |
|
|
$ |
84,038 |
|
|
$ |
175,469 |
|
Purchases |
|
|
2,030 |
|
|
|
21,958 |
|
|
|
23,988 |
|
Servicing from securitizations or asset transfers |
|
|
11,968 |
|
|
|
8,040 |
|
|
|
20,008 |
|
Changes due to payments on loans (1) |
|
|
(4,561 |
) |
|
|
(16,837 |
) |
|
|
(21,398 |
) |
Changes in fair value due to changes in valuation model
inputs or assumptions |
|
|
3,887 |
|
|
|
(4,015 |
) |
|
|
(128 |
) |
Other changes |
|
|
|
|
|
|
(66 |
) |
|
|
(66 |
) |
|
Fair value as of June 30, 2007 |
|
$ |
104,755 |
|
|
$ |
93,118 |
|
|
$ |
197,873 |
|
|
|
|
|
(1) |
|
Represents changes due to collection / realization of expected cash flows over time. |
|
Residential mortgage loans serviced for others were $20.4 billion as of June 30, 2008 (December 31,
2007 $20.5 billion; June 30, 2007 $15.4 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, as well as information on the residual interests derived from
securitizations.
22
Popular Financial Holdings
Key economic assumptions used to estimate the fair value of residual interests and MSRs derived
from PFHs securitization transactions and the sensitivity of residual cash flows to immediate
changes in those assumptions as of period end were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008 |
|
|
December 31, 2007 |
|
|
|
|
|
|
Originated MSRs |
|
|
|
|
|
|
Originated MSRs |
|
|
Residual |
|
Fixed-rate |
|
ARM |
|
|
Residual |
|
Fixed-rate |
|
ARM
|
(In thousands) |
|
Interests |
|
loans |
|
loans |
|
|
Interests |
|
loans |
|
loans |
|
|
|
|
Carrying amount of retained
interests (fair
value) |
|
$ |
37,490 |
|
|
$ |
41,109 |
|
|
$ |
2,080 |
|
|
|
$ |
45,009 |
|
|
$ |
47,243 |
|
|
$ |
11,335 |
|
Weighted average life of
collateral |
|
7.8 years |
|
5.4 years |
|
3.4 years |
|
|
7.6 years |
|
4.3 years |
|
2.6 years |
Weighted average prepayment speed (annual rate) |
|
16.6% (Fixed-rate loans) 24.0% (ARM loans) |
|
|
16.6 |
% |
|
|
24.0 |
% |
|
|
20.7% (Fixed-rate loans) 30.0% (ARM loans) |
|
|
20.7 |
% |
|
30.0 |
% |
Impact on fair value of 10% adverse change |
|
$ |
3,428 |
|
|
($ |
723 |
) |
|
$ |
240 |
|
|
|
$ |
5,031 |
|
|
($ |
192 |
) |
|
$ |
272 |
|
Impact on fair value of 20%
adverse change |
|
$ |
6,820 |
|
|
($ |
1,831 |
) |
|
$ |
467 |
|
|
|
$ |
6,766 |
|
|
($ |
886 |
) |
|
$ |
688 |
|
Weighted average discount rate
(annual rate) |
|
|
40.0 |
% |
|
|
17.0 |
% |
|
|
17.0 |
% |
|
|
|
40.0 |
% |
|
|
17.0 |
% |
|
|
17.0 |
% |
Impact on fair value of 10%
adverse change |
|
($ |
2,756 |
) |
|
($ |
1,452 |
) |
|
($ |
18 |
) |
|
|
($ |
2,884 |
) |
|
($ |
1,466 |
) |
|
($ |
225 |
) |
Impact on fair value of 20%
adverse change |
|
($ |
5,159 |
) |
|
($ |
2,808 |
) |
|
($ |
36 |
) |
|
|
($ |
5,427 |
) |
|
($ |
2,846 |
) |
|
($ |
441 |
) |
Cumulative credit losses |
|
5.62% to 16.29% |
|
|
|
|
|
|
|
|
|
|
3.35% to 11.03% |
|
|
|
|
|
|
|
|
Impact on fair value of 10%
adverse change |
|
($ |
7,527 |
) |
|
|
|
|
|
|
|
|
|
|
($ |
8,829 |
) |
|
|
|
|
|
|
|
|
Impact on fair value of 20%
adverse change |
|
($ |
14,359 |
) |
|
|
|
|
|
|
|
|
|
|
($ |
15,950 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
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 period end were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased MSRs |
|
|
June 30, 2008 |
|
|
December 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
Fixed-rate loans |
|
ARM loans |
|
|
Fixed-rate loans |
|
ARM loans |
|
|
|
|
Carrying amount of retained
interests (fair
value) |
|
$ |
9,416 |
|
|
$ |
3,659 |
|
|
|
$ |
7,808 |
|
|
$ |
14,626 |
|
Weighted average life of
collateral |
|
6.6 years |
|
3.5 years |
|
|
4.7 years |
|
3.4 years |
Weighted average prepayment
speed (annual rate) |
|
|
14.1 |
% |
|
|
20.6 |
% |
|
|
|
18.3 |
% |
|
|
25.2 |
% |
Impact on fair value of 10%
adverse change |
|
($ |
415 |
) |
|
($ |
208 |
) |
|
|
($ |
329 |
) |
|
($ |
719 |
) |
Impact on fair value of 20%
adverse change |
|
($ |
817 |
) |
|
($ |
402 |
) |
|
|
($ |
631 |
) |
|
($ |
1,377 |
) |
Weighted average discount rate
(annual rate) |
|
|
17.0 |
% |
|
|
17.0 |
% |
|
|
|
17.0 |
% |
|
|
17.0 |
% |
Impact on fair value of 10%
adverse change |
|
($ |
522 |
) |
|
($ |
136 |
) |
|
|
($ |
330 |
) |
|
($ |
509 |
) |
Impact on fair value of 20%
adverse change |
|
($ |
994 |
) |
|
($ |
262 |
) |
|
|
($ |
633 |
) |
|
($ |
981 |
) |
|
|
|
|
Another key assumption used to estimate the fair value of
PFHs MSRs was the default/delinquency rate which varies by the delinquency bucket in which the particular loans are
categorized. The sensitivity to changes in the default curve as of June 30, 2008 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Originated MSRs |
|
|
Purchased MSRs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
Fixed-rate loans |
|
ARM loans |
|
|
Fixed-rate loans |
|
ARM loans |
|
|
|
|
Fair value |
|
$ |
41,109 |
|
|
$ |
2,080 |
|
|
|
$ |
9,416 |
|
|
$ |
3,659 |
|
Impact on fair value of 10% adverse change |
|
($ |
1,235 |
) |
|
($ |
1,408 |
) |
|
|
($ |
315 |
) |
|
($ |
1,978 |
) |
Impact on fair value of 20%
adverse change |
|
($ |
2,471 |
) |
|
($ |
2,795 |
) |
|
|
($ |
630 |
) |
|
($ |
3,935 |
) |
|
|
|
|
23
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.
Key economic assumptions used in measuring the servicing rights retained at the date of the
residential mortgage loan securitizations and whole loan sales by the banking subsidiaries during
the quarter ended June 30, 2008 and year ended December 31, 2007 were:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008 |
|
December 31, 2007 |
|
Prepayment speed |
|
|
12.8 |
% |
|
|
9.5 |
% |
Weighted average life |
|
7.8 years |
|
10.6 years |
Discount rate (annual rate) |
|
|
11.5 |
% |
|
|
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 of
residual cash flows to immediate changes in those assumptions were as follows:
|
|
|
|
|
|
|
|
|
|
|
Originated MSRs |
(In thousands) |
|
June 30, 2008 |
|
December 31, 2007 |
|
Fair value of retained interests |
|
$ |
105,235 |
|
|
$ |
86,453 |
|
Weighted average life (in years) |
|
12.4 years |
|
12.5 years |
Weighted average prepayment speed (annual rate) |
|
|
8.1 |
% |
|
|
8.0 |
% |
Impact on fair value of 10% adverse change |
|
($ |
4,126 |
) |
|
($ |
1,983 |
) |
Impact on fair value of 20% adverse change |
|
($ |
7,154 |
) |
|
($ |
3,902 |
) |
Weighted average discount rate (annual rate) |
|
|
11.49 |
% |
|
|
10.83 |
% |
Impact on fair value of 10% adverse change |
|
($ |
5,524 |
) |
|
($ |
2,980 |
) |
Impact on fair value of 20% adverse change |
|
($ |
9,757 |
) |
|
($ |
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) |
|
June 30, 2008 |
|
|
December 31, 2007 |
|
|
|
|
Fair value of retained interests |
|
$ |
24,656 |
|
|
|
$ |
24,159 |
|
Weighted average life of collateral |
|
12.3 years |
|
|
12.4 years |
Weighted average prepayment
speed (annual rate) |
|
|
8.2 |
% |
|
|
|
8.0 |
% |
Impact on fair value of 10%
adverse change |
|
($ |
1,204 |
) |
|
|
($ |
719 |
) |
Impact on fair value of 20%
adverse change |
|
($ |
1,943 |
) |
|
|
($ |
1,407 |
) |
Weighted average discount rate
(annual rate) |
|
|
13.1 |
% |
|
|
|
10.8 |
% |
Impact on fair value of 10%
adverse change |
|
($ |
1,560 |
) |
|
|
($ |
956 |
) |
Impact on fair value of 20%
adverse change |
|
($ |
2,597 |
) |
|
|
($ |
1,846 |
) |
|
|
|
|
The sensitivity analyses presented in the tables above for residual interests and servicing
rights of PFH and the banking subsidiaries 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
24
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.
Note 8 Other Assets
The caption of other assets in the consolidated statements of condition consists of the following
major categories:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
June 30, |
(In thousands) |
|
2008 |
|
2007 |
|
2007 |
|
Net deferred tax assets |
|
$ |
807,884 |
|
|
$ |
525,369 |
|
|
$ |
419,611 |
|
Trade receivables from brokers and
counterparties |
|
|
515,273 |
|
|
|
1,160 |
|
|
|
19,685 |
|
Securitization advances and related assets |
|
|
299,519 |
|
|
|
168,599 |
|
|
|
106,123 |
|
Bank-owned life insurance program |
|
|
219,867 |
|
|
|
215,171 |
|
|
|
210,333 |
|
Prepaid expenses |
|
|
198,286 |
|
|
|
188,237 |
|
|
|
200,307 |
|
Investments under the equity method |
|
|
108,008 |
|
|
|
89,870 |
|
|
|
82,620 |
|
Derivative assets |
|
|
50,121 |
|
|
|
76,958 |
|
|
|
77,484 |
|
Others |
|
|
256,884 |
|
|
|
191,630 |
|
|
|
181,437 |
|
|
Total |
|
$ |
2,455,842 |
|
|
$ |
1,456,994 |
|
|
$ |
1,297,600 |
|
|
Note 9 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 second quarter of 2008.
Cash Flow Hedges
Derivative financial instruments designated as cash flow hedges outstanding as of June 30, 2008 and
December 31, 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2008 |
(In thousands) |
|
Notional amount |
|
Derivative assets |
|
Derivative liabilities |
|
Equity OCI |
|
Ineffectiveness |
|
Asset Hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward commitments |
|
$ |
180,900 |
|
|
$ |
742 |
|
|
$ |
354 |
|
|
$ |
237 |
|
|
|
|
|
|
Liability Hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
$ |
200,000 |
|
|
|
|
|
|
$ |
4,517 |
|
|
($ |
2,936 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 June 30, 2008
have a maximum remaining maturity of 84 days.
25
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 9.3
months.
26
Non-Hedging Activities
Financial instruments designated as non-hedging derivatives outstanding as of June 30, 2008 and
December 31, 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of June 30, 2008 |
|
|
|
|
|
|
Fair Values |
(In thousands) |
|
Notional amount |
|
Derivative assets |
|
Derivative liabilities |
|
Forward contracts |
|
$ |
379,115 |
|
|
$ |
1,383 |
|
|
$ |
987 |
|
Interest rate swaps associated with: |
|
|
|
|
|
|
|
|
|
|
|
|
- bond certificates offered in an on-balance sheet
securitization |
|
|
67,985 |
|
|
|
|
|
|
|
2,557 |
|
- swaps with corporate clients |
|
|
963,773 |
|
|
|
|
|
|
|
23,969 |
|
- swaps offsetting position of corporate client swaps |
|
|
963,773 |
|
|
|
23,969 |
|
|
|
|
|
Foreign currency and exchange rate commitments w/ clients |
|
|
28 |
|
|
|
|
|
|
|
|
|
Foreign currency and exchange rate commitments w/
counterparty |
|
|
28 |
|
|
|
|
|
|
|
|
|
Interest rate caps |
|
|
214,500 |
|
|
|
803 |
|
|
|
|
|
Interest rate caps for benefit of corporate clients |
|
|
114,500 |
|
|
|
|
|
|
|
802 |
|
Indexed options on deposits |
|
|
198,307 |
|
|
|
21,156 |
|
|
|
|
|
Indexed options on S&P Notes |
|
|
31,152 |
|
|
|
2,286 |
|
|
|
|
|
Bifurcated embedded options |
|
|
214,766 |
|
|
|
|
|
|
|
24,784 |
|
Mortgage rate lock commitments |
|
|
98,139 |
|
|
|
122 |
|
|
|
812 |
|
|
Total |
|
$ |
3,246,066 |
|
|
$ |
49,719 |
|
|
$ |
53,911 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $68 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 $2.4 million for the second quarter and $0.4 million for the six months ended June 30,
2008 due to changes in the fair value of this swap. The Corporation recognized gains of $1.7
million for the second quarter and $1.9 million for the six months ended June 30, 2007 due to
changes in its fair value.
In addition, the Corporation also utilizes 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.
Interest Rate Caps
27
The Corporation has interest rate caps to economically hedge the exposure to rising interest rates
of certain short-term borrowings. Additionally, 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 six months ended
June 30, 2008, gains of $1.1 million and $2.2 million, respectively, were recognized due to changes
in fair value of these forward sales commitments. For the quarter and six months ended June 30,
2007, gains of $2.3 million and $1.6 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 six months ended June 30, 2008, the Corporation recognized gains of $611 thousand and
$1.4 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 six months ended June 30,
2007, gains of $428 thousand and $259 thousand, 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 six months ended
June 30, 2008, losses of $639 thousand and $562 thousand, respectively, were recognized due to
changes in fair value of these commitments. For the quarter and six months ended June 30, 2007, the
Corporation recognized losses of $2.3 million and $1.5 million, respectively, related to these
commitments.
Note 10 Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill for the six months ended June 30, 2008 and 2007,
allocated by reportable segments, were as follows (refer to Note 24 for the definition of the
Corporations reportable segments):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
Balance at |
|
Goodwill |
|
Purchase accounting |
|
|
|
|
|
Balance at |
(In thousands) |
|
January 1, 2008 |
|
acquired |
|
adjustments |
|
Other |
|
June 30, 2008 |
|
Banco Popular de Puerto Rico: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Banking |
|
$ |
35,371 |
|
|
|
|
|
|
($ |
115 |
) |
|
|
|
|
|
$ |
35,256 |
|
Consumer and Retail Banking |
|
|
136,407 |
|
|
|
|
|
|
|
(562 |
) |
|
|
|
|
|
|
135,845 |
|
Other Financial Services |
|
|
8,621 |
|
|
$ |
153 |
|
|
|
|
|
|
$ |
3 |
|
|
|
8,777 |
|
Banco Popular North America: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banco Popular North America |
|
|
404,237 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
404,237 |
|
E-LOAN |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Popular Financial Holdings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EVERTEC |
|
|
46,125 |
|
|
|
1,000 |
|
|
|
|
|
|
|
(2,414 |
) |
|
|
44,711 |
|
|
Total Popular, Inc. |
|
$ |
630,761 |
|
|
$ |
1,153 |
|
|
($ |
677 |
) |
|
($ |
2,411 |
) |
|
$ |
628,826 |
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
Balance at |
|
Goodwill |
|
|
|
|
|
Balance at |
(In thousands) |
|
January 1, 2007 |
|
acquired |
|
Other |
|
June 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 |
|
|
$ |
24 |
|
|
|
|
|
|
|
4,415 |
|
Banco Popular North America: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banco Popular North America |
|
|
404,237 |
|
|
|
|
|
|
|
|
|
|
|
404,237 |
|
E-LOAN |
|
|
164,410 |
|
|
|
|
|
|
|
|
|
|
|
164,410 |
|
Popular Financial Holdings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EVERTEC |
|
|
45,142 |
|
|
|
775 |
|
|
|
($183 |
) |
|
|
45,734 |
|
|
Total Popular, Inc. |
|
$ |
667,853 |
|
|
$ |
799 |
|
|
|
($183 |
) |
|
$ |
668,469 |
|
|
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 six months ended
June 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 six months ended June 30, 2008 was the result of the
sale of substantially all assets of EVERTECs health processing division during the second quarter
of 2008.
As of June 30, 2008, other than goodwill, the Corporation had $17 million of identifiable
intangibles with indefinite useful lives (December 31, 2007 $17 million; June 30, 2007 $65
million).
The following table reflects the components of other intangible assets subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008 |
|
December 31, 2007 |
|
June 30, 2007 |
|
|
Gross |
|
Accumulated |
|
Gross |
|
Accumulated |
|
Gross |
|
Accumulated |
(In thousands) |
|
Amount |
|
Amortization |
|
Amount |
|
Amortization |
|
Amount |
|
Amortization |
|
Core deposits |
|
$ |
66,040 |
|
|
$ |
26,141 |
|
|
$ |
66,381 |
|
|
$ |
23,171 |
|
|
$ |
71,629 |
|
|
$ |
46,982 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
customer relationships |
|
|
9,852 |
|
|
|
4,803 |
|
|
|
10,375 |
|
|
|
4,131 |
|
|
|
11,543 |
|
|
|
3,113 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other intangibles |
|
|
8,219 |
|
|
|
6,150 |
|
|
|
8,164 |
|
|
|
5,385 |
|
|
|
9,146 |
|
|
|
4,534 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
84,111 |
|
|
$ |
37,094 |
|
|
$ |
84,920 |
|
|
$ |
32,687 |
|
|
$ |
92,318 |
|
|
$ |
54,629 |
|
|
Certain core deposit intangibles with a gross amount of $699 thousand became fully amortized or
written off during the six months ended June 30, 2008 and, as such, their gross amount and
accumulated amortization were eliminated from the tabular disclosure presented above.
During the quarter and six months ended June 30, 2008, the Corporation recognized $2.5 million and
$5.0 million, respectively, in amortization expense related to other intangible assets with
definite lives (June 30, 2007 - $2.8 million and $5.8 million in the quarter and six months ended
June 30, 2007, respectively).
29
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 |
|
$ |
4,717 |
|
2009 |
|
|
8,332 |
|
2010 |
|
|
7,479 |
|
2011 |
|
|
6,125 |
|
2012 |
|
|
5,105 |
|
No significant events or circumstances have occurred during the quarter ended June 30, 2008 that
would reduce the fair value of any reporting unit below its carrying amount.
Note 11 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
operations of Popular Financial Holdings that are running off, 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 believes that accounting for these loans at fair value provides a more relevant
and transparent measurement of the realizable value of the assets and differentiates the PFH
portfolio from the loan portfolios that the Corporation will continue 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, $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
lines of credit
30
with monthly advances and pay-downs, and construction credit agreements in which permanent
financing will be with a lender other than PFH. Although these businesses are running off, PFH must
contractually continue to fund the revolving credit arrangements.
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 June 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 |
|
|
|
|
as of |
|
UPB as of |
|
Unrealized |
(In thousands) |
|
June 30, 2008 |
|
June 30, 2008 |
|
(loss) gain |
|
Loans |
|
$ |
844,892 |
|
|
$ |
1,345,573 |
|
|
($ |
500,681 |
) |
|
Loans past due 90 days or more |
|
$ |
110,433 |
|
|
$ |
194,767 |
|
|
|
($84,334 |
) |
|
Non-accrual loans (1) |
|
$ |
110,433 |
|
|
$ |
194,767 |
|
|
|
($84,334 |
) |
|
Notes payable (bond certificates) |
|
($ |
173,725 |
) |
|
($ |
253,541 |
) |
|
$ |
79,816 |
|
|
|
|
|
(1) |
|
It is the Corporations policy to recognize interest income separately from other
changes in fair value. Interest income is included as part of net interest income 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 six-months ended June 30, 2008, the Corporation recognized $31.0 million and
$32.7 million, respectively, in estimated net losses attributable to changes in the fair value of
loans, including net losses attributable to changes in instrument-specific credit spreads. These
estimated net losses were included in the caption Losses from changes in fair value related to
instruments measured at fair value pursuant to SFAS No. 159 in the consolidated statement of
operations. The change in fair value included estimated losses of $6.9 million for the quarter and
$43.5 million for the
six months ended June 30, 2008 that were attributable to changes in instrument-specific credit
spreads. Instrument-specific credit spreads were determined by excluding the non-credit components
of gains and losses, such as those due to changes in interest rates.
During the quarter and six months ended June 30, 2008, the Corporation recognized $4.9 million and
$6.2 million, respectively, in estimated net losses attributable to changes in the fair value of
notes payable (bond certificates),
31
including changes in instrument-specific credit spreads. The
estimated net losses were included in the caption Losses
from changes in fair value related to instruments measured at fair value pursuant to SFAS No. 159
in the consolidated statement of operations. The change in fair value included estimated losses of $5.3 million for
the quarter and $10.0 million for the six months ended June 30, 2008 that were attributable to
changes in instrument-specific credit spreads.
As indicated in Note 12 to the consolidated financial statements, these assets and liabilities are
categorized as Level 3 under the requirements of SFAS No. 157.
Note 12 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.
32
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 June 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2008 |
|
|
Quoted prices in |
|
|
|
|
|
|
|
|
active markets |
|
|
|
|
|
|
|
|
for identical |
|
Significant other |
|
Significant |
|
|
|
|
assets or |
|
observable |
|
unobservable |
|
Balance as of |
|
|
liabilities |
|
inputs |
|
inputs |
|
June 30, |
(In millions) |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
2008 |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available-for-sale |
|
$ |
10 |
|
|
$ |
7,651 |
|
|
$ |
41 |
|
|
$ |
7,702 |
|
Trading account securities |
|
|
|
|
|
|
154 |
|
|
|
345 |
|
|
|
499 |
|
Loans measured at fair value (SFAS No. 159) |
|
|
|
|
|
|
|
|
|
|
845 |
|
|
|
845 |
|
Derivatives |
|
|
|
|
|
|
51 |
|
|
|
|
|
|
|
51 |
|
Mortgage servicing rights |
|
|
|
|
|
|
|
|
|
|
186 |
|
|
|
186 |
|
|
Total |
|
$ |
10 |
|
|
$ |
7,856 |
|
|
$ |
1,417 |
|
|
$ |
9,283 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable measured at fair value (SFAS No. 159) |
|
|
|
|
|
|
|
|
|
($ |
174 |
) |
|
($ |
174 |
) |
Derivatives |
|
|
|
|
|
($ |
59 |
) |
|
|
|
|
|
|
(59 |
) |
|
Total |
|
|
|
|
|
($ |
59 |
) |
|
($ |
174 |
) |
|
($ |
233 |
) |
|
The following tables present the changes in Level 3 assets and liabilities measured at fair value
on a recurring basis for the quarter and six months ended June 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended June 30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
unrealized |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
gains |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(losses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases, |
|
|
|
|
|
included in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
sales, |
|
|
|
|
|
earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase |
|
issuances, |
|
|
|
|
|
related to |
|
|
|
|
|
|
|
|
|
|
Gains (losses) |
|
(decrease) |
|
settlements, |
|
|
|
|
|
assets and |
|
|
Balance |
|
Gains |
|
included in |
|
in accrued |
|
paydowns |
|
|
|
|
|
liabilities |
|
|
as of |
|
(losses) |
|
other |
|
interest |
|
and |
|
Balance as |
|
still held |
|
|
March 31, |
|
included in |
|
comprehensive |
|
receivable |
|
maturities |
|
of June 30, |
|
as of June |
(In millions) |
|
2008 |
|
earnings |
|
income |
|
/ payable |
|
(net) |
|
2008 |
|
30, 2008 |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
available-for-sale (e) |
|
$ |
42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ |
1 |
) |
|
$ |
41 |
|
|
|
|
(a) |
Trading account securities |
|
|
280 |
|
|
$ |
2 |
|
|
|
|
|
|
|
|
|
|
|
63 |
|
|
|
345 |
|
|
($ |
1) |
(b) |
Loans measured at fair
value (SFAS No. 159) |
|
|
927 |
|
|
|
(31 |
) |
|
|
|
|
|
($ |
1 |
) |
|
|
(50 |
) |
|
|
845 |
|
|
|
(9) |
(c) |
Mortgage servicing rights |
|
|
184 |
|
|
|
(9 |
) |
|
|
|
|
|
|
|
|
|
|
11 |
|
|
|
186 |
|
|
|
(1) |
(d) |
|
Total |
|
$ |
1,433 |
|
|
($ |
38 |
) |
|
|
|
|
|
($ |
1 |
) |
|
$ |
23 |
|
|
$ |
1,417 |
|
|
($ |
11 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable measured at
fair value (SFAS No. 159) |
|
($ |
186 |
) |
|
($ |
5 |
) |
|
|
|
|
|
|
|
|
|
$ |
17 |
|
|
($ |
174 |
) |
|
($ |
5 |
)(c) |
|
Total |
|
($ |
186 |
) |
|
($ |
5 |
) |
|
|
|
|
|
|
|
|
|
$ |
17 |
|
|
($ |
174 |
) |
|
($ |
5 |
) |
|
|
|
|
(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 Losses from changes in fair value related to
instruments measured at fair value pursuant to SFAS No. 159 in the statement of
operations. |
|
(d) |
|
Gains (losses) are included in Other service fees in the statement of operations. |
|
(e) |
|
Other-than-temporary impairment on residual interests classified as available-for-sale
amounted to $0.6 million and is classified as realized losses. |
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
unrealized |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
gains |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(losses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases, |
|
|
|
|
|
included in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
sales, |
|
|
|
|
|
earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase |
|
issuances, |
|
|
|
|
|
related to |
|
|
|
|
|
|
|
|
|
|
Gains (losses) |
|
(decrease) |
|
settlements, |
|
|
|
|
|
assets and |
|
|
Balance |
|
Gains |
|
included in |
|
in accrued |
|
paydowns |
|
|
|
|
|
liabilities |
|
|
as of |
|
(losses) |
|
other |
|
interest |
|
and |
|
Balance as |
|
still held |
|
|
January 1, |
|
included in |
|
comprehensive |
|
receivable |
|
maturities |
|
of June 30, |
|
as of June |
(In millions) |
|
2008 |
|
earnings |
|
income |
|
/ payable |
|
(net) |
|
2008 |
|
30, 2008 |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
available-for-sale (e) |
|
$ |
43 |
|
|
$ |
(2 |
) |
|
$ |
1 |
|
|
|
|
|
|
$ |
(1 |
) |
|
$ |
41 |
|
|
|
|
(a) |
Trading account securities |
|
|
273 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72 |
|
|
|
345 |
|
|
$ |
(7) |
(b) |
Loans measured at fair
value (SFAS No. 159) |
|
|
987 |
|
|
|
(33 |
) |
|
|
|
|
|
$ |
(2 |
) |
|
|
(107 |
) |
|
|
845 |
|
|
|
15 |
(c) |
Mortgage servicing rights |
|
|
192 |
|
|
|
(24 |
) |
|
|
|
|
|
|
|
|
|
|
18 |
|
|
|
186 |
|
|
|
(5) |
(d) |
|
Total |
|
$ |
1,495 |
|
|
$ |
(59 |
) |
|
$ |
1 |
|
|
$ |
(2 |
) |
|
$ |
(18 |
) |
|
$ |
1,417 |
|
|
$ |
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable measured at
fair value (SFAS No. 159) |
|
$ |
(201 |
) |
|
$ |
(6 |
) |
|
|
|
|
|
|
|
|
|
$ |
33 |
|
|
$ |
(174 |
) |
|
$ |
(6) |
(c) |
|
Total |
|
$ |
(201 |
) |
|
$ |
(6 |
) |
|
|
|
|
|
|
|
|
|
$ |
33 |
|
|
$ |
(174 |
) |
|
$ |
(6 |
) |
|
|
|
|
(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 Losses from changes in fair value related to
instruments measured at fair value pursuant to SFAS No. 159 in the statement of
operations. |
|
(d) |
|
Gains (losses) are included in Other service fees in the statement of operations. |
|
(e) |
|
Other-than-temporary impairment on residual interests classified as available-for-sale
amounted to $2.9 million and is classified as realized losses. |
There were no transfers in and / or out of Level 3 for financial instruments measured at fair value on a
recurring basis during the quarter and six months ended June 30, 2008.
Gains and losses (realized and unrealized) included in earnings for the quarter and six months
ended June 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 June 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 |
|
Interest income |
|
$ |
4 |
|
|
|
|
|
Other service fees |
|
|
(9 |
) |
|
$ |
(1 |
) |
Net loss on sale and
valuation adjustments of
investment securities |
|
|
(1 |
) |
|
|
|
|
Trading account loss |
|
|
(1 |
) |
|
|
(1 |
) |
Losses from changes in fair
value related to instruments
measured at fair
value pursuant to SFAS No.
159 |
|
|
(36 |
) |
|
|
(14 |
) |
|
Total |
|
$ |
(43 |
) |
|
$ |
(16 |
) |
|
34
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 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 |
|
Interest income |
|
$ |
9 |
|
|
|
|
|
Other service fees |
|
|
(24 |
) |
|
|
($5 |
) |
Net loss on sale and
valuation adjustments of
investment securities |
|
|
(3 |
) |
|
|
|
|
Trading account loss |
|
|
(8 |
) |
|
|
(7 |
) |
Losses from changes in fair
value related to instruments
measured at fair
value pursuant to SFAS No.
159 |
|
|
(39 |
) |
|
|
9 |
|
|
Total |
|
$ |
(65 |
) |
|
|
($3 |
) |
|
Additionally, the Corporation may be required to measure certain assets at fair value on a
nonrecurring basis in accordance with accounting principles generally accepted. 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 six months ended June 30, 2008 and which are
still included in the consolidated statement of condition as of June 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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans (1) |
|
|
|
|
|
|
|
|
|
$ |
426 |
|
|
$ |
426 |
|
|
Loans held-for-sale (2) |
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
5 |
|
|
|
|
|
(1) |
|
Relates mostly to certain impaired collateral dependent loans. The impairment was measured
based on the fair value of the collateral, which is derived from appraisals that take into
consideration prices in observed transactions involving similar assets in similar locations,
in accordance with the provisions of SFAS No. 114 (as amended by SFAS No. 118). |
|
(2) |
|
Relates to lower of cost or market adjustments on transfers from loans held-in-portfolio to loans held-for-sale. |
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 12 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. |
35
|
|
|
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 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. |
|
|
|
|
Residual interests: Residual interests do not trade in an active market with readily
observable prices and, based on their valuation methodology, are classified as Level 3. The
estimated fair value of the residual interests associated to PFHs securitizations is
determined by using a cash flow valuation model to calculate the present value of projected
future cash flows. All economic assumptions are internally-developed (internal-based
valuation). The assumptions, which are highly uncertain and require a high degree of
judgment, include primarily market discount rates, anticipated prepayment speeds,
delinquency and loss rates. The assumptions used are drawn from a combination of internal
and external data sources. |
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 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.
36
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.
Loans measured at fair value pursuant to SFAS No. 159
The fair value of loans measured at fair value pursuant to the SFAS No. 159 election was estimated
using discounted cash flow analyses that incorporate assumptions or considerations such as
prepayment rates, credit loss estimates, delinquency rates, loss severities, among others. Due to
the subprime characteristics of the loan portfolio measured at fair value, the lack of trading
activity in that market, and the nature of the valuation inputs, these loans are classified as
Level 3. The assumptions used in the valuations were validated by management with market
data and other pricing indicators obtained from other sources.
Notes payable measured at fair value pursuant to SFAS No. 159 (bond certificates associated
with PFHs on-balance sheet securitizations)
Bond certificates associated with PFHs on-balance sheet securitizations are measured at fair value
on a recurring basis due to the election of the fair value option of SFAS No. 159. The fair value
of these bond certificates is derived from discounted cash flow analyses based on historical
performance measures, credit risks, interest rate assumptions, and rates of return for similar
instruments given the current market environment. The notes payable measured at fair value pursuant
to SFAS No. 159 are classified as Level 3.
37
Note 13 Borrowings
The composition of federal funds purchased and assets sold under agreements to repurchase was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
June 30, |
(In thousands) |
|
2008 |
|
2007 |
|
2007 |
|
Federal funds purchased |
|
$ |
625,000 |
|
|
$ |
303,492 |
|
|
$ |
1,430,952 |
|
Assets sold under agreements
to repurchase |
|
|
4,113,677 |
|
|
|
5,133,773 |
|
|
|
4,224,984 |
|
|
|
|
$ |
4,738,677 |
|
|
$ |
5,437,265 |
|
|
$ |
5,655,936 |
|
|
Other short-term borrowings consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
June 30, |
(In thousands) |
|
2008 |
|
2007 |
|
2007 |
|
Advances with the FHLB paying interest monthly at
fixed rates (June 30, 2007 - 5.24% to 5.44%) |
|
|
|
|
|
$ |
72,000 |
|
|
$ |
305,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advances with the FHLB paying interest at maturity at
fixed rates ranging from 2.23% to 2.40% |
|
$ |
675,000 |
|
|
|
570,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advances under credit facilities with other institutions at
fixed rates ranging from 2.50% to 2.94% (June 30, 2007 5.35% to 5.50%) |
|
|
214,000 |
|
|
|
487,000 |
|
|
|
262,675 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper paying interest at
fixed rates (June 30, 2007 - 4.75% to 5.37%) |
|
|
|
|
|
|
7,329 |
|
|
|
264,239 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term notes purchased paying interest at maturity at
fixed rates ranging from 2.20% to 3.40% |
|
|
6,453 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term funds purchased at: |
|
|
|
|
|
|
|
|
|
|
|
|
-fixed rates ranging from 2.26% to 2.45% (June 30, 2007 5.28% to 5.38%) |
|
|
439,000 |
|
|
|
280,000 |
|
|
|
2,065,000 |
|
-a floating rate of 0.08% over the fed funds rate |
|
|
|
|
|
|
|
|
|
|
400,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
2,757 |
|
|
|
85,650 |
|
|
|
87,191 |
|
|
|
|
$ |
1,337,210 |
|
|
$ |
1,501,979 |
|
|
$ |
3,384,105 |
|
|
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. Fed funds rate at June 30, 2008 was 2.50% and 5.38% at June 30,
2007.
38
Notes payable consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
June 30, |
(In thousands) |
|
2008 |
|
2007 |
|
2007 |
|
Advances with the FHLB: |
|
|
|
|
|
|
|
|
|
|
|
|
-with maturities ranging from 2008 through 2018 paying interest at fixed rates
ranging from 2.67% to 6.98% (June 30, 2007 3.07% to 6.98%) |
|
$ |
1,026,817 |
|
|
$ |
813,958 |
|
|
$ |
204,195 |
|
-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 2007 paying interest monthly
at a floating rate of 0.90% over the 1-month LIBOR rate |
|
|
|
|
|
|
|
|
|
|
362,787 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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%
(June 30, 2007
0.20% to 0.35%) over the 3-month LIBOR rate |
|
|
85,000 |
|
|
|
110,000 |
|
|
|
124,997 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 6.85% (June 30, 2007
3.35% to 5.65%) |
|
|
1,519,021 |
|
|
|
2,038,259 |
|
|
|
2,014,659 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
5,358 |
|
|
|
6,805 |
|
|
|
8,168 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term notes maturing in 2009 paying interest quarterly at a floating rate of
0.40% (June 30, 2007 0.35% to 0.40%) over the 3-month LIBOR rate |
|
|
199,822 |
|
|
|
199,706 |
|
|
|
349,504 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured borrowings with maturities ranging from 2009 to 2032 paying interest
monthly at fixed rates ranging from 6.04% to 7.04% (June 30, 2007
3.86%
to 7.12%) |
|
|
35,224 |
* |
|
|
59,241 |
|
|
|
2,489,329 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured borrowings with maturities ranging from 2008 to 2046 paying interest
monthly at floating rates ranging from 2.53% to 3.38% (June 30, 2007
0.05% to 3.50%) over the 1-month LIBOR rate |
|
|
138,501 |
* |
|
|
227,743 |
|
|
|
1,352,710 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes linked
to the S&P 500 Index maturing in 2008 |
|
|
32,838 |
|
|
|
36,498 |
|
|
|
38,118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 14) |
|
|
849,672 |
|
|
|
849,672 |
|
|
|
849,672 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
29,019 |
|
|
|
26,370 |
|
|
|
21,399 |
|
|
|
|
$ |
3,924,372 |
|
|
$ |
4,621,352 |
|
|
$ |
8,068,638 |
|
|
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 June 30, 2008 and
June 30, 2007, respectively, were as follows: 1-month LIBOR = 2.46% and 5.32%; 3-month LIBOR rate = 2.78% and 5.36%; 10-year U.S. Treasury note = 3.97% and 5.03%.
* |
|
These secured borrowings are measured at fair value as of June 30, 2008 pursuant to the fair value option election under SFAS No. 159. |
39
Note 14 Trust Preferred Securities
As of June 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.
40
Note 15 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 closed the public offering of its Series B Preferred Stock
pursuant to an Underwriting Agreement, dated May 22, 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 June 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 June
30, 2008 (December 31, 2007 $374 million; June 30, 2007 $346 million). There were no transfers
between the statutory reserve account and the retained earnings account during the quarter and six
months ended June 30, 2008 and 2007.
Note 16 Commitments and Contingencies
Commercial letters of credit and stand-by letters of credit amounted to $21 million and $163
million, respectively, as of June 30, 2008 (December 31, 2007 $26 million and $174 million; June
30, 2007 $15 million and $181 million). There were also other commitments outstanding and
contingent liabilities, such as commitments to extend credit.
As of June 30, 2008, the Corporation recorded a liability of $607 thousand (December 31, 2007 -
$636 thousand; June 30, 2007 $753 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 stand-by letters of credit were issued to guarantee
the performance of various customers to third parties. 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 (PIHC) fully and unconditionally guarantees certain
borrowing obligations issued by certain of its wholly-owned consolidated subsidiaries, which
aggregated to $2.5 billion as of June 30, 2008
41
(December 31, 2007 $2.9 billion and June 30, 2007
- $3.4 billion). In addition, as of June 30, 2008, PIHC fully and unconditionally guaranteed $824
million of capital securities (December 31, 2007 and June 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 17 Other Service Fees
The caption of other service fees in the consolidated statements of operations consists of the
following major categories:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended |
|
Six months ended |
|
|
June 30, |
|
June 30, |
(In thousands) |
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
Credit card fees and discounts |
|
$ |
27,282 |
|
|
$ |
24,999 |
|
|
$ |
54,526 |
|
|
$ |
48,523 |
|
Debit card fees |
|
|
26,340 |
|
|
|
16,855 |
|
|
|
51,710 |
|
|
|
32,956 |
|
Insurance fees |
|
|
13,507 |
|
|
|
14,720 |
|
|
|
26,202 |
|
|
|
27,669 |
|
Processing fees |
|
|
13,158 |
|
|
|
11,677 |
|
|
|
25,543 |
|
|
|
23,789 |
|
Sale and administration of
investment products |
|
|
8,079 |
|
|
|
7,311 |
|
|
|
19,076 |
|
|
|
14,571 |
|
Mortgage servicing fees, net
of
amortization and fair value
adjustments |
|
|
11,868 |
|
|
|
4,641 |
|
|
|
18,817 |
|
|
|
10,869 |
|
Other fees |
|
|
9,845 |
|
|
|
9,387 |
|
|
|
19,672 |
|
|
|
19,062 |
|
|
Total |
|
$ |
110,079 |
|
|
$ |
89,590 |
|
|
$ |
215,546 |
|
|
$ |
177,439 |
|
|
Note 18 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 six months ended June 30, 2008 and
2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plans |
|
Benefit Restoration Plans |
|
|
Quarters ended |
|
Six months ended |
|
Quarters ended |
|
Six months ended |
|
|
June 30, |
|
June 30, |
|
June 30, |
|
June 30, |
(In thousands) |
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
Service cost |
|
$ |
2,315 |
|
|
$ |
2,639 |
|
|
$ |
4,630 |
|
|
$ |
5,745 |
|
|
$ |
182 |
|
|
$ |
220 |
|
|
$ |
364 |
|
|
$ |
457 |
|
Interest cost |
|
|
8,611 |
|
|
|
7,959 |
|
|
|
17,222 |
|
|
|
15,932 |
|
|
|
461 |
|
|
|
419 |
|
|
|
922 |
|
|
|
839 |
|
Expected return on plan assets |
|
|
(10,169 |
) |
|
|
(10,533 |
) |
|
|
(20,338 |
) |
|
|
(21,057 |
) |
|
|
(420 |
) |
|
|
(368 |
) |
|
|
(840 |
) |
|
|
(736 |
) |
Amortization of prior service cost |
|
|
67 |
|
|
|
52 |
|
|
|
134 |
|
|
|
104 |
|
|
|
(13 |
) |
|
|
(13 |
) |
|
|
(26 |
) |
|
|
(26 |
) |
Amortization of net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
172 |
|
|
|
247 |
|
|
|
343 |
|
|
|
495 |
|
|
Net periodic cost |
|
|
824 |
|
|
|
117 |
|
|
|
1,648 |
|
|
|
724 |
|
|
|
382 |
|
|
|
505 |
|
|
|
763 |
|
|
|
1,029 |
|
Curtailment gain |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(246 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(258 |
) |
|
Total cost |
|
$ |
824 |
|
|
$ |
117 |
|
|
$ |
1,648 |
|
|
$ |
478 |
|
|
$ |
382 |
|
|
$ |
505 |
|
|
$ |
763 |
|
|
$ |
771 |
|
|
For the six months ended June 30, 2008, contributions made to the pension and restoration plans
amounted to approximately $0.8 million. The total contributions expected to be paid during the year
2008 for the pension and restoration plans amount to approximately $5.2 million.
42
The Corporation also provides certain health care benefits for retired employees of certain
subsidiaries. The components of net periodic postretirement benefit cost for the quarters and six
months ended June 30, 2008 and 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters ended |
|
Six months ended |
|
|
June 30, |
|
June 30, |
(In thousands) |
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
Service cost |
|
$ |
485 |
|
|
$ |
578 |
|
|
$ |
970 |
|
|
$ |
1,156 |
|
Interest cost |
|
|
1,967 |
|
|
|
1,889 |
|
|
|
3,934 |
|
|
|
3,778 |
|
Amortization of prior service cost |
|
|
(262 |
) |
|
|
(261 |
) |
|
|
(524 |
) |
|
|
(523 |
) |
|
Total net periodic cost |
|
$ |
2,190 |
|
|
$ |
2,206 |
|
|
$ |
4,380 |
|
|
$ |
4,411 |
|
|
For the six months ended June 30, 2008, contributions made to the postretirement benefit plan
amounted to approximately $2.8 million. The total contributions expected to be paid during the year
2008 for the postretirement benefit plan amount to approximately $6.3 million.
Note 19 Restructuring Plans
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 its subprime loan origination operations at PFH (the PFH Branch
Network Restructuring Plan). PFH continues to hold a $1.2 billion maturing loan portfolio as of
June 30, 2008. 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). The gain on sale
of loans and valuation adjustments on loans held-for-sale associated to this portfolio approximated
$47.4 million for the six months ended June 30, 2008. 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.
Full-time equivalent employees at the PFH reportable segment were 321 as of June 30, 2008, compared
with 932 as of June 30, 2007. PFH continues to operate a mortgage loan servicing unit, a small
scale origination / refinancing unit and to carry a maturing loan portfolio.
During the quarter and six months ended June 30, 2008 and as part of this particular restructuring
plan, the Corporation incurred (reversed) certain costs, on a pre-tax basis, as detailed in the
table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended |
|
Six months ended |
|
|
|
|
(In thousands) |
|
June 30, 2008 |
|
June 30, 2008 |
|
|
|
|
|
Personnel costs |
|
$ |
412 |
|
|
$ |
8,405 |
(a) |
|
|
|
|
Net occupancy expenses |
|
|
(845 |
) |
|
|
5,905 |
(b) |
|
|
|
|
Equipment expenses |
|
|
|
|
|
|
675 |
|
|
|
|
|
Communications |
|
|
|
|
|
|
590 |
|
|
|
|
|
Other operating expenses |
|
|
|
|
|
|
1,021 |
(c) |
|
|
|
|
|
Total restructuring charges |
|
($ |
433 |
) |
|
$ |
16,596 |
|
|
|
|
|
|
|
|
|
(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.
43
As of June 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 |
) |
|
Total |
|
$ |
1,892 |
|
|
$ |
16,596 |
|
|
$ |
18,488 |
|
|
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, 2008 |
|
$ |
17,029 |
|
Cash payments |
|
|
(4,728 |
) |
|
Balance at March 31, 2008 |
|
$ |
12,301 |
|
Charges in quarter ended June 30, 2008 |
|
|
412 |
|
Cash payments |
|
|
(7,913 |
) |
Reversals |
|
|
(845 |
) |
|
Balance as of June 30, 2008 |
|
$ |
3,955 |
|
|
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 include 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
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 as of June 30, 2008 |
|
$ |
2,943 |
|
|
The E-LOAN Restructuring Plan charges are part of the results of the BPNA reportable segment.
44
Note 20 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 |
|
|
As of June 30, 2008, the related accrued interest approximated $3.6 million (June 30, 2007 $2.8
million). Management determined that as of June 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 $26.7 million as of June 30,
2008 (June 30, 2007 $23.2 million).
The amount of unrecognized tax benefits may increase or decrease in the future for various reasons
including adding amounts for current tax year positions, expiration of open income tax returns due
to the statutes of limitation, changes in managements judgment about the level of uncertainty,
status of examinations, litigation and legislative activity and the addition or elimination of
uncertain tax positions.
The Corporation and its subsidiaries file income tax returns in Puerto Rico, the U.S. federal
jurisdiction, various U.S. states and political subdivisions, and foreign jurisdictions. As of June
30, 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 June 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.
Note 21 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 June 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.
45
The following table presents information on stock options outstanding as of June 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
|
|
|
|
|
1,509,952 |
|
|
$ |
15.81 |
|
|
|
4.23 |
|
|
|
1,508,752 |
|
|
$ |
15.80 |
|
$19.25 $27.20
|
|
|
|
|
1,547,327 |
|
|
$ |
25.24 |
|
|
|
5.99 |
|
|
|
1,229,760 |
|
|
$ |
25.05 |
|
|
$14.39 $27.20
|
|
|
|
|
3,057,279 |
|
|
$ |
20.58 |
|
|
|
5.12 |
|
|
|
2,738,512 |
|
|
$ |
19.96 |
|
|
The aggregate intrinsic value of options outstanding as of June 30, 2008 was $2.1 million (June 30,
2007 $12.6 million). There was no intrinsic value of options exercisable as of June 30, 2008
(June 30, 2007 $1.0 million).
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 |
|
|
(4,293 |
) |
|
|
27.20 |
|
|
Outstanding as of June 30, 2008 |
|
|
3,057,279 |
|
|
$ |
20.58 |
|
|
The stock options exercisable as of June 30, 2008 totaled 2,738,512 (June 30, 2007 2,380,590).
There were no stock options exercised during the quarters ended June 30, 2008 and 2007. Thus, there
was no intrinsic value of options exercised during the quarters ended June 30, 2008 and 2007. There
were no stock options exercised during the six-month period ended June 30, 2008 (June 30, 2007
10,064). Thus, there was no intrinsic value of options exercised during the six-month period ended
June 30, 2008 (June 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 June 30, 2008 (June 30, 2007 $0.4 million, with a tax benefit of
$0.2 million). For the six months ended June 30, 2008, the Corporation recognized $0.6 million of
stock option expense, with a tax benefit of $0.2 million (June 30, 2007 $0.9 million, with a tax
benefit of $0.4 million). The total unrecognized compensation cost as of June 30, 2008 related to
non-vested stock option awards was $1.1 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 stock purchased by
the Corporation for such purpose, authorized but unissued shares of common stock or treasury
46
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 |
|
|
(50,233 |
) |
|
|
20.33 |
|
Forfeited |
|
|
(4,134 |
) |
|
|
19.95 |
|
|
Non-vested as of June 30, 2008 |
|
|
249,319 |
|
|
$ |
22.82 |
|
|
During the quarters and six-month periods ended June 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 June 30, 2008,
6,217 shares have been granted under this plan.
During the quarter ended June 30, 2008, the Corporation recognized $0.3 million of restricted stock
expense related to management incentive awards, with a tax benefit of $0.1 million (June 30, 2007
$0.5 million, with a tax benefit of $0.2 million). For the six-month period ended June 30, 2008,
the Corporation recognized $1.2 million of restricted stock expense related to management incentive
awards, with a tax benefit of $0.5 million (June 30, 2007 $1.8 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 $20 thousand. During the quarter and six-month
period ended June 30, 2008, the Corporation recognized $0.5 million and $0.9 million, respectively,
of performance shares expense, with a tax benefit of $0.2 million 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 June 30, 2008 was $11 million and is expected to
be recognized over a weighted-average period of 2 years.
47
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 |
|
|
45,348 |
|
|
|
11.58 |
|
Vested |
|
|
(45,348 |
) |
|
|
11.58 |
|
Forfeited |
|
|
|
|
|
|
|
|
|
Non-vested as of June 30, 2008 |
|
|
|
|
|
|
|
|
|
During the quarter ended June 30, 2008, the Corporation granted 41,926 (June 30, 2007 26,751)
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 June 30, 2008, the Corporation recognized
$0.1 million of restricted stock expense related to these restricted stock grants, with a tax
benefit of $46 thousand (June 30, 2007 $0.1 million, with a tax benefit of $58 thousand). For the
six-month period ended June 30, 2008, the Corporation granted 45,348 (June 30, 2007 29,363)
shares of restricted stock to members of the Board of Directors of Popular Inc. and BPPR, which
became vested at grant date. During the six-month period ended June 30, 2008, the Corporation
recognized $0.2 million of restricted stock expense related to these restricted stock grants, with
a tax benefit of $91 thousand (June 30, 2007 $0.3 million, with a tax benefit of $0.1 million).
The fair value at vesting date of the restricted stock vested during 2008 for directors was $0.5
million.
Note 22 Earnings per Common Share
The computation of earnings per common share (EPS) follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended |
|
Six months ended |
|
|
June 30, |
|
June 30, |
(In thousands, except share information) |
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
Net income |
|
$ |
24,250 |
|
|
$ |
74,950 |
|
|
$ |
127,540 |
|
|
$ |
193,597 |
|
Less: Preferred stock dividends |
|
|
6,003 |
|
|
|
2,978 |
|
|
|
8,981 |
|
|
|
5,956 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common stock |
|
$ |
18,247 |
|
|
$ |
71,972 |
|
|
$ |
118,559 |
|
|
$ |
187,641 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares outstanding |
|
|
280,773,513 |
|
|
|
279,355,701 |
|
|
|
280,514,164 |
|
|
|
279,218,147 |
|
Average potential common shares |
|
|
|
|
|
|
88,158 |
|
|
|
|
|
|
|
117,671 |
|
|
Average common shares outstanding assuming dilution |
|
|
280,773,513 |
|
|
|
279,443,859 |
|
|
|
280,514,164 |
|
|
|
279,335,818 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted EPS |
|
$ |
0.06 |
|
|
$ |
0.26 |
|
|
$ |
0.42 |
|
|
$ |
0.67 |
|
|
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
six-month period ended June 30, 2008, there were 3,057,279 and 3,068,430 weighted average
antidilutive stock options outstanding, respectively (June 30, 2007 1,752,235 and 1,756,748).
48
Note 23 Supplemental Disclosure on the Consolidated Statements of Cash Flows
Additional disclosures on non-cash activities for the six-month period are listed in the following
table:
|
|
|
|
|
|
|
|
|
(In thousands) |
|
June 30, 2008 |
|
June 30, 2007 |
|
Non-cash activities: |
|
|
|
|
|
|
|
|
Loans transferred to other real estate |
|
$ |
52,926 |
|
|
$ |
90,271 |
|
Loans transferred to other property |
|
|
21,219 |
|
|
|
18,106 |
|
|
Total loans transferred to foreclosed assets |
|
|
74,145 |
|
|
|
108,377 |
|
Transfers from loans held-in-portfolio to loans
held-for-sale |
|
|
422,103 |
|
|
|
|
|
Transfers from loans held-for-sale to loans
held-in-portfolio |
|
|
35,482 |
|
|
|
56,850 |
|
Loans securitized into investment securities (a) |
|
|
1,033,032 |
|
|
|
721,413 |
|
Recognition of mortgage servicing rights on
securitizations or asset transfers |
|
|
15,521 |
|
|
|
20,008 |
|
Business acquisitions: |
|
|
|
|
|
|
|
|
Fair value of assets acquired |
|
|
|
|
|
|
703 |
|
Goodwill and other intangible assets acquired |
|
|
|
|
|
|
1,657 |
|
Other liabilities assumed |
|
|
|
|
|
|
(726 |
) |
|
|
|
|
(a) |
|
Includes loans securitized into investment securities and
subsequently sold before quarter end. |
Note 24 Segment Reporting
The Corporations corporate structure consists of four reportable segments Banco Popular de
Puerto Rico, Banco Popular North America, Popular Financial Holdings and EVERTEC. Also, a corporate
group has been defined to support the reportable segments.
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. Also, management has considered its business
strategies with respect to the discontinuance of certain loan origination operations of PFH and
runoff of its loan portfolio.
Banco Popular de Puerto Rico:
Given that Banco Popular de Puerto Rico constitutes a significant portion of the Corporations
results of operations and total assets as of June 30, 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 respectively on auto and lease financing, small personal loans and
mortgage loan originations. 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. |
|
|
|
|
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. |
49
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 6 states, while E-LOAN provides online consumer direct lending
and supports BPNAs deposit gathering through its online platform. 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.
Popular Financial Holdings:
PFH, after certain restructuring events discussed in Note 19 to the consolidated financial
statements, exited the branch network loan origination business during the first quarter of 2008,
but continues to operate a small scale origination / refinancing unit, to carry a maturing loan
portfolio and to operate a mortgage loan servicing unit. PFHs clientele is primarily subprime
borrowers. PFH continues to carry a maturing loan portfolio that approximated $1.2 billion as of
June 30, 2008.
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.
50
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 June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Popular |
|
|
|
|
|
|
|
|
Banco Popular de |
|
Banco Popular |
|
Financial |
|
|
|
|
|
Intersegment |
(In thousands) |
|
Puerto Rico |
|
North America |
|
Holdings |
|
EVERTEC |
|
Eliminations |
|
Net interest income (expense) |
|
$ |
243,211 |
|
|
$ |
92,363 |
|
|
$ |
7,595 |
|
|
$ |
(234 |
) |
|
|
|
|
Provision for loan losses |
|
|
107,755 |
|
|
|
81,410 |
|
|
|
1,475 |
|
|
|
|
|
|
|
|
|
Non-interest income (loss) |
|
|
185,072 |
|
|
|
29,275 |
|
|
|
(43,575 |
) |
|
|
65,862 |
|
|
$ |
(36,569 |
) |
Amortization of intangibles |
|
|
765 |
|
|
|
1,506 |
|
|
|
|
|
|
|
219 |
|
|
|
|
|
Depreciation expense |
|
|
10,537 |
|
|
|
3,674 |
|
|
|
275 |
|
|
|
3,570 |
|
|
|
(18 |
) |
Other operating expenses |
|
|
197,188 |
|
|
|
94,146 |
|
|
|
17,121 |
|
|
|
44,002 |
|
|
|
(37,307 |
) |
Income tax expense (benefit) |
|
|
19,553 |
|
|
|
(24,779 |
) |
|
|
(19,057 |
) |
|
|
4,346 |
|
|
|
240 |
|
|
Net income (loss) |
|
$ |
92,485 |
|
|
$ |
(34,319 |
) |
|
$ |
(35,794 |
) |
|
$ |
13,491 |
|
|
$ |
516 |
|
|
Segment Assets |
|
$ |
26,524,462 |
|
|
$ |
12,873,833 |
|
|
$ |
2,012,956 |
|
|
$ |
249,160 |
|
|
$ |
(183,029 |
) |
|
For the quarter ended June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Reportable |
|
|
|
|
|
|
|
|
|
Total |
(In thousands) |
|
Segments |
|
Corporate |
|
Eliminations |
|
Popular, Inc. |
|
Net interest income (expense) |
|
$ |
342,935 |
|
|
$ |
(5,349 |
) |
|
$ |
299 |
|
|
$ |
337,885 |
|
Provision for loan losses |
|
|
190,640 |
|
|
|
|
|
|
|
|
|
|
|
190,640 |
|
Non-interest income |
|
|
200,065 |
|
|
|
976 |
|
|
|
(7,469 |
) |
|
|
193,572 |
|
Amortization of intangibles |
|
|
2,490 |
|
|
|
|
|
|
|
|
|
|
|
2,490 |
|
Depreciation expense |
|
|
18,038 |
|
|
|
569 |
|
|
|
|
|
|
|
18,607 |
|
Other operating expenses |
|
|
315,150 |
|
|
|
15,086 |
|
|
|
(3,600 |
) |
|
|
326,636 |
|
Income tax benefit |
|
|
(19,697 |
) |
|
|
(11,555 |
) |
|
|
86 |
|
|
|
(31,166 |
) |
|
Net income (loss) |
|
$ |
36,379 |
|
|
$ |
(8,473 |
) |
|
|
($3,656 |
) |
|
$ |
24,250 |
|
|
Segment Assets |
|
$ |
41,477,382 |
|
|
$ |
5,902,462 |
|
|
$ |
(5,701,250 |
) |
|
$ |
41,678,594 |
|
|
For the six months ended June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Popular |
|
|
|
|
|
|
|
|
Banco Popular de |
|
Banco Popular |
|
Financial |
|
|
|
|
|
Intersegment |
(In thousands) |
|
Puerto Rico |
|
North America |
|
Holdings |
|
EVERTEC |
|
Eliminations |
|
Net interest income (expense) |
|
$ |
487,883 |
|
|
$ |
187,803 |
|
|
$ |
28,991 |
|
|
$ |
(469 |
) |
|
$ |
53 |
|
Provision for loan losses |
|
|
210,234 |
|
|
|
140,127 |
|
|
|
8,461 |
|
|
|
|
|
|
|
|
|
Non-interest income (loss) |
|
|
362,758 |
|
|
|
83,097 |
|
|
|
(352 |
) |
|
|
135,572 |
|
|
|
(74,232 |
) |
Amortization of intangibles |
|
|
1,508 |
|
|
|
3,021 |
|
|
|
|
|
|
|
453 |
|
|
|
|
|
Depreciation expense |
|
|
21,004 |
|
|
|
7,268 |
|
|
|
649 |
|
|
|
7,280 |
|
|
|
(36 |
) |
Other operating expenses |
|
|
384,517 |
|
|
|
184,820 |
|
|
|
65,965 |
|
|
|
92,265 |
|
|
|
(74,812 |
) |
Income tax expense (benefit) |
|
|
42,065 |
|
|
|
(28,044 |
) |
|
|
(14,681 |
) |
|
|
9,852 |
|
|
|
208 |
|
|
Net income (loss) |
|
$ |
191,313 |
|
|
$ |
(36,292 |
) |
|
$ |
(31,755 |
) |
|
$ |
25,253 |
|
|
$ |
461 |
|
|
51
For the six months ended June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Reportable |
|
|
|
|
|
|
|
|
|
Total |
(In thousands) |
|
Segments |
|
Corporate |
|
Eliminations |
|
Popular, Inc. |
|
Net interest income (expense) |
|
$ |
704,261 |
|
|
$ |
(9,785 |
) |
|
$ |
598 |
|
|
$ |
695,074 |
|
Provision for loan losses |
|
|
358,822 |
|
|
|
40 |
|
|
|
|
|
|
|
358,862 |
|
Non-interest income |
|
|
506,843 |
|
|
|
3,719 |
|
|
|
(9,015 |
) |
|
|
501,547 |
|
Amortization of intangibles |
|
|
4,982 |
|
|
|
|
|
|
|
|
|
|
|
4,982 |
|
Depreciation expense |
|
|
36,165 |
|
|
|
1,153 |
|
|
|
|
|
|
|
37,318 |
|
Other operating expenses |
|
|
652,755 |
|
|
|
30,789 |
|
|
|
(5,596 |
) |
|
|
677,948 |
|
Income tax expense (benefit) |
|
|
9,400 |
|
|
|
(19,808 |
) |
|
|
379 |
|
|
|
(10,029 |
) |
|
Net income (loss) |
|
$ |
148,980 |
|
|
$ |
(18,240 |
) |
|
$ |
(3,200 |
) |
|
$ |
127,540 |
|
|
2007
For the quarter ended June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banco |
|
Popular |
|
|
|
|
|
|
|
|
Banco Popular de |
|
Popular North |
|
Financial |
|
|
|
|
|
Intersegment |
(In thousands) |
|
Puerto Rico |
|
America |
|
Holdings |
|
EVERTEC |
|
Eliminations |
|
Net interest income (expense) |
|
$ |
237,154 |
|
|
$ |
91,954 |
|
|
$ |
46,755 |
|
|
$ |
(240 |
) |
|
$ |
867 |
|
Provision for loan losses |
|
|
63,482 |
|
|
|
12,217 |
|
|
|
39,468 |
|
|
|
|
|
|
|
|
|
Non-interest income |
|
|
125,090 |
|
|
|
45,667 |
|
|
|
11,751 |
|
|
|
59,853 |
|
|
|
(35,078 |
) |
Amortization of intangibles |
|
|
656 |
|
|
|
1,938 |
|
|
|
|
|
|
|
219 |
|
|
|
|
|
Depreciation expense |
|
|
10,441 |
|
|
|
4,059 |
|
|
|
647 |
|
|
|
4,256 |
|
|
|
(18 |
) |
Other operating expenses |
|
|
179,164 |
|
|
|
107,070 |
|
|
|
30,018 |
|
|
|
44,729 |
|
|
|
(35,108 |
) |
Income tax expense (benefit) |
|
|
27,887 |
|
|
|
3,905 |
|
|
|
(3,552 |
) |
|
|
3,814 |
|
|
|
374 |
|
|
Net income (loss) |
|
$ |
80,614 |
|
|
$ |
8,432 |
|
|
$ |
(8,075 |
) |
|
$ |
6,595 |
|
|
$ |
541 |
|
|
Segment Assets |
|
$ |
25,863,421 |
|
|
$ |
12,914,122 |
|
|
$ |
7,759,262 |
|
|
$ |
233,167 |
|
|
$ |
(150,730 |
) |
|
For the quarter ended June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Reportable |
|
|
|
|
|
|
|
|
|
Total |
(In thousands) |
|
Segments |
|
Corporate |
|
Eliminations |
|
Popular, Inc. |
|
Net interest income (expense) |
|
$ |
376,490 |
|
|
$ |
(5,373 |
) |
|
$ |
300 |
|
|
$ |
371,417 |
|
Provision for loan losses |
|
|
115,167 |
|
|
|
|
|
|
|
|
|
|
|
115,167 |
|
Non-interest income (loss) |
|
|
207,283 |
|
|
|
(1,614 |
) |
|
|
(2,294 |
) |
|
|
203,375 |
|
Amortization of intangibles |
|
|
2,813 |
|
|
|
|
|
|
|
|
|
|
|
2,813 |
|
Depreciation expense |
|
|
19,385 |
|
|
|
594 |
|
|
|
|
|
|
|
19,979 |
|
Other operating expenses |
|
|
325,873 |
|
|
|
14,218 |
|
|
|
(1,830 |
) |
|
|
338,261 |
|
Income tax expense (benefit) |
|
|
32,428 |
|
|
|
(8,750 |
) |
|
|
(56 |
) |
|
|
23,622 |
|
|
Net income (loss) |
|
$ |
88,107 |
|
|
$ |
(13,049 |
) |
|
$ |
(108 |
) |
|
$ |
74,950 |
|
|
Segment Assets |
|
$ |
46,619,242 |
|
|
$ |
6,471,299 |
|
|
$ |
(6,105,178 |
) |
|
$ |
46,985,363 |
|
|
52
For the six months ended June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banco |
|
Popular |
|
|
|
|
|
|
|
|
Banco Popular de |
|
Popular North |
|
Financial |
|
|
|
|
|
Intersegment |
(In thousands) |
|
Puerto Rico |
|
America |
|
Holdings |
|
EVERTEC |
|
Eliminations |
|
Net interest income (expense) |
|
$ |
469,378 |
|
|
$ |
181,738 |
|
|
$ |
88,409 |
|
|
$ |
(473 |
) |
|
$ |
1,524 |
|
Provision for loan losses |
|
|
110,480 |
|
|
|
22,650 |
|
|
|
78,376 |
|
|
|
|
|
|
|
|
|
Non-interest income (loss) |
|
|
241,842 |
|
|
|
102,609 |
|
|
|
(50,603 |
) |
|
|
119,475 |
|
|
|
(82,305 |
) |
Amortization of intangibles |
|
|
1,318 |
|
|
|
4,011 |
|
|
|
|
|
|
|
467 |
|
|
|
|
|
Depreciation expense |
|
|
21,165 |
|
|
|
8,082 |
|
|
|
1,260 |
|
|
|
8,320 |
|
|
|
(36 |
) |
Other operating expenses |
|
|
352,992 |
|
|
|
212,757 |
|
|
|
81,338 |
|
|
|
88,625 |
|
|
|
(69,824 |
) |
Income tax expense (benefit) |
|
|
58,382 |
|
|
|
12,902 |
|
|
|
(42,708 |
) |
|
|
7,749 |
|
|
|
(4,472 |
) |
|
Net income (loss) |
|
$ |
166,883 |
|
|
$ |
23,945 |
|
|
$ |
(80,460 |
) |
|
$ |
13,841 |
|
|
$ |
(6,449 |
) |
|
For the six months ended June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Reportable |
|
|
|
|
|
|
|
|
|
Total Popular, |
(In thousands) |
|
Segments |
|
Corporate |
|
Eliminations |
|
Inc. |
|
Net interest income (expense) |
|
$ |
740,576 |
|
|
$ |
(14,776 |
) |
|
$ |
599 |
|
|
$ |
726,399 |
|
Provision for loan losses |
|
|
211,506 |
|
|
|
7 |
|
|
|
|
|
|
|
211,513 |
|
Non-interest income |
|
|
331,018 |
|
|
|
128,049 |
|
|
|
(3,516 |
) |
|
|
455,551 |
|
Amortization of intangibles |
|
|
5,796 |
|
|
|
|
|
|
|
|
|
|
|
5,796 |
|
Depreciation expense |
|
|
38,791 |
|
|
|
1,182 |
|
|
|
|
|
|
|
39,973 |
|
Other operating expenses |
|
|
665,888 |
|
|
|
28,161 |
|
|
|
(3,437 |
) |
|
|
690,612 |
|
Income tax expense |
|
|
31,853 |
|
|
|
8,386 |
|
|
|
220 |
|
|
|
40,459 |
|
|
Net income |
|
$ |
117,760 |
|
|
$ |
75,537 |
|
|
$ |
300 |
|
|
$ |
193,597 |
|
|
During the six months ended June 30, 2007, the Corporate group realized net gains on sale and
valuation adjustments of investment securities, mainly marketable equity securities, of
approximately $108.1 million before tax. There were no realized net gains on sale of securities
recorded by the Corporate group during the six-month period ended June 30, 2008. These net gains
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 June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Banco |
|
|
Commercial |
|
Consumer and |
|
Other Financial |
|
|
|
|
|
Popular de |
(In thousands) |
|
Banking |
|
Retail Banking |
|
Services |
|
Eliminations |
|
Puerto Rico |
|
Net interest income |
|
$ |
88,401 |
|
|
$ |
151,596 |
|
|
$ |
3,070 |
|
|
$ |
144 |
|
|
$ |
243,211 |
|
Provision for loan losses |
|
|
61,150 |
|
|
|
46,605 |
|
|
|
|
|
|
|
|
|
|
|
107,755 |
|
Non-interest income |
|
|
35,755 |
|
|
|
118,265 |
|
|
|
31,145 |
|
|
|
(93 |
) |
|
|
185,072 |
|
Amortization of intangibles |
|
|
31 |
|
|
|
572 |
|
|
|
162 |
|
|
|
|
|
|
|
765 |
|
Depreciation expense |
|
|
3,825 |
|
|
|
6,416 |
|
|
|
296 |
|
|
|
|
|
|
|
10,537 |
|
Other operating expenses |
|
|
55,244 |
|
|
|
123,846 |
|
|
|
18,194 |
|
|
|
(96 |
) |
|
|
197,188 |
|
Income tax (benefit) expense |
|
|
(5,875 |
) |
|
|
20,025 |
|
|
|
5,334 |
|
|
|
69 |
|
|
|
19,553 |
|
|
Net income |
|
$ |
9,781 |
|
|
$ |
72,397 |
|
|
$ |
10,229 |
|
|
$ |
78 |
|
|
$ |
92,485 |
|
|
Segment Assets |
|
$ |
11,461,433 |
|
|
$ |
19,066,945 |
|
|
$ |
791,390 |
|
|
$ |
(4,795,306 |
) |
|
$ |
26,524,462 |
|
|
53
For the six months ended June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Banco |
|
|
Commercial |
|
Consumer and |
|
Other Financial |
|
|
|
|
|
Popular de |
(In thousands) |
|
Banking |
|
Retail Banking |
|
Services |
|
Eliminations |
|
Puerto Rico |
|
Net interest income |
|
$ |
181,759 |
|
|
$ |
299,986 |
|
|
$ |
5,857 |
|
|
$ |
281 |
|
|
$ |
487,883 |
|
Provision for loan losses |
|
|
118,018 |
|
|
|
92,216 |
|
|
|
|
|
|
|
|
|
|
|
210,234 |
|
Non-interest income |
|
|
61,156 |
|
|
|
245,946 |
|
|
|
55,775 |
|
|
|
(119 |
) |
|
|
362,758 |
|
Amortization of intangibles |
|
|
61 |
|
|
|
1,144 |
|
|
|
303 |
|
|
|
|
|
|
|
1,508 |
|
Depreciation expense |
|
|
7,352 |
|
|
|
13,043 |
|
|
|
609 |
|
|
|
|
|
|
|
21,004 |
|
Other operating expenses |
|
|
102,273 |
|
|
|
246,905 |
|
|
|
35,497 |
|
|
|
(158 |
) |
|
|
384,517 |
|
Income tax (benefit) expense |
|
|
(6,405 |
) |
|
|
39,402 |
|
|
|
8,915 |
|
|
|
153 |
|
|
|
42,065 |
|
|
Net income |
|
$ |
21,616 |
|
|
$ |
153,222 |
|
|
$ |
16,308 |
|
|
$ |
167 |
|
|
$ |
191,313 |
|
|
2007
For the quarter ended June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Banco |
|
|
Commercial |
|
Consumer and |
|
Other Financial |
|
|
|
|
|
Popular de |
(In thousands) |
|
Banking |
|
Retail Banking |
|
Services |
|
Eliminations |
|
Puerto Rico |
|
Net interest income |
|
$ |
93,754 |
|
|
$ |
140,326 |
|
|
$ |
2,933 |
|
|
$ |
141 |
|
|
$ |
237,154 |
|
Provision for loan losses |
|
|
22,889 |
|
|
|
40,593 |
|
|
|
|
|
|
|
|
|
|
|
63,482 |
|
Non-interest income |
|
|
22,000 |
|
|
|
80,681 |
|
|
|
22,956 |
|
|
|
(547 |
) |
|
|
125,090 |
|
Amortization of intangibles |
|
|
220 |
|
|
|
325 |
|
|
|
111 |
|
|
|
|
|
|
|
656 |
|
Depreciation expense |
|
|
3,574 |
|
|
|
6,569 |
|
|
|
298 |
|
|
|
|
|
|
|
10,441 |
|
Other operating expenses |
|
|
44,048 |
|
|
|
118,478 |
|
|
|
16,717 |
|
|
|
(79 |
) |
|
|
179,164 |
|
Income tax expense |
|
|
12,507 |
|
|
|
12,703 |
|
|
|
2,803 |
|
|
|
(126 |
) |
|
|
27,887 |
|
|
Net income |
|
$ |
32,516 |
|
|
$ |
42,339 |
|
|
$ |
5,960 |
|
|
$ |
(201 |
) |
|
$ |
80,614 |
|
|
Segment Assets |
|
$ |
11,422,905 |
|
|
$ |
18,081,721 |
|
|
$ |
724,346 |
|
|
$ |
(4,365,551 |
) |
|
$ |
25,863,421 |
|
|
For the six months ended June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Banco |
|
|
Commercial |
|
Consumer and |
|
Other Financial |
|
|
|
|
|
Popular de |
(In thousands) |
|
Banking |
|
Retail Banking |
|
Services |
|
Eliminations |
|
Puerto Rico |
|
Net interest income |
|
$ |
184,182 |
|
|
$ |
279,736 |
|
|
$ |
5,180 |
|
|
$ |
280 |
|
|
$ |
469,378 |
|
Provision for loan losses |
|
|
35,822 |
|
|
|
74,658 |
|
|
|
|
|
|
|
|
|
|
|
110,480 |
|
Non-interest income |
|
|
45,107 |
|
|
|
154,575 |
|
|
|
42,807 |
|
|
|
(647 |
) |
|
|
241,842 |
|
Amortization of intangibles |
|
|
440 |
|
|
|
658 |
|
|
|
220 |
|
|
|
|
|
|
|
1,318 |
|
Depreciation expense |
|
|
7,378 |
|
|
|
13,214 |
|
|
|
573 |
|
|
|
|
|
|
|
21,165 |
|
Other operating expenses |
|
|
88,353 |
|
|
|
231,927 |
|
|
|
32,891 |
|
|
|
(179 |
) |
|
|
352,992 |
|
Income tax expense |
|
|
27,400 |
|
|
|
26,722 |
|
|
|
4,328 |
|
|
|
(68 |
) |
|
|
58,382 |
|
|
Net income |
|
$ |
69,896 |
|
|
$ |
87,132 |
|
|
$ |
9,975 |
|
|
$ |
(120 |
) |
|
$ |
166,883 |
|
|
54
Additional disclosures with respect to the Banco Popular North America reportable segment are as
follows:
2008
For the quarter ended June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
Banco Popular |
|
|
|
|
|
|
|
|
|
Banco Popular |
(In thousands) |
|
North America |
|
E-LOAN |
|
Eliminations |
|
North America |
|
Net interest income |
|
$ |
84,666 |
|
|
$ |
7,350 |
|
|
$ |
347 |
|
|
$ |
92,363 |
|
Provision for loan losses |
|
|
55,066 |
|
|
|
26,344 |
|
|
|
|
|
|
|
81,410 |
|
Non-interest income |
|
|
26,246 |
|
|
|
3,263 |
|
|
|
(234 |
) |
|
|
29,275 |
|
Amortization of intangibles |
|
|
1,057 |
|
|
|
449 |
|
|
|
|
|
|
|
1,506 |
|
Depreciation expense |
|
|
3,205 |
|
|
|
469 |
|
|
|
|
|
|
|
3,674 |
|
Other operating expenses |
|
|
73,976 |
|
|
|
20,167 |
|
|
|
3 |
|
|
|
94,146 |
|
Income tax benefit |
|
|
(9,723 |
) |
|
|
(15,094 |
) |
|
|
38 |
|
|
|
(24,779 |
) |
|
Net loss |
|
$ |
(12,669 |
) |
|
$ |
(21,722 |
) |
|
$ |
72 |
|
|
$ |
(34,319 |
) |
|
Segment Assets |
|
$ |
13,151,497 |
|
|
$ |
1,053,195 |
|
|
$ |
(1,330,859 |
) |
|
$ |
12,873,833 |
|
|
For the six months ended June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
Banco Popular |
|
|
|
|
|
|
|
|
|
Banco Popular |
(In thousands) |
|
North America |
|
E-LOAN |
|
Eliminations |
|
North America |
|
Net interest income |
|
$ |
173,133 |
|
|
$ |
13,996 |
|
|
$ |
674 |
|
|
$ |
187,803 |
|
Provision for loan losses |
|
|
87,347 |
|
|
|
52,780 |
|
|
|
|
|
|
|
140,127 |
|
Non-interest income |
|
|
72,169 |
|
|
|
11,267 |
|
|
|
(339 |
) |
|
|
83,097 |
|
Amortization of intangibles |
|
|
2,122 |
|
|
|
899 |
|
|
|
|
|
|
|
3,021 |
|
Depreciation expense |
|
|
6,318 |
|
|
|
950 |
|
|
|
|
|
|
|
7,268 |
|
Other operating expenses |
|
|
146,970 |
|
|
|
37,844 |
|
|
|
6 |
|
|
|
184,820 |
|
Income tax benefit |
|
|
(603 |
) |
|
|
(27,556 |
) |
|
|
115 |
|
|
|
(28,044 |
) |
|
Net income (loss) |
|
$ |
3,148 |
|
|
$ |
(39,654 |
) |
|
$ |
214 |
|
|
$ |
(36,292 |
) |
|
2007
For the quarter ended June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Banco |
|
|
Banco Popular |
|
|
|
|
|
|
|
|
|
Popular North |
(In thousands) |
|
North America |
|
E-LOAN |
|
Eliminations |
|
America |
|
Net interest income |
|
$ |
87,949 |
|
|
$ |
3,795 |
|
|
$ |
210 |
|
|
$ |
91,954 |
|
Provision for loan losses |
|
|
10,756 |
|
|
|
1,461 |
|
|
|
|
|
|
|
12,217 |
|
Non-interest income |
|
|
24,261 |
|
|
|
21,762 |
|
|
|
(356 |
) |
|
|
45,667 |
|
Amortization of intangibles |
|
|
1,240 |
|
|
|
698 |
|
|
|
|
|
|
|
1,938 |
|
Depreciation expense |
|
|
3,240 |
|
|
|
819 |
|
|
|
|
|
|
|
4,059 |
|
Other operating expenses |
|
|
69,086 |
|
|
|
37,973 |
|
|
|
11 |
|
|
|
107,070 |
|
Income tax expense (benefit) |
|
|
10,271 |
|
|
|
(6,312 |
) |
|
|
(54 |
) |
|
|
3,905 |
|
|
Net income (loss) |
|
$ |
17,617 |
|
|
$ |
(9,082 |
) |
|
$ |
(103 |
) |
|
$ |
8,432 |
|
|
Segment Assets |
|
$ |
12,897,767 |
|
|
$ |
1,006,336 |
|
|
$ |
(989,981 |
) |
|
$ |
12,914,122 |
|
|
55
For the six months ended June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Banco |
|
|
Banco Popular |
|
|
|
|
|
|
|
|
|
Popular North |
(In thousands) |
|
North America |
|
E-LOAN |
|
Eliminations |
|
America |
|
Net interest income |
|
$ |
173,913 |
|
|
$ |
7,441 |
|
|
$ |
384 |
|
|
$ |
181,738 |
|
Provision for loan losses |
|
|
19,635 |
|
|
|
3,015 |
|
|
|
|
|
|
|
22,650 |
|
Non-interest income |
|
|
48,386 |
|
|
|
54,844 |
|
|
|
(621 |
) |
|
|
102,609 |
|
Amortization of intangibles |
|
|
2,616 |
|
|
|
1,395 |
|
|
|
|
|
|
|
4,011 |
|
Depreciation expense |
|
|
6,491 |
|
|
|
1,591 |
|
|
|
|
|
|
|
8,082 |
|
Other operating expenses |
|
|
138,607 |
|
|
|
74,127 |
|
|
|
23 |
|
|
|
212,757 |
|
Income tax expense (benefit) |
|
|
20,312 |
|
|
|
(7,319 |
) |
|
|
(91 |
) |
|
|
12,902 |
|
|
Net income (loss) |
|
$ |
34,638 |
|
|
$ |
(10,524 |
) |
|
$ |
(169 |
) |
|
$ |
23,945 |
|
|
A breakdown of intersegment eliminations, particularly revenues, by segment in which the revenues
are recorded follows:
INTERSEGMENT REVENUES*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended |
|
Six months ended |
|
|
June 30, |
|
June 30, |
|
June 30, |
|
June 30, |
(In thousands) |
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
Banco Popular de Puerto Rico: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Banking |
|
$ |
212 |
|
|
$ |
(64 |
) |
|
$ |
612 |
|
|
$ |
(58 |
) |
Consumer and Retail Banking |
|
|
491 |
|
|
|
(163 |
) |
|
|
1,414 |
|
|
|
(178 |
) |
Other Financial Services |
|
|
(97 |
) |
|
|
(102 |
) |
|
|
(130 |
) |
|
|
(231 |
) |
Banco Popular North America: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banco Popular North America |
|
|
(1,347 |
) |
|
|
(1,081 |
) |
|
|
(4,335 |
) |
|
|
(1,108 |
) |
E-LOAN |
|
|
|
|
|
|
(73 |
) |
|
|
(627 |
) |
|
|
(12,613 |
) |
Popular Financial Holdings |
|
|
1,999 |
|
|
|
1,943 |
|
|
|
3,721 |
|
|
|
2,246 |
|
EVERTEC |
|
|
(37,827 |
) |
|
|
(34,671 |
) |
|
|
(74,834 |
) |
|
|
(68,839 |
) |
|
Total |
|
$ |
(36,569 |
) |
|
$ |
(34,211 |
) |
|
$ |
(74,179 |
) |
|
$ |
(80,781 |
) |
|
|
|
|
* |
|
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. |
56
A breakdown of revenues and selected balance sheet information by geographical area follows:
Geographic Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended |
|
Six months ended |
|
|
June 30, |
|
June 30, |
|
June 30, |
|
June 30, |
(In thousands) |
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
Revenues** |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Puerto Rico |
|
$ |
426,504 |
|
|
$ |
362,811 |
|
|
$ |
849,106 |
|
|
$ |
840,796 |
|
United States |
|
|
78,272 |
|
|
|
190,244 |
|
|
|
288,844 |
|
|
|
297,483 |
|
Other |
|
|
26,681 |
|
|
|
21,737 |
|
|
|
58,671 |
|
|
|
43,671 |
|
|
Total consolidated revenues |
|
$ |
531,457 |
|
|
$ |
574,792 |
|
|
$ |
1,196,621 |
|
|
$ |
1,181,950 |
|
|
|
|
|
** |
|
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), losses from changes in fair value related to
instruments
measured at fair value pursuant to SFAS No. 159, gain on sale of loans and valuation adjustments on loans held- for-sale, and other operating
income. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
June 30, |
(In thousands) |
|
2008 |
|
2007 |
|
2007 |
|
Selected Balance Sheet Information: |
|
|
|
|
|
|
|
|
|
|
|
|
Puerto Rico |
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
25,352,860 |
|
|
$ |
26,017,716 |
|
|
$ |
24,996,466 |
|
Loans |
|
|
15,442,742 |
|
|
|
15,679,181 |
|
|
|
15,129,703 |
|
Deposits |
|
|
16,462,795 |
|
|
|
17,341,601 |
|
|
|
14,237,308 |
|
Mainland United States |
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
15,033,702 |
|
|
$ |
17,093,929 |
|
|
$ |
20,733,903 |
|
Loans |
|
|
11,524,665 |
|
|
|
13,517,728 |
|
|
|
16,955,769 |
|
Deposits |
|
|
9,342,281 |
|
|
|
9,737,996 |
|
|
|
9,900,375 |
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,292,032 |
|
|
$ |
1,299,792 |
|
|
$ |
1,254,994 |
|
Loans |
|
|
664,271 |
|
|
|
714,093 |
|
|
|
666,373 |
|
Deposits * |
|
|
1,310,652 |
|
|
|
1,254,881 |
|
|
|
1,248,312 |
|
|
|
|
|
* |
|
Represents deposits from BPPR operations located in the U.S. and British Virgin Islands. |
Note 25 Condensed Consolidating Financial Information of Guarantor and Issuers of Registered
Guaranteed Securities
The following condensed consolidating financial information presents the financial position of
Popular, Inc. Holding Company (PIHC) (parent only), Popular International Bank, Inc. (PIBI),
Popular North America, Inc. (PNA), and all other subsidiaries of the Corporation as of June 30,
2008, December 31, 2007 and June 30, 2007, and the results of their operations and cash flows for
the periods ended June 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 Insurance, Inc.; and |
|
|
|
|
EVERTEC USA, Inc. |
57
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 June 30, 2008, BPPR could have declared a
dividend of approximately $110 million (December 31, 2007 $45 million; June 30, 2007 $192
million) without the approval of the Federal Reserve Board. As of June 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.
58
POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CONDITION
JUNE 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 |
|
$ |
904 |
|
|
$ |
285 |
|
|
$ |
7,646 |
|
|
$ |
879,893 |
|
|
$ |
(1,109 |
) |
|
$ |
887,619 |
|
Money market investments |
|
|
435,200 |
|
|
|
38,700 |
|
|
|
207 |
|
|
|
897,796 |
|
|
|
(474,107 |
) |
|
|
897,796 |
|
Investment securities available-for-sale, at fair value |
|
|
|
|
|
|
10,077 |
|
|
|
|
|
|
|
7,692,250 |
|
|
|
|
|
|
|
7,702,327 |
|
Investment securities held-to-maturity, at amortized cost |
|
|
456,490 |
|
|
|
1,250 |
|
|
|
|
|
|
|
204,743 |
|
|
|
(430,000 |
) |
|
|
232,483 |
|
Other investment securities, at lower of cost or realizable value |
|
|
14,425 |
|
|
|
1 |
|
|
|
12,392 |
|
|
|
213,913 |
|
|
|
|
|
|
|
240,731 |
|
Trading account securities, at fair value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
499,989 |
|
|
|
(501 |
) |
|
|
499,488 |
|
Investment in subsidiaries |
|
|
2,546,533 |
|
|
|
306,970 |
|
|
|
1,485,245 |
|
|
|
|
|
|
|
(4,338,748 |
) |
|
|
|
|
Loans held-for-sale measured at lower of cost or market value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
337,552 |
|
|
|
|
|
|
|
337,552 |
|
Loans measured at fair value pursuant to SFAS No. 159 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
844,892 |
|
|
|
|
|
|
|
844,892 |
|
|
Loans held-in-portfolio |
|
|
739,360 |
|
|
|
|
|
|
|
1,685,000 |
|
|
|
26,633,984 |
|
|
|
(2,422,340 |
) |
|
|
26,636,004 |
|
Less Unearned income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
186,770 |
|
|
|
|
|
|
|
186,770 |
|
Allowance for loan losses |
|
|
60 |
|
|
|
|
|
|
|
|
|
|
|
652,670 |
|
|
|
|
|
|
|
652,730 |
|
|
|
|
|
739,300 |
|
|
|
|
|
|
|
1,685,000 |
|
|
|
25,794,544 |
|
|
|
(2,422,340 |
) |
|
|
25,796,504 |
|
|
Premises and equipment, net |
|
|
22,679 |
|
|
|
|
|
|
|
131 |
|
|
|
610,640 |
|
|
|
|
|
|
|
633,450 |
|
Other real estate |
|
|
47 |
|
|
|
|
|
|
|
|
|
|
|
102,762 |
|
|
|
|
|
|
|
102,809 |
|
Accrued income receivable |
|
|
725 |
|
|
|
119 |
|
|
|
8,044 |
|
|
|
162,829 |
|
|
|
(8,443 |
) |
|
|
163,274 |
|
Servicing assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
190,778 |
|
|
|
|
|
|
|
190,778 |
|
Other assets |
|
|
34,320 |
|
|
|
63,450 |
|
|
|
66,159 |
|
|
|
2,335,114 |
|
|
|
(43,201 |
) |
|
|
2,455,842 |
|
Goodwill |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
628,826 |
|
|
|
|
|
|
|
628,826 |
|
Other intangible assets |
|
|
554 |
|
|
|
|
|
|
|
|
|
|
|
63,669 |
|
|
|
|
|
|
|
64,223 |
|
|
|
|
$ |
4,251,177 |
|
|
$ |
420,852 |
|
|
$ |
3,264,824 |
|
|
$ |
41,460,190 |
|
|
$ |
(7,718,449 |
) |
|
$ |
41,678,594 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,483,338 |
|
|
$ |
(1,051 |
) |
|
$ |
4,482,287 |
|
Interest bearing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,672,348 |
|
|
|
(38,907 |
) |
|
|
22,633,441 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,155,686 |
|
|
|
(39,958 |
) |
|
|
27,115,728 |
|
Federal funds purchased and assets sold under agreements
to repurchase |
|
|
|
|
|
|
|
|
|
$ |
223,500 |
|
|
|
4,950,377 |
|
|
|
(435,200 |
) |
|
|
4,738,677 |
|
Other short-term borrowings |
|
|
|
|
|
|
|
|
|
|
479,193 |
|
|
|
1,796,357 |
|
|
|
(938,340 |
) |
|
|
1,337,210 |
|
Notes payable at cost |
|
$ |
476,639 |
|
|
|
|
|
|
|
2,212,215 |
|
|
|
2,546,294 |
|
|
|
(1,484,501 |
) |
|
|
3,750,647 |
|
Notes payable at fair value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
173,725 |
|
|
|
|
|
|
|
173,725 |
|
Subordinated notes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
430,000 |
|
|
|
(430,000 |
) |
|
|
|
|
Other liabilities |
|
|
68,544 |
|
|
$ |
93 |
|
|
|
69,684 |
|
|
|
769,459 |
|
|
|
(51,276 |
) |
|
|
856,504 |
|
|
|
|
|
545,183 |
|
|
|
93 |
|
|
|
2,984,592 |
|
|
|
37,821,898 |
|
|
|
(3,379,275 |
) |
|
|
37,972,491 |
|
|
Minority interest in consolidated subsidiaries |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
109 |
|
|
|
|
|
|
|
109 |
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock |
|
|
586,875 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
586,875 |
|
Common stock |
|
|
1,767,721 |
|
|
|
3,961 |
|
|
|
2 |
|
|
|
51,819 |
|
|
|
(55,782 |
) |
|
|
1,767,721 |
|
Surplus |
|
|
554,306 |
|
|
|
851,193 |
|
|
|
734,964 |
|
|
|
2,810,895 |
|
|
|
(4,388,258 |
) |
|
|
563,100 |
|
Retained earnings |
|
|
1,095,167 |
|
|
|
(378,975 |
) |
|
|
(448,860 |
) |
|
|
815,083 |
|
|
|
3,958 |
|
|
|
1,086,373 |
|
Accumulated other comprehensive loss, net of tax |
|
|
(90,448 |
) |
|
|
(55,420 |
) |
|
|
(5,874 |
) |
|
|
(39,122 |
) |
|
|
100,416 |
|
|
|
(90,448 |
) |
Treasury stock, at cost |
|
|
(207,627 |
) |
|
|
|
|
|
|
|
|
|
|
(492 |
) |
|
|
492 |
|
|
|
(207,627 |
) |
|
|
|
|
3,705,994 |
|
|
|
420,759 |
|
|
|
280,232 |
|
|
|
3,638,183 |
|
|
|
(4,339,174 |
) |
|
|
3,705,994 |
|
|
|
|
$ |
4,251,177 |
|
|
$ |
420,852 |
|
|
$ |
3,264,824 |
|
|
$ |
41,460,190 |
|
|
$ |
(7,718,449 |
) |
|
$ |
41,678,594 |
|
|
59
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 |
|
|
60
POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CONDITION
JUNE 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 |
|
$ |
1,775 |
|
|
$ |
317 |
|
|
$ |
377 |
|
|
$ |
761,533 |
|
|
$ |
(1,917 |
) |
|
$ |
762,085 |
|
Money market investments |
|
|
|
|
|
|
19,025 |
|
|
|
212 |
|
|
|
632,987 |
|
|
|
(77,237 |
) |
|
|
574,987 |
|
Investment securities available-for-sale, at fair value |
|
|
6,354 |
|
|
|
36,261 |
|
|
|
|
|
|
|
8,940,703 |
|
|
|
(8,850 |
) |
|
|
8,974,468 |
|
Investment securities held-to-maturity, at amortized cost |
|
|
670,336 |
|
|
|
1,501 |
|
|
|
|
|
|
|
187,642 |
|
|
|
(430,000 |
) |
|
|
429,479 |
|
Other investment securities, at lower of cost or realizable value |
|
|
14,425 |
|
|
|
1 |
|
|
|
12,392 |
|
|
|
133,332 |
|
|
|
|
|
|
|
160,150 |
|
Trading account securities, at fair value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
676,923 |
|
|
|
(65 |
) |
|
|
676,858 |
|
Investment in subsidiaries |
|
|
3,144,484 |
|
|
|
1,052,636 |
|
|
|
1,995,552 |
|
|
|
|
|
|
|
(6,192,672 |
) |
|
|
|
|
Loans held-for-sale measured at lower of cost or market value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
605,990 |
|
|
|
|
|
|
|
605,990 |
|
|
Loans held-in-portfolio |
|
|
340,197 |
|
|
|
|
|
|
|
2,958,637 |
|
|
|
32,454,522 |
|
|
|
(3,283,637 |
) |
|
|
32,469,719 |
|
Less Unearned income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
323,864 |
|
|
|
|
|
|
|
323,864 |
|
Allowance for loan losses |
|
|
40 |
|
|
|
|
|
|
|
|
|
|
|
564,807 |
|
|
|
|
|
|
|
564,847 |
|
|
|
|
|
340,157 |
|
|
|
|
|
|
|
2,958,637 |
|
|
|
31,565,851 |
|
|
|
(3,283,637 |
) |
|
|
31,581,008 |
|
|
Premises and equipment, net |
|
|
24,891 |
|
|
|
|
|
|
|
133 |
|
|
|
562,481 |
|
|
|
|
|
|
|
587,505 |
|
Other real estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
112,858 |
|
|
|
|
|
|
|
112,858 |
|
Accrued income receivable |
|
|
446 |
|
|
|
110 |
|
|
|
12,473 |
|
|
|
249,104 |
|
|
|
(12,387 |
) |
|
|
249,746 |
|
Servicing assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
201,861 |
|
|
|
|
|
|
|
201,861 |
|
Other assets |
|
|
42,239 |
|
|
|
59,686 |
|
|
|
53,233 |
|
|
|
1,199,718 |
|
|
|
(57,276 |
) |
|
|
1,297,600 |
|
Goodwill |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
668,469 |
|
|
|
|
|
|
|
668,469 |
|
Other intangible assets |
|
|
554 |
|
|
|
|
|
|
|
|
|
|
|
101,745 |
|
|
|
|
|
|
|
102,299 |
|
|
|
|
$ |
4,245,661 |
|
|
$ |
1,169,537 |
|
|
$ |
5,033,009 |
|
|
$ |
46,601,197 |
|
|
$ |
(10,064,041 |
) |
|
$ |
46,985,363 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,282,054 |
|
|
$ |
(1,859 |
) |
|
$ |
4,280,195 |
|
Interest bearing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,125,036 |
|
|
|
(19,236 |
) |
|
|
21,105,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,407,090 |
|
|
|
(21,095 |
) |
|
|
25,385,995 |
|
Federal funds purchased and assets sold under agreements
to repurchase |
|
|
|
|
|
|
|
|
|
$ |
153,952 |
|
|
|
5,559,984 |
|
|
|
(58,000 |
) |
|
|
5,655,936 |
|
Other short-term borrowings |
|
|
|
|
|
|
|
|
|
|
857,763 |
|
|
|
4,018,829 |
|
|
|
(1,492,487 |
) |
|
|
3,384,105 |
|
Notes payable |
|
$ |
486,479 |
|
|
|
|
|
|
|
2,890,535 |
|
|
|
6,491,688 |
|
|
|
(1,800,064 |
) |
|
|
8,068,638 |
|
Subordinated notes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
430,000 |
|
|
|
(430,000 |
) |
|
|
|
|
Other liabilities |
|
|
62,102 |
|
|
$ |
66 |
|
|
|
94,464 |
|
|
|
705,236 |
|
|
|
(68,368 |
) |
|
|
793,500 |
|
|
|
|
|
548,581 |
|
|
|
66 |
|
|
|
3,996,714 |
|
|
|
42,612,827 |
|
|
|
(3,870,014 |
) |
|
|
43,288,174 |
|
|
Minority interest in consolidated subsidiaries |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
109 |
|
|
|
|
|
|
|
109 |
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock |
|
|
186,875 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
186,875 |
|
Common stock |
|
|
1,756,337 |
|
|
|
3,961 |
|
|
|
2 |
|
|
|
51,619 |
|
|
|
(55,582 |
) |
|
|
1,756,337 |
|
Surplus |
|
|
528,151 |
|
|
|
851,193 |
|
|
|
734,964 |
|
|
|
2,571,295 |
|
|
|
(4,152,451 |
) |
|
|
533,152 |
|
Retained earnings |
|
|
1,706,101 |
|
|
|
380,548 |
|
|
|
323,165 |
|
|
|
1,601,501 |
|
|
|
(2,310,215 |
) |
|
|
1,701,100 |
|
Accumulated other comprehensive loss, net of tax |
|
|
(274,817 |
) |
|
|
(66,231 |
) |
|
|
(21,836 |
) |
|
|
(235,490 |
) |
|
|
323,557 |
|
|
|
(274,817 |
) |
Treasury stock, at cost |
|
|
(205,567 |
) |
|
|
|
|
|
|
|
|
|
|
(664 |
) |
|
|
664 |
|
|
|
(205,567 |
) |
|
|
|
|
3,697,080 |
|
|
|
1,169,471 |
|
|
|
1,036,295 |
|
|
|
3,988,261 |
|
|
|
(6,194,027 |
) |
|
|
3,697,080 |
|
|
|
|
$ |
4,245,661 |
|
|
$ |
1,169,537 |
|
|
$ |
5,033,009 |
|
|
$ |
46,601,197 |
|
|
$ |
(10,064,041 |
) |
|
$ |
46,985,363 |
|
|
61
POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED JUNE 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 |
|
|
5,876 |
|
|
|
|
|
|
$ |
23,502 |
|
|
$ |
497,163 |
|
|
|
(29,123 |
) |
|
$ |
497,418 |
|
Money market investments |
|
|
475 |
|
|
$ |
299 |
|
|
|
15 |
|
|
|
3,511 |
|
|
|
(824 |
) |
|
|
3,476 |
|
Investment securities |
|
|
7,367 |
|
|
|
316 |
|
|
|
224 |
|
|
|
82,236 |
|
|
|
(7,015 |
) |
|
|
83,128 |
|
Trading account securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,133 |
|
|
|
|
|
|
|
16,133 |
|
|
|
|
|
58,718 |
|
|
|
615 |
|
|
|
23,741 |
|
|
|
599,043 |
|
|
|
(81,962 |
) |
|
|
600,155 |
|
|
INTEREST EXPENSE: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
168,343 |
|
|
|
(298 |
) |
|
|
168,045 |
|
Short-term borrowings |
|
|
589 |
|
|
|
|
|
|
|
4,520 |
|
|
|
44,967 |
|
|
|
(7,574 |
) |
|
|
42,502 |
|
Long-term debt |
|
|
8,283 |
|
|
|
|
|
|
|
30,483 |
|
|
|
42,346 |
|
|
|
(29,389 |
) |
|
|
51,723 |
|
|
|
|
|
8,872 |
|
|
|
|
|
|
|
35,003 |
|
|
|
255,656 |
|
|
|
(37,261 |
) |
|
|
262,270 |
|
|
Net interest income (loss) |
|
|
49,846 |
|
|
|
615 |
|
|
|
(11,262 |
) |
|
|
343,387 |
|
|
|
(44,701 |
) |
|
|
337,885 |
|
Provision for loan losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
190,640 |
|
|
|
|
|
|
|
190,640 |
|
|
Net interest income (loss) after provision for loan losses |
|
|
49,846 |
|
|
|
615 |
|
|
|
(11,262 |
) |
|
|
152,747 |
|
|
|
(44,701 |
) |
|
|
147,245 |
|
Service charges on deposit accounts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51,799 |
|
|
|
|
|
|
|
51,799 |
|
Other service fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
116,391 |
|
|
|
(6,312 |
) |
|
|
110,079 |
|
Net gain on sale and valuation adjustments of investment securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,763 |
|
|
|
|
|
|
|
27,763 |
|
Trading account profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,711 |
|
|
|
|
|
|
|
16,711 |
|
Losses from changes in fair value related to instruments measured
at fair value pursuant to SFAS No. 159 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(35,922 |
) |
|
|
|
|
|
|
(35,922 |
) |
Loss on sale of loans and valuation adjustments on loans
held-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,453 |
) |
|
|
|
|
|
|
(1,453 |
) |
Other operating (loss) income |
|
|
(76 |
) |
|
|
3,604 |
|
|
|
(2,045 |
) |
|
|
24,270 |
|
|
|
(1,158 |
) |
|
|
24,595 |
|
|
|
|
|
49,770 |
|
|
|
4,219 |
|
|
|
(13,307 |
) |
|
|
352,306 |
|
|
|
(52,171 |
) |
|
|
340,817 |
|
|
OPERATING EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel costs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries |
|
|
5,909 |
|
|
|
106 |
|
|
|
|
|
|
|
121,182 |
|
|
|
(1,774 |
) |
|
|
125,423 |
|
Pension, profit sharing and other benefits |
|
|
1,414 |
|
|
|
19 |
|
|
|
|
|
|
|
35,039 |
|
|
|
(10 |
) |
|
|
36,462 |
|
|
|
|
|
7,323 |
|
|
|
125 |
|
|
|
|
|
|
|
156,221 |
|
|
|
(1,784 |
) |
|
|
161,885 |
|
Net occupancy expenses |
|
|
614 |
|
|
|
8 |
|
|
|
1 |
|
|
|
25,739 |
|
|
|
|
|
|
|
26,362 |
|
Equipment expenses |
|
|
892 |
|
|
|
|
|
|
|
|
|
|
|
29,832 |
|
|
|
|
|
|
|
30,724 |
|
Other taxes |
|
|
461 |
|
|
|
|
|
|
|
|
|
|
|
13,418 |
|
|
|
|
|
|
|
13,879 |
|
Professional fees |
|
|
3,289 |
|
|
|
2 |
|
|
|
90 |
|
|
|
29,679 |
|
|
|
(1,433 |
) |
|
|
31,627 |
|
Communications |
|
|
73 |
|
|
|
4 |
|
|
|
9 |
|
|
|
13,059 |
|
|
|
|
|
|
|
13,145 |
|
Business promotion |
|
|
482 |
|
|
|
|
|
|
|
|
|
|
|
17,769 |
|
|
|
|
|
|
|
18,251 |
|
Printing and supplies |
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
3,880 |
|
|
|
|
|
|
|
3,899 |
|
Other operating expenses |
|
|
(12,683 |
) |
|
|
(101 |
) |
|
|
68 |
|
|
|
58,570 |
|
|
|
(383 |
) |
|
|
45,471 |
|
Amortization of intangibles |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,490 |
|
|
|
|
|
|
|
2,490 |
|
|
|
|
|
470 |
|
|
|
38 |
|
|
|
168 |
|
|
|
350,657 |
|
|
|
(3,600 |
) |
|
|
347,733 |
|
|
Income (loss) before income tax and equity in losses of subsidiaries |
|
|
49,300 |
|
|
|
4,181 |
|
|
|
(13,475 |
) |
|
|
1,649 |
|
|
|
(48,571 |
) |
|
|
(6,916 |
) |
Income tax benefit |
|
|
(1,003 |
) |
|
|
|
|
|
|
(4,721 |
) |
|
|
(25,529 |
) |
|
|
87 |
|
|
|
(31,166 |
) |
|
Income (loss) before equity in losses of subsidiaries |
|
|
50,303 |
|
|
|
4,181 |
|
|
|
(8,754 |
) |
|
|
27,178 |
|
|
|
(48,658 |
) |
|
|
24,250 |
|
Equity in undistributed losses of subsidiaries |
|
|
(26,053 |
) |
|
|
(76,247 |
) |
|
|
(70,488 |
) |
|
|
|
|
|
|
172,788 |
|
|
|
|
|
|
NET INCOME (LOSS) |
|
$ |
24,250 |
|
|
$ |
(72,066 |
) |
|
$ |
(79,242 |
) |
|
$ |
27,178 |
|
|
$ |
124,130 |
|
|
$ |
24,250 |
|
|
62
POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED JUNE 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 |
|
$ |
44,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(44,700 |
) |
|
|
|
|
Loans |
|
|
4,158 |
|
|
|
|
|
|
$ |
38,419 |
|
|
$ |
656,059 |
|
|
|
(42,151 |
) |
|
$ |
656,485 |
|
Money market investments |
|
|
793 |
|
|
$ |
98 |
|
|
|
10 |
|
|
|
6,701 |
|
|
|
(1,850 |
) |
|
|
5,752 |
|
Investment securities |
|
|
9,548 |
|
|
|
821 |
|
|
|
224 |
|
|
|
109,671 |
|
|
|
(7,201 |
) |
|
|
113,063 |
|
Trading account securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,611 |
|
|
|
|
|
|
|
9,611 |
|
|
|
|
|
59,199 |
|
|
|
919 |
|
|
|
38,653 |
|
|
|
782,042 |
|
|
|
(95,902 |
) |
|
|
784,911 |
|
|
INTEREST EXPENSE: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
183,564 |
|
|
|
(834 |
) |
|
|
182,730 |
|
Short-term borrowings |
|
|
78 |
|
|
|
|
|
|
|
14,418 |
|
|
|
124,934 |
|
|
|
(19,964 |
) |
|
|
119,466 |
|
Long-term debt |
|
|
8,366 |
|
|
|
|
|
|
|
37,033 |
|
|
|
96,602 |
|
|
|
(30,703 |
) |
|
|
111,298 |
|
|
|
|
|
8,444 |
|
|
|
|
|
|
|
51,451 |
|
|
|
405,100 |
|
|
|
(51,501 |
) |
|
|
413,494 |
|
|
Net interest income (loss) |
|
|
50,755 |
|
|
|
919 |
|
|
|
(12,798 |
) |
|
|
376,942 |
|
|
|
(44,401 |
) |
|
|
371,417 |
|
Provision for loan losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
115,167 |
|
|
|
|
|
|
|
115,167 |
|
|
Net interest income (loss) after provision for loan losses |
|
|
50,755 |
|
|
|
919 |
|
|
|
(12,798 |
) |
|
|
261,775 |
|
|
|
(44,401 |
) |
|
|
256,250 |
|
Service charges on deposit accounts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48,392 |
|
|
|
|
|
|
|
48,392 |
|
Other service fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91,163 |
|
|
|
(1,573 |
) |
|
|
89,590 |
|
Net (loss) gain on sale and valuation adjustments of investment
securities |
|
|
(2,132 |
) |
|
|
(907 |
) |
|
|
|
|
|
|
4,214 |
|
|
|
|
|
|
|
1,175 |
|
Trading account gain |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,377 |
|
|
|
|
|
|
|
10,377 |
|
Gain on sale of loans and valuation adjustment on loans
held-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,294 |
|
|
|
|
|
|
|
28,294 |
|
Other operating income (loss) |
|
|
529 |
|
|
|
1,201 |
|
|
|
(102 |
) |
|
|
24,640 |
|
|
|
(721 |
) |
|
|
25,547 |
|
|
|
|
|
49,152 |
|
|
|
1,213 |
|
|
|
(12,900 |
) |
|
|
468,855 |
|
|
|
(46,695 |
) |
|
|
459,625 |
|
|
OPERATING EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel costs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries |
|
|
5,518 |
|
|
|
98 |
|
|
|
|
|
|
|
121,742 |
|
|
|
(408 |
) |
|
|
126,950 |
|
Pension, profit sharing and other benefits |
|
|
1,277 |
|
|
|
17 |
|
|
|
|
|
|
|
36,162 |
|
|
|
(118 |
) |
|
|
37,338 |
|
|
|
|
|
6,795 |
|
|
|
115 |
|
|
|
|
|
|
|
157,904 |
|
|
|
(526 |
) |
|
|
164,288 |
|
Net occupancy expenses |
|
|
612 |
|
|
|
8 |
|
|
|
1 |
|
|
|
25,880 |
|
|
|
|
|
|
|
26,501 |
|
Equipment expenses |
|
|
385 |
|
|
|
|
|
|
|
|
|
|
|
31,860 |
|
|
|
|
|
|
|
32,245 |
|
Other taxes |
|
|
335 |
|
|
|
|
|
|
|
|
|
|
|
11,500 |
|
|
|
|
|
|
|
11,835 |
|
Professional fees |
|
|
3,295 |
|
|
|
8 |
|
|
|
57 |
|
|
|
36,204 |
|
|
|
(922 |
) |
|
|
38,642 |
|
Communications |
|
|
136 |
|
|
|
|
|
|
|
|
|
|
|
16,837 |
|
|
|
|
|
|
|
16,973 |
|
Business promotion |
|
|
881 |
|
|
|
|
|
|
|
|
|
|
|
29,488 |
|
|
|
|
|
|
|
30,369 |
|
Printing and supplies |
|
|
24 |
|
|
|
|
|
|
|
|
|
|
|
4,525 |
|
|
|
|
|
|
|
4,549 |
|
Other operating expenses |
|
|
(12,112 |
) |
|
|
(100 |
) |
|
|
117 |
|
|
|
45,317 |
|
|
|
(384 |
) |
|
|
32,838 |
|
Amortization of intangibles |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,813 |
|
|
|
|
|
|
|
2,813 |
|
|
|
|
|
351 |
|
|
|
31 |
|
|
|
175 |
|
|
|
362,328 |
|
|
|
(1,832 |
) |
|
|
361,053 |
|
|
Income (loss) before income tax and equity in earnings (losses)
of subsidiaries |
|
|
48,801 |
|
|
|
1,182 |
|
|
|
(13,075 |
) |
|
|
106,527 |
|
|
|
(44,863 |
) |
|
|
98,572 |
|
Income tax expense (benefit) |
|
|
1,385 |
|
|
|
|
|
|
|
(4,576 |
) |
|
|
26,870 |
|
|
|
(57 |
) |
|
|
23,622 |
|
|
Income (loss) before equity in earnings (losses) of subsidiaries |
|
|
47,416 |
|
|
|
1,182 |
|
|
|
(8,499 |
) |
|
|
79,657 |
|
|
|
(44,806 |
) |
|
|
74,950 |
|
Equity in undistributed earnings (losses) of subsidiaries |
|
|
27,534 |
|
|
|
(7,926 |
) |
|
|
(143 |
) |
|
|
|
|
|
|
(19,465 |
) |
|
|
|
|
|
NET INCOME (LOSS) |
|
$ |
74,950 |
|
|
$ |
(6,744 |
) |
|
$ |
(8,642 |
) |
|
$ |
79,657 |
|
|
$ |
(64,271 |
) |
|
$ |
74,950 |
|
|
63
POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 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 |
|
$ |
89,900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ |
89,900 |
) |
|
|
|
|
Loans |
|
|
12,773 |
|
|
$ |
219 |
|
|
$ |
58,592 |
|
|
$ |
1,058,688 |
|
|
|
(71,737 |
) |
|
$ |
1,058,535 |
|
Money market investments |
|
|
557 |
|
|
|
405 |
|
|
|
195 |
|
|
|
11,262 |
|
|
|
(2,215 |
) |
|
|
10,204 |
|
Investment securities |
|
|
16,076 |
|
|
|
632 |
|
|
|
447 |
|
|
|
174,409 |
|
|
|
(14,031 |
) |
|
|
177,533 |
|
Trading account securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,826 |
|
|
|
|
|
|
|
34,826 |
|
|
|
|
|
119,306 |
|
|
|
1,256 |
|
|
|
59,234 |
|
|
|
1,279,185 |
|
|
|
(177,883 |
) |
|
|
1,281,098 |
|
|
INTEREST EXPENSE: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
363,384 |
|
|
|
(399 |
) |
|
|
362,985 |
|
Short-term borrowings |
|
|
2,609 |
|
|
|
|
|
|
|
14,373 |
|
|
|
113,318 |
|
|
|
(22,653 |
) |
|
|
107,647 |
|
Long-term debt |
|
|
16,567 |
|
|
|
|
|
|
|
67,035 |
|
|
|
97,319 |
|
|
|
(65,529 |
) |
|
|
115,392 |
|
|
|
|
|
19,176 |
|
|
|
|
|
|
|
81,408 |
|
|
|
574,021 |
|
|
|
(88,581 |
) |
|
|
586,024 |
|
|
Net interest income (loss) |
|
|
100,130 |
|
|
|
1,256 |
|
|
|
(22,174 |
) |
|
|
705,164 |
|
|
|
(89,302 |
) |
|
|
695,074 |
|
Provision for loan losses |
|
|
40 |
|
|
|
|
|
|
|
|
|
|
|
358,822 |
|
|
|
|
|
|
|
358,862 |
|
|
Net interest income (loss) after provision for loan losses |
|
|
100,090 |
|
|
|
1,256 |
|
|
|
(22,174 |
) |
|
|
346,342 |
|
|
|
(89,302 |
) |
|
|
336,212 |
|
Service charges on deposit accounts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
102,886 |
|
|
|
|
|
|
|
102,886 |
|
Other service fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
222,668 |
|
|
|
(7,122 |
) |
|
|
215,546 |
|
Net gain on sale and valuation adjustments of investment securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75,703 |
|
|
|
|
|
|
|
75,703 |
|
Trading account profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,175 |
|
|
|
|
|
|
|
21,175 |
|
Losses from changes in fair value related to instruments measured
at fair value pursuant to SFAS No. 159 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(38,942 |
) |
|
|
|
|
|
|
(38,942 |
) |
Gain on sale of loans and valuation adjustments on loans
held-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67,292 |
|
|
|
|
|
|
|
67,292 |
|
Other operating (loss) income |
|
|
(111 |
) |
|
|
7,154 |
|
|
|
(2,041 |
) |
|
|
54,779 |
|
|
|
(1,894 |
) |
|
|
57,887 |
|
|
|
|
|
99,979 |
|
|
|
8,410 |
|
|
|
(24,215 |
) |
|
|
851,903 |
|
|
|
(98,318 |
) |
|
|
837,759 |
|
|
OPERATING EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel costs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries |
|
|
11,993 |
|
|
|
197 |
|
|
|
|
|
|
|
251,951 |
|
|
|
(2,009 |
) |
|
|
262,132 |
|
Pension, profit sharing and other benefits |
|
|
2,923 |
|
|
|
42 |
|
|
|
|
|
|
|
72,039 |
|
|
|
(72 |
) |
|
|
74,932 |
|
|
|
|
|
14,916 |
|
|
|
239 |
|
|
|
|
|
|
|
323,990 |
|
|
|
(2,081 |
) |
|
|
337,064 |
|
Net occupancy expenses |
|
|
1,243 |
|
|
|
15 |
|
|
|
2 |
|
|
|
60,094 |
|
|
|
|
|
|
|
61,354 |
|
Equipment expenses |
|
|
1,741 |
|
|
|
|
|
|
|
|
|
|
|
60,981 |
|
|
|
|
|
|
|
62,722 |
|
Other taxes |
|
|
900 |
|
|
|
|
|
|
|
|
|
|
|
26,122 |
|
|
|
|
|
|
|
27,022 |
|
Professional fees |
|
|
7,445 |
|
|
|
5 |
|
|
|
180 |
|
|
|
63,304 |
|
|
|
(2,682 |
) |
|
|
68,252 |
|
Communications |
|
|
195 |
|
|
|
9 |
|
|
|
18 |
|
|
|
28,226 |
|
|
|
|
|
|
|
28,448 |
|
Business promotion |
|
|
771 |
|
|
|
|
|
|
|
|
|
|
|
34,696 |
|
|
|
|
|
|
|
35,467 |
|
Printing and supplies |
|
|
42 |
|
|
|
|
|
|
|
|
|
|
|
8,132 |
|
|
|
|
|
|
|
8,174 |
|
Other operating expenses |
|
|
(26,740 |
) |
|
|
(201 |
) |
|
|
121 |
|
|
|
114,415 |
|
|
|
(832 |
) |
|
|
86,763 |
|
Amortization of intangibles |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,982 |
|
|
|
|
|
|
|
4,982 |
|
|
|
|
|
513 |
|
|
|
67 |
|
|
|
321 |
|
|
|
724,942 |
|
|
|
(5,595 |
) |
|
|
720,248 |
|
|
Income (loss) before income tax and equity in earnings (losses) of
subsidiaries |
|
|
99,466 |
|
|
|
8,343 |
|
|
|
(24,536 |
) |
|
|
126,961 |
|
|
|
(92,723 |
) |
|
|
117,511 |
|
Income tax expense (benefit) |
|
|
665 |
|
|
|
|
|
|
|
(8,372 |
) |
|
|
(2,701 |
) |
|
|
379 |
|
|
|
(10,029 |
) |
|
Income (loss) before equity in earnings (losses) of subsidiaries |
|
|
98,801 |
|
|
|
8,343 |
|
|
|
(16,164 |
) |
|
|
129,662 |
|
|
|
(93,102 |
) |
|
|
127,540 |
|
Equity in undistributed earnings (losses) of subsidiaries |
|
|
28,739 |
|
|
|
(78,589 |
) |
|
|
(71,060 |
) |
|
|
|
|
|
|
120,910 |
|
|
|
|
|
|
NET INCOME (LOSS) |
|
$ |
127,540 |
|
|
$ |
(70,246 |
) |
|
$ |
(87,224 |
) |
|
$ |
129,662 |
|
|
$ |
27,808 |
|
|
$ |
127,540 |
|
|
64
POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 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 |
|
$ |
89,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(89,400 |
) |
|
|
|
|
Loans |
|
|
9,539 |
|
|
|
|
|
|
$ |
76,174 |
|
|
$ |
1,299,805 |
|
|
|
(84,919 |
) |
|
$ |
1,300,599 |
|
Money market investments |
|
|
940 |
|
|
$ |
115 |
|
|
|
11 |
|
|
|
12,424 |
|
|
|
(3,129 |
) |
|
|
10,361 |
|
Investment securities |
|
|
17,363 |
|
|
|
1,196 |
|
|
|
447 |
|
|
|
223,966 |
|
|
|
(14,418 |
) |
|
|
228,554 |
|
Trading account securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,992 |
|
|
|
|
|
|
|
18,992 |
|
|
|
|
|
117,242 |
|
|
|
1,311 |
|
|
|
76,632 |
|
|
|
1,555,187 |
|
|
|
(191,866 |
) |
|
|
1,558,506 |
|
|
INTEREST EXPENSE: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
356,739 |
|
|
|
(907 |
) |
|
|
355,832 |
|
Short-term borrowings |
|
|
1,965 |
|
|
|
|
|
|
|
28,886 |
|
|
|
254,481 |
|
|
|
(41,057 |
) |
|
|
244,275 |
|
Long-term debt |
|
|
16,732 |
|
|
|
|
|
|
|
73,885 |
|
|
|
202,488 |
|
|
|
(61,105 |
) |
|
|
232,000 |
|
|
|
|
|
18,697 |
|
|
|
|
|
|
|
102,771 |
|
|
|
813,708 |
|
|
|
(103,069 |
) |
|
|
832,107 |
|
|
Net interest income (loss) |
|
|
98,545 |
|
|
|
1,311 |
|
|
|
(26,139 |
) |
|
|
741,479 |
|
|
|
(88,797 |
) |
|
|
726,399 |
|
Provision for loan losses |
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
211,506 |
|
|
|
|
|
|
|
211,513 |
|
|
Net interest income (loss) after provision for loan losses |
|
|
98,538 |
|
|
|
1,311 |
|
|
|
(26,139 |
) |
|
|
529,973 |
|
|
|
(88,797 |
) |
|
|
514,886 |
|
Service charges on deposit accounts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96,863 |
|
|
|
|
|
|
|
96,863 |
|
Other service fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
179,711 |
|
|
|
(2,272 |
) |
|
|
177,439 |
|
Net gain (loss) on sale and valuation adjustments of investment
securities |
|
|
116,592 |
|
|
|
(8,507 |
) |
|
|
|
|
|
|
(25,139 |
) |
|
|
|
|
|
|
82,946 |
|
Trading account loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,787 |
) |
|
|
|
|
|
|
(3,787 |
) |
Gain on sale of loans and valuation adjustment on loans
held-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,728 |
|
|
|
|
|
|
|
31,728 |
|
Other operating income (loss) |
|
|
9,762 |
|
|
|
11,210 |
|
|
|
(629 |
) |
|
|
51,268 |
|
|
|
(1,249 |
) |
|
|
70,362 |
|
|
|
|
|
224,892 |
|
|
|
4,014 |
|
|
|
(26,768 |
) |
|
|
860,617 |
|
|
|
(92,318 |
) |
|
|
970,437 |
|
|
OPERATING EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel costs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries |
|
|
11,618 |
|
|
|
194 |
|
|
|
|
|
|
|
252,431 |
|
|
|
(814 |
) |
|
|
263,429 |
|
Pension, profit sharing and other benefits |
|
|
3,317 |
|
|
|
37 |
|
|
|
|
|
|
|
76,118 |
|
|
|
(238 |
) |
|
|
79,234 |
|
|
|
|
|
14,935 |
|
|
|
231 |
|
|
|
|
|
|
|
328,549 |
|
|
|
(1,052 |
) |
|
|
342,663 |
|
Net occupancy expenses |
|
|
1,165 |
|
|
|
15 |
|
|
|
2 |
|
|
|
57,333 |
|
|
|
|
|
|
|
58,515 |
|
Equipment expenses |
|
|
673 |
|
|
|
|
|
|
|
2 |
|
|
|
63,966 |
|
|
|
|
|
|
|
64,641 |
|
Other taxes |
|
|
710 |
|
|
|
|
|
|
|
|
|
|
|
22,972 |
|
|
|
|
|
|
|
23,682 |
|
Professional fees |
|
|
5,777 |
|
|
|
19 |
|
|
|
121 |
|
|
|
70,331 |
|
|
|
(1,619 |
) |
|
|
74,629 |
|
Communications |
|
|
278 |
|
|
|
|
|
|
|
|
|
|
|
33,757 |
|
|
|
|
|
|
|
34,035 |
|
Business promotion |
|
|
1,163 |
|
|
|
|
|
|
|
|
|
|
|
57,578 |
|
|
|
|
|
|
|
58,741 |
|
Printing and supplies |
|
|
42 |
|
|
|
|
|
|
|
|
|
|
|
8,783 |
|
|
|
|
|
|
|
8,825 |
|
Other operating expenses |
|
|
(24,952 |
) |
|
|
(200 |
) |
|
|
233 |
|
|
|
90,541 |
|
|
|
(768 |
) |
|
|
64,854 |
|
Amortization of intangibles |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,796 |
|
|
|
|
|
|
|
5,796 |
|
|
|
|
|
(209 |
) |
|
|
65 |
|
|
|
358 |
|
|
|
739,606 |
|
|
|
(3,439 |
) |
|
|
736,381 |
|
|
Income (loss) before income tax and equity in losses of subsidiaries |
|
|
225,101 |
|
|
|
3,949 |
|
|
|
(27,126 |
) |
|
|
121,011 |
|
|
|
(88,879 |
) |
|
|
234,056 |
|
Income tax expense (benefit) |
|
|
29,246 |
|
|
|
|
|
|
|
(9,494 |
) |
|
|
20,488 |
|
|
|
219 |
|
|
|
40,459 |
|
|
Income (loss) before equity in losses of subsidiaries |
|
|
195,855 |
|
|
|
3,949 |
|
|
|
(17,632 |
) |
|
|
100,523 |
|
|
|
(89,098 |
) |
|
|
193,597 |
|
Equity in undistributed losses of subsidiaries |
|
|
(2,258 |
) |
|
|
(82,917 |
) |
|
|
(66,609 |
) |
|
|
|
|
|
|
151,784 |
|
|
|
|
|
|
NET INCOME (LOSS) |
|
$ |
193,597 |
|
|
$ |
(78,968 |
) |
|
$ |
(84,241 |
) |
|
$ |
100,523 |
|
|
$ |
62,686 |
|
|
$ |
193,597 |
|
|
65
POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 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 income (loss) |
|
$ |
127,540 |
|
|
$ |
(70,246 |
) |
|
$ |
(87,224 |
) |
|
$ |
129,662 |
|
|
$ |
27,808 |
|
|
$ |
127,540 |
|
|
Adjustments to reconcile net income to net cash
provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in
undistributed (earnings) losses of subsidiaries |
|
|
(28,739 |
) |
|
|
78,589 |
|
|
|
71,060 |
|
|
|
|
|
|
|
(120,910 |
) |
|
|
|
|
Depreciation and amortization of premises and equipment |
|
|
1,152 |
|
|
|
|
|
|
|
2 |
|
|
|
36,164 |
|
|
|
|
|
|
|
37,318 |
|
Provision for loan losses |
|
|
40 |
|
|
|
|
|
|
|
|
|
|
|
358,822 |
|
|
|
|
|
|
|
358,862 |
|
Amortization of intangibles |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,982 |
|
|
|
|
|
|
|
4,982 |
|
Amortization and fair value adjustment of servicing assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,122 |
|
|
|
|
|
|
|
25,122 |
|
Net gain on sale and valuation adjustment of
investment securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(75,703 |
) |
|
|
|
|
|
|
(75,703 |
) |
Losses from changes in fair value related to instruments
measured at fair value pursuant to SFAS No. 159 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,942 |
|
|
|
|
|
|
|
38,942 |
|
Net loss (gain) on disposition of premises and equipment |
|
|
57 |
|
|
|
|
|
|
|
|
|
|
|
(3,168 |
) |
|
|
|
|
|
|
(3,111 |
) |
Net gain on sale of loans and valuation adjustments on
loans held-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(67,292 |
) |
|
|
|
|
|
|
(67,292 |
) |
Net amortization of premiums and accretion of discounts
on investments |
|
|
(1,611 |
) |
|
|
|
|
|
|
|
|
|
|
14,267 |
|
|
|
|
|
|
|
12,656 |
|
Net amortization of premiums and deferred loan
origination fees and costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,951 |
|
|
|
|
|
|
|
28,951 |
|
Losses (earnings) from investments under the equity method |
|
|
111 |
|
|
|
(7,154 |
) |
|
|
2,041 |
|
|
|
(125 |
) |
|
|
(1,772 |
) |
|
|
(6,899 |
) |
Stock options expense |
|
|
239 |
|
|
|
|
|
|
|
|
|
|
|
320 |
|
|
|
|
|
|
|
559 |
|
Deferred income taxes |
|
|
(170 |
) |
|
|
|
|
|
|
(8,372 |
) |
|
|
(90,533 |
) |
|
|
15,239 |
|
|
|
(83,836 |
) |
Net disbursements on loans held-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,509,819 |
) |
|
|
|
|
|
|
(1,509,819 |
) |
Acquisitions of loans held-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(185,053 |
) |
|
|
|
|
|
|
(185,053 |
) |
Proceeds from sale of loans held-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,006,208 |
|
|
|
|
|
|
|
1,006,208 |
|
Net decrease in trading securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
731,885 |
|
|
|
182 |
|
|
|
732,067 |
|
Net decrease (increase) in accrued income receivable |
|
|
950 |
|
|
|
(57 |
) |
|
|
(7,566 |
) |
|
|
42,349 |
|
|
|
6,625 |
|
|
|
42,301 |
|
Net decrease (increase) in other assets |
|
|
2,804 |
|
|
|
3,936 |
|
|
|
(12,149 |
) |
|
|
(260,052 |
) |
|
|
1,291 |
|
|
|
(264,170 |
) |
Net decrease in interest payable |
|
|
(521 |
) |
|
|
|
|
|
|
(8,686 |
) |
|
|
(37,608 |
) |
|
|
(6,625 |
) |
|
|
(53,440 |
) |
Net increase in postretirement benefit obligation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
203 |
|
|
|
|
|
|
|
203 |
|
Net (decrease) increase in other liabilities |
|
|
(1,970 |
) |
|
|
(24 |
) |
|
|
14,972 |
|
|
|
(22,046 |
) |
|
|
(15,361 |
) |
|
|
(24,429 |
) |
|
Total adjustments |
|
|
(27,658 |
) |
|
|
75,290 |
|
|
|
51,302 |
|
|
|
36,816 |
|
|
|
(121,331 |
) |
|
|
14,419 |
|
|
Net cash provided by (used in) operating activities |
|
|
99,882 |
|
|
|
5,044 |
|
|
|
(35,922 |
) |
|
|
166,478 |
|
|
|
(93,523 |
) |
|
|
141,959 |
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (increase) decrease in money market investments |
|
|
(388,800 |
) |
|
|
(38,400 |
) |
|
|
(56 |
) |
|
|
185,416 |
|
|
|
350,756 |
|
|
|
108,916 |
|
Purchases of investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale |
|
|
|
|
|
|
(181 |
) |
|
|
|
|
|
|
(3,427,479 |
) |
|
|
|
|
|
|
(3,427,660 |
) |
Held-to-maturity |
|
|
(497,750 |
) |
|
|
|
|
|
|
|
|
|
|
(3,133,391 |
) |
|
|
|
|
|
|
(3,631,141 |
) |
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(136,775 |
) |
|
|
|
|
|
|
(136,775 |
) |
Proceeds from calls, paydowns, maturities and
redemptions of investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,851,899 |
|
|
|
|
|
|
|
1,851,899 |
|
Held-to-maturity |
|
|
669,000 |
|
|
|
|
|
|
|
|
|
|
|
3,215,838 |
|
|
|
|
|
|
|
3,884,838 |
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
112,628 |
|
|
|
|
|
|
|
112,628 |
|
Proceeds from sale of investment securities
available-for-sale |
|
|
|
|
|
|
8,296 |
|
|
|
|
|
|
|
2,398,208 |
|
|
|
|
|
|
|
2,406,504 |
|
Proceeds from sale of other investment securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49,330 |
|
|
|
|
|
|
|
49,330 |
|
Net
(disbursements) repayments on loans |
|
|
(14,020 |
) |
|
|
25,150 |
|
|
|
1,207,321 |
|
|
|
(515,568 |
) |
|
|
(1,299,431 |
) |
|
|
(596,548 |
) |
Proceeds from sale of loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,715,330 |
|
|
|
|
|
|
|
1,715,330 |
|
Acquisition of loan portfolios |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,669 |
) |
|
|
|
|
|
|
(6,669 |
) |
Capital contribution to subsidiary |
|
|
(1,512 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,512 |
|
|
|
|
|
Mortgage servicing rights purchased |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,986 |
) |
|
|
|
|
|
|
(2,986 |
) |
Acquisition of premises and equipment |
|
|
(118 |
) |
|
|
|
|
|
|
|
|
|
|
(97,910 |
) |
|
|
|
|
|
|
(98,028 |
) |
Proceeds from sale of premises and equipment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,743 |
|
|
|
|
|
|
|
19,743 |
|
Proceeds from sale of foreclosed assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51,684 |
|
|
|
|
|
|
|
51,684 |
|
|
Net cash (used in) provided by investing activities |
|
|
(233,200 |
) |
|
|
(5,135 |
) |
|
|
1,207,265 |
|
|
|
2,279,298 |
|
|
|
(947,163 |
) |
|
|
2,301,065 |
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,160,743 |
) |
|
|
(37,769 |
) |
|
|
(1,198,512 |
) |
Net increase (decrease) in federal funds purchased and
assets sold under agreements to repurchase |
|
|
|
|
|
|
|
|
|
|
54,608 |
|
|
|
(440,896 |
) |
|
|
(312,300 |
) |
|
|
(698,588 |
) |
Net (decrease) increase in other short-term borrowings |
|
|
(165,000 |
) |
|
|
|
|
|
|
(676,581 |
) |
|
|
75,380 |
|
|
|
601,432 |
|
|
|
(164,769 |
) |
Payments of notes payable |
|
|
|
|
|
|
|
|
|
|
(549,745 |
) |
|
|
(1,393,747 |
) |
|
|
699,818 |
|
|
|
(1,243,674 |
) |
Proceeds from issuance of notes payable |
|
|
198 |
|
|
|
|
|
|
|
7,621 |
|
|
|
624,367 |
|
|
|
(2,000 |
) |
|
|
630,186 |
|
Dividends paid to parent company |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(89,900 |
) |
|
|
89,900 |
|
|
|
|
|
Dividends paid |
|
|
(98,685 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(98,685 |
) |
66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PIBI |
|
|
|
|
|
All other |
|
|
|
|
|
|
Popular, Inc. |
|
Holding |
|
PNA |
|
subsidiaries |
|
Elimination |
|
Popular, Inc. |
(In thousands) |
|
Holding Co. |
|
Co. |
|
Holding Co. |
|
and eliminations |
|
entries |
|
Consolidated |
|
Proceeds from issuance of common stock |
|
|
10,120 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,120 |
|
Proceeds from issuance of preferred stock |
|
|
386,257 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,793 |
|
|
|
390,050 |
|
Treasury stock acquired |
|
|
(59 |
) |
|
|
|
|
|
|
|
|
|
|
(299 |
) |
|
|
|
|
|
|
(358 |
) |
Capital contribution from parent |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,500 |
|
|
|
(1,500 |
) |
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
132,831 |
|
|
|
|
|
|
|
(1,164,097 |
) |
|
|
(2,384,338 |
) |
|
|
1,041,374 |
|
|
|
(2,374,230 |
) |
|
Net (decrease) increase in cash and due from banks |
|
|
(487 |
) |
|
|
(91 |
) |
|
|
7,246 |
|
|
|
61,438 |
|
|
|
688 |
|
|
|
68,794 |
|
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 |
|
$ |
904 |
|
|
$ |
285 |
|
|
$ |
7,646 |
|
|
$ |
879,893 |
|
|
|
($1,109 |
) |
|
$ |
887,619 |
|
|
67
POPULAR, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 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) |
|
$ |
193,597 |
|
|
$ |
(78,968 |
) |
|
$ |
(84,241 |
) |
|
$ |
100,523 |
|
|
$ |
62,686 |
|
|
$ |
193,597 |
|
|
Adjustments to reconcile net income to net cash
provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in
undistributed losses of subsidiaries |
|
|
2,258 |
|
|
|
82,917 |
|
|
|
66,609 |
|
|
|
|
|
|
|
(151,784 |
) |
|
|
|
|
Depreciation and amortization of premises and
equipment |
|
|
1,180 |
|
|
|
|
|
|
|
2 |
|
|
|
38,791 |
|
|
|
|
|
|
|
39,973 |
|
Provision for loan losses |
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
211,506 |
|
|
|
|
|
|
|
211,513 |
|
Amortization of intangibles |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,796 |
|
|
|
|
|
|
|
5,796 |
|
Amortization and fair value adjustments of
servicing assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,606 |
|
|
|
|
|
|
|
22,606 |
|
Net (gain) loss on sale and valuation adjustment of
investment securities |
|
|
(116,592 |
) |
|
|
8,507 |
|
|
|
|
|
|
|
25,139 |
|
|
|
|
|
|
|
(82,946 |
) |
Net gain on disposition of premises and equipment |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
(4,852 |
) |
|
|
|
|
|
|
(4,851 |
) |
Net gain on sale of loans and valuation adjustments
on loans held-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31,728 |
) |
|
|
|
|
|
|
(31,728 |
) |
Net amortization of premiums and accretion of
discounts
on investments |
|
|
(2,665 |
) |
|
|
6 |
|
|
|
|
|
|
|
13,894 |
|
|
|
|
|
|
|
11,235 |
|
Net amortization of premiums and deferred loan
origination fees and costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47,938 |
|
|
|
|
|
|
|
47,938 |
|
(Earnings) losses from investments under the equity
method |
|
|
(4,515 |
) |
|
|
(11,210 |
) |
|
|
629 |
|
|
|
(682 |
) |
|
|
(812 |
) |
|
|
(16,590 |
) |
Stock options expense |
|
|
364 |
|
|
|
|
|
|
|
|
|
|
|
543 |
|
|
|
|
|
|
|
907 |
|
Deferred income taxes |
|
|
1,470 |
|
|
|
|
|
|
|
(9,494 |
) |
|
|
(56,613 |
) |
|
|
16,525 |
|
|
|
(48,112 |
) |
Net disbursements on loans held-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,087,103 |
) |
|
|
|
|
|
|
(3,087,103 |
) |
Acquisitions of loans held-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(403,712 |
) |
|
|
|
|
|
|
(403,712 |
) |
Proceeds from sale of loans held-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,833,030 |
|
|
|
|
|
|
|
2,833,030 |
|
Net decrease in trading securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
645,616 |
|
|
|
64 |
|
|
|
645,680 |
|
Net decrease (increase) in accrued income receivable |
|
|
613 |
|
|
|
(98 |
) |
|
|
(893 |
) |
|
|
(1,463 |
) |
|
|
335 |
|
|
|
(1,506 |
) |
Net decrease (increase) in other assets |
|
|
23,320 |
|
|
|
2,541 |
|
|
|
(2,625 |
) |
|
|
(39,802 |
) |
|
|
305 |
|
|
|
(16,261 |
) |
Net increase (decrease) in interest payable |
|
|
130 |
|
|
|
|
|
|
|
(533 |
) |
|
|
(13,275 |
) |
|
|
(335 |
) |
|
|
(14,013 |
) |
Net increase in postretirement benefit obligation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,824 |
|
|
|
|
|
|
|
1,824 |
|
Net increase (decrease) in other liabilities |
|
|
3,108 |
|
|
|
6 |
|
|
|
16,532 |
|
|
|
(55,396 |
) |
|
|
(16,321 |
) |
|
|
(52,071 |
) |
|
Total adjustments |
|
|
(91,321 |
) |
|
|
82,669 |
|
|
|
70,227 |
|
|
|
152,057 |
|
|
|
(152,023 |
) |
|
|
61,609 |
|
|
Net cash provided by (used in) operating activities |
|
|
102,276 |
|
|
|
3,701 |
|
|
|
(14,014 |
) |
|
|
252,580 |
|
|
|
(89,337 |
) |
|
|
255,206 |
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease (increase) in money market investments |
|
|
8,700 |
|
|
|
(17,950 |
) |
|
|
2,341 |
|
|
|
(214,043 |
) |
|
|
14,109 |
|
|
|
(206,843 |
) |
Purchases of investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale |
|
|
(6,808 |
) |
|
|
(2 |
) |
|
|
|
|
|
|
(520,700 |
) |
|
|
462,125 |
|
|
|
(65,385 |
) |
Held-to-maturity |
|
|
(1,215,671 |
) |
|
|
|
|
|
|
|
|
|
|
(11,077,940 |
) |
|
|
|
|
|
|
(12,293,611 |
) |
Other |
|
|
|
|
|
|
|
|
|
|
(928 |
) |
|
|
(16,007 |
) |
|
|
|
|
|
|
(16,935 |
) |
Proceeds from calls, paydowns, maturities and
redemptions of investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,267,162 |
|
|
|
(456,452 |
) |
|
|
810,710 |
|
Held-to-maturity |
|
|
978,000 |
|
|
|
400 |
|
|
|
|
|
|
|
10,979,564 |
|
|
|
|
|
|
|
11,957,964 |
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,445 |
|
|
|
|
|
|
|
5,445 |
|
Proceeds from sale of investment securities
available-for-sale |
|
|
|
|
|
|
14,009 |
|
|
|
|
|
|
|
14,972 |
|
|
|
|
|
|
|
28,981 |
|
Proceeds from sale of other investment securities |
|
|
245,484 |
|
|
|
2 |
|
|
|
865 |
|
|
|
1 |
|
|
|
|
|
|
|
246,352 |
|
Net repayments (disbursements) on loans |
|
|
127,445 |
|
|
|
|
|
|
|
(78 |
) |
|
|
(359,059 |
) |
|
|
(130,877 |
) |
|
|
(362,569 |
) |
Proceeds from sale of loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,549 |
|
|
|
|
|
|
|
3,549 |
|
Acquisition of loan portfolios |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(784 |
) |
|
|
|
|
|
|
(784 |
) |
Capital contribution to subsidiary |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
500 |
|
|
|
(500 |
) |
|
|
|
|
Assets acquired, net of cash |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,633 |
) |
|
|
|
|
|
|
(1,633 |
) |
Mortgage servicing rights purchased |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23,988 |
) |
|
|
|
|
|
|
(23,988 |
) |
Acquisition of premises and equipment |
|
|
(445 |
) |
|
|
|
|
|
|
|
|
|
|
(49,207 |
) |
|
|
|
|
|
|
(49,652 |
) |
Proceeds from sale of premises and equipment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,951 |
|
|
|
|
|
|
|
21,951 |
|
Proceeds from sale of foreclosed assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80,278 |
|
|
|
|
|
|
|
80,278 |
|
|
Net cash provided by (used in) investing activities |
|
|
136,705 |
|
|
|
(3,541 |
) |
|
|
2,200 |
|
|
|
110,061 |
|
|
|
(111,595 |
) |
|
|
133,830 |
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
954,144 |
|
|
|
(17,334 |
) |
|
|
936,810 |
|
Net decrease in federal funds purchased and
assets sold under agreements to repurchase |
|
|
|
|
|
|
|
|
|
|
(5,877 |
) |
|
|
(102,132 |
) |
|
|
1,500 |
|
|
|
(106,509 |
) |
Net decrease in other short-term borrowings |
|
|
(150,787 |
) |
|
|
|
|
|
|
(37,195 |
) |
|
|
(384,474 |
) |
|
|
(77,564 |
) |
|
|
(650,020 |
) |
Payments of notes payable |
|
|
|
|
|
|
|
|
|
|
(3,920 |
) |
|
|
(972,515 |
) |
|
|
202,704 |
|
|
|
(773,731 |
) |
Proceeds from issuance of notes payable |
|
|
198 |
|
|
|
|
|
|
|
58,861 |
|
|
|
44,190 |
|
|
|
|
|
|
|
103,249 |
|
Dividends paid to parent company |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(89,400 |
) |
|
|
89,400 |
|
|
|
|
|
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All other |
|
|
|
|
|
|
Popular, Inc. |
|
PIBI |
|
PNA |
|
subsidiaries |
|
Elimination |
|
Popular, Inc. |
(In thousands) |
|
Holding Co. |
|
Holding Co. |
|
Holding Co. |
|
and eliminations |
|
entries |
|
Consolidated |
|
Dividends paid |
|
|
(95,223 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(95,223 |
) |
Proceeds from issuance of common stock |
|
|
8,667 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,667 |
|
Treasury stock acquired |
|
|
(63 |
) |
|
|
|
|
|
|
|
|
|
|
(289 |
) |
|
|
|
|
|
|
(352 |
) |
Capital contribution from parent |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(500 |
) |
|
|
500 |
|
|
|
|
|
|
Net cash (used in) provided by financing activities |
|
|
(237,208 |
) |
|
|
|
|
|
|
11,869 |
|
|
|
(550,976 |
) |
|
|
199,206 |
|
|
|
(577,109 |
) |
|
Net increase (decrease) in cash and due from banks |
|
|
1,773 |
|
|
|
160 |
|
|
|
55 |
|
|
|
(188,335 |
) |
|
|
(1,726 |
) |
|
|
(188,073 |
) |
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 |
|
$ |
1,775 |
|
|
$ |
317 |
|
|
$ |
377 |
|
|
$ |
761,533 |
|
|
$ |
(1,917 |
) |
|
$ |
762,085 |
|
|
69
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 full service 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 to the communities it serves. BPNA operates branches in New York, California, Illinois,
New Jersey, Florida and Texas. E-LOAN offers online consumer direct lending and provides an online
platform to raise deposits for BPNA. As described in Note 19 to the consolidated financial
statements, E-LOAN restructured its business operations during the fourth quarter of 2007 and the
beginning of 2008. PFH, after certain restructuring events discussed also in Note 19 to the
consolidated financial statements, exited the branch network loan origination business during the
first quarter of 2008, but continues to operate a mortgage loan servicing unit, a small scale
origination / refinancing unit and to carry a maturing loan portfolio. 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 24 to the consolidated financial statements presents
further information about the Corporations business segments.
The Corporation reported net income for the quarter ended June 30, 2008 of $24.3 million, compared
with $75.0 million in the same quarter of 2007. Table A provides selected financial data and
performance indicators for the quarter and six-month periods ended June 30, 2008 and 2007.
During the second quarter of 2008, the Corporation continued to feel the pressure of the turmoil in
the financial markets and deteriorating economic conditions. Management is actively engaged in the
process of evaluating various strategic alternatives to improve the profitability of the
Corporations operations in the United States and to improve the Corporations liquidity. Some of
these alternatives may involve further restructurings and the sale of
some or all of these operations or
their assets. As a result of the current lack of liquidity in the credit markets, certain recent
sales of portfolios of mortgages or mortgage related assets by other institutions have been
executed at prices below the carrying value of those assets. If we were to execute a sale of some
of our operations or their assets at a similar discounted price, such a sale would result in a loss
on their disposition, which may be significant. In addition, restructurings or asset sales may
require the Corporation to recognize a valuation allowance against its deferred tax assets,
resulting in further losses.
Our banking and processing businesses in Puerto Rico continue to perform well despite a weak
economy. Banco Popular de Puerto Rico met managements expectations for the first half of the year
with that segment reporting net income amounting to $191.3 million even with significant increases
in its provision for loan losses. In addition, the Corporation remains well capitalized with over
$1 billion of Tier I capital in excess of the regulatory
well capitalized requirement.
Financial results for the quarter ended June 30, 2008 were principally impacted by the following
items (on a pre-tax basis compared to the second quarter of 2007):
70
|
|
|
Lower net interest income on a taxable equivalent basis by $34.3 million mainly
due to the sale and reduction of various low margin assets. |
|
|
|
|
Higher provision for loan losses for the second quarter of 2008, which increased
by $75.5 million as compared with the same period in 2007, driven principally by
higher net charge-offs, and deteriorating credit quality trends, primarily in the
U.S. mainland consumer loan portfolio, and in the Corporations commercial and
construction loan portfolios. Details on credit quality indicators are included in
the Credit Risk Management and Loan Quality Section in this MD&A. |
|
|
|
|
Net losses attributable to changes in the fair value of Popular Financial
Holdings (PFH) loans and bond certificates measured at fair value pursuant to
SFAS No. 159 amounted to $35.9 million for the quarter ended June 30, 2008. |
|
|
|
|
Lower net gain on sale of loans and valuation adjustments on loans held-for-sale
by $29.7 million for the second quarter of 2008, with PFH and E-LOAN showing a
reduction of approximately $34 million. |
The above were partially offset by:
|
|
|
Higher combined net gains on sale and valuation adjustments of investment
securities and trading account profits by $32.9 million, primarily resulting from
sales of agency securities and a higher volume of mortgage loans pooled and sold as
mortgage-backed securities in the secondary markets in the Banco Popular de Puerto
Rico reportable segment. Refer to Balance Sheet comments for further information. |
|
|
|
|
Higher other non-interest income by $22.9 million. |
|
|
|
|
Lower operating expenses by $13.3 million. |
|
|
|
|
Income tax benefit of $31.2 million for the second quarter of 2008, compared with
income tax expense of $23.6 million for the same quarter in 2007. |
During the second quarter of 2008, the Corporation successfully 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. The offering, which was
oversubscribed, was priced at $25 per share. The preferred stock issue was completely sold in
Puerto Rico. Net proceeds will be used for general corporate purposes, including funding
subsidiaries and increasing Populars liquidity and capital.
Specific significant events that occurred in the first quarter ended March 31, 2008 were also
important in evaluating the Corporations financial performance for the six months ended June 30,
2008, which included:
|
|
|
The sale of certain assets of Equity One, a subsidiary of PFH, to American
General Financial (American General), a member of American International Group. As
part of the transaction, American General acquired approximately $1.4 billion of
mortgage and consumer loans and retained some of Equity Ones branch locations. The
gain on sale and valuation adjustments of these loans approximated $47.4 million for
the six-month period ended June 30, 2008. This sale transaction also led to branch
closures as part of the PFH Branch Network Restructuring Plan during the first
quarter of 2008. This plan resulted in charges for the Corporation of approximately
$16.6 million for the six-month period ended June 30, 2008. Refer to the
Restructuring Plans section of this MD&A for further information. |
|
|
|
|
The sale of six retail bank branches of BPNA in Houston, Texas to Prosperity
Bank. The Corporation realized a gain of approximately $12.8 million in the first
quarter of 2008 related with this transaction. BPNA will continue to operate its
mortgage business based in Houston as well as its franchise and small business
lending activities in Texas. BPNA will also continue to maintain a retail branch in
Arlington, Texas. |
|
|
|
|
Gain of $49.3 million in the first quarter of 2008 resulting from the mandatory
partial redemption of Visa stock as a result of Visas initial public offering.
After the mandatory partial redemption of Visa stock, the Corporation continues to
hold 883,435 Class C (Series I) and 21,454 Class B unredeemed shares of Visa stock
with a book value of zero as of June 30, 2008. No gains will be recognized on the
unredeemed stock until such time they are redeemed for cash or sold. |
71
TABLE A
Financial Highlights
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Condition Highlights
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, |
|
Average for the six months |
(In thousands) |
|
2008 |
|
2007 |
|
Variance |
|
2008 |
|
2007 |
|
Variance |
|
Money market investments |
|
$ |
897,796 |
|
|
$ |
574,987 |
|
|
$ |
322,809 |
|
|
$ |
677,101 |
|
|
$ |
404,686 |
|
|
$ |
272,415 |
|
Investment and trading securities |
|
|
8,675,029 |
|
|
|
10,240,955 |
|
|
|
(1,565,926 |
) |
|
|
9,093,840 |
|
|
|
10,785,609 |
|
|
|
(1,691,769 |
) |
Loans |
|
|
27,631,678 |
|
|
|
32,751,845 |
|
|
|
(5,120,167 |
) |
|
|
28,299,865 |
|
|
|
32,712,076 |
|
|
|
(4,412,211 |
) |
Total earning assets |
|
|
37,204,503 |
|
|
|
43,567,787 |
|
|
|
(6,363,284 |
) |
|
|
38,070,806 |
|
|
|
43,902,371 |
|
|
|
(5,831,565 |
) |
Total assets |
|
|
41,678,594 |
|
|
|
46,985,363 |
|
|
|
(5,306,769 |
) |
|
|
41,774,824 |
|
|
|
47,224,603 |
|
|
|
(5,449,779 |
) |
Deposits |
|
|
27,115,728 |
|
|
|
25,385,995 |
|
|
|
1,729,733 |
|
|
|
27,275,700 |
|
|
|
24,630,221 |
|
|
|
2,645,479 |
|
Borrowings |
|
|
10,000,259 |
|
|
|
17,108,679 |
|
|
|
(7,108,420 |
) |
|
|
10,217,503 |
|
|
|
17,940,022 |
|
|
|
(7,722,519 |
) |
Stockholders equity |
|
|
3,705,994 |
|
|
|
3,697,080 |
|
|
|
8,914 |
|
|
|
3,425,003 |
|
|
|
3,854,240 |
|
|
|
(429,237 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Highlights
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter |
|
Six months ended June 30, |
(In thousands, except per share information) |
|
2008 |
|
2007 |
|
Variance |
|
2008 |
|
2007 |
|
Variance |
|
Net interest income |
|
$ |
337,885 |
|
|
$ |
371,417 |
|
|
($ |
33,532 |
) |
|
$ |
695,074 |
|
|
$ |
726,399 |
|
|
($ |
31,325 |
) |
Provision for loan losses |
|
|
190,640 |
|
|
|
115,167 |
|
|
|
75,473 |
|
|
|
358,862 |
|
|
|
211,513 |
|
|
|
147,349 |
|
Non-interest income |
|
|
193,572 |
|
|
|
203,375 |
|
|
|
(9,803 |
) |
|
|
501,547 |
|
|
|
455,551 |
|
|
|
45,996 |
|
Operating expenses |
|
|
347,733 |
|
|
|
361,053 |
|
|
|
(13,320 |
) |
|
|
720,248 |
|
|
|
736,381 |
|
|
|
(16,133 |
) |
Income tax (benefit) expense |
|
|
(31,166 |
) |
|
|
23,622 |
|
|
|
(54,788 |
) |
|
|
(10,029 |
) |
|
|
40,459 |
|
|
|
(50,488 |
) |
Net income |
|
$ |
24,250 |
|
|
$ |
74,950 |
|
|
($ |
50,700 |
) |
|
$ |
127,540 |
|
|
$ |
193,597 |
|
|
($ |
66,057 |
) |
Net income applicable to common stock |
|
$ |
18,247 |
|
|
$ |
71,972 |
|
|
($ |
53,725 |
) |
|
$ |
118,559 |
|
|
$ |
187,641 |
|
|
($ |
69,082 |
) |
Basic and diluted EPS |
|
$ |
0.06 |
|
|
$ |
0.26 |
|
|
($ |
0.20 |
) |
|
$ |
0.42 |
|
|
$ |
0.67 |
|
|
($ |
0.25 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Statistical Information |
|
|
|
|
|
|
|
|
|
|
Second Quarter |
|
Six months ended June 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
Common Stock Data Market price |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High |
|
$ |
13.06 |
|
|
$ |
17.49 |
|
|
$ |
14.07 |
|
|
$ |
18.94 |
|
Low |
|
|
6.59 |
|
|
|
15.82 |
|
|
|
6.59 |
|
|
|
15.82 |
|
End |
|
|
6.59 |
|
|
|
16.07 |
|
|
|
6.59 |
|
|
|
16.07 |
|
Book value per share at period end |
|
|
11.10 |
|
|
|
12.57 |
|
|
|
11.10 |
|
|
|
12.57 |
|
Dividends declared per share |
|
|
0.16 |
|
|
|
0.16 |
|
|
|
0.32 |
|
|
|
0.32 |
|
Dividend payout ratio |
|
|
273.89 |
% |
|
|
62.04 |
% |
|
|
80.22 |
% |
|
|
47.57 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profitability Ratios Return on assets |
|
|
0.24 |
% |
|
|
0.64 |
% |
|
|
0.61 |
% |
|
|
0.83 |
% |
Return on common equity |
|
|
2.08 |
|
|
|
7.80 |
|
|
|
7.11 |
|
|
|
10.32 |
|
Net interest spread (taxable equivalent) |
|
|
3.48 |
|
|
|
3.06 |
|
|
|
3.47 |
|
|
|
2.99 |
|
Net interest margin (taxable equivalent) |
|
|
3.90 |
|
|
|
3.60 |
|
|
|
3.91 |
|
|
|
3.52 |
|
Effective tax rate |
|
|
N.M. |
|
|
|
23.96 |
|
|
|
N.M. |
|
|
|
17.29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalization Ratios Equity to assets |
|
|
8.61 |
% |
|
|
8.24 |
% |
|
|
8.20 |
% |
|
|
8.16 |
% |
Tangible equity to assets |
|
|
7.03 |
|
|
|
6.72 |
|
|
|
6.64 |
|
|
|
6.63 |
|
Equity to loans |
|
|
12.67 |
|
|
|
11.86 |
|
|
|
12.10 |
|
|
|
11.78 |
|
Internal capital generation |
|
|
(3.25 |
) |
|
|
2.81 |
|
|
|
1.28 |
|
|
|
5.10 |
|
Tier I capital to risk adjusted assets |
|
|
10.50 |
|
|
|
10.66 |
|
|
|
10.50 |
|
|
|
10.66 |
|
Total capital to risk adjusted assets |
|
|
11.77 |
|
|
|
11.92 |
|
|
|
11.77 |
|
|
|
11.92 |
|
Leverage ratio |
|
|
8.52 |
|
|
|
8.17 |
|
|
|
8.52 |
|
|
|
8.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N.M., not a meaningful value. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
72
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, 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.
RESTRUCTURING PLANS
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 its subprime loan origination operations at PFH (the PFH Branch
Network Restructuring Plan). PFH continues to hold a $1.2 billion maturing portfolio as of June
30, 2008. 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. 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. Full-time
equivalent employees at the PFH reportable segment were 321 as of June 30, 2008, compared with 932
as of June 30, 2007. PFH continues to operate a mortgage loan servicing unit, a small scale
origination / refinancing unit and to carry a maturing loan portfolio.
During the quarter and six months ended June 30, 2008 and as part of this particular restructuring
plan, the Corporation incurred (reduced) certain costs, on a pre-tax basis, as detailed in the
table below.
|
|
|
|
|
|
|
|
|
|
|
Quarter ended |
|
Six months ended |
(In thousands) |
|
June 30, 2008 |
|
June 30, 2008 |
|
Personnel costs |
|
$ |
412 |
|
|
$ |
8,405 |
(a) |
Net occupancy expenses |
|
|
(845 |
) |
|
|
5,905 |
(b) |
Equipment expenses |
|
|
|
|
|
|
675 |
|
Communications |
|
|
|
|
|
|
590 |
|
Other operating expenses |
|
|
|
|
|
|
1,021 |
(c) |
|
Total restructuring charges |
|
($ |
433 |
) |
|
$ |
16,596 |
|
|
|
|
|
(a) |
|
Severance, retention bonuses and other benefits |
|
(b) |
|
Lease terminations |
|
(c) |
|
Contract cancellations and branch closing costs |
|
|
|
73
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 June 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 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,892 |
|
|
$ |
16,596 |
|
|
$ |
18,488 |
|
|
|
|
|
|
|
|
|
|
The following table presents the changes during 2008 in the reserve for restructuring costs
associated with the PFH Branch Network Restructuring Plan.
|
|
|
|
|
(In thousands) |
|
Restructuring
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 as of June 30, 2008 |
|
$ |
3,955 |
|
|
The amounts accrued as of June 30, 2008 related to the PFH Branch Network Restructuring Plan are
expected to be substantially paid during 2008.
As disclosed in Note 24 to the consolidated financial statements, PFHs reportable segment
reported net loss of $31.8 million for the six months ended June 30, 2008, compared with a net
loss of $80.5 million for the same period in the previous year. The following table summarizes
the main categories in the statement of operations for PFHs reportable segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended |
|
|
|
|
|
|
June 30, |
|
June 30, |
|
|
|
|
(In thousands) |
|
2008 |
|
2007 |
|
Variance |
|
Notes |
|
Net interest income |
|
$ |
28,991 |
|
|
$ |
88,409 |
|
|
($ |
59,418 |
) |
|
|
(a |
) |
Provision for loan losses |
|
|
8,461 |
|
|
|
78,376 |
|
|
|
(69,915 |
) |
|
|
(b |
) |
Fair value adjustments on residual interests |
|
|
(13,562 |
) |
|
|
(54,984 |
) |
|
|
41,422 |
|
|
|
|
|
Mortgage servicing fees, net of fair value
adjustments |
|
|
(621 |
) |
|
|
3,652 |
|
|
|
(4,273 |
) |
|
|
(c |
) |
Losses from changes in fair value related
to instruments measured at fair value
pursuant to SFAS No. 159 |
|
|
(38,942 |
) |
|
|
|
|
|
|
(38,942 |
) |
|
|
|
|
Gain (loss) on sale of loans and valuation
adjustments on loans held-for-sale |
|
|
46,768 |
|
|
|
(1,521 |
) |
|
|
48,289 |
|
|
|
(d |
) |
Other operating income |
|
|
6,005 |
|
|
|
2,250 |
|
|
|
3,755 |
|
|
|
|
|
Personnel costs |
|
|
25,778 |
|
|
|
30,161 |
|
|
|
(4,383 |
) |
|
|
(e |
) |
Restructuring plan costs and related charges |
|
|
16,596 |
|
|
|
14,916 |
|
|
|
1,680 |
|
|
|
|
|
Other operating expenses |
|
|
24,240 |
|
|
|
37,521 |
|
|
|
(13,281 |
) |
|
|
(f |
) |
Income tax |
|
|
(14,681 |
) |
|
|
(42,708 |
) |
|
|
28,027 |
|
|
|
|
|
|
Net loss |
|
($ |
31,755 |
) |
|
($ |
80,460 |
) |
|
$ |
48,705 |
|
|
|
|
|
|
|
|
|
(a) |
|
The decline was mostly due to a reduction in the loan portfolio as a result of exiting
origination channels. |
74
|
|
|
(b) |
|
The reduction in the provision for loan losses was also associated to decline in portfolio
due to exiting origination channels, sale of loan portfolio to American General and
reclassification of loans to fair value measurement (SFAS No. 159). Allowance for loan
losses to loans
held-in-portfolio was 2.57% as of June 30, 2008, compared with 1.85% as of June 30, 2007.
PFH loans held-in-portfolio amounted to $307 million as of June 30, 2008, compared with $7.3
billion as of the same date in 2007. |
|
(c) |
|
Refer to Note 7 to the consolidated financial statements for information on PFHs MSRs. |
|
(d) |
|
2008 results were mostly impacted by the gain on the sale of loans to American General in
first quarter of 2008, partially offset by fair value adjustment on loans repurchased under
payment indemnification clauses; 2007 results were mainly impacted by realized gains of
$13.5 million related to the off-balance sheet securitization completed during the second
quarter of 2007. |
|
(e) |
|
Headcount was reduced to 321 FTEs as of June 30, 2008 after the closing of the Equity One
branches, compared to 932 FTEs as of June 30, 2007. |
|
(f) |
|
The reduction was principally in professional fees, net occupancy, business promotion and
communication expenses. |
|
|
|
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 include 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 312 as of June 30, 2008,
compared with 805 as of June 30, 2007.
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 |
|
|
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 June 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 24 to the consolidated financial statements for disclosures on the financial results of
E-LOAN for the quarter and six months ended June 30, 2008 and the comparable periods in 2007.
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.
75
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 operations of Popular
Financial Holdings that are running off, were as follows:
|
|
|
Approximately $1.2 billion of whole loans held-in-portfolio by PFH 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 believes that accounting for these loans at fair value provides a more relevant
and transparent measurement of the realizable value of the assets and differentiates the PFH
portfolio from the loan portfolios that the Corporation will continue 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, $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 lines of credit with monthly advances and pay-downs, and
construction credit agreements in which permanent financing will be with a lender other than PFH.
Although these businesses are running off, PFH must contractually continue to fund the revolving
credit arrangements.
There were no other assets or liabilities elected for the fair value option after January 1, 2008.
76
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 |
|
|
|
|
December 31, |
|
adjustment to |
|
January 1, 2008 |
|
|
2007 (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 |
) |
|
|
|
|
|
As of January 1, 2008, the Corporation eliminated $37 million in allowance for loan losses
associated to the loan portfolio elected under the fair value option accounting and recognized it
as part of the cumulative effect adjustment. As the loans are measured at fair value, there is no
requirement to establish an allowance for loan losses with respect to these loan portfolios, as the
fair value takes into consideration cumulative expected credit losses on the loan portfolio.
The significant 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. |
|
|
|
|
The majority of first lien mortgage loans were originated in 2006 and 2007. Industry and
internally derived credit metrics show a high loss severity in these vintages.
Approximately 81% of this portfolio was considered subprime as of December 31, 2007. |
|
|
|
|
The subprime component of second lien closed-end mortgage loans (classified as part of
consumer loans) increased. There has been a significant deterioration in the delinquency
profile of the portfolio, and migration to the 90+ day delinquent buckets impacting the
potential loss exposure for the closed-end second lien loan portfolio leading to
consideration of a 100% loss severity. Market data considered for the valuation showed
property values obtained on subprime loans in foreclosure declining dramatically. As
property values do not justify initiating a foreclosure action, the loan in essence behaves
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
(HELOCs) that were transferred in 2007 from E-LOAN to PFH. Although this portfolio is
considered prime based on FICO scores, it has deteriorated. Similar to second lien
closed-end loans, the HELOCs are also behaving as an unsecured loan. The loan-to-value
characteristics of the portfolio also negatively impact its performance. These loans were
mostly originated in 2006, when there was a peak in the real estate market. As the housing
market continues to deteriorate, the Corporation noted continued deterioration in the
combined loan-to-value profile of the portfolio that was also considered in the market
valuation. The geographical distribution of this portfolio also negatively impacts its
performance since a significant portion of the portfolio is concentrated in California. The
Corporation no longer originates HELOCs in its E-LOAN or PFH operations as a result of the
restructuring plan. |
|
|
|
|
Other product types include small balance commercial and manufactured housing loans that
are trading at distressed levels based on the small trading activity available for these
products and the expected return by the investors rather than the actual performance and
fundamentals of these loans. |
With respect to the bond certificates, as these are collateralized with the cash flows received
from the mortgage loans, their fair value is influenced by the decline in the fair value of the
loans. Historical performance was analyzed layered with general macro economic and housing market
expectations that led to the projected forward performance for each bond. Also, the valuation
considered forward LIBOR curves and the market dictated rate of return for these types of
investments. The Corporations liquidity exposure with respect to the bond certificates is limited
to the cash flows of
77
the loans placed as collateral on the securitization trust and any other
related assets such as other real estate. Also, the Corporation advances funds under the
terms of the loan servicing agreements.
The following table presents the differences as of June 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate fair |
|
|
|
|
|
|
value as of June |
|
Aggregate UPB as |
|
Unrealized |
(In thousands) |
|
30, 2008 |
|
of June 30, 2008 |
|
(loss) gain |
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage |
|
$ |
646,535 |
|
|
$ |
958,285 |
|
|
($ |
311,750 |
) |
Consumer |
|
|
86,534 |
|
|
|
262,581 |
|
|
|
(176,047 |
) |
Commercial |
|
|
111,823 |
|
|
|
124,707 |
|
|
|
(12,884 |
) |
|
Total loans |
|
$ |
844,892 |
|
|
$ |
1,345,573 |
|
|
($ |
500,681 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable (bond certificates) |
|
($ |
173,725 |
) |
|
($ |
253,541 |
) |
|
$ |
79,816 |
|
|
These financial instruments are segregated in the consolidated statement of condition in the
following line items: Loans measured at fair value pursuant to SFAS No. 159 and Notes Payable
measured at fair value pursuant to SFAS No. 159. As the loans are measured at fair value, there is
no requirement to establish allowance for loan losses with respect to these loan portfolios.
During the quarter ended June 30, 2008, the Corporation recognized $35.9 million in estimated net
losses attributable to changes in the fair value of the loans and borrowings, which were included
in the caption Losses from changes in fair value related to instruments measured at fair value
pursuant to SFAS No. 159 in the consolidated statement of operations. The unfavorable fair value
adjustments for the quarter consisted of $31.0 million in net losses attributable to changes in the
fair value of loans and $4.9 million in net losses attributable to changes in the fair value of
notes payable (bond certificates). The change in the fair value of the loans was principally due to
increases in market interest rates as well as credit considerations.
Refer to Note 11 to the consolidated financial statements for further information on the
impact of SFAS No. 159 and to the Critical Accounting Policies / Estimates section of this MD&A
for additional information on the valuation methodology and critical assumptions considered in the
valuations of the financial instruments measured at fair value under the provisions of SFAS No.
159, which are categorized as Level 3 under the requirements of SFAS No. 157.
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 12 to these consolidated financial statements for the
disclosures required for the six-month period ended June 30, 2008. The adoption of SFAS No. 157 in
January 1, 2008 did not have an impact in beginning retained earnings.
78
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 11 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.
SFAS No. 160 Statement of Financial Accounting Standards No. 160, Noncontrolling Interest in
Consolidated Financial Statements, an amendment of ARB No. 51
79
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, for the six months ended June 30, 2008.
80
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.
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). 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.
81
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 in accordance with SFAS No. 159 as previously
described in this MD&A.
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:
|
|
|
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 12 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 June 30, 2008, approximately $7.9 billion
or 85% out of the $9.3 billion of assets measured at fair value on a recurring basis used
market-based or market-derived valuation inputs in their valuation methodology and, therefore, were
classified as Level 1 or Level 2. Approximately 15% of the assets measured at fair value
on a recurring basis were classified as Level 3 since their valuation methodology considered
significant unobservable inputs. The bond certificates measured at fair value were classified as
Level 3 in the hierarchy. Additionally, the Corporation reported $431 million of financial assets
that were measured at fair value on a nonrecurring basis during the six-month period ended June 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.
82
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.
As of June 30, 2008, the Corporations portfolio of trading and investment securities
available-for-sale amounted to $8.2 billion and represented 88% of the Corporations
assets measured at fair value on a recurring basis. As of June 30, 2008, net unrealized gains on
the trading portfolio approximated $5 million, while for securities available-for-sale the
unrealized net losses approximated $22 million. Fair values for most of the Corporations trading
and investment securities are classified under the Level 2 category. Refer to Note 12 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 5 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 June 30, 2008.
Residual interests from securitizations (included in trading and investment securities
available-for-sale), which approximated $37 million as of June 30, 2008, are valued using a
discounted cash flow model that considers the underlying structure of the securitization and net
estimated credit exposure, prepayment assumptions, discount rate and expected life. Refer to the
Critical Accounting Policies / Estimates section of the 2007 Annual Report for information on the
valuation methodology followed by the Corporation with respect to the residual interests, which are
categorized as Level 3. Disclosure of the key economic assumptions used to measure the residual
interests and a sensitivity analysis to adverse changes to these assumptions is included in Note 7
to the consolidated financial statements.
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 $845 million in loans as of June 30, 2008
pursuant to the SFAS No. 159 election. These loans represented 9% of the Corporations financial
assets measured at fair value as of such date. The loans
measured at fair value pursuant to SFAS No. 159 were valued internally and the assumptions were validated with sources such as market
data, other price indicators and historical data. The current illiquidity in
the market for certain loan products resulting from current distressed market conditions in the
subprime sector poses a challenge in the observability of the price quotations. When estimating
fair value, assumptions considered include prepayment speeds, default
rates, loss severity rates and interest rate risk, among others.
Mortgage servicing rights (MSRs), which amounted to $186 million as of June 30, 2008, do not
trade in an active market with readily observable prices. MSRs 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
83
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 7 to the
consolidated financial statements.
The estimate of fair value of the bond certificates (derived from PFH securitizations) measured
pursuant to the fair value option of SFAS No. 159 was determined utilizing a discounted cash flow
model. The bond certificates had a fair value of $174 million as of June 30, 2008. In determining
the fair value, the historical performance of the bond certificates, as well as market historical
performance, were taken into consideration. This past information layered with general macro
economic and housing market expectations led to a projected forward performance for each
securitization. Structural cash flows were based on the established performance assumptions and
forward LIBOR curves.
NET INTEREST INCOME
Tables B and C present the different components of the Corporations net interest income, on a
taxable equivalent basis, for the quarter and six months ended June 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 investment securities and loans that are exempt from income
tax, principally in Puerto Rico (P.R.). 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 P.R. Commonwealth and its agencies, and assets held by the Corporations
international banking entities, which are tax-exempt under P.R. laws. To facilitate the comparison
of all interest data 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
six-month period. The taxable equivalent computation considers the interest expense disallowance
required by the P.R. tax law.
Average outstanding securities balances are based upon amortized cost excluding any unrealized
gains or losses on securities available-for-sale. Average loan balances include the impact of the
valuation adjustments on the loans and bonds as part of the adoption of SFAS No. 159. Refer to the
SFAS No. 159 Fair Value Option Election of this MD&A for further details. Non-accrual loans have
been included in the respective average loan 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 the quarter and six months ended June 30, 2008 included a
favorable impact of $5.2 million and $12.1 million, respectively, compared to an unfavorable
impact for the quarter and six months ended June 30, 2007 of $2.5 million and $5.4 million,
respectively. These balances consist principally of amortization of net loan origination costs
(net of origination fees) and amortization of net premiums on loans
purchased, partially offset
by prepayment penalties and late payment charges. The positive variance in this category was mainly
influenced by the fact that in 2008 the Corporation amortized less loan premiums since a
substantial portion of the loan portfolio that was acquired at a premium in earlier years was part
of the recharacterization transaction completed in December 2007 in which the Corporation achieved
sale accounting and was able to remove the loans from its statement of condition.
84
TABLE B
Analysis of Levels & Yields on a Taxable Equivalent Basis
Quarter ended June 30,
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variance |
Average Volume |
|
Average Yields / Costs |
|
|
|
Interest |
|
Attributable to |
2008 |
|
2007 |
|
Variance |
|
2008 |
|
2007 |
|
Variance |
|
|
|
2008 |
|
2007 |
|
Variance |
|
Rate |
|
Volume |
($ in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
$ |
575 |
|
|
$ |
434 |
|
|
$ |
141 |
|
|
|
2.43 |
% |
|
|
5.57 |
% |
|
|
(3.14 |
%) |
|
Money market investments |
|
$ |
3,476 |
|
|
$ |
6,018 |
|
|
($ |
2,542 |
) |
|
($ |
4,167 |
) |
|
$ |
1,625 |
|
|
7,939 |
|
|
|
9,966 |
|
|
|
(2,027 |
) |
|
|
5.07 |
|
|
|
5.21 |
|
|
|
(0.14 |
) |
|
Investment securities |
|
|
100,510 |
|
|
|
129,727 |
|
|
|
(29,217 |
) |
|
|
(3,597 |
) |
|
|
(25,620 |
) |
|
794 |
|
|
|
662 |
|
|
|
132 |
|
|
|
8.47 |
|
|
|
6.06 |
|
|
|
2.41 |
|
|
Trading securities |
|
|
16,724 |
|
|
|
10,002 |
|
|
|
6,722 |
|
|
|
4,474 |
|
|
|
2,248 |
|
|
|
|
|
|
|
9,308 |
|
|
|
11,062 |
|
|
|
(1,754 |
) |
|
|
5.19 |
|
|
|
5.27 |
|
|
|
(0.08 |
) |
|
|
|
|
120,710 |
|
|
|
145,747 |
|
|
|
(25,037 |
) |
|
|
(3,290 |
) |
|
|
(21,747 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,851 |
|
|
|
14,885 |
|
|
|
966 |
|
|
|
6.04 |
|
|
|
7.83 |
|
|
|
(1.79 |
) |
|
Commercial * |
|
|
238,229 |
|
|
|
290,670 |
|
|
|
(52,441 |
) |
|
|
(70,343 |
) |
|
|
17,902 |
|
|
1,109 |
|
|
|
1,187 |
|
|
|
(78 |
) |
|
|
8.07 |
|
|
|
7.81 |
|
|
|
0.26 |
|
|
Leasing |
|
|
22,379 |
|
|
|
23,177 |
|
|
|
(798 |
) |
|
|
745 |
|
|
|
(1,543 |
) |
|
5,711 |
|
|
|
11,316 |
|
|
|
(5,605 |
) |
|
|
7.58 |
|
|
|
7.20 |
|
|
|
0.38 |
|
|
Mortgage |
|
|
108,177 |
|
|
|
203,705 |
|
|
|
(95,528 |
) |
|
|
10,138 |
|
|
|
(105,666 |
) |
|
5,095 |
|
|
|
5,378 |
|
|
|
(283 |
) |
|
|
10.48 |
|
|
|
10.78 |
|
|
|
(0.30 |
) |
|
Consumer |
|
|
132,937 |
|
|
|
144,646 |
|
|
|
(11,709 |
) |
|
|
(8,933 |
) |
|
|
(2,776 |
) |
|
|
|
|
|
|
27,766 |
|
|
|
32,766 |
|
|
|
(5,000 |
) |
|
|
7.25 |
|
|
|
8.10 |
|
|
|
(0.85 |
) |
|
|
|
|
501,722 |
|
|
|
662,198 |
|
|
|
(160,476 |
) |
|
|
(68,393 |
) |
|
|
(92,083 |
) |
|
|
|
|
|
$ |
37,074 |
|
|
$ |
43,828 |
|
|
($ |
6,754 |
) |
|
|
6.74 |
% |
|
|
7.38 |
% |
|
|
(0.64 |
%) |
|
Total earning assets |
|
$ |
622,432 |
|
|
$ |
807,945 |
|
|
($ |
185,513 |
) |
|
($ |
71,683 |
) |
|
($ |
113,830 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,103 |
|
|
$ |
4,419 |
|
|
$ |
684 |
|
|
|
1.82 |
% |
|
|
2.64 |
% |
|
|
(0.82 |
%) |
|
NOW and money market** |
|
$ |
23,103 |
|
|
$ |
29,123 |
|
|
($ |
6,020 |
) |
|
($ |
10,374 |
) |
|
$ |
4,354 |
|
|
5,621 |
|
|
|
5,742 |
|
|
|
(121 |
) |
|
|
1.51 |
|
|
|
1.99 |
|
|
|
(0.48 |
) |
|
Savings |
|
|
21,050 |
|
|
|
28,512 |
|
|
|
(7,462 |
) |
|
|
(5,124 |
) |
|
|
(2,338 |
) |
|
12,140 |
|
|
|
10,698 |
|
|
|
1,442 |
|
|
|
4.10 |
|
|
|
4.69 |
|
|
|
(0.59 |
) |
|
Time deposits |
|
|
123,892 |
|
|
|
125,095 |
|
|
|
(1,203 |
) |
|
|
(19,963 |
) |
|
|
18,760 |
|
|
|
|
|
|
|
22,864 |
|
|
|
20,859 |
|
|
|
2,005 |
|
|
|
2.96 |
|
|
|
3.51 |
|
|
|
(0.55 |
) |
|
|
|
|
168,045 |
|
|
|
182,730 |
|
|
|
(14,685 |
) |
|
|
(35,461 |
) |
|
|
20,776 |
|
|
|
|
|
|
|
5,567 |
|
|
|
9,313 |
|
|
|
(3,746 |
) |
|
|
3.07 |
|
|
|
5.15 |
|
|
|
(2.08 |
) |
|
Short-term borrowings |
|
|
42,502 |
|
|
|
119,466 |
|
|
|
(76,964 |
) |
|
|
(40,310 |
) |
|
|
(36,654 |
) |
|
3,920 |
|
|
|
8,250 |
|
|
|
(4,330 |
) |
|
|
5.30 |
|
|
|
5.41 |
|
|
|
(0.11 |
) |
|
Medium and long-term debt |
|
|
51,723 |
|
|
|
111,298 |
|
|
|
(59,575 |
) |
|
|
(7,644 |
) |
|
|
(51,931 |
) |
|
|
|
|
|
|
32,351 |
|
|
|
38,422 |
|
|
|
(6,071 |
) |
|
|
3.26 |
|
|
|
4.32 |
|
|
|
(1.06 |
) |
|
Total interest bearing liabilities |
|
|
262,270 |
|
|
|
413,494 |
|
|
|
(151,224 |
) |
|
|
(83,415 |
) |
|
|
(67,809 |
) |
|
4,130 |
|
|
|
4,065 |
|
|
|
65 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing demand deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
593 |
|
|
|
1,341 |
|
|
|
(748 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other sources of funds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
37,074 |
|
|
$ |
43,828 |
|
|
($ |
6,754 |
) |
|
|
2.84 |
% |
|
|
3.78 |
% |
|
|
(0.94 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.90 |
% |
|
|
3.60 |
% |
|
|
0.30 |
% |
|
Net interest margin |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income on a
taxable equivalent basis |
|
|
360,162 |
|
|
|
394,451 |
|
|
|
(34,289 |
) |
|
$ |
11,732 |
|
|
($ |
46,021 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.48 |
% |
|
|
3.06 |
% |
|
|
0.42 |
% |
|
Net interest spread |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable equivalent adjustment |
|
|
22,277 |
|
|
|
23,034 |
|
|
|
(757 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
337,885 |
|
|
$ |
371,417 |
|
|
($ |
33,532 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, net interest income on a taxable equivalent basis for the second quarter of
2008 decreased substantially when compared with the same quarter of the previous year. This
decrease was mainly driven by several initiatives undertaken by management to lower the amount of
low yielding assets in the statement of condition as well as to reduce the exposure of the
Corporation to the mortgage market and address liquidity needs. The decrease in the average balance
of earning assets resulted in part from the following:
|
|
|
The recharacterization of approximately $3.2 billion in subprime mortgage loans from PFH
during December 2007. This transaction allowed the Corporation to remove these loans from
its financial statements. |
85
|
|
|
The sale of approximately $1.4 billion in mortgage and consumer loans from the PFH
Branch Network during
the first quarter of 2008. |
|
|
|
|
The Corporations strategy of not reinvesting maturities of low yielding investments
during 2007. |
|
|
|
|
The sale of approximately $271 million in auto loans from PFH during the fourth
quarter of 2007. |
|
|
|
|
The sale of approximately $101 million in auto loans from E-LOAN during the second
quarter of 2008. |
|
|
|
|
The securitization into agency mortgage-backed securities (MBS) of approximately $232
million in principal balance of residential mortgage loans originated in Puerto Rico from
BPPRs loan portfolio and their sale in the secondary markets during the second quarter of
2008. |
|
|
|
|
Lower origination activity in E-LOAN as a result of the restructuring plan, and the
runoff of operations at PFH. |
These reductions were partially offset by a higher volume of commercial, construction, credit cards
and personal loans. The increase in average interest bearing deposits was principally in brokered
certificates of deposit. Refer to Balance Sheets comments for a general description of the main
factor that drove the increase in brokered certificates of deposit during the third quarter of
2007.
The increase in the net interest margin, on a taxable equivalent basis, was mainly the result of
the following factors:
|
|
|
The Federal Reserve (FED) lowered the federal funds target rate by 325 basis points
from June 30, 2007 to June 30, 2008. The decrease in market rates was the main driver of
the reductions in the average cost of short-term borrowings and interest bearing deposits. |
|
|
|
|
In addition to the reduction of the cost of funds, the net interest margin was also
favorably impacted by the PFH loan recharacterization transaction. The mortgage loans
subject to this treatment were mainly acquired through PFHs exited asset acquisition unit.
As a result the yield had been negatively impacted by the amortization of the premium
originally paid for the loans. |
|
|
|
|
As part of the PFH loan recharacterization transaction that occurred during the 4th
quarter of 2007, the Corporation recognized approximately $38 million in residual interests
at that time. These instruments were recorded as part of the trading portfolio and account
for the majority of the increase in yield for the trading securities category. |
|
|
|
|
The unfavorable valuation from the adoption of SFAS No. 159 resulted in a reduction of
the average loan balance. As a result, the average yields for these loan portfolios, mainly
mortgage and consumer, were favorably impacted. |
Unfavorable items impacting net interest margin are detailed as follows:
|
|
|
Lower yields in commercial and construction loans, mainly in the floating rate
portfolios which were negatively impacted by the decrease in market rates. As of June 30,
2008, approximately 64% of the commercial and construction loan portfolio had floating or
adjustable interest rates. |
|
|
|
|
Lower yields in the consumer loans. The decrease in yield for this particular category
can be divided between the floating rate portfolios, such as home equity lines of credits,
which were negatively impacted as a result of the decreases in market rates, and the
origination of closed-end second mortgages in the U.S. mainland, which carry a lower rate
than consumer loans originated in the Puerto Rico market. |
|
|
|
|
The increase in the volume of brokered certificates of deposit during the second half
of 2007 limited the expected benefit of reduced market rates in the overall cost of funds.
The brokered certificates of deposit carried a higher rate than short-term borrowings for
the second quarter of 2008. |
Similar factors described in the paragraphs above influenced the net interest income variances for
the six-month period ended June 30, 2008, as compared to the results for the same period in the
previous year. Refer to Table C for the corresponding analysis of levels and yields.
86
TABLE C
Analysis of Levels & Yields on a Taxable Equivalent Basis
Six-month period ended June 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) |
$ |
677 |
|
|
$ |
405 |
|
|
$ |
272 |
|
|
|
3.27 |
% |
|
|
5.46 |
% |
|
|
(2.19 |
%) |
|
Money market investments |
|
$ |
11,004 |
|
|
$ |
10,949 |
|
|
$ |
55 |
|
|
($ |
5,430 |
) |
|
$ |
5,485 |
|
|
8,279 |
|
|
|
10,158 |
|
|
|
(1,879 |
) |
|
|
5.12 |
|
|
|
5.15 |
|
|
|
(0.03 |
) |
|
Investment securities |
|
|
211,937 |
|
|
|
261,259 |
|
|
|
(49,322 |
) |
|
|
(971 |
) |
|
|
(48,351 |
) |
|
815 |
|
|
|
627 |
|
|
|
188 |
|
|
|
9.01 |
|
|
|
6.36 |
|
|
|
2.65 |
|
|
Trading securities |
|
|
36,511 |
|
|
|
19,777 |
|
|
|
16,734 |
|
|
|
9,778 |
|
|
|
6,956 |
|
|
|
|
|
|
|
9,771 |
|
|
|
11,190 |
|
|
|
(1,419 |
) |
|
|
5.32 |
|
|
|
5.22 |
|
|
|
0.10 |
|
|
|
|
|
259,452 |
|
|
|
291,985 |
|
|
|
(32,533 |
) |
|
|
3,377 |
|
|
|
(35,910 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,735 |
|
|
|
14,770 |
|
|
|
965 |
|
|
|
6.44 |
|
|
|
7.81 |
|
|
|
(1.37 |
) |
|
Commercial * |
|
|
504,112 |
|
|
|
572,340 |
|
|
|
(68,228 |
) |
|
|
(103,051 |
) |
|
|
34,823 |
|
|
1,115 |
|
|
|
1,196 |
|
|
|
(81 |
) |
|
|
8.05 |
|
|
|
7.85 |
|
|
|
0.20 |
|
|
Leasing |
|
|
44,900 |
|
|
|
46,948 |
|
|
|
(2,048 |
) |
|
|
1,173 |
|
|
|
(3,221 |
) |
|
6,111 |
|
|
|
11,412 |
|
|
|
(5,301 |
) |
|
|
7.81 |
|
|
|
7.13 |
|
|
|
0.68 |
|
|
Mortgage |
|
|
238,477 |
|
|
|
406,670 |
|
|
|
(168,193 |
) |
|
|
35,648 |
|
|
|
(203,841 |
) |
|
5,339 |
|
|
|
5,334 |
|
|
|
5 |
|
|
|
10.56 |
|
|
|
10.78 |
|
|
|
(0.22 |
) |
|
Consumer |
|
|
280,812 |
|
|
|
285,759 |
|
|
|
(4,947 |
) |
|
|
(13,898 |
) |
|
|
8,951 |
|
|
|
|
|
|
|
28,300 |
|
|
|
32,712 |
|
|
|
(4,412 |
) |
|
|
7.58 |
|
|
|
8.06 |
|
|
|
(0.48 |
) |
|
|
|
|
1,068,301 |
|
|
|
1,311,717 |
|
|
|
(243,416 |
) |
|
|
(80,128 |
) |
|
|
(163,288 |
) |
|
|
|
|
|
$ |
38,071 |
|
|
$ |
43,902 |
|
|
($ |
5,831 |
) |
|
|
7.00 |
% |
|
|
7.34 |
% |
|
|
(0.34 |
%) |
|
Total earning assets |
|
$ |
1,327,753 |
|
|
$ |
1,603,702 |
|
|
($ |
275,949 |
) |
|
($ |
76,751 |
) |
|
($ |
199,198 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,938 |
|
|
$ |
4,282 |
|
|
$ |
656 |
|
|
|
2.00 |
% |
|
|
2.57 |
% |
|
|
(0.57 |
%) |
|
NOW and money market ** |
|
$ |
49,155 |
|
|
$ |
54,655 |
|
|
($ |
5,500 |
) |
|
($ |
13,859 |
) |
|
|
8,359 |
|
|
5,631 |
|
|
|
5,770 |
|
|
|
(139 |
) |
|
|
1.62 |
|
|
|
1.98 |
|
|
|
(0.36 |
) |
|
Savings |
|
|
45,234 |
|
|
|
56,576 |
|
|
|
(11,342 |
) |
|
|
(7,206 |
) |
|
|
(4,136 |
) |
|
12,554 |
|
|
|
10,550 |
|
|
|
2,004 |
|
|
|
4.30 |
|
|
|
4.68 |
|
|
|
(0.38 |
) |
|
Time deposits |
|
|
268,596 |
|
|
|
244,601 |
|
|
|
23,995 |
|
|
|
(26,690 |
) |
|
|
50,685 |
|
|
|
|
|
|
|
23,123 |
|
|
|
20,602 |
|
|
|
2,521 |
|
|
|
3.16 |
|
|
|
3.48 |
|
|
|
(0.32 |
) |
|
|
|
|
362,985 |
|
|
|
355,832 |
|
|
|
7,153 |
|
|
|
(47,755 |
) |
|
|
54,908 |
|
|
|
|
|
|
|
6,003 |
|
|
|
9,522 |
|
|
|
(3,519 |
) |
|
|
3.61 |
|
|
|
5.17 |
|
|
|
(1.56 |
) |
|
Short-term borrowings |
|
|
107,647 |
|
|
|
244,275 |
|
|
|
(136,628 |
) |
|
|
(63,471 |
) |
|
|
(73,157 |
) |
|
4,215 |
|
|
|
8,418 |
|
|
|
(4,203 |
) |
|
|
5.50 |
|
|
|
5.55 |
|
|
|
(0.05 |
) |
|
Medium and long-term debt |
|
|
115,392 |
|
|
|
232,000 |
|
|
|
(116,608 |
) |
|
|
(10,293 |
) |
|
|
(106,315 |
) |
|
|
|
|
|
|
33,341 |
|
|
|
38,542 |
|
|
|
(5,201 |
) |
|
|
3.53 |
|
|
|
4.35 |
|
|
|
(0.82 |
) |
|
Total interest bearing liabilities |
|
|
586,024 |
|
|
|
832,107 |
|
|
|
(246,083 |
) |
|
|
(121,519 |
) |
|
|
(124,564 |
) |
|
4,153 |
|
|
|
4,028 |
|
|
|
125 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing demand deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
577 |
|
|
|
1,332 |
|
|
|
(755 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other sources of funds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
38,071 |
|
|
$ |
43,902 |
|
|
($ |
5,831 |
) |
|
|
3.09 |
% |
|
|
3.82 |
% |
|
|
(0.73 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.91 |
% |
|
|
3.52 |
% |
|
|
0.39 |
% |
|
Net interest margin |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income on a
taxable equivalent basis |
|
|
741,729 |
|
|
|
771,595 |
|
|
|
(29,866 |
) |
|
$ |
44,768 |
|
|
($ |
74,634 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.47 |
% |
|
|
2.99 |
% |
|
|
0.48 |
% |
|
Net interest spread |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable equivalent adjustment |
|
|
46,655 |
|
|
|
45,196 |
|
|
|
1,459 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
695,074 |
|
|
$ |
726,399 |
|
|
($ |
31,325 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 totaled $190.6 million or 163% of net charge-offs for the quarter
ended June 30, 2008, compared with $115.2 million or 125%, respectively, for the same quarter in
2007. The provision for loan losses for the quarter ended June 30, 2008, when compared with the
same quarter in 2007, reflects higher net charge-offs by $24.5 million. Also, the higher level of
provision for the quarter ended June 30, 2008 reflects current economic conditions, including a
recessionary cycle in Puerto Rico, and deteriorating credit quality trends, primarily in the Puerto
Rico
commercial and construction loan portfolio and in the U.S. consumer loan portfolio. Further
information
87
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
Refer to Table D for a breakdown of non-interest income by major categories for the quarters and
six months ended June 30, 2008 and 2007.
TABLE D
Non-Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended June 30, |
|
Six months ended June 30, |
(In thousands) |
|
2008 |
|
2007 |
|
$ Variance |
|
2008 |
|
2007 |
|
$ Variance |
|
Service charges on deposit accounts |
|
$ |
51,799 |
|
|
$ |
48,392 |
|
|
$ |
3,407 |
|
|
$ |
102,886 |
|
|
$ |
96,863 |
|
|
$ |
6,023 |
|
|
Other service fees: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit card fees and discounts |
|
|
27,282 |
|
|
|
24,999 |
|
|
|
2,283 |
|
|
|
54,526 |
|
|
|
48,523 |
|
|
|
6,003 |
|
Debit card fees |
|
|
26,340 |
|
|
|
16,855 |
|
|
|
9,485 |
|
|
|
51,710 |
|
|
|
32,956 |
|
|
|
18,754 |
|
Insurance fees |
|
|
13,507 |
|
|
|
14,720 |
|
|
|
(1,213 |
) |
|
|
26,202 |
|
|
|
27,669 |
|
|
|
(1,467 |
) |
Processing fees |
|
|
13,158 |
|
|
|
11,677 |
|
|
|
1,481 |
|
|
|
25,543 |
|
|
|
23,789 |
|
|
|
1,754 |
|
Sale and administration of investment products |
|
|
8,079 |
|
|
|
7,311 |
|
|
|
768 |
|
|
|
19,076 |
|
|
|
14,571 |
|
|
|
4,505 |
|
Mortgage servicing fees, net of amortization
and fair value adjustments |
|
|
11,868 |
|
|
|
4,641 |
|
|
|
7,227 |
|
|
|
18,817 |
|
|
|
10,869 |
|
|
|
7,948 |
|
Trust fees |
|
|
3,052 |
|
|
|
2,530 |
|
|
|
522 |
|
|
|
6,132 |
|
|
|
4,926 |
|
|
|
1,206 |
|
Other fees |
|
|
6,793 |
|
|
|
6,857 |
|
|
|
(64 |
) |
|
|
13,540 |
|
|
|
14,136 |
|
|
|
(596 |
) |
|
Total other service fees |
|
|
110,079 |
|
|
|
89,590 |
|
|
|
20,489 |
|
|
|
215,546 |
|
|
|
177,439 |
|
|
|
38,107 |
|
|
Net gain on sale and valuation adjustments
of investment securities |
|
|
27,763 |
|
|
|
1,175 |
|
|
|
26,588 |
|
|
|
75,703 |
|
|
|
82,946 |
|
|
|
(7,243 |
) |
Trading account profit (loss) |
|
|
16,711 |
|
|
|
10,377 |
|
|
|
6,334 |
|
|
|
21,175 |
|
|
|
(3,787 |
) |
|
|
24,962 |
|
Losses from changes in fair value related to instruments measured at
fair value pursuant to SFAS No. 159 |
|
|
(35,922 |
) |
|
|
|
|
|
|
(35,922 |
) |
|
|
(38,942 |
) |
|
|
|
|
|
|
(38,942 |
) |
(Loss) gain on sale of loans and valuation adjustments
on loans held-for-sale |
|
|
(1,453 |
) |
|
|
28,294 |
|
|
|
(29,747 |
) |
|
|
67,292 |
|
|
|
31,728 |
|
|
|
35,564 |
|
Other operating income |
|
|
24,595 |
|
|
|
25,547 |
|
|
|
(952 |
) |
|
|
57,887 |
|
|
|
70,362 |
|
|
|
(12,475 |
) |
|
Total non-interest income |
|
$ |
193,572 |
|
|
$ |
203,375 |
|
|
($ |
9,803 |
) |
|
$ |
501,547 |
|
|
$ |
455,551 |
|
|
$ |
45,996 |
|
|
The variance in non-interest income for the quarter and six-month periods was mostly impacted by:
|
|
|
Other service fees for the quarter and six-month period ended June 30, 2008 increased
when compared to the same periods of the previous year. A detail of other service fees by
category is shown in Table D. Debit card fees rose principally due to higher revenues from
merchants as a result of 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. Also, mortgage servicing fees increased as a result of higher servicing fees due
to the growth in the portfolio of mortgage loans serviced for others, which rose by
approximately $5.0 billion from June 30, 2007 to June 30, 2008, and as a result of lower
negative impact, on a consolidated basis, of changes in the fair value of the servicing rights. |
|
|
|
|
Net gain on sale and valuation adjustments of investment
securities consisted of the
following: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended June 30, |
|
|
Six months ended June 30, |
|
(In thousands) |
|
2008 |
|
|
2007 |
|
|
$ Variance |
|
|
2008 |
|
|
2007 |
|
|
$ Variance |
|
|
Net gain on sale of
investment
securities |
|
$ |
28,332 |
|
|
$ |
2,493 |
|
|
$ |
25,839 |
|
|
$ |
78,561 |
|
|
$ |
121,219 |
|
|
($ |
42,658 |
) |
Valuation
adjustments of
investment
securities |
|
|
(569 |
) |
|
|
(1,318 |
) |
|
|
749 |
|
|
|
(2,858 |
) |
|
|
(38,273 |
) |
|
|
35,415 |
|
|
Total |
|
$ |
27,763 |
|
|
$ |
1,175 |
|
|
$ |
26,588 |
|
|
$ |
75,703 |
|
|
$ |
82,946 |
|
|
($ |
7,243 |
) |
|
During the quarter ended June 30, 2008, the Corporation realized approximately $28.3 million in
capital gains from sales of $2.4 billion in U.S. agency securities to reduce its vulnerability
to declining interest rates. The
proceeds were reinvested primarily in U.S. agency securities, and to a lesser extent in
mortgage-backed
88
securities with a longer average duration.
The decrease in the net gain on sale of investment securities for the six-month period ended
June 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 to the impact of the aforementioned sale of U.S. agency
securities during the second quarter of 2008.
The unfavorable valuation adjustments of investment securities during the six-month period ended
June 30, 2007 were principally related to PFHs residual interests classified as
available-for-sale, which were negatively impacted by the unfavorable conditions in the subprime
market. The balance in the residual interests classified as available-for-sale decreased from
$18.7 million as of June 30, 2007 to $2.6 million as of June 30, 2008, the Corporation having
written down their value for the most part in 2007.
|
|
|
Trading account profit (loss) broken down as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended June 30, |
|
|
Six months ended June 30, |
|
(In thousands) |
|
2008 |
|
|
2007 |
|
|
$ Variance |
|
|
2008 |
|
|
2007 |
|
|
$ Variance |
|
|
Mark-to-market of PFHs
residual interests |
|
($ |
1,831 |
) |
|
($ |
835 |
) |
|
($ |
996 |
) |
|
($ |
10,704 |
) |
|
($ |
24,313 |
) |
|
$ |
13,609 |
|
Other trading account profit |
|
|
18,542 |
|
|
|
11,212 |
|
|
|
7,330 |
|
|
|
31,879 |
|
|
|
20,526 |
|
|
|
11,353 |
|
|
Total |
|
$ |
16,711 |
|
|
$ |
10,377 |
|
|
$ |
6,334 |
|
|
$ |
21,175 |
|
|
($ |
3,787 |
) |
|
$ |
24,962 |
|
|
The increase in trading account profit for the quarter and six months ended June 30, 2008 was
related to a gross gain of approximately $8.8 million related to 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.
The decrease in the write-downs of PFHs residual interests classified as trading securities
during the six-month period ended June 30, 2008, when compared to the same period of the
previous year, was due to the changes in the assumptions used to determine their fair value,
which were more dramatic during 2007 when conditions in the subprime market were deteriorating
considerably. Also, the decrease resulted because a substantial amount of PFHs residual
interests were written down during 2007, and therefore, the average balance of residual
interests was much lower during the first six months of 2008. Refer to Note 7 to the
consolidated financial statements for information on key economic assumptions used in measuring
the fair value of the residual interests as of June 30, 2008. Also, Note 7 contains a
sensitivity analysis based on immediate changes to the most critical assumptions used in the
valuations as of June 30, 2008. As of such date, there were $35 million in residual interests
held by PFH that were classified as trading securities.
|
|
|
Net losses attributable to changes in the fair value of PFH loans and bond certificates
measured at fair value pursuant to SFAS No. 159, which was adopted in 2008, amounted to
$35.9 million for the quarter ended June 30, 2008 and $38.9 million for the six months
ended June 30, 2008. The $35.9 million of net losses for the quarter includes losses of
$31.0 million related to the loans and losses of $4.9 million associated with the bond
certificates. The $38.9 million of net losses for the six-month period includes losses of
$32.7 million associated with the loans and losses of $6.2 million related to the bond
certificates. Refer to the SFAS No. 159 Fair Value Option Election sections of this MD&A
for further information on these financial instruments. |
89
|
|
|
Gain on sales of loans and unfavorable valuation adjustments on loans held-for-sale,
which are broken down as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended June 30, |
|
|
Six months ended June 30, |
|
(In thousands) |
|
2008 |
|
|
2007 |
|
|
$ Variance |
|
|
2008 |
|
|
2007 |
|
|
$ Variance |
|
|
Gain on sales of loans |
|
$ |
5,457 |
|
|
$ |
31,905 |
|
|
|
($26,448 |
) |
|
$ |
74,202 |
|
|
$ |
52,218 |
|
|
$ |
21,984 |
|
Lower of cost or
market valuation
adjustment
on loans
held-for-sale |
|
|
(6,910 |
) |
|
|
(3,611 |
) |
|
|
(3,299 |
) |
|
|
(6,910 |
) |
|
|
(20,490 |
) |
|
|
13,580 |
|
|
Total |
|
($ |
1,453 |
) |
|
$ |
28,294 |
|
|
|
($29,747 |
) |
|
$ |
67,292 |
|
|
$ |
31,728 |
|
|
$ |
35,564 |
|
|
The decrease in the above caption for the quarter ended June 30, 2008, compared to the same
quarter of the previous year, was in part related to PFH completing one off-balance sheet
mortgage loan securitization during 2007 involving $461 million in loans with realized gains of
approximately $13.5 million. No securitizations were performed by PFH during 2008 as a result of
PFH exiting the wholesale subprime mortgage business. Also, E-LOAN had lower gains on sales of
mortgage loans by $14.7 million, in the most part related to lower origination volumes and lower
yields due to the weakness in the U.S. mainland mortgage and housing market and the downsizing
of E-LOANs operations, and to a lesser extent, due to $4.3 million in losses as a result of a
sale of approximately $101 million in auto loans that were originated prior to the restructuring
at that subsidiary. Also, during the quarter ended June 30, 2008, the Corporation recorded
losses of approximately $7.1 million related to $12.3 million in loans classified as
held-for-sale which were repurchased under payment default
indemnification clauses that
terminated in April 2008.
The increase in gains on sales of loans for the six months ended June 30, 2008, when compared to
the same period of the previous year, was primarily related to the sale of loans by PFH to
American General during 2008, which contributed with a gain of approximately $47.4 million, net
of fair value adjustments on loans repurchased under indemnification clauses, partially offset
by the off-balance sheet securitization completed during 2007. Also, there were lower sales
volume due to shutdown of the loan origination activities at PFH and to the restructuring plan
at E-LOAN which commenced in the fourth quarter of 2007. The unfavorable valuation adjustments
of mortgage loans held-for-sale during the quarter and six-month period ended June 30, 2007
resulted principally from deterioration in the U.S. subprime market.
|
|
Lower other operating income in the six months ended June 30, 2008, compared with the
same period in 2007, resulted mainly from lower revenues derived from investments accounted
under the equity method, lower other referral and escrow closing services income from
E-LOAN due to the downsizing of its operations, and lower gains on the sale of real estate,
among others. These unfavorable variances were partially offset by the gain of $12.8
million recorded in the first quarter of 2008 related to the sale of BPNAs retail bank
branches as previously described. |
90
OPERATING EXPENSES
Refer to Table E for a breakdown of operating expenses by major categories.
TABLE E
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended June 30, |
|
|
Six months ended June 30, |
|
(In thousands) |
|
2008 |
|
|
2007 |
|
|
$ Variance |
|
|
2008 |
|
|
2007 |
|
|
$ Variance |
|
|
Personnel costs |
|
$ |
161,885 |
|
|
$ |
164,288 |
|
|
($ |
2,403 |
) |
|
$ |
337,064 |
|
|
$ |
342,663 |
|
|
($ |
5,599 |
) |
Net occupancy expenses |
|
|
26,362 |
|
|
|
26,501 |
|
|
|
(139 |
) |
|
|
61,354 |
|
|
|
58,515 |
|
|
|
2,839 |
|
Equipment expenses |
|
|
30,724 |
|
|
|
32,245 |
|
|
|
(1,521 |
) |
|
|
62,722 |
|
|
|
64,641 |
|
|
|
(1,919 |
) |
Other taxes |
|
|
13,879 |
|
|
|
11,835 |
|
|
|
2,044 |
|
|
|
27,022 |
|
|
|
23,682 |
|
|
|
3,340 |
|
Professional fees |
|
|
31,627 |
|
|
|
38,642 |
|
|
|
(7,015 |
) |
|
|
68,252 |
|
|
|
74,629 |
|
|
|
(6,377 |
) |
Communications |
|
|
13,145 |
|
|
|
16,973 |
|
|
|
(3,828 |
) |
|
|
28,448 |
|
|
|
34,035 |
|
|
|
(5,587 |
) |
Business promotion |
|
|
18,251 |
|
|
|
30,369 |
|
|
|
(12,118 |
) |
|
|
35,467 |
|
|
|
58,741 |
|
|
|
(23,274 |
) |
Printing and supplies |
|
|
3,899 |
|
|
|
4,549 |
|
|
|
(650 |
) |
|
|
8,174 |
|
|
|
8,825 |
|
|
|
(651 |
) |
Other operating
expenses |
|
|
45,471 |
|
|
|
32,838 |
|
|
|
12,633 |
|
|
|
86,763 |
|
|
|
64,854 |
|
|
|
21,909 |
|
Amortization
of intangibles |
|
|
2,490 |
|
|
|
2,813 |
|
|
|
(323 |
) |
|
|
4,982 |
|
|
|
5,796 |
|
|
|
(814 |
) |
|
Total |
|
$ |
347,733 |
|
|
$ |
361,053 |
|
|
($ |
13,320 |
) |
|
$ |
720,248 |
|
|
$ |
736,381 |
|
|
($ |
16,133 |
) |
|
Operating expenses for the second quarter of 2008 decreased by approximately 4%, compared with the
same quarter in 2007. For the six-month period ended June 30, 2008, operating expenses decreased by
2%, compared with the same period of the previous year. The following restructuring costs were
included in operating expenses:
Breakdown of Restructuring Costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended June 30, |
|
|
Six months ended June 30, |
|
(In thousands) |
|
2008 |
|
|
2007 |
|
|
$ Variance |
|
|
2008 |
|
|
2007 |
|
|
$ Variance |
|
|
Personnel costs |
|
$ |
412 |
|
|
($ |
34 |
) |
|
$ |
446 |
|
|
$ |
8,104 |
|
|
$ |
8,124 |
|
|
($ |
20 |
) |
Net occupancy expenses |
|
|
(845 |
) |
|
|
|
|
|
|
(845 |
) |
|
|
5,905 |
|
|
|
4,413 |
|
|
|
1,492 |
|
Equipment expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
675 |
|
|
|
281 |
|
|
|
394 |
|
Professional fees |
|
|
|
|
|
|
(185 |
) |
|
|
185 |
|
|
|
|
|
|
|
1,762 |
|
|
|
(1,762 |
) |
Communications |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
590 |
|
|
|
67 |
|
|
|
523 |
|
Other operating
expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,021 |
|
|
|
269 |
|
|
|
752 |
|
|
Total |
|
($ |
433 |
) |
|
($ |
219 |
) |
|
($ |
214 |
) |
|
$ |
16,295 |
|
|
$ |
14,916 |
|
|
$ |
1,379 |
|
|
Full-time equivalent employees (FTEs) were 11,233 as of June 30, 2008, a decrease of 925 from the
same date in 2007. PFH and E-LOAN contributed with lower FTEs by 1,104 on a combined basis. The
reduction in FTEs was partially offset by new hires in other of the Corporations subsidiaries as
well as the workforce that joined the Corporation from the acquisition of the Citibank retail
branches in Puerto Rico. The impact of the reduction in headcount was offset in part by lower
deferred salaries due to lower volume loan originations as a result of the shutdown and downsizing
of certain of the Corporations U.S. operations as described earlier, and the impact of annual
salary revisions.
The reduction in business promotion for the quarter and six months ended June 30, 2008, when
compared to the same period of the previous year, resulted principally from the downsizing of
E-LOANs operations.
Professional fees also decreased as a result of lower consulting fees and loan origination costs
such as appraisals and title recording fees at PFH and E-LOAN, and to $1.8 million in restructuring
costs incurred during the six months ended June 30, 2007 for professional services related to the
PFH Restructuring and Integration Plan. This was partially offset by increases in collection fees,
appraisal charges, IT consulting development, ATM switch processing, and merchant processing fees
in the Corporations Puerto Rico operations. Equipment and communication expenses also decreased
mostly as a result of the streamlining of the PFH and E-LOAN operations.
Partially offsetting these variances were higher other operating expenses for the quarter and six
months ended June 30, 2008, when compared to the same periods of the previous year. Other operating
expenses increased mainly as a
91
result of the $10.1 million in reserves for unfunded loan commitments recorded during the second
quarter of 2008, primarily related to commercial and consumer lines of credit. Also, there were
higher FDIC insurance assessments in the U.S. banking subsidiary. Other operating expenses also
increased for the six-month period as a result of higher credit card interchange and processing
costs, higher FDIC insurance assessments, and losses on the sale of other real estate properties.
INCOME TAXES
Income tax benefit amounted to $31.2 million for the quarter ended June 30, 2008, compared with
income tax expense of $23.6 million for the same quarter of 2007. This variance was primarily due
to the losses in the Corporations U.S. operations for the second quarter of 2008. In addition,
there was an increase in income subject to a lower preferential tax rate on capital gains
applicable to Puerto Rico corporations for the second quarter of 2008 as compared to the same
quarter of 2007. Beginning July 1, 2007, the capital gain tax
rate for Puerto Rico corporations was reduced
from 20% to 15%. The components of the income tax benefit for the quarter ended June 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 |
|
$ |
48,289 |
|
|
|
39 |
% |
|
($ |
45,757 |
) |
|
|
35 |
% |
|
$ |
2,532 |
|
|
|
(37 |
%) |
Benefits of net tax exempt
interest income |
|
|
(13,871 |
) |
|
|
(11 |
) |
|
|
(877 |
) |
|
|
1 |
|
|
|
(14,748 |
) |
|
|
213 |
|
Effect of income subject to
preferential tax rate |
|
|
(8,651 |
) |
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
(8,651 |
) |
|
|
125 |
|
Difference in tax rates due
to multiple jurisdictions |
|
|
(1,467 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
(1,467 |
) |
|
|
21 |
|
State taxes and others |
|
|
(5,552 |
) |
|
|
(4 |
) |
|
|
(3,280 |
) |
|
|
3 |
|
|
|
(8,832 |
) |
|
|
128 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) |
|
$ |
18,748 |
|
|
|
15 |
% |
|
($ |
49,914 |
) |
|
|
38 |
% |
|
($ |
31,166 |
) |
|
|
451 |
% |
|
Income tax benefit amounted to $10.0 million for the six-month period ended June 30, 2008, compared
with income tax expense of $40.5 million for the same period in 2007. The reduction in income
tax expense was primarily due to lower pre-tax earnings, and higher exempt interest income net of
disallowance of expenses attributed to such exempt income.
The Corporations net deferred tax assets as of June 30, 2008 amounted to $808 million, compared
with $525 million as of December 31, 2007. The net deferred tax assets as of June 30, 2008
consisted principally of $264 million related to timing differences in the recognition of the
provision for loan losses under GAAP and actual net charge-offs under the tax code, $210 million
related to net operating losses carryforward in the U.S. operations, and $151 million related to
the measurement of certain loans and bond certificates of PFH at fair value (SFAS No. 159). The
realization of the deferred tax asset is dependent upon the existence of, or generation of,
sufficient taxable income to utilize the deferred tax asset. The only portion of the deferred tax
asset that has a limited life is the portion related to the net operating loss carryforward of the
Corporations U.S. operations. Since its expiration term is of 20 years, the Corporation expects
to generate enough taxable income prior to such expiration term to fully realize it. Refer to Item
1A. Risk Factors included in the Corporations Form 10-K for the year ended December 31, 2007 for
disclosures on risk factors associated with deferred tax assets.
REPORTABLE SEGMENT RESULTS
The Corporations reportable segments for managerial reporting purposes consist of Banco Popular de
Puerto Rico, EVERTEC, Banco Popular North America and PFH. Also, a Corporate group has been defined
to support the reportable segments. For managerial reporting purposes, the costs incurred by this
latter group are not allocated to the four reportable segments. For a description of the
Corporations reportable segments, including additional financial information and the underlying
management accounting process, refer to Note 24 to the consolidated financial statements. Financial
information for interim periods prior to 2008 was restated to conform to the 2008 presentation.
92
The Corporate group had a net loss of $8.5 million in the second quarter of 2008, compared with a
net loss of $13.0 million in the same quarter of 2007. The Corporate group had net losses of $18.2
million for the six months ended June 30, 2008, compared with net income of $75.5 million for the
same period in 2007. During the six months ended June 30, 2007, the Corporate group realized net
gains on the sale and valuation adjustment of investment securities approximating $108.1 million,
mainly due to gains on the sale of the Corporations interest in TELPRI during the second quarter
of 2007, representing the principal contributor to the variance in the financial results between
2007 and 2008 comparable six-month periods.
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 $92.5 million for the
quarter ended June 30, 2008, an increase of $11.9 million, or 15%, when compared with the same
quarter in the previous year. The main factors that contributed to the variance in results for the
quarter ended June 30, 2008, when compared to the second quarter of 2007, included:
|
|
|
higher net interest income by $6.1 million, or 3%, primarily due to lower cost of funds
in short-term debt and time deposits due to a lower rate environment in the latter part of
2007 and 2008 and higher average volume of earning assets, mainly in commercial,
construction and consumer loans. These favorable variances were partially offset by lower
interest income derived from investment securities due to lower average volume outstanding,
higher interest expense due to greater volume of deposits, including brokered certificates
of deposit, and the resetting of the floating rate loan portfolios in a lower interest rate
scenario. |
|
|
|
|
higher provision for loan losses by $44.3 million, or 70%, primarily associated with the
current economic conditions, including a recessionary cycle in Puerto Rico and
deteriorating quality trends in the commercial and construction loan portfolios. The ratio
of allowance for loan losses to loans held-in-portfolio for the Banco Popular de Puerto
Rico reportable segment was 2.86% as of June 30, 2008, compared with 2.17% as of June 30,
2007. The provision for loan losses represented 154% of net charge-offs for the second
quarter of 2008, compared with 130% of net charge-offs in the same period of 2007. The net
charge-offs to average loans held-in-portfolio for the Banco Popular de Puerto Rico
operations was 0.43% for the quarter ended June 30, 2008, compared with 0.32% in the same
quarter of the previous year. |
|
|
|
|
higher non-interest income by $60.0 million, or 48%, mainly due to a favorable variance
in the caption of other service fees during the second quarter of 2008, principally related
to increase fee income from debit cards and credit cards and higher mortgage servicing
fees. Also, there were higher gains on sale of securities by $22.7 million, mainly as a
result of the aforementioned gain on sale of $2.4 billion in U.S. agency securities during
the second quarter of 2008, and higher trading profits by $7.3 million, principally due to
the sale of mortgage-backed securities. As explained in Note 24 to the financial
statements, management distributes a proportionate share of the investment function of BPPR
between the commercial banking and the consumer and retail banking businesses of BPPR. In
the additional disclosures of the Banco Popular de Puerto Rico reportable segment presented
in Note 24, the capital gain specifically related to the sale of the U.S. agencies
securities in the quarter ended June 30, 2008 was distributed $8.3 million ($7.0 million
after-tax) to the commercial banking business and $20.0 million ($17.0 million after-tax)
to the consumer and retail banking business of BPPR. |
|
|
|
|
higher operating expenses by $18.2 million, or 10%, primarily associated with higher
personnel costs, professional fees, net occupancy, other taxes and other operating
expenses. Included in other operating expenses were $6.5 million in reserves for unfunded
loan commitments, primarily related to commercial and consumer lines of credit. |
|
|
|
|
lower income taxes by $8.3 million, or 30%. |
Net income for the six months ended June 30, 2008 totaled $191.3 million, an increase of $24.4
million, or 15%, compared with the same period in the previous year. These results reflected:
|
|
|
higher net interest income by $18.5 million, or 4%; |
|
|
|
|
higher provision for loan losses by $99.8 million, or 90%; |
|
|
|
|
higher non-interest income by $120.9 million, or 50%; |
|
|
|
|
higher operating expenses by $31.6 million, or 8%; and |
93
|
|
|
lower income tax expense by $16.3 million, or 28%. |
Factors similar to those described in the quarterly variances above were the contributors to the
variances in the six-month periods. Also included in non-interest income for 2008 was the gain on
redemption of Visa stock amounting to approximately $40.9 million recognized in the first quarter
of 2008.
EVERTEC
EVERTECs net income for the quarter ended June 30, 2008 totaled $13.5 million, an increase of $6.9
million, or 105%, 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 June 30,
2008, when compared with the second quarter of 2007, included:
|
|
|
higher non-interest income by $6.0 million, or 10%, primarily due to higher electronic
transactions processing fees mainly related to the automated teller machine (ATM) network
and point-of-sale (POS) terminals, and higher cash processing fees and business process
outsourcing and IT consulting services, among others. Also, non-interest income included a
gain of approximately $1.7 million related to the sale of substantially all assets of
EVERTECs health processing division in exchange for an equity participation in the
acquiring company. |
|
|
|
|
lower operating expenses by $1.4 million, or 3%, primarily due to lower personnel,
communications, equipment and other operating expenses; and |
|
|
|
higher income tax expense by $0.5 million. |
Net income for the six months ended June 30, 2008 total $25.3 million, an increase of $11.4
million, or 82%, compared to $13.8 million with the same period in the previous year. These
results reflected:
|
|
|
higher non-interest income by $16.1 million, or 13%. The results for the six months
ended June 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, cash processing,
item processing, and bank applications and credit cards processing fees. |
|
|
|
|
higher operating expenses by $2.6 million, or 3%; and |
|
|
|
|
higher income tax expense by $2.1 million. |
Banco Popular North America
Banco Popular North America reported a net loss of $34.3 million for the quarter ended June 30,
2008, compared to net income of $8.4 million for the second quarter of 2007. The main factors that
contributed to the quarterly variance in this reportable segment included:
|
|
|
higher net interest income by $0.4 million, or less than 1%; |
|
|
|
|
higher provision for loan losses by $69.2 million, primarily due to higher net
charge-offs in the consumer, mortgage and commercial loan portfolios. 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 $148 million, when compared to June 30,
2007. The ratio of allowance for loan losses to loans held-in-portfolio for the Banco
Popular North America reportable segment was 1.84% as of June 30, 2008, compared with 0.98%
as of June 30, 2007. The provision for loan losses represented 188% of net charge-offs for
the second quarter of 2008, compared with 121% of net charge-offs in the same period of
2007. The net charge-offs to average loans held-in-portfolio for the Banco Popular North
America operations was 0.43% for the quarter ended June 30, 2008, compared with 0.11% in
the same quarter of the previous year. |
|
|
|
|
lower non-interest income by $16.4 million, or 36%, mainly due to lower gain on sale of
loans by $12.2 million, primarily by $14.7 million at E-LOAN as a result of lower
originations and sales due to the
discontinuance of certain lines of business and the losses incurred in the second quarter of
2008 related to the auto loan sales; |
94
|
|
|
lower operating expenses by $13.7 million, or 12%. E-LOANs expenses were reduced by
$18.4 million principally in business promotion, personnel costs and professional fees. The
reduction at E-LOAN was partially offset by higher personnel costs and other operating
expenses at the banking subsidiary. Included in other operating expenses were $3.5 million
in reserves for unfunded loan commitments, primarily related to commercial and home equity
lines of credit. |
|
|
|
|
income tax benefit of $24.8 million in the first quarter of 2008 due to taxable losses,
compared with income tax expense of $3.9 million in the second quarter of 2007. |
Net loss for the six months ended June 30, 2008 totaled $36.3 million, a decrease of $60.2 million,
compared to net income of $23.9 million for the same period in the previous year. These results
reflected:
|
|
|
higher net interest income by $6.1 million, or 3%; |
|
|
|
|
higher provision for loan losses by $117.5 million; |
|
|
|
|
lower non-interest income of $19.5 million, or 19%, mainly due to lower gain on sale of
loans and valuation adjustments on loans held-for-sale by $26.1 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. |
|
|
|
|
lower operating expenses by $29.7 million, or 13%; and |
|
|
|
|
income tax benefit of $28.0 million for the six months ended June 30, 2008, compared to
income tax expense of $12.9 million for the same period in the previous year. |
Popular Financial Holdings
For the quarter ended June 30, 2008, net loss for the reportable segment of Popular Financial
Holdings totaled $35.8 million, compared to net loss of $8.1 million for the second quarter of
2007. Refer to the Restructuring Plans section of this MD&A for information of the PFH Branch
Network Restructuring plan and its impact to the year-to-date results. The main factors that
contributed to the quarterly variance included:
|
|
|
lower net interest income by $39.2 million, or 84%, primarily due to the reduction in
loan levels due to the sale of the loan portfolio to American General in the first quarter
of 2008, the recharacterization transaction in December 2007 which resulted in the removal
of loans from the statement of condition, and the discontinuance of loan origination
activities in its principal loan origination channels, including the closure of the branch
network in the first quarter of 2008; |
|
|
|
|
lower provision for loan losses by $38.0 million, or 96%, primarily due to lower loan
portfolio levels and to the fact that there is no need to establish loan reserves for loans
measured at fair value since any credit deterioration on those loans become part of the
fair value measurement. The ratio of allowance for loan losses to loans held-in-portfolio
for the Popular Financial Holdings reportable segment was 2.57% as of June 30, 2008,
compared with 1.85% as of June 30, 2007. The provision for loan losses represented 42% of
net charge-offs for the second quarter of 2008, compared with 119% of net charge-offs in
the same period of 2007. The net charge-offs to average loans held-in-portfolio for the
Popular Financial Holdings reportable segment was 1.10% for the quarter ended June 30,
2008, compared with 0.44% in the same quarter of the previous year. |
|
|
|
|
lower non-interest income by $55.3 million, principally due to recognition during the
second quarter of 2008 of $35.9 million in unfavorable valuation adjustments on the
financial instruments measured at fair value. This also includes the effect of losses of
$7.1 million in the quarter ended June 30, 2008 due to fair value adjustments on $12.3
million in loans repurchased under payment default indemnification clauses. |
|
|
|
|
lower operating expenses by $13.3 million, or 43%, mainly due to lower professional
fees, net occupancy expenses, personnel costs, communications and business promotion
expenses; and |
|
|
|
|
income tax benefit of $19.1 million in the second quarter of 2008, compared with income
tax benefit of $3.6 million in the second quarter of 2007. |
Net loss for the six months ended June 30, 2008 totaled $31.8 million, a decrease of $48.7 million,
or 61%, compared to net loss of $80.5 million for the same period in the previous year. These
results reflected:
|
|
|
lower net interest income by $59.4 million, or 67%; |
|
|
|
|
lower provision for loan losses by $69.9 million, or 89%; |
95
|
|
|
higher non-interest income by $50.3 million, or 99%. The variance in non-interest income
consisted of higher gain on sale of loans and valuation adjustments on loans held-for-sale
of $48.3 million, principally due to the sale of loans to American General, and lower
impairment losses on residual interests by $41.4 million. These favorable variances were
partially offset by $38.9 million in SFAS 159 unfavorable valuation adjustments. |
|
|
|
|
lower operating expenses by $16.0 million, or 19%; and |
|
|
|
|
lower income tax benefit by $28.0 million, or 66%. |
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 June 30, 2008, total assets were $41.7 billion, compared to $44.4
billion at December 31, 2007 and $47.0 billion at June 30, 2007.
Investment securities
A breakdown of the Corporations investment securities available-for-sale and held-to-maturity is
provided in Table F. Notes 5 and 6 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
|
|
|
|
June 30, |
|
|
(In millions) |
|
2008 |
|
2007 |
|
Variance |
|
2007 |
|
Variance |
|
U.S. Treasury securities |
|
$ |
460.8 |
|
|
$ |
471.1 |
|
|
($ |
10.3 |
) |
|
$ |
462.6 |
|
|
($ |
1.8 |
) |
Obligations of U.S. Government sponsored entities |
|
|
4,639.8 |
|
|
|
5,893.1 |
|
|
|
(1,253.3 |
) |
|
|
6,182.1 |
|
|
|
(1,542.3 |
) |
Obligations of Puerto Rico, States and political
subdivisions |
|
|
311.0 |
|
|
|
178.0 |
|
|
|
133.0 |
|
|
|
186.2 |
|
|
|
124.8 |
|
Collateralized mortgage obligations |
|
|
1,608.9 |
|
|
|
1,396.8 |
|
|
|
212.1 |
|
|
|
1,532.4 |
|
|
|
76.5 |
|
Mortgage-backed securities |
|
|
884.0 |
|
|
|
1,010.1 |
|
|
|
(126.1 |
) |
|
|
960.2 |
|
|
|
(76.2 |
) |
Equity securities |
|
|
15.4 |
|
|
|
34.0 |
|
|
|
(18.6 |
) |
|
|
45.3 |
|
|
|
(29.9 |
) |
Others |
|
|
14.9 |
|
|
|
16.5 |
|
|
|
(1.6 |
) |
|
|
35.1 |
|
|
|
(20.2 |
) |
|
Total |
|
$ |
7,934.8 |
|
|
$ |
8,999.6 |
|
|
($ |
1,064.8 |
) |
|
$ |
9,403.9 |
|
|
($ |
1,469.1 |
) |
|
The vast majority of these investment securities, or approximately 99%, 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 June 30, 2008. All MBS held by the Corporation
and approximately 87% of the CMOs held as of June 30, 2008 are guaranteed by government sponsored
entities.
The decline in the Corporations available-for-sale and held-to-maturity investment portfolios was
mainly associated with the maturities of securities, which were not replaced as they matured during
2007, in part because of the Corporations strategy to deleverage the balance sheet and reduce
lower yielding assets.
The Corporation sold $2.4 billion in U.S. agency securities during the quarter ended June 30, 2008
to reduce its vulnerability to declining interest rates. The proceeds were reinvested primarily in
U.S. agency securities and, to a lesser extent, mortgage-backed securities, with a longer average
duration. As indicated earlier in this MD&A, this sale generated a capital gain of approximately
$28.3 million. Before the completion of the transaction, the Corporation had an asset sensitive
position, whereby net interest income simulations suggested that a decline in the general level of
interest rates would be expected to exert downward pressure on the Corporations future net
interest income. To mitigate this risk, the Corporation extended the duration of the securities
portfolio. The degree of asset sensitivity on the balance sheet was thus reduced with these
transactions.
96
Loan portfolio
Total loans, net of unearned, amounted to $27.6 billion as of June 30, 2008, compared with $29.9
billion as of December 31, 2007 and $32.8 billion as of June 30, 2007. A breakdown of the
Corporations loan portfolio, the principal category of earning assets, is presented in Table G.
TABLE G
Loans Ending Balances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variance |
|
|
|
|
|
Variance |
|
|
|
|
|
|
|
|
|
|
June 30, 2008 |
|
|
|
|
|
June 30, 2008 |
|
|
June 30, |
|
December 31, |
|
Vs. |
|
June 30, |
|
Vs. |
(In thousands) |
|
2008 |
|
2007 |
|
December 31, 2007 |
|
2007 |
|
June 30, 2007 |
|
Loans held-in-portfolio, net of unearned: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
13,696,892 |
|
|
$ |
13,661,643 |
|
|
$ |
35,249 |
|
|
$ |
13,485,625 |
|
|
$ |
211,267 |
|
Construction |
|
|
2,107,933 |
|
|
|
1,941,372 |
|
|
|
166,561 |
|
|
|
1,619,967 |
|
|
|
487,966 |
|
Lease financing |
|
|
1,116,769 |
|
|
|
1,097,803 |
|
|
|
18,966 |
|
|
|
1,184,560 |
|
|
|
(67,791 |
) |
Mortgage * |
|
|
4,652,598 |
|
|
|
6,071,374 |
|
|
|
(1,418,776 |
) |
|
|
10,505,024 |
|
|
|
(5,852,426 |
) |
Consumer |
|
|
4,875,042 |
|
|
|
5,249,264 |
|
|
|
(374,222 |
) |
|
|
5,350,679 |
|
|
|
(475,637 |
) |
|
Total loans held-in-portfolio |
|
$ |
26,449,234 |
|
|
$ |
28,021,456 |
|
|
($ |
1,572,222 |
) |
|
$ |
32,145,855 |
|
|
($ |
5,696,621 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans measured at fair value (SFAS No. 159): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
111,823 |
|
|
|
|
|
|
$ |
111,823 |
|
|
|
|
|
|
$ |
111,823 |
|
Mortgage |
|
|
646,535 |
|
|
|
|
|
|
|
646,535 |
|
|
|
|
|
|
|
646,535 |
|
Consumer |
|
|
86,534 |
|
|
|
|
|
|
|
86,534 |
|
|
|
|
|
|
|
86,534 |
|
|
Total loans measured at fair value |
|
$ |
844,892 |
|
|
|
|
|
|
$ |
844,892 |
|
|
|
|
|
|
$ |
844,892 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held-for-sale measured at lower of
cost or market: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
24,023 |
|
|
$ |
24,148 |
|
|
($ |
125 |
) |
|
$ |
39,830 |
|
|
($ |
15,807 |
) |
Lease financing |
|
|
|
|
|
|
66,636 |
|
|
|
(66,636 |
) |
|
|
|
|
|
|
|
|
Mortgage |
|
|
309,990 |
|
|
|
1,363,426 |
|
|
|
(1,053,436 |
) |
|
|
503,500 |
|
|
|
(193,510 |
) |
Consumer |
|
|
3,539 |
|
|
|
435,336 |
|
|
|
(431,797 |
) |
|
|
62,660 |
|
|
|
(59,121 |
) |
|
Total loans held-for-sale measured at lower
of cost or market |
|
$ |
337,552 |
|
|
$ |
1,889,546 |
|
|
($ |
1,551,994 |
) |
|
$ |
605,990 |
|
|
($ |
268,438 |
) |
|
|
|
|
* |
|
Includes residential construction |
|
|
The decrease in mortgage and consumer loans held-in-portfolio from December 31, 2007 to June 30,
2008 was mainly due to the reclassification of certain loans to the category of loans measured at
fair value pursuant to the SFAS No. 159 election described in the SFAS No. 159 Fair Value Option
Election section of this MD&A. Table H provides information on the unpaid principal balance,
unrealized losses and fair value of the loans measured at fair value as of June 30, 2008.
The reduction in mortgage loans held-in-portfolio was also 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 increase in construction loans held-to-maturity from December 31, 2007 to June 30, 2008 was
principally at the Banco Popular de Puerto Rico reportable segment, which increased by $106
million. The growth in the construction loan portfolio included loans to builders and developers of
residential real estate and other commercial property.
97
TABLE H
Loans Measured at Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2008 |
|
|
Aggregate unpaid |
|
Unrealized |
|
|
(In thousands) |
|
principal balance |
|
losses |
|
Fair value |
|
Commercial |
|
$ |
124,707 |
|
|
($ |
12,884 |
) |
|
$ |
111,823 |
|
Mortgage |
|
|
958,285 |
|
|
|
(311,750 |
) |
|
|
646,535 |
|
Consumer |
|
|
262,581 |
|
|
|
(176,047 |
) |
|
|
86,534 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans measured at fair value (SFAS No. 159) |
|
$ |
1,345,573 |
|
|
($ |
500,681 |
) |
|
$ |
844,892 |
|
|
The reduction in mortgage and consumer loans held-for-sale from the end of 2007 to June 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 June 30, 2008 was
principally due to the sale of approximately $66 million of lease financings by Popular Equipment
Leasing, a subsidiary of BPNA, during 2008.
Similar factors, as previously described, influenced the variances in the different portfolio categories
from June 30, 2007 to the same date in 2008. Furthermore, also impacting the decrease in mortgage
loans held-for-sale from June 30, 2007 was the PFH loan recharacterization transaction completed in
December 2007. Additionally, the reduction is associated with the runoff of existing portfolios and
to the downsizing of E-LOANs wholesale mortgage loan origination business as part of the
restructuring plan at that subsidiary in the fourth quarter of 2007.
Table I provides a breakdown of the total consumer loan portfolio, including consumer loans
measured at fair value.
TABLE I
Breakdown of Total Consumer Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variance |
|
|
|
|
|
Variance |
|
|
|
|
|
|
|
|
|
|
June 30, 2008 |
|
|
|
|
|
June 30, 2008 |
|
|
June 30, |
|
December 31, |
|
Vs. |
|
June 30, |
|
Vs. |
(In thousands) |
|
2008 |
|
2007 |
|
December 31, 2007 |
|
2007 |
|
June 30, 2007 |
|
Personal |
|
$ |
2,073,972 |
|
|
$ |
2,525,458 |
|
|
($ |
451,486 |
) |
|
$ |
2,063,129 |
|
|
$ |
10,843 |
|
Credit cards |
|
|
1,130,932 |
|
|
|
1,128,137 |
|
|
|
2,795 |
|
|
|
1,038,096 |
|
|
|
92,836 |
|
Auto |
|
|
851,633 |
|
|
|
1,040,661 |
|
|
|
(189,028 |
) |
|
|
1,518,028 |
|
|
|
(666,395 |
) |
Home equity lines of credit |
|
|
662,912 |
|
|
|
751,299 |
|
|
|
(88,387 |
) |
|
|
575,298 |
|
|
|
87,614 |
|
Others |
|
|
245,666 |
|
|
|
239,045 |
|
|
|
6,621 |
|
|
|
218,788 |
|
|
|
26,878 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
4,965,115 |
|
|
$ |
5,684,600 |
|
|
($ |
719,485 |
) |
|
$ |
5,413,339 |
|
|
($ |
448,224 |
) |
|
The reduction in consumer loans from June 30, 2007 to the same date in 2008 was also influenced by
the discontinuation of home equity lines of credit and auto loan originations at E-LOAN due to the
restructuring plan, and to the sales of auto loan portfolios by E-LOAN during the later part of
2007 and in June 2008. Also, the reduction in auto loans was due to declining overall unit sales in
the Puerto Rico market.
98
Other assets
Table J provides a breakdown of the Other Assets caption presented in the consolidated statements
of condition.
TABLE J
Breakdown of Other Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variance |
|
|
|
|
|
Variance |
|
|
|
|
|
|
|
|
|
|
June 30, 2008 |
|
|
|
|
|
June 30, 2008 |
|
|
|
|
|
|
|
|
|
|
Vs. |
|
|
|
|
|
Vs. |
|
|
June 30, |
|
December 31, |
|
December 31, |
|
June 30, |
|
June 30, |
(In thousands) |
|
2008 |
|
2007 |
|
2007 |
|
2007 |
|
2007 |
|
Net deferred tax assets |
|
$ |
807,884 |
|
|
$ |
525,369 |
|
|
$ |
282,515 |
|
|
$ |
419,611 |
|
|
$ |
388,273 |
|
Trade receivables from brokers and
counterparties |
|
|
515,273 |
|
|
|
1,160 |
|
|
|
514,113 |
|
|
|
19,685 |
|
|
|
495,588 |
|
Securitization advances and related assets |
|
|
299,519 |
|
|
|
168,599 |
|
|
|
130,920 |
|
|
|
106,123 |
|
|
|
193,396 |
|
Bank-owned life insurance program |
|
|
219,867 |
|
|
|
215,171 |
|
|
|
4,696 |
|
|
|
210,333 |
|
|
|
9,534 |
|
Prepaid expenses |
|
|
198,286 |
|
|
|
188,237 |
|
|
|
10,049 |
|
|
|
200,307 |
|
|
|
(2,021 |
) |
Investments under the equity method |
|
|
108,008 |
|
|
|
89,870 |
|
|
|
18,138 |
|
|
|
82,620 |
|
|
|
25,388 |
|
Derivative assets |
|
|
50,121 |
|
|
|
76,958 |
|
|
|
(26,837 |
) |
|
|
77,484 |
|
|
|
(27,363 |
) |
Others |
|
|
256,884 |
|
|
|
191,630 |
|
|
|
65,254 |
|
|
|
181,437 |
|
|
|
75,447 |
|
|
Total |
|
$ |
2,455,842 |
|
|
$ |
1,456,994 |
|
|
$ |
998,848 |
|
|
$ |
1,297,600 |
|
|
$ |
1,158,242 |
|
|
Explanations for the principal variances from December 31, 2007 to June 30, 2008 included the
following:
|
|
|
Increase in trade receivables as a result of mortgage-backed securities sold by Popular
Mortgage and BPPR prior to quarter end, with settlement date in July 2008. |
|
|
|
|
Increase in net deferred tax assets was primarily due to the deferred tax asset of $151
million recorded as of June 30, 2008 related specifically to the SFAS No. 159 fair value
option, and increases of $50 million related to timing differences in the recognition of
the provision for loan losses under GAAP and actual net charge offs under the tax code and
$35 million related to net operating losses carryforward in the U.S. operations. |
|
|
|
|
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. |
Principal variances in other assets from June 30, 2007 to the same date in 2008 were mostly due to
similar factors as described above. The increase in the net deferred
tax asset was also associated with
PFH due to certain events that occurred during 2007 which were disclosed in the 2007 Annual Report,
such as the impact of the loss on the loan recharacterization transaction and on the valuation of
PFHs residual interests since these losses were recognized for tax purposes in a different period
causing a timing difference. Also, the increase was due to the net operating loss carryforwards in
certain tax jurisdictions and to the reversal of a deferred tax liability due to the impairment of
E-LOANs trademark.
99
Deposits, borrowings and capital
The composition of the Corporations financing to total assets as of June 30, 2008 and December 31,
2007 is included in Table K as follows:
TABLE K
Financing to Total Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% increase (decrease) from |
|
% of total assets |
|
|
June 30, |
|
December 31, |
|
December 31, 2007 to |
|
June 30, |
|
December 31, |
(Dollars in millions) |
|
2008 |
|
2007 |
|
June 30, 2008 |
|
|
2008 |
|
2007 |
|
|
Non-interest bearing
deposits |
|
$ |
4,482 |
|
|
$ |
4,511 |
|
|
|
(0.6 |
%) |
|
|
10.8 |
% |
|
|
10.2 |
% |
Interest-bearing core
deposits |
|
|
15,689 |
|
|
|
15,553 |
|
|
|
0.9 |
|
|
|
37.6 |
|
|
|
35.0 |
|
Other interest-bearing
deposits |
|
|
6,945 |
|
|
|
8,271 |
|
|
|
(16.0 |
) |
|
|
16.7 |
|
|
|
18.6 |
|
Federal funds and
repurchase agreements |
|
|
4,739 |
|
|
|
5,437 |
|
|
|
(12.8 |
) |
|
|
11.4 |
|
|
|
12.2 |
|
Other short-term
borrowings |
|
|
1,337 |
|
|
|
1,502 |
|
|
|
(11.0 |
) |
|
|
3.2 |
|
|
|
3.4 |
|
Notes payable |
|
|
3,924 |
|
|
|
4,621 |
|
|
|
(15.1 |
) |
|
|
9.4 |
|
|
|
10.4 |
|
Others |
|
|
857 |
|
|
|
934 |
|
|
|
(8.1 |
) |
|
|
2.1 |
|
|
|
2.1 |
|
Stockholders equity |
|
|
3,706 |
|
|
|
3,582 |
|
|
|
3.5 |
|
|
|
8.9 |
|
|
|
8.1 |
|
|
A breakdown of the Corporations deposits at period-end is included in Table L.
TABLE L
Deposits Ending Balances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variance |
|
|
|
|
|
Variance |
|
|
June 30, |
|
December 31, |
|
June 30, 2008 Vs. |
|
June 30, |
|
June 30, 2008 Vs. |
(In thousands) |
|
2008 |
|
2007 |
|
December 31, 2007 |
|
2007 |
|
June 30, 2007 |
|
Demand deposits * |
|
$ |
5,118,844 |
|
|
$ |
5,115,875 |
|
|
$ |
2,969 |
|
|
$ |
4,977,827 |
|
|
$ |
141,017 |
|
Savings, NOW and money
market deposits |
|
|
9,916,308 |
|
|
|
9,804,605 |
|
|
|
111,703 |
|
|
|
9,477,737 |
|
|
|
438,571 |
|
Time deposits |
|
|
12,080,576 |
|
|
|
13,413,998 |
|
|
|
(1,333,422 |
) |
|
|
10,930,431 |
|
|
|
1,150,145 |
|
|
Total |
|
$ |
27,115,728 |
|
|
$ |
28,334,478 |
|
|
($ |
1,218,750 |
) |
|
$ |
25,385,995 |
|
|
$ |
1,729,733 |
|
|
|
|
|
* |
|
Includes interest and non-interest bearing demand deposits. |
|
|
Brokered certificates of deposit (brokered CDs) totaled $2.1 billion at June 30, 2008, which
represented 8% of the Corporations total deposits, compared to $3.1 billion, or 11%,
respectively, at December 31, 2007. Brokered CDs amounted to $0.6 billion at June 30, 2007, or 3%
of total deposits. Brokered CDs, 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 the
later part of 2007 was the utilization of brokered CDs to replace a portion of the exposure to
uncommitted lines of credit. Management reduced partially the overall outstanding balance of
brokered CDs during the quarter ended June 30, 2008 and financed the reduction with short-term
borrowings. The Corporation will place less reliance on this funding source as liquidity
conditions permit.
The decrease in time deposits from December 31, 2007 to June 30, 2008 included the reduction in
brokered certificates of deposit of $1.0 billion. Also, the decline in time deposits was 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 June 30, 2007 to the same date in 2008 was
influenced principally by the increase in brokered CDs.
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 CDs,
including those brokered CDs with denominations under $100,000. The Corporations core deposits
totaled $20.2 billion, or 74% of total deposits as of June 30, 2008, compared to $20.1 billion and
71% as of December 31, 2007. Core deposits financed 54% of the Corporations earning assets as of
June 30, 2008, compared to 49% as of December 31, 2007.
100
The distribution of certificates of deposit with denominations of $100 thousand and over as of June
30, 2008, including brokered certificates of deposit, was as follows:
|
|
|
|
|
(In millions) |
|
|
|
|
|
3 months or less |
|
$ |
2,295,054 |
|
3 to 6 months |
|
|
1,236,074 |
|
6 to 12 months |
|
|
728,210 |
|
Over 12 months |
|
|
755,500 |
|
|
|
|
$ |
5,014,838 |
|
|
The aggregate amount of overdrafts in demand deposit accounts that were reclassified to loans was
$88 million as of June 30, 2008, $144 million as of December 31, 2007 and $115 million as of June
30, 2007.
At June 30, 2008, borrowed funds totaled $10.0 billion, compared with $11.6 billion at December 31,
2007 and $17.1 billion at June 30, 2007. Refer to Note 13 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 June 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.
The decrease in borrowings from June 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. Also, the use of
borrowings was decreased substantially at the banking subsidiaries during 2007 due to the reliance
on brokered certificates of deposit in the later part of 2007. As indicated earlier, management
reduced partially the overall outstanding balance of brokered certificates of deposit during the
quarter ended June 30, 2008 and financed the reduction with short-term borrowings. Another
strategy implemented by management during the second half of 2007 included the utilization of
unpledged liquid assets to raise financing in the repo markets, the proceeds of which were also
used to pay off unsecured borrowings.
Stockholders equity totaled $3.7 billion at June 30, 2008, compared with $3.6 billion at December
31, 2007 and $3.7 billion at June 30, 2007. Stockholders equity increased $124 million from the
end of 2007 to June 30, 2008 as a result of the $400 million preferred stock offering during this
quarter, partially offset by the $262 million negative after-tax adjustment to beginning retained
earnings due to the transitional adjustment for electing the fair value option, as previously
described. Stockholders equity remained stable, compared to June 30, 2007, due to the preferred
stock offering and lower unrealized losses in securities available-for-sale, partially offset by
the impact of the SFAS 159 adoption and the net taxable losses in the Corporations U.S.
operations. Also, the increase resulting from the preferred stock offering was partially offset by
a reduction in retained earnings as a result of the dividends paid.
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 June 30, 2008, December 31, 2007
and June 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).
The average tangible common equity amounted to $2.5 billion for the quarter ended June 30, 2008,
compared to $2.8 billion for the quarter ended December 31, 2007 and $2.9 billion for the quarter
ended June 30, 2007. Total tangible common equity at period end was $2.4 billion at June 30, 2008,
compared to $2.7 billion at December 31, 2007 and June 30, 2007. The average tangible common equity
to average tangible assets ratio was 6.20% for the quarter ended June 30, 2008, compared with 6.14%
for the quarter ended December 31, 2007 and 6.31% for the quarter ended June 30, 2007. Tangible
common equity consists of total stockholders equity less preferred stock, goodwill and other
intangibles.
The Corporation continues to exceed the well-capitalized guidelines under the federal banking
regulations. For this quarter, the ratios improved as a result of the $400 million preferred stock
offering, which qualifies as Tier I capital. The regulatory capital ratios and amounts of total
risk-based capital, Tier 1 risk-based capital and Tier 1
101
leverage at June 30, 2008, December 31,
2007, and June 30, 2007 are presented on Table M. As of such dates, BPPR, BPNA and Banco Popular,
National Association were well-capitalized.
TABLE M
Capital Adequacy Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
June 30, |
(Dollars in thousands) |
|
2008 |
|
2007 |
|
2007 |
|
Risk-based capital |
|
|
|
|
|
|
|
|
|
|
|
|
Tier I capital |
|
$ |
3,376,331 |
|
|
$ |
3,361,132 |
|
|
$ |
3,770,991 |
|
Supplementary (Tier II) capital |
|
|
407,009 |
|
|
|
417,132 |
|
|
|
443,689 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital |
|
$ |
3,783,340 |
|
|
$ |
3,778,264 |
|
|
$ |
4,214,680 |
|
|
Risk-weighted assets |
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheet items |
|
$ |
28,876,581 |
|
|
$ |
30,294,418 |
|
|
$ |
32,502,007 |
|
Off-balance sheet items |
|
|
3,271,018 |
|
|
|
2,915,345 |
|
|
|
2,869,633 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total risk-weighted assets |
|
$ |
32,147,599 |
|
|
$ |
33,209,763 |
|
|
$ |
35,371,640 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average assets |
|
$ |
39,626,240 |
|
|
$ |
45,842,338 |
|
|
$ |
46,150,567 |
|
|
Ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
Tier I capital (minimum required - 4.00%) |
|
|
10.50 |
% |
|
|
10.12 |
% |
|
|
10.66 |
% |
Total capital (minimum required - 8.00%) |
|
|
11.77 |
|
|
|
11.38 |
|
|
|
11.92 |
|
Leverage ratio * |
|
|
8.52 |
|
|
|
7.33 |
|
|
|
8.17 |
|
|
|
|
|
* |
|
All banks are required to have a minimum Tier I leverage ratio of 3% or 4% of adjusted quarterly
average assets, depending on the banks classification. |
|
|
As of June 30, 2008, the capital adequacy minimum requirement for Popular, Inc. was (in
thousands): Total Capital of $2,571,808, Tier I Capital of $1,285,904, and Tier I Leverage of
$1,188,787 based on a 3% ratio or $1,585,050 based on a 4% ratio according to the Banks
classification.
OFF-BALANCE SHEET FINANCING ENTITIES
The Corporation, through certain subsidiaries 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 June 30, 2008 and December 31, 2007, the Corporation had mortgage loans of
approximately $5.0 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
$4.7 billion and $5.1 billion as of June 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 June 30,
2008 at fair value.
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 N summarizes the detail of the changes in the
allowance for loan losses, including charge-offs and recoveries by loan category for the quarters
and six months ended June 30, 2008 and 2007.
102
TABLE N
Allowance for Loan Losses and Selected Loan Losses Statistics
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter |
|
Six months ended June 30, |
(Dollars in thousands) |
|
2008 |
|
2007 |
|
Variance |
|
2008 |
|
2007 |
|
Variance |
|
Balance at beginning of period |
|
$ |
579,379 |
|
|
$ |
541,748 |
|
|
$ |
37,631 |
|
|
$ |
548,832 |
|
|
$ |
522,232 |
|
|
$ |
26,600 |
|
Provision for loan losses |
|
|
190,640 |
|
|
|
115,167 |
|
|
|
75,473 |
|
|
|
358,862 |
|
|
|
211,513 |
|
|
|
147,349 |
|
|
|
|
|
770,019 |
|
|
|
656,915 |
|
|
|
113,104 |
|
|
|
907,694 |
|
|
|
733,745 |
|
|
|
173,949 |
|
|
Losses charged to the allowance: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
43,806 |
|
|
|
21,532 |
|
|
|
22,274 |
|
|
|
75,884 |
|
|
|
38,860 |
|
|
|
37,024 |
|
Construction |
|
|
5,770 |
|
|
|
|
|
|
|
5,770 |
|
|
|
5,770 |
|
|
|
|
|
|
|
5,770 |
|
Lease financing |
|
|
5,362 |
|
|
|
6,200 |
|
|
|
(838 |
) |
|
|
10,994 |
|
|
|
12,608 |
|
|
|
(1,614 |
) |
Mortgage |
|
|
11,917 |
|
|
|
23,492 |
|
|
|
(11,575 |
) |
|
|
22,879 |
|
|
|
44,100 |
|
|
|
(21,221 |
) |
Consumer |
|
|
63,475 |
|
|
|
55,481 |
|
|
|
7,994 |
|
|
|
125,007 |
|
|
|
102,688 |
|
|
|
22,319 |
|
|
|
|
|
130,330 |
|
|
|
106,705 |
|
|
|
23,625 |
|
|
|
240,534 |
|
|
|
198,256 |
|
|
|
42,278 |
|
|
Recoveries: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
3,821 |
|
|
|
3,487 |
|
|
|
334 |
|
|
|
6,840 |
|
|
|
6,969 |
|
|
|
(129 |
) |
Construction |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease financing |
|
|
804 |
|
|
|
2,510 |
|
|
|
(1,706 |
) |
|
|
1,506 |
|
|
|
4,508 |
|
|
|
(3,002 |
) |
Mortgage |
|
|
803 |
|
|
|
706 |
|
|
|
97 |
|
|
|
1,247 |
|
|
|
851 |
|
|
|
396 |
|
Consumer |
|
|
8,288 |
|
|
|
7,934 |
|
|
|
354 |
|
|
|
16,525 |
|
|
|
17,030 |
|
|
|
(505 |
) |
|
|
|
|
13,716 |
|
|
|
14,637 |
|
|
|
(921 |
) |
|
|
26,118 |
|
|
|
29,358 |
|
|
|
(3,240 |
) |
|
Net loans charged-off: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
39,985 |
|
|
|
18,045 |
|
|
|
21,940 |
|
|
|
69,044 |
|
|
|
31,891 |
|
|
|
37,153 |
|
Construction |
|
|
5,770 |
|
|
|
|
|
|
|
5,770 |
|
|
|
5,770 |
|
|
|
|
|
|
|
5,770 |
|
Lease financing |
|
|
4,558 |
|
|
|
3,690 |
|
|
|
868 |
|
|
|
9,488 |
|
|
|
8,100 |
|
|
|
1,388 |
|
Mortgage |
|
|
11,114 |
|
|
|
22,786 |
|
|
|
(11,672 |
) |
|
|
21,632 |
|
|
|
43,249 |
|
|
|
(21,617 |
) |
Consumer |
|
|
55,187 |
|
|
|
47,547 |
|
|
|
7,640 |
|
|
|
108,482 |
|
|
|
85,658 |
|
|
|
22,824 |
|
|
|
|
|
116,614 |
|
|
|
92,068 |
|
|
|
24,546 |
|
|
|
214,416 |
|
|
|
168,898 |
|
|
|
45,518 |
|
|
Write-downs related to loans transferred to
loans held-for-sale |
|
|
675 |
|
|
|
|
|
|
|
675 |
|
|
|
3,617 |
|
|
|
|
|
|
|
3,617 |
|
Adjustment due to the adoption of SFAS No. 159 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,931 |
|
|
|
|
|
|
|
36,931 |
|
|
Balance at end of period |
|
$ |
652,730 |
|
|
$ |
564,847 |
|
|
$ |
87,883 |
|
|
$ |
652,730 |
|
|
$ |
564,847 |
|
|
$ |
87,883 |
|
|
Ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs to average loans
held-in-portfolio |
|
|
1.76 |
% |
|
|
1.16 |
% |
|
|
|
|
|
|
1.62 |
% |
|
|
1.06 |
% |
|
|
|
|
Provision to net charge-offs |
|
|
1.63x |
|
|
|
1.25x |
|
|
|
|
|
|
|
1.67x |
|
|
|
1.25x |
|
|
|
|
|
|
103
Table O presents annualized net charge-offs to average loans held-in-portfolio for the quarters and
six months ended June 30, 2008 and 2007 by loan category.
TABLE O
Annualized Net Charge-offs to Average Loans Held-in-Portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended June 30, |
|
Six months ended June 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
Commercial |
|
|
1.17 |
% |
|
|
0.54 |
% |
|
|
1.02 |
% |
|
|
0.48 |
% |
Construction |
|
|
1.13 |
|
|
|
|
|
|
|
0.58 |
|
|
|
|
|
Lease financing |
|
|
1.65 |
|
|
|
1.24 |
|
|
|
1.72 |
|
|
|
1.35 |
|
Mortgage |
|
|
0.93 |
|
|
|
0.87 |
|
|
|
0.90 |
|
|
|
0.80 |
|
Consumer |
|
|
4.49 |
|
|
|
3.61 |
|
|
|
4.37 |
|
|
|
3.28 |
|
|
|
|
|
1.76 |
% |
|
|
1.16 |
% |
|
|
1.62 |
% |
|
|
1.06 |
% |
|
The increase in commercial loans net charge-offs for the quarter ended June 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. 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 1.71% for the
quarter ended June 30, 2008, compared to 0.68% for the second quarter of 2007. Also, an increase
was experienced in the Banco Popular North America reportable segment, which had a ratio of 0.48%
for the second quarter of 2008, compared with 0.29% for the same quarter in the previous year.
Commercial net charge-offs recorded during the second 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 June 30, 2008 compared to
the same quarter in the previous year was related to the Corporations U.S. operations. Despite the
increased volume of construction loans in non-performing status during 2008 as explained in the
Non-performing Assets section in this MD&A, principally in Puerto Rico, there have not been any
construction loan charge-offs in the Puerto Rico operations. Management has identified construction
loans considered impaired under SFAS No. 114 and established specific reserves based on the value
of the collateral.
The increase in the lease financing net charge-offs to average lease financing loans
held-in-portfolio ratio for the second quarter of 2008, when compared with the second quarter in
the previous year, was associated with higher delinquencies in the Puerto Rico operations due to
the current recessionary environment, and also higher charge-offs in the Corporations U.S.
mainland operations.
Mortgage loans net charge-offs as a percentage of average mortgage loans held-in-portfolio did not
reflect a sharp increase when comparing this credit indicator for the second quarter of 2008 to
that same quarter in the previous year even when the Corporation was greatly impacted throughout
2007 by the slowdown in the housing sector and experienced higher delinquency levels in the U.S.
mainland primarily in the Corporations U.S. subprime mortgage loan portfolio. The net charge-offs
to average mortgage loans held-in-portfolio credit indicator reflects a substantial reduction from that indicator
reported for the fourth quarter of 2007 which was 2.25%. This decline was influenced by a lower
subprime mortgage loan portfolio outstanding for PFH as a result of the loan recharacterization
transaction completed in late December 2007, the sale to American General in March 2008 and the
election to measure the PFH loan portfolio described previously at fair value. For the loans
accounted at fair value, loan losses are not recorded as part of the changes in the allowance for
loan losses. Any unfavorable changes in their fair value are reported through earnings in the
Losses from changes in fair value related to instruments measured at fair value pursuant to SFAS
No. 159 caption of the consolidated statement of operations.
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. Consumer loans net charge-offs in the BPNA
reportable segment rose for the quarter ended June 30, 2008 when compared with the same quarter in
the previous year by $17.2 million. The ratio of consumer loans net charge-offs to average consumer
loans held-in-portfolio in the Banco Popular North America reportable segment was 6.08% for the
quarter ended June 30, 2008, compared to 1.39% for the second
104
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. As indicated in the SFAS No.
159 Fair Value Option Election section of this MD&A, the deterioration in the delinquency profile
and the declines in property values have negatively impacted charge-offs. E-LOAN represented
approximately $11.7 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. The increase in net charge-offs for the quarter
in the BPNA reportable segment was mostly offset by a decrease of $10.0 million in PFH due the
shutdown of the consumer loan origination activities at that subsidiary.
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 P for loans, excluding loans measured at fair value, and
Table Q for loans measured at fair value pursuant to the SFAS No. 159 fair value option. 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 included in Note 1 to the audited consolidated financial
statements included in Popular, Inc.s 2007 Annual Report.
Upon adoption of SFAS No. 159, the Corporation elected to account for interest income as part of
net interest income in the consolidated statement of operations. Accrued interest receivable on
loans measured at fair value (SFAS No. 159) is included as part of the fair value of the loans. For
loans held-in-portfolio and loans held-for-sale measured at lower of cost or market, accrued
interest receivable is presented separately in the consolidated statement of condition.
TABLE P
Non-Performing Assets, Excluding Loans Measured at Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ Variance |
|
|
|
|
|
|
|
|
|
$ Variance |
|
|
|
|
|
|
As a |
|
|
|
|
|
As a |
|
June 30, |
|
|
|
|
|
As a |
|
June 30, |
|
|
|
|
|
|
percentage |
|
|
|
|
|
percentage |
|
2008 |
|
|
|
|
|
percentage |
|
2008 |
|
|
|
|
|
|
of loans |
|
|
|
|
|
of loans |
|
Vs. |
|
|
|
|
|
of loans |
|
Vs. |
|
|
June 30, |
|
HIP* |
|
December 31, |
|
HIP* |
|
December 31, |
|
June 30, |
|
HIP* |
|
June 30, |
(Dollars in thousands) |
|
2008 |
|
by category |
|
2007 |
|
by category |
|
2007 |
|
2007 |
|
by category |
|
2007 |
|
Commercial |
|
$ |
390,181 |
|
|
|
2.8 |
% |
|
$ |
266,790 |
|
|
|
2.0 |
% |
|
$ |
123,391 |
|
|
$ |
229,793 |
|
|
|
1.7 |
% |
|
$ |
160,388 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction |
|
|
216,374 |
|
|
|
10.3 |
|
|
|
95,229 |
|
|
|
4.9 |
|
|
|
121,145 |
|
|
|
11,024 |
|
|
|
0.7 |
|
|
|
205,350 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease financing |
|
|
11,393 |
|
|
|
1.0 |
|
|
|
10,182 |
|
|
|
0.9 |
|
|
|
1,211 |
|
|
|
12,682 |
|
|
|
1.1 |
|
|
|
(1,289 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage |
|
|
242,104 |
|
|
|
5.2 |
|
|
|
349,381 |
|
|
|
5.8 |
|
|
|
(107,277 |
) |
|
|
562,523 |
|
|
|
5.4 |
|
|
|
(320,419 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer |
|
|
63,319 |
|
|
|
1.3 |
|
|
|
49,090 |
|
|
|
0.9 |
|
|
|
14,229 |
|
|
|
42,230 |
|
|
|
0.8 |
|
|
|
21,089 |
|
|
Total non-performing loans,
excluding loans
measured at fair value |
|
|
923,371 |
|
|
|
3.5 |
% |
|
|
770,672 |
|
|
|
2.8 |
% |
|
|
152,699 |
|
|
|
858,252 |
|
|
|
2.7 |
% |
|
|
65,119 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other real estate |
|
|
102,809 |
|
|
|
|
|
|
|
81,410 |
|
|
|
|
|
|
|
21,399 |
|
|
|
112,858 |
|
|
|
|
|
|
|
(10,049 |
) |
|
Total non-performing
assets, excluding loans
measured at fair value |
|
$ |
1,026,180 |
|
|
|
|
|
|
$ |
852,082 |
|
|
|
|
|
|
$ |
174,098 |
|
|
$ |
971,110 |
|
|
|
|
|
|
$ |
55,070 |
|
|
Accruing loans past due 90
days or more,
excluding loans measured at
fair value |
|
$ |
114,834 |
|
|
|
|
|
|
$ |
109,569 |
|
|
|
|
|
|
$ |
5,265 |
|
|
$ |
104,497 |
|
|
|
|
|
|
$ |
10,337 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing assets,
excluding loans measured
at fair value, to total
assets |
|
|
2.46 |
% |
|
|
|
|
|
|
1.92 |
% |
|
|
|
|
|
|
|
|
|
|
2.07 |
% |
|
|
|
|
|
|
|
|
Allowance for loan losses
to loans held-
in-portfolio |
|
|
2.47 |
|
|
|
|
|
|
|
1.96 |
|
|
|
|
|
|
|
|
|
|
|
1.76 |
|
|
|
|
|
|
|
|
|
Allowance for loan losses to
non-performing assets,
excluding loans
measured at fair value
(SFAS No. 159) |
|
|
63.61 |
|
|
|
|
|
|
|
64.41 |
|
|
|
|
|
|
|
|
|
|
|
58.17 |
|
|
|
|
|
|
|
|
|
Allowance for loan losses to
non-performing loans,
excluding loans
measured at fair value
(SFAS No. 159) |
|
|
70.69 |
|
|
|
|
|
|
|
71.21 |
|
|
|
|
|
|
|
|
|
|
|
65.81 |
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
HIP = held-in-portfolio |
105
TABLE Q
Non-Performing Loans Measured at Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid principal |
|
|
|
|
Fair value as of |
|
balance as of |
|
Unrealized |
(Dollars in thousands) |
|
June 30, 2008 |
|
June 30, 2008 |
|
losses |
|
Commercial |
|
$ |
8,857 |
|
|
$ |
11,762 |
|
|
($ |
2,905 |
) |
Mortgage |
|
|
98,398 |
|
|
|
172,045 |
|
|
|
(73,647 |
) |
Consumer |
|
|
3,178 |
|
|
|
10,960 |
|
|
|
(7,782 |
) |
|
Total non-performing loans measured at fair value |
|
$ |
110,433 |
|
|
$ |
194,767 |
|
|
($ |
84,334 |
) |
|
Loans past due 90 days or more |
|
$ |
110,433 |
|
|
$ |
194,767 |
|
|
($ |
84,334 |
) |
|
Non-performing loans measured at fair value to total assets |
|
|
0.26 |
% |
|
|
|
|
|
|
|
|
|
Non-performing loans measured at fair value to loans
measured at fair value |
|
|
13.07 |
% |
|
|
|
|
|
|
|
|
|
The allowance for loan losses increased by $104 million from December 31, 2007 to June 30, 2008.
The increase is the net result of additional reserves for specific commercial loans considered
impaired, primarily construction loans, and higher reserves for U.S. consumer loan portfolios
(mainly home equity lines of credit), offset by the reduction in reserves related to PFHs loan
portfolio accounted at fair value. Refer to Table Q for non-performing loans measured at fair
value.
Non-performing commercial and construction loans held-in-portfolio increased from December 31, 2007
to June 30, 2008 by $245 million, primarily in Banco Popular de Puerto Rico reportable segment by
$219 million. During the quarter ended March 31, 2008, the Corporation placed in non-performing
status its participation of $51 million in a syndicated commercial loan collateralized by a marina,
commercial real estate, and a high-end apartment complex in the U.S. Virgin Islands. The
Corporation is a participant, with two other financial institutions, in a syndicated financing for
a total of approximately $110 million. The lenders and borrowers are currently in negotiations for
the restructuring of the loan; however, no assurance can be given that the loan will be
successfully restructured. The Corporation classified this loan relationship as impaired under SFAS
No. 114 and established a specific reserve of $32 million based on a third-party appraisal of value
of the related collateral less estimated cost to sell. During the quarter ended June 30, 2008, the
Corporation also placed in non-performing status a construction loan of $47 million and classified
this credit as impaired under SFAS No. 114. Management established a specific reserve of $5
million based on the value of the collateral less estimated cost to sell. 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.
The reduction in non-performing mortgage loans held-in-portfolio from December 31, 2007 to June 30,
2008 was associated in part to the reclassification of a substantial portion of PFHs mortgage loan
portfolio to loans measured at fair value, which are disclosed in Table Q. This was offset in part
by increases in non-performing mortgage loans in both Banco Popular de Puerto Rico and Banco
Popular North America reportable segments. Mortgage loans net charge-offs in the Puerto Rico
operations for the quarter and six months ended June 30, 2008 remained stable compared to the same
quarter in the previous year. Banco Popular de Puerto Rico reportable segments mortgage loan
portfolio averaged approximately $2.9 billion for the six months ended June 30, 2008. The mortgage
loans net charge-offs in this segment amounted to $0.8 million for the six months ended June 30,
2008. On the other hand, the mortgage loans net charge-offs in the Banco Popular North America
operations rose by approximately $14.7 million when comparing results for the six-month periods
ended June 30, 2008 and 2007. This increase was related to the slowdown in the United States
housing sector. Refer to the Overview of Mortgage Loan Exposure section later in this MD&A for
further information on BPNAs mortgage loan portfolio.
106
Non-performing consumer loans held-in-portfolio increased as of June 30, 2008 when compared with
December 31, 2007 despite the impact of the reclassification of PFHs consumer loan portfolio to
loans measured at fair value. The increase was associated with the Banco Popular North America
reportable segment, principally E-LOAN which showed an increase of $10 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.
Regarding the consumer loan portfolio at the Banco Popular de Puerto Rico reportable segment, the
Corporation has seen signs of stabilization in terms of delinquency levels. Nevertheless, the
continued deterioration in the economic conditions in Puerto Rico may adversely impact the
performance of this portfolio.
Other real estate, which represents real estate property acquired through foreclosure, increased by
$21 million from December 31, 2007 to June 30, 2008, principally in Banco Popular North America
reportable segment by $18 million. 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 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 June 30, 2008 reflects the prevailing negative economic
outlook, and specific reserves for commercial and construction 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.
107
The Corporations recorded investment in impaired commercial loans and the related valuation
allowance calculated under SFAS No. 114 as of June 30, 2008, December 31, 2007 and June 30, 2007
were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008 |
|
December 31, 2007 |
|
June 30, 2007 |
|
|
Recorded |
|
Valuation |
|
Recorded |
|
Valuation |
|
Recorded |
|
Valuation |
(In millions) |
|
Investment |
|
Allowance |
|
Investment |
|
Allowance |
|
Investment |
|
Allowance |
|
Impaired loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance required |
|
$ |
435.4 |
|
|
$ |
123.1 |
|
|
$ |
174.0 |
|
|
$ |
54.0 |
|
|
$ |
156.6 |
|
|
$ |
40.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No valuation allowance required |
|
|
212.4 |
|
|
|
|
|
|
|
147.7 |
|
|
|
|
|
|
|
119.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans |
|
$ |
647.8 |
|
|
$ |
123.1 |
|
|
$ |
321.7 |
|
|
$ |
54.0 |
|
|
$ |
276.1 |
|
|
$ |
40.7 |
|
|
With respect to the $212.4 million portfolio of impaired commercial loans (including construction)
for which no allowance for loan losses was required as of June 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 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 $212.4 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 June 30, 2008.
Average impaired loans during the second quarter of 2008 and 2007 were $549 million and $259
million, respectively. The Corporation recognized interest income on impaired loans of $2.0 million
and $2.1 million for the quarters ended June 30, 2008 and June 30, 2007 and $3.6 million and $4.2
million for the six months ended on those same dates, respectively.
In addition to the non-performing loans included in Tables P and Q, there were $150 million of
loans as of June 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 June 30, 2007, these potential problem loans approximated $50 million and $99 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 $1.1 billion as of June 30, 2008, $803
million as of December 31, 2007 and $929 million as of June 30, 2007.
Commitments to extend credit, which include credit card lines, commercial lines of credit, and
other unused credit commitments, amounted to $8 billion as of June 30, 2008. Commercial letters
of credit and stand-by letters of credit amounted to $21 million and $163 million, respectively, as
of June 30, 2008.
The Corporation maintains a reserve of approximately $10.1 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 24 to the consolidated financial statements.
108
As of June 30, 2008, the Corporation had $971 million of credit facilities granted to or guaranteed
by the Puerto Rico Government and its political subdivisions, of which $175 million are uncommitted
lines of credit. Of these total credit facilities granted, $798 million in loans were outstanding
as of June 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 June 30, 2008, the Corporation had outstanding $311 million in Obligations of
Puerto Rico, States and Political Subdivisions as part of its investment portfolio. Refer to Notes
5 and 6 to the consolidated financial statements for additional information. Of that total, $55
million is exposed to the creditworthiness of the Puerto Rico Government and its municipalities. Of
that portfolio, $288 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 R 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 June 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 R
Mortgage Loans Exposure
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions) |
|
Prime loans |
|
Subprime loans |
|
Total |
|
Banco Popular de Puerto Rico |
|
$ |
968 |
|
|
$ |
1,160 |
|
|
$ |
2,128 |
|
Banco Popular North America: |
|
|
|
|
|
|
|
|
|
|
|
|
- Banco Popular North America |
|
|
469 |
|
|
|
1,183 |
|
|
|
1,652 |
|
- E-LOAN |
|
|
58 |
|
|
|
13 |
|
|
|
71 |
|
Popular Financial Holdings |
|
|
79 |
|
|
|
89 |
|
|
|
168 |
|
|
Sub-total |
|
$ |
1,574 |
|
|
$ |
2,445 |
|
|
$ |
4,019 |
|
Others not classified as prime
or subprime loans |
|
|
|
|
|
|
|
|
|
|
634 |
|
|
Total |
|
|
|
|
|
|
|
|
|
$ |
4,653 |
|
|
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 June 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 0.05% for the six months ended June 30, 2008, compared with 0.04% for the
year ended December 31, 2007.
109
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 June 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 4.45% as of June 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 2.70% for the six months
ended June 30, 2008, compared with 1.28% for the year ended December 31, 2007. As a result of
higher delinquency and net charge-offs experienced, BPNA recorded a higher provision for loan
losses in the first six 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 June 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
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).
Mortgage loans held-in-portfolio for PFH, excluding Popular FS, that are considered subprime
approximated 46% of its total mortgage loans held-in-portfolio as of June 30, 2008, compared with
73% as of December 31, 2007. As indicated previously, $647 million of PFHs mortgage loan portfolio
is measured at fair value, thus the expected cumulative losses for the estimated lifetime of the
portfolio are included in its fair value. As a result, management has not included these loans as
part of the disclosure in Table Q, which considers only those loans for which an allowance for loan
losses has been established only in consideration of inherent losses in the portfolio. The
annualized ratio of mortgage loans net charge-offs to average mortgage loans held-in-portfolio for
PFH was 2.75% for the six months ended June 30, 2008.
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.
As indicated in Note 2 to the consolidated financial statements and in section SFAS No. 159 Fair
Value Option Election in this MD&A, 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. As a result, net gain or loss attributable to changes in the fair value of these loans and
borrowings are included in the Corporations consolidated statement of operations. Market factors, such as liquidity, changes
in interest rates and the availability of credit, impact the fair value of these loans and
borrowings. For example, because the market value of an obligation with a fixed interest rate
generally decreases when prevailing interest rates rise, significant increases in interest rates
will reduce the fair value of these loans and borrowings, and result in losses. Similarly, to the
extent that portfolios of similar assets are sold by others at prices different than the value at
which the Corporation carries these loans and borrowings, including as a result of liquidity
factors and lack of availability of credit, those sales are taken into consideration when the
Corporation measures the fair value of these loans and borrowings, and may result in gains or
losses. Therefore, the adoption of the fair value option provided by SFAS No. 159 for these loans
and borrowings has increased 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
110
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 possible
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 June 30, 2008, the Corporations net
interest income for the next twelve months is estimated to increase by $34.3 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 $28.1 million. Both
hypothetical rate scenarios consider the gradual change to be achieved during a twelve-month period
from the prevailing rates as of June 30, 2008.
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 9 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 June 30, 2008, the Corporation had approximately $36
million in an unfavorable foreign currency translation adjustment as part of accumulated other
comprehensive loss, compared with
111
$35 million as of December 31, 2007 and
$34 million as of June
30, 2007, respectively, also unfavorable.
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 unacceptable 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 June 30, 2008, there have been no significant or unusual changes in 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, other than changes in short-term borrowings and
deposits in the normal course of business, repayment of $500 million in medium-term notes upon
their maturity in April 2008, and the $400 million preferred stock offering mentioned in the
Overview section of this MD&A. Also, there have been no significant changes in the Corporations
aggregate contractual obligations since the end of 2007.
Refer to Note 13 to the consolidated financial statements for the composition of the Corporations
borrowings as of June 30, 2008. Also, refer to Note 16 to the consolidated financial statements for
the Corporations involvement in certain commitments as of June 30, 2008.
Liquidity, Funding and Capital Resources
Sources of liquidity include both those available to the banking affiliates and to a lesser extent,
those expected to be available with third party providers. The former include access to stable base
of core deposits and other sources of credit. 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 13 to the consolidated financial
statements. Also, the consolidated statements of cash 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.
112
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 June 30, 2008, the banking subsidiaries had short-term and long-term
credit facilities authorized with the FHLB aggregating $2.2 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 $1.7 billion as of June 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 13
to the consolidated financial statements for additional information.
As of June 30, 2008, the banking subsidiaries had a borrowing capacity at the FED discount window
of approximately $3.4 billion, of which $2.8 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 and proceeds from the issuance of medium-term notes,
commercial paper, 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.
During the six-months ended June 30, 2008, the Corporations holding companies did not issue any
debt or other securities under a registration statement filed with the SEC, except for the
aforementioned $400 million in preferred stock.
The principal source of income for the PIHC consists of dividends from BPPR. As members subject to
the regulations of the Federal Reserve System, BPPR and BPNA must obtain the approval of the
Federal Reserve Board for any dividend if the total of all dividends declared by each entity
during the calendar year would exceed the total of its net income for that year, as defined by the
Federal Reserve Board, combined with its retained net income for the preceding two years, less any
required transfers to surplus or to a fund for the retirement of any preferred stock. The payment
of dividends by BPPR may also be affected by other regulatory requirements and policies, such as
the maintenance of certain minimum capital levels. As of June 30, 2008, BPPR could have declared a
dividend of approximately $110 million without the approval of the Federal Reserve Board. As of
June 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.
113
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 or securitization of certain asset classes and accessing secured credit lines and loan
facilities put in place with the FHLB, leading commercial banks 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 are considering alternate sources for raising liquidity, including sales of some or all
of their operations in the United States mainland or the assets of those operations. Given
that conditions in the financial markets remain difficult, these alternative sources may not be
available to the BHCs, and even if available the costs of raising liquidity have remained
significantly higher than experienced in recent years. Among the criteria considered in pursuing
alternate sources of liquidity are speed of execution and cost. To the extent that the BHCs are
required to sell operations or assets to fulfill liquidity needs, losses on their disposition may
be incurred, which may be significant.
Maintaining adequate credit ratings on Populars debt obligations is an important factor for
liquidity, because the credit ratings influence 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.
Credit ratings are an important factor in accessing the credit markets. Even though the Corporation
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 June 30, 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Popular, Inc. |
|
BPPR |
|
|
Short-term |
|
Long-term |
|
|
|
Short-term |
|
Long-term |
|
|
debt |
|
debt |
|
Outlook |
|
debt |
|
debt |
|
Fitch Ratings
|
|
F-2
|
|
A-
|
|
Negative
|
|
F-1
|
|
A- |
Moodys
|
|
P-2
|
|
A3
|
|
Negative
|
|
P-1
|
|
A2 |
S&P
|
|
A-2
|
|
BBB+
|
|
Stable
|
|
A-2
|
|
A- |
|
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. 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
114
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 $39 million as of June 30, 2008.
In the course of borrowing from institutional lenders, the Corporation has entered into contractual
agreements to maintain certain levels of debt, capital and asset quality, among other financial
covenants. If the Corporation were to fail to comply with those agreements, it may result in an
event of default. Such failure may accelerate the repayment of the related obligations or restrict
additional borrowings under such facilities. An event of default could also affect the ability of
the Corporation to raise new funds or renew maturing borrowings. As of June 30, 2008, the
Corporation had $0.1 billion in outstanding obligations subject to covenants, including those which
are subject to rating triggers. As of June 30, 2008, the Corporation was in compliance with debt
covenants in all credit facilities with outstanding balances.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
The Corporations management, with the participation of the Corporations Chief Executive Officer
and Chief Financial Officer, has evaluated the effectiveness of the Corporations disclosure
controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act) as of the end of the period covered by this report. Based on such evaluation, the
Corporations Chief Executive Officer and Chief Financial Officer have concluded that, as of the
end of such period, the Corporations disclosure controls and procedures are effective in
recording, processing, summarizing and reporting, on a timely basis, information required to be
disclosed by the Corporation in the reports that it files or submits under the Exchange Act and
such information is accumulated and communicated to management, as appropriate, to allow timely
decisions regarding required disclosures.
Internal Control Over Financial Reporting
There have been no changes in the Corporations internal control over financial reporting (as such
term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the
quarter ended on June 30, 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.
Item 1A. Risk Factors
For a
detailed discussion of certain risk factors that could affect the
Corporations results for future periods see Item 1A, Risk Factors,
in Popular, Inc.s 2007 Annual Report on Form 10-K.
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.
115
The following table sets forth the details of purchases of common stock during the quarter ended
June 30, 2008 under the 2004 Omnibus Incentive Plan.
Not in thousands
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of Shares |
|
Maximum Number of Shares |
|
|
Total Number of Shares |
|
Average Price Paid |
|
Purchased as Part of Publicly |
|
that May Yet be Purchased |
Period |
|
Purchased |
|
per Share |
|
Announced Plans or Programs |
|
Under the Plans or Programs (a) |
|
April 1 April 30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,566,298 |
|
May 1 May 31
|
|
|
41,926 |
|
|
$ |
11.42 |
|
|
|
41,926 |
|
|
|
8,524,372 |
|
June 1 June 30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,525,349 |
|
|
Total June 30, 2008
|
|
|
41,926 |
|
|
$ |
11.42 |
|
|
|
41,926 |
|
|
|
8,525,349 |
|
|
|
|
|
(a) |
|
Includes shares forfeited. |
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Shareholders Meeting of Popular, Inc. was held on April 25, 2008. A quorum was obtained
with 248,222,084 shares represented in person or by proxy, which represented approximately 88.46%
of all votes eligible to be cast at the meeting. Three Directors of the Corporation, María Luisa
Ferré, Frederic V. Salerno, and William Teuber Jr., were elected for a three-year term. The
following directors were not up for reelection and continued to hold office after the meeting: Juan
J. Bermúdez, Richard L. Carrión, Francisco M. Rexach Jr., Michael J. Masin, Manuel Morales Jr., and
José R. Vizcarrondo. The ratification of PricewaterhouseCoopers LLP as the Corporations
independent registered public accounting firm for 2008 was also approved at the Annual Meeting. The
result of the voting on each of the proposals is set forth below:
Proposal 1: Election of three (3) Class 3 Directors for a three-year term:
|
|
|
|
|
|
|
|
|
Nominees |
|
Votes For |
|
Withheld |
|
María Luisa Ferré |
|
|
232,630,564 |
|
|
|
15,591,521 |
|
Frederic V. Salerno |
|
|
236,980,346 |
|
|
|
11,241,739 |
|
William Teuber Jr. |
|
|
241,767,768 |
|
|
|
6,454,317 |
|
Proposal 2: Ratification of the appointment of PricewaterhouseCoopers LLP as the Corporations
independent registered public accounting firm for 2008:
|
|
|
|
|
In favor: |
|
|
241,084,822 |
|
Against: |
|
|
5,501,134 |
|
Abstain: |
|
|
1,636,127 |
|
Item 6. Exhibits
|
|
|
Exhibit No. |
|
Exhibit Description |
|
|
|
12.1
|
|
Computation of the ratios of earnings to fixed charges and preferred stock
dividends. |
|
|
|
31.1
|
|
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
31.2
|
|
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.1
|
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.2
|
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. |
116
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: August 11, 2008 |
By: |
/s/ Jorge A. Junquera
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Jorge A. Junquera |
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Senior Executive Vice President &
Chief Financial Officer |
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Date: August 11, 2008 |
By: |
/s/ Ileana González Quevedo
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Ileana González Quevedo |
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Senior Vice President & Corporate Comptroller |
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