Form 10-Q
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

 

x Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2012

Commission File Number: 001-34084

POPULAR, INC.

(Exact name of registrant as specified in its charter)

 

Puerto Rico    66-0667416

(State or other jurisdiction of

Incorporation or organization)

   (IRS Employer Identification Number)
Popular Center Building   
209 Muñoz Rivera Avenue   
Hato Rey, Puerto Rico    00918
(Address of principal executive offices)    (Zip code)

(787) 765-9800

(Registrant’s 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.    x  Yes    ¨  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes     ¨  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:

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    x  No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: Common Stock, $0.01 par value, 1,027,812,904 shares outstanding as of April 30, 2012.


Table of Contents

POPULAR, INC.

INDEX

 

Part I – Financial Information

     Page   
Item 1. Financial Statements   
Unaudited Consolidated Statements of Financial Condition at March 31, 2012, December 31, 2011 and March 31, 2011      4   
Unaudited Consolidated Statements of Operations for the quarters ended March 31, 2012 and 2011      5   
Unaudited Consolidated Statements of Comprehensive Income (Loss) for the quarters ended March 31, 2012 and 2011      6   
Unaudited Consolidated Statements of Changes in Stockholders’ Equity for the quarters ended March 31, 2012 and 2011      7   
Unaudited Consolidated Statements of Cash Flows for the quarters ended March 31, 2012 and 2011      8   
Notes to Unaudited Consolidated Financial Statements      9   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations      115   
Item 3. Quantitative and Qualitative Disclosures about Market Risk      175   
Item 4. Controls and Procedures      175   
Part II – Other Information   
Item 1. Legal Proceedings      176   
Item 1A. Risk Factors      176   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds      177   
Item 6. Exhibits      177   
Signatures      178   

 

2


Table of Contents

Forward-Looking Information

The information included in this Form 10-Q contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may relate to Popular, Inc.’s (the “Corporation”, “Popular”, “we, “us”, “our”) 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, delinquency trends, 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 Corporation’s 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 Popular’s control, could cause actual results to differ materially from those expressed in, or implied by, such forward-looking statements. Factors that might cause such a difference include, but are not limited to:

 

   

the rate of growth in the economy and employment levels, as well as general business and economic conditions;

 

   

changes in interest rates, as well as the magnitude of such changes;

 

   

the fiscal and monetary policies of the federal government and its agencies;

 

   

changes in federal bank regulatory and supervisory policies, including required levels of capital;

 

   

the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) on our businesses, business practices and cost of operations;

 

   

regulatory approvals that may be necessary to undertake certain actions or consummate strategic transactions such as acquisitions and dispositions;

 

   

the relative strength or weakness of the consumer and commercial credit sectors and of the real estate markets in Puerto Rico and the other markets in which borrowers are located;

 

   

the performance of the stock and bond markets;

 

   

competition in the financial services industry;

 

   

additional Federal Deposit Insurance Corporation (“FDIC”) assessments; and

 

   

possible legislative, tax or regulatory changes.

Other possible events or factors that could cause results or performance to differ materially from those expressed in these forward-looking statements include the following: negative economic conditions that adversely affect the general economy, housing prices, the job market, consumer confidence and spending habits which may affect, among other things, the level of non-performing assets, charge-offs and provision expense; changes in interest rates and market liquidity which may reduce interest margins, impact funding sources and affect our ability to originate and distribute financial products in the primary and secondary markets; adverse movements and volatility in debt and equity capital markets; changes in market rates and prices which may adversely impact the value of financial assets and liabilities; liabilities resulting from litigation and regulatory investigations; changes in accounting standards, rules and interpretations; increased competition; our ability to grow our core businesses; decisions to downsize, sell or close units or otherwise change our business mix; and management’s ability to identify and manage these and other risks. 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. Investors should refer to the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2011 as well as “Part II, Item 1A” of this Form 10-Q for a discussion of such factors and certain risks and uncertainties to which the Corporation is subject.

All forward-looking statements included in this document are based upon information available to the Corporation as of the date of this document, and other than as required by law, including the requirements of applicable securities laws, we assume no obligation to update or revise any such forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements.

 

3


Table of Contents

POPULAR, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(UNAUDITED)

 

(In thousands, except share information)

   March 31, 2012     December 31, 2011     March 31, 2011  

Assets:

      

Cash and due from banks

   $ 472,806     $ 535,282     $ 464,555  
  

 

 

   

 

 

   

 

 

 

Money market investments:

      

Federal funds sold

     —          75,000       —     

Securities purchased under agreements to resell

     240,411       252,668       200,185  

Time deposits with other banks

     1,063,852       1,048,506       761,380  
  

 

 

   

 

 

   

 

 

 

Total money market investments

     1,304,263       1,376,174       961,565  
  

 

 

   

 

 

   

 

 

 

Trading account securities, at fair value:

      

Pledged securities with creditors’ right to repledge

     348,103       402,591       587,218  

Other trading securities

     56,190       33,740       47,581  

Investment securities available-for-sale, at fair value:

      

Pledged securities with creditors’ right to repledge

     1,736,706       1,737,868       2,105,783  

Other investment securities available-for-sale

     3,401,910       3,271,955       3,580,558  

Investment securities held-to-maturity, at amortized cost (fair value at

      

March 31, 2012 - $124,829; December 31, 2011 - $125,254;

      

March 31, 2011 - $147,816)

     124,372       125,383       142,106  

Other investment securities, at lower of cost or realizable value (realizable

      

value at March 31, 2012 - $197,372; December 31, 2011 - $181,583;

      

March 31, 2011 - $176,336)

     195,708       179,880       174,930  

Loans held-for-sale, at lower of cost or fair value

     361,596       363,093       569,678  
  

 

 

   

 

 

   

 

 

 

Loans held-in-portfolio:

      

Loans not covered under loss sharing agreements with the FDIC

     20,577,995       20,703,192       20,781,549  

Loans covered under loss sharing agreements with the FDIC

     4,221,788       4,348,703       4,729,550  

Less – Unearned income

     99,321       100,596       104,760  

Allowance for loan losses

     803,264       815,308       736,505  
  

 

 

   

 

 

   

 

 

 

Total loans held-in-portfolio, net

     23,897,198       24,135,991       24,669,834  
  

 

 

   

 

 

   

 

 

 

FDIC loss share asset

     1,880,357       1,915,128       2,426,305  

Premises and equipment, net

     533,545       538,486       543,577  

Other real estate not covered under loss sharing agreements with the FDIC

     193,768       172,497       156,888  

Other real estate covered under loss sharing agreements with the FDIC

     110,559       109,135       65,562  

Accrued income receivable

     126,568       125,209       147,670  

Mortgage servicing assets, at fair value

     156,331       151,323       167,416  

Other assets

     1,439,532       1,462,393       1,314,739  

Goodwill

     647,911       648,350       647,387  

Other intangible assets

     61,798       63,954       56,441  
  

 

 

   

 

 

   

 

 

 

Total assets

   $ 37,049,221     $ 37,348,432     $ 38,829,793  
  

 

 

   

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

      

Liabilities:

      

Deposits:

      

Non-interest bearing

   $ 5,366,420     $ 5,655,474     $ 4,913,009  

Interest bearing

     21,831,316       22,286,653       22,283,665  
  

 

 

   

 

 

   

 

 

 

Total deposits

     27,197,736       27,942,127       27,196,674  
  

 

 

   

 

 

   

 

 

 

Assets sold under agreements to repurchase

     2,113,557       2,141,097       2,642,800  

Other short-term borrowings

     751,200       296,200       290,302  

Notes payable

     1,843,754       1,856,372       3,794,655  

Other liabilities

     1,175,903       1,193,883       1,100,456  
  

 

 

   

 

 

   

 

 

 

Total liabilities

     33,082,150       33,429,679       35,024,887  
  

 

 

   

 

 

   

 

 

 

Commitments and contingencies (See Note 18)

      
  

 

 

   

 

 

   

 

 

 

Stockholders’ equity:

      

Preferred stock, 30,000,000 shares authorized; 2,006,391 shares issued and outstanding in all periods presented

     50,160       50,160       50,160  

Common stock, $0.01 par value; 1,700,000,000 shares authorized in all periods presented; 1,027,555,936 shares issued at March 31, 2012 (December 31, 2011 – 1,026,346,396; March 31, 2011 – 1,023,628,492) and 1,027,117,068 shares outstanding (December 31, 2011 – 1,025,904,567; March 31, 2011 – 1,023,416,118)

     10,276        10,263       10,236  

Surplus

     4,116,710       4,114,661       4,096,245  

Accumulated deficit

     (165,249     (212,726     (338,126

Treasury stock – at cost, 438,868 shares at March 31, 2012 (December 31, 2011 – 441,829; March 31, 2011 – 212,374)

     (1,041     (1,057     (607

Accumulated other comprehensive loss, net of tax

     (43,785     (42,548     (13,002
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

     3,967,071       3,918,753       3,804,906  
  

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 37,049,221     $ 37,348,432     $ 38,829,793  
  

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

4


Table of Contents

POPULAR, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

     Quarters ended March 31,  

(In thousands, except per share information)

   2012     2011  

Interest income:

    

Loans

   $ 387,942     $ 423,375  

Money market investments

     948       947  

Investment securities

     45,070       52,375  

Trading account securities

     5,891       8,754  
  

 

 

   

 

 

 

Total interest income

     439,851       485,451  
  

 

 

   

 

 

 

Interest expense:

    

Deposits

     51,679       76,879  

Short-term borrowings

     13,583       14,015  

Long-term debt

     37,007       51,198  
  

 

 

   

 

 

 

Total interest expense

     102,269       142,092  
  

 

 

   

 

 

 

Net interest income

     337,582       343,359  

Provision for loan losses - non-covered loans

     82,514       59,762  

Provision for loan losses - covered loans

     18,209       15,557  
  

 

 

   

 

 

 

Net interest income after provision for loan losses

     236,859       268,040  
  

 

 

   

 

 

 

Service charges on deposit accounts

     46,589       45,630  

Other service fees (Refer to Note 24)

     66,039       58,652  

Trading account loss

     (2,143     (499

Net gain on sale of loans, including valuation adjustments on loans held-for-sale

     15,471       7,244  

Adjustments (expense) to indemnity reserves on loans sold

     (3,875     (9,848

FDIC loss share (expense) income (Refer to Note 25)

     (15,255     16,035  

Fair value change in equity appreciation instrument

     —          7,745  

Other operating income

     17,082       39,409  
  

 

 

   

 

 

 

Total non-interest income

     123,908       164,368  
  

 

 

   

 

 

 

Operating expenses:

    

Personnel costs

     121,491       106,140  

Net occupancy expenses

     24,162       24,586  

Equipment expenses

     11,341       12,036  

Other taxes

     13,438       11,972  

Professional fees

     48,105       46,688  

Communications

     7,131       7,210  

Business promotion

     12,850       9,860  

FDIC deposit insurance

     24,926       17,673  

Loss on early extinguishment of debt

     69       8,239  

Other real estate owned (OREO) expenses

     14,165       2,211  

Other operating expenses

     15,896       26,179  

Amortization of intangibles

     2,593       2,255  
  

 

 

   

 

 

 

Total operating expenses

     296,167       275,049  
  

 

 

   

 

 

 

Income before income tax

     64,600       157,359  

Income tax expense

     16,192       147,227  
  

 

 

   

 

 

 

Net Income

   $ 48,408     $ 10,132  
  

 

 

   

 

 

 

Net Income Applicable to Common Stock

   $ 47,477     $ 9,202  
  

 

 

   

 

 

 

Net Income per Common Share – Basic

   $ 0.05     $ 0.01  
  

 

 

   

 

 

 

Net Income per Common Share – Diluted

   $ 0.05     $ 0.01  
  

 

 

   

 

 

 

Dividends Declared per Common Share

     —          —     
  

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

5


Table of Contents

POPULAR, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

 

     Quarter ended  
     March 31,  

(In thousands)

   2012     2011  

Net income

   $ 48,408     $ 10,132  
  

 

 

   

 

 

 

Other comprehensive loss before tax:

    

Foreign currency translation adjustment

     (86     (591

Reclassification adjustment for losses included in net income

     —          10,084  

Adjustment of pension and postretirement benefit plans

     —          —     

Amortization of net losses

     6,289       3,243  

Amortization of prior service cost

     (50     (240

Unrealized holding losses on securities available-for-sale arising during the period

     (7,882     (19,978

Reclassification adjustment for losses included in net income

     —          —     

Unrealized net losses on cash flow hedges

     (290     (51

Reclassification adjustment for net losses (gains) included in net income

     1,057       (935
  

 

 

   

 

 

 

Other comprehensive loss before tax

     (962     (8,468

Income tax (expense) benefit

     (275     1,427  
  

 

 

   

 

 

 

Total other comprehensive loss, net of tax

     (1,237     (7,041
  

 

 

   

 

 

 

Comprehensive income, net of tax

   $ 47,171     $ 3,091  
  

 

 

   

 

 

 

Tax effect allocated to each component of other comprehensive loss:

 

     Quarter ended  
     March 31,  

(In thousands)

   2012     2011  

Underfunding of pension and postretirement benefit plans

   $ —        $ —     

Amortization of net losses

     (1,740     (966

Amortization of prior service cost

     15       72  

Unrealized holding losses on securities available-for-sale arising during the period

     1,681       1,941  

Reclassification adjustment for losses included in net income

     —          —     

Unrealized net losses on cash flow hedges

     87       15  

Reclassification adjustment for net losses (gains) included in net income

     (318     365  
  

 

 

   

 

 

 

Income tax (expense) benefit

   $ (275   $ 1,427  
  

 

 

   

 

 

 

Disclosure of accumulated other comprehensive loss:

 

(In thousands)

   March 31, 2012     December 31, 2011     March 31, 2011  

Foreign currency translation adjustment

   $ (28,915   $ (28,829   $ (26,658
  

 

 

   

 

 

   

 

 

 

Pension and postretirement benefit plans

     (327,048     (333,287     (207,933

Tax effect

     115,504       117,229       79,962  
  

 

 

   

 

 

   

 

 

 

Net of tax amount

     (211,544     (216,058     (127,971
  

 

 

   

 

 

   

 

 

 

Unrealized holding gains on securities available-for-sale

     222,864       230,746       164,596  

Tax effect

     (25,987     (27,668     (22,933
  

 

 

   

 

 

   

 

 

 

Net of tax amount

     196,877       203,078       141,663  
  

 

 

   

 

 

   

 

 

 

Unrealized (losses) gains on cash flow hedges

     (290     (1,057     (51

Tax effect

     87       318       15  
  

 

 

   

 

 

   

 

 

 

Net of tax amount

     (203     (739     (36
  

 

 

   

 

 

   

 

 

 

Accumulated other comprehensive loss

   $ (43,785   $ (42,548   $ (13,002
  

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

6


Table of Contents

POPULAR, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)

 

(In thousands)

   Common stock,
including
treasury stock
    Preferred stock      Surplus      Accumulated
deficit
    Accumulated
other
comprehensive
loss
    Total  

Balance at December 31, 2010

   $ 9,655       $ 50,160        $ 4,094,005        $ (347,328   $ (5,961   $ 3,800,531    

Net income

             10,132         10,132    

Issuance of stock

               2,240              2,247    

Dividends declared:

              

Preferred stock

             (930       (930 )  

Common stock purchases

     (33 )                 (33 )  

Other comprehensive loss, net of tax

               (7,041 )       (7,041 )  
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at March 31, 2011

   $ 9,629       $ 50,160        $ 4,096,245        $ (338,126   $ (13,002   $ 3,804,906    
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at December 31, 2011

   $ 9,206       $ 50,160        $ 4,114,661        $ (212,726   $ (42,548   $ 3,918,753    

Net income

             48,408         48,408    

Issuance of stock

     13            2,049              2,062    

Dividends declared:

              

Preferred stock

             (931       (931 )  

Common stock purchases

     (6 )                 (6 )  

Common stock reissuance

     22                   22    

Other comprehensive loss, net of tax

               (1,237 )       (1,237 )  
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at March 31, 2012

   $ 9,235       $ 50,160        $ 4,116,710        $ (165,249   $ (43,785   $ 3,967,071    
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

Disclosure of changes in number of shares:

   March 31, 2012     December 31, 2011     March 31, 2011  

Preferred Stock:

      

Balance at beginning and end of period

     2,006,391       2,006,391         2,006,391    
  

 

 

   

 

 

   

 

 

 

Common Stock – Issued:

      

Balance at beginning of year

     1,026,346,396       1,022,929,158         1,022,929,158    

Issuance of stock

     1,209,540       3,417,238         699,334    
  

 

 

   

 

 

   

 

 

 

Balance at end of the period

     1,027,555,936       1,026,346,396         1,023,628,492    

Treasury stock

     (438,868     (441,829 )       (212,374 )  
  

 

 

   

 

 

   

 

 

 

Common Stock – Outstanding

     1,027,117,068       1,025,904,567         1,023,416,118    
  

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

7


Table of Contents

POPULAR, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

     Quarters ended March 31,  

(In thousands)

   2012     2011  

Cash flows from operating activities:

    

Net income

   $ 48,408     $ 10,132  
  

 

 

   

 

 

 

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

    

Provision for loan losses

     100,723       75,319  

Amortization of intangibles

     2,593       2,255  

Depreciation and amortization of premises and equipment

     11,756       12,060  

Net accretion of discounts and amortization of premiums and deferred fees

     (4,077     (88,327

Impairment losses on net assets to be disposed of

     —          8,564  

Fair value adjustments on mortgage servicing rights

     (784     6,171  

Fair value change in equity appreciation instrument

     —          (7,745

FDIC loss share expense (income)

     15,255       (13,621

FDIC deposit insurance expense

     24,926       17,673  

Adjustments (expense) to indemnity reserves on loans sold

     3,875       9,848  

Earnings from investments under the equity method

     (2,252     (6,826

Deferred income tax expense

     4,418       140,915  

(Gain) loss on:

    

Disposition of premises and equipment

     (6,284     (1,412

Early extinguishment of debt

     69       —     

Sale of loans, including valuation adjustments on loans held-for-sale

     (15,471     (7,244

Sale of equity method investment

     —          (16,666

Acquisitions of loans held-for-sale

     (76,118     (90,780

Proceeds from sale of loans held-for-sale

     63,460       45,448  

Net disbursements on loans held-for-sale

     (223,500     (184,641

Net (increase) decrease in:

    

Trading securities

     270,691       206,222  

Accrued income receivable

     (1,357     2,988  

Other assets

     22,956       (4,602

Net increase (decrease) in:

    

Interest payable

     (2,249     (4,410

Pension and other postretirement benefit obligation

     4,720       (123,957

Other liabilities

     (2,421     (38,203
  

 

 

   

 

 

 

Total adjustments

     190,929       (60,971
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     239,337       (50,839
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Net decrease in money market investments

     71,911       17,730  

Purchases of investment securities:

    

Available-for-sale

     (529,445     (752,479

Held-to-maturity

     (250     (51,998

Other

     (47,629     (38,305

Proceeds from calls, paydowns, maturities and redemptions of investment securities:

    

Available-for-sale

     388,472       278,274  

Held-to-maturity

     1,539       27,335  

Other

     31,800       27,050  

Net repayments on loans

     191,073       427,622  

Proceeds from sale of loans

     21,304       200,387  

Acquisition of loan portfolios

     (140,005     (348,226

Payments received from FDIC under loss sharing agreements

     20,896       583  

Net proceeds from sale of equity method investment

     —          31,068  

Mortgage servicing rights purchased

     (474     (383

Acquisition of premises and equipment

     (12,298     (18,599

Proceeds from sale of:

    

Premises and equipment

     11,946       7,763  

Foreclosed assets

     25,923       44,648  
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     34,763       (147,530
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Net increase (decrease) in:

    

Deposits

     (745,906     433,505  

Federal funds purchased and assets sold under agreements to repurchase

     (27,541     230,250  

Other short-term borrowings

     455,000       (73,920

Payments of notes payable

     (22,284     (622,568

Proceeds from issuance of notes payable

     2,719       242,000  

Proceeds from issuance of common stock

     2,062       2,247  

Dividends paid

     (620     (930

Treasury stock acquired

     (6     (33
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (336,576     210,551  
  

 

 

   

 

 

 

Net (decrease) increase in cash and due from banks

     (62,476     12,182  

Cash and due from banks at beginning of period

     535,282       452,373  
  

 

 

   

 

 

 

Cash and due from banks at end of period

   $ 472,806     $ 464,555  
  

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

8


Table of Contents

Notes to Consolidated Financial

Statements (Unaudited)

 

  Note 1 -   Organization, consolidation and basis of presentation      10   
  Note 2 -   New accounting pronouncements      11   
  Note 3 -   Restrictions on cash and due from banks and certain securities      13   
  Note 4 -   Pledged assets      13   
  Note 5 -   Investment securities available-for-sale      15   
  Note 6 -   Investment securities held-to-maturity      20   
  Note 7 -   Loans      22   
  Note 8 -   Allowance for loan losses      31   
  Note 9 -   FDIC loss share asset and true-up payment obligation      49   
  Note 10 -   Transfers of financial assets and mortgage servicing rights      51   
  Note 11 -   Other assets      54   
  Note 12 -   Goodwill and other intangible assets      54   
  Note 13 -   Deposits      56   
  Note 14 -   Borrowings      57   
  Note 15 -   Trust preferred securities      59   
  Note 16 -   Stockholders’ equity      61   
  Note 17 -   Guarantees      61   
  Note 18 -   Commitments and contingencies      64   
  Note 19 -   Non-consolidated variable interest entities      69   
  Note 20 -   Related party transactions with affiliated company / joint venture      72   
  Note 21 -   Fair value measurement      74   
  Note 22 -   Fair value of financial instruments      83   
  Note 23 -   Net income per common share      88   
  Note 24 -   Other service fees      88   
  Note 25 -   FDIC loss share (expense) income      89   
  Note 26 -   Pension and postretirement benefits      89   
  Note 27 -   Stock-based compensation      90   
  Note 28 -   Income taxes      92   
  Note 29 -   Supplemental disclosure on the consolidated statements of cash flows      95   
  Note 30 -   Segment reporting      95   
  Note 31 -   Subsequent events      99   
  Note 32 -   Condensed consolidating financial information of guarantor and issuers of registered guaranteed securities      100   

 

9


Table of Contents

Note 1 – Organization, consolidation and basis of presentation

Nature of Operations

Popular, Inc. (the “Corporation”) is a diversified, publicly-owned financial holding company subject to the supervision and regulation of the Board of Governors of the Federal Reserve System. The Corporation has operations in Puerto Rico, the United States, the Caribbean and Latin America. In Puerto Rico, the Corporation provides retail and commercial banking services through its principal banking subsidiary, Banco Popular de Puerto Rico (“BPPR”), as well as mortgage banking, investment banking, broker-dealer, auto and equipment leasing and financing, and insurance services through specialized subsidiaries. In the U.S. mainland, the Corporation operates Banco Popular North America (“BPNA”), including its wholly-owned subsidiary E-LOAN. BPNA focuses efforts and resources on the core community banking business. BPNA operates branches in New York, California, Illinois, New Jersey and Florida. E-LOAN markets deposit accounts under its name for the benefit of BPNA. As part of the rebranding of the BPNA franchise, some of its branches operate under a new name, Popular Community Bank. Note 30 to the consolidated financial statements presents information about the Corporation’s business segments.

Principles of Consolidation and Basis of Presentation

The consolidated financial statements include the accounts of Popular, Inc. and its subsidiaries (the “Corporation”). All significant intercompany accounts and transactions have been eliminated in consolidation. In accordance with the consolidation guidance for variable interest entities, the Corporation would also consolidate any variable interest entities (“VIEs”) for which it has a controlling financial interest and therefore is the primary beneficiary. The Corporation does not hold an interest in any VIEs subject to consolidation at this time. Assets held in a fiduciary capacity are not assets of the Corporation and, accordingly, are not included in the consolidated statements of financial condition. The results of operations of companies or assets acquired are included only from the dates of acquisition.

Unconsolidated investments, in which there is at least 20% ownership, are generally accounted for by the equity method. These investments are included in other assets and the Corporation’s proportionate share of income or loss is included in other operating income. Investments, in which there is less than 20% ownership, are generally carried under the cost method of accounting, unless significant influence is exercised. Under the cost method, the Corporation recognizes income when dividends are received. Limited partnerships are accounted for by the equity method unless the Corporation’s interest is so “minor” that it may have virtually no influence over partnership operating and financial policies.

Statutory business trusts that are wholly-owned by the Corporation and are issuers of trust preferred securities are not consolidated in the Corporation’s consolidated financial statements.

The consolidated interim financial statements have been prepared without audit. The consolidated statement of financial condition data at December 31, 2011 was derived from audited financial statements. The unaudited interim financial statements are, in the opinion of management, a fair statement of the results for the periods reported and include all necessary adjustments, all of a normal recurring nature, for a fair statement of such results.

Certain reclassifications have been made to the 2011 consolidated financial statements and notes to the financial statements to conform with the 2012 presentation.

Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted from the unaudited financial statements pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, these financial statements should be read in conjunction with the audited consolidated financial statements of the Corporation for the year ended December 31, 2011, included in the Corporation’s 2011 Annual Report (the “2011 Annual Report”). Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

10


Table of Contents

Note 2 – New accounting pronouncements

FASB Accounting Standards Update 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income (“ASU 2011-05”) and FASB Accounting Standards Update 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 (“ASU 2011-12”)

The FASB issued ASU 2011-05 in June 2011. The amendment of this ASU allows an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments to the Codification in this ASU do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. This ASU also does not change the option for an entity to present components of other comprehensive income either net of related tax effects or before related tax effects, with one amount shown for the aggregate income tax expense or benefit related to the total of other comprehensive income items.

In December 2011, the FASB issued ASU 2011-12, which defers indefinitely the new requirement in ASU 2011-05 to present components of reclassification adjustments out of accumulated other comprehensive income on the face of the income statement by income statement line item.

The Corporation adopted the provisions of these two guidance in the first quarter of 2012. The guidance impacts presentation disclosure only and did not have an impact on the Corporation’s financial condition or results of operations.

FASB Accounting Standards Update 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities (“ASU 2011-11”)

The FASB issued ASU 2011-11 in December 2011. The amendments in this ASU require an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. To meet this objective, entities with financial instruments and derivatives that are either offset on the balance sheet or subject to a master netting arrangement or similar arrangement shall disclose the following quantitative information separately for assets and liabilities in tabular format: a) gross amounts of recognized assets and liabilities; b) amounts offset to determine the net amount presented in the balance sheet; c) net amounts presented in the balance sheet; d) amounts subject to an enforceable master netting agreement or similar arrangement not otherwise included in (b), including: amounts related to recognized financial instruments and other derivatives instruments if either management makes an accounting election not to offset or the amounts do not meet the guidance in ASC Section 210-20-45 or ASC Section 815-10-45, and also amounts related to financial collateral (including cash collateral); and e) the net amount after deducting the amounts in (d) from the amounts in (c).

In addition to these tabular disclosures, entities are required to provide a description of the setoff rights associated with assets and liabilities subject to an enforceable master netting arrangement.

An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented.

The provisions of this guidance impact presentation disclosure only and will not have an impact on the Corporation’s financial condition or results of operations.

FASB Accounting Standards Update 2011-10, Property, Plant, and Equipment (Topic 360): Derecognition of in Substance Real Estate-a Scope Clarification (“ASU 2011-10”)

The FASB issued ASU 2011-10 in December 2011. The objective of this ASU is to resolve the diversity in practice about whether the guidance in ASC Subtopic 360-20, “Property, Plant, and Equipment Real Estate Sales” applies to a parent that ceases to have a controlling financial interest in a subsidiary that is in substance real estate as a result of default on the subsidiary’s nonrecourse debt. ASU 2011-10 provides that when a parent (reporting entity) ceases to have a controlling financial interest in a subsidiary that is in substance real estate as a result of default on the subsidiary’s nonrecourse debt, the reporting entity should apply the guidance in ASC Subtopic 360-20 to determine whether it should derecognize the in substance real estate. Generally, a reporting entity would not satisfy the requirements to derecognize the in substance real estate before the legal transfer of the real estate to the lender and

 

11


Table of Contents

the extinguishment of the related nonrecourse indebtedness. That is, even if the reporting entity ceases to have a controlling financial interest under ASC Subtopic 810-10, the reporting entity would continue to include the real estate, debt, and the results of the subsidiary’s operations in its consolidated financial statements until legal title to the real estate is transferred to legally satisfy the debt.

ASU 2011-10 should be applied on a prospective basis to deconsolidation events occurring after the effective date; with prior periods not adjusted even if the reporting entity has continuing involvement with previously derecognized in substance real estate entities. For public entities, ASU 2011-10 is effective for fiscal years, and interim periods within those years, beginning on or after June 15, 2012. Early adoption is permitted; however, the Corporation is not early adopting this ASU.

The adoption of this guidance is not expected to have a material effect on the Corporation’s consolidated financial statements.

FASB Accounting Standards Update 2011-08, Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for Impairment (“ASU 2011-08”)

The FASB issued Accounting Standards Update (“ASU”) No. 2011-08 in September 2011. ASU 2011-08 is intended to simplify how entities test goodwill for impairment. ASU 2011-08 permits an entity the option to first assess qualitative factors to determine whether it is “more likely than not” that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in ASC Topic 350, Intangibles-Goodwill and Other. The more-likely-than-not threshold is defined as having a likelihood of more than 50%. The previous guidance under ASC Topic 350 required an entity to test goodwill for impairment, on at least an annual basis, by comparing the fair value of a reporting unit with its carrying amount, including goodwill (step one). If the fair value of a reporting unit is less than its carrying amount, then the second step of the test must be performed to measure the amount of the impairment loss, if any. Under the amendments in this ASU, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount.

This ASU also removes the guidance that permitted the entities to carry forward the calculation of the fair value of the reporting unit from one year to the next if certain conditions are met. In addition, the new qualitative indicators replace those currently used to determine whether an interim goodwill impairment test is required. These indicators are also applicable for assessing whether to perform step two for reporting units with zero or negative carrying amounts.

ASU 2011-08 was effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption was permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period had not yet been issued. The Corporation did not elect to adopt early the provisions of this ASU.

The Corporation adopted this guidance on January 1, 2012. The provisions of this guidance simplify how entities test for goodwill impairment and it did not impact the Corporation’s consolidated financial statements for the quarter ended March 31, 2012.

FASB Accounting Standards Update 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS (“ASU 2011-04”)

The FASB issued ASU 2011-04 in May 2011. The amendment of this ASU provides a consistent definition of fair value between U.S. GAAP and International Financial Reporting Standards (“IFRS”). The ASU modifies some fair value measurement principles and disclosure requirements including the application of the highest and best use and valuation premise concepts, measuring the fair value of an instrument classified in a reporting entity’s shareholders’ equity, measuring the fair value of financial instruments that are managed within a portfolio, application of premiums and discounts in a fair value measurement, disclosing quantitative information about unobservable inputs used in Level 3 fair value measurements, and other additional disclosures about fair value measurements.

The new guidance was effective for the first interim or annual period beginning on or after December 15, 2011. The guidance should be applied prospectively and early application was not permitted.

The Corporation adopted this guidance on the first quarter of 2012. It did not have a material impact on the Corporation’s consolidated financial statements. Refer to Notes 21 and 22 for additional fair value disclosures included for the quarter ended March 31, 2012.

 

12


Table of Contents

FASB Accounting Standards Update 2011-03, Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements (“ASU 2011-03”)

The FASB issued ASU 2011-03 in April 2011. The amendment of this ASU affects all entities that enter into agreements to transfer financial assets that both entitle and obligate the transferor to repurchase or redeem the financial assets before their maturity. The ASU modifies the criteria for determining when these transactions would be accounted for as financings (secured borrowings / lending agreements) as opposed to sales (purchases) with commitments to repurchase (resell). This ASU does not affect other transfers of financial assets. ASC Topic 860 prescribes when an entity may or may not recognize a sale upon the transfer of financial assets subject to repurchase agreements. That determination is based, in part, on whether the entity has maintained effective control over transferred financial assets.

Specifically, the amendments in this ASU remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the requirement to demonstrate that the transferor possesses adequate collateral to fund substantially all the cost of purchasing replacement financial assets.

The new guidance was effective for the first interim or annual period beginning on or after December 15, 2011. The guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early application was not permitted.

The adoption of this guidance on January 1, 2012 did not have an impact on the Corporation’s consolidated financial statements for the quarter ended March 31, 2012.

Note 3—Restrictions on cash and due from banks and certain securities

The Corporation’s banking subsidiaries, BPPR and BPNA, are required by federal and state regulatory agencies to maintain average reserve balances with the Federal Reserve Bank of New York (the “Fed”) or other banks. Those required average reserve balances amounted to $877 million at March 31, 2012 (December 31, 2011—$838 million; March 31, 2011—$843 million). Cash and due from banks, as well as other short-term, highly liquid securities, are used to cover the required average reserve balances.

At March 31, 2012 and December 31, 2011, the Corporation held $36 million in restricted assets in the form of cash and funds deposited in money market accounts (March 31, 2011—$51 million).

Note 4 – Pledged assets

Certain securities, loans and other real estate owned were pledged to secure public and trust deposits, assets sold under agreements to repurchase, other borrowings and credit facilities available, derivative positions, and loan servicing agreements. The classification and carrying amount of the Corporation’s pledged assets, in which the secured parties are not permitted to sell or repledge the collateral, were as follows:

 

     March 31,      December 31,      March 31,  

(In thousands)

   2012      2011      2011  

Investment securities available-for-sale, at fair value

   $ 1,840,351      $ 1,894,651      $ 1,529,464  

Investment securities held-to-maturity, at amortized cost

     25,000        25,000        49,734  

Loans held-for-sale measured at lower of cost or fair value

     4,421        5,286        2,638  

Loans held-in-portfolio covered under loss sharing agreements with the FDIC

     536,666        —           4,634,499  

Loans held-in-portfolio not covered under loss sharing agreements with the FDIC

     8,967,998        8,571,268        8,906,093  

Other real estate covered under loss sharing agreements with the FDIC

     —           —           65,562  
  

 

 

    

 

 

    

 

 

 

Total pledged assets

   $ 11,374,436      $ 10,496,205      $ 15,187,990  
  

 

 

    

 

 

    

 

 

 

 

13


Table of Contents

Pledged securities and loans that the creditor has the right by custom or contract to repledge are presented separately on the consolidated statements of financial condition.

At March 31, 2012, the Corporation had $1.3 billion in investment securities available-for-sale and $0.3 billion in loans that served as collateral to secure public funds (December 31, 2011—$1.4 billion and $0.4 billion, respectively; March 31, 2011—$1.0 billion and $0.7 billion, respectively).

At March 31, 2012, the Corporation’s banking subsidiaries had short-term and long-term credit facilities authorized with the Federal Home Loan Bank system (the “FHLB”) aggregating $2.5 billion (December 31, 2011—$2.0 billion; March 31, 2011—$1.7 billion). Refer to Note 14 to the consolidated financial statements for borrowings outstanding under these credit facilities. At March 31, 2012, the credit facilities authorized with the FHLB were collateralized by $3.7 billion in loans held-in-portfolio (December 31, 2011—$3.2 billion; March 31, 2011—$2.7 billion). Also, the Corporation’s banking subsidiaries had a borrowing capacity at the Federal Reserve (“Fed”) discount window of $3.2 billion (December 31, 2011—$2.6 billion; March 31, 2011—$2.8 billion), which remained unused as of such date. The amount available under these credit facilities with the Fed is dependent upon the balance of loans and securities pledged as collateral. At March 31, 2012, the credit facilities with the Fed discount window were collateralized by $4.9 billion in loans held-in-portfolio (December 31, 2011—$4.0 billion; March 31, 2011—$5.5 billion). These pledged assets are included in the above table and were not reclassified and separately reported in the consolidated statements of financial condition.

In addition, at March 31, 2012 and December 31, 2011, securities sold but not yet delivered amounting to $68 million were pledged to secure repurchase agreements.

Loans held-in-portfolio and other real estate owned that are covered by loss sharing agreements with the FDIC amounting to $4.7 billion served as collateral to secure the note issued to the FDIC at March 31, 2011.

 

14


Table of Contents

Note 5 – Investment securities available-for-sale

The following tables present the amortized cost, gross unrealized gains and losses, approximate fair value, weighted average yield and contractual maturities of investment securities available-for-sale.

 

     At March 31, 2012  

(In thousands)

   Amortized
cost
     Gross
unrealized
gains
     Gross
unrealized
losses
     Fair value      Weighted
average
yield
 

U.S. Treasury securities

              

Within 1 year

   $ 7,012      $ 84      $ —         $ 7,096        1.50 

After 1 to 5 years

     27,790        3,198        —           30,988        3.82  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total U.S. Treasury securities

     34,802        3,282        —           38,084        3.35  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Obligations of U.S. Government sponsored entities

              

Within 1 year

     99,515        1,735        —           101,250        3.36  

After 1 to 5 years

     625,230        21,897        —           647,127        3.31  

After 5 to 10 years

     310,004        2,290        940        311,354        2.14  

After 10 years

     32,085        369        387        32,067        4.00  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total obligations of U.S. Government sponsored entities

     1,066,834        26,291        1,327        1,091,798        3.00  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Obligations of Puerto Rico, States and political subdivisions

              

Within 1 year

     765        4        —           769        4.94  

After 1 to 5 years

     13,039        296        23        13,312        4.04  

After 5 to 10 years

     4,595        41        —           4,636        5.33  

After 10 years

     37,320        799        —           38,119        5.38  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total obligations of Puerto Rico, States and political subdivisions

     55,719        1,140        23        56,836        5.06  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Collateralized mortgage obligations—federal agencies

              

After 1 to 5 years

     6,822        81        —           6,903        1.48  

After 5 to 10 years

     41,988        1,347        —           43,335        2.86  

After 10 years

     1,756,972        51,991        394        1,808,569        2.66  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total collateralized mortgage obligations—federal agencies

     1,805,782        53,419        394        1,858,807        2.66  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Collateralized mortgage obligations—private label

              

After 5 to 10 years

     5,041        1        149        4,893        0.77  

After 10 years

     52,445        70        2,740        49,775        2.52  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total collateralized mortgage obligations—private label

     57,486        71        2,889        54,668        2.37  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Mortgage-backed securities

              

Within 1 year

     32        —           —           32        3.71  

After 1 to 5 years

     6,619        311        —           6,930        3.90  

After 5 to 10 years

     102,677        7,837        1        110,513        4.67  

After 10 years

     1,755,946        131,139        36        1,887,049        4.24  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage-backed securities

     1,865,274        139,287        37        2,004,524        4.26  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Equity securities (without contractual maturity)

     6,595        875        11        7,459        2.81  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other

              

After 5 to 10 years

     17,850        3,063        —           20,913        10.99  

After 10 years

     5,410        117        —           5,527        3.62  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total other

     23,260        3,180        —           26,440        9.28  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities available-for-sale

   $ 4,915,752      $ 227,545      $ 4,681      $ 5,138,616        3.40 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

15


Table of Contents
     At December 31, 2011  

(In thousands)

   Amortized
cost
     Gross
unrealized
gains
     Gross
unrealized
losses
     Fair value      Weighted
average
yield
 

U.S. Treasury securities

              

After 1 to 5 years

   $ 34,980      $ 3,688      $ —         $ 38,668        3.35 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total U.S. Treasury securities

     34,980        3,688        —           38,668        3.35  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Obligations of U.S. Government sponsored entities

              

Within 1 year

     94,492        2,382        —           96,874        3.45  

After 1 to 5 years

     655,625        25,860        —           681,485        3.38  

After 5 to 10 years

     171,633        2,969        —           174,602        2.94  

After 10 years

     32,086        499        —           32,585        3.20  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total obligations of U.S. Government sponsored entities

     953,836        31,710        —           985,546        3.30  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Obligations of Puerto Rico, States and political subdivisions

              

Within 1 year

     765        9        —           774        4.97  

After 1 to 5 years

     14,824        283        31        15,076        4.07  

After 5 to 10 years

     4,595        54        —           4,649        5.33  

After 10 years

     37,320        909        —           38,229        5.38  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total obligations of Puerto Rico, States and political subdivisions

     57,504        1,255        31        58,728        5.03  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Collateralized mortgage obligations—federal agencies

              

After 1 to 5 years

     2,424        49        —           2,473        3.28  

After 5 to 10 years

     55,096        1,446        —           56,542        2.64  

After 10 years

     1,589,373        49,462        208        1,638,627        2.84  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total collateralized mortgage obligations—federal agencies

     1,646,893        50,957        208        1,697,642        2.83  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Collateralized mortgage obligations—private label

              

After 5 to 10 years

     5,653        1        181        5,473        0.81  

After 10 years

     59,460        —           7,141        52,319        2.44  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total collateralized mortgage obligations—private label

     65,113        1        7,322        57,792        2.30  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Mortgage-backed securities

              

Within 1 year

     57        1        —           58        3.91  

After 1 to 5 years

     7,564        328        —           7,892        3.86  

After 5 to 10 years

     111,639        8,020        1        119,658        4.66  

After 10 years

     1,870,736        141,274        49        2,011,961        4.25  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage-backed securities

     1,989,996        149,623        50        2,139,569        4.27  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Equity securities (without contractual maturity)

     6,594        426        104        6,916        2.96  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other

              

After 5 to 10 years

     17,850        700        —           18,550        10.99  

After 10 years

     6,311        101        —           6,412        3.61  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total other

     24,161        801        —           24,962        9.06  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities available-for-sale

   $ 4,779,077      $ 238,461      $ 7,715      $ 5,009,823        3.58 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

16


Table of Contents
     At March 31, 2011  

(In thousands)

   Amortized
cost
     Gross
unrealized
gains
     Gross
unrealized
losses
     Fair value      Weighted
average
yield
 

U.S. Treasury securities

              

After 1 to 5 years

   $ 7,003      $ 98      $ —         $ 7,101        1.50 

After 5 to 10 years

     28,505        2,076        —           30,581        3.81  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total U.S. Treasury securities

     35,508        2,174        —           37,682        3.35  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Obligations of U.S. Government sponsored entities

              

Within 1 year

     230,290        906        921        230,275        2.95  

After 1 to 5 years

     1,005,737        45,685        92        1,051,330        3.73  

After 5 to 10 years

     180,000        —           518        179,482        2.66  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total obligations of U.S. Government sponsored entities

     1,416,027        46,591        1,531        1,461,087        3.47  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Obligations of Puerto Rico, States and political subdivisions

              

Within 1 year

     10,357        10        —           10,367        3.92  

After 1 to 5 years

     15,753        255        6        16,002        4.52  

After 5 to 10 years

     20,765        35        167        20,633        5.07  

After 10 years

     5,505        62        —           5,567        5.28  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total obligations of Puerto Rico, States and political subdivisions

     52,380        362        173        52,569        4.70  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Collateralized mortgage obligations—federal agencies

              

Within 1 year

     35        —           —           35        3.36  

After 1 to 5 years

     1,737        88        —           1,825        4.76  

After 5 to 10 years

     91,067        1,019        865        91,221        2.47  

After 10 years

     1,487,274        28,001        1,011        1,514,264        2.94  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total collateralized mortgage obligations—federal agencies

     1,580,113        29,108        1,876        1,607,345        2.91  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Collateralized mortgage obligations—private label

              

After 5 to 10 years

     8,109        13        90        8,032        0.86  

After 10 years

     73,612        51        4,547        69,116        2.30  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total collateralized mortgage obligations—private label

     81,721        64        4,637        77,148        2.16  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Mortgage-backed securities

              

Within 1 year

     633        51        —           684        5.35  

After 1 to 5 years

     13,444        519        4        13,959        3.98  

After 5 to 10 years

     164,579        10,230        8        174,801        4.71  

After 10 years

     2,143,295        81,696        967        2,224,024        4.25  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage-backed securities

     2,321,951        92,496        979        2,413,468        4.28  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Equity securities (without contractual maturity)

     8,722        968        256        9,434        3.43  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other

              

After 5 to 10 years

     17,850        2,363        —           20,213        11.00  

After 10 years

     7,473        —           78        7,395        3.62  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total other

     25,323        2,363        78        27,608        8.82  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities available-for-sale

   $ 5,521,745      $ 174,126      $ 9,530      $ 5,686,341        3.67 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The weighted average yield on investment securities available-for-sale is based on amortized cost; therefore, it does not give effect to changes in fair value.

Securities not due on a single contractual maturity date, such as mortgage-backed securities and collateralized mortgage obligations, are classified in the period of final contractual maturity. The expected maturities of collateralized mortgage obligations, mortgage-backed securities and certain other securities may differ from their contractual maturities because they may be subject to prepayments or may be called by the issuer.

There were no securities sold during the quarters ended March 31, 2012 and 2011.

 

17


Table of Contents

The following tables present the Corporation’s fair value and gross unrealized losses of investment securities available-for-sale, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position.

 

     At March 31, 2012  
     Less than 12 months      12 months or more      Total  

(In thousands)

   Fair value      Gross
unrealized
losses
     Fair value      Gross
unrealized
losses
     Fair value      Gross
unrealized
losses
 

Obligations of U.S. Government sponsored entities

   $ 235,106      $ 1,327      $ —         $ —         $ 235,106      $ 1,327  

Obligations of Puerto Rico, States and political subdivisions

     2,816        23        —           —           2,816        23  

Collateralized mortgage obligations—federal agencies

     101,959        379        3,002        15        104,961        394  

Collateralized mortgage obligations—private label

     914        29        48,494        2,860        49,408        2,889  

Mortgage-backed securities

     209        3        1,475        34        1,684        37  

Equity securities

     47        3        3        8        50        11  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities available-for-sale in an unrealized loss position

   $ 341,051      $ 1,764      $ 52,974      $ 2,917      $ 394,025      $ 4,681  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     At December 31, 2011  
     Less than 12 months      12 months or more      Total  

(In thousands)

   Fair
value
     Gross
unrealized
losses
     Fair
value
     Gross
unrealized
losses
     Fair
value
     Gross
unrealized
losses
 

Obligations of Puerto Rico, States and political subdivisions

   $ 7,817      $ 28      $ 191      $ 3      $ 8,008      $ 31  

Collateralized mortgage obligations—federal agencies

     90,543        208        —           —           90,543        208  

Collateralized mortgage obligations—private label

     13,595        539        44,148        6,783        57,743        7,322  

Mortgage-backed securities

     5,577        14        1,466        36        7,043        50  

Equity securities

     5,199        95        2        9        5,201        104  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities available-for-sale in an unrealized loss position

   $ 122,731      $ 884      $ 45,807      $ 6,831      $ 168,538      $ 7,715  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     At March 31, 2011  
     Less than 12 months      12 months or more      Total  

(In thousands)

   Fair
value
     Gross
unrealized
losses
     Fair
value
     Gross
unrealized
losses
     Fair
value
     Gross
unrealized
losses
 

Obligations of U.S. Government sponsored entities

   $ 304,080      $ 1,531      $ —         $ —         $ 304,080      $ 1,531  

Obligations of Puerto Rico, States and political subdivisions

     18,138        167        301        6        18,439        173  

Collateralized mortgage obligations—federal agencies

     345,887        1,876        —           —           345,887        1,876  

Collateralized mortgage obligations—private label

     21,678        252        46,424        4,385        68,102        4,637  

Mortgage-backed securities

     35,010        714        9,185        265        44,195        979  

Equity securities

     3,798        169        51        87        3,849        256  

Other

     7,395        78        —           —           7,395        78  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities available-for-sale in an unrealized loss position

   $ 735,986      $ 4,787      $ 55,961      $ 4,743      $ 791,947      $ 9,530  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Management evaluates investment securities for other-than-temporary (“OTTI”) declines in fair value on a quarterly basis. Once a decline in value is determined to be other-than-temporary, the value of a debt security is reduced and a corresponding charge to earnings is recognized for anticipated credit losses. Also, for equity securities that are considered other-than-temporarily impaired,

 

18


Table of Contents

the excess of the security’s carrying value over its fair value at the evaluation date is accounted for as a loss in the results of operations. The OTTI analysis requires management to consider various factors, which include, but are not limited to: (1) the length of time and the extent to which fair value has been less than the amortized cost basis, (2) the financial condition of the issuer or issuers, (3) actual collateral attributes, (4) the payment structure of the debt security and the likelihood of the issuer being able to make payments, (5) any rating changes by a rating agency, (6) adverse conditions specifically related to the security, industry, or a geographic area, and (7) management’s intent to sell the debt security or whether it is more likely than not that the Corporation would be required to sell the debt security before a forecasted recovery occurs.

At March 31, 2012, management performed its quarterly analysis of all debt securities in an unrealized loss position. Based on the analyses performed, management concluded that no individual debt security was other-than-temporarily impaired as of such date. At March 31, 2012, the Corporation did not have the intent to sell debt securities in an unrealized loss position and it is not more likely than not that the Corporation will have to sell the investment securities prior to recovery of their amortized cost basis. Also, management evaluated the Corporation’s portfolio of equity securities at March 31, 2012. No other-than-temporary impairment losses on equity securities were recorded during the quarters ended March 31, 2012 and 2011. Management has the intent and ability to hold the investments in equity securities that are at a loss position at March 31, 2012, for a reasonable period of time for a forecasted recovery of fair value up to (or beyond) the cost of these investments.

The unrealized losses associated with “Collateralized mortgage obligations – private label” (“private-label CMO”) are primarily related to securities backed by residential mortgages. In addition to verifying the credit ratings for the private-label CMOs, management analyzed the underlying mortgage loan collateral for these bonds. Various statistics or metrics were reviewed for each private-label CMO, including among others, the weighted average loan-to-value, FICO score, and delinquency and foreclosure rates of the underlying assets in the securities. At March 31, 2012, there were no “sub-prime” securities in the Corporation’s private-label CMOs portfolios. For private-label CMOs with unrealized losses at March 31, 2012, credit impairment was assessed using a cash flow model that estimates the cash flows on the underlying mortgages, using the security-specific collateral and transaction structure. The model estimates cash flows from the underlying mortgage loans and distributes those cash flows to various tranches of securities, considering the transaction structure and any subordination and credit enhancements that exist in that structure. The cash flow model incorporates actual cash flows through the current period and then projects the expected cash flows using a number of assumptions, including default rates, loss severity and prepayment rates. Management’s assessment also considered tests using more stressful parameters. Based on the assessments, management concluded that the tranches of the private-label CMOs held by the Corporation were not other-than-temporarily impaired at March 31, 2012, thus management expects to recover the amortized cost basis of the securities.

The following table states the name of issuers, and the aggregate amortized cost and fair value of the securities of such issuer (includes available-for-sale and held-to-maturity securities), in which the aggregate amortized cost of such securities exceeds 10% of stockholders’ equity. This information excludes securities backed by the full faith and credit of the U.S. Government. 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.

 

     March 31, 2012      December 31, 2011      March 31, 2011  

(In thousands)

   Amortized cost      Fair value      Amortized cost      Fair value      Amortized cost      Fair value  

FNMA

   $ 1,117,928      $ 1,157,729      $ 1,049,315      $ 1,089,069      $ 1,029,936      $ 1,057,977  

FHLB

     583,897        604,020        553,940        578,617        1,003,317        1,047,747  

Freddie Mac

     1,149,415        1,176,487        984,270        1,010,669        977,365        993,342  

 

19


Table of Contents

 

Note 6 – Investment securities held-to-maturity

The following tables present the amortized cost, gross unrealized gains and losses, approximate fair value, weighted average yield and contractual maturities of investment securities held-to-maturity.

 

     At March 31, 2012  

(In thousands)

   Amortized
cost
     Gross
unrealized
gains
     Gross
unrealized
losses
     Fair value      Weighted
average
yield
 

Obligations of Puerto Rico, States and political subdivisions

              

Within 1 year

   $ 7,375      $ 29      $ —         $ 7,404        2.31 

After 1 to 5 years

     11,649        556        —           12,205        5.83  

After 5 to 10 years

     19,302        395        51        19,646        6.00  

After 10 years

     59,391        116        623        58,884        4.05  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total obligations of Puerto Rico, States and political subdivisions

     97,717        1,096        674        98,139        4.52  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Collateralized mortgage obligations—federal agencies

              

After 10 years

     155        6        —           161        5.16  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total collateralized mortgage obligations—federal agencies

     155        6        —           161        5.16  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other

              

After 1 to 5 years

     26,500        29        —           26,529        3.39  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total other

     26,500        29        —           26,529        3.39  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities held-to-maturity

   $ 124,372      $ 1,131      $ 674      $ 124,829        4.28 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     At December 31, 2011  

(In thousands)

   Amortized
cost
     Gross
unrealized
gains
     Gross
unrealized
losses
     Fair
value
     Weighted
average
yield
 

Obligations of Puerto Rico, States and political subdivisions

              

Within 1 year

   $ 7,275      $ 6      $ —         $ 7,281        2.24 

After 1 to 5 years

     11,174        430        —           11,604        5.80  

After 5 to 10 years

     18,512        266        90        18,688        5.99  

After 10 years

     62,012        40        855        61,197        4.11  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total obligations of Puerto Rico, States and political subdivisions

     98,973        742        945        98,770        4.51  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Collateralized mortgage obligations—private label

              

After 10 years

     160        —           9        151        5.45  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total collateralized mortgage obligations—private label

     160        —           9        151        5.45  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other

              

After 1 to 5 years

     26,250        83        —           26,333        3.41  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total other

     26,250        83        —           26,333        3.41  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities held-to-maturity

   $ 125,383      $ 825      $ 954      $ 125,254        4.28 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

20


Table of Contents
     At March 31, 2011  
            Gross      Gross             Weighted  
     Amortized      unrealized      unrealized      Fair      average  

(In thousands)

   cost      gains      losses      Value      yield  

U.S. Treasury securities

              

Within 1 year

   $ 24,734      $ —         $ —         $ 24,734        0.02 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total U.S. Treasury securities

     24,734        —           —           24,734        0.02  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Obligations of Puerto Rico, States and political subdivisions

              

Within 1 year

     2,235        30        —           2,265        5.56  

After 1 to 5 years

     15,973        356        —           16,329        4.19  

After 5 to 10 years

     18,340        94        264        18,170        5.97  

After 10 years

     54,154        6,695        1,325        59,524        4.13  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total obligations of Puerto Rico, States and political subdivisions

     90,702        7,175        1,589        96,288        4.55  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Collateralized mortgage obligations - private label

              

After 10 years

     170        —           9        161        5.45  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total collateralized mortgage obligations - private label

     170        —           9        161        5.45  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other

              

Within 1 year

     1,250        —           —           1,250        0.96  

After 1 to 5 years

     25,250        133        —           25,383        3.47  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total other

     26,500        133        —           26,633        3.35  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities held-to-maturity

   $ 142,106      $ 7,308      $ 1,598      $ 147,816        3.54 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Securities not due on a single contractual maturity date, such as collateralized mortgage obligations, are classified in the period of final contractual maturity. The expected maturities of collateralized mortgage obligations and certain other securities may differ from their contractual maturities because they may be subject to prepayments or may be called by the issuer.

The following tables present the Corporation’s fair value and gross unrealized losses of investment securities held-to-maturity, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2012, December 31, 2011 and March 31, 2011:

 

     At March 31, 2012  
     Less than 12 months      12 months or more      Total  
            Gross             Gross             Gross  
     Fair      unrealized      Fair      unrealized      Fair      unrealized  

(In thousands)

   value      losses      value      losses      value      losses  

Obligations of Puerto Rico, States and political subdivisions

   $ —         $ —         $ 30,866      $ 674      $ 30,866      $ 674  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities held-to-maturity in an unrealized loss position

   $ —         $ —         $ 30,866      $ 674      $ 30,866      $ 674  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     At December 31, 2011  
     Less than 12 months      12 months or more      Total  
            Gross             Gross             Gross  
     Fair      unrealized      Fair      unrealized      Fair      unrealized  

(In thousands)

   value      losses      value      losses      value      losses  

Obligations of Puerto Rico, States and political subdivisions

   $ 10,323      $ 92      $ 31,062      $ 853      $ 41,385      $ 945  

Collateralized mortgage obligations - private label

     —           —           151        9        151        9  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities held-to-maturity in an unrealized loss position

   $ 10,323      $ 92      $ 31,213      $ 862      $ 41,536      $ 954  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

21


Table of Contents
     At March 31, 2011  
     Less than 12 months      12 months or more      Total  
            Gross             Gross             Gross  
     Fair      unrealized      Fair      unrealized      Fair      unrealized  

(In thousands)

   value      losses      value      losses      value      losses  

Obligations of Puerto Rico, States and political subdivisions

   $ 26,407      $ 567      $ 30,808      $ 1,022      $ 57,215      $ 1,589  

Collateralized mortgage obligations - private label

     —           —           161        9        161        9  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities held-to-maturity in an unrealized loss position

   $ 26,407      $ 567      $ 30,969      $ 1,031      $ 57,376      $ 1,598  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

As indicated in Note 5 to these consolidated financial statements, management evaluates investment securities for OTTI declines in fair value on a quarterly basis.

The “Obligations of Puerto Rico, States and political subdivisions” classified as held-to-maturity at March 31, 2012 are primarily associated with securities issued by municipalities of Puerto Rico and are generally not rated by a credit rating agency. The Corporation performs periodic credit quality reviews on these issuers. The decline in fair value at March 31, 2012 was attributable to changes in interest rates and not credit quality, thus no other-than-temporary decline in value was necessary to be recorded in these held-to-maturity securities at March 31, 2012. At March 31, 2012, the Corporation does not have the intent to sell securities held-to-maturity and it is not more likely than not that the Corporation will have to sell these investment securities prior to recovery of their amortized cost basis.

Note 7 – Loans

Covered loans acquired in the Westernbank FDIC-assisted transaction, except for lines of credit with revolving privileges, are accounted for by the Corporation in accordance with ASC Subtopic 310-30. Under ASC Subtopic 310-30, the acquired loans were aggregated into pools based on similar characteristics. Each loan pool is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows. The covered loans which are accounted for under ASC Subtopic 310-30 by the Corporation are not considered non-performing and will continue to have an accretable yield as long as there is a reasonable expectation about the timing and amount of cash flows expected to be collected. The Corporation measures additional losses for this portfolio when it is probable the Corporation will be unable to collect all cash flows expected at acquisition plus additional cash flows expected to be collected arising from changes in estimates after acquisition. Lines of credit with revolving privileges that were acquired as part of the Westernbank FDIC-assisted transaction are accounted for under the guidance of ASC Subtopic 310-20, which requires that any differences between the contractually required loan payment receivable in excess of the Corporation’s initial investment in the loans be accreted into interest income. Loans accounted for under ASC Subtopic 310-20 are placed in non-accrual status when past due in accordance with the Corporation’s non-accruing policy and any accretion of discount is discontinued.

The risks on loans acquired in the FDIC-assisted transaction are significantly different from the risks on loans not covered under the FDIC loss sharing agreements because of the loss protection provided by the FDIC. Accordingly, the Corporation presents loans subject to the loss sharing agreements as “covered loans” in the information below and loans that are not subject to the FDIC loss sharing agreements as “non-covered loans”.

For a summary of the accounting policy related to loans, interest recognition and allowance for loan losses refer to the summary of significant accounting policies included in Note 2 to the consolidated financial statements included in the 2011 Annual Report. Also, refer to Note 8 for a description of enhancements done to the Corporation’s methodology for determining the allowance for loan losses which were effective on March 31, 2012.

 

22


Table of Contents

The following table presents the composition of non-covered loans held-in-portfolio (“HIP”), net of unearned income, at March 31, 2012 and December 31, 2011.

 

     Non-covered loans      Non-covered loans  

(In thousands)

   HIP at March 31, 2012      HIP at December 31, 2011  

Commercial multi-family

   $ 802,286      $ 808,933  

Commercial real estate non-owner occupied

     2,641,361        2,665,499  

Commercial real estate owner occupied

     2,665,551        2,817,266  

Commercial and industrial

     3,759,044        3,681,629  

Construction

     236,579        239,939  

Mortgage

     5,591,745        5,518,460  

Leasing

     543,314        548,706  

Legacy[2]

     603,874        648,409  

Consumer:

     

Credit cards

     1,204,551        1,230,029  

Home equity lines of credit

     542,249        557,894  

Personal

     1,119,335        1,130,593  

Auto

     533,575        518,476  

Other

     235,210        236,763  
  

 

 

    

 

 

 

Total loans held-in-portfolio[1]

   $ 20,478,674      $ 20,602,596  
  

 

 

    

 

 

 

 

[1] Non-covered loans held-in-portfolio at March 31, 2012 are net of $99 million in unearned income and exclude $362 million in loans held-for-sale. (December 31, 2011 - $101 million in unearned income and $363 million in loans held-for-sale.)

 

[2] The legacy portfolio is comprised of commercial loans, construction loans and lease financings related to certain lending products exited by the Corporation as part of restructuring efforts carried out in prior years at the BPNA reportable segment.

The following table presents the composition of covered loans at March 31, 2012 and December 31, 2011.

 

     Covered loans at      Covered loans at  

(In thousands)

   March 31, 2012      December 31, 2011  

Commercial real estate

   $ 2,202,860      $ 2,271,295  

Commercial and industrial

     228,841        241,447  

Construction

     532,433        546,826  

Mortgage

     1,150,996        1,172,954  

Consumer

     106,658        116,181  
  

 

 

    

 

 

 

Total loans held-in-portfolio

   $ 4,221,788      $ 4,348,703  
  

 

 

    

 

 

 

The following table provides a breakdown of loans held-for-sale (“LHFS”) at March 31, 2012 and December 31, 2011 by main categories.

 

      Non-covered loans  

(In thousands)

   March 31, 2012      December 31, 2011  

Commercial

   $ 25,994      $ 26,198  

Construction

     206,246        236,045  

Mortgage

     129,356        100,850  
  

 

 

    

 

 

 

Total

   $ 361,596      $ 363,093  
  

 

 

    

 

 

 

During the quarter ended March 31, 2012, the Corporation recorded purchases of mortgage loans amounting to $215 million (March 31, 2011—$439 million). In addition, during the quarter ended March 31, 2012, the Corporation recorded purchases of construction loans amounting to $1 million (no construction loans were purchased during the quarter ended March 31, 2011). There were no significant purchases of commercial loans during the quarters ended March 31, 2012 and 2011.

 

23


Table of Contents

The Corporation performed whole-loan sales involving approximately $50 million of residential mortgage loans during the quarter ended March 31, 2012 (March 31, 2011—$235 million). Also, the Corporation securitized approximately $190 million of mortgage loans into Government National Mortgage Association (“GNMA”) mortgage-backed securities during the quarter ended March 31, 2012 (March 31, 2011—$256 million). Furthermore, the Corporation securitized approximately $60 million of mortgage loans into Federal National Mortgage Association (“FNMA”) mortgage-backed securities during the quarter ended March 31, 2012 (March 31, 2011—$73 million). The Corporation sold commercial and construction loans with a book value of approximately $20 million during the quarter ended March 31, 2012 (March 31, 2011—$2 million).

Non-covered loans

The following tables present non-covered loans held-in-portfolio by loan class that are in non-performing status or are accruing interest but are past due 90 days or more at March 31, 2012 and December 31, 2011. Accruing loans past due 90 days or more consist primarily of credit cards, FHA / VA and other insured mortgage loans, and delinquent mortgage loans which are included in the Corporation’s financial statements pursuant to GNMA’s buy-back option program. Servicers of loans underlying GNMA mortgage-backed securities must report as their own assets the defaulted loans that they have the option (but not the obligation) to repurchase, even when they elect not to exercise that option. Also, accruing loans past due 90 days or more include residential conventional loans purchased from another financial institution that, although delinquent, the Corporation has received timely payment from the seller / servicer, and, in some instances, have partial guarantees under recourse agreements. However, residential conventional loans purchased from another financial institution, which are in the process of foreclosure, are classified as non-performing mortgage loans.

 

At March 31, 2012

 
      Puerto Rico      U.S. mainland      Popular, Inc.  
      Non-covered loans                              
            Accruing             Accruing             Accruing  
     Non-accrual      loans past-due      Non-accrual      loans past-due      Non-accrual      loans past-due  

(In thousands)

   loans      90 days or more      loans      90 days or more      loans      90 days or more  

Commercial multi-family

   $ 14,666      $ —         $ 16,860      $ —         $ 31,526      $ —     

Commercial real estate non-owner occupied

     62,155        —           86,448        —           148,603        —     

Commercial real estate owner occupied

     377,623        —           52,979        —           430,602        —     

Commercial and industrial

     166,472        671        41,475        —           207,947        671  

Construction

     56,247        —           13,223        —           69,470        —     

Mortgage

     633,517        293,805        33,700        —           667,217        293,805  

Leasing

     5,673        —           —           —           5,673        —     

Legacy

     —           —           79,077        —           79,077        —     

Consumer:

                 

Credit cards

     —           24,478        623        —           623        24,478  

Home equity lines of credit

     —           439        12,212        —           12,212        439  

Personal

     17,630        —           1,639        —           19,269        —     

Auto

     6,527        —           38        —           6,565        —     

Other

     2,971        695        48        —           3,019        695  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total[1]

   $ 1,343,481      $ 320,088      $ 338,322      $ —         $ 1,681,803      $ 320,088  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

[1] For purposes of this table non-performing loans exclude $232 million in non-performing loans held-for-sale.

 

24


Table of Contents

At December 31, 2011

 
      Puerto Rico      U.S. mainland      Popular, Inc.  
      Non-covered loans                              
            Accruing             Accruing             Accruing  
     Non-accrual      loans past-due      Non-accrual      loans past-due      Non-accrual      loans past-due  

(In thousands)

   loans      90 days or more      loans      90 days or more      loans      90 days or more  

Commercial multi-family

   $ 15,396      $ —         $ 13,935      $ —         $ 29,331      $ —     

Commercial real estate non-owner occupied

     51,013        —           80,820        —           131,833        —     

Commercial real estate owner occupied

     385,303        —           59,726        —           445,029        —     

Commercial and industrial

     179,459        675        44,440        —           223,899        675  

Construction

     53,859        —           42,427        —           96,286        —     

Mortgage

     649,279        280,912        37,223        —           686,502        280,912  

Leasing

     5,642        —           —           —           5,642        —     

Legacy

     —           —           75,660        —           75,660        —     

Consumer:

                 

Credit cards

     —           25,748        735        —           735        25,748  

Home equity lines of credit

     —           157        10,065        —           10,065        157  

Personal

     19,317        —           1,516        —           20,833        —     

Auto

     6,830        —           34        —           6,864        —     

Other

     5,144        468        27        —           5,171        468  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total[1]

   $ 1,371,242      $ 307,960      $ 366,608      $ —         $ 1,737,850      $ 307,960  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

[1] For purposes of this table non-performing loans exclude $262 million in non-performing loans held-for-sale.

The following tables present loans by past due status at March 31, 2012 and December 31, 2011 for non-covered loans held-in-portfolio (net of unearned income).

 

March 31, 2012

 

Puerto Rico

 

Non- covered loans

 
      Past due             Non - covered  
     30-59      60-89      90 days      Total             loans HIP  

(In thousands)

   days      days      or more      past due      Current      Puerto Rico  

Commercial multi-family

   $ 409      $ —         $ 14,666      $ 15,075      $ 94,503      $ 109,578  

Commercial real estate non-owner occupied

     6,708        230        62,155        69,093        1,209,572        1,278,665  

Commercial real estate owner occupied

     51,307        10,426        377,623        439,356        1,648,609        2,087,965  

Commercial and industrial

     58,769        8,000        167,143        233,912        2,719,549        2,953,461  

Construction

     12,360        —           56,247        68,607        107,161        175,768  

Mortgage

     261,859        45,756        927,322        1,234,937        3,525,408        4,760,345  

Leasing

     9,203        1,448        5,673        16,324        526,990        543,314  

Consumer:

                 

Credit cards

     15,323        11,016        24,478        50,817        1,140,363        1,191,180  

Home equity lines of credit

     205        340        439        984        18,693        19,677  

Personal

     15,471        9,360        17,630        42,461        932,538        974,999  

Auto

     21,213        5,817        6,527        33,557        498,360        531,917  

Other

     678        651        3,666        4,995        228,735        233,730  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 453,505      $ 93,044      $ 1,663,569      $ 2,210,118      $ 12,650,481      $ 14,860,599  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

25


Table of Contents

March 31, 2012

 

U.S. mainland

 
      Past due                
     30-59      60-89      90 days      Total             Loans HIP  

(In thousands)

   days      days      or more      past due      Current      U.S. mainland  

Commercial multi-family

   $ 4,107      $ —         $ 16,860      $ 20,967      $ 671,741      $ 692,708  

Commercial real estate non-owner occupied

     31,834        169        86,448        118,451        1,244,245        1,362,696  

Commercial real estate owner occupied

     14,371        237        52,979        67,587        509,999        577,586  

Commercial and industrial

     8,159        605        41,475        50,239        755,344        805,583  

Construction

     681        —           13,223        13,904        46,907        60,811  

Mortgage

     32,232        4,798        33,700        70,730        760,670        831,400  

Legacy

     18,752        1,806        79,077        99,635        504,239        603,874  

Consumer:

                 

Credit cards

     178        169        623        970        12,401        13,371  

Home equity lines of credit

     4,804        1,938        12,212        18,954        503,618        522,572  

Personal

     5,082        98        1,639        6,819        137,517        144,336  

Auto

     31        5        38        74        1,584        1,658  

Other

     11        18        48        77        1,403        1,480  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 120,242      $ 9,843      $ 338,322      $ 468,407      $ 5,149,668      $ 5,618,075  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

March 31, 2012

 

Popular, Inc.

 

Non-covered loans

 
      Past due             Non-covered  
     30-59      60-89      90 days      Total             loans HIP  

(In thousands)

   days      days      or more      past due      Current      Popular, Inc.  

Commercial multi-family

   $ 4,516      $ —         $ 31,526      $ 36,042      $ 766,244      $ 802,286  

Commercial real estate non-owner occupied

     38,542        399        148,603        187,544        2,453,817        2,641,361  

Commercial real estate owner occupied

     65,678        10,663        430,602        506,943        2,158,608        2,665,551  

Commercial and industrial

     66,928        8,605        208,618        284,151        3,474,893        3,759,044  

Construction

     13,041        —           69,470        82,511        154,068        236,579  

Mortgage

     294,091        50,554        961,022        1,305,667        4,286,078        5,591,745  

Leasing

     9,203        1,448        5,673        16,324        526,990        543,314  

Legacy

     18,752        1,806        79,077        99,635        504,239        603,874  

Consumer:

                 

Credit cards

     15,501        11,185        25,101        51,787        1,152,764        1,204,551  

Home equity lines of credit

     5,009        2,278        12,651        19,938        522,311        542,249  

Personal

     20,553        9,458        19,269        49,280        1,070,055        1,119,335  

Auto

     21,244        5,822        6,565        33,631        499,944        533,575  

Other

     689        669        3,714        5,072        230,138        235,210  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 573,747      $ 102,887      $ 2,001,891      $ 2,678,525      $ 17,800,149      $ 20,478,674  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

26


Table of Contents

December 31, 2011

 

Puerto Rico

 

Non-covered loans

 
      Past due             Non-covered  
     30-59      60-89      90 days      Total             loans HIP  

(In thousands)

   days      days      or more      past due      Current      Puerto Rico  

Commercial multi-family

   $ 435      $ 121      $ 15,396      $ 15,952      $ 107,164      $ 123,116  

Commercial real estate non-owner occupied

     16,584        462        51,013        68,059        1,193,447        1,261,506  

Commercial real estate owner occupied

     39,578        21,003        385,303        445,884        1,785,542        2,231,426  

Commercial and industrial

     46,013        17,233        180,134        243,380        2,611,154        2,854,534  

Construction

     608        21,055        53,859        75,522        85,419        160,941  

Mortgage

     202,072        98,565        930,191        1,230,828        3,458,655        4,689,483  

Leasing

     7,927        2,301        5,642        15,870        532,836        548,706  

Consumer:

                 

Credit cards

     14,507        11,479        25,748        51,734        1,164,086        1,215,820  

Home equity lines of credit

     155        395        157        707        19,344        20,051  

Personal

     17,583        10,434        19,317        47,334        935,854        983,188  

Auto

     22,677        5,883        6,830        35,390        480,874        516,264  

Other

     1,740        1,442        5,612        8,794        226,310        235,104  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 369,879      $ 190,373      $ 1,679,202      $ 2,239,454      $ 12,600,685      $ 14,840,139  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

December 31, 2011

 

U.S. mainland

 
      Past due                
     30-59      60-89      90 days      Total             Loans HIP  

(In thousands)

   days      days      or more      past due      Current      U.S. mainland  

Commercial multi-family

   $ 14,582      $ —         $ 13,935      $ 28,517      $ 657,300      $ 685,817  

Commercial real estate non-owner occupied

     15,794        3,168        80,820        99,782        1,304,211        1,403,993  

Commercial real estate owner occupied

     14,004        449        59,726        74,179        511,661        585,840  

Commercial and industrial

     22,545        3,791        44,440        70,776        756,319        827,095  

Construction

     —           —           42,427        42,427        36,571        78,998  

Mortgage

     30,594        13,190        37,223        81,007        747,970        828,977  

Legacy

     30,712        7,536        75,660        113,908        534,501        648,409  

Consumer:

                 

Credit cards

     314        229        735        1,278        12,931        14,209  

Home equity lines of credit

     7,090        3,587        10,065        20,742        517,101        537,843  

Personal

     3,574        2,107        1,516        7,197        140,208        147,405  

Auto

     106        37        34        177        2,035        2,212  

Other

     29        10        27        66        1,593        1,659  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 139,344      $ 34,104      $ 366,608      $ 540,056      $ 5,222,401      $ 5,762,457  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

27


Table of Contents

December 31, 2011

 

Popular, Inc.

 

Non-covered loans

 
      Past due             Non-covered  
     30-59      60-89      90 days      Total             loans HIP  

(In thousands)

   days      days      or more      past due      Current      Popular, Inc.  

Commercial multi-family

   $ 15,017      $ 121      $ 29,331      $ 44,469      $ 764,464      $ 808,933  

Commercial real estate non-owner occupied

     32,378        3,630        131,833        167,841        2,497,658        2,665,499  

Commercial real estate owner occupied

     53,582        21,452        445,029        520,063        2,297,203        2,817,266  

Commercial and industrial

     68,558        21,024        224,574        314,156        3,367,473        3,681,629  

Construction

     608        21,055        96,286        117,949        121,990        239,939  

Mortgage

     232,666        111,755        967,414        1,311,835        4,206,625        5,518,460  

Leasing

     7,927        2,301        5,642        15,870        532,836        548,706  

Legacy

     30,712        7,536        75,660        113,908        534,501        648,409  

Consumer:

                 

Credit cards

     14,821        11,708        26,483        53,012        1,177,017        1,230,029  

Home equity lines of credit

     7,245        3,982        10,222        21,449        536,445        557,894  

Personal

     21,157        12,541        20,833        54,531        1,076,062        1,130,593  

Auto

     22,783        5,920        6,864        35,567        482,909        518,476  

Other

     1,769        1,452        5,639        8,860        227,903        236,763  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 509,223      $ 224,477      $ 2,045,810      $ 2,779,510      $ 17,823,086      $ 20,602,596  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table provides a breakdown of loans held-for-sale (“LHFS”) in non-performing status at March 31, 2012 and December 31, 2011 by main categories.

 

      Non-covered loans HFS  

(In thousands)

   March 31, 2012      December 31, 2011  

Commercial

   $ 25,994      $ 26,198  

Construction

     206,246        236,045  

Mortgage

     53        59  
  

 

 

    

 

 

 

Total

   $ 232,293      $ 262,302  
  

 

 

    

 

 

 

Covered loans

The following table presents covered loans in non-performing status and accruing loans past-due 90 days or more by loan class at March 31, 2012 and December 31, 2011.

 

     March 31, 2012      December 31, 2011  

Covered loans

 
     Non-accrual      Accruing loans past      Non-accrual      Accruing loans past  

(In thousands)

   loans      due 90 days or more      loans      due 90 days or more  

Commercial real estate

   $ 24,924      $ —         $ 14,241      $ 125  

Commercial and industrial

     62,324        463        63,858        1,392  

Construction

     4,541        6,172        4,598        5,677  

Mortgage

     423        113        423        113  

Consumer

     483        625        516        377  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total[1]

   $ 92,695      $ 7,373      $ 83,636      $ 7,684  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

[1] Covered loans accounted for under ASC Subtopic 310-30 are excluded from the above table as they are considered to be performing due to the application of the accretion method, in which these loans will accrete interest income over the remaining life of the loans using estimated cash flow analyses.

 

28


Table of Contents

The following tables present loans by past due status at March 31, 2012 and December 31, 2011 for covered loans held-in-portfolio. The information considers covered loans accounted for under ASC Subtopic 310-20 and ASC Subtopic 310-30.

 

March 31, 2012

 

Covered loans

 
      Past due                
     30-59      60-89      90 days      Total             Covered  

(In thousands)

   days      days      or more      past due      Current      loans HIP  

Commercial real estate

   $ 53,879      $ 20,695      $ 537,549      $ 612,123      $ 1,590,737      $ 2,202,860  

Commercial and industrial

     5,483        4,708        93,658        103,849        124,992        228,841  

Construction

     2,411        480        415,960        418,851        113,582        532,433  

Mortgage

     58,408        6,532        187,719        252,659        898,337        1,150,996  

Consumer

     5,018        1,939        14,701        21,658        85,000        106,658  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total covered loans

   $ 125,199      $ 34,354      $ 1,249,587      $ 1,409,140      $ 2,812,648      $ 4,221,788  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

December 31, 2011

 

Covered loans

 
      Past due                
     30-59      60-89      90 days      Total             Covered  

(In thousands)

   days      days      or more      past due      Current      loans HIP  

Commercial real estate

   $ 35,286      $ 25,273      $ 519,222      $ 579,781      $ 1,691,514      $ 2,271,295  

Commercial and industrial

     4,438        1,390        99,555        105,383        136,064        241,447  

Construction

     997        625        434,661        436,283        110,543        546,826  

Mortgage

     32,371        28,238        196,541        257,150        915,804        1,172,954  

Consumer

     2,913        3,289        15,551        21,753        94,428        116,181  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total covered loans

   $ 76,005      $ 58,815      $ 1,265,530      $ 1,400,350      $ 2,948,353      $ 4,348,703  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The carrying amount of the covered loans consisted of loans determined to be impaired at the time of acquisition, which are accounted for in accordance with ASC Subtopic 310-30 (“credit impaired loans”), and loans that were considered to be performing at the acquisition date, accounted for by analogy to ASC Subtopic 310-30 (“non-credit impaired loans”), as detailed in the following table.

 

      March 31, 2012     December 31, 2011  
      Covered loans ASC 310-30  
      Carrying amount     Carrying amount  

(In thousands)

   Non-credit
impaired loans
    Credit impaired
loans
    Total     Non-credit
impaired loans
    Credit impaired
loans
    Total  

Commercial real estate

   $ 1,853,679     $ 215,758     $ 2,069,437     $ 1,920,141     $ 215,560     $ 2,135,701  

Commercial and industrial

     79,335       3,482       82,817       85,859       4,621       90,480  

Construction

     199,724       309,418       509,142       279,561       260,208       539,769  

Mortgage

     1,125,643       13,288       1,138,931       1,065,842       102,027       1,167,869  

Consumer

     86,930       7,648       94,578       95,048       7,604       102,652  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Carrying amount

     3,345,311       549,594       3,894,905       3,446,451       590,020       4,036,471  

Allowance for loan losses

     (63,240     (31,319     (94,559     (62,951     (20,526     (83,477
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Carrying amount, net of allowance

   $ 3,282,071     $ 518,275     $ 3,800,346     $ 3,383,500     $ 569,494     $ 3,952,994  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

29


Table of Contents

The outstanding principal balance of covered loans accounted pursuant to ASC Subtopic 310-30, including amounts charged off by the Corporation, amounted to $5.8 billion at March 31, 2012 (December 31, 2011—$6.0 billion). At March 31, 2012, none of the acquired loans from the Westernbank FDIC-assisted transaction accounted for under ASC Subtopic 310-30 were considered non-performing loans. Therefore, interest income, through accretion of the difference between the carrying amount of the loans and the expected cash flows, was recognized on all acquired loans.

Changes in the carrying amount and the accretable yield for the covered loans accounted pursuant to the ASC Subtopic 310-30, for the quarters ended March 31, 2012 and 2011, were as follows:

 

      Activity in the accretable discount  
      Covered loans ASC 310-30  
      For the quarters ended  
      March 31, 2012     March 31, 2011  
     Non-credit     Credit           Non-credit     Credit        
     impaired     impaired           impaired     impaired        

(In thousands)

   loans     loans     Total     loans     loans     Total  

Beginning balance

   $ 1,428,764     $ 41,495     $ 1,470,259     $ 1,307,927     $ 23,181     $ 1,331,108  

Accretion

     (62,467     (6,870     (69,337     (63,418     (9,514     (72,932

Change in expected cash flows

     148,422       (6,825     141,597       —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 1,514,719     $ 27,800     $ 1,542,519     $ 1,244,509     $ 13,667     $ 1,258,176  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

      Carrying amount of covered loans accounted for pursuant to ASC 310-30  
      For the quarters ended  
      March 31, 2012     March 31, 2011  
     Non-credit     Credit           Non-credit     Credit        
     impaired     impaired           impaired     impaired        

(In thousands)

   loans     loans     Total     loans     loans     Total  

Beginning balance

   $ 3,383,500     $ 569,494     $ 3,952,994     $ 3,894,379     $ 645,549     $ 4,539,928  

Accretion

     62,467       6,870       69,337       63,418       9,514       72,932  

Collections

     (100,656     (26,770     (127,426     (169,147     (20,217     (189,364
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 3,345,311     $ 549,594     $ 3,894,905     $ 3,788,650     $ 634,846     $ 4,423,496  

Allowance for loan losses

            

ASC 310-30 covered loans

     (63,240     (31,319     (94,559     —          (5,297     (5,297
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ 3,282,071     $ 518,275     $ 3,800,346     $ 3,788,650     $ 629,549     $ 4,418,199  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following table provides the activity in the allowance for loan losses related to covered loans accounted for pursuant to ASC Subtopic 310-30.

 

      ASC 310-30 Covered loans  

(In thousands)

   March 31, 2012     March 31, 2011  

Balance at beginning of period

   $ 83,477     $ —     

Provision for loan losses

     11,370       9,127  

Net charge-offs

     (288     (3,830
  

 

 

   

 

 

 

Balance at end of period

   $ 94,559     $ 5,297  
  

 

 

   

 

 

 

The Corporation accounts for lines of credit with revolving privileges under the accounting guidance of ASC Subtopic 310-20. Covered loans accounted for under ASC Subtopic 310-20 amounted to $0.3 billion at March 31, 2012 and 2011.

 

30


Table of Contents

Note 8 – Allowance for loan losses

The Corporation’s assessment of the allowance for loan losses is determined in accordance with accounting guidance, specifically guidance of loss contingencies in ASC Subtopic 450-20 and loan impairment guidance in ASC Section 310-10-35.

The accounting guidance provides for the recognition of a loss allowance for groups of homogeneous loans. The determination for general reserves of the allowance for loan losses includes the following principal factors:

 

   

Historical net loss rates (including losses from impaired loans) by loan type and by legal entity adjusted for recent net charge-off trends and environmental factors. The base net loss rates are based on the moving average of annualized net charge-offs computed over a 3-year historical loss window for the commercial and construction loan portfolios, and an 18-month period for the consumer and mortgage loan portfolios.

 

   

Net charge-off trend factors are applied to adjust the base loss rates based on recent loss trends. The Corporation applies a trend factor when base losses are below recent loss trends. Currently, the trend factor is based on the last 12 months of losses for the commercial, construction and legacy loan portfolios and 6 months of losses for the consumer and mortgage loan portfolios. The trend factor accounts for inherent imprecision and the “lagging perspective” in base loss rates. The trend factor replaces the base-loss period when it is higher than base loss up to a determined cap.

 

   

Environmental factors, which include credit and macroeconomic indicators such as employment, price index and construction permits, were adopted to account for current market conditions that are likely to cause estimated credit losses to differ from historical losses. The Corporation reflects the effect of these environmental factors on each loan group as an adjustment that, as appropriate, increases or decreases the historical loss rate applied to each group. Environmental factors provide updated perspective on credit and economic conditions. Correlation and regression analyses are used to select and weight these indicators.

During the first quarter of 2012, in order to better reflect current market conditions, management revised the estimation process for evaluating the adequacy of the general reserve component of the allowance for loan losses for the Corporation’s commercial and construction loan portfolios. The change in the methodology, which is described in the paragraphs below, was implemented as of March 31, 2012 and resulted in a reduction to the allowance for loan losses of $40.5 million. As part of the analyses performed with the revisions in the allowance for loan losses methodology, the Corporation recorded an increase of $15.7 million related to environmental factor reserves for BPPR’s commercial loan portfolio which although improving continues to warrant additional scrutiny. The net impact of the revisions in the allowance methodology and the aforementioned increase due to environmental factors was $24.8 million for the quarter.

Management made the following principal changes to the methodology during the first quarter of 2012:

 

   

Established a more granular stratification of the commercial loan portfolios to enhance the homogeneity of the loan classes. Previously, the Corporation used loan groupings for commercial loan portfolios based on business lines and collateral types (secured / unsecured loans). As part of the loan segregation, management evaluated the risk profiles of the loan portfolio, recent and historical credit and loss trends, current and expected portfolio behavior and the economic factors affecting the economy. The revised groupings consider product types (construction, commercial multifamily, commercial & industrial, non-owner occupied commercial real estate (“CRE”) and owner occupied CRE) and business lines for each of the Corporation’s reportable segments, BPPR and BPNA. In addition, the Corporation established a legacy portfolio at the BPNA reportable segment, comprised of commercial loans, construction loans and commercial lease financings related to certain lending products exited by the Corporation as part of restructuring efforts carried out in prior years.

The refinement in the loan groupings resulted in a decrease to the allowance for loan losses of $7.9 million at March 31, 2012, which consisted of a $9.7 million reduction related to the BPNA reportable segment, partially offset by an increase of $1.8 million related to the BPPR reportable segment.

 

   

Increased the historical look-back period for determining the loss trend factor. The Corporation increased the look-back period for assessing recent trends applicable to the determination of commercial and construction loan net charge-offs from 6 months to 12 months.

Previously, the Corporation used a trend factor based on 6 months of net charge-offs as it aligned the estimation of inherent losses for the Corporation’s commercial and construction loan portfolios with deteriorating trends.

Given the current overall commercial and construction credit quality improvements noted on recent periods in terms of loss trends, non-performing loan balances and non-performing loan inflows, management concluded that a 12-month look-back period for the trend factor aligns the Corporation’s allowance for loan losses methodology to current credit quality trends.

The increase in the historical look-back period for determining the loss trend factor resulted in a decrease to the allowance for loan losses of $28.1 million at March 31, 2012, of which $24.0 million related to the BPPR reportable segment and $4.1 million to the BPNA reportable segment.

There were additional enhancements to the allowance for loan losses methodology which accounted for a reduction to the allowance for loan losses of $4.5 million at March 31, 2012, of which $3.9 million related to the BPNA reportable segment and $0.6 million to the BPPR reportable segment. This reduction related to loan portfolios with minimal or zero loss history.

There were no changes in the methodology for environmental factor reserves. There were no changes to the allowance for loan losses methodology for the Corporation’s consumer and mortgage loan portfolios during the first quarter of 2012.

 

31


Table of Contents

The following tables present the activity in the allowance for loan losses by portfolio segment for the quarters ended March 31, 2012 and 2011.

 

For the quarter ended March 31, 2012

 

Puerto Rico—Non-covered loans

 

(In thousands)

   Commercial     Construction     Mortgage     Leasing     Consumer     Total  

Allowance for credit losses:

            

Beginning balance

   $ 255,453     $ 5,850     $ 72,322     $ 4,651     $ 115,126     $ 453,402  

Provision

     3,394       450       36,411       470       27,067       67,792  

Charge-offs

     (47,644     (280     (13,491     (1,217     (32,238     (94,870

Recoveries

     10,126       651       1,265       1,063       8,107       21,212  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 221,329     $ 6,671     $ 96,507     $ 4,967     $ 118,062     $ 447,536  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the quarter ended March 31, 2012

 

Puerto Rico—Covered loans

 

(In thousands)

   Commercial     Construction     Mortgage     Leasing     Consumer     Total  

Allowance for credit losses:

            

Beginning balance

   $ 94,472     $ 20,435     $ 5,310     $ —        $ 4,728     $ 124,945  

Provision (reversal of provision)

     (300     9,556       5,410       —          3,543       18,209  

Charge-offs

     (4,102     (264     (203     —          (89     (4,658

Recoveries

     —          —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 90,070     $ 29,727     $ 10,517     $ —        $ 8,182     $ 138,496  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the quarter ended March 31, 2012

 

U.S. Mainland

 

(In thousands)

   Commercial     Construction     Mortgage     Legacy     Consumer     Total  

Allowance for credit losses:

            

Beginning balance

   $ 113,979     $ 2,631     $ 29,939     $ 46,228     $ 44,184     $ 236,961  

Provision (reversal of provision)

     (4,864     (3     4,261       12,055       3,273       14,722  

Charge-offs

     (19,602     (1,396     (5,332     (8,473     (10,358     (45,161

Recoveries

     2,737       1,230       104       4,915       1,724       10,710  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 92,250     $ 2,462     $ 28,972     $ 54,725     $ 38,823     $ 217,232  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

For the quarter ended March 31, 2012

 

Popular, Inc.

 

(In thousands)

   Commercial     Construction     Mortgage     Legacy     Leasing     Consumer     Total  

Allowance for credit losses:

              

Beginning balance

   $ 463,904     $ 28,916     $ 107,571     $ 46,228     $ 4,651     $ 164,038     $ 815,308  

Provision (reversal of provision)

     (1,770     10,003       46,082       12,055       470       33,883       100,723  

Charge-offs

     (71,348     (1,940     (19,026     (8,473     (1,217     (42,685     (144,689

Recoveries

     12,863       1,881       1,369       4,915       1,063       9,831       31,922  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 403,649     $ 38,860     $ 135,996     $ 54,725     $ 4,967     $ 165,067     $ 803,264  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

32


Table of Contents

For the quarter ended March 31, 2011

 

Puerto Rico—Non-covered loans

 

(In thousands)

   Commercial     Construction     Mortgage     Leasing     Consumer     Total  

Allowance for credit losses:

            

Beginning balance

   $ 256,643     $ 16,074     $ 42,029     $ 7,154     $ 133,531     $ 455,431  

Provision

     1,099       3,385       21,515       633       25,067       51,699  

Charge-offs

     (46,032     (9,754     (8,204     (1,946     (35,477     (101,413

Recoveries

     7,504       1,733       527       767       7,063       17,594  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 219,214     $ 11,438     $ 55,867     $ 6,608     $ 130,184     $ 423,311  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the quarter ended March 31, 2011

 

Puerto Rico—Covered Loans

 

(In thousands)

   Commercial     Construction     Mortgage     Leasing     Consumer     Total  

Allowance for credit losses:

            

Beginning balance

   $ —        $ —        $ —        $ —        $ —        $ —     

Provision

     3,642       11,279       59       —          577       15,557  

Charge-offs

     (1,707     (4,345     —          —          (346     (6,398

Recoveries

     —          —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 1,935     $ 6,934     $ 59     $ —        $ 231     $ 9,159  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the quarter ended March 31, 2011

 

U.S. Mainland

 

(In thousands)

   Commercial     Construction     Mortgage     Legacy     Consumer     Total  

Allowance for credit losses:

            

Beginning balance

   $ 143,281     $ 23,711     $ 28,839     $ 76,405     $ 65,558     $ 337,794  

Provision (reversal of provision)

     2,280       (808     (17,833     13,755       10,669       8,063  

Charge-offs

     (19,532     (982     (1,358     (23,504     (17,914     (63,290

Recoveries

     2,048       218       788       3,255       1,352       7,661  

Net recovery related to loans transferred to LHFS

     —          —          13,807       —          —          13,807  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 128,077     $ 22,139     $ 24,243     $ 69,911     $ 59,665     $ 304,035  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

For the quarter ended March 31, 2011

 

Popular, Inc.

 

(In thousands)

   Commercial     Construction     Mortgage     Legacy     Leasing     Consumer     Total  

Allowance for credit losses:

              

Beginning balance

   $ 399,924     $ 39,785     $ 70,868     $ 76,405     $ 7,154     $ 199,089     $ 793,225  

Provision

     7,021       13,856       3,741       13,755       633       36,313       75,319  

Charge-offs

     (67,271     (15,081     (9,562     (23,504     (1,946     (53,737     (171,101

Recoveries

     9,552       1,951       1,315       3,255       767       8,415       25,255  

Net recovery related to loans transferred to LHFS

     —          —          13,807       —          —          —          13,807  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 349,226     $ 40,511     $ 80,169     $ 69,911     $ 6,608     $ 190,080     $ 736,505  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

33


Table of Contents

The following tables present information at March 31, 2012, December 31, 2011 and March 31, 2011 regarding loan ending balances and the allowance for loan losses by portfolio segment and whether such loans and the allowance pertains to loans individually or collectively evaluated for impairment.

 

At March 31, 2012

 

Puerto Rico

 

(In thousands)

   Commercial      Construction      Mortgage      Leasing      Consumer      Total  

Allowance for credit losses:

                 

Specific ALLL non-covered loans

   $ 11,115      $ 1,013      $ 27,096      $ 1,344      $ 18,887      $ 59,455  

General ALLL non-covered loans

     210,214        5,658        69,411        3,623        99,175        388,081  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

ALLL - non-covered loans

     221,329        6,671        96,507        4,967        118,062        447,536  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Specific ALLL covered loans

     32,489        —           —           —           —           32,489  

General ALLL covered loans

     57,581        29,727        10,517        —           8,182        106,007  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

ALLL - covered loans

     90,070        29,727        10,517        —           8,182        138,496  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ALLL

   $ 311,399      $ 36,398      $ 107,024      $ 4,967      $ 126,244      $ 586,032  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans held-in-portfolio:

                 

Impaired non-covered loans

   $ 402,097      $ 51,023      $ 396,854      $ 5,412      $ 135,745      $ 991,131  

Non-covered loans held-in-portfolio excluding impaired loans

     6,027,572        124,745        4,363,491        537,902        2,815,758        13,869,468  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Non-covered loans held-in-portfolio

     6,429,669        175,768        4,760,345        543,314        2,951,503        14,860,599  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Impaired covered loans

     85,855        —           —           —           —           85,855  

Covered loans held-in-portfolio excluding impaired loans

     2,345,846        532,433        1,150,996        —           106,658        4,135,933  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Covered loans held-in-portfolio

     2,431,701        532,433        1,150,996        —           106,658        4,221,788  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans held-in-portfolio

   $ 8,861,370      $ 708,201      $ 5,911,341      $ 543,314      $ 3,058,161      $ 19,082,387  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At March 31, 2012

 

U.S. Mainland

 

(In thousands)

   Commercial      Construction      Mortgage      Legacy      Consumer      Total  

Allowance for credit losses:

                 

Specific ALLL

   $ 1,883      $ —         $ 13,850      $ 765      $ 103      $ 16,601  

General ALLL

     90,367        2,462        15,122        53,960        38,720        200,631  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ALLL

   $ 92,250      $ 2,462      $ 28,972      $ 54,725      $ 38,823      $ 217,232  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans held-in-portfolio:

                 

Impaired loans

   $ 150,055      $ 13,126      $ 53,900      $ 47,731      $ 2,455      $ 267,267  

Loans held-in-portfolio, excluding impaired loans

     3,288,518        47,685        777,500        556,143        680,962        5,350,808  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans held-in-portfolio

   $ 3,438,573      $ 60,811      $ 831,400      $ 603,874      $ 683,417      $ 5,618,075  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

34


Table of Contents

At March 31, 2012

 

Popular, Inc.

 

(In thousands)

   Commercial      Construction      Mortgage      Legacy      Leasing      Consumer      Total  

Allowance for credit losses:

                    

Specific ALLL non-covered loans

   $ 12,998      $ 1,013      $ 40,946      $ 765      $ 1,344      $ 18,990      $ 76,056  

General ALLL non-covered loans

     300,581        8,120        84,533        53,960        3,623        137,895        588,712  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

ALLL - non-covered loans

     313,579        9,133        125,479        54,725        4,967        156,885        664,768  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Specific ALLL covered loans

     32,489        —           —           —           —           —           32,489  

General ALLL covered loans

     57,581        29,727        10,517        —           —           8,182        106,007  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

ALLL - covered loans

     90,070        29,727        10,517        —           —           8,182        138,496  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ALLL

   $ 403,649      $ 38,860      $ 135,996      $ 54,725      $ 4,967      $ 165,067      $ 803,264  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans held-in-portfolio:

                    

Impaired non-covered loans

   $ 552,152      $ 64,149      $ 450,754      $ 47,731      $ 5,412      $ 138,200      $ 1,258,398  

Non-covered loans held-in-portfolio excluding impaired loans

     9,316,090        172,430        5,140,991        556,143        537,902        3,496,720        19,220,276  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Non-covered loans held-in-portfolio

     9,868,242        236,579        5,591,745        603,874        543,314        3,634,920        20,478,674  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Impaired covered loans

     85,855        —           —           —           —           —           85,855  

Covered loans held-in-portfolio excluding impaired loans

     2,345,846        532,433        1,150,996        —           —           106,658        4,135,933  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Covered loans held-in-portfolio

     2,431,701        532,433        1,150,996        —           —           106,658        4,221,788  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans held-in-portfolio

   $ 12,299,943      $ 769,012      $ 6,742,741      $ 603,874      $ 543,314      $ 3,741,578      $ 24,700,462  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

At December 31, 2011

 

Puerto Rico

 

(In thousands)

   Commercial      Construction      Mortgage      Leasing      Consumer      Total  

Allowance for credit losses:

                 

Specific ALLL non-covered loans

   $ 10,407      $ 289      $ 14,944      $ 793      $ 16,915      $ 43,348  

General ALLL non-covered loans

     245,046        5,561        57,378        3,858        98,211        410,054  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

ALLL - non-covered loans

     255,453        5,850        72,322        4,651        115,126        453,402  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Specific ALLL covered loans

     27,086        —           —           —           —           27,086  

General ALLL covered loans

     67,386        20,435        5,310        —           4,728        97,859  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

ALLL - covered loans

     94,472        20,435        5,310        —           4,728        124,945  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ALLL

   $ 349,925      $ 26,285      $ 77,632      $ 4,651      $ 119,854      $ 578,347  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans held-in-portfolio:

                 

Impaired non-covered loans

   $ 403,089      $ 49,747      $ 333,346      $ 6,104      $ 137,582      $ 929,868  

Non-covered loans held-in-portfolio excluding impaired loans

     6,067,493        111,194        4,356,137        542,602        2,832,845        13,910,271  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Non-covered loans held-in-portfolio

     6,470,582        160,941        4,689,483        548,706        2,970,427        14,840,139  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Impaired covered loans

     76,798        —           —           —           —           76,798  

Covered loans held-in-portfolio excluding impaired loans

     2,435,944        546,826        1,172,954        —           116,181        4,271,905  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Covered loans held-in-portfolio

     2,512,742        546,826        1,172,954        —           116,181        4,348,703  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans held-in-portfolio

   $ 8,983,324      $ 707,767      $ 5,862,437      $ 548,706      $ 3,086,608      $ 19,188,842  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

35


Table of Contents

At December 31, 2011

 

U.S. Mainland

 

(In thousands)

   Commercial      Construction      Mortgage      Legacy      Consumer      Total  

Allowance for credit losses:

                 

Specific ALLL

   $ 1,331      $ —         $ 14,119      $ 57      $ 131      $ 15,638  

General ALLL

     112,648        2,631        15,820        46,171        44,053        221,323  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ALLL

   $ 113,979      $ 2,631      $ 29,939      $ 46,228      $ 44,184      $ 236,961  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans held-in-portfolio:

                 

Impaired loans

   $ 153,240      $ 41,963      $ 49,534      $ 48,890      $ 2,526      $ 296,153  

Loans held-in-portfolio, excluding impaired loans

     3,349,505        37,035        779,443        599,519        700,802        5,466,304  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans held-in-portfolio

   $ 3,502,745      $ 78,998      $ 828,977      $ 648,409      $ 703,328      $ 5,762,457  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

At December 31, 2011

 

Popular, Inc.

 

(In thousands)

   Commercial      Construction      Mortgage      Legacy      Leasing      Consumer      Total  

Allowance for credit losses:

                    

Specific ALLL non-covered loans

   $ 11,738      $ 289      $ 29,063      $ 57      $ 793      $ 17,046      $ 58,986  

General ALLL non-covered loans

     357,694        8,192        73,198        46,171        3,858        142,264        631,377  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

ALLL - non-covered loans

     369,432        8,481        102,261        46,228        4,651        159,310        690,363  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Specific ALLL covered loans

     27,086        —           —           —           —           —           27,086  

General ALLL covered loans

     67,386        20,435        5,310        —           —           4,728        97,859  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

ALLL - covered loans

     94,472        20,435        5,310        —           —           4,728        124,945  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ALLL

   $ 463,904      $ 28,916      $ 107,571      $ 46,228      $ 4,651      $ 164,038      $ 815,308  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans held-in-portfolio:

                    

Impaired non-covered loans

   $ 556,329      $ 91,710      $ 382,880      $ 48,890      $ 6,104      $ 140,108      $ 1,226,021  

Non-covered loans held-in-portfolio excluding impaired loans

     9,416,998        148,229        5,135,580        599,519        542,602        3,533,647        19,376,575  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Non-covered loans held-in-portfolio

     9,973,327        239,939        5,518,460        648,409        548,706        3,673,755        20,602,596  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Impaired covered loans

     76,798        —           —           —           —           —           76,798  

Covered loans held-in-portfolio excluding impaired loans

     2,435,944        546,826        1,172,954        —           —           116,181        4,271,905  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Covered loans held-in-portfolio

     2,512,742        546,826        1,172,954        —           —           116,181        4,348,703  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans held-in-portfolio

   $ 12,486,069      $ 786,765      $ 6,691,414      $ 648,409      $ 548,706      $ 3,789,936      $ 24,951,299  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

36


Table of Contents

At March 31, 2011

 

Puerto Rico

 

(In thousands)

   Commercial      Construction      Mortgage      Leasing      Consumer      Total  

Allowance for credit losses:

                 

Specific ALLL non-covered loans

   $ 8,212      $ —         $ 6,883      $ —         $ —         $ 15,095  

General ALLL non-covered loans

     211,002        11,438        48,984        6,608        130,184        408,216  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

ALLL - non-covered loans

     219,214        11,438        55,867        6,608        130,184        423,311  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Specific ALLL covered loans

     —           —           —           —           —           —     

General ALLL covered loans

     1,935        6,934        59        —           231        9,159  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

ALLL - covered loans

     1,935        6,934        59        —           231        9,159  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ALLL

   $ 221,149      $ 18,372      $ 55,926      $ 6,608      $ 130,415      $ 432,470  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans held-in-portfolio:

                 

Impaired non-covered loans

   $ 325,075      $ 56,607      $ 141,819      $ —         $ —         $ 523,501  

Non-covered loans held-in-portfolio excluding impaired loans

     6,337,511        92,682        3,889,361        565,881        2,852,855        13,738,290  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Non-covered loans held-in-portfolio

     6,662,586        149,289        4,031,180        565,881        2,852,855        14,261,791  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Impaired covered loans

     —           —           —           —           —           —     

Covered loans held-in-portfolio excluding impaired loans

     2,709,130        621,187        1,247,476        —           151,757        4,729,550  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Covered loans held-in-portfolio

     2,709,130        621,187        1,247,476        —           151,757        4,729,550  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans held-in-portfolio

   $ 9,371,716      $ 770,476      $ 5,278,656      $ 565,881      $ 3,004,612      $ 18,991,341  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At March 31, 2011

 

U.S. Mainland

 

(In thousands)

   Commercial      Construction      Mortgage      Legacy      Consumer      Total  

Allowance for credit losses:

                 

Specific ALLL

   $ 1,514      $ —         $ 1,283      $ —         $ —         $ 2,797  

General ALLL

     126,563        22,139        22,960        69,911        59,665        301,238  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ALLL

   $ 128,077      $ 22,139      $ 24,243      $ 69,911      $ 59,665      $ 304,035  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans held-in-portfolio:

                 

Impaired loans

   $ 124,004      $ 68,217      $ 5,207      $ 104,017      $ —         $ 301,445  

Loans held-in-portfolio, excluding impaired loans

     3,614,695        72,377        859,295        794,755        772,431        6,113,553  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans held-in-portfolio

   $ 3,738,699      $ 140,594      $ 864,502      $ 898,772      $ 772,431      $ 6,414,998  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

37


Table of Contents

At March 31, 2011

 

Popular, Inc.

 

(In thousands)

   Commercial      Construction      Mortgage      Legacy      Leasing      Consumer      Total  

Allowance for credit losses:

                    

Specific ALLL non-covered loans

   $ 9,726      $ —         $ 8,166      $ —         $ —         $ —         $ 17,892  

General ALLL non-covered loans

     337,565        33,577        71,944        69,911        6,608        189,849        709,454  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

ALLL - non-covered loans

     347,291        33,577        80,110        69,911        6,608        189,849        727,346  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Specific ALLL covered loans

     —           —           —           —           —           —           —     

General ALLL covered loans

     1,935        6,934        59        —           —           231        9,159  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

ALLL - covered loans

     1,935        6,934        59        —           —           231        9,159  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ALLL

   $ 349,226      $ 40,511      $ 80,169      $ 69,911      $ 6,608      $ 190,080      $ 736,505  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans held-in-portfolio:

                    

Impaired non-covered loans

   $ 449,079      $ 124,824      $ 147,026      $ 104,017      $ —         $ —         $ 824,946  

Non-covered loans held-in-portfolio excluding impaired loans

     9,952,206        165,059        4,748,656        794,755        565,881        3,625,286        19,851,843  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Non-covered loans held-in-portfolio

     10,401,285        289,883        4,895,682        898,772        565,881        3,625,286        20,676,789  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Impaired covered loans

     —           —           —           —           —           —           —     

Covered loans held-in-portfolio excluding impaired loans

     2,709,130        621,187        1,247,476        —           —           151,757        4,729,550  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Covered loans held-in-portfolio

     2,709,130        621,187        1,247,476        —           —           151,757        4,729,550  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans held-in-portfolio

   $ 13,110,415      $ 911,070      $ 6,143,158      $ 898,772      $ 565,881      $ 3,777,043      $ 25,406,339  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Impaired loans

The following tables present loans individually evaluated for impairment at March 31, 2012 and December 31, 2011.

 

March 31, 2012

 

Puerto Rico

 
     Impaired Loans – With an
Allowance
     Impaired Loans
With No Allowance
     Impaired Loans - Total  

(In thousands)

   Recorded
investment
     Unpaid
principal
balance
     Related
allowance
     Recorded
investment
     Unpaid
principal
balance
     Recorded
investment
     Unpaid
principal
balance
     Related
allowance
 

Commercial multi-family

   $ 143      $ 143      $ —         $ 8,629      $ 13,035      $ 8,772      $ 13,178      $ —     

Commercial real estate non-owner occupied

     23,072        24,403        1,988        39,455        43,338        62,527        67,741        1,988  

Commercial real estate owner occupied

     37,989        50,338        4,053        162,233        212,474        200,222        262,812        4,053  

Commercial and industrial

     38,950        43,746        5,074        91,626        128,809        130,576        172,555        5,074  

Construction

     4,716        9,187        1,013        46,307        96,665        51,023        105,852        1,013  

Mortgage

     375,863        380,449        27,096        20,991        20,991        396,854        401,440        27,096  

Leasing

     5,412        5,412        1,344        —           —           5,412        5,412        1,344  

Consumer:

                       

Credit cards

     39,045        39,045        1,973        —           —           39,045        39,045        1,973  

Personal

     92,042        92,042        16,208        —           —           92,042        92,042        16,208  

Other

     4,658        4,658        706        —           —           4,658        4,658        706  

Covered loans

     81,675        81,675        32,489        4,180        4,180        85,855        85,855        32,489  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Puerto Rico

   $ 703,565      $ 731,098      $ 91,944      $ 373,421      $ 519,492      $ 1,076,986      $ 1,250,590      $ 91,944  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

38


Table of Contents

March 31, 2012

 

U.S. mainland

 
     Impaired Loans – With an
Allowance
     Impaired Loans
With No Allowance
     Impaired Loans - Total  

(In thousands)

   Recorded
investment
     Unpaid
principal
balance
     Related
allowance
     Recorded
investment
     Unpaid
principal
balance
     Recorded
investment
     Unpaid
principal
balance
     Related
allowance
 

Commercial multi-family

   $ —         $ —         $ —         $ 11,719      $ 17,749      $ 11,719      $ 17,749      $ —     

Commercial real estate non-owner occupied

     4,364        4,817        1,591        60,981        88,638        65,345        93,455        1,591  

Commercial real estate owner occupied

     —           —           —           41,565        51,091        41,565        51,091        —     

Commercial and industrial

     4,151        4,151        292        27,275        33,453        31,426        37,604        292  

Construction

     —           —           —           13,126        15,066        13,126        15,066        —     

Mortgage

     49,136        49,823        13,850        4,764        —           53,900        49,823        13,850  

Legacy

     10,306        10,306        765        37,425        63,016        47,731        73,322        765  

Consumer

     2,455        2,455        103        —           —           2,455        2,455        103  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total U.S. mainland

   $ 70,412      $ 71,552      $ 16,601      $ 196,855      $ 269,013      $ 267,267      $ 340,565      $ 16,601  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

March 31, 2012

 

Popular, Inc.

 
     Impaired Loans – With an
Allowance
     Impaired Loans
With No Allowance
     Impaired Loans - Total  

(In thousands)

   Recorded
investment
     Unpaid
principal
balance
     Related
allowance
     Recorded
investment
     Unpaid
principal
balance
     Recorded
investment
     Unpaid
principal
balance
     Related
allowance
 

Commercial multi-family

   $ 143      $ 143      $ —         $ 20,348      $ 30,784      $ 20,491      $ 30,927      $ —     

Commercial real estate non-owner occupied

     27,436        29,220        3,579        100,436        131,976        127,872        161,196        3,579  

Commercial real estate owner occupied

     37,989        50,338        4,053        203,798        263,565        241,787        313,903        4,053  

Commercial and industrial

     43,101        47,897        5,366        118,901        162,262        162,002        210,159        5,366  

Construction

     4,716        9,187        1,013        59,433        111,731        64,149        120,918        1,013  

Mortgage

     424,999        430,272        40,946        25,755        20,991        450,754        451,263        40,946  

Legacy

     10,306        10,306        765        37,425        63,016        47,731        73,322        765  

Leasing

     5,412        5,412        1,344        —           —           5,412        5,412        1,344  

Consumer:

                       

Credit cards

     39,045        39,045        1,973        —           —           39,045        39,045        1,973  

Personal

     92,042        92,042        16,208        —           —           92,042        92,042        16,208  

Other

     7,113        7,113        809        —           —           7,113        7,113        809  

Covered loans

     81,675        81,675        32,489        4,180        4,180        85,855        85,855        32,489  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Popular, Inc.

   $ 773,977      $ 802,650      $ 108,545      $ 570,276      $ 788,505      $ 1,344,253      $ 1,591,155      $ 108,545  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011

 

Puerto Rico

 
     Impaired Loans – With an
Allowance
     Impaired Loans
With No Allowance
     Impaired Loans - Total  

(In thousands)

   Recorded
investment
     Unpaid
principal
balance
     Related
allowance
     Recorded
investment
     Unpaid
principal
balance
     Recorded
investment
     Unpaid
principal
balance
     Related
allowance
 

Commercial multi-family

   $ 10,463      $ 10,463      $ 575      $ 12,206      $ 21,312      $ 22,669      $ 31,775      $ 575  

Commercial real estate non-owner occupied

     5,909        7,006        836        45,517        47,439        51,426        54,445        836  

Commercial real estate owner occupied

     37,534        46,806        2,757        165,745        215,288        203,279        262,094        2,757  

Commercial and industrial

     42,294        55,180        6,239        83,421        108,224        125,715        163,404        6,239  

Construction

     1,672        2,369        289        48,075        101,042        49,747        103,411        289  

Mortgage

     333,346        336,682        14,944        —           —           333,346        336,682        14,944  

Leasing

     6,104        6,104        793        —           —           6,104        6,104        793  

Consumer:

                       

Credit cards

     38,874        38,874        2,151        —           —           38,874        38,874        2,151  

Personal

     93,760        93,760        14,115        —           —           93,760        93,760        14,115  

Other

     4,948        4,948        649        —           —           4,948        4,948        649  

Covered loans

     75,798        75,798        27,086        1,000        1,000        76,798        76,798        27,086  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Puerto Rico

   $ 650,702      $ 677,990      $ 70,434      $ 355,964      $ 494,305      $ 1,006,666      $ 1,172,295      $ 70,434  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

39


Table of Contents

December 31, 2011

 

U.S. mainland

 
      Impaired Loans – With an
Allowance
     Impaired Loans
With No Allowance
     Impaired Loans - Total  

(In thousands)

   Recorded
investment
     Unpaid
principal
balance
     Related
allowance
     Recorded
investment
     Unpaid
principal
balance
     Recorded
investment
     Unpaid
principal
balance
     Related
allowance
 

Commercial multi-family

   $ —         $ —         $ —         $ 8,655      $ 12,403      $ 8,655      $ 12,403      $ —     

Commercial real estate non-owner occupied

     1,306        1,306        214        61,111        83,938        62,417        85,244        214  

Commercial real estate owner occupied

     1,239        1,239        455        46,403        56,229        47,642        57,468        455  

Commercial and industrial

     7,390        7,390        662        27,136        29,870        34,526        37,260        662  

Construction

     —           —           —           41,963        44,751        41,963        44,751        —     

Mortgage

     39,570        39,899        14,119        9,964        9,964        49,534        49,863        14,119  

Legacy

     6,013        6,013        57        42,877        69,221        48,890        75,234        57  

Consumer:

                       

Auto

     93        93        6        —           —           93        93        6  

Other Consumer

     2,433        2,433        125        —           —           2,433        2,433        125  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total U.S. mainland

   $ 58,044      $ 58,373      $ 15,638      $ 238,109      $ 306,376      $ 296,153      $ 364,749      $ 15,638  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011

 

Popular, Inc.

 
     Impaired Loans – With an
Allowance
     Impaired Loans
With No Allowance
     Impaired Loans - Total  

(In thousands)

   Recorded
investment
     Unpaid
principal
balance
     Related
allowance
     Recorded
investment
     Unpaid
principal
balance
     Recorded
investment
     Unpaid
principal
balance
     Related
allowance
 

Commercial multi-family

   $ 10,463      $ 10,463      $ 575      $ 20,861      $ 33,715      $ 31,324      $ 44,178      $ 575  

Commercial real estate non-owner occupied

     7,215        8,312        1,050        106,628        131,377        113,843        139,689        1,050  

Commercial real estate owner occupied

     38,773        48,045        3,212        212,148        271,517        250,921        319,562        3,212  

Commercial and industrial

     49,684        62,570        6,901        110,557        138,094        160,241        200,664        6,901  

Construction

     1,672        2,369        289        90,038        145,793        91,710        148,162        289  

Mortgage

     372,916        376,581        29,063        9,964        9,964        382,880        386,545        29,063  

Legacy

     6,013        6,013        57        42,877        69,221        48,890        75,234        57  

Leasing

     6,104        6,104        793        —           —           6,104        6,104        793  

Consumer:

                       

Credit cards

     38,874        38,874        2,151        —           —           38,874        38,874        2,151  

Personal

     93,760        93,760        14,115        —           —           93,760        93,760        14,115  

Auto

     93        93        6        —           —           93        93        6  

Other

     7,381        7,381        774        —           —           7,381        7,381        774  

Covered loans

     75,798        75,798        27,086        1,000        1,000        76,798        76,798        27,086  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Popular, Inc.

   $ 708,746      $ 736,363      $ 86,072      $ 594,073      $ 800,681      $ 1,302,819      $ 1,537,044      $ 86,072  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents the average recorded investment and interest income recognized on impaired loans for the quarters ended March 31, 2012 and 2011.

 

March 31, 2012

 
     Puerto Rico      U.S. Mainland      Popular, Inc.  

(In thousands)

   Average
recorded
investment
     Interest
income
recognized
     Average
recorded
investment
     Interest
income
recognized
     Average
recorded
investment
     Interest
income
recognized
 

Commercial multi-family

   $ 15,721      $ —         $ 10,187      $ 90      $ 25,908      $ 90  

Commercial real estate non-owner occupied

     56,977        181        63,881        487        120,858        668  

Commercial real estate owner occupied

     201,750        576        44,604        —           246,354        576  

Commercial and industrial

     128,146        483        32,976        37        161,122        520  

Construction

     50,385        16        27,545        —           77,930        16  

Mortgage

     365,100        5,573        51,717        482        416,817        6,055  

Legacy

     —           —           48,311        46        48,311        46  

Leasing

     5,758        —           —           —           5,758        —     

Consumer:

                 

Credit cards

     38,959        —           —           —           38,959        —     

Personal

     92,901        —           —           —           92,901        —     

Auto

     —           —           46        —           46        —     

Other

     4,803        —           2,444        —           7,247        —     

Covered loans

     81,327        —           —           —           81,327        —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Popular, Inc.

   $ 1,041,827      $ 6,829      $ 281,711      $ 1,142      $ 1,323,538      $ 7,971  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

40


Table of Contents

 

 

March 31, 2011

 
     Puerto Rico      U.S. Mainland      Popular, Inc.  

(In thousands)

   Average
recorded
investment
     Interest
income
recognized
     Average
recorded
investment
     Interest
income
recognized
     Average
recorded
investment
     Interest
income
recognized
 

Commercial multi-family

   $ 14,744      $ 106      $ 5,982      $ —         $ 20,726      $ 106  

Commercial real estate non-owner occupied

     27,542        117        92,583        114        120,125        231  

Commercial real estate owner occupied

     183,972        446        14,527        69        198,499        515  

Commercial and industrial

     91,570        252        10,409        31        101,979        283  

Construction

     61,153        49        116,921        124        178,074        173  

Mortgage

     131,514        1,914        2,603        98        134,117        2,012  

Legacy

     —           —           58,202        28        58,202        28  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Popular, Inc.

   $ 510,495      $ 2,884      $ 301,227      $ 464      $ 811,722      $ 3,348  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Modifications

Troubled debt restructurings related to non-covered loan portfolios amounted to $911 million at March 31, 2012 (December 31, 2011—$881 million). The amount of outstanding commitments to lend additional funds to debtors owing receivables whose terms have been modified in troubled debt restructurings amounted to $445 thousand related to the construction loan portfolio and $3 million related to the commercial loan portfolio at March 31, 2012 (December 31, 2011—$152 thousand and $3 million, respectively).

A modification of a loan constitutes a troubled debt restructuring (“TDR”) when a borrower is experiencing financial difficulty and the modification constitutes a concession.

Commercial and industrial loans modified in a TDR often involve temporary interest-only payments, term extensions, and converting evergreen revolving credit lines to long-term loans. Commercial real estate (“CRE”), which includes multifamily, owner-occupied and non-owner occupied CRE, and construction loans modified in a TDR often involve reducing the interest rate for a limited period of time or the remaining term of the loan, extending the maturity date at an interest rate lower than the current market rate for new debt with similar risk, or reductions in the payment plan. Construction loans modified in a TDR may also involve extending the interest-only payment period.

Residential mortgage loans modified in a TDR are primarily comprised of loans where monthly payments are lowered to accommodate the borrowers’ financial needs for a period of time, normally five to ten years. After the lowered monthly payment period ends, the borrower reverts back to paying principal and interest per the original terms with the maturity date adjusted accordingly.

Home equity modifications are made infrequently and are not offered if the Corporation also holds the first mortgage. Home equity modifications are uniquely designed to meet the specific needs of each borrower. Automobile loans modified in a TDR are primarily comprised of loans where the Corporation has lowered monthly payments by extending the term. Credit cards modified in a TDR are primarily comprised of loans where monthly payments are lowered to accommodate the borrowers’ financial needs for a period of time, normally up to 24 months.

Loans modified in a TDR that are not accounted pursuant to ASC 310-30 are typically already in non-accrual status at the time of the modification and partial charge-offs have in some cases already been taken against the outstanding loan balance. The TDR loan continues in non-accrual status until the borrower has demonstrated a willingness and ability to make the restructured loan payments (generally at least six months of sustained performance after the modification (or one year for loans providing for quarterly or semi-annual payments)) and management has concluded that it is probable that the borrower would not be in payment default in the foreseeable future.

Loans modified in a TDR may have the financial effect to the Corporation of increasing the specific allowance for loan losses associated with the loan. Consumer and residential mortgage loans modified under the Corporation’s loss mitigation programs that are determined to be TDRs are individually evaluated for impairment based on an analysis of discounted cash flows.

For consumer and mortgage loans that are modified with regard to payment terms and which constitute TDRs, the discounted cash flow value method is used as the impairment valuation is more appropriately calculated based on the ongoing cash flow from the individuals rather than the liquidation of the asset. The computations give consideration to probability of defaults and loss-given-foreclosure on the related estimated cash flows.

Commercial and construction loans that have been modified as part of loss mitigation efforts are evaluated individually for impairment. The vast majority of the Corporation’s modified commercial loans are measured for impairment using the estimated fair value of the collateral, as these are normally considered as collateral dependent loans. In very few instances, the Corporation

 

41


Table of Contents

measures modified commercial loans at their estimated realizable values determined by discounting the expected future cash flows. Construction loans that have been modified are also accounted for as collateral dependent loans. The Corporation determines the fair value measurement dependent upon its exit strategy for the particular asset(s) acquired in foreclosure. The discounted cash flows analyses for the commercial and construction TDRs, currently, do not consider a default component. As indicated above, the vast majority of the Corporation’s modified commercial and construction loans are measured for impairment using the estimated fair value of the collateral, thus the consideration of the default rates in the evaluation of TDRs in these portfolios is not deemed material.

The following tables present the loan count by type of modification for those loans modified in a TDR during the quarter ended March 31, 2012.

 

Puerto Rico

 

For the quarter ended March 31, 2012

 
     Reduction in
interest rate
     Extension of
maturity date
     Combination of
reduction in interest
rate and extension
of maturity date
     Other  

Commercial multi-family

     —           —           —           —     

Commercial real estate non-owner occupied

     1        3        —           —     

Commercial real estate owner occupied

     2        8        —           —     

Commercial and industrial

     17        31        —           —     

Construction

     1        1        —           —     

Mortgage

     36        41        335        45  

Leasing

     —           28        —           —     

Consumer:

           

Credit cards

     547        —           —           340  

HELOCs

     —           —           —           —     

Personal

     388        9        —           —     

Auto

     —           —           2        —     

Other

     11        —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     1,003        121        337        385  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

U.S. mainland

 

For the quarter ended March 31, 2012

 
     Reduction in
interest rate
     Extension of
maturity date
     Combination of
reduction in interest
rate and extension
of maturity date
     Other  
           

Commercial multi-family

     —           —           —           —     

Commercial real estate non-owner occupied

     —           —           —           1  

Commercial real estate owner occupied

     —           —           —           —     

Commercial and industrial

     —           —           —           —     

Construction

     —           —           —           1  

Mortgage

     2        —           25        —     

Legacy

     —           —           —           2  

Consumer:

           

Credit cards

     —           —           —           —     

HELOCs

     —           —           —           —     

Personal

     —           —           —           —     

Auto

     —           —           —           —     

Other

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     2        —           25        4  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

42


Table of Contents

Popular, Inc.

 

For the quarter ended March 31, 2012

 
     Reduction in
interest rate
     Extension of
maturity date
     Combination of
reduction in interest
rate and extension
of maturity date
     Other  
           

Commercial multi-family

     —           —           —           —     

Commercial real estate non-owner occupied

     1        3        —           1  

Commercial real estate owner occupied

     2        8        —           —     

Commercial and industrial

     17        31        —           —     

Construction

     1        1        —           1  

Mortgage

     38        41        360        45  

Legacy

     —           —           —           2  

Leasing

     —           28        —           —     

Consumer:

           

Credit cards

     547        —           —           340  

HELOCs

     —           —           —           —     

Personal

     388        9        —           —     

Auto

     —           —           2        —     

Other

     11        —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     1,005        121        362        389  
  

 

 

    

 

 

    

 

 

    

 

 

 

The following tables present by class, quantitative information related to loans modified as TDRs during the quarter ended March 31, 2012.

 

Puerto Rico

 

For the quarter ended March 31, 2012

 
(Dollars in thousands)    Loan count      Pre-modification
outstanding recorded
investment
     Post-modification
outstanding recorded
investment
     Increase (decrease) in the
allowance for loan losses
as a result of modification
 
           

Commercial multi-family

     —         $ —         $ —         $ —     

Commercial real estate non-owner occupied

     4        878        878        (38

Commercial real estate owner occupied

     10        3,212        3,212        (37

Commercial and industrial

     48        6,373        6,373        21  

Construction

     2        1,097        1,097        52  

Mortgage

     457        61,916        62,510        4,644  

Leasing

     28        510        486        50  

Consumer:

           

Credit cards

     887        7,225        8,366        40  

HELOCs

     —           —           —           —     

Personal

     397        4,782        4,788        720  

Auto

     2        45        24        (1

Other

     11        41        41        —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     1,846      $ 86,079      $ 87,775      $ 5,451  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

43


Table of Contents

U.S. Mainland

 

For the quarter ended March 31, 2012

 
(Dollars in thousands)    Loan count      Pre-modification outstanding
recorded investment
     Post-modification outstanding
recorded investment
     Increase (decrease) in the
allowance for loan losses as

a result of modification
 

Commercial multi-family

     —         $ —         $ —         $ —     

Commercial real estate non-owner occupied

     1        3,545        3,545        —     

Commercial real estate owner occupied

     —           —           —           —     

Commercial and industrial

     —           —           —           —     

Construction

     1        1,573        1,573        —     

Mortgage

     27        3,021        3,111        478  

Legacy

     2        951        951        —     

Consumer:

           

Credit cards

     —           —           —           —     

HELOCs

     —           —           —           —     

Personal

     —           —           —           —     

Auto

     —           —           —           —     

Other

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     31        $9,090        $9,180        $478  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

Popular, Inc.

 

For the quarter ended March 31, 2012

 
(Dollars in thousands)    Loan count      Pre-modification outstanding
recorded investment
     Post-modification outstanding
recorded investment
     Increase (decrease) in the
allowance for loan losses as  a
result of modification
 

Commercial multi-family

     —         $ —         $ —         $ —     

Commercial real estate non-owner occupied

     5        4,423        4,423        (38

Commercial real estate owner occupied

     10        3,212        3,212        (37

Commercial and industrial

     48        6,373        6,373        21  

Construction

     3        2,670        2,670        52  

Mortgage

     484        64,937        65,621        5,122  

Legacy

     2        951        951        —     

Leasing

     28        510        486        50  

Consumer:

           

Credit cards

     887        7,225        8,366        40  

HELOCs

     —           —           —           —     

Personal

     397        4,782        4,788        720  

Auto

     2        45        24        (1

Other

     11        41        41        —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     1,877      $ 95,169      $ 96,955      $ 5,929  
  

 

 

    

 

 

    

 

 

    

 

 

 

The following tables present by class, TDRs that were subject to payment default from January 1, 2012 through March 31, 2012 and that had been modified as a TDR during the twelve months preceding the default date. Payment default is defined as a restructured loan becoming 90 days past due after being modified, foreclosed or charged-off, whichever occurs first. The recorded investment at March 31, 2012 is inclusive of all partial paydowns and charge-offs since modification date. Loans modified as a TDR that were fully paid down, charged-off or foreclosed upon by period end are not reported.

 

44


Table of Contents

Puerto Rico

 

Defaulted during the quarter ended March 31, 2012

 
(Dollars In thousands)    Loan count      Recorded investment as of first default date during the
quarter ended March 31, 2012
 

Commercial multi-family

     —         $ —     

Commercial real estate non-owner occupied

     1        1,770  

Commercial real estate owner occupied

     7        1,746  

Commercial and industrial

     7        1,070  

Construction

     —           —     

Mortgage

     159        23,088  

Leasing

     9        369  

Consumer:

     

Credit cards

     240        2,046  

HELOCs

     —           —     

Personal

     96        739  

Auto

     —           —     

Other

     1        1  
  

 

 

    

 

 

 

Total

     520      $ 30,829  
  

 

 

    

 

 

 

 

U.S. mainland

 

Defaulted during the quarter ended March 31, 2012

 
(Dollars In thousands)    Loan count      Recorded investment as of first default date during the
quarter ended March 31, 2012
 

Commercial multi-family

     —         $ —     

Commercial real estate non-owner occupied

     1        1,935  

Commercial real estate owner occupied

     —           —     

Commercial and industrial

     —           —     

Construction

     —           —     

Mortgage

     3        413  

Legacy

     —           —     

Consumer:

     

Credit cards

     —           —     

HELOCs

     —           —     

Personal

     —           —     

Auto

     —           —     

Other

     —           —     
  

 

 

    

 

 

 

Total

     4      $ 2,348  
  

 

 

    

 

 

 

 

Popular, Inc.

 

Defaulted during the quarter ended March 31, 2012

 
(Dollars In thousands)    Loan count      Recorded investment as of first default date during the
quarter ended March 31, 2012
 
     

Commercial multi-family

     —         $ —     

Commercial real estate non-owner occupied

     2        3,705  

Commercial real estate owner occupied

     7        1,746  

Commercial and industrial

     7        1,070  

Construction

     —           —     

Mortgage

     162        23,501  

Legacy

     —           —     

Leasing

     9        369  

Consumer:

     

Credit cards

     240        2,046  

HELOCs

     —           —     

Personal

     96        739  

Auto

     —           —     

Other

     1        1  
  

 

 

    

 

 

 

Total

     524      $ 33,177  
  

 

 

    

 

 

 

 

45


Table of Contents

Commercial, consumer and mortgage loans modified in a TDR are closely monitored for delinquency as an early indicator of possible future default. If loans modified in a TDR subsequently default, the Corporation evaluates the loan for possible further impairment. The allowance for loan losses may be increased or partial charge-offs may be taken to further write-down the carrying value of the loan.

Credit Quality

The Corporation has defined a dual risk rating system to assign a rating to all credit exposures, particularly for the commercial and construction loan portfolios. Risk ratings in the aggregate provide the Corporation’s management the asset quality profile for the loan portfolio. The dual risk rating system provides for the assignment of ratings at the obligor level based on the financial condition of the borrower, and at the credit facility level based on the collateral supporting the transaction. The Corporation’s consumer and mortgage loans are not subject to the dual risk rating system. Consumer and mortgage loans are classified substandard or loss based on their delinquency status. All other consumer and mortgage loans that are not classified as substandard or loss would be considered “unrated”.

The Corporation’s obligor risk rating scales range from rating 1 (Excellent) to rating 14 (Loss). The obligor risk rating reflects the risk of payment default of a borrower in the ordinary course of business.

Pass Credit Classifications:

Pass (Scales 1 through 8) – Loans classified as pass have a well defined primary source of repayment very likely to be sufficient, with no apparent risk, strong financial position, minimal operating risk, profitability, liquidity and capitalization better than industry standards.

Watch (Scale 9) – Loans classified as watch have acceptable business credit, but borrowers’ operations, cash flow or financial condition evidence more than average risk, requires above average levels of supervision and attention from Loan Officers.

Special Mention (Scale 10) – Loans classified as special mention have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Corporation’s credit position at some future date.

Adversely Classified Classifications:

Substandard (Scales 11 and 12) – Loans classified as substandard are deemed to be inadequately protected by the current net worth and payment capacity of the obligor or of the collateral pledged, if any. Loans classified as such have well-defined weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful (Scale 13) - Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the additional characteristic that the weaknesses make the collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loss (Scale 14) – Uncollectible and of such little value that continuance as a bankable asset is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this asset even though partial recovery may be effected in the future.

Risk ratings scales 10 through 14 conform to regulatory ratings. The assignment of the obligor risk rating is based on relevant information about the ability of borrowers to service their debts such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors.

The Corporation periodically reviews loans classified as watch list or worse, to evaluate if they are properly classified, and to determine impairment, if any. The frequency of these reviews will depend on the amount of the aggregate outstanding debt, and the risk rating classification of the obligor. In addition, during the renewal process of applicable credit facilities, the Corporation evaluates the corresponding loan grades.

Loans classified as pass credits are excluded from the scope of the review process described above until: (a) they become past due; (b) management becomes aware of deterioration in the creditworthiness of the borrower; or (c) the customer contacts the Corporation for a modification. In these circumstances, the credit facilities are specifically evaluated to assign the appropriate risk rating classification.

 

46


Table of Contents

The Corporation has a Credit Process Review Group within the Corporate Credit Risk Management Division (“CCRMD”), which performs annual comprehensive credit process reviews of several middle markets, construction, asset-based and corporate banking lending groups in BPPR. This group evaluates the credit risk profile of each originating unit along with each unit’s credit administration effectiveness, including the assessment of the risk rating representative of the current credit quality of the loans, and the evaluation of collateral documentation. The monitoring performed by this group contributes to assess compliance with credit policies and underwriting standards, determine the current level of credit risk, evaluate the effectiveness of the credit management process and identify control deficiencies that may arise in the credit-granting process. Based on its findings, the Credit Process Review Group recommends corrective actions, if necessary, that help in maintaining a sound credit process. CCRMD has contracted an outside loan review firm to perform the credit process reviews for the portfolios of commercial and construction loans in the U.S. mainland operations. The CCRMD participates in defining the review plan with the outside loan review firm and actively participates in the discussions of the results of the loan reviews with the business units. The CCRMD may periodically review the work performed by the outside loan review firm. CCRMD reports the results of the credit process reviews to the Risk Management Committee of the Corporation’s Board of Directors.

The following table presents the outstanding balance, net of unearned income, of non-covered loans held-in-portfolio based on the Corporation’s assignment of obligor risk ratings as defined at March 31, 2012 and December 31, 2011.

 

March 31, 2012

 
            Special                                  Pass/         
(In thousands)    Watch      Mention      Substandard      Doubtful      Loss      Sub-total      Unrated      Total  

Puerto Rico[1]

                       

Commercial multi-family

   $ 411      $ 690      $ 15,748      $ —         $ —         $ 16,849      $ 92,729      $ 109,578  

Commercial real estate non-owner occupied

     161,701        128,583        211,376        2,802        —           504,462        774,203        1,278,665  

Commercial real estate owner occupied

     185,413        188,528        677,087        3,560        —           1,054,588        1,033,377        2,087,965  

Commercial and industrial

     330,584        268,899        476,301        3,223        1,084        1,080,091        1,873,370        2,953,461  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Commercial

     678,109        586,700        1,380,512        9,585        1,084        2,655,990        3,773,679        6,429,669  

Construction

     2,557        31,886        65,463        1,312        —           101,218        74,550        175,768  

Mortgage

     —           —           610,678        —           —           610,678        4,149,667        4,760,345  

Leasing

     —           —           3,385        —           2,289        5,674        537,640        543,314  

Consumer

     —           —           47,022        —           4,020        51,042        2,900,461        2,951,503  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Puerto Rico

   $ 680,666      $ 618,586      $ 2,107,060      $ 10,897      $ 7,393      $ 3,424,602      $ 11,435,997      $ 14,860,599  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

U.S. mainland

                       

Commercial multi-family

   $ 71,457      $ 10,546      $ 75,719      $ —         $ —         $ 157,722      $ 534,986      $ 692,708  

Commercial real estate non-owner occupied

     167,425        49,888        242,138        —           —           459,451        903,245        1,362,696  

Commercial real estate owner occupied

     27,156        13,717        143,120        —           —           183,993        393,593        577,586  

Commercial and industrial

     24,199        32,386        90,819        —           —           147,404        658,179        805,583  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Commercial

     290,237        106,537        551,796        —           —           948,570        2,490,003        3,438,573  

Construction

     1,515        —           35,262        —           —           36,777        24,034        60,811  

Mortgage

     —           —           33,767        —           —           33,767        797,633        831,400  

Legacy

     37,138        37,898        141,124        —           —           216,160        387,714        603,874  

Consumer

     —           —           6,741        —           7,818        14,559        668,858        683,417  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total U.S. mainland

   $ 328,890      $ 144,435      $ 768,690      $ —         $ 7,818      $ 1,249,833      $ 4,368,242      $ 5,618,075  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Popular, Inc.

                       

Commercial multi-family

   $ 71,868      $ 11,236      $ 91,467      $ —         $ —         $ 174,571      $ 627,715      $ 802,286  

Commercial real estate non-owner occupied

     329,126        178,471        453,514        2,802        —           963,913        1,677,448        2,641,361  

Commercial real estate owner occupied

     212,569        202,245        820,207        3,560        —           1,238,581        1,426,970        2,665,551  

Commercial and industrial

     354,783        301,285        567,120        3,223        1,084        1,227,495        2,531,549        3,759,044  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Commercial

     968,346        693,237        1,932,308        9,585        1,084        3,604,560        6,263,682        9,868,242  

Construction

     4,072        31,886        100,725        1,312        —           137,995        98,584        236,579  

Mortgage

     —           —           644,445        —           —           644,445        4,947,300        5,591,745  

Legacy

     37,138        37,898        141,124        —           —           216,160        387,714        603,874  

Leasing

     —           —           3,385        —           2,289        5,674        537,640        543,314  

Consumer

     —           —           53,763        —           11,838        65,601        3,569,319        3,634,920  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Popular, Inc.

   $ 1,009,556      $ 763,021      $ 2,875,750      $ 10,897      $ 15,211      $ 4,674,435      $ 15,804,239      $ 20,478,674  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents the weighted average obligor risk rating at March 31, 2012 for those classifications that consider a range of rating scales.

 

47


Table of Contents

Weighted average obligor risk rating

   (Scales 11 and 12)      (Scales 1 through 8)  
   Substandard      Pass  
Puerto Rico:[1]      

Commercial multi-family

     11.93        5.99  

Commercial real estate non-owner occupied

     11.28        7.08  

Commercial real estate owner occupied

     11.56        6.83  

Commercial and industrial

     11.38        6.81  
  

 

 

    

 

 

 

Total Commercial

     11.46        6.87  
  

 

 

    

 

 

 

Construction

     11.77        7.93  
  

 

 

    

 

 

 
     
U.S. mainland:    Substandard      Pass  

Commercial multi-family

     11.22        7.11  

Commercial real estate non-owner occupied

     11.36        6.98  

Commercial real estate owner occupied

     11.37        7.00  

Commercial and industrial

     11.44        6.88  
  

 

 

    

 

 

 

Total Commercial

     11.36        6.87  
  

 

 

    

 

 

 

Construction

     11.37        7.68  
  

 

 

    

 

 

 

Legacy

     11.50        7.46  
  

 

 

    

 

 

 

 

[1] Excludes covered loans acquired in the Westernbank FDIC-assisted transaction.

 

 

 

December 31, 2011

 

(In thousands)

   Watch      Special
Mention
     Substandard      Doubtful      Loss      Sub-total      Pass/
Unrated
     Total  

Puerto Rico[1]

                       

Commercial multi-family

   $ 420      $ 698      $ 11,848      $ —         $ —         $ 12,966      $ 110,150      $ 123,116  

Commercial real estate non-owner occupied

     177,523        134,266        210,596        2,886        —           525,271        736,235        1,261,506  

Commercial real estate owner occupied

     201,375        192,591        680,912        4,631        —           1,079,509        1,151,917        2,231,426  

Commercial and industrial

     248,188        282,935        439,853        3,326        1,458        975,760        1,878,774        2,854,534  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Commercial

     627,506        610,490        1,343,209        10,843        1,458        2,593,506        3,877,076        6,470,582  

Construction

     2,245        27,820        69,562        1,586        —           101,213        59,728        160,941  

Mortgage

     —           —           626,771        —           —           626,771        4,062,712        4,689,483  

Leasing

     —           —           1,365        —           4,277        5,642        543,064        548,706  

Consumer

     —           —           53,648        —           4,015        57,663        2,912,764        2,970,427  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Puerto Rico

   $ 629,751      $ 638,310      $ 2,094,555      $ 12,429      $ 9,750      $ 3,384,795      $ 11,455,344      $ 14,840,139  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

U.S. mainland

                       

Commercial multi-family

   $ 71,335      $ 8,230      $ 69,400      $ —         $ —         $ 148,965      $ 536,852      $ 685,817  

Commercial real estate non-owner occupied

     192,080        48,085        231,266        —           —           471,431        932,562        1,403,993  

Commercial real estate owner occupied

     21,109        20,859        146,367        —           —           188,335        397,505        585,840  

Commercial and industrial

     30,020        26,131        102,607        —           —           158,758        668,337        827,095  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Commercial

     314,544        103,305        549,640        —           —           967,489        2,535,256        3,502,745  

Construction

     3,202        10,609        54,096        —           —           67,907        11,091        78,998  

Mortgage

     —           —           37,236        —           —           37,236        791,741        828,977  

Legacy

     34,233        38,724        148,629        —           —           221,586        426,823        648,409  

Consumer

     —           —           5,667        —           6,711        12,378        690,950        703,328  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total U.S. mainland

   $ 351,979      $ 152,638      $ 795,268      $ —         $ 6,711      $ 1,306,596      $ 4,455,861      $ 5,762,457  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Popular, Inc.

                       

Commercial multi-family

   $ 71,755      $ 8,928      $ 81,248      $ —         $ —         $ 161,931      $ 647,002      $ 808,933  

Commercial real estate non-owner occupied

     369,603        182,351        441,862        2,886        —           996,702        1,668,797        2,665,499  

Commercial real estate owner occupied

     222,484        213,450        827,279        4,631        —           1,267,844        1,549,422        2,817,266  

Commercial and industrial

     278,208        309,066        542,460        3,326        1,458        1,134,518        2,547,111        3,681,629  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Commercial

     942,050        713,795        1,892,849        10,843        1,458        3,560,995        6,412,332        9,973,327  

Construction

     5,447        38,429        123,658        1,586        —           169,120        70,819        239,939  

Mortgage

     —           —           664,007        —           —           664,007        4,854,453        5,518,460  

Legacy

     34,233        38,724        148,629        —           —           221,586        426,823        648,409  

Leasing

     —           —           1,365        —           4,277        5,642        543,064        548,706  

Consumer

     —           —           59,315        —           10,726        70,041        3,603,714        3,673,755  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Popular, Inc.

   $ 981,730      $ 790,948      $ 2,889,823      $ 12,429      $ 16,461      $ 4,691,391      $ 15,911,205      $ 20,602,596  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
                       

 

48


Table of Contents

The following table presents the weighted average obligor risk rating at December 31, 2011 for those classifications that consider a range of rating scales.

 

Weighted average obligor risk rating    (Scales 11 and 12)
Substandard
     (Scales 1 through 8)
Pass
 

Puerto Rico:[1]

     

Commercial multi-family

     11.91        5.92  

Commercial real estate non-owner occupied

     11.23        7.16  

Commercial real estate owner occupied

     11.56        6.85  

Commercial and industrial

     11.40        6.62  
  

 

 

    

 

 

 

Total Commercial

     11.46        6.79  
  

 

 

    

 

 

 

Construction

     11.76        7.84  
  

 

 

    

 

 

 
     Substandard      Pass  

U.S. mainland:

     

Commercial multi-family

     11.20        7.09  

Commercial real estate non-owner occupied

     11.35        7.00  

Commercial real estate owner occupied

     11.41        7.04  

Commercial and industrial

     11.39        6.85  
  

 

 

    

 

 

 

Total Commercial

     11.35        6.99  
  

 

 

    

 

 

 

Construction

     11.78        7.52  
  

 

 

    

 

 

 

Legacy

     11.45        7.47  
  

 

 

    

 

 

 

 

[1] Excludes covered loans acquired in the Westernbank FDIC-assisted transaction.

 

 

Note 9 – FDIC loss share asset and true-up payment obligation

In connection with the Westernbank FDIC-assisted transaction, BPPR entered into loss share agreements with the FDIC with respect to the covered loans and other real estate owned. Pursuant to the terms of the loss share agreements, the FDIC’s obligation to reimburse BPPR for losses with respect to covered assets begins with the first dollar of loss incurred. The FDIC reimburses BPPR for 80% of losses with respect to covered assets, and BPPR reimburses the FDIC for 80% of recoveries with respect to losses for which the FDIC paid BPPR 80% reimbursement under the loss share agreements. The loss share agreement applicable to single-family residential mortgage loans provides for FDIC loss and recoveries sharing for ten years. The loss share agreement applicable to commercial (including construction) and consumer loans provides for FDIC loss sharing for five years and BPPR reimbursement to the FDIC for eight years, in each case, on the same terms and conditions as described above.

The following table sets forth the activity in the FDIC loss share asset for the periods presented.

 

     For the quarter ended March 31,  

(In thousands)

   2012     2011  

Balance at beginning of year

   $ 1,915,128     $ 2,410,219  

(Amortization) accretion of loss share indemnification asset, net

     (29,375     25,796  

Credit impairment losses to be covered under loss sharing agreements

     13,422       12,445  

Decrease due to reciprocal accounting on the discount accretion for loans and unfunded commitments accounted for under ASC Subtopic 310-20

     (248     (21,465

Payments received from FDIC under loss sharing agreements

     (20,896     (583

Other adjustments attributable to FDIC loss sharing agreements

     2,326       (107
  

 

 

   

 

 

 

Balance at March 31

   $ 1,880,357     $ 2,426,305  
  

 

 

   

 

 

 

As part of the loss share agreements, BPPR has to make a true-up payment to the FDIC on a pre-determined date following the true-up measurement date of the final shared-loss month, or upon the final disposition of all covered assets under the loss share agreements in the event losses on the loss share agreements fail to reach expected levels. The estimated fair value of such true-up payment obligation is recorded as contingent consideration, which is included in the caption of other liabilities in the consolidated statements of financial condition. Under the loss sharing agreements, BPPR will pay to the FDIC 50% of the excess, if any, of: (i) 20% of the intrinsic loss estimate of $4.6 billion (or $925 million) (as determined by the FDIC) less (ii) the sum of: (A) 25% of the asset discount (per bid) (or ($1.1 billion)); plus (B) 25% of the cumulative shared-loss payments (defined as the aggregate of all of the payments made or payable to BPPR minus the aggregate of all of the payments made or payable to the FDIC); plus (C) the sum of the period servicing amounts for every consecutive twelve-month period prior to and ending on the true-up measurement date in respect of each of the loss sharing agreements during which the loss sharing provisions of the applicable loss sharing agreement is in effect (defined as the product of the simple average of the principal amount of shared loss loans and shared loss assets at the beginning and end of such period times 1%).

 

49


Table of Contents

At March 31, 2012, the carrying amount of the true-up payment obligation amounted to $100 million (December 31, 2011—$98 million; March 31, 2011—$94 million).

The loss share agreements contain specific terms and conditions regarding the management of the covered assets that BPPR must follow in order to receive reimbursement on losses from the FDIC. Under the loss share agreements, BPPR must:

 

   

manage and administer the covered assets and collect and effect charge-offs and recoveries with respect to such covered assets in a manner consistent with its usual and prudent business and banking practices and, with respect to single family shared-loss loans, the procedures (including collection procedures) customarily employed by BPPR in servicing and administering mortgage loans for its own account and the servicing procedures established by FNMA or the Federal Home Loan Mortgage Corporation (“FHLMC”), as in effect from time to time, and in accordance with accepted mortgage servicing practices of prudent lending institutions;

 

   

exercise its best judgment in managing, administering and collecting amounts on covered assets and effecting charge-offs with respect to the covered assets;

 

   

use commercially reasonable efforts to maximize recoveries with respect to losses on single family shared-loss assets and best efforts to maximize collections with respect to commercial shared-loss assets;

 

   

retain sufficient staff to perform the duties under the loss share agreements;

 

   

adopt and implement accounting, reporting, record-keeping and similar systems with respect to the commercial shared-loss assets;

 

   

comply with the terms of the modification guidelines approved by the FDIC or another federal agency for any single-family shared-loss loan;

 

   

provide notice with respect to proposed transactions pursuant to which a third party or affiliate will manage, administer or collect any commercial shared-loss assets;

 

   

file monthly and quarterly certificates with the FDIC specifying the amount of losses, charge-offs and recoveries; and

 

   

maintain books and records sufficient to ensure and document compliance with the terms of the loss share agreements.

 

50


Table of Contents

Note 10 – Transfers of financial assets and mortgage servicing rights

The Corporation typically transfers conforming residential mortgage loans in conjunction with GNMA and FNMA securitization transactions whereby the loans are exchanged for cash or securities and servicing rights. The securities issued through these transactions are guaranteed by the corresponding agency and, as such, under seller/service agreements the Corporation is required to service the loans in accordance with the agencies’ servicing guidelines and standards. Substantially, all mortgage loans securitized by the Corporation in GNMA and FNMA securities have fixed rates and represent conforming loans. As seller, the Corporation has made certain representations and warranties with respect to the originally transferred loans and, in some instances, has sold loans with credit recourse to a government-sponsored entity, namely FNMA. Refer to Notes 17 and 19 to the consolidated financial statements for a description of such arrangements.

No liabilities were incurred as a result of the transfers occurring during the quarters ended March 31, 2012 and 2011 because they did not contain any credit recourse arrangements. During the quarter ended March 31, 2012, the Corporation recorded a net gain of $13.7 million (March 31, 2011—$6.3 million) related to the residential mortgage loans securitized.

The following tables present the initial fair value of the assets obtained as proceeds from residential mortgage loans securitized. Refer to Note 21 for a description of the level hierarchy.

 

     Proceeds Obtained During the Quarter Ended March 31, 2012  

(In thousands)

   Level 1      Level 2      Level 3      Initial Fair Value  

Assets

           

Trading account securities:

           

Mortgage-backed securities-GNMA

     —         $ 190,178        —         $ 190,178  

Mortgage-backed securities-FNMA

     —           59,535        —           59,535  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total trading account securities

     —         $ 249,713        —         $ 249,713  
  

 

 

    

 

 

    

 

 

    

 

 

 

Mortgage servicing rights

     —           —         $ 3,233      $ 3,233  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     —         $ 249,713      $ 3,233      $ 252,946  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Proceeds Obtained During the Quarter Ended March 31, 2011  

(In thousands)

   Level 1      Level 2      Level 3      Initial Fair Value  

Assets

           

Trading account securities:

           

Mortgage-backed securities-GNMA

     —         $ 255,574        —         $ 255,574  

Mortgage-backed securities-FNMA

     —           73,018        —           73,018  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total trading account securities

     —         $ 328,592        —         $ 328,592  
  

 

 

    

 

 

    

 

 

    

 

 

 

Mortgage servicing rights

     —           —         $ 5,949      $ 5,949  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     —         $ 328,592      $ 5,949      $ 334,541  
  

 

 

    

 

 

    

 

 

    

 

 

 

During the quarter ended March 31, 2012, the Corporation retained servicing rights on whole loan sales involving approximately $53 million in principal balance outstanding (March 31, 2011—$37 million), with realized gains of approximately $1.9 million (March 31, 2011—gains of $0.9 million). All loan sales performed during the quarters ended March 31, 2012 and 2011 were without credit recourse agreements.

The Corporation recognizes as assets the rights to service loans for others, whether these rights are purchased or result from asset transfers such as sales and securitizations.

Classes of mortgage servicing rights were determined based on the different markets or types of assets being serviced. The Corporation recognizes the servicing rights of its banking subsidiaries that are related to residential mortgage loans as a class of servicing rights. These mortgage servicing rights (“MSRs”) are measured at fair value. Fair value determination is performed on a subsidiary basis using a discounted cash flow model with assumptions varying in accordance with the types of assets or markets served.

 

51


Table of Contents

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 Corporation’s loan characteristics and portfolio behavior.

The following table presents the changes in MSRs measured using the fair value method.

 

Residential MSRs

 

(In thousands)

   March 31, 2012     March 31, 2011  

Fair value at beginning of period

   $ 151,323     $ 166,907  

Purchases

     474       383  

Servicing from securitizations or asset transfers

     3,757       6,297  

Changes due to payments on loans[1]

     (4,161     (3,246

Reduction due to loan repurchases

     (810     (1,008

Changes in fair value due to changes in valuation model inputs or assumptions

     5,755       (1,917

Other disposals

     (7     —     
  

 

 

   

 

 

 

Fair value at end of period

   $ 156,331     $ 167,416  
  

 

 

   

 

 

 

 

[1]

Represents changes due to collection / realization of expected cash flows over time.

 

 

Residential mortgage loans serviced for others were $17.2 billion at March 31, 2012 (December 31, 2011—$17.3 billion; March 31, 2011—$18.0 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 and other changes, including changes due to collection / realization of expected cash flows. Mortgage servicing fees, excluding fair value adjustments, for the quarter ended March 31, 2012 amounted to $12.1 million (March 31, 2011—$12.4 million). The banking subsidiaries receive servicing fees based on a percentage of the outstanding loan balance. At March 31, 2012, those weighted average mortgage servicing fees were 0.28% (March 31, 2011 – 0.26%). Under these servicing agreements, the banking subsidiaries do not generally earn significant prepayment penalty fees on the underlying loans serviced.

The section below includes information on assumptions used in the valuation model of the MSRs, originated and purchased.

Key economic assumptions used in measuring the servicing rights derived from loans securitized or sold by the Corporation during the quarters ended March 31, 2012 and 2011 were as follows:

 

     Quarter ended  
      March 31, 2012     March 31, 2011  

Prepayment speed

     5.6      4.9 

Weighted average life

     17.8 years        20.6 years   

Discount rate (annual rate)

     11.5      11.4 

 

52


Table of Contents

Key economic assumptions used to estimate the fair value of MSRs derived from sales and securitizations of mortgage loans performed by the banking subsidiaries and the sensitivity to immediate changes in those assumptions were as follows as of the end of the periods reported:

Originated MSRs

 

(In thousands)

   March 31, 2012     December 31, 2011     March 31, 2011  

Fair value of retained interests

   $ 101,890     $ 99,280     $ 104,513  

Weighted average life

     12.1 years        13.0 years        12.5 years   

Weighted average prepayment speed (annual rate)

     8.3      7.7      8.0 

Impact on fair value of 10% adverse change

   $ (3,129   $ (2,744   $ (3,441

Impact on fair value of 20% adverse change

   $ (6,385   $ (5,800   $ (6,811

Weighted average discount rate (annual rate)

     12.5      12.6      12.7 

Impact on fair value of 10% adverse change

   $ (4,142   $ (3,913   $ (4,582

Impact on fair value of 20% adverse change

   $ (8,234   $ (7,948   $ (8,895

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 were as follows as of the end of the periods reported:

Purchased MSRs

 

(In thousands)

   March 31, 2012     December 31, 2011     March 31, 2011  

Fair value of retained interests

   $ 54,441     $ 52,043     $ 62,903  

Weighted average life

     13.7 years        14.6 years        12.0 years   

Weighted average prepayment speed (annual rate)

     7.3      6.9      8.3 

Impact on fair value of 10% adverse change

   $ (1,958   $ (1,887   $ (2,577

Impact on fair value of 20% adverse change

   $ (3,474   $ (3,303   $ (4,642

Weighted average discount rate (annual rate)

     11.4      11.4      11.4 

Impact on fair value of 10% adverse change

   $ (2,405   $ (2,376   $ (2,821

Impact on fair value of 20% adverse change

   $ (4,305   $ (4,214   $ (5,077

The sensitivity analyses presented in the tables above for servicing rights are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on a 10 and 20 percent variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in the sensitivity tables included herein, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption. In reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments and increased credit losses), which might magnify or counteract the sensitivities.

At March 31, 2012, the Corporation serviced $3.3 billion (December 31, 2011—$3.5 billion; March 31, 2011—$3.8 billion) in residential mortgage loans with credit recourse to the Corporation.

Under the GNMA securitizations, the Corporation, as servicer, has the right to repurchase (but not the obligation), at its option and without GNMA’s prior authorization, any loan that is collateral for a GNMA guaranteed mortgage-backed security when certain delinquency criteria are met. At the time that individual loans meet GNMA’s specified delinquency criteria and are eligible for repurchase, the Corporation is deemed to have regained effective control over these loans if the Corporation was the pool issuer. At March 31, 2012, the Corporation had recorded $173 million in mortgage loans on its consolidated statements of financial condition related to this buy-back option program (December 31, 2011—$180 million; March 31, 2011—$157 million). As long as the Corporation continues to service the loans that continue to be collateral in a GNMA guaranteed mortgage-backed security, the MSR is recognized by the Corporation.

 

53


Table of Contents

Note 11– Other assets

The caption of other assets in the consolidated statements of financial condition consists of the following major categories:

 

(In thousands)

   March 31, 2012      December 31, 2011      March 31, 2011  

Net deferred tax assets (net of valuation allowance)

   $ 424,193      $ 429,691      $ 250,568  

Investments under the equity method

     335,762        313,152        294,559  

Bank-owned life insurance program

     238,870        238,077        239,103  

Prepaid FDIC insurance assessment

     34,634        58,082        129,093  

Other prepaid expenses

     69,524        77,335        66,719  

Derivative assets

     58,604        61,886        65,169  

Securities sold not yet delivered

     71,007        69,535        37,752  

Others

     206,938        214,635        231,776  
  

 

 

    

 

 

    

 

 

 

Total other assets

   $ 1,439,532      $ 1,462,393      $ 1,314,739  
  

 

 

    

 

 

    

 

 

 

Note 12 – Goodwill and other intangible assets

The changes in the carrying amount of goodwill for the quarter ended March 31, 2012 and 2011, allocated by reportable segments, were as follows (refer to Note 30 for the definition of the Corporation’s reportable segments):

 

2012

 

(In thousands)

   Balance at
January 1, 2012
     Goodwill on
acquisition
     Purchase
accounting
adjustments
    Other      Balance at
March 31, 2012
 

Banco Popular de Puerto Rico

   $ 246,272      $ —         $ (439   $ —         $ 245,833  

Banco Popular North America

     402,078        —           —          —           402,078  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total Popular, Inc.

   $ 648,350      $ —         $ (439   $ —         $ 647,911  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

2011

 

(In thousands)

   Balance at
January 1, 2011
     Goodwill on
acquisition
     Purchase
accounting
adjustments
    Other      Balance at
March 31, 2011
 

Banco Popular de Puerto Rico

   $ 245,309      $ —         $ —        $ —         $ 245,309  

Banco Popular North America

     402,078        —           —          —           402,078  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total Popular, Inc.

   $ 647,387      $ —         $ —        $ —         $ 647,387  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Purchase accounting adjustments consists 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.

 

54


Table of Contents

The following table presents the gross amount of goodwill and accumulated impairment losses by reportable segments.

 

March 31, 2012

 

(In thousands)

   Balance at
January 1,
2012

(gross amounts)
     Accumulated
impairment
losses
     Balance at
January 1,
2012

(net amounts)
     Balance at
March 31,
2012

(gross amounts)
     Accumulated
impairment
losses
     Balance at
March 31,
2012

(net amounts)
 

Banco Popular de Puerto Rico

   $ 246,272      $ —         $ 246,272      $ 245,833      $ —         $ 245,833  

Banco Popular North America

     566,489        164,411        402,078        566,489        164,411        402,078  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Popular, Inc.

   $ 812,761      $ 164,411      $ 648,350      $ 812,322      $ 164,411      $ 647,911  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

December 31, 2011

 

(In thousands)

   Balance at
January 1,
2011

(gross amounts)
     Accumulated
impairment
losses
     Balance at
January 1,
2011

(net amounts)
     Balance at
December 31,
2011

(gross amounts)
     Accumulated
impairment
losses
     Balance at
December 31,
2011

(net amounts)
 

Banco Popular de Puerto Rico

   $ 245,309      $ —         $ 245,309      $ 246,272      $ —         $ 246,272  

Banco Popular North America

     566,489        164,411        402,078        566,489        164,411        402,078  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Popular, Inc.

   $ 811,798      $ 164,411      $ 647,387      $ 812,761      $ 164,411      $ 648,350  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

March 31, 2011

 

(In thousands)

   Balance at
January 1,
2011

(gross amounts)
     Accumulated
impairment
losses
     Balance at
January 1,
2011

(net amounts)
     Balance at
March 31,
2011

(gross amounts)
     Accumulated
impairment
losses
     Balance at
March 31,
2011

(net amounts)
 

Banco Popular de Puerto Rico

   $ 245,309      $ —         $ 245,309      $ 245,309      $ —         $ 245,309  

Banco Popular North America

     566,489        164,411        402,078        566,489        164,411        402,078  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Popular, Inc.

   $ 811,798      $ 164,411      $ 647,387      $ 811,798      $ 164,411      $ 647,387  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At March 31, 2012, December 31, 2011 and March 31, 2011, the Corporation had $6 million of identifiable intangible assets, with indefinite useful lives, mostly associated with E-LOAN’s trademark.

The following table reflects the components of other intangible assets subject to amortization:

 

     March 31, 2012      December 31, 2011      March 31, 2011  

(In thousands)

   Gross
Amount
     Accumulated
Amortization
     Gross
Amount
     Accumulated
Amortization
     Gross
Amount
     Accumulated
Amortization
 

Core deposits

   $ 77,885      $ 37,543      $ 80,591      $ 38,199      $ 80,591      $ 31,912  

Other customer relationships

     19,791        4,563        19,953        4,643        5,092        3,578  

Other intangibles

     188        74        242        103        189        55  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 97,864      $ 42,180      $ 100,786      $ 42,945      $ 85,872      $ 35,545  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Certain core deposits and other customer relationships intangibles with a gross amount of $3 million and $0.6 million, respectively, became fully amortized during the quarter ended March 31, 2012, and, as such, their gross amount and accumulated amortization were eliminated from the tabular disclosure presented above.

 

55


Table of Contents

During the quarter ended March 31, 2012, the Corporation recognized $2.6 million in amortization expense related to other intangible assets with definite useful lives (March 31, 2011—$2.3 million).

The following table presents the estimated amortization of the intangible assets with definite useful lives for each of the following periods:

 

(In thousands)

      

Remaining 2012

   $ 7,503  

Year 2013

     9,871  

Year 2014

     9,227  

Year 2015

     7,084  

Year 2016

     6,799  

Year 2017

     4,050  

Note 13 – Deposits

Total interest bearing deposits as of the end of the periods presented consisted of:

 

(In thousands)

   March 31, 2012      December 31, 2011      March 31, 2011  

Savings accounts

   $ 6,631,518      $ 6,473,215      $ 6,274,716  

NOW, money market and other interest bearing demand deposits

     5,276,207        5,103,398        4,991,617  
  

 

 

    

 

 

    

 

 

 

Total savings, NOW, money market and other interest bearing demand deposits

     11,907,725        11,576,613        11,266,333  
  

 

 

    

 

 

    

 

 

 

Certificates of deposit:

        

Under $100,000

     6,066,658        6,473,095        6,402,998  

$100,000 and over

     3,856,933        4,236,945        4,614,334  
  

 

 

    

 

 

    

 

 

 

Total certificates of deposit

     9,923,591        10,710,040        11,017,332  
  

 

 

    

 

 

    

 

 

 

Total interest bearing deposits

   $ 21,831,316      $ 22,286,653      $ 22,283,665  
  

 

 

    

 

 

    

 

 

 

A summary of certificates of deposit by maturity at March 31, 2012, follows:

 

(In thousands)

      

2012

   $ 5,543,598  

2013

     1,896,635  

2014

     914,494  

2015

     835,831  

2016

     523,224  

2017 and thereafter

     209,809  
  

 

 

 

Total certificates of deposit

   $ 9,923,591  
  

 

 

 

At March 31, 2012, the Corporation had brokered deposits amounting to $2.9 billion (December 31, 2011—$3.4 billion; March 31, 2011—$2.5 billion).

The aggregate amount of overdrafts in demand deposit accounts that were reclassified to loans was $15 million at March 31, 2012 (December 31, 2011—$13 million; March 31, 2011—$61 million).

 

56


Table of Contents

Note 14 – Borrowings

Assets sold under agreements to repurchase as of the end of the periods presented were as follows:

 

(In thousands)

   March 31,
2012
     December 31,
2011
     March 31,
2011
 

Assets sold under agreements to repurchase

   $ 2,113,557      $ 2,141,097      $ 2,642,800  
  

 

 

    

 

 

    

 

 

 

The repurchase agreements outstanding at March 31, 2012 were collateralized by $1.8 billion (December 31, 2011—$1.8 billion; March 31, 2011—$2.1 billion) in investment securities available-for-sale, $348 million (December 31, 2011—$403 million; March 31, 2011—$587 million) in trading securities and $68 million (December 31, 2011—$68 million; March 31, 2011—$32 million) in securities sold not yet delivered that are classified in other assets. It is the Corporation’s policy to maintain effective control over assets sold under agreements to repurchase; accordingly, such securities continue to be carried on the consolidated statements of financial condition.

In addition, there were repurchase agreements outstanding collateralized by $244 million in securities purchased under agreements to resell to which the Corporation has the right to repledge the securities (December 31, 2011—$274 million; March 31, 2011—$209 million). It is the Corporation’s policy to take possession of securities purchased under agreements to resell. However, the counterparties to such agreements maintain effective control over such securities; accordingly, are not reflected in the Corporation’s consolidated statements of financial condition.

Other short-term borrowings as of the end of the periods presented consisted of:

 

(In thousands)

   March 31,
2012
     December 31,
2011
     March 31,
2011
 

Advances with the FHLB paying interest at maturity, at fixed rates ranging from 0.37% to 0.40% (March 31, 2011—0.36% to 0.40%)

   $ 750,000      $ 295,000      $ 250,000  

Term funds purchased paying interest at maturity, at fixed rates ranging from 0.70% to 1.05%

     —           —           39,102  

Others

     1,200        1,200        1,200  
  

 

 

    

 

 

    

 

 

 

Total other short-term borrowings

   $ 751,200      $ 296,200      $ 290,302  
  

 

 

    

 

 

    

 

 

 

Note: Refer to the Corporation’s 2011 Annual Report for rates information corresponding to the short-term borrowings outstanding at December 31, 2011.

 

57


Table of Contents

Notes payable as of the end of the periods reported consisted of:

 

(In thousands)

   March 31,
2012
     December 31,
2011
     March 31,
2011
 

Advances with the FHLB with maturities ranging from 2012 through 2021 paying interest at monthly fixed rates ranging from 1.07% to 4.95% (March 31, 2011 - 0.66% to 4.95%)

   $ 623,286      $ 642,568      $ 577,000  

Note issued to the FDIC paying interest monthly at an annual fixed rate of 2.50%

     —           —           2,022,669  

Term notes with maturities ranging from 2012 to 2016 paying interest semiannually at fixed rates ranging from 5.25% to 7.86% (March 31, 2011 - 5.25% to 7.03%)

     278,337        278,309        278,201  

Term notes with maturities ranging from 2012 to 2013 paying interest monthly at a floating rate of 3.00% over the 10-year U.S. Treasury note rate

     478        588        907  

Junior subordinated deferrable interest debentures (related to trust preferred securities) with maturities ranging from 2027 to 2034 with fixed interest rates ranging from 6.125% to 8.327% (Refer to Note 15)

     439,800        439,800        439,800  

Junior subordinated deferrable interest debentures (related to trust preferred securities) ($936,000 less discount of $459,043 at March 31, 2012 and $485,128 at March 31, 2011) with no stated maturity and a fixed interest rate of 5.00% until, but excluding December 5, 2013 and 9.00% thereafter (Refer to Note 15)[1]

     476,957        470,037        450,872  

Others

     24,896        25,070        25,206  
  

 

 

    

 

 

    

 

 

 

Total notes payable

   $ 1,843,754      $ 1,856,372      $ 3,794,655  
  

 

 

    

 

 

    

 

 

 

Note: Refer to the Corporation’s 2011 Annual Report, for rates and maturity information corresponding to the borrowings outstanding at December 31, 2011. The10-year U.S. Treasury note key index rate at March 31, 2012 and March 31, 2011 were 2.21% and 3.47%, respectively.

 

[1] The debentures are perpetual and may be redeemed by the Corporation at any time, subject to the consent of the Board of Governors of the Federal Reserve System. The discount on the debentures is being amortized over an estimated 30-year term that started in August 2009. The effective interest rate, including the discount accretion, was approximately 16% at March 31, 2012 and 2011.

 

 

A breakdown of borrowings by contractual maturities at March 31, 2012 is included in the table below.

 

(In thousands)

   Assets sold under
agreements
to repurchase
     Short-term
borrowings
     Notes payable      Total  

Year

           

2012

   $ 1,021,360      $ 751,200      $ 192,697      $ 1,965,257  

2013

     —           —           98,901        98,901  

2014

     350,000        —           189,452        539,452  

2015

     174,135        —           36,099        210,234  

2016

     453,062        —           311,479        764,541  

Later years

     115,000        —           538,169        653,169  

No stated maturity

     —           —           936,000        936,000  
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     2,113,557        751,200        2,302,797        5,167,554  

Less: Discount

     —           —           459,043        459,043  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total borrowings

   $ 2,113,557      $ 751,200      $ 1,843,754      $ 4,708,511  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

58


Table of Contents

Note 15 – Trust preferred securities

At March 31, 2012, December 31, 2011 and March 31, 2011, four statutory trusts established by the Corporation (BanPonce Trust I, Popular Capital Trust I, Popular North America Capital Trust I and Popular Capital Trust II) had issued trust preferred securities (also referred to as “capital securities”) to the public. The proceeds from such issuances, together with the proceeds of the related issuances of common securities of the trusts (the “common securities”), were used by the trusts to purchase junior subordinated deferrable interest debentures (the “junior subordinated debentures”) issued by the Corporation. In August 2009, the Corporation established the Popular Capital Trust III for the purpose of exchanging the shares of Series C preferred stock held by the U.S. Treasury at the time for trust preferred securities issued by this trust. In connection with this exchange, the trust used the Series C preferred stock, together with the proceeds of issuance and sale of common securities of the trust, to purchase junior subordinated debentures issued by the Corporation.

The sole assets of the five trusts consisted of the junior subordinated debentures of the Corporation and the related accrued interest receivable. These trusts are not consolidated by the Corporation pursuant to accounting principles generally accepted in the United States of America.

The junior subordinated debentures are included by the Corporation as notes payable in the consolidated statements of financial 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.

 

59


Table of Contents

The following table presents financial data pertaining to the different trusts at March 31, 2012, December 31, 2011 and March 31, 2011.

 

(Dollars in thousands)

                              

Issuer

   BanPonce
Trust I
    Popular
Capital Trust I
    Popular
North America
Capital Trust I
    Popular
Capital Trust Il
    Popular
Capital Trust III
 

Capital securities

   $ 52,865     $ 181,063     $ 91,651     $ 101,023     $ 935,000  

Distribution rate

     8.327      6.700      6.564      6.125     
 
 
 
 
 
5.000% until,
but excluding
December 5,
2013 and
9.000%
thereafter
  
  
  
  
  
  

Common securities

   $ 1,637     $ 5,601     $ 2,835     $ 3,125     $ 1,000  

Junior subordinated debentures aggregate liquidation amount

   $ 54,502     $ 186,664     $ 94,486     $ 104,148     $ 936,000  

Stated maturity date

    
 
February
2027
  
 
   
 
November
2033
  
 
   
 
September
2034
  
 
   
 
December
2034
  
 
    Perpetual   

Reference notes

     [1],[3],[6]        [2],[4],[5]        [1],[3],[5]        [2],[4],[5]        [2],[4],[7],[8]   

 

[1] Statutory business trust that is wholly-owned by Popular North America and indirectly wholly-owned by the Corporation.
[2] Statutory business trust that is wholly-owned by the Corporation.
[3] 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.
[4] 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.
[5] 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.
[6] Same as [5] above, except that the investment company event does not apply for early redemption.
[7] The debentures are perpetual and may be redeemed by Popular at any time, subject to the consent of the Board of Governors of the Federal Reserve System.
[8] Carrying value of junior subordinates debentures of $477 million at March 31, 2012 ($936 million aggregate liquidation amount, net of $459 million discount) and $470 million at December 31, 2011 ($936 million aggregate liquidation amount, net of $466 million discount) and $451 million at March 31, 2011 ($936 million aggregate liquidation amount, net of $485 million discount).

In accordance with the Federal Reserve Board guidance, the trust preferred securities represent restricted core capital elements and qualify as Tier 1 capital, subject to certain quantitative limits. The aggregate amount of restricted core capital elements that may be included in the Tier 1 capital of a banking organization must not exceed 25% of the sum of all core capital elements (including cumulative perpetual preferred stock and trust preferred securities). At March 31, 2012, December 31, 2011, and March 31, 2011 the Corporation’s restricted core capital elements did not exceed the 25% limitation. Thus, all trust preferred securities were allowed as Tier 1 capital. Amounts of restricted core capital elements in excess of this limit generally may be included in Tier 2 capital, subject to further limitations. Effective March 31, 2011, the Federal Reserve Board revised the quantitative limit which would limit restricted core capital elements included in the Tier 1 capital of a bank holding company to 25% of the sum of core capital elements (including restricted core capital elements), net of goodwill less any associated deferred tax liability. Furthermore, the Dodd-Frank Act, enacted in July 2010, has a provision to effectively phase out the use of trust preferred securities issued before May 19, 2010 as Tier 1 capital over a 3-year period commencing on January 1, 2013. Trust preferred securities issued on or after May 19, 2010 no longer qualify as Tier 1 capital. At March 31, 2012, the Corporation had $427 million in trust preferred securities (capital securities) that are subject to the phase-out. The Corporation has not issued any trust preferred securities since May 19, 2010. At March 31, 2012, the remaining $935 million of trust preferred securities corresponded to capital securities issued to the U.S. Treasury pursuant to the Emergency Economic Stabilization Act of 2008, which are exempt from the phase-out provision.

 

60


Table of Contents

Note 16 – Stockholders’ equity

BPPR statutory reserve

The Banking Act of the Commonwealth of Puerto Rico requires that a minimum of 10% of BPPR’s 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. BPPR’s statutory reserve fund amounted to $415 million at March 31, 2012 (December 31, 2011 - $415 million; March 31, 2011 - $402 million). There were no transfers between the statutory reserve account and the retained earnings account during the three months ended March 31, 2012 and March 31, 2011.

Refer to Note 31 for information on the reverse stock split approved by the holders of the Corporation’s common stock on April 27, 2012.

Note 17 – Guarantees

At March 31, 2012, the Corporation recorded a liability of $1.0 million (December 31, 2011 - $0.5 million and March 31, 2011 - $0.6 million), which represents the unamortized balance of the obligations undertaken in issuing the guarantees under the standby letters of credit. Management does not anticipate any material losses related to these instruments.

From time to time, the Corporation securitized mortgage loans into guaranteed mortgage-backed securities subject to limited, and in certain instances, lifetime credit recourse on the loans that serve as collateral for the mortgage-backed securities. The Corporation has not sold any mortgage loans subject to credit recourse since 2009. Also, from time to time, the Corporation may sell, in bulk sale transactions, residential mortgage loans and Small Business Administration (“SBA”) commercial loans subject to certain representations and warranties from the Corporation to the purchaser. These representations and warranties may relate, for example, to borrower creditworthiness, loan documentation, collateral, prepayment and early payment defaults. The Corporation may be required to repurchase the loans under the credit recourse agreements or representation and warranties.

At March 31, 2012, the Corporation serviced $3.3 billion (December 31, 2011 - $3.5 billion; March 31, 2011 - $3.8 billion) in residential mortgage loans subject to credit recourse provisions, principally loans associated with FNMA and FHLMC residential mortgage loan securitization programs. In the event of any customer default, pursuant to the credit recourse provided, the Corporation is required to repurchase the loan or reimburse the third party investor for the incurred loss. The maximum potential amount of future payments that the Corporation would be required to make under the recourse arrangements in the event of nonperformance by the borrowers is equivalent to the total outstanding balance of the residential mortgage loans serviced with recourse and interest, if applicable. During the quarter ended March 31, 2012, the Corporation repurchased approximately $50 million of unpaid principal balance in mortgage loans subject to the credit recourse provisions (March 31, 2011 - $63 million). In the event of nonperformance by the borrower, the Corporation has rights to the underlying collateral securing the mortgage loan. The Corporation suffers ultimate losses on these loans when the proceeds from a foreclosure sale of the property underlying a defaulted mortgage loan are less than the outstanding principal balance of the loan plus any uncollected interest advanced and the costs of holding and disposing the related property. At March 31, 2012, the Corporation’s liability established to cover the estimated credit loss exposure related to loans sold or serviced with credit recourse amounted to $56 million (December 31, 2011 - $59 million; March 31, 2011 - $55 million).

 

61


Table of Contents

The following table presents the changes in the Corporation’s liability for estimated losses related to loans serviced with credit recourse provisions during the quarters ended March 31, 2012 and 2011.

 

(In thousands)

   2012     2011  

Balance as of beginning of period

   $ 58,659     $ 53,729  

Additions for new sales

     —          —     

Provision for recourse liability

     4,232       9,765  

Net charge-offs / terminations

     (6,776     (8,176
  

 

 

   

 

 

 

Balance as of end of period

   $ 56,115     $ 55,318  
  

 

 

   

 

 

 

The estimated losses to be absorbed under the credit recourse arrangements are recorded as a liability when the loans are sold or credit recourse is assumed as part of acquired servicing rights, and are updated by accruing or reversing expense (categorized in the line item “adjustments (expense) to indemnity reserves on loans sold” in the consolidated statements of operations) throughout the life of the loan, as necessary, when additional relevant information becomes available. The methodology used to estimate the recourse liability is a function of the recourse arrangements given and considers a variety of factors, which include actual defaults and historical loss experience, foreclosure rate, estimated future defaults and the probability that a loan would be delinquent. Statistical methods are used to estimate the recourse liability. Expected loss rates are applied to different loan segmentations. The expected loss, which represents the amount expected to be lost on a given loan, considers the probability of default and loss severity. The probability of default represents the probability that a loan in good standing would become 90 days delinquent within the following twelve-month period. Regression analysis quantifies the relationship between the default event and loan-specific characteristics, including credit scores, loan-to-value ratios, and loan aging, among others.

When the Corporation sells or securitizes mortgage loans, it generally makes customary representations and warranties regarding the characteristics of the loans sold. The Corporation’s mortgage operations in Puerto Rico group conforming mortgage loans into pools which are exchanged for FNMA and GNMA mortgage-backed securities, which are generally sold to private investors, or are sold directly to FNMA or other private investors for cash. As required under the government agency programs, quality review procedures are performed by the Corporation to ensure that asset guideline qualifications are met. To the extent the loans do not meet specified characteristics, the Corporation may be required to repurchase such loans or indemnify for losses and bear any subsequent loss related to the loans. Repurchases under representation and warranty arrangements in which the Corporation’s Puerto Rico banking subsidiaries were obligated to repurchase the loans approximated $0.4 million in unpaid principal balance with losses amounting to $0.1 million for the quarter ended March 31, 2012 (March 31, 2011 - $4.8 million and $0.4 million, respectively). A substantial amount of these loans reinstate to performing status or have mortgage insurance, and thus the ultimate losses on the loans are not deemed significant.

During the quarter ended June 30, 2011, the Corporation’s banking subsidiary, BPPR, reached an agreement (the “June 2011 agreement”) with the FDIC, as receiver for a local Puerto Rico institution, and the financial institution with respect to a loan servicing portfolio that BPPR services since 2008, related to FHLMC and GNMA pools. The loans were originated and sold by the financial institution and the servicing rights were transferred to BPPR in 2008. As part of the 2008 servicing agreement, the financial institution was required to repurchase from BPPR any loans that BPPR, as servicer, was required to repurchase from the investors under representation and warranty obligations. As part of the June 2011 agreement, the Corporation received cash to discharge the financial institution from any repurchase obligation and other claims over the serviced portfolio. At March 31, 2012, the related representation and warranty reserve amounted to $8.6 million, and the related serviced portfolio approximated $3.4 billion (December 31, 2011 - $8.5 million and $3.5 billion, respectively).

Servicing agreements relating to the mortgage-backed securities programs of FNMA and GNMA, and to mortgage loans sold or serviced to certain other investors, including FHLMC, require the Corporation to advance funds to make scheduled payments of principal, interest, taxes and insurance, if such payments have not been received from the borrowers. At March 31, 2012, the Corporation serviced $17.2 billion in mortgage loans for third-parties, including the loans serviced with credit recourse (December 31, 2011 - $17.3 billion; March 31, 2011 - $18.0 billion). The Corporation generally recovers funds advanced pursuant to these arrangements from the mortgage owner, from liquidation proceeds when the mortgage loan is foreclosed or, in the case of FHA/VA loans, under the applicable FHA and VA insurance and guarantees programs. However, in the meantime, the Corporation must absorb the cost of the funds it advances during the time the advance is outstanding. The Corporation must also bear the costs of attempting to collect on delinquent and defaulted mortgage loans. In addition, if a defaulted loan is not cured, the mortgage loan would be canceled as part of the foreclosure proceedings and the Corporation would not receive any future servicing income with

 

62


Table of Contents

respect to that loan. At March 31, 2012, the outstanding balance of funds advanced by the Corporation under such mortgage loan servicing agreements was approximately $34 million (December 31, 2011 - $32 million; March 31, 2011 - $28 million). To the extent the mortgage loans underlying the Corporation’s servicing portfolio experience increased delinquencies, the Corporation would be required to dedicate additional cash resources to comply with its obligation to advance funds as well as incur additional administrative costs related to increases in collection efforts.

At March 31, 2012, the Corporation has reserves for customary representation and warranties related to loans sold by its U.S. subsidiary E-LOAN prior to 2009. These loans had been sold to investors on a servicing released basis subject to certain representation and warranties. Although the risk of loss or default was generally assumed by the investors, the Corporation made certain representations relating to borrower creditworthiness, loan documentation and collateral, which if not correct, may result in requiring the Corporation to repurchase the loans or indemnify investors for any related losses associated to these loans. At March 31, 2012, the Corporation’s reserve for estimated losses from such representation and warranty arrangements amounted to $11 million, which was included as part of other liabilities in the consolidated statement of financial condition (December 31, 2011 - $11 million; March 31, 2011 - $31 million). E-LOAN is no longer originating and selling loans since the subsidiary ceased these activities in 2008 and most of the outstanding agreements with major counterparties were settled during 2010 and 2011. On a quarterly basis, the Corporation reassesses its estimate for expected losses associated to E-LOAN’s customary representation and warranty arrangements. The analysis incorporates expectations on future disbursements based on quarterly repurchases and make-whole events. The analysis also considers factors such as the average length-time between the loan’s funding date and the loan repurchase date, as observed in the historical loan data. Make-whole events are typically defaulted cases in which the investor attempts to recover by collateral or guarantees, and the seller is obligated to cover any impaired or unrecovered portion of the loan. Claims have been predominantly for first mortgage agency loans and principally consist of underwriting errors related to undisclosed debt or missing documentation. The following table presents the changes in the Corporation’s liability for estimated losses associated with customary representations and warranties related to loans sold by E-LOAN for the quarters ended March 31, 2012 and 2011.

 

(In thousands)

   2012      2011  

Balance as of beginning of period

   $ 10,625      $ 30,659  

Additions for new sales

     —           —     

Provision for representation and warranties

     —           83  

Net charge-offs / terminations

     —           (54

Other—settlements paid

     —           —     
  

 

 

    

 

 

 

Balance as of end of period

   $ 10,625      $ 30,688  
  

 

 

    

 

 

 

Popular, Inc. Holding Company (“PIHC”) fully and unconditionally guarantees certain borrowing obligations issued by certain of its wholly-owned consolidated subsidiaries amounting to $0.6 billion at March 31, 2012 (December 31, 2011 and March 31, 2011 - $0.7 billion). In addition, at March 31, 2012, December 31, 2011 and March 31, 2011, PIHC fully and unconditionally guaranteed on a subordinated basis $1.4 billion of capital securities (trust preferred securities) issued by wholly-owned issuing trust entities to the extent set forth in the applicable guarantee agreement. Refer to Note 15 to the consolidated financial statements for further information on the trust preferred securities.

 

63


Table of Contents

Note 18 – Commitments and contingencies

Off-balance sheet risk

The Corporation is a party to financial instruments with off-balance sheet credit risk in the normal course of business to meet the financial needs of its customers. These financial instruments include loan commitments, letters of credit, and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statements of financial condition.

The Corporation’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit, standby letters of credit and financial guarantees written is represented by the contractual notional amounts of those instruments. The Corporation uses the same credit policies in making these commitments and conditional obligations as it does for those reflected on the consolidated statements of financial condition.

Financial instruments with off-balance sheet credit risk, whose contract amounts represent potential credit risk as of the end of the periods presented were as follows:

 

(In thousands)

   March 31, 2012      December 31, 2011      March 31, 2011  

Commitments to extend credit:

        

Credit card lines

   $ 4,361,641      $ 4,297,755      $ 3,864,026  

Commercial lines of credit

     2,092,520        2,039,629        2,471,756  

Other unused credit commitments

     367,672        358,572        373,832  

Commercial letters of credit

     11,700        11,632        13,297  

Standby letters of credit

     131,785        124,709        133,178  

Commitments to originate mortgage loans

     66,908        53,323        40,002  

At March 31, 2012, the Corporation maintained a reserve of approximately $9 million for potential losses associated with unfunded loan commitments related to commercial and consumer lines of credit (December 31, 2011 - $15 million; March 31, 2011 - $17 million), including $3 million of the unamortized balance of the contingent liability on unfunded loan commitments recorded with the Westernbank FDIC-assisted transaction (December 31, 2011 - $5 million; March 31, 2011 - $4 million).

Other commitments

At March 31, 2012, the Corporation also maintained other non-credit commitments for $10 million, primarily for the acquisition of other investments (December 31, 2011 and March 31, 2011 - $10 million).

Business concentration

Since the Corporation’s business activities are currently concentrated primarily in Puerto Rico, its results of operations and financial condition are dependent upon the general trends of the Puerto Rico economy and, in particular, the residential and commercial real estate markets. The concentration of the Corporation’s operations in Puerto Rico exposes it to greater risk than other banking companies with a wider geographic base. Its asset and revenue composition by geographical area is presented in Note 30 to the consolidated financial statements.

The Corporation’s loan portfolio is diversified by loan category. However, approximately $12.4 billion, or 61% of the Corporation’s loan portfolio not covered under the FDIC loss sharing agreements, excluding loans held-for-sale, at March 31, 2012, consisted of real estate related loans, including residential mortgage loans, construction loans and commercial loans secured by commercial real estate (December 31, 2011 - $12.5 billion, or 61%; March 31, 2011 - $12.2 billion, or 59%).

Except for the Corporation’s exposure to the Puerto Rico Government sector, no individual or single group of related accounts is considered material in relation to the Corporation’s total assets or deposits, or in relation to the Corporation’s overall business. At March 31, 2012, the Corporation had approximately $1.1 billion of credit facilities granted to or guaranteed by the Puerto Rico Government, its municipalities and public corporations, of which $264 million were uncommitted lines of credit (December 31, 2011 - $1.3 billion and $140 million, respectively; March 31, 2011 - $1.4 billion and $215 million, respectively). Of the total credit facilities granted, $863 million was outstanding at March 31, 2012 (December 31, 2011 - $1.2 billion; March 31, 2011 - $1.1 billion). Furthermore, at March 31, 2012, the Corporation had $151 million in obligations issued or guaranteed by the Puerto Rico Government, its municipalities and public corporations as part of its investment securities portfolio (December 31, 2011 - $154 million; March 31, 2011 - $143 million).

 

64


Table of Contents

Other contingencies

As indicated in Note 9 to the consolidated financial statements, as part of the loss sharing agreements related to the Westernbank FDIC-assisted transaction, the Corporation agreed to make a true-up payment to the FDIC on the date that is 45 days following the last day of the final shared loss month, or upon the final disposition of all covered assets under the loss sharing agreements in the event losses on the loss sharing agreements fail to reach expected levels. The true-up payment obligation was estimated at $100 million at March 31, 2012 (December 31, 2011 - $98 million; March 31, 2011 - $94 million).

Legal Proceedings

The nature of Popular’s business ordinarily results in a certain number of claims, litigation, investigations, and legal and administrative cases and proceedings. When the Corporation determines it has meritorious defenses to the claims asserted, it vigorously defends itself. The Corporation will consider the settlement of cases (including cases where it has meritorious defenses) when, in management’s judgment, it is in the best interests of both the Corporation and its shareholders to do so.

On at least a quarterly basis, Popular assesses its liabilities and contingencies in connection with outstanding legal proceedings utilizing the latest information available. For matters where it is probable that the Corporation will incur a material loss and the amount can be reasonably estimated, the Corporation establishes an accrual for the loss. Once established, the accrual is adjusted on at least a quarterly basis as appropriate to reflect any relevant developments. For matters where a material loss is not probable or the amount of the loss cannot be estimated, no accrual is established.

In certain cases, exposure to loss exists in excess of the accrual to the extent such loss is reasonably possible, but not probable. Management believes and estimates the aggregate range of reasonably possible losses for those matters where a range may be determined, in excess of amounts accrued, for current legal proceedings is from $0 to approximately $16.5 million at March 31, 2012. For certain other cases, management cannot reasonably estimate the possible loss at this time. Any estimate involves significant judgment, given the varying stages of the proceedings (including the fact that many of them are currently in preliminary stages), the existence of multiple defendants in several of the current proceedings whose share of liability has yet to be determined, the numerous unresolved issues in many of the proceedings, and the inherent uncertainty of the various potential outcomes of such proceedings. Accordingly, management’s estimate will change from time-to-time, and actual losses may be more or less than the current estimate.

While the final outcome of legal proceedings is inherently uncertain, based on information currently available, advice of counsel, and available insurance coverage, management believes that the amount it has already accrued is adequate and any incremental liability arising from the Corporation’s legal proceedings will not have a material adverse effect on the Corporation’s consolidated financial position as a whole. However, in the event of unexpected future developments, it is possible that the ultimate resolution of these matters, if unfavorable, may be material to the Corporation’s consolidated financial position in a particular period.

Between May 14, 2009 and September 9, 2009, five putative class actions and two derivative claims were filed in the United States District Court for the District of Puerto Rico and the Puerto Rico Court of First Instance, San Juan Part, against Popular, Inc., and certain of its directors and officers, among others. The five class actions were consolidated into two separate actions: a securities class action captioned Hoff v. Popular, Inc., et al. (consolidated with Otero v. Popular, Inc., et al.) and an Employee Retirement Income Security Act (ERISA) class action entitled In re Popular, Inc. ERISA Litigation (comprised of the consolidated cases of Walsh v. Popular, Inc., et al.; Montañez v. Popular, Inc., et al.; and Dougan v. Popular, Inc., et al.).

On October 19, 2009, plaintiffs in the Hoff case filed a consolidated class action complaint which included as defendants the underwriters in the May 2008 offering of Series B Preferred Stock, among others. The consolidated action purported to be on behalf of purchasers of Popular’s securities between January 24, 2008 and February 19, 2009 and alleged that the defendants violated Section 10(b) of the Exchange Act, and Rule 10b-5 promulgated thereunder, and Section 20(a) of the Exchange Act by issuing a series of allegedly false and/or misleading statements and/or omitting to disclose material facts necessary to make statements made by the Corporation not false and misleading. The consolidated action also alleged that the defendants violated Section 11, Section 12(a)(2) and Section 15 of the Securities Act by making allegedly untrue statements and/or omitting to disclose material facts necessary to make statements made by the Corporation not false and misleading in connection with the May 2008 offering of Series B Preferred Stock. The consolidated securities class action complaint sought class certification, an award of compensatory damages and reasonable costs and expenses, including counsel fees. On January 11, 2010, the defendants moved to dismiss the consolidated securities class action complaint. On August 2, 2010, the U.S. District Court for the District of Puerto Rico granted the

 

65


Table of Contents

motion to dismiss filed by the underwriter defendants on statute of limitations grounds. The Court also dismissed the Section 11 claim brought against Popular’s directors on statute of limitations grounds and the Section 12(a)(2) claim brought against Popular because plaintiffs lacked standing. The Court declined to dismiss the claims brought against Popular and certain of its officers under Section 10(b) of the Exchange Act (and Rule 10b-5 promulgated thereunder), Section 20(a) of the Exchange Act, and Sections 11 and 15 of the Securities Act, holding that plaintiffs had adequately alleged that defendants made materially false and misleading statements with the requisite state of mind.

On November 30, 2009, plaintiffs in the ERISA case filed a consolidated class action complaint. The consolidated complaint purported to be on behalf of employees participating in the Popular, Inc. U.S.A. 401(k) Savings and Investment Plan and the Popular, Inc. Puerto Rico Savings and Investment Plan from January 24, 2008 to the date of the Complaint to recover losses pursuant to Sections 409 and 502(a)(2) of ERISA against Popular, certain directors, officers and members of plan committees, each of whom was alleged to be a plan fiduciary. The consolidated complaint alleged that defendants breached their alleged fiduciary obligations by, among other things, failing to eliminate Popular stock as an investment alternative in the plans. The complaint sought to recover alleged losses to the plans and equitable relief, including injunctive relief and a constructive trust, along with costs and attorneys’ fees. On December 21, 2009, and in compliance with a scheduling order issued by the Court, Popular and the individual defendants submitted an answer to the amended complaint. Shortly thereafter, on December 31, 2009, Popular and the individual defendants filed a motion to dismiss the consolidated class action complaint or, in the alternative, for judgment on the pleadings. On May 5, 2010, a magistrate judge issued a report and recommendation in which he recommended that the motion to dismiss be denied except with respect to Banco Popular de Puerto Rico, as to which he recommended that the motion be granted. On May 19, 2010, Popular filed objections to the magistrate judge’s report and recommendation. On September 30, 2010, the Court issued an order without opinion granting in part and denying in part the motion to dismiss and providing that the Court would issue an opinion and order explaining its decision. No opinion was, however, issued prior to the settlement in principle discussed below.

The derivative actions (García v. Carrión, et al. and Díaz v. Carrión, et al.) were brought purportedly for the benefit of nominal defendant Popular, Inc. against certain executive officers and directors and alleged breaches of fiduciary duty, waste of assets and abuse of control in connection with Popular’s issuance of allegedly false and misleading financial statements and financial reports and the offering of the Series B Preferred Stock. The derivative complaints sought a judgment that the action was a proper derivative action, an award of damages, restitution, costs and disbursements, including reasonable attorneys’ fees, costs and expenses. On October 9, 2009, the Court coordinated for purposes of discovery the García action and the consolidated securities class action. On October 15, 2009, Popular and the individual defendants moved to dismiss the García complaint for failure to make a demand on the Board of Directors prior to initiating litigation. On November 20, 2009, plaintiffs filed an amended complaint, and on December 21, 2009, Popular and the individual defendants moved to dismiss the García amended complaint. At a scheduling conference held on January 14, 2010, the Court stayed discovery in both the Hoff and García matters pending resolution of their respective motions to dismiss. On August 11, 2010, the Court granted in part and denied in part the motion to dismiss the Garcia action. The Court dismissed the gross mismanagement and corporate waste claims, but declined to dismiss the breach of fiduciary duty claim. The Díaz case, filed in the Puerto Rico Court of First Instance, San Juan, was removed to the U.S. District Court for the District of Puerto Rico. On October 13, 2009, Popular and the individual defendants moved to consolidate the García and Díaz actions. On October 26, 2009, plaintiff moved to remand the Diaz case to the Puerto Rico Court of First Instance and to stay defendants’ consolidation motion pending the outcome of the remand proceedings. On September 30, 2010, the Court issued an order without opinion remanding the Diaz case to the Puerto Rico Court of First Instance. On October 13, 2010, the Court issued a Statement of Reasons In Support of Remand Order. On October 28, 2010, Popular and the individual defendants moved for reconsideration of the remand order. The court denied Popular’s request for reconsideration shortly thereafter.

On April 13, 2010, the Puerto Rico Court of First Instance in San Juan granted summary judgment dismissing a separate complaint brought by plaintiff in the García action that sought to enforce an alleged right to inspect the books and records of the Corporation in support of the pending derivative action. The Court held that plaintiff had not propounded a “proper purpose” under Puerto Rico law for such inspection. On April 28, 2010, plaintiff in that action moved for reconsideration of the Court’s dismissal. On May 4, 2010, the Court denied plaintiff’s request for reconsideration. On June 7, 2010, plaintiff filed an appeal before the Puerto Rico Court of Appeals. On June 11, 2010, Popular and the individual defendants moved to dismiss the appeal. On June 22, 2010, the Court of Appeals dismissed the appeal. On July 6, 2010, plaintiff moved for reconsideration of the Court’s dismissal. On July 16, 2010, the Court of Appeals denied plaintiff’s request for reconsideration.

At the Court’s request, the parties to the Hoff and García cases discussed the prospect of mediation and agreed to nonbinding mediation in an attempt to determine whether the cases could be settled. On January 18 and 19, 2011, the parties to the Hoff and García cases engaged in nonbinding mediation before the Honorable Nicholas Politan. As a result of the mediation, the Corporation and the other named defendants to the Hoff matter entered into a memorandum of understanding to settle this matter. Under the

 

66


Table of Contents

terms of the memorandum of understanding, subject to certain customary conditions including court approval of a final settlement agreement in consideration for the full settlement and release of all defendants, the parties agreed that the amount of $37.5 million would be paid by or on behalf of defendants. On June 17, 2011, the parties filed a stipulation of settlement and a joint motion for preliminary approval of such settlement, which the Court granted on June 20, 2011. On or about July 5, 2011, the amount of $37.5 million was paid to the settlement fund by or on behalf of defendants. Specifically, the amount of $26 million was paid by insurers and the amount of $11.5 million was paid by Popular (after which approximately $4.7 million was reimbursed by insurers per the terms of the relevant insurance agreement). On January 18, 2011, certain individual shareholders filed a suit captioned Montilla-Rojo et al. v. Popular, Inc., et al., against the Corporation and certain officers asserting claims under the federal securities laws similar or identical to those in the Hoff action. On February 25, 2011, those shareholders filed an amended complaint asserting additional legal theories. On June 19, 2011, certain of those shareholders sought leave to intervene in the securities class action. On June 28, 2011, the Court denied their motion to intervene as untimely. On or about October 11, 2011, certain individual shareholders, including shareholders represented by counsel in the Montilla-Rojo action, filed requests to opt-out of the proposed settlement in the Hoff securities class action. Other purported shareholders represented by the same counsel, filed an objection to the settlement. On November 22, 2011, the plaintiffs in the Montilla-Rojo action filed a second amended complaint asserting additional legal theories. On December 2, 2011, the parties to the Montilla-Rojo action filed a joint motion to stay the proceedings in light of the pending appeal in the related Hoff securities class action. The Court granted the motion to stay on December 13, 2011. With the January 27, 2012 voluntary dismissal of the appeal (below), the stay was lifted. On March 13, 2012, defendants filed a motion to dismiss the Montilla-Rojo second amended complaint. On April 23, 2012, plaintiffs filed their opposition thereto. Defendants were granted leave to reply by May 7, 2012.

On November 2, 2011, the Court in the Hoff securities class action announced at a hearing on the proposed settlement that it would deny certain individual shareholders’ requests to opt out, overrule the objection to the settlement and grant final approval in a written order to follow, which order and final judgment were issued on the same date. On November 29, 2011, the individual shareholders whose requests to opt-out were rejected and the objectors to the settlement appealed from the final judgment to the United States Court of Appeals for the First Circuit. On December 21, 2011, the lead plaintiffs in the Hoff action filed a motion for an order requiring the objectors to post a bond to cover the costs associated with the objectors’ appeal, which the Court granted on January 9, 2012. On January 17, 2012, the objectors moved for reconsideration of the order requiring them to post a bond. On January 24, 2012, the Court denied the objectors’ motion for reconsideration. On January 27, 2012, the objectors filed a motion informing the Court that they would voluntarily dismiss the appeal with prejudice, which the Court noted on January 30, 2012.

In April 2011, the parties to the García and Díaz actions entered into a separate memorandum of understanding. Under the terms of this memorandum of understanding, subject to certain customary conditions, including court approval of a final settlement agreement, and in consideration for the full and final settlement and release of all defendants, Popular agreed, for a period of three years, to maintain or implement certain corporate governance practices, measures and policies, as set forth in the memorandum of understanding. Aside from the payment by or on behalf of Popular of approximately $2.1 million of attorneys’ fees and expenses of counsel for the plaintiffs, all of which were covered by insurance), the settlement did not require any cash payments by or on behalf of Popular or the defendants. On June 14, 2011, a motion for preliminary approval of settlement was filed. On July 8, 2011, the Court granted preliminary approval of such settlement and set the final approval hearing date for September 12, 2011. On that same date, the Court granted final approval of the settlement. On September 23, 2011, the court in Díaz entered a separate judgment approving the final settlement as well.

Prior to the Hoff and derivative action mediation, the parties to the ERISA class action entered into a separate memorandum of understanding to settle that action. Under the terms of the ERISA memorandum of understanding, subject to certain customary conditions including court approval of a final settlement agreement and in consideration for the full settlement and release of all defendants, the parties agreed that the amount of $8.2 million would be paid by or on behalf of the defendants. The parties filed a joint request to approve the settlement on April 13, 2011. On June 8, 2011, the Court held a preliminary approval hearing, and on June 23, 2011, the Court preliminarily approved such settlement. On June 30, 2011, the amount of $8.2 million was transferred to the settlement fund by insurers on behalf of the defendants. A final fairness hearing was set for August 26, 2011. On that date, the Court stated that it would approve the settlement but requested that plaintiffs’ counsel submit certain supporting documentation prior to issuing its final approval. On March 12, 2012, the Court granted final approval of the settlement.

Popular does not expect to record any material gain or loss as a result of the settlements. Popular has made no admission of liability in connection with these settlements.

In addition to the foregoing, Banco Popular is a defendant in two class lawsuits arising from its consumer banking and trust-related activities. On October 7, 2010, a putative class action for breach of contract and damages captioned Almeyda-Santiago v. Banco

 

67


Table of Contents

Popular de Puerto Rico, was filed in the Puerto Rico Court of First Instance against Banco Popular de Puerto Rico. The complaint essentially asserts that plaintiff and others similarly situated who he purports to represent have suffered damages because of Banco Popular’s allegedly fraudulent overdraft fee practices in connection with debit card transactions. Such practices allegedly consist of: (a) the reorganization of electronic debit transactions in high-to-low order so as to multiply the number of overdraft fees assessed on its customers; (b) the assessment of overdraft fees even when clients have not overdrawn their accounts; (c) the failure to disclose, or to adequately disclose, its overdraft policy to its customers; and (d) the provision of false and fraudulent information regarding its clients’ account balances at point of sale transactions and on its website. Plaintiff seeks damages, restitution and provisional remedies against Banco Popular for breach of contract, abuse of trust, illegal conversion and unjust enrichment. On January 13, 2011, Banco Popular submitted a motion to dismiss the complaint.

In January 2012, the parties to the Almeyda action entered into a memorandum of understanding. Under the terms of this memorandum of understanding, subject to certain customary conditions, including court approval of a final settlement agreement, and in consideration for the full and final settlement and release of all defendants, the parties agreed that the amount of $0.4 million will be paid by defendants, which amount, net of attorneys’ fees, shall be donated to one or more non-profit consumer financial counseling services organizations based in Puerto Rico. A settlement stipulation and a joint motion for preliminary approval of such settlement, which were expected to be filed with the Court by March 14, 2012, have not yet been filed as the parties continue in discussions with respect to the beneficiaries of the donations to be made by the defendants as part of such settlement.

On December 13, 2010, Popular was served with a class action complaint captioned García Lamadrid , et al. v. Banco Popular de Puerto Rico, et al., filed in the Puerto Rico Court of First Instance. The complaint generally seeks damages against Banco Popular de Puerto Rico, other defendants and their respective insurance companies for their alleged breach of certain fiduciary duties, breach of contract, and alleged violations of local tort law. Plaintiffs seek in excess of $600 million in damages, plus costs and attorneys fees.

More specifically, plaintiffs—Guillermo García Lamadrid and Benito del Cueto Figueras—are suing Defendant BPPR for the losses they (and others) experienced through their investment in the RG Financial Corporation-backed Conservation Trust Fund securities. Plaintiffs essentially claim that Banco Popular allegedly breached its purported fiduciary duty to keep all relevant parties informed of any developments that could affect the Conservation Trust notes or that could become an event of default under the relevant trust agreements; and that in so doing, it acted imprudently, unreasonably and with gross negligence. Popular and the other defendants submitted separate motions to dismiss on or about February 28, 2011. Plaintiffs submitted a consolidated opposition thereto on April 15, 2011. The parties were allowed to submit replies and surreplies to such motions and the motions have now been deemed submitted by the Court and are pending resolution. An argumentative hearing on this motion was set for April 20, 2012, but was subsequently cancelled. It has now been tentatively scheduled for July 3, 2012.

 

68


Table of Contents

Note 19 – Non-consolidated variable interest entities

The Corporation is involved with four statutory trusts which it established to issue trust preferred securities to the public. Also, it established Popular Capital Trust III for the purpose of exchanging Series C preferred stock shares held by the U.S. Treasury for trust preferred securities issued by this trust. These trusts are deemed to be variable interest entities (“VIEs”) since the equity investors at risk have no substantial decision-making rights. The Corporation does not hold any variable interest in the trusts, and therefore, cannot be the trusts’ primary beneficiary.

Also, the Corporation is involved with various special purpose entities mainly in guaranteed mortgage securitization transactions, including GNMA and FNMA. These special purpose entities are deemed to be VIEs since they lack equity investments at risk. The Corporation’s continuing involvement in these guaranteed loan securitizations includes owning certain beneficial interests in the form of securities as well as the servicing rights retained. The Corporation is not required to provide additional financial support to any of the variable interest entities to which it has transferred the financial assets. The mortgage-backed securities, to the extent retained, are classified in the Corporation’s consolidated statements of financial condition as available-for-sale or trading securities.

ASU 2009-17 requires that an ongoing primary beneficiary assessment should be made to determine whether the Corporation is the primary beneficiary of any of the VIEs it is involved with. The conclusion on the assessment of these trusts and guaranteed mortgage securitization transactions has not changed since their initial evaluation. The Corporation concluded that it is still not the primary beneficiary of these VIEs, and therefore, these VIEs are not required to be consolidated in the Corporation’s financial statements at March 31, 2012.

The Corporation concluded that it did not hold a controlling financial interest in these trusts since the decisions of the trusts are predetermined through the trust documents and the guarantee of the trust preferred securities is irrelevant since in substance the sponsor is guaranteeing its own debt. In the case of the guaranteed mortgage securitization transactions, the Corporation concluded that, essentially, these entities (FNMA and GNMA) control the design of their respective VIEs, dictate the quality and nature of the collateral, require the underlying insurance, set the servicing standards via the servicing guides and can change them at will, and can remove a primary servicer with cause, and without cause in the case of FNMA. Moreover, through their guarantee obligations, agencies (FNMA and GNMA) have the obligation to absorb losses that could be potentially significant to the VIE.

The Corporation holds variable interests in these VIEs in the form of agency mortgage-backed securities and collateralized mortgage obligations, including those securities originated by the Corporation and those acquired from third parties. Additionally, the Corporation holds agency mortgage-backed securities, agency collateralized mortgage obligations and private label collateralized mortgage obligations issued by third party VIEs in which it has no other form of continuing involvement. Refer to Note 21 to the consolidated financial statements for additional information on the debt securities outstanding at March 31, 2012, December 31, 2011 and March 31, 2011, which are classified as available-for-sale and trading securities in the Corporation’s consolidated statements of financial condition. In addition, the Corporation may retain the right to service the transferred loans in those government-sponsored special purpose entities (“SPEs”) and may also purchase the right to service loans in other government-sponsored SPEs that were transferred to those SPEs by a third-party. Pursuant to ASC Subtopic 810-10, the servicing fees that the Corporation receives for its servicing role are considered variable interests in the VIEs since the servicing fees are subordinated to the principal and interest that first needs to be paid to the mortgage-backed securities’ investors and to the guaranty fees that need to be paid to the federal agencies.

 

69


Table of Contents

The following table presents the carrying amount and classification of the assets related to the Corporation’s variable interests in non-consolidated VIEs and the maximum exposure to loss as a result of the Corporation’s involvement as servicer with non-consolidated VIEs at March 31, 2012, December 31, 2011 and March 31, 2011.

 

(In thousands)

   March 31, 2012      December 31, 2011      March 31, 2011  

Assets

        

Servicing assets:

        

Mortgage servicing rights

   $ 103,130      $ 101,511      $ 108,447  
  

 

 

    

 

 

    

 

 

 

Total servicing assets

   $ 103,130      $ 101,511      $ 108,447  
  

 

 

    

 

 

    

 

 

 

Other assets:

        

Servicing advances

   $ 2,583      $ 3,027      $ 3,506  
  

 

 

    

 

 

    

 

 

 

Total other assets

   $ 2,583      $ 3,027      $ 3,506  
  

 

 

    

 

 

    

 

 

 

Total

   $ 105,713      $ 104,538      $ 111,953  
  

 

 

    

 

 

    

 

 

 

Maximum exposure to loss

   $ 105,713      $ 104,538      $ 111,953  
  

 

 

    

 

 

    

 

 

 

The size of the non-consolidated VIEs, in which the Corporation has a variable interest in the form of servicing fees, measured as the total unpaid principal balance of the loans, amounted to $9.4 billion at March 31, 2012 (December 31, 2011—$9.4 billion; March 31, 2011 - $9.4 billion).

Maximum exposure to loss represents the maximum loss, under a worst case scenario, that would be incurred by the Corporation, as servicer for the VIEs, assuming all loans serviced are delinquent and that the value of the Corporation’s interests and any associated collateral declines to zero, without any consideration of recovery. The Corporation determined that the maximum exposure to loss includes the fair value of the MSRs and the assumption that the servicing advances at March 31, 2012, December 31, 2011 and March 31, 2011, will not be recovered. The agency debt securities are not included as part of the maximum exposure to loss since they are guaranteed by the related agencies.

In September of 2011, BPPR sold construction and commercial real estate loans with a fair value of $148 million, and most of which were non-performing, to a newly created joint venture, PRLP 2011 Holdings, LLC. The joint venture is majority owned by Caribbean Property Group (“CPG”), Goldman Sachs & Co. and East Rock Capital LLC. The joint venture was created for the limited purpose of acquiring the loans from BPPR; servicing the loans through a third-party servicer; ultimately working out, resolving and/or foreclosing the loans; and indirectly owning, operating, constructing, developing, leasing and selling any real properties acquired by the joint venture through deed in lieu of foreclosure, foreclosure, or by resolution of any loan.

BPPR provided financing to the joint venture for the acquisition of the loans in an amount equal to the sum of 57% of the purchase price of the loans, or $84 million, and $2 million of closing costs, for a total acquisition loan of $86 million (the “acquisition loan”). The acquisition loan has a 5-year maturity and bears a variable interest at 30-day LIBOR plus 300 basis points and is secured by a pledge of all of the acquiring entity’s assets. In addition, BPPR provided the joint venture with a non-revolving advance facility (the “advance facility”) of $68.5 million to cover unfunded commitments and costs-to-complete related to certain construction projects, and a revolving working capital line (the “working capital line”) of $20 million to fund certain operating expenses of the joint venture. Cash proceeds received by the joint venture are first used to cover debt service payments for the acquisition loan, advance facility, and the working capital line described above which must be paid in full before proceeds can be used for other purposes. The distributable cash proceeds are determined based on a pro-rata basis in accordance with the respective equity ownership percentages. BPPR’s equity interest in the joint venture ranks pari-passu with those of other parties involved. As part of the transaction executed in September 2011, BPPR received $48 million in cash and a 24.9% equity interest in the joint venture. The Corporation is not required to provide any other financial support to the joint venture.

BPPR accounted for this transaction as a true sale pursuant to ASC Subtopic 860-10 and thus recognized the cash received, its equity investment in the joint venture, and the acquisition loan provided to the joint venture and derecognized the loans sold.

The Corporation has determined that PRLP 2011 Holdings, LLC is a VIE but the Corporation is not the primary beneficiary. All decisions are made by CPG (or an affiliate thereof) (the “Manager”), except for certain limited material decisions which would require the unanimous consent of all members. The Manager is authorized to execute and deliver on behalf of the joint venture any and all documents, contracts, certificates, agreements and instruments, and to take any action deemed necessary in the benefit of the joint venture. Also, the Manager delegates the day-to-day management and servicing of the loans to CPG Island Servicing, LLC, an affiliate of CPG, which contracted Archon, an affiliate of Goldman Sachs, to act as subservicer, but it has the responsibility to oversee such servicing responsibilities.

 

70


Table of Contents

The Corporation holds variable interests in this VIE in the form of the 24.9% equity interest (the “Investment in PRLP 2011 Holdings, LLC.”) and the financing provided to the joint venture. The equity interest is accounted for under the equity method of accounting pursuant to ASC Subtopic 323-10.

The following table presents the carrying amount and classification of the assets and liabilities, net of eliminations, related to the Corporation’s variable interests in the non-consolidated VIE, PRLP 2011 Holdings, LLC and its maximum exposure to loss at March 31, 2012 and December 31, 2011.

 

(In thousands)

   March 31, 2012     December 31, 2011  

Assets

    

Loans held-in-portfolio:

    

Acquisition loan

   $ 64,456     $ 64,711  

Advances under the working capital line

     1,658       —     

Advances under the advance facility

     2,445       —     
  

 

 

   

 

 

 

Total loans held-in-portfolio

   $ 68,559     $ 64,711  
  

 

 

   

 

 

 

Accrued interest receivable

   $ 199     $ —     

Other assets:

    

Investment in PRLP 2011 Holdings LLC

   $ 43,294     $ 37,561  
  

 

 

   

 

 

 

Total other assets

   $ 43,294     $ 37,561  
  

 

 

   

 

 

 

Total assets

   $ 112,052     $ 102,272  
  

 

 

   

 

 

 

Deposits

   $ (6,438   $ (48
  

 

 

   

 

 

 

Total liabilities

   $ (6,438   $ (48
  

 

 

   

 

 

 

Total net assets

   $ 105,614     $ 102,224  
  

 

 

   

 

 

 

Maximum exposure to loss

   $ 105,614     $ 102,224  
  

 

 

   

 

 

 

The Corporation determined that the maximum exposure to loss under a worst case scenario at March 31, 2012 would be not recovering the carrying amount of the acquisition loan, the advances on the advance facility and working capital line, and the equity interest held by the Corporation, net of the deposits.

 

71


Table of Contents

Note 20 – Related party transactions with affiliated company / joint venture

On September 30, 2010, the Corporation completed the sale of a 51% majority interest in EVERTEC, Inc. (“EVERTEC”) to an unrelated third-party, including the Corporation’s merchant acquiring and processing and technology businesses (the “EVERTEC transaction”), and retained a 49% ownership interest in Carib Holdings, the holding company of EVERTEC. EVERTEC continues to provide various processing and information technology services to the Corporation and its subsidiaries and gives BPPR access to the ATH network owned and operated by EVERTEC. The investment in EVERTEC is accounted for under the equity method and is evaluated for impairment if events or circumstances indicate that a decrease in value of the investment has occurred that is other than temporary. Refer to Note 25 “Related party transactions” to the consolidated financial statements included in the Corporation’s 2011 Annual Report for details on this sale to an unrelated third-party.

The Corporation’s investment in EVERTEC, including the impact of intra-entity eliminations, amounted to $192 million at March 31, 2012 (December 31, 2011—$203 million; March 31, 2011—$203 million), and is included as part of “other assets” in the consolidated statements of financial condition. The Corporation did not receive any capital distributions from EVERTEC during the period from January 1, 2012 through March 31, 2012 or during the year ended December 31, 2011.

The Corporation’s proportionate share of income or loss from EVERTEC is included in other operating income in the consolidated statements of operations since October 1, 2010. The following table presents the Corporation’s proportionate share of income (loss) from EVERTEC for the quarters ended March 31, 2012 and 2011. The unfavorable impact of the elimination in non-interest income presented in the table is principally offset by the elimination of 49% of the professional fees (operating expenses) paid by the Corporation to EVERTEC during the same period.

 

     Quarters ended March 31,  

(In thousands)

   2012     2011  

Share of income from the equity investment in EVERTEC

   $ 1,730     $ 11,792  

Intra-company eliminations considered in other operating income (detailed in next table)

     (13,345     (13,713
  

 

 

   

 

 

 

Share of loss from the equity investment in EVERTEC, net of eliminations

   $ (11,615   $ (1,921
  

 

 

   

 

 

 

The following tables present the impact of transactions and service payments between the Corporation and EVERTEC (as an affiliate) and their impact on the results of operations for the quarters ended March 31, 2012 and 2011. Items that represent expenses to the Corporation are presented with parenthesis. For consolidation purposes, the Corporation eliminates 49% of the income (expense) between EVERTEC and the Corporation from the corresponding categories in the consolidated statements of operations and the net effect of all items at 49% is eliminated against other operating income, which is the category used to record the Corporation’s share of income (loss) as part of its equity method investment in EVERTEC. The 51% majority interest in the table that follows represents the share of transactions with the affiliate that is not eliminated in the consolidation of the Corporation’s results of operations.

 

72


Table of Contents
     Quarters ended        
     March 31, 2012     March 31, 2011        

(In thousands)

   100%     Popular’s
49% interest
(eliminations)
    51%
majority
interest
    100%     Popular’s
49% interest
(eliminations)
    51%
majority
interest
    Category  

Interest income on loan to EVERTEC

   $ 823     $ 403     $ 420     $ 1,056     $ 518     $ 538       Interest income   

Interest income on investment securities issued by EVERTEC

     963       472       491       963       472       491       Interest income   

Interest expense on deposits

     (110     (54     (56     (295     (145     (150     Interest expense   

ATH and credit cards interchange income from services to EVERTEC

     5,853       2,868       2,985       6,793       3,328       3,465       Other service fees   

Processing fees on services provided by EVERTEC

     (36,659     (17,963     (18,696     (38,678     (18,952     (19,726     Professional fees   

Rental income charged to EVERTEC

     1,682       824       858       1,807       886       921       Net occupancy   

Transition services provided to EVERTEC

     213       105       108       369       181       188      
 
Other operating
expenses
  
  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ (27,235   $ (13,345   $ (13,890   $ (27,985   $ (13,712   $ (14,273  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The Corporation had the following financial condition accounts outstanding with EVERTEC at March 31, 2012, December 31, 2011 and March 31, 2011. The 51% majority interest represents the share of transactions with the affiliate that is not eliminated in the consolidation of the Corporation’s statements of financial condition.

 

     At March 31, 2012      At December 31, 2011      At March 31, 2011  

(In thousands)

   100%      51% majority
interest
     100%      51% majority
interest
     100%      51% majority
interest
 

Loans

   $ 53,306      $ 27,186      $ 53,215      $ 27,140      $ 57,459      $ 29,304  

Investment securities

     35,000        17,850        35,000        17,850        35,000        17,850  

Deposits

     79,241        40,413        54,288        27,687        50,846        25,932  

Accounts receivables (Other assets)

     3,251        1,658        5,132        2,617        3,709        1,891  

Accounts payable (Other liabilities)

     14,685        7,489        14,684        7,489        17,078        8,710  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

EVERTEC has certain performance bonds outstanding, which are guaranteed by the Corporation under a general indemnity agreement between the Corporation and the insurance companies issuing the bonds. EVERTEC’s performance bonds guaranteed by the Corporation amounted to approximately $14.0 million at March 31, 2012 (December 31, 2011—$15.0 million; March 31, 2011—$10.4 million). Also, EVERTEC has a letter of credit issued by BPPR, for an amount of $2.9 million at March 31, 2012, December 31, 2011 and March 31, 2011. As part of the merger agreement, the Corporation also agreed to maintain outstanding this letter of credit for a 5-year period. EVERTEC and the Corporation entered into a Reimbursement Agreement, in which EVERTEC will reimburse the Corporation for any losses incurred by the Corporation in connection with the performance bonds and the letter of credit. Possible losses resulting from these agreements are considered insignificant.

As indicated in Note 19 to the consolidated financial statements, the Corporation holds a 24.9% equity interest in PRLP 2011 Holdings LLC and currently provides certain financing to the joint venture as well as holds certain deposits from the entity.

 

73


Table of Contents

The following table presents transactions between the Corporation and PRLP 2011 Holdings, LLC and their impact on the Corporation’s results of operations for the quarter ended March 31, 2012.

 

     March 31, 2012         
(In thousands)    100%      Popular’s
24.9%
interest
(eliminations)
     75.1%
majority
interest
     Category  

Interest income on loan to PRLP 2011 Holdings, LLC

   $ 785      $ 195      $ 590        Interest income   

The Corporation had the following financial condition accounts outstanding with PRLP 2011 Holdings, LLC at March 31, 2012 and December 31, 2011. The 75.1% majority interest represents the share of transactions with the affiliate that is not eliminated in the consolidation of the Corporation’s statement of financial condition.

 

     At March 31, 2012      At December 31, 2011  
(In thousands)    100%      75.1% majority
interest
     100%      75.1% majority
interest
 

Loans

   $ 91,290      $ 68,559      $ 86,167      $ 64,711  

Deposits (non-interest bearing)

     8,573        6,438        64        48  

Accrued interest receivable

     265        199        —           —     

Note 21 – Fair value measurement

ASC Subtopic 820-10 “Fair Value Measurements and Disclosures” establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels in order to increase consistency and comparability in fair value measurements and disclosures. The hierarchy is broken down into three levels based on the reliability of inputs as follows:

 

   

Level 1—Unadjusted quoted prices in active markets for identical assets or liabilities that the Corporation has the ability to access at the measurement date. Valuation on these instruments does not necessitate a significant degree of judgment since valuations are based on quoted prices that are readily available in an active market.

 

   

Level 2—Quoted prices other than those included in Level 1 that are observable either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or that can be corroborated by observable market data for substantially the full term of the financial instrument.

 

   

Level 3—Inputs are unobservable and significant to the fair value measurement. Unobservable inputs reflect the Corporation’s own assumptions about assumptions that market participants would use in pricing the asset or liability.

The Corporation maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the observable inputs be used when available. Fair value is based upon quoted market prices when available. If listed prices or quotes are not available, the Corporation employs internally-developed models that primarily use market-based inputs including yield curves, interest rates, volatilities, and credit curves, among others. Valuation adjustments are limited to those necessary to ensure that the financial instrument’s 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 Corporation’s 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.

 

74


Table of Contents

Fair Value on a Recurring Basis

The following fair value hierarchy tables present information about the Corporation’s assets and liabilities measured at fair value on a recurring basis at March 31, 2012, December 31, 2011 and March 31, 2011:

 

At March 31, 2012

 

(In thousands)

   Level 1      Level 2     Level 3     Total  

Assets

         

Investment securities available-for-sale:

         

U.S. Treasury securities

   $ —         $ 38,084     $ —        $ 38,084  

Obligations of U.S. Government sponsored entities

     —           1,091,798       —          1,091,798  

Obligations of Puerto Rico, States and political subdivisions

     —           56,836       —          56,836  

Collateralized mortgage obligations-federal agencies

     —           1,858,807       —          1,858,807  

Collateralized mortgage obligations-private label

     —           54,668       —          54,668  

Mortgage-backed securities

     —           1,997,298       7,226       2,004,524  

Equity securities

     3,846        3,613       —          7,459  

Other

     —           26,440       —          26,440  
  

 

 

    

 

 

   

 

 

   

 

 

 

Total investment securities available-for-sale

   $ 3,846      $ 5,127,544     $ 7,226     $ 5,138,616  
  

 

 

    

 

 

   

 

 

   

 

 

 

Trading account securities, excluding derivatives:

         

Obligations of Puerto Rico, States and political subdivisions

   $ —         $ 28,038     $ —        $ 28,038  

Collateralized mortgage obligations

     —           734       2,750       3,484  

Mortgage-backed securities-federal agencies

     —           335,961       16,363       352,324  

Other

     —           16,372       3,988       20,360  
  

 

 

    

 

 

   

 

 

   

 

 

 

Total trading account securities

   $ —         $ 381,105     $ 23,101     $ 404,206  
  

 

 

    

 

 

   

 

 

   

 

 

 

Mortgage servicing rights

   $ —         $ —        $ 156,331     $ 156,331  

Derivatives

     —           58,691       —          58,691  
  

 

 

    

 

 

   

 

 

   

 

 

 

Total assets

   $ 3,846      $ 5,567,340     $ 186,658     $ 5,757,844  
  

 

 

    

 

 

   

 

 

   

 

 

 

Liabilities

         

Derivatives

   $ —         $ (62,717   $ —        $ (62,717

Contingent consideration

     —           —          (100,834     (100,834
  

 

 

    

 

 

   

 

 

   

 

 

 

Total liabilities

   $ —         $ (62,717   $ (100,834   $ (163,551
  

 

 

    

 

 

   

 

 

   

 

 

 

 

75


Table of Contents

At December 31, 2011

 

(In thousands)

   Level 1      Level 2     Level 3     Total  
Assets          
Investment securities available-for-sale:          

U.S. Treasury securities

   $ —         $ 38,668     $ —        $ 38,668  

Obligations of U.S. Government sponsored entities

     —           985,546       —          985,546  

Obligations of Puerto Rico, States and political subdivisions

     —           58,728       —          58,728  

Collateralized mortgage obligations-federal agencies

     —           1,697,642       —          1,697,642  

Collateralized mortgage obligations-private label

     —           57,792       —          57,792  

Mortgage-backed securities

     —           2,132,134       7,435       2,139,569  

Equity securities

     3,465        3,451       —          6,916  

Other

     —           24,962       —          24,962  
  

 

 

    

 

 

   

 

 

   

 

 

 

Total investment securities available-for-sale

   $ 3,465      $ 4,998,923     $ 7,435     $ 5,009,823  
  

 

 

    

 

 

   

 

 

   

 

 

 

Trading account securities, excluding derivatives:

         

Obligations of Puerto Rico, States and political subdivisions

   $ —         $ 90,332     $ —        $ 90,332  

Collateralized mortgage obligations

     —           737       2,808       3,545  

Mortgage-backed securities-federal agencies

     —           303,428       21,777       325,205  

Other

     —           13,212       4,036       17,248  
  

 

 

    

 

 

   

 

 

   

 

 

 

Total trading account securities

   $ —         $ 407,709     $ 28,621     $ 436,330  
  

 

 

    

 

 

   

 

 

   

 

 

 

Mortgage servicing rights

   $ —         $ —        $ 151,323     $ 151,323  

Derivatives

     —           61,887       —          61,887  
  

 

 

    

 

 

   

 

 

   

 

 

 

Total assets

   $ 3,465      $ 5,468,519     $ 187,379     $ 5,659,363  
  

 

 

    

 

 

   

 

 

   

 

 

 

Liabilities

         

Derivatives

   $ —         $ (66,700   $ —        $ (66,700

Contingent consideration

     —           —          (99,762     (99,762
  

 

 

    

 

 

   

 

 

   

 

 

 

Total liabilities

   $ —         $ (66,700   $ (99,762   $ (166,462
  

 

 

    

 

 

   

 

 

   

 

 

 

 

76


Table of Contents

At March 31, 2011

 

(In thousands)

   Level 1      Level 2     Level 3     Total  

Assets

         

Investment securities available-for-sale:

         

U.S. Treasury securities

   $ —         $ 37,682     $ —        $ 37,682  

Obligations of U.S. Government sponsored entities

     —           1,461,087       —          1,461,087  

Obligations of Puerto Rico, States and political subdivisions

     —           52,569       —          52,569  

Collateralized mortgage obligations-federal agencies

     —           1,607,345       —          1,607,345  

Collateralized mortgage obligations-private label

     —           77,148       —          77,148  

Mortgage-backed securities

     —           2,405,753       7,715       2,413,468  

Equity securities

     4,007        5,427       —          9,434  

Other

     —           27,608       —          27,608  
  

 

 

    

 

 

   

 

 

   

 

 

 

Total investment securities available-for-sale

   $ 4,007      $ 5,674,619     $ 7,715     $ 5,686,341  
  

 

 

    

 

 

   

 

 

   

 

 

 

Trading account securities, excluding derivatives:

         

Obligations of Puerto Rico, States and political subdivisions

   $ —         $ 21,578     $ —        $ 21,578  

Collateralized mortgage obligations

     —           713       2,678       3,391  

Mortgage-backed securities-federal agencies

     —           566,795       20,862       587,657  

Other

     —           18,132       2,883       21,015  
  

 

 

    

 

 

   

 

 

   

 

 

 

Total trading account securities

   $ —         $ 607,218     $ 26,423     $ 633,641  
  

 

 

    

 

 

   

 

 

   

 

 

 

Mortgage servicing rights

   $ —         $ —        $ 167,416     $ 167,416  

Derivatives

     —           66,327       —          66,327  
  

 

 

    

 

 

   

 

 

   

 

 

 

Total

   $ 4,007      $ 6,348,164     $ 201,554     $ 6,553,725  
  

 

 

    

 

 

   

 

 

   

 

 

 

Liabilities

         

Derivatives

   $ —         $ (66,902   $ —        $ (66,902

Equity appreciation instrument

     —           (578     —          (578

Contingent consideration

     —           —          (94,483     (94,483
  

 

 

    

 

 

   

 

 

   

 

 

 

Total

   $ —         $ (67,480   $ (94,483   $ (161,963
  

 

 

    

 

 

   

 

 

   

 

 

 

 

77


Table of Contents

The following tables present the changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the quarters ended March 31, 2012 and 2011.

 

Quarter ended March 31, 2012

 

(In millions)

   Balance at
January 1,
2012
    Gains
(losses)
included
in
earnings/
OCI
    Purchases      Sales     Settlements      Transfers
into
Level 3
     Transfers
out of
Level 3
    Balance
at March
31,
2012
    Changes in
unrealized
gains
(losses)
included in
earnings
related to
assets still
held at
March 31,
2012
 

Assets

                     

Investment securities available-for-sale:

                     

Mortgage-backed securities

   $ 7     $ —        $ —         $ —        $ —         $ —         $ —        $ 7     $ —     
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total investment securities available-for-sale

   $ 7     $ —        $ —         $ —        $ —         $ —         $ —        $ 7     $ —   [a] 
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Trading account securities:

                     

Collateralized mortgage obligations

   $ 3     $ —        $ —         $ —        $ —         $ —         $ —        $ 3     $ —     

Residential mortgage- backed securities—federal agencies

     22       1       3        (4     —           2        (8     16       1   

Other

     4       —          —           —          —           —           —          4       —     
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total trading account securities

   $ 29     $ 1     $ 3      $ (4   $ —         $ 2      $ (8   $ 23     $ 1 [b] 
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Mortgage servicing rights

   $ 151     $ 1     $ 4      $ —        $ —         $ —         $ —        $ 156     $ 6 [c] 
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total assets

   $ 187     $ 2     $ 7      $ (4   $ —         $ 2      $ (8   $ 186     $ 7   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Liabilities

                     

Contingent consideration

   $ (100   $ (1   $ —         $ —        $ —         $ —         $ —        $ (101   $ (1
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total liabilities

   $ (100   $ (1   $ —         $ —        $ —         $ —         $ —        $ (101   $ (1 )[d] 
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

[a] Gains (losses) are included in OCI.
[b] Gains (losses) are included in “Trading account profit” in the consolidated statement of operations.
[c] Gains (losses) are included in “Other services fees” in the consolidated statement of operations.
[d] Gains (losses) are included in “FDIC loss share (expense) income” in the consolidated statement of operations.

 

78


Table of Contents

Quarter ended March 31, 2011

 

(In millions)

   Balance at
January
1, 2011
    Gains
(losses)
included
in
earnings/
OCI
    Purchases      Sales     Settlements      Transfers
in (out)
of Level
3
     Balance
at
March
31,
2011
    Changes in
unrealized
gains
(losses)
included in
earnings
related to
assets still
held at
March 31,
2011
 

Assets

                   

Investment securities available-for-sale:

                   

Mortgage-backed securities

   $ 8     $ —        $ —         $ —        $ —         $ —         $ 8     $ —     
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total investment securities available-for-sale

   $ 8     $ —        $ —         $ —        $ —         $ —         $ 8     $ —   [a] 
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Trading account securities:

                   

Collateralized mortgage obligations

   $ 3     $ —        $ —         $ —        $ —         $ —         $ 3     $ —     

Residential mortgage- backed securities—federal agencies

     20       —          2        (1     —           —           21       —     

Other

     3       —          —           —          —           —           3       —     
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total trading account securities

   $ 26     $ —        $ 2      $ (1   $ —         $ —         $ 27     $ —   [b] 
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Mortgage servicing rights

   $ 167     $ (6   $ 7      $ —        $ —         $ —         $ 168     $ (2 )[c] 
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 201     $ (6   $ 9      $ (1   $ —         $ —         $ 203     $ (2
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Liabilities

                   

Contingent consideration

   $ (93   $ (1   $ —         $ —        $ —         $ —         $ (94   $ (1
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

   $ (93   $ (1   $ —         $ —        $ —         $ —         $ (94   $ (1 )[d] 
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

[a] Gains (losses) are included in OCI.
[b] Gains (losses) are included in “Trading account profit” in the consolidated statement of operations.
[c] Gains (losses) are included in “Other services fees” in the consolidated statement of operations.
[d] Gains (losses) are included in “FDIC loss share (expense) income” in the consolidated statement of operations.

 

 

There were $2 million in transfers from Level 2 to Level 3 and $8 million in transfers from Level 3 to Level 2 for financial instruments measured at fair value on a recurring basis during the quarter ended March 31, 2012. The transfers from Level 2 to Level 3 of trading mortgage-backed securities were the result of a change in valuation technique to a matrix pricing model, based on indicative prices provided by brokers. The transfers from Level 3 to Level 2 of trading mortgage-backed securities resulted from observable market data becoming available for these securities. There were no transfers in and/or out of Level 1 during the quarter ended March 31, 2012.

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 ended March 31, 2011. There were no transfers in and/or out of Level 1 and Level 2 during the quarter ended March 31, 2011.

Gains and losses (realized and unrealized) included in earnings for the quarters ended March 31, 2012 and 2011 for Level 3 assets and liabilities included in the previous tables are reported in the consolidated statements of operations as follows:

 

     Quarter ended March 31, 2012     Quarter ended March 31, 2011  

(In millions)

   Total gains
(losses) included
in earnings
    Changes in unrealized to
gains (losses) relating
assets still held at
reporting date
    Total gains
(losses) included
in earnings
    Changes in unrealized to
gains (losses) relating
assets still held at
reporting date
 

FDIC loss share (expense) income

   $ (1   $ (1   $ (1   $ (1

Other service fees

     1       6       (6     (2

Trading account loss

     1       1       —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 1     $ 6     $ (7   $ (3
  

 

 

   

 

 

   

 

 

   

 

 

 

 

79


Table of Contents

The following table includes quantitative information about significant unobservable inputs used to derive the fair value of Level 3 instruments, excluding those instruments for which the unobservable inputs were not developed by the Corporation such as prices of prior transactions and/or unadjusted third-party pricing sources.

 

(In thousands)

   Fair Value
at March 31,
2012
    Valuation
Technique
   Unobservable Inputs    Weighted Average (Range)  

Collateralized mortgage obligations - trading

   $ 2,750     Discounted

cash flow
model

   Weighted average life

Yield

Constant prepayment rate

    

 

 

2.4 years (0.4 - 3.4 years)

4.15 %

24.2% (19.5% - 28.0%)

  

  

  

Other - trading

   $ 1,325     Discounted

cash flow
model

   Weighted average life

Yield

Constant prepayment rate

    

 

 

5.8 years

12.9 %

9.0 %

  

  

  

Mortgage servicing rights

   $ 156,331     Discounted

cash flow
model

   Prepayment speed

Weighted average life

Discount rate

    

 

 

7.9% (4.2% - 24.7%)

12.7 years (4.0 - 24.0 years)

12.1% (10.0 - 15.5%)

 

  

  

Contingent consideration

     Discounted    Credit loss rate on covered loans      27.4% (0.0% - 100.0%)   
     cash flow    Risk premium component   
   $ (100,834   model    of discount rate      4.8 %   

Loans

   $ 49,876     External
Appraisal
   Haircut applied on

external appraisals

     25.3% (5.0% - 48.0%)   

Other real estate owned

   $ 76,648     External
Appraisal
   Haircut applied on

external appraisals

     19.1% (5.0% - 40.0%)   

The significant unobservable inputs used in the fair value measurement of the Corporation’s collateralized mortgage obligations and interest-only collateralized mortgage obligation (reported as “other”), which are classified in the “trading” category, are yield, constant prepayment rate, and weighted average life. Significant increases (decreases) in any of those inputs in isolation would result in significantly lower (higher) fair value measurement. Generally, a change in the assumption used for the constant prepayment rate will generate a directionally opposite change in the weighted average life. For example, as the average life is reduced by a higher constant prepayment rate, a lower yield will be realized, and when there is a reduction in the constant prepayment rate, the average life of these collateralized mortgage obligations will extend, thus resulting in a higher yield. These particular financial instruments are valued internally by the Corporation’s investment banking and broker-dealer unit utilizing internal valuation techniques. The unobservable inputs incorporated into the internal discounted cash flow models used to derive the fair value of collateralized mortgage obligations and interest-only collateralized mortgage obligation (reported as “other”), which are classified in the “trading” category, are reviewed by the Corporation’s Corporate Treasury unit on a quarterly basis. In the case of Level 3 financial instruments which fair value is based on broker quotes, the Corporation’s Corporate Treasury unit reviews the inputs used by the broker-dealers for reasonableness utilizing information available from other published sources and validates that the fair value measurements were developed in accordance with ASC Topic 820. The Corporate Treasury unit also substantiates the inputs used by validating the prices with other broker-dealers, whenever possible.

The significant unobservable inputs used in the fair value measurement of the Corporation’s mortgage servicing rights are constant prepayment rates and discount rates. Increases in interest rates may result in lower prepayments. Discount rates vary according to products and or portfolios depending on the perceived risk. Increases in discount rates result in a lower fair value measurement. The Corporation’s Corporate Comptroller’s unit is responsible for determining the fair value of MSRs, which is based on discounted cash flow methods based on assumptions developed by an external pricing service provider, except for prepayment speeds, which are adjusted internally for the local market based on historical experience. The Corporation’s Corporate Treasury unit validates the economic assumptions developed by the external pricing service provider on a quarterly basis. In addition, an analytical review of prepayment speeds is performed quarterly by the Corporate Comptroller’s unit. Significant variances in prepayment speeds are investigated by the Corporate Treasury unit. The Corporation’s MSR Committee analyzes changes in fair value measurements of MSRs and approves the valuation assumptions at each reporting period. Changes in valuation assumptions must also be approved by the MSR Committee. The fair value of MSRs are compared with those of the external service pricing provider on a quarterly basis in order to validate if the fair values are within the materiality thresholds established by management to monitor and investigate material deviations. Back-testing is performed to compare projected cash flows with actual historical data to ascertain the reasonability of the projected net cash flow results.

Additionally, the Corporation may be required to measure certain assets at fair value on a nonrecurring basis in periods subsequent to their initial recognition. The adjustments to fair value usually result from the application of lower of cost or fair value accounting, identification of impaired loans requiring specific reserves under ASC Section 310-10-35 “Accounting by Creditors for Impairment of

 

80


Table of Contents

a Loan”, or write-downs of individual assets. The following tables present financial and non-financial assets that were subject to a fair value measurement on a nonrecurring basis during the quarters ended March 31, 2012 and 2011, and which were still included in the consolidated statements of financial condition as of such dates. The amounts disclosed represent the aggregate fair value measurements of those assets as of the end of the reporting period.

 

      Carrying value at March 31, 2012     Carrying value at March 31, 2011  

(In millions)

   Level 1      Level
2
     Level
3
     Total      Write-
downs
    Level 1      Level
2
     Level
3
     Total      Write-
downs
 

Loans[1]

   $ —         $ —         $ 50      $ 50      $ (11   $ —         $ —         $ 19      $ 19      $ (3

Loans held-for-sale [2]

     —           —           8        8        (1     —           —           10        10        (1

Other real estate owned [3]

     —           —           77        77        (13     —           —           13        13        (4
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ —         $ 135      $ 135      $ (25   $ —         $ —         $ 42      $ 42      $ (8
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

[1] Relates mostly to certain impaired collateral dependent loans. The impairment was measured based on the fair value of the collateral, which is derived from appraisals that take into consideration prices in observed transactions involving similar assets in similar locations, in accordance with the provisions of ASC Section 310-10-35.
[2] Relates to lower of cost or fair value adjustments on loans held-for-sale and loans transferred from loans held-in-portfolio to loans held-for-sale.
[3] Represents the fair value of foreclosed real estate and other collateral owned that were written down to their fair value. Costs to sell excluded from the reported fair value amount were $5 million at March 31, 2012 and $1 million at March 31, 2011.

Following is a description of the Corporation’s 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 disclosed do not represent management’s estimate of the underlying value of the Corporation.

Trading Account Securities and Investment Securities Available-for-Sale

 

   

U.S. Treasury securities: The fair value of U.S. Treasury securities is based on yields that are interpolated from the constant maturity treasury curve. These securities are classified as Level 2.

 

   

Obligations of U.S. Government sponsored entities: The Obligations of U.S. Government sponsored entities include U.S. agency securities, which fair value is based on an active exchange market and on quoted market prices for similar securities. The U.S. agency securities are classified as Level 2.

 

   

Obligations of Puerto Rico, States and political subdivisions: Obligations of Puerto Rico, States and political subdivisions include municipal bonds. The bonds are segregated and the like characteristics divided into specific sectors. Market inputs used in the evaluation process include all or some of the following: trades, bid price or spread, two sided markets, quotes, benchmark curves including but not limited to Treasury benchmarks, LIBOR and swap curves, market data feeds such as those obtained from municipal market sources, discount and capital rates, and trustee reports. The municipal bonds are classified as Level 2.

 

   

Mortgage-backed securities: Certain agency mortgage-backed securities (“MBS”) are priced based on a bond’s theoretical value derived 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-label collateralized mortgage obligations (“CMOs”) are priced based on a bond’s theoretical value derived 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 CMOs are classified as Level 2. Other CMOs, due to their limited liquidity, are classified as Level 3 due to the insufficiency of inputs such as broker quotes, executed trades, credit information and cash flows.

 

   

Equity securities: Equity securities with quoted market prices obtained from an active exchange market are classified as Level 1. Other equity securities that do not trade in highly liquid markets are classified as Level 2.

 

   

Corporate securities, commercial paper and mutual funds (included as “other” in the “trading account securities” category): Quoted prices for these security types are obtained from broker dealers. Given that the quoted prices are for similar instruments or do not trade in highly liquid markets, these securities are classified as Level 2. The important

 

81


Table of Contents
 

variables in determining the prices of Puerto Rico tax-exempt mutual fund shares are net asset value, dividend yield and type of assets in the fund. All funds trade based on a relevant dividend yield taking into consideration the aforementioned variables. In addition, demand and supply also affect the price. Corporate securities that trade less frequently or are in distress are classified as Level 3.

Mortgage servicing rights

Mortgage servicing rights (“MSRs”) do not trade in an active market with readily observable prices. MSRs are priced internally using a discounted cash flow model. The discounted cash flow model incorporates assumptions that market participants would use in estimating future net servicing income, including portfolio characteristics, prepayments assumptions, discount rates, delinquency and foreclosure rates, late charges, other ancillary revenues, cost to service and other economic factors. Prepayment speeds are adjusted for the Corporation’s loan characteristics and portfolio behavior. Due to the unobservable nature of certain valuation inputs, the MSRs are classified as Level 3.

Derivatives

Interest rate swaps, interest rate caps and indexed options are traded in over-the-counter active markets. These derivatives are indexed to an observable interest rate benchmark, such as LIBOR or equity indexes, and are priced using an income approach based on present value and option pricing models using observable inputs. Other derivatives are liquid and have quoted prices, such as forward contracts or “to be announced securities” (“TBAs”). All of these derivatives are classified as Level 2. The non-performance risk is determined using internally-developed models that consider the collateral held, the remaining term, and the creditworthiness of the entity that bears the risk, and uses available public data or internally-developed data related to current spreads that denote their probability of default.

Contingent consideration liability

The fair value of the true-up payment obligation (contingent consideration) to the FDIC as it relates to the Westernbank FDIC-assisted transaction was estimated using projected cash outflows related to the loss sharing agreements at the true-up measurement date. It took into consideration the intrinsic loss estimate, asset premium/discount, cumulative shared loss payments, and the cumulative servicing amount related to the loan portfolio. Refer to Note 9 to the consolidated financial statements for a description of the formula established in the loss share agreements for determining the true-up payment.

On a quarterly basis, management evaluates and revises the estimated credit loss rates that are used to determine expected cash flows on the covered loan pools. The expected credit losses on the loan pools are used to determine the loss share cash outflows expected to be paid to the FDIC when the true-up payment is due.

The loss share cash outflows expected to be paid to the FDIC were discounted using a term rate consistent with the time remaining until the payment is due. The discount rate was an estimate of the sum of the risk-free benchmark rate for the term remaining before the true-up payment is due and a premium to account for the credit risk profile of BPPR owing the payment and a liquidity premium. Two methodologies were used to realize this estimate. One consisted of adding a risk premium determined by an independent third party to the US Treasury benchmark. This resulted in a discount rate of 6.6%. The second methodology involved using an index of the yields on corporate bonds with credit ratings similar to BPPR. This index amounted to 6.7%. Both observations were averaged, resulting in a discount rate of 6.6%, which was used for estimating the value of the true-up payment obligation.

Loans held-in-portfolio considered impaired under ASC Section 310-10-35 that are collateral dependent

The impairment is measured based on the fair value of the collateral, which is derived from appraisals that take into consideration prices in observed transactions involving similar assets in similar locations, in accordance with the provisions of ASC Section 310-10-35, and which could be subject to internal adjustments based on the age of the appraisal. Currently, the associated loans considered impaired are classified as Level 3.

Loans measured at fair value pursuant to lower of cost or fair value adjustments

Loans measured at fair value on a nonrecurring basis pursuant to lower of cost or fair value were priced based on secondary market prices and discounted cash flow models which incorporate internally-developed assumptions for prepayments and credit loss estimates. These loans are classified as Level 3.

Other real estate owned and other foreclosed assets

Other real estate owned includes real estate properties securing mortgage, consumer, and commercial loans. Other foreclosed assets include automobiles securing auto loans. The fair value of foreclosed assets may be determined using an external appraisal, broker price opinion or an internal valuation. These foreclosed assets are classified as Level 3 given certain internal adjustments that may be made to external appraisals.

 

82


Table of Contents

Note 22 – Fair value of financial instruments

The fair value of financial instruments is the amount at which an asset or obligation could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Fair value estimates are made at a specific point in time based on the type of financial instrument and relevant market information. Many of these estimates involve various assumptions and may vary significantly from amounts that could be realized in actual transactions.

The information about the estimated fair values of financial instruments presented hereunder excludes all nonfinancial instruments and certain other specific items.

For those financial instruments with no quoted market prices available, fair values have been estimated using present value calculations or other valuation techniques, as well as management’s best judgment with respect to current economic conditions, including discount rates, estimates of future cash flows, and prepayment assumptions.

The fair values reflected herein have been determined based on the prevailing interest rate environment at March 31, 2012 and December 31, 2011, as applicable. In different interest rate environments, fair value estimates can differ significantly, especially for certain fixed rate financial instruments. In addition, the fair values presented do not attempt to estimate the value of the Corporation’s fee generating businesses and anticipated future business activities, that is, they do not represent the Corporation’s value as a going concern. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Corporation.

Following is a description of the Corporation’s valuation methodologies and inputs used to estimate the fair values for each class of financial assets and liabilities not measured at fair value, but for which the fair value is disclosed. The disclosure requirements exclude certain financial instruments and all non-financial instruments. Accordingly, the aggregate fair value amounts of the financial instruments disclosed do not represent management’s estimate of the underlying value of the Corporation. For a description of the valuation methodologies and inputs used to estimate the fair value for each class of financial assets and liabilities measured at fair value, refer to Note 21.

Cash and due from banks

Cash and due from banks include cash on hand, cash items in process of collection, and non-interest bearing deposits due from other financial institutions. The carrying amount of cash and due from banks is a reasonable estimate of its fair value. Cash and due from banks are classified as Level 1.

Money market investments

Investments in money market instruments are highly liquid instruments with an average maturity of three months or less. For this reason, they carry a low risk of changes in value as a result of changes in interest rates, and the carrying amount approximates their fair value. Money market investments include federal funds sold, securities purchased under agreements to resell, time deposits with other banks, and restricted cash. These money market investments are classified as Level 2.

Investment securities held-to-maturity

 

   

Obligations of Puerto Rico, States and political subdivisions: Obligations of Puerto Rico, States and political subdivisions include municipal bonds priced based on a bond’s theoretical value derived 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 and are classified as Level 2. Other municipal bonds include Puerto Rico public municipalities debt and bonds collateralized by second mortgages under the Home Purchase Stimulus Program. Puerto Rico public municipalities debt was valued internally based on benchmark treasury notes and a credit spread derived from comparable Puerto Rico government trades and recent issuances. Puerto Rico public municipalities debt is classified as Level 3. Given that the fair value of municipal bonds collateralized by second mortgages was based on internal yield and prepayment speed assumptions, these municipal bonds are classified as Level 3.

 

83


Table of Contents
   

Agency collateralized mortgage obligation: The fair value of the agency collateralized mortgage obligation (“CMO”), which is guaranteed by GNMA, was based on internal yield and prepayment speed assumptions. This agency CMO is classified as Level 3.

 

   

Other: Other securities include foreign and corporate debt. Given that the fair value was based on quoted prices for similar instruments, foreign debt is classified as Level 2. The fair value of corporate debt, which is collateralized by municipal bonds of Puerto Rico, was internally derived from benchmark treasury notes and a credit spread based on comparable Puerto Rico government trades, similar securities, and/or recent issuances. Corporate debt is classified as Level 3.

Other investment securities

 

   

Federal Home Loan Bank capital stock: Federal Home Loan Bank (FHLB) capital stock represents an equity interest in the FHLB of New York. It does not have a readily determinable fair value because its ownership is restricted and it lacks a market. Since the excess stock is repurchased by the FHLB at its par value, the carrying amount of FHLB capital stock approximates fair value. Thus, these stocks are classified as Level 2.

 

   

Federal Reserve Bank capital stock: Federal Reserve Bank (FRB) capital stock represents an equity interest in the FRB of New York. It does not have a readily determinable fair value because its ownership is restricted and it lacks a market. Since the canceled stock is repurchased by the FRB for the amount of the cash subscription paid, the carrying amount of FRB capital stock approximates fair value. Thus, these stocks are classified as Level 2.

 

   

Trust preferred securities: Given that the fair value of junior subordinated debentures is the same amount as the fair value of the trust preferred securities, the fair value of the equity-method investment in the common stock, which represents the capital contribution to create these trusts, is the same as its book value. The equity-method investment in the common stock of these trusts is classified as Level 2, except for that of Popular Capital Trust III (Troubled Asset Relief Program) which is classified as Level 3. Refer to Note 15 for additional information on these trust preferred securities.

 

   

Other investments: Other investments include private equity method investments and Visa Class B common stock held by the Corporation. Since there are no observable market values, private equity method investments are classified as Level 3. The Visa Class B common stock was priced by applying the quoted price of Visa Class A common stock, net of a liquidity adjustment, to the as converted number of Class A common shares since these Class B common shares are restricted and not convertible to Class A common shares until pending litigation is resolved. Thus, these stocks are classified as Level 3.

Loans held-for-sale

The fair value of certain impaired loans held-for-sale was based on a discounted cash flow model that assumes that no principal payments are received prior to the effective average maturity date, that the outstanding unpaid principal balance is reduced by a monthly net loss rate, and that the remaining unpaid principal balance is received as a lump sum principal payment at the effective average maturity date. The remaining unpaid principal balance expected to be received, which is based on the prior 12-month cash payment experience of these loans and their expected collateral recovery, was discounted using the interest rate currently offered to clients for the origination of comparable loans. These loans are classified as Level 3. For loans held-for-sale originated with the intent to sell in the secondary market, its fair value was determined using similar characteristics of loans and secondary market prices assuming the conversion to mortgage-backed securities. Given that the valuation methodology uses internal assumptions based on loan level data, these loans are classified as Level 3. The fair value of certain other loans held-for-sale is based on bids received from potential buyers; binding offers; or external appraisals, net of internal adjustments and estimated costs to sell. Loans held-for-sale based on binding offers are classified as Level 2. Loans held-for-sale based on indicative offers and/or external appraisals are classified as Level 3.

Loans held-in-portfolio

The fair values of the loans held-in-portfolio have been determined for groups of loans with similar characteristics. Loans were segregated by type such as commercial, construction, residential mortgage, consumer, and credit cards. Each loan category was further segmented based on loan characteristics, including interest rate terms, credit quality and vintage. Generally, fair values were estimated based on an exit price by discounting expected cash flows for the segmented groups of loans using a discount rate that considers interest, credit and expected return by market participant under current market conditions. Additionally, prepayment, default and recovery assumptions have been applied in the mortgage loan portfolio valuations. Generally accepted accounting principles do not require a fair valuation of the lease financing portfolio, therefore it is included in the loans total at its carrying amount. Loans held-in-portfolio are classified as Level 3.

 

84


Table of Contents

FDIC loss share asset

Fair value of the FDIC loss share asset was estimated using projected net losses related to the loss sharing agreements, which are expected to be reimbursed by the FDIC. The projected net losses were discounted using the U.S. Government agency curve. The loss share asset is classified as Level 3.

Deposits

 

   

Demand deposits: The fair value of demand deposits, which have no stated maturity, was calculated based on the amount payable on demand as of the respective dates. These demand deposits include non-interest bearing demand deposits, savings, NOW, and money market accounts. Thus, these deposits are classified as Level 2.

 

   

Time deposits: The fair value of time deposits was calculated based on the discounted value of contractual cash flows using interest rates being offered on time deposits with similar maturities. The non-performance risk was determined using internally-developed models that consider, where applicable, the collateral held, amounts insured, the remaining term, and the credit premium of the institution. For certain 5-year certificates of deposit in which customers may withdraw their money anytime with no penalties or charges, the fair value of these certificates of deposit incorporate an early cancellation estimate based on historical experience. Time deposits are classified as Level 2.

Assets sold under agreements to repurchase

 

   

Securities sold under agreements to repurchase (structured and non-structured): Securities sold under agreements to repurchase with short-term maturities approximate fair value because of the short-term nature of those instruments. Resell and repurchase agreements with long-term maturities were valued using discounted cash flows based on the three-month LIBOR curve. In determining the non-performance credit risk valuation adjustment, the collateralization levels of these long-term securities sold under agreements to repurchase were considered. In the case of callable structured repurchase agreements, the callable feature is not considered when determining the fair value of those repurchase agreements, since there is a remote possibility, based on forward rates, that the investor will call back these agreements before maturity since it is not expected that the interest rates would rise more than the specified interest rate of these agreements. Securities sold under agreements to repurchase (structured and non-structured) are classified as Level 2.

Other short-term borrowings

The carrying amount of other short-term borrowings approximate fair value because of the short-term maturity of those instruments or because they carry interest rates which approximate market. Thus, these other short-term borrowings are classified as Level 2.

Notes payable

 

   

FHLB advances: The fair value of FHLB advances was based on the discounted value of contractual cash flows over their contractual term. In determining the non-performance credit risk valuation adjustment, the collateralization levels of these advances were considered. These advances are classified as Level 2.

 

   

Medium-term notes: The fair value of publicly-traded medium-term notes was determined using recent trades of similar transactions. Publicly-traded medium-term notes are classified as Level 2. The fair value of non-publicly traded debt was based on remaining contractual cash outflows, discounted at a rate commensurate with the non-performance credit risk of the Corporation, which is subjective in nature. Non-publicly traded debt is classified as Level 3.

 

   

Junior subordinated deferrable interest debentures (related to trust preferred securities): The fair value of junior subordinated interest debentures was determined using recent trades of similar transactions. Thus, these junior subordinated deferrable interest debentures are classified as Level 2.

 

   

Junior subordinated deferrable interest debentures (Troubled Asset Relief Program): The fair value of junior subordinated deferrable interest debentures was based on the discounted value of contractual cash flows over their contractual term. The discount rate was based on the rate at which a similar security was priced in the open market. Thus, these junior subordinated deferrable interest debentures are classified as Level 3.

 

85


Table of Contents
   

Others: The other category includes capital lease obligations. Generally accepted accounting principles do not require a fair valuation of capital lease obligations, therefore; it is included at its carrying amount. Capital lease obligations are classified as Level 3.

Commitments to extend credit and letters of credit

Commitments to extend credit were valued using the fees currently charged to enter into similar agreements. For those commitments where a future stream of fees is charged, the fair value was estimated by discounting the projected cash flows of fees on commitments. Since the fair value of commitments to extend credit varies depending on the undrawn amount of the credit facility, fees are subject to constant change, and cash flows are dependent on the creditworthiness of borrowers, commitments to extend credit are classified as Level 3. The fair value of letters of credit was based on fees currently charged on similar agreements. Given that the fair value of letters of credit constantly vary due to fees being subject to constant change and whether the fees are received depends on the creditworthiness of the account parties, letters of credit are classified as Level 3.

The following table presents the carrying or notional amounts, as applicable, and estimated fair values for financial instruments with their corresponding level in the fair value hierarchy.

 

     March 31, 2012      December 31, 2011  

(In thousands)

   Carrying
amount
     Level 1      Level 2      Level 3      Fair value      Carrying
amount
     Fair value  

Financial Assets:

                    

Cash and due from banks

   $ 472,806      $ 472,806      $ —         $ —         $ 472,806      $ 535,282      $ 535,282  

Money market investments

     1,304,263        —           1,304,263        —           1,304,263        1,376,174        1,376,174  

Trading account securities, excluding derivatives [1]

     404,206        —           381,105        23,101        404,206        436,330        436,330  

Investment securities

available-for-sale [1]

     5,138,616        3,846        5,127,544        7,226        5,138,616        5,009,823        5,009,823  

Investment securities held-to-maturity:

                    

Obligations of Puerto Rico, States and political subdivisions

   $ 97,717      $ —         $ 1,400      $ 96,739      $ 98,139      $ 98,973      $ 98,770  

Collateralized mortgage obligation-federal agency

     155        —           —           161        161        160        151  

Other

     26,500        —           1,500        25,029        26,529        26,250        26,333  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities held-to-maturity

   $ 124,372      $ —         $ 2,900      $ 121,929      $ 124,829      $ 125,383      $ 125,254  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other investment securities:

                    

FHLB stock

   $ 100,240      $ —         $ 100,240      $ —         $ 100,240      $ 84,133      $ 84,133  

FRB stock

     79,369        —           79,369        —           79,369        79,648        79,648  

Trust preferred securities

     14,197        —           13,197        1,000        14,197        14,197        14,197  

Other investments

     1,902        —           —           3,566        3,566        1,902        3,605  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total other investment securities

   $ 195,708      $ —         $ 192,806      $ 4,566      $ 197,372      $ 179,880      $ 181,583  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans held-for-sale

   $ 361,596      $ —         $ 3,229      $ 375,794      $ 379,023      $ 363,093      $ 390,783  

Loans not covered under loss sharing agreement with the FDIC

     19,813,906        —           —           16,749,026        16,749,026        19,912,233        16,753,889  

Loans covered under loss sharing agreements with the FDIC

     4,083,292        —           —           4,665,129        4,665,129        4,223,758        4,663,327  

FDIC loss share asset

     1,880,357        —           —           1,734,507        1,734,507        1,915,128        1,755,295  

Mortgage servicing rights

     156,331        —           —           156,331        156,331        151,323        151,323  

Derivatives

     58,691        —           58,691        —           58,691        61,887        61,887  

 

86


Table of Contents
$XXX,XX $XXX,XX $XXX,XX $XXX,XX $XXX,XX $XXX,XX $XXX,XX
      March 31, 2012      December 31, 2011  

(In thousands)

   Carrying
amount
     Level 1      Level 2      Level 3      Fair value      Carrying
amount
     Fair value  

Financial Liabilities:

                    

Deposits:

                    

Demand deposits

   $ 17,274,145      $ —         $ 17,274,145      $ —         $ 17,274,145      $ 17,232,087      $ 17,232,087  

Time deposits

     9,923,591        —           10,015,038        —           10,015,038        10,710,040        10,825,256  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total deposits

   $ 27,197,736      $ —         $ 27,289,183      $ —         $ 27,289,183      $ 27,942,127      $ 28,057,343  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Assets sold under agreements to repurchase:

                    

Securities sold under agreements to repurchase

   $ 1,125,367      $ —         $ 1,131,082      $ —         $ 1,131,082      $ 1,102,907      $ 1,107,314  

Structured repurchase agreements

     988,190        —           1,102,336        —           1,102,336        1,038,190        1,166,488  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total assets sold under agreements to repurchase

   $ 2,113,557      $ —         $ 2,233,418      $ —         $ 2,233,418      $ 2,141,097      $ 2,273,802  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other short-term borrowings [2]

   $ 751,200      $ —         $ 751,200      $ —         $ 751,200      $ 296,200      $ 296,200  

Notes payable:

                    

FHLB advances

   $ 623,286      $ —         $ 654,941      $ —         $ 654,941      $ 642,568      $ 673,505  

Medium-term notes

     278,815        —           283,965        4,053        288,018        278,897        282,898  

Junior subordinated deferrable interest debentures (related to trust preferred securities)

     439,800        —           343,276        —           343,276        439,800        284,238  

Junior subordinated deferrable interest debentures (Troubled Asset Relief Program)

     476,957        —           —           729,351        729,351        470,037        457,120  

Others

     24,896        —           —           24,896        24,896        25,070        25,070  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total notes payable

   $ 1,843,754      $ —         $ 1,282,182      $ 758,300      $ 2,040,482      $ 1,856,372      $ 1,722,831  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Derivatives

   $ 62,717      $ —         $ 62,717      $ —         $ 62,717      $ 66,700      $ 66,700  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Contingent consideration

   $ 100,834      $ —         $ —         $ 100,834      $ 100,834      $ 99,762      $ 99,762  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

(In thousands)

   Notional
amount
     Level 1      Level 2      Level 3      Fair value      Notional
amount
     Fair value  

Commitments to extend credit

   $ 6,821,833      $ —         $ —         $ 1,796      $ 1,796      $ 6,231,213      $ 2,062  

Letters of credit

     143,485        —           —           3,450        3,450        136,341        2,339  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

[1] Refer to Note 21 to the consolidated financial statements for the fair value by class of financial asset and its hierarchy level.
[2] Refer to Note 14 to the consolidated financial statements for the composition of short-term borrowings.

 

87


Table of Contents

Note 23 – Net income per common share

The following table sets forth the computation of net income per common share (“EPS”), basic and diluted, for the quarters ended March 31, 2012 and 2011:

 

$XXX,XX $XXX,XX
      Quarters ended March 31,  

(In thousands, except per share information)

   2012     2011  

Net income (loss)

   $ 48,408     $ 10,132  

Preferred stock dividends

     (931     (930
  

 

 

   

 

 

 

Net income (loss) applicable to common stock

   $ 47,477     $ 9,202  
  

 

 

   

 

 

 

Average common shares outstanding

     1,023,418,052       1,021,536,201  

Average potential dilutive common shares

     1,526,948       802,894  
  

 

 

   

 

 

 

Average common shares outstanding - assuming dilution

     1,024,945,000       1,022,339,095  
  

 

 

   

 

 

 

Basic and dilutive EPS

   $ 0.05     $ 0.01  
  

 

 

   

 

 

 

Potential common shares consist of common stock issuable under the assumed exercise of stock options and restricted stock awards using the treasury stock method. This method assumes that the potential common shares are issued and the proceeds from exercise, in addition to the amount of compensation cost attributed to future services, are used to purchase common stock at the exercise date. The difference between the number of potential shares issued and the shares purchased is added as incremental shares to the actual number of shares outstanding to compute diluted earnings per share. Warrants, stock options, and restricted stock awards that result in lower potential shares issued than shares purchased under the treasury stock method are not included in the computation of dilutive earnings per share since their inclusion would have an antidilutive effect in earnings per common share.

For the quarter ended March 31, 2012, there were 1,682,158 weighted average antidilutive stock options outstanding (March 31, 2011 – 2,121,618). Additionally, the Corporation has outstanding a warrant issued to the U.S. Treasury to purchase 20,932,836 shares of common stock, which have an antidilutive effect at March 31, 2012 and 2011.

Note 24 – Other service fees

The caption of other services fees in the consolidated statements of operations consist of the following major categories:

 

$XXX,XX,XX $XXX,XX,XX
      Quarters ended March 31,  

(In thousands)

   2012      2011  

Mortgage servicing fees, net of fair value adjustments

   $ 12,931      $ 6,260  

Insurance fees

     12,390        11,926  

Credit card fees and discounts

     11,892        10,576  

Debit card fees

     9,832        12,925  

Sale and administration of investment products

     8,889        7,130  

Trust fees

     4,081        3,495  

Processing fees

     1,774        1,697  

Other fees

     4,250        4,643  
  

 

 

    

 

 

 

Total other services fees

   $ 66,039      $ 58,652  
  

 

 

    

 

 

 

 

88


Table of Contents

Note 25 – FDIC loss share (expense) income

The caption of FDIC loss share (expense) income in the consolidated statements of operations consists of the following major categories:

 

     Quarters ended March 31,  

(In thousands)

   2012     2011  

(Amortization) accretion of loss share indemnification asset, net

   $ (29,375   $ 25,796  

80% mirror accounting on discount accretion on loans and unfunded commitments accounted for under ASC 310-20

     (248     (21,465

80% mirror accounting on provision for loan losses for reductions in expected cash flows that are reimbursable by the FDIC[1]

     13,422       12,445  

Other

     946       (741
  

 

 

   

 

 

 

Total FDIC loss share (expense) income

   $ (15,255   $ 16,035  
  

 

 

   

 

 

 

 

[1] Reductions in expected cash flows for ASC 310-30 loans, which may impact the provision for loan losses, may consider reductions in both principal and interest cash flow expectations. The amount covered under the FDIC loss sharing agreements for interest not collected from borrowers is limited under the agreements (approximately 90 days); accordingly, these amounts are not subject fully to the 80% mirror accounting.

Note 26 – Pension and postretirement benefits

The Corporation has a non-contributory defined benefit pension plan and supplementary pension benefit restoration plans for regular employees of certain of its subsidiaries. The accrual of benefits under the plans is frozen to all participants.

The components of net periodic pension cost for the periods presented were as follows:

 

     Pension Plan     Benefit Restoration Plans  
     Quarters ended March 31,     Quarters ended March 31,  

(In thousands)

   2012     2011     2012     2011  

Interest cost

   $ 7,495     $ 7,785     $ 393     $ 395  

Expected return on plan assets

     (9,810     (10,840     (526     (451

Amortization of net loss

     5,426       2,828       323       148  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net periodic pension cost (benefit)

   $ 3,111     $ (227   $ 190     $ 92  
  

 

 

   

 

 

   

 

 

   

 

 

 

The Corporation did not make any contributions to the pension and benefit restoration plans during the quarter ended March 31, 2012. The total contributions expected to be paid during the year 2012 for the pension and benefit restoration plans amount to approximately $50 thousand.

The Corporation also provides certain postretirement health care benefits for retired employees of certain subsidiaries. The table that follows presents the components of net periodic postretirement benefit cost.

 

     Quarters ended March 31,  

(In thousands)

   2012     2011  

Service cost

   $ 548     $ 504  

Interest cost

     1,950       2,136  

Amortization of prior service cost

     (50     (240

Amortization of net loss

     540       267  
  

 

 

   

 

 

 

Total postretirement cost

   $ 2,988     $ 2,667  
  

 

 

   

 

 

 

 

89


Table of Contents

Contributions made to the postretirement benefit plan for the quarter ended March 31, 2012 amounted to approximately $1.6 million. The total contributions expected to be paid during the year 2012 for the postretirement benefit plan amount to approximately $7.4 million.

Note 27 – 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 Corporation’s shareholders adopted the Popular, Inc. 2004 Omnibus Incentive Plan (the “Incentive Plan”), which replaced and superseded the Stock Option Plan. The adoption of the Incentive Plan did not alter the original terms of the grants made under the Stock Option Plan prior to the adoption of the Incentive Plan.

Stock Option Plan

Employees and directors of the Corporation or any of its subsidiaries were eligible to participate in the Stock Option Plan. The Board of Directors or the Compensation Committee of the Board had the absolute discretion to determine the individuals that were eligible to participate in the Stock Option Plan. This plan provided for the issuance of Popular, Inc.’s common stock at a price equal to its fair market value at the grant date, subject to certain plan provisions. The shares are to be made available from authorized but unissued shares of common stock or treasury stock. The Corporation’s 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.

 

(Not in thousands)

 

Exercise price range

per share

   Options outstanding      Weighted-average
exercise price of
options outstanding
     Weighted-average
remaining life  of

options outstanding
in years
     Options exercisable
(fully vested)
     Weighted-average
exercise price of
options exercisable
 

$ 15.82 - $18.50

     598,409      $ 16.77        0.92        598,409      $ 16.77  

$ 19.25 - $27.20

     1,083,749      $ 25.27        2.26        1,083,749      $ 25.27  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

$ 15.82 - $27.20

     1,682,158      $ 22.25        1.79        1,682,158      $ 22.25  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

There was no intrinsic value of options outstanding at March 31, 2012 and 2011. There was no intrinsic value of options exercisable at March 31, 2012 and 2011.

The following table summarizes the stock option activity and related information:

 

(Not in thousands)

   Options Outstanding     Weighted-Average
Exercise Price
 

Outstanding at December 31, 2010

     2,275,166     $ 20.67  

Granted

     —          —     

Exercised

     —          —     

Forfeited

     —          —     

Expired

     (205,715     19.55  
  

 

 

   

 

 

 

Outstanding at December 31, 2011

     2,069,451     $ 20.78  

Granted

     —          —     

Exercised

     —          —     

Forfeited

     —          —     

Expired

     (387,293     14.42  
  

 

 

   

 

 

 

Outstanding at March 31, 2012

     1,682,158     $ 22.25  
  

 

 

   

 

 

 

 

90


Table of Contents

The stock options exercisable at March 31, 2012 totalled 1,682,158 (March 31, 2011 – 2,121,618). There were no stock options exercised during the quarters ended March 31, 2012 and 2011. Thus, there was no intrinsic value of options exercised during the quarters ended March 31, 2012 and 2011.

There were no new stock option grants issued by the Corporation under the Stock Option Plan during 2011 and 2012.

There was no stock option expense recognized for the quarters ended March 31, 2012 and 2011.

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.

Under the Incentive Plan, the Corporation has issued restricted shares, which become vested based on the employees’ continued service with Popular. Unless otherwise stated in an agreement, the compensation cost associated with the shares of restricted stock is determined based on a two-prong vesting schedule. The first part is vested ratably over five years commencing at the date of grant and the second part is vested at termination of employment after attainment of 55 years of age and 10 years of service. The five-year vesting part is accelerated at termination of employment after attaining 55 years of age and 10 years of service.

The following table summarizes the restricted stock activity under the Incentive Plan for members of management.

 

(Not in thousands)

   Restricted
Stock
    Weighted-Average
Grant Date Fair

Value
 

Non-vested at December 31, 2010

     1,131,736     $ 3.61  

Granted

     1,559,463       3.24  

Vested

     (51,563     9.00  

Forfeited

     (220,293     4.20  
  

 

 

   

 

 

 

Non-vested at December 31, 2011

     2,419,343     $ 3.20  

Granted

     1,521,904       1.68  

Vested

     —          —     

Forfeited

     —          —     
  

 

 

   

 

 

 

Non-vested at March 31, 2012

     3,941,247     $ 2.61  
  

 

 

   

 

 

 

During the quarter ended March 31, 2012, 1,521,904 shares of restricted stock were awarded to management under the Incentive Plan (March 31, 2011 - 1,559,463). The awards granted met the standards for compensation established under the Interim Final Rule promulgated pursuant to the Emergency Economic Stabilization Act of 2008 (“EESA”), as amended by the American Recovery and Reinvestment Act of 2009 (“ARRA”).

Beginning in 2007, the Corporation authorized the issuance of performance shares, in addition to restricted shares, under the Incentive Plan. The performance share awards consist of the opportunity to receive shares of Popular Inc.’s common stock provided that the Corporation achieves certain performance goals during a three-year performance cycle. The compensation cost associated with the performance shares is recorded ratably over a three-year performance period. The performance shares are granted at the end of the three-year period and vest at grant date, except when the participant’s employment is terminated by the Corporation without cause. In such case, the participant would receive a pro-rata amount of shares calculated as if the Corporation would have met the performance goal for the performance period. During the quarters ended March 31, 2012 and 2011, no performance shares were granted under this plan.

During the quarter ended March 31, 2012, the Corporation recognized $0.9 million of restricted stock expense related to management incentive awards, with a tax benefit of $0.2 million (March 31, 2011 - $0.5 million, with a tax benefit of $0.1 million). No additional income tax expense was recorded for the U.S. employees due to the valuation allowance of the deferred tax asset. There was no performance share expense recognized for the quarters ended March 31, 2012 and 2011. The total unrecognized compensation cost related to non-vested restricted stock awards and performance shares to members of management at March 31, 2012 was $7.0 million and is expected to be recognized over a weighted-average period of 1.5 years.

 

91


Table of Contents

The following table summarizes the restricted stock activity under the Incentive Plan for members of the Board of Directors:

 

(Not in thousands)

   Restricted Stock     Weighted-Average
Grant Date Fair
Value
 

Non-vested at December 31, 2010

     —          —     

Granted

     305,898     $ 2.95  

Vested

     (305,898     2.95  

Forfeited

     —          —     
  

 

 

   

 

 

 

Non-vested at December 31, 2011

     —          —     

Granted

     53,750     $ 1.60  

Vested

     (53,750     1.60  

Forfeited

     —          —     
  

 

 

   

 

 

 

Non-vested at March 31, 2012

     —          —     
  

 

 

   

 

 

 

During the quarter ended March 31, 2012, 53,750 shares of restricted stock were granted to members of the Board of Directors of Popular, Inc. and BPPR, which became vested at grant date (March 31, 2011 – 23,284). During this period, the Corporation recognized $0.1 million of restricted stock expense related to these restricted stock grants, with a tax benefit of $35 thousand (March 31, 2011 - $0.1 million, with a tax benefit of $35 thousand). The fair value at vesting date of the restricted stock vested during the quarter ended March 31, 2012 for directors was $86 thousand.

Note 28 – Income taxes

The reasons for the difference between the income tax expense applicable to income before taxes and the amount computed by applying the statutory tax rate in Puerto Rico are included in the following tables.

 

     Quarters ended  
     March 31, 2012     March 31, 2011  

(In thousands)

   Amount     % of pre-tax
income
    Amount     % of pre-tax
income
 

Computed income tax at statutory rates

   $ 19,380       30    $ 47,207       30 

Net benefit of net tax exempt interest income

     (7,014     (11     (2,407     (2

Effect of income subject to preferential tax rate

     (971     (2     (232     —     

Deferred tax asset valuation allowance

     1,167       2       (5,305     (3

Non-deductible expenses

     5,639       9       5,326       3  

Difference in tax rates due to multiple jurisdictions

     (3,207     (5     (2,464     (2

Initial adjustment in deferred tax due to change in tax rate

     —          —          103,287       66  

State taxes and others

     1,198       2       1,815       1  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income tax expense

   $ 16,192       25    $ 147,227       93 
  

 

 

   

 

 

   

 

 

   

 

 

 

On January 31, 2011, the Governor of Puerto Rico signed into law a new Internal Revenue Code for Puerto Rico (the “2011 Tax Code”) which resulted in a reduction in the Corporation’s net deferred tax asset with a corresponding charge to income tax expense of $103.3 million due to a reduction in the marginal corporate income tax rate. Under the provisions of the 2011 Tax Code, the maximum marginal corporate income tax rate is 30% for years commenced after December 31, 2010. Prior to the 2011 Tax Code, the maximum marginal corporate income tax rate in Puerto Rico was 39%, which had increased to 40.95% due to a temporary 5% surtax approved in March 2009 for years beginning on January 1, 2009 through December 31, 2011. The 2011 Tax Code, however, eliminated the special 5% surtax on corporations for tax year 2011. The effective tax rate for the Corporation’s Puerto Rico banking operations for 2012 is estimated at 20%.

 

92


Table of Contents

The following table presents the components of the Corporation’s deferred tax assets and liabilities.

 

(In thousands)

   March 31,
2012
     December 31,
2011
 

Deferred tax assets:

     

Tax credits available for carryforward

   $ 3,139      $ 3,459  

Net operating loss and other carryforward available

     1,186,297        1,174,488  

Postretirement and pension benefits

     103,118        104,663  

Deferred loan origination fees

     7,035        6,788  

Allowance for loan losses

     595,494        605,105  

Deferred gains

     11,454        11,763  

Accelerated depreciation

     5,627        5,527  

Intercompany deferred gains

     4,054        4,344  

Other temporary differences

     28,470        27,341  
  

 

 

    

 

 

 

Total gross deferred tax assets

     1,944,688        1,943,478  
  

 

 

    

 

 

 

Deferred tax liabilities:

     

Differences between the assigned values and the tax bases of assets and liabilities recognized in purchase business combinations

     33,524        32,293  

Difference in outside basis between financial and tax reporting on sale of a business

     20,721        20,721  

FDIC-assisted transaction

     145,628        142,000  

Unrealized net gain on trading and available-for-sale securities

     72,223        73,991  

Deferred loan origination costs

     4,224        4,277  

Other temporary differences

     8,262        6,187  
  

 

 

    

 

 

 

Total gross deferred tax liabilities

     284,582        279,469  
  

 

 

    

 

 

 

Valuation allowance

     1,260,099        1,259,358  
  

 

 

    

 

 

 

Net deferred tax asset

   $ 400,007      $ 404,651  
  

 

 

    

 

 

 

The net deferred tax asset shown in the table above at March 31, 2012 is reflected in the consolidated statements of financial condition as $424 million in net deferred tax assets (in the “Other assets” caption) (December 31, 2011 - $430 million) and $24 million in deferred tax liabilities in the “Other liabilities” caption (December 31, 2011 - $25 million), reflecting the aggregate deferred tax assets or liabilities of individual tax-paying subsidiaries of the Corporation.

A deferred tax asset should be reduced by a valuation allowance if based on the weight of all available evidence, it is more likely than not (a likelihood of more than 50%) that some portion or the entire deferred tax asset will not be realized. The valuation allowance should be sufficient to reduce the deferred tax asset to the amount that is more likely than not to be realized. The determination of whether a deferred tax asset is realizable is based on weighting all available evidence, including both positive and negative evidence. The realization of deferred tax assets, including carryforwards and deductible temporary differences, depends upon the existence of sufficient taxable income of the same character during the carryback or carryforward period. The analysis considers all sources of taxable income available to realize the deferred tax asset, including the future reversal of existing taxable temporary differences, future taxable income exclusive of reversing temporary differences and carryforwards, taxable income in prior carryback years and tax-planning strategies.

The Corporation’s U.S. mainland operations are in a cumulative loss position for the three-year period ended March 31, 2012. For purposes of assessing the realization of the deferred tax assets in the U.S. mainland, this cumulative taxable loss position is considered significant negative evidence and has caused management to conclude that it is more likely than not that the Corporation will not be able to realize the associated deferred tax assets in the future. At March 31, 2012, the Corporation recorded a valuation allowance of approximately $1.3 billion on the deferred tax assets of its U.S. operations (December 31, 2011 - $1.3 billion).

At March 31, 2012, the Corporation’s net deferred tax assets related to its Puerto Rico operations amounted to $425 million. The Corporation’s Puerto Rico banking operation is in a cumulative loss position for the three-year period ended March 31, 2012 taking

 

93


Table of Contents

into account taxable income exclusive of temporary differences. This cumulative loss position was mainly due to the performance of the construction and commercial real estate loan portfolios in prior years, including the losses related to the reclassification and sale of certain loans pertaining to those portfolios. The Corporation weights all available positive and negative evidence to assess the realization of the deferred tax asset. Positive evidence assessed included (i) the Corporation’s Puerto Rico banking operations very strong earnings history; (ii) consideration that the event causing the cumulative loss position is not a continuing condition of the operations; (iii) new legislation extending the period of carryover of net operating losses to ten years; (iii) unrealized gain on appreciated assets that could be realized to increase taxable income; and (iv) the financial results of the operations showed an improvement in the profitability of the business during 2011 and first quarter of 2012. Accordingly, there is enough positive evidence to outweigh the negative evidence of the cumulative loss. Based on this evidence, the Corporation has concluded that it is more-likely-than-not that such net deferred tax asset will be realized.

The reconciliation of unrecognized tax benefits for the quarters ended March 31, 2012 and 2011 was as follows:

 

(In millions)

   2012      2011  

Balance at January 1

   $ 19.5      $ 26.3  

Additions for tax positions – January through March

     0.7        2.2  

Reduction as a result of settlements – January through March

     —           (4.4
  

 

 

    

 

 

 

Balance at March 31

   $ 20.2      $ 24.1  
  

 

 

    

 

 

 

The accrued interest related to uncertain tax positions approximated $6.0 million at March 31, 2012 (March 31, 2011 - $6.6 million). Management determined that at March 31, 2012 and 2011, 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 Corporation’s effective tax rate, was approximately $25.3 million at March 31, 2012 (March 31, 2011 - $30.0 million).

The amount of unrecognized tax benefits may increase or decrease in the future for various reasons including adding amounts for current tax year positions, expiration of open income tax returns due to the statutes of limitation, changes in management’s 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. At March 31, 2012, the following years remain subject to examination in the U.S. Federal jurisdiction: 2008 and thereafter; and in the Puerto Rico jurisdiction, 2007 and thereafter. The Corporation anticipates a reduction in the total amount of unrecognized tax benefits within the next 12 months, which could amount to approximately $11 million.

 

94


Table of Contents

Note 29 – Supplemental disclosure on the consolidated statements of cash flows

Additional disclosures on cash flow information and non-cash activities for the quarters ended March 31, 2012 and March 31, 2011 are listed in the following table:

 

(In thousands)

   March 31, 2012      March 31, 2011  

Non-cash activities:

     

Loans transferred to other real estate

   $ 49,812      $ 39,443  

Loans transferred to other property

     5,552        7,117  
  

 

 

    

 

 

 

Total loans transferred to foreclosed assets

     55,364        46,560  

Transfers from loans held-in-portfolio to loans held-for-sale

     28,294        8,465  

Transfers from loans held-for-sale to loans held-in-portfolio

     421        24,558  

Loans securitized into investment securities[1]

     236,327        328,592  

Recoveries related to loans transferred to loans held-for-sale

     —           13,807  

Securities sold not yet delivered

     71,007        37,752  

Recognition of mortgage servicing rights on securitizations or asset transfers

     3,757        6,297  

 

[1] Includes loans securitized into trading securities and subsequently sold before quarter end.

Note 30 – Segment reporting

The Corporation’s corporate structure consists of two reportable segments – Banco Popular de Puerto Rico and Banco Popular North America.

Management determined the reportable segments based on the internal reporting used to evaluate performance and to assess where to allocate resources. The segments were determined based on the organizational structure, which focuses primarily on the markets the segments serve, as well as on the products and services offered by the segments.

Banco Popular de Puerto Rico:

Given that Banco Popular de Puerto Rico constitutes a significant portion of the Corporation’s results of operations and total assets at March 31, 2012, additional disclosures are provided for the business areas included in this reportable segment, as described below:

 

   

Commercial banking represents the Corporation’s banking operations conducted at BPPR, which are targeted mainly to corporate, small and middle size businesses. It includes aspects of the lending and depository businesses, as well as other finance and advisory services. BPPR allocates funds across business areas based on duration matched transfer pricing at market rates. This area also incorporates income related with the investment of excess funds, as well as a proportionate share of the investment function of BPPR.

 

   

Consumer and retail banking represents the branch banking operations of BPPR which focus on retail clients. It includes the consumer lending business operations of BPPR, as well as the lending operations of Popular Auto and Popular Mortgage. Popular Auto focuses on auto and lease financing, while Popular Mortgage focuses principally on residential mortgage loan originations. The consumer and retail banking area also incorporates income related with the investment of excess funds from the branch network, as well as a proportionate share of the investment function of BPPR.

 

   

Other financial services include the trust and asset management service units of BPPR, the brokerage and investment banking operations of Popular Securities, and the insurance agency and reinsurance businesses of Popular Insurance, Popular Insurance V.I., Popular Risk Services, and Popular Life Re. Most of the services that are provided by these subsidiaries generate profits based on fee income.

Banco Popular North America:

Banco Popular North America’s reportable segment consists of the banking operations of BPNA, E-LOAN, Popular Equipment Finance, Inc. and Popular Insurance Agency, U.S.A. BPNA operates through a retail branch network in the U.S. mainland, while E-LOAN supports BPNA’s deposit gathering through its online platform. All direct lending activities at E-LOAN were ceased during the fourth quarter of 2008. Popular Equipment Finance, Inc. also holds a running-off loan portfolio as this subsidiary ceased originating loans during 2009. Popular Insurance Agency, U.S.A. offers investment and insurance services across the BPNA branch network.

 

95


Table of Contents

The Corporate group consists primarily of the holding companies: Popular, Inc., Popular North America, Popular International Bank and certain of the Corporation’s investments accounted for under the equity method, including EVERTEC and Centro Financiero BHD, S.A. The Corporate group also includes the expenses of certain corporate areas that are identified as critical to the organization: Finance, Risk Management and Legal.

The accounting policies of the individual operating segments are the same as those of the Corporation. Transactions between reportable segments are primarily conducted at market rates, resulting in profits that are eliminated for reporting consolidated results of operations.

The tables that follow present the results of operations and total assets by reportable segments:

2012

 

For the quarter ended March 31, 2012

 
     Banco Popular      Banco Popular      Intersegment  
(In thousands)    de Puerto Rico      North America      Eliminations  

Net interest income

   $ 290,107      $ 74,075      $ —     

Provision for loan losses

     85,857        14,726        —     

Non-interest income

     113,734        15,456        —     

Amortization of intangibles

     1,913        680        —     

Depreciation expense

     9,387        2,029        —     

Loss on early extinguishment of debt

     69        —           —     

Other operating expenses

     222,357        61,882        —     

Income tax expense

     17,353        936        —     
  

 

 

    

 

 

    

 

 

 

Net income

   $ 66,905      $ 9,278      $ —     
  

 

 

    

 

 

    

 

 

 

Segment assets

   $ 28,026,771      $ 8,664,824      $ (12,300
  

 

 

    

 

 

    

 

 

 

 

For the quarter ended March 31, 2012

 
     Reportable                     

(In thousands)

   Segments      Corporate     Eliminations     Total Popular, Inc.  

Net interest income (loss)

   $ 364,182      $ (26,816   $ 216     $ 337,582  

Provision for loan losses

     100,583        140       —          100,723  

Non-interest income

     129,190        11,506       (16,788     123,908  

Amortization of intangibles

     2,593        —          —          2,593  

Depreciation expense

     11,416        340       —          11,756  

Loss on early extinguishment of debt

     69        —          —          69  

Other operating expenses

     284,239        14,826       (17,316     281,749  

Income tax expense (benefit)

     18,289        (2,296     199       16,192  
  

 

 

    

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 76,183      $ (28,320   $ 545     $ 48,408  
  

 

 

    

 

 

   

 

 

   

 

 

 

Segment assets

   $ 36,679,295      $ 5,342,418     $ (4,972,492   $ 37,049,221  
  

 

 

    

 

 

   

 

 

   

 

 

 

 

96


Table of Contents

2011

 

For the quarter ended March 31, 2011  

(In thousands)

   Banco Popular
de Puerto Rico
     Banco Popular
North America
     Intersegment
Eliminations
 

Net interest income

   $ 295,445      $ 74,814      $ —     

Provision for loan losses

     67,256        8,063        —     

Non-interest income

     121,727        17,417        —     

Amortization of intangibles

     1,575        680        —     

Depreciation expense

     9,632        1,991        —     

Loss on early extinguishment of debt

     239        —           —     

Other operating expenses

     188,730        58,227        —     

Income tax expense

     146,144        938        —     
  

 

 

    

 

 

    

 

 

 

Net income

   $ 3,596      $ 22,332      $ —     
  

 

 

    

 

 

    

 

 

 

Segment assets

   $ 29,452,947      $ 8,975,972      $ (26,335
  

 

 

    

 

 

    

 

 

 

 

For the quarter ended March 31, 2011  

(In thousands)

   Reportable
Segments
     Corporate     Eliminations     Total Popular, Inc.  

Net interest income (expense)

   $ 370,259      $ (27,207   $ 307     $ 343,359  

Provision for loan losses

     75,319        —          —          75,319  

Non-interest income

     139,144        42,242       (17,018     164,368  

Amortization of intangibles

     2,255        —          —          2,255  

Depreciation expense

     11,623        437       —          12,060  

Loss on early extinguishment of debt

     239        8,000       —          8,239  

Other operating expenses

     246,957        23,093       (17,555     252,495  

Income tax expense (benefit)

     147,082        (158     303       147,227  
  

 

 

    

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 25,928      $ (16,337   $ 541     $ 10,132  
  

 

 

    

 

 

   

 

 

   

 

 

 

Segment assets

   $ 38,402,584      $ 5,459,100     $ (5,031,891   $ 38,829,793  
  

 

 

    

 

 

   

 

 

   

 

 

 

Additional disclosures with respect to the Banco Popular de Puerto Rico reportable segment are as follows:

2012

 

For the quarter ended March 31, 2012  
Banco Popular de Puerto Rico  
            Consumer      Other            Total Banco  
     Commercial      and Retail      Financial            Popular de  

(In thousands)

   Banking      Banking      Services      Eliminations     Puerto Rico  

Net interest income

   $ 100,196      $ 186,258      $ 3,649      $ 4     $ 290,107  

Provision for loan losses

     13,698        72,159        —           —          85,857  

Non-interest income

     21,092        66,004        26,664        (26     113,734  

Amortization of intangibles

     9        1,708        196        —          1,913  

Depreciation expense

     4,168        4,979        240        —          9,387  

Loss on early extinguishment of debt

     69        —           —           —          69  

Other operating expenses

     61,181        143,847        17,355        (26     222,357  

Income tax expense

     9,762        4,301        3,288        2       17,353  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Net income

   $ 32,401      $ 25,268      $ 9,234      $ 2     $ 66,905  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Segment assets

   $ 13,853,077      $ 19,985,139      $ 568,375      $ (6,379,820   $ 28,026,771  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

97


Table of Contents

2011

 

For the quarter ended March 31, 2011  
Banco Popular de Puerto Rico  
            Consumer     Other            Total Banco  
     Commercial      and Retail     Financial            Popular de  

(In thousands)

   Banking      Banking     Services      Eliminations     Puerto Rico  

Net interest income

   $ 119,560      $ 173,470     $ 2,374      $ 41     $ 295,445  

Provision for loan losses

     27,895        39,361       —           —          67,256  

Non-interest income

     45,358        54,901       21,523        (55     121,727  

Amortization of intangibles

     26        1,394       155        —          1,575  

Depreciation expense

     4,379        5,016       237        —          9,632  

Loss on early extinguishment of debt

     239        —          —           —          239  

Other operating expenses

     54,908        118,227       15,650        (55     188,730  

Income tax expense

     76,840        66,844       2,444        16       146,144  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Net income (loss)

   $ 631      $ (2,471   $ 5,411      $ 25     $ 3,596  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Segment assets

   $ 15,607,809      $ 21,285,084     $ 459,462      $ (7,899,408   $ 29,452,947  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Additional disclosures with respect to the Banco Popular North America reportable segments are as follows:

2012

 

For the quarter ended March 31, 2012  
Banco Popular North America  

(In thousands)

   Banco Popular
North America
     E-LOAN     Eliminations     Total Banco
Popular North
America
 

Net interest income

   $ 73,607      $ 468     $ —        $ 74,075  

Provision for loan losses

     9,396        5,330       —          14,726  

Non-interest income

     15,292        164       —          15,456  

Amortization of intangibles

     680        —          —          680  

Depreciation expense

     2,029        —          —          2,029  

Other operating expenses

     61,023        859       —          61,882  

Income tax expense

     936        —          —          936  
  

 

 

    

 

 

   

 

 

   

 

 

 

Net income ( loss)

   $ 14,835      $ (5,557   $ —        $ 9,278  
  

 

 

    

 

 

   

 

 

   

 

 

 

Segment assets

   $ 9,387,896      $ 412,726     $ (1,135,798   $ 8,664,824  
  

 

 

    

 

 

   

 

 

   

 

 

 

2011

 

For the quarter ended March 31, 2011  
Banco Popular North America  
                        Total Banco  
     Banco Popular                  Popular North  

(In thousands)

   North America      E-LOAN     Eliminations     America  

Net interest income

   $ 74,300      $ 514     $ —        $ 74,814  

Provision for loan losses

     605        7,458       —          8,063  

Non-interest income

     17,374        43       —          17,417  

Amortization of intangibles

     680        —          —          680  

Depreciation expense

     1,991        —          —          1,991  

Other operating expenses

     55,955        2,272       —          58,227  

Income tax expense

     938        —          —          938  
  

 

 

    

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 31,505      $ (9,173   $ —        $ 22,332  
  

 

 

    

 

 

   

 

 

   

 

 

 

Segment assets

   $ 9,645,089      $ 474,834     $ (1,143,951   $ 8,975,972  
  

 

 

    

 

 

   

 

 

   

 

 

 

 

98


Table of Contents

Geographic Information

 

      Quarter ended  

(In thousands)

   March 31, 2012      March 31, 2011  

Revenues:[1]

     

Puerto Rico

   $ 353,510      $ 396,249  

United States

     83,724        88,404  

Other

     24,256        23,074  
  

 

 

    

 

 

 

Total consolidated revenues

   $ 461,490      $ 507,727  
  

 

 

    

 

 

 

 

[1] Total revenues include net interest income, service charges on deposit accounts, other service fees, net gain on sale and valuation adjustments of investment securities, trading account profit, net gain on sale of loans and valuation adjustments on loans held-for-sale, adjustments to indemnity reserves on loans sold, FDIC loss share (expense) income, fair value change in equity appreciation instrument and other operating income.

Selected Balance Sheet Information:

 

(In thousands)

   March 31, 2012      December 31, 2011      March 31, 2011  

Puerto Rico

        

Total assets

   $ 26,980,854      $ 27,410,644      $ 28,582,499  

Loans

     18,482,906        18,594,751        18,723,166  

Deposits

     19,915,877        20,696,606        19,524,566  

United States

        

Total assets

   $ 8,829,183      $ 8,708,709      $ 9,098,562  

Loans

     5,707,884        5,845,359        6,483,596  

Deposits

     6,240,063        6,151,959        6,570,511  

Other

        

Total assets

   $ 1,239,184      $ 1,229,079      $ 1,148,732  

Loans

     871,268        874,282        769,255  

Deposits [1]

     1,041,796        1,093,562        1,101,597  

 

[1] Represents deposits from BPPR operations located in the U.S. and British Virgin Islands.

Note 31 – Subsequent events

Subsequent events are events and transactions that occur after the balance sheet date but before the financial statements are issued. The effects of subsequent events and transactions are recognized in the financial statements when they provide additional evidence about conditions that existed at the balance sheet date. The Corporation has evaluated events and transactions occurring subsequent to March 31, 2012. Such evaluation resulted in no adjustments or additional disclosures in the consolidated financial statements for the quarter ended March 31, 2012, other than information updated in the legal proceedings in Note 18 and the disclosures included below.

Approval of reverse stock split

On April 27, 2012, the stockholders of Popular, Inc. approved an amendment to the Corporation’s Restated Certificate of Incorporation to effect a reverse stock split of the Corporation’s common stock of 1-for-10, together with a corresponding reduction in the number of authorized shares of its common stock. The amendment will become effective upon the filing of a certificate of amendment to the Restated Certificate of Incorporation with the Puerto Rico Department of State or at such later date and time specified in that certificate of amendment (the “effective date”). The reverse split is expected to become effective at 11:59 p.m. Atlantic Standard Time on May 29, 2012. If effective on that date, Popular, Inc.’s common stock will begin trading on a split-adjusted basis when the market opens on May 30, 2012.

In connection with the reverse stock split, the Corporation will amend its Restated Certificate of Incorporation to reduce the number of shares of its authorized common stock. At the effective date, the number of authorized shares of common stock will be reduced from 1,700,000,000 to 170,000,000.

The reverse stock split will not affect the par value of a share of the Corporation’s common stock. At the effective date of the reverse stock split, the stated capital attributable to common stock on its statement of financial condition will be reduced by dividing the amount of the stated capital prior to the reverse stock split by 10 (including a retroactive adjustment of prior periods), and the

additional paid-in capital will be credited with the amount by which the stated capital is reduced. Reported per share net income or loss (both basic and diluted) and dividends per common share, if declared in the future, will be higher because there will be fewer shares of common stock outstanding. Basic earnings per share data will be retroactively adjusted for changes for all prior periods presented.

Dividend received from Carib Holdings

In early May 2012, EVERTEC completed a $40 million add-on notes offering and a $170 million add-on term loan as part of an amendment to its existing credit facility and used the proceeds, together with cash on hand, to pay approximately $270 million cash distribution to its parent company Carib Holdings, which in turn paid a cash dividend of $131 million to the Corporation, in its capacity as a shareholder of Carib Holdings’ ultimate parent. As a result of the dividend, the Corporation’s investment in the entity, which as of March 31, 2012 amounted to $192 million (net of intra-entity eliminations), was reduced by the amount of the dividend. The Corporation’s participation interest on the entity continues to be 49%.

 

99


Table of Contents

Note 32 – 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 at March 31, 2012, December 31, 2011 and March 31, 2011, and the results of their operations and cash flows for periods ended March 31, 2012 and 2011.

PIBI is an operating, wholly-owned subsidiary of PIHC and is the holding company of its wholly-owned subsidiaries: Popular Insurance V.I., Inc. and Tarjetas y Transacciones en Red Tranred, C.A. Effective January 1, 2012, PNA, which was a wholly-owned subsidiary of PIBI prior to that date, became a direct wholly-owned subsidiary of PIHC after an internal reorganization.

Following the reorganization, PNA is an operating, wholly-owned subsidiary of PIHC and is the holding company of its wholly-owned subsidiaries: Equity One, Inc.; and Banco Popular North America (“BPNA”), including its wholly-owned subsidiaries Popular Equipment Finance, Inc., Popular Insurance Agency, U.S.A., and E-LOAN, Inc.

PIHC fully and unconditionally guarantees all registered debt securities issued by PNA. As of March 31, 2012 and 2011, and December 31, 2011, PIBI has no outstanding registered debt securities that would also be guaranteed by PIHC.

A source of income for PIHC consists of dividends from BPPR. Currently, the prior approval of the Federal Reserve Bank of New York and the Office of the Commissioner of Financial Institutions in Puerto Rico is necessary for the payment of any dividends by BPPR to PIHC. Furthermore, under existing federal banking regulations, the prior approval of the Federal Reserve System is required for any dividend from BPPR or BPNA to the PIHC 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. Under this test, at March 31, 2012, BPPR could have declared a dividend of approximately $239 million (March 31, 2011—$70 million; December 31, 2011—$243 million); however, the prior approval continues to be necessary. BPNA could not have declared any dividends without the prior approval of the Federal Reserve Bank of New York.

 

100


Table of Contents

Condensed Consolidating Statement of Financial Condition

 

     At March 31, 2012  
                          All other               
     Popular Inc.      PIBI      PNA      subsidiaries and      Elimination     Popular, Inc.  

(In thousands)

   Holding Co.      Holding Co.      Holding Co.      eliminations      entries     Consolidated  

Assets

                

Cash and due from banks

   $ 4,460      $ 936      $ 930      $ 473,020      $ (6,540   $ 472,806  

Money market investments

     18,298        16,100        14,526        1,285,964        (30,625     1,304,263  

Trading account securities, at fair value

     —           —           —           404,293        —          404,293  

Investment securities available-for-sale, at fair value

     41,798        —           —           5,114,293        (17,475     5,138,616  

Investment securities held-to-maturity, at amortized cost

     185,000        1,000        —           123,372        (185,000     124,372  

Other investment securities, at lower of cost or realizable value

     10,850        1        4,492        180,365        —          195,708  

Investment in subsidiaries

     4,081,525        944        1,633,640        —           (5,716,109     —     

Loans held-for-sale, at lower of cost or fair value

     —           —           —           361,596        —          361,596  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Loans held-in-portfolio:

                

Loans not covered under loss sharing agreements with the FDIC

     212,602        —           —           20,548,313        (182,920     20,577,995  

Loans covered under loss sharing agreements with the FDIC

     —           —           —           4,221,788        —          4,221,788  

Less - Unearned income

     —           —           —           99,321        —          99,321  

Allowance for loan losses

     148        —           —           803,116        —          803,264  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total loans held-in-portfolio, net

     212,454        —           —           23,867,664        (182,920     23,897,198  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

FDIC loss share asset

     —           —           —           1,880,357        —          1,880,357  

Premises and equipment, net

     2,563        —           118        530,864        —          533,545  

Other real estate not covered under loss sharing agreements with the FDIC

     —           —           —           193,768        —          193,768  

Other real estate covered under loss sharing agreements with the FDIC

     —           —           —           110,559        —          110,559  

Accrued income receivable

     2,156        6        37        124,471        (102     126,568  

Mortgage servicing assets, at fair value

     —           —           —           156,331        —          156,331  

Other assets

     232,648        71,068        12,954        1,163,764        (40,902     1,439,532  

Goodwill

     —           —           —           647,912        (1     647,911  

Other intangible assets

     554        —           —           61,244        —          61,798  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 4,792,306      $ 90,055      $ 1,666,697      $ 36,679,837      $ (6,179,674   $ 37,049,221  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

                

Liabilities:

                

Deposits:

                

Non-interest bearing

   $ —         $ —         $ —         $ 5,374,587      $ (8,167   $ 5,366,420  

Interest bearing

     —           —           —           21,899,143        (67,827     21,831,316  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total deposits

     —           —           —           27,273,730        (75,994     27,197,736  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Assets sold under agreements to repurchase

     —           —           —           2,113,557        —          2,113,557  

Other short-term borrowings

     —           —           —           908,000        (156,800     751,200  

Notes payable

     767,769        —           427,325        648,660        —          1,843,754  

Subordinated notes

     —           —           —           185,000        (185,000     —     

Other liabilities

     57,466        4,707        44,784        1,114,857        (45,911     1,175,903  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

101


Table of Contents

Total liabilities

     825,235       4,707       472,109       32,243,804       (463,705     33,082,150  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Stockholders’ equity:

            

Preferred stock

     50,160       —          —          —          —          50,160  

Common stock

     10,276       4,066       2       51,564       (55,632     10,276  

Surplus

     4,108,183       2,929,370       4,153,208       5,870,137       (12,944,188     4,116,710  

Accumulated deficit

     (156,721     (2,819,171     (3,015,889     (1,467,930     7,294,462       (165,249

Treasury stock, at cost

     (1,041     —          —          —          —          (1,041

Accumulated other comprehensive (loss)income, net of tax

     (43,786     (28,917     57,267       (17,738     (10,611     (43,785
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

     3,967,071       85,348       1,194,588       4,436,033       (5,715,969     3,967,071  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 4,792,306     $ 90,055     $ 1,666,697     $ 36,679,837     $ (6,179,674   $ 37,049,221  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

102


Table of Contents

Condensed Consolidated Statement of Financial Condition (Unaudited)

 

     At March 31, 2011  

(In thousands)

   Popular, Inc.
Holding Co.
     PIBI
Holding Co.
     PNA
Holding Co.
     All other
subsidiaries and
eliminations
     Elimination
entries
    Popular, Inc.
Consolidated
 

Assets

                

Cash and due from banks

   $ 1,836      $ 40,583      $ 675      $ 464,790      $ (43,329   $ 464,555  

Money market investments

     2        7,266        1,323        961,497        (8,523     961,565  

Trading account securities, at fair value

     —           —           —           634,799        —          634,799  

Investment securities available-for-sale, at fair value

     37,363        3,898        —           5,663,205        (18,125     5,686,341  

Investment securities held-to-maturity, at amortized cost

     209,734        1,000        —           116,372        (185,000     142,106  

Other investment securities, at lower of cost or realizable value

     10,850        1        4,492        159,587        —          174,930  

Investment in subsidiaries

     3,846,966        1,104,183        1,595,118        —           (6,546,267     —     

Loans held-for-sale, at lower of cost or fair value

     —           —           —           569,678        —          569,678  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Loans held-in-portfolio:

                

Loans not covered under loss sharing agreements with the FDIC

     330,208        —           —           20,746,496        (295,155     20,781,549  

Loans covered under loss sharing agreements with the FDIC

     —           —           —           4,729,550        —          4,729,550  

Less - Unearned income

     —           —           —           104,760        —          104,760  

Allowance for loan losses

     60        —           —           736,445        —          736,505  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total loans held-in-portfolio, net

     330,148        —           —           24,634,841        (295,155     24,669,834  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

FDIC loss share asset

     —           —           —           2,426,305        —          2,426,305  

Premises and equipment, net

     2,818        —           121        540,638        —          543,577  

Other real estate not covered under loss sharing agreements with the FDIC

     —           —           —           156,888        —          156,888  

Other real estate covered under loss sharing agreements with the FDIC

     —           —           —           65,562        —          65,562  

Accrued income receivable

     2,347        14        31        145,365        (87     147,670  

Mortgage servicing assets, at fair value

     —           —           —           167,416        —          167,416  

Other assets

     257,598        73,935        15,669        993,319        (25,782     1,314,739  

Goodwill

     —           —           —           647,387        —          647,387  

Other intangible assets

     554        —           —           55,887        —          56,441  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 4,700,216      $ 1,230,880      $ 1,617,429      $ 38,403,536      $ (7,122,268   $ 38,829,793  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

                

Liabilities:

                

Deposits:

                

Non-interest bearing

   $ —         $ —         $ —         $ 4,981,103      $ (68,094   $ 4,913,009  

Interest bearing

     —           —           —           22,292,338        (8,673     22,283,665  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total deposits

     —           —           —           27,273,441        (76,767     27,196,674  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Assets sold under agreements to repurchase

     —           —           —           2,642,800        —          2,642,800  

Other short-term borrowings

     —           —           42,400        514,902        (267,000     290,302  

Notes payable

     741,684        —           427,189        2,625,782        —          3,794,655  

Subordinated notes

     —           —           —           185,000        (185,000     —     

Other liabilities

     153,626        7,636        44,345        941,449        (46,600     1,100,456  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

103


Table of Contents

Total liabilities

     895,310       7,636       513,934       34,183,374       (575,367     35,024,887  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Stockholders’ equity:

            

Preferred stock

     50,160       —          —          —          —          50,160  

Common stock

     10,236       4,066       2       51,564       (55,632     10,236  

Surplus

     4,087,718       4,092,743       4,066,208       5,857,287       (14,007,711     4,096,245  

Accumulated deficit

     (329,599     (2,869,853     (2,985,273     (1,699,949     7,546,548       (338,126

Treasury stock, at cost

     (607     —          —          —          —          (607

Accumulated other comprehensive (loss) income, net of tax

     (13,002     (3,712     22,558       11,260       (30,106     (13,002
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

     3,804,906       1,223,244       1,103,495       4,220,162       (6,546,901     3,804,906  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 4,700,216     $ 1,230,880     $ 1,617,429     $ 38,403,536     $ (7,122,268   $ 38,829,793  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

104


Table of Contents

Condensed Consolidating Statement of Financial Condition

 

     At December 31, 2011  

(In thousands)

   Popular, Inc.
Holding Co.
     PIBI Holding
Co.
     PNA Holding
Co.
     All other
subsidiaries and
eliminations
     Elimination
entries
    Popular, Inc.
Consolidated
 

Assets

                

Cash and due from banks

   $ 6,365      $ 391      $ 932      $ 534,796      $ (7,202   $ 535,282  

Money market investments

     42,239        15,456        552        1,357,890        (39,963     1,376,174  

Trading account securities, at fair value

     —           —           —           436,331        —          436,331  

Investment securities available-for-sale, at fair value

     35,700        3,370        —           4,988,390        (17,637     5,009,823  

Investment securities held-to-maturity, at amortized cost

     185,000        1,000        —           124,383        (185,000     125,383  

Other investment securities, at lower of cost or realizable value

     10,850        1        4,492        164,537        —          179,880  

Investment in subsidiaries

     3,987,287        1,147,617        1,627,313        —           (6,762,217     —     

Loans held-for-sale, at lower of cost or fair value

     —           —           —           363,093        —          363,093  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Loans held-in-portfolio:

                

Loans not covered under loss sharing agreements with the FDIC

     249,615        —           —           20,673,552        (219,975     20,703,192  

Loans covered under loss sharing agreements with the FDIC

     —           —           —           4,348,703        —          4,348,703  

Less - Unearned income

     —           —           —           100,596        —          100,596  

Allowance for loan losses

     8        —           —           815,300        —          815,308  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total loans held-in-portfolio, net

     249,607        —           —           24,106,359        (219,975     24,135,991  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

FDIC loss share asset

     —           —           —           1,915,128        —          1,915,128  

Premises and equipment, net

     2,533        —           118        535,835        —          538,486  

Other real estate not covered under loss sharing agreements with the FDIC

     —           —           —           172,497        —          172,497  

Other real estate covered under loss sharing agreements with the FDIC

     —           —           —           109,135        —          109,135  

Accrued income receivable

     1,512        15        113        123,858        (289     125,209  

Mortgage servicing assets, at fair value

     —           —           —           151,323        —          151,323  

Other assets

     217,877        78,221        13,222        1,183,103        (30,030     1,462,393  

Goodwill

     —           —           —           648,350        —          648,350  

Other intangible assets

     554        —           —           63,400        —          63,954  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 4,739,524      $ 1,246,071      $ 1,646,742      $ 36,978,408      $ (7,262,313   $ 37,348,432  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

                

Liabilities:

                

Deposits:

                

Non-interest bearing

   $ —         $ —         $ —         $ 5,689,034      $ (33,560   $ 5,655,474  

Interest bearing

     —           —           —           22,302,798        (16,145     22,286,653  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total deposits

     —           —           —           27,991,832        (49,705     27,942,127  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Assets sold under agreements to repurchase

     —           —           —           2,165,157        (24,060     2,141,097  

Other short-term borrowings

     —           —           30,500        459,600        (193,900     296,200  

Notes payable

     760,849        —           427,297        668,226        —          1,856,372  

Subordinated notes

     —           —           —           185,000        (185,000     —     

Other liabilities

     59,922        4,901        42,269        1,133,815        (47,024     1,193,883  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

105


Table of Contents

Total liabilities

     820,771       4,901       500,066       32,603,630       (499,689     33,429,679  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Stockholders’ equity:

            

Preferred stock

     50,160       —          —          —          —          50,160  

Common stock

     10,263       4,066       2       51,564       (55,632     10,263  

Surplus

     4,106,134       4,092,743       4,103,208       5,870,287       (14,057,711     4,114,661  

Accumulated deficit

     (204,199     (2,883,705     (3,013,481     (1,532,810     7,421,469       (212,726

Treasury stock, at cost

     (1,057     —          —          —          —          (1,057

Accumulated other comprehensive (loss) income, net of tax

     (42,548     28,066       56,947       (14,263     (70,750     (42,548
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

     3,918,753       1,241,170       1,146,676       4,374,778       (6,762,624     3,918,753  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 4,739,524     $ 1,246,071     $ 1,646,742     $ 36,978,408     $ (7,262,313   $ 37,348,432  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

106


Table of Contents

Condensed Statement of Operations (Unaudited)

 

     Quarter ended March 31, 2012  

(In thousands)

   Popular, Inc.
Holding Co.
    PIBI
Holding Co.
    PNA
Holding Co.
    All other
subsidiaries and
eliminations
    Elimination
entries
    Popular, Inc.
Consolidated
 

Interest income:

            

Loans

   $ 1,691     $ —        $ —        $ 387,548     $ (1,297   $ 387,942  

Money market investments

     12       20       8       946       (38     948  

Investment securities

     4,042       4       81       44,164       (3,221     45,070  

Trading account securities

     —          —          —          5,891       —          5,891  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     5,745       24       89       438,549       (4,556     439,851  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense:

            

Deposits

     —          —          —          51,760       (81     51,679  

Short-term borrowings

     —          —          143       14,292       (852     13,583  

Long-term debt

     23,527       —          8,077       8,367       (2,964     37,007  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     23,527       —          8,220       74,419       (3,897     102,269  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest (expense) income

     (17,782     24       (8,131     364,130       (659     337,582  

Provision for loan losses

     140       —          —          100,583       —          100,723  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest (expense) income after provision for loan losses

     (17,922     24       (8,131     263,547       (659     236,859  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Service charges on deposit accounts

     —          —          —          46,589       —          46,589  

Other service fees

     —          —          —          68,962       (2,923     66,039  

Trading account loss

     —          —          —          (2,143     —          (2,143

Net gain on sale of loans, including valuation adjustments on loans held-for-sale

     —          —          —          15,471       —          15,471  

Adjustments (expense) to indemnity reserves on loans sold

     —          —          —          (3,875     —          (3,875

FDIC loss share expense

     —          —          —          (15,255     —          (15,255

Other operating income (loss)

     2,952       6,109       (169     21,535       (13,345     17,082  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest income (loss)

     2,952       6,109       (169     131,284       (16,268     123,908  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

            

Personnel costs

     7,904       150       —          113,437       —          121,491  

Net occupancy expenses

     861       8       1       22,468       824       24,162  

Equipment expenses

     880       —          —          10,461       —          11,341  

Other taxes

     713       —          —          12,725       —          13,438  

Professional fees

     1,991       40       3       64,089       (18,018     48,105  

Communications

     133       —          —          6,998       —          7,131  

Business promotion

     411       —          —          12,439       —          12,850  

FDIC deposit insurance

     —          —          —          24,926       —          24,926  

Loss on early extinguishment of debt

     —          —          —          69       —          69  

Other real estate owned (OREO) expenses

     —          —          —          14,165       —          14,165  

Other operating expenses

     (12,280     (4,399     110       32,942       (477     15,896  

Amortization of intangibles

     —          —          —          2,593       —          2,593  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     613       (4,201     114       317,312       (17,671     296,167  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income tax and equity in earnings (losses) of subsidiaries

     (15,583     10,334       (8,414     77,519       744       64,600  

Income tax expense (benefit)

     672       (393     —          15,714       199       16,192  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

107


Table of Contents

(Loss) income before equity in earnings (losses) of subsidiaries

     (16,255     10,727       (8,414     61,805        545       48,408  

Equity in undistributed earnings (losses) of subsidiaries

     64,663       (3,141     6,006       —           (67,528     —     
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net income (loss)

   $ 48,408     $ 7,586     $ (2,408   $ 61,805      $ (66,983   $ 48,408  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Comprehensive income (loss), net of tax

   $ 47,171     $ (49,397   $ (2,088   $ 58,330      $ (6,845   $ 47,171  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

108


Table of Contents

Condensed Statement of Operations (Unaudited)

 

     Quarter ended March 31, 2011  

(In thousands)

   Popular, Inc.
Holding Co.
    PIBI
Holding Co.
     PNA
Holding Co.
    All other
subsidiaries and
eliminations
    Elimination
entries
    Popular, Inc.
Consolidated
 

Interest income:

             

Loans

     3,020       16        —          422,726       (2,387     423,375  

Money market investments

     —          16        1       969       (39     947  

Investment securities

     4,130       7        81       51,379       (3,222     52,375  

Trading account securities

     —          —           —          8,754       —          8,754  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     7,150       39        82       483,828       (5,648     485,451  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense:

             

Deposits

     —          —           —          77,040       (161     76,879  

Short-term borrowings

     22       —           314       15,556       (1,877     14,015  

Long-term debt

     25,548       —           7,600       20,978       (2,928     51,198  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     25,570       —           7,914       113,574       (4,966     142,092  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net interest (expense) income

     (18,420     39        (7,832     370,254       (682     343,359  

Provision for loan losses

     —          —           —          75,319       —          75,319  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net interest (expense) income after provision for loan losses

     (18,420     39        (7,832     294,935       (682     268,040  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Service charges on deposit accounts

     —          —           —          45,630       —          45,630  

Other service fees

     —          —           —          62,040       (3,388     58,652  

Trading account loss

     —          —           —          (499     —          (499

Net gain on sale of loans, including valuation adjustments on loans held-for-sale

     —          —           —          7,244       —          7,244  

Adjustments (expense) to indemnity reserves on loans sold

     —          —           —          (9,848     —          (9,848

FDIC loss share income

     —          —           —          16,035       —          16,035  

Fair value change in equity appreciation instrument

     —          —           —          7,745       —          7,745  

Other operating income

     18,185       19,944        1,696       12,875       (13,291     39,409  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest income

     18,185       19,944        1,696       141,222       (16,679     164,368  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

             

Personnel costs

     6,856       84        —          99,200       —          106,140  

Net occupancy expenses

     806       8        1       22,886       885       24,586  

Equipment expenses

     772       2        —          11,262       —          12,036  

Other taxes

     330       —           —          11,642       —          11,972  

Professional fees

     2,826       25        2       62,424       (18,589     46,688  

Communications

     122       5        5       7,078       —          7,210  

Business promotion

     423       —           —          9,437       —          9,860  

FDIC deposit insurance

     —          —           —          17,673       —          17,673  

Loss on early extinguishment of debt

     8,000       —           —          239       —          8,239  

Other real estate owned (OREO) expenses

     —          —           —          2,211       —          2,211  

Other operating expenses

     (11,481     8,468        110       29,583       (501     26,179  

Amortization of intangibles

     —          —           —          2,255       —          2,255  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     8,654       8,592        118       275,890       (18,205     275,049  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income tax and equity in earnings of subsidiaries

     (8,889     11,391        (6,254     160,267       844       157,359  

Income tax expense (benefit)

     2,026       3,462        (264     141,699       304       147,227  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

109


Table of Contents

(Loss) income before equity in earnings of subsidiaries

     (10,915     7,929        (5,990     18,568       540       10,132  

Equity in undistributed earnings of subsidiaries

     21,047       16,665        21,399       —          (59,111     —     
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 10,132     $ 24,594      $ 15,409     $ 18,568     $ (58,571   $ 10,132  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income, net of tax

   $ 3,091     $ 31,344      $ 12,632     $ (159 )   $ (43,817   $ 3,091  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

110


Table of Contents

Condensed Consolidating Statement of Cash Flows (Unaudited)

 

     Quarter ended March 31, 2012  

(In thousands)

   Popular, Inc.
Holding Co.
    PIBI
Holding Co.
    PNA
Holding Co.
    All other
subsidiaries and
eliminations
    Elimination
entries
    Popular, Inc.
Consolidated
 

Cash flows from operating activities:

            

Net income (loss)

   $ 48,408     $ 7,586     $ (2,408   $ 61,805     $ (66,983   $ 48,408  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:

            

Equity in undistributed (earnings) losses of subsidiaries

     (64,663     3,141       (6,006     —          67,528       —     

Provision for loan losses

     140       —          —          100,583       —          100,723  

Amortization of intangibles

     —          —          —          2,593       —          2,593  

Depreciation and amortization of premises and equipment

     161       —          1       11,594       —          11,756  

Net accretion of discounts and amortization of premiums and deferred fees

     6,920       —          28       (10,863     (162     (4,077

Fair value adjustments on mortgage servicing rights

     —          —          —          (784     —          (784

FDIC loss share income

     —          —          —          15,255       —          15,255  

FDIC deposit insurance expense

     —          —          —          24,926       —          24,926  

Adjustments (expense) to indemnity reserves on loans sold

     —          —          —          3,875       —          3,875  

(Earnings) losses from investments under the equity method

     (2,952     (6,109     170       (6,706     13,345       (2,252

Deferred income tax expense (benefit)

     468       (871     —          4,622       199       4,418  

Loss (gain) on:

            

Disposition of premises and equipment

     —          —          —          (6,284     —          (6,284

Early extinguishment of debt

     —          —          —          69       —          69  

Sale of loans, including valuation adjustments on loans held for sale

     —          —          —          (15,471     —          (15,471

Acquisitions of loans held-for-sale

     —          —          —          (76,118     —          (76,118

Proceeds from sale of loans held-for-sale

     —          —          —          63,460       —          63,460  

Net disbursements on loans held-for-sale

     —          —          —          (223,500     —          (223,500

Net (increase) decrease in:

            

Trading securities

     —          —          —          270,691       —          270,691  

Accrued income receivable

     (643     9       73       (609     (187     (1,357

Other assets

     719       (2,664     99       27,474       (2,672     22,956  

Net increase (decrease) in:

            

Interest payable

     —          —          2,525       (4,828     54       (2,249

Pension and other postretirement benefits obligations

     —          —          —          4,720       —          4,720  

Other liabilities

     (2,766     203       (11     (908     1,061       (2,421
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total adjustments

     (62,616     (6,291     (3,121     183,791       79,166       190,929  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by operating activities

     (14,208     1,295       (5,529     245,596       12,183       239,337  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

            

Net decrease (increase) in money market investments

     24,046       (750     (13,973     71,925       (9,337     71,911  

Purchases of investment securities:

            

Available-for-sale

     —          —          —          (529,445     —          (529,445

Held-to-maturity

     —          —          —          (250     —          (250

Other

     —          —          —          (47,629     —          (47,629

Proceeds from calls, paydowns, maturities and redemptions of investment securities:

            

Available-for-sale

     —          —          —          388,472       —          388,472  

Held-to-maturity

     —          —          —          1,539       —          1,539  

Other

     —          —          —          31,800       —          31,800  

Net repayments on loans

     37,014       —          —          191,114       (37,055     191,073  

Proceeds from sale of loans

     —          —          —          21,304       —          21,304  

Acquisition of loan portfolios

     —          —          —          (140,005     —          (140,005

Payments received from FDIC under loss sharing agreements

     —          —          —          20,896       —          20,896  

Capital contribution to subsidiary

     (50,000     —          —          —          50,000       —     

Mortgage servicing rights purchased

     —          —          —          (474     —          (474

Acquisition of premises and equipment

     (199     —          —          (12,099     —          (12,298

 

111


Table of Contents

Proceeds from sale of:

            

Premises and equipment

     6       —          —          11,940       —          11,946  

Foreclosed assets

     —          —          —          25,923       —          25,923  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     10,867       (750     (13,973     35,011       3,608       34,763  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

            

Net increase (decrease) in:

            

Deposits

     —          —          —          (719,617     (26,289     (745,906

Federal funds purchased and assets sold under agreements to repurchase

     —          —          —          (51,601     24,060       (27,541

Other short-term borrowings

     —          —          (30,500     448,400       37,100       455,000  

Payments of notes payable

     —          —          —          (22,284     —          (22,284

Proceeds from issuance of notes payable

     —          —          —          2,719       —          2,719  

Proceeds from issuance of common stock

     2,062       —          —          —          —          2,062  

Dividends paid

     (620     —          —          —          —          (620

Treasury stock acquired

     (6     —          —          —          —          (6

Capital contribution from parent

     —          —          50,000       —          (50,000     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     1,436       —          19,500       (342,383     (15,129     (336,576
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (decrease) increase in cash and due from banks

     (1,905     545       (2     (61,776     662       (62,476

Cash and due from banks at beginning of period

     6,365       391       932       534,796       (7,202     535,282  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and due from banks at end of period

   $ 4,460     $ 936     $ 930     $ 473,020     $ (6,540   $ 472,806  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

112


Table of Contents

Condensed Consolidating Statement of Cash Flows (Unaudited)

 

     Quarter ended March 31, 2011  

(In thousands)

   Popular, Inc.
Holding Co.
    PIBI
Holding Co.
    PNA
Holding Co.
    All other
subsidiaries and
eliminations
    Elimination
entries
    Popular, Inc.
Consolidated
 

Cash flows from operating activities:

            

Net income

   $ 10,132     $ 24,594     $ 15,409     $ 18,568     $ (58,571   $ 10,132  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjustments to reconcile net income to net cash used in operating activities:

            

Equity in undistributed earnings of subsidiaries

     (21,047     (16,665     (21,399     —          59,111       —     

Provision for loan losses

     —          —          —          75,319       —          75,319  

Amortization of intangibles

     —          —          —          2,255       —          2,255  

Depreciation and amortization of premises and equipment

     196       —          1       11,863       —          12,060  

Net accretion of discounts and amortization of premiums and deferred fees

     5,885       —          69       (94,119     (162     (88,327

Impairment losses on net assets to be disposed of

     —          8,564       —          —          —          8,564  

Fair value adjustments on mortgage servicing rights

     —          —          —          6,171       —          6,171  

Fair value change in equity appreciation instrument

     —          —          —          (7,745     —          (7,745

FDIC loss share income

     —          —          —          (13,621     —          (13,621

FDIC deposit insurance expense

     —          —          —          17,673       —          17,673  

Adjustments (expense) to indemnity reserves on loans sold

     —          —          —          9,848       —          9,848  

Earnings from investments under the equity method

     (11,881     (6,540     (1,695     —          13,290       (6,826

Deferred income tax expense

     3,100       37       —          137,474       304       140,915  

Loss (gain) on:

            

Disposition of premises and equipment

     —          —          —          (1,412     —          (1,412

Sale of loans, including valuation adjustments on loans held for sale

     —          —          —          (7,244     —          (7,244

Sale of equity method investments

     (5,308     (11,358     —          —          —          (16,666

Acquisitions of loans held-for-sale

     —          —          —          (90,780     —          (90,780

Proceeds from sale of loans held-for-sale

     —          —          —          45,448       —          45,448  

Net disbursements on loans held-for-sale

     —          —          —          (184,641     —          (184,641

Net (increase) decrease in:

            

Trading securities

     —          —          —          206,222       —          206,222  

Accrued income receivable

     (838     (15     80       3,770       (9     2,988  

Other assets

     (251     397       1,131       4,922       (10,801     (4,602

Net increase (decrease) in:

            

Interest payable

     (3,467     —          2,003       (2,955     9       (4,410

Pension and other postretirement benefits obligations

     —          —          —          (123,957     —          (123,957

Other liabilities

     (15,200     203       (2,338     (23,946     3,078       (38,203
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total adjustments

     (48,811     (25,377     (22,148     (29,455     64,820       (60,971
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in operating activities

     (38,679     (783     (6,739     (10,887     6,249       (50,839
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

            

Net decrease (increase) in money market investments

     —          246       (1,062     17,734       812       17,730  

Purchases of investment securities:

            

Available-for-sale

     —          —          —          (752,479     —          (752,479

Held-to-maturity

     (24,734     —          —          (27,264     —          (51,998

Other

     —          —          —          (38,305     —          (38,305

Proceeds from calls, paydowns, maturities and redemptions of investment securities:

            

Available-for-sale

     —          —          —          278,274       —          278,274  

Held-to-maturity

     25,879       —          —          1,456       —          27,335  

Other

     —          —          —          27,050       —          27,050  

Net repayments on loans

     145,874       193       —          427,082       (145,527     427,622  

Proceeds from sale of loans

     —          —          —          200,387       —          200,387  

Acquisition of loan portfolios

     —          —          —          (348,226     —          (348,226

Payments received from FDIC under loss

            

 

113


Table of Contents

sharing agreements

     —         —         —         583       —         583  

Net proceeds from sale of equity method investments

     (10,755     41,823       —          —          —          31,068  

Mortgage servicing rights purchased

     —          —          —          (383     —          (383

Acquisition of premises and equipment

     (185     —          —          (18,414     —          (18,599

Proceeds from sale of:

            

Premises and equipment

     —          —          —          7,763       —          7,763  

Foreclosed assets

     —          —          —          44,648       —          44,648  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     136,079       42,262       (1,062     (180,094     (144,715     (147,530
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

            

Net increase (decrease) in:

            

Deposits

     —          —          —          480,386       (46,881     433,505  

Federal funds purchased and assets sold under agreements to repurchase

     —          —          —          230,250       —          230,250  

Other short-term borrowings

     —          —          9,900       (229,020     145,200       (73,920

Payments of notes payable

     (100,000     —          (3,000     (519,568     —          (622,568

Proceeds from issuance of notes payable

     —          —          —          242,000       —          242,000  

Proceeds from issuance of common stock

     2,247       —          —          —          —          2,247  

Dividends paid

     (930     —          —          —          —          (930

Treasury stock acquired

     (33     —          —          —          —          (33

Return of capital

     1,514       (1,514     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (97,202     (1,514     6,900       204,048       98,319       210,551  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and due from banks

     198       39,965       (901     13,067       (40,147     12,182  

Cash and due from banks at beginning of period

     1,638       618       1,576       451,723       (3,182     452,373  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and due from banks at end of period

   $ 1,836     $ 40,583     $ 675     $ 464,790     $ (43,329   $ 464,555  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

114


Table of Contents

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This report includes management’s discussion and analysis (“MD&A”) of the consolidated financial position and financial performance of Popular, Inc. (the “Corporation” or “Popular”). All accompanying tables, financial statements and notes included elsewhere in this report should be considered an integral part of this analysis.

The Corporation is a diversified, publicly-owned financial holding company subject to the supervision and regulation of the Board of Governors of the Federal Reserve System. The Corporation has operations in Puerto Rico, the United States (“U.S.”) mainland, and the U.S. and British Virgin Islands. In Puerto Rico, the Corporation provides retail and commercial banking services through its principal banking subsidiary, Banco Popular de Puerto Rico (“BPPR”), as well as mortgage banking, investment banking, broker-dealer, auto and equipment leasing and financing, and insurance services through specialized subsidiaries. In the U.S. mainland, the Corporation operates Banco Popular North America (“BPNA”), including its wholly-owned subsidiary E-LOAN. BPNA focuses efforts and resources on the core community banking business. BPNA operates branches in New York, California, Illinois, New Jersey and Florida. E-LOAN markets deposit accounts under its name for the benefit of BPNA. As part of the rebranding of the BPNA franchise, some of its branches operate under a new name, Popular Community Bank. Note 30 to the consolidated financial statements presents information about the Corporation’s business segments. The Corporation has a 49% interest in EVERTEC, which provides transaction processing services throughout the Caribbean and Latin America, including servicing many of the Corporation’s system infrastructures and transaction processing businesses.

OVERVIEW

The first quarter of 2012 represents the fifth consecutive profitable quarter for the Corporation. Net income amounted to $48.4 million for the quarter ended March 31, 2012, compared with $10.1 million for the same quarter in the previous year. Most credit metrics, such as the level of net charge-offs and non-performing loans in most portfolios, reflected encouraging trends during the first quarter of the current year. Revenue generation continued solid with continued strong production from the Corporation’s Puerto Rico mortgage business, stable fee income and continuing efforts to reduce deposit costs. The Corporation continues to generate capital internally through net earnings.

The discussion that follows provides highlights of the Corporation’s results of operations for the quarter ended March 31, 2012 compared to the results of operations for the same quarter in 2011. It also provides some highlights with respect to the Corporation’s financial condition, credit quality, capital and liquidity.

Highlights for the first quarter of 2012, compared with first quarter of 2011

 

   

Net income per common share of $0.05 for the first quarter of 2012, compared with $0.01 for the same period in 2011;

 

   

Net interest margin on a taxable equivalent basis of 4.39% for the first quarter of 2012, compared with 4.17% for the first quarter of 2011. The Corporation continued reducing the cost of deposits, which has contributed to boost the net interest margin further, which coupled with a reduction in the cost of borrowings, has more than compensated the reduction in interest income on loans, primarily on covered loans. Refer to the Net Interest Income section of this MD&A for a discussion of the major variances in net interest income, including yields and costs. The cost of interest bearing deposits in Puerto Rico, where the Corporation holds a considerable share of the market, fell to 87 basis points. That is a 48-basis-point drop from the year-ago quarter.

 

   

Provision for loan losses in the first quarter of 2012 increased by $25.4 million compared with the first quarter of 2011, principally due to an increase in the general reserve requirement for the BPPR residential mortgage loan portfolio, coupled with an increase in the specific reserve requirements for mortgage and consumer loan troubled debt restructurings. Also, influencing the unfavorable variance in the provision for loan losses was the fact that the provision for loan losses for the first quarter of 2011 included a positive impact (reduction to provision expense) of $13.8 million related to the non-conventional residential mortgage loans that were sold by BPNA in the first quarter of 2011. These increases were partially offset by a net benefit of $24.8 million related to revisions in the allowance for loan losses methodology of $40.5 million as described in the Critical Accounting Policies / Estimates section, net of $15.7 million related to environmental factor reserves for the BPPR commercial loan portfolio which although improving continues to warrant additional scrutiny.

During the first quarter of 2012, in order to better reflect current market conditions, the Corporation revised the estimation process for evaluating the adequacy of its allowance for loan losses for the Corporation’s commercial and construction loan portfolios primarily by (i) establishing a more granular stratification of the commercial and construction loan portfolios to enhance the homogeneity of the loan classes and (ii) increasing the look-back period for assessing the recent trends applicable to the determination of commercial and construction loan net charge-offs from 6 months to 12 months. These changes resulted in a reduction in the Corporation’s allowance for loan losses. Refer to the Critical Accounting Policies / Estimates for detailed information on the changes to the allowance for loan losses methodology, including financial impacts.

 

115


Table of Contents

The allowance for loan losses to loans held-in-portfolio ratio corresponding to non-covered loans stood at 3.25% at March 31, 2012 compared with 3.35% at December 31, 2011. The general and specific reserves related to non-covered loans amounted to $589 million and $76 million, respectively, at March 31, 2012, compared with $631 million and $59 million, respectively, at December 31, 2011. Total non-covered loans net charge-offs for the first quarter of 2012 declined $31.3 million when compared with the same quarter in the previous year. Total non-covered, non-performing loans held-in-portfolio decreased $56 million from December 31, 2011 to March 31, 2012, while non-performing loans held-for-sale declined $30 million.

 

   

Non-interest income amounted to $123.9 million for the quarter ended March 31, 2012, compared with $164.4 million for the same quarter in the previous year. The decline was principally due to an unfavorable variance in FDIC loss share income of $31.3 million, in part due to negative amortization of the loss share asset due to improved cash flow expectations and lower discount accretion on ASC 310-20 loans and unfunded commitments, which had a short-term accretion period that mostly expired during 2011. The negative amortization of the loss share asset is the result of lower expected losses in the FDIC covered loan portfolio, relative to the Corporation’s original estimates at the time of acquisition. The negative amortization is offset by an increase in the accretable yield (interest income), which is amortized over the expected life of the loans, which is longer than the terms of the loss sharing agreements. Refer to Table 3B for a description and amounts of the items that compose the FDIC loss share income (expense) caption.

The unfavorable variance in non-interest income was also due to the fact that during the first quarter of 2011 the Corporation completed the sale of its equity investment in the processing business of Consorcio de Tarjetas Dominicanas, S.A. (“CONTADO”) with a positive impact in earnings of $16.7 million, net of tax. Refer to the Non-Interest Income section of this MD&A for additional information on the main variances in non-interest income categories.

 

   

Total operating expenses increased $21.1 million, principally due to higher personnel costs by $15.4 million, other real estate owned expenses, including valuation adjustments, by $12.0 million and FDIC deposit insurance assessments by $7.3 million. Also, there was a higher provision for operational losses by $6.3 million, including a legal settlement on the U.S. operations that approximated $3.1 million. These unfavorable variances were partially offset by lower losses on the early extinguishment of debt by $8.2 million, lower losses on the impairment of net assets to be disposed of by $12.9 million and lower provision for unfunded credit commitments by $4.6 million. Full-time equivalent employees were 8,074 at March 31, 2012, compared with 8,329 at December 31, 2011 and 8,260 at March 31, 2011. The reduction in headcount was mostly associated with the voluntary retirement program effective on February 1, 2012.

Refer to the Operating Expenses section in this MD&A for additional explanations on the driving factors that influenced the variances in the different operating expense categories detailed above.

 

   

Lower income tax expense by $131.0 million since the results for the quarter ended March 31, 2011 included a $103.3 million reduction in the Corporation’s net deferred tax asset with a corresponding charge to income tax expense due to a reduction in the marginal corporate income tax rate. Refer to the Income Tax section in this MD&A for information on the changes to the Puerto Rico internal revenue code that triggered the change in the tax rate.

 

   

Total assets amounted to $37.0 billion at March 31, 2012, compared with $37.3 billion at December 31, 2011. Total loans held-in-portfolio declined $251 million, of which $124 million pertained to non-covered loans and $127 million to covered loans. Refer to Table 7 for a breakdown by loan portfolio category.

 

   

Refer to Table 11 in the Financial Condition section of this MD&A for the percentage allocation of the composition of the Corporation’s financing to total assets. The Corporation continues to have ample sources of liquidity. Refer to the Liquidity section of this MD&A for additional information on liquidity sources.

 

   

Deposits amounted to $27.2 billion at March 31, 2012, compared with $27.9 billion at December 31, 2011. The decrease in demand deposits from December 31, 2011 to March 31, 2012 of $244 million was principally related to lower balance of

 

116


Table of Contents
 

deposits in trust by $561 million, partially offset by an increase in commercial accounts. The deposits in trust outstanding as of December 31, 2011 were of a short-term nature and were mostly associated with certain Puerto Rico government bond issuances for which BPPR’s trust division serves as trustee. Time deposits, including brokered certificates of deposit, decreased $786 million. These decreases were partially offset by an increase in savings, NOW and money market deposits, both from the retail and commercial sectors.

 

   

The Corporation’s borrowings amounted to $4.7 billion at March 31, 2012, compared with $4.3 billion at December 31, 2011. The increase in borrowings was principally in short-term debt by approximately $455 million mostly associated with FHLB advances.

 

   

Stockholders’ equity amounted to $4.0 billion at March 31, 2012. Capital ratios, which are shown in Table 13, continued strengthening from December 31, 2011 to March 31, 2012, principally due to the reduction in assets, and changes in balance sheet composition including the increase in lower risk-assets such as mortgage loans and internal capital generation.

Table 1 provides selected financial data and performance indicators for the quarters ended March 31, 2012 and 2011.

 

117


Table of Contents

Table 1 - Financial highlights

 

Financial Condition Highlights

   At March 31,     Average for the first quarter  

(In thousands)

   2012      2011      Variance     2012      2011      Variance  

Money market investments

   $ 1,304,263      $ 961,565      $ 342,698     $ 1,095,294      $ 1,123,805      $ (28,511

Investment and trading securities

     5,862,989        6,638,176        (775,187     5,666,127        6,345,664        (679,537

Loans

     25,062,058        25,976,017        (913,959     24,938,842        25,945,614        (1,006,772

Earning assets

     32,229,310        33,575,758        (1,346,448     31,700,262        33,415,083        (1,714,821

Total assets

     37,049,221        38,829,793        (1,780,572     36,555,815        38,770,256        (2,214,441

Deposits*

     27,197,736        27,196,674        1,062       27,257,768        27,279,489        (21,721

Borrowings

     4,708,511        6,727,757        (2,019,246     4,364,646        6,746,215        (2,381,569

Stockholders’ equity

     3,967,071        3,804,906        162,165       3,752,817        3,597,212        155,605  

 

* Average deposits exclude average derivatives.

 

 

 

Operating Highlights

   First Quarter  

(In thousands, except per share information)

   2012      2011      Variance  

Net interest income

   $ 337,582      $ 343,359      $ (5,777

Provision for loan losses-non-covered loans

     82,514        59,762        22,752  

Provision for loan losses-covered loans

     18,209        15,557        2,652  

Net interest income

     123,908         164,368         (40,460

Operating expenses

     296,167        275,049        21,118  
  

 

 

    

 

 

    

 

 

 

Income (loss) before income tax

     64,600        157,359        (92,759

Income tax expense (benefit)

     16,192        147,227        (131,035
  

 

 

    

 

 

    

 

 

 

Net income (loss)

   $ 48,408      $ 10,132      $ 38,276  
  

 

 

    

 

 

    

 

 

 

Net income (loss) applicable to common stock

   $ 47,477      $ 9,202      $ 38,275  
  

 

 

    

 

 

    

 

 

 

Net income (loss) per common share-basic and diluted

   $ 0.05      $ 0.01      $ 0.04  
  

 

 

    

 

 

    

 

 

 

 

      First Quarter  

Selected Statistical Information

   2012     2011  

Common Stock Data

    

Market price

    

High

   $ 2.30     $ 3.53  

Low

     1.43       2.87  

End

     2.05       2.92  

Book value per common share at period end

     3.81       3.67  

Profitability Ratios

    

Return on assets

     0.53      0.11 

Return on common equity

     5.16       1.05  

Net interest spread (taxable equivalent)

     4.14       3.92  

Net interest margin (taxable equivalent)

     4.39       4.17  

Capitalization Ratios

    

Average equity to average assets

     10.27      9.28 

Tier I capital to risk-weighted assets

     16.51       15.23  

Total capital to risk-weighted assets

     17.79       16.50  

Leverage ratio

     11.10       10.15  

 

118


Table of Contents

General Business, Trends and Economy

In recent years, credit costs have been the most noticeable drivers of the Corporation’s financial results. Despite the unfavorable variance in the provision for loan losses described for the first quarter of 2012 compared with the same period in 2011, most credit trends during the first quarter of the current year were encouraging. During the first quarter of 2012, when compared with the fourth quarter of 2011, the Corporation experienced lower net charge-offs by $24.7 million, lower levels of non-performing loans held-in-portfolio by $47 million and lower commercial non-performing loan inflows by $40 million. The provision for loan losses for the quarter ended March 31, 2012 amounted to $100.7 million, a decrease of $79.1 million compared with the fourth quarter of 2011. The provision for loan losses for the non-covered portfolio for the first quarter of 2012 decreased by $41.4 million compared with the fourth quarter of 2011, of which $20.3 million was related to the BPPR reportable segment and $21.1 million to the BPNA reportable segment. In the BPPR reportable segment, the reduction in provision for loan losses was primarily driven by lower losses in the commercial and construction loan portfolios. In the BPNA reportable segment, the decrease in the provision for loan losses was driven by the combination of lower losses and the effect of the enhancement to the allowance for loan losses methodology. The drop in charge-offs in the commercial and construction loan portfolios was partially offset by increased mortgage loan charge-offs in the Puerto Rico operations. The remaining $38 million of the decrease in the provision for loan losses was due to the lower estimated losses in the covered loan portfolio.

Credit costs for the Corporation are declining, benefiting from an improvement in certain credit trends in both Puerto Rico and the U.S. mainland operations. Key highlights related to the Corporation’s loan portfolios include:

 

   

All of the Corporation’s loan portfolios in Puerto Rico showed improved credit quality during the first quarter of 2012. The first quarter marked the second consecutive quarter with decreasing net charge offs in the non-covered loan portfolio, which fell to $74 million, the lowest level since 2008. Non-performing loans in Puerto Rico also dropped for the second consecutive quarter, driven mostly by lower non-performing loans in the commercial and mortgage loan portfolios.

In the BPPR reportable segment, mortgage net charge-offs (excluding covered loans) increased by $7.0 million for the first quarter of 2012, compared with the last quarter in 2011. This increase was the main driver of a higher ratio of annualized net charge-offs to average non-covered mortgage loans held-in-portfolio at the BPPR reportable segment, which increased by 61 basis points, from 0.46% for the quarter ended December 31, 2011 to 1.07% for the quarter ended March 31, 2012. This increase was not caused by deterioration in the inherent credit quality of this portfolio, but was principally due to the implementation of a revised charge-off policy in Puerto Rico. During the first quarter of 2012, the Corporation revised its charge-off policy for the residential mortgage loan portfolio by including historical losses on recent other real estate owned (OREO) sales to determine the net realizable value and assess charge-offs once a loan becomes 180 days past due. Previously, this was only done once the loan was foreclosed.

 

   

The Corporation continues to enjoy the benefits of its de-risking strategies in the U.S. mainland operations. For the first quarter of 2012, non-performing loans at the BPNA reportable segment amounted to $338 million, an improvement of $28 million over the amounts at December 31, 2011. The first quarter of 2012 marked the 9th consecutive quarterly decrease in non-performing loans for the U.S. mainland business. Net charge-offs for the first quarter in the BPNA reportable segment amounted to $34 million, an improvement of $13 million compared with the fourth quarter of 2011. The first quarter of 2012 marked the fifth consecutive quarterly decrease in charge offs, reaching the lowest level since the first quarter in 2008 at the BPNA reportable segment.

The Corporation is reaping the benefits from the numerous actions that it has taken since 2009 to de-risk the balance sheet. In addition, to ensure the Corporation maximizes the value of the FDIC covered loan portfolio, as well as the Corporation’s special (delinquent) loan portfolios, management created a new division specifically dedicated to commercial loan administration. The new Commercial Credit Administration Group includes the Special Loans Division, the Commercial Credit Operations Division and the Loss-Sharing Agreement Administration Group. With this reorganization, the Corporation strives to streamline decision-making in those three critical areas, reinforce credit administration and allow the lending side of the Corporation’s Commercial Group to concentrate on generating business.

Critical to the Corporation’s business is the state of the economy in Puerto Rico, and it is management’s perception that it is gradually improving. There have been year-over-year increases in the number of non-farm jobs in Puerto Rico for the first time in several years, and cement sales, which are a proxy for real investment and infrastructure spending, are rising. Auto sales and hotel occupancy are also trending positively.

 

119


Table of Contents

Management’s view is that the contraction in Puerto Rico’s economy seems to be over and that it is transitioning from recession to stability. While this is a positive development, Popular’s management does not expect significant economic growth in the near future. Puerto Rico still has some headwinds to deal with including a relatively high level of public-sector debt and energy needs which are highly dependent on oil. Nonetheless, the macro-economic environment appears better so far in 2012 than a year ago.

In general, the Corporation continued making progress on various fronts during the first quarter of 2012, including that (i) the credit metrics of its loan portfolio continued improving, (ii) revenue generation was once again strong, and (iii) its capital base continues to rise. The Corporation’s plan for 2012 includes (i) continue working on improving the risk profile of its loan portfolio, (ii) acquire moderate-risk assets with good returns, (iii) continue its efficiency initiatives, and (iv) further improve the U.S. community banking business.

As a financial services company, the Corporation’s 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 Corporation’s business contained in Item 1 of the Corporation’s 2011 Annual Report, while not all inclusive, discusses additional information about the business of the Corporation and risk factors, many beyond the Corporation’s control that, in addition to the other information in this Form 10-Q, readers should consider.

The Corporation’s common stock is traded on the NASDAQ Global Select Market under the symbol BPOP.

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 Corporation’s 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 Corporation’s Audit Committee. The Corporation has identified as critical accounting policies those related to: (i) Fair Value Measurement of Financial Instruments; (ii) Loans and Allowance for Loan Losses; (iii) Acquisition Accounting for Loans and Related Indemnification Asset; (iv) Income Taxes; (v) Goodwill, and (vi) Pension and Postretirement Benefit Obligations. For a summary of these critical accounting policies and estimates, refer to that particular section in the MD&A included in Popular, Inc.’s 2011 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, 2011 (the “2011 Annual Report”). Also, refer to Note 2 to the consolidated financial statements included in the 2011 Annual Report for a summary of the Corporation’s significant accounting policies.

Allowance for Loan Losses

One of the most critical and complex accounting estimates is associated with the determination of the allowance for loan losses. The provision for loan losses charged to current operations is based on this determination. The Corporation’s assessment of the allowance for loan losses is determined in accordance with accounting guidance, specifically guidance of loss contingencies in ASC Subtopic 450-20 and loan impairment guidance in ASC Section 310-10-35.

 

120


Table of Contents

The accounting guidance provides for the recognition of a loss allowance for groups of homogeneous loans. The determination for general reserves of the allowance for loan losses includes the following principal factors:

 

   

Historical net loss rates (including losses from impaired loans) by loan type and by legal entity adjusted for recent net charge-off trends and environmental factors. The base net loss rates are based on the moving average of annualized net charge-offs computed over a 3-year historical loss window for the commercial and construction loan portfolios, and an 18-month period for the consumer and mortgage loan portfolios.

 

   

Net charge-off trend factors are applied to adjust the base loss rates based on recent loss trends. The Corporation applies a trend factor when base losses are below recent loss trends. Currently, the trend factor is based on the last 12 months of losses for the commercial, construction and legacy loan portfolios and 6 months of losses for the consumer and mortgage loan portfolios. The trend factor accounts for inherent imprecision and the “lagging perspective” in base loss rates. The trend factor replaces the base-loss period when it is higher than base loss up to a determined cap.

 

   

Environmental factors, which include credit and macroeconomic indicators such as employment, price index and construction permits, were adopted to account for current market conditions that are likely to cause estimated credit losses to differ from historical losses. The Corporation reflects the effect of these environmental factors on each loan group as an adjustment that, as appropriate, increases or decreases the historical loss rate applied to each group. Environmental factors provide updated perspective on credit and economic conditions. Correlation and regression analyses are used to select and weight these indicators.

During the first quarter of 2012, in order to better reflect current market conditions, management revised the estimation process for evaluating the adequacy of the general reserve component of the allowance for loan losses for the Corporation’s commercial and construction loan portfolios. The change in the methodology, which is described in the paragraphs below, was implemented as of March 31, 2012 and resulted in a reduction to the allowance for loan losses of $40.5 million. As part of the analyses performed with the revisions in the allowance for loan losses methodology, the Corporation recorded an increase of $15.7 million related to environmental factor reserves for BPPR’s commercial loan portfolio which although improving continues to warrant additional scrutiny. The net impact of the revisions in the allowance methodology and the aforementioned increase due to environmental factors was $24.8 million for the quarter.

Management made the following principal changes to the methodology during the first quarter of 2012:

 

   

Established a more granular stratification of the commercial loan portfolios to enhance the homogeneity of the loan classes. Previously, the Corporation used loan groupings for commercial loan portfolios based on business lines and collateral types (secured / unsecured loans). As part of the loan segregation, management evaluated the risk profiles of the loan portfolio, recent and historical credit and loss trends, current and expected portfolio behavior and the economic factors affecting the economy. The revised groupings consider product types (construction, commercial multifamily, commercial & industrial, non-owner occupied commercial real estate (“CRE”) and owner occupied CRE) and business lines for each of the Corporation’s reportable segments, BPPR and BPNA. In addition, the Corporation established a legacy portfolio at the BPNA reportable segment, comprised of commercial loans, construction loans and commercial lease financings related to certain lending products exited by the Corporation as part of restructuring efforts carried out in prior years.

The refinement in the loan groupings resulted in a decrease to the allowance for loan losses of $7.9 million at March 31, 2012, which consisted of a $9.7 million reduction related to the BPNA reportable segment, partially offset by an increase of $1.8 million related to the BPPR reportable segment.

 

   

Increased the historical look-back period for determining the loss trend factor. The Corporation increased the look-back period for assessing recent trends applicable to the determination of commercial and construction loan net charge-offs from 6 months to 12 months.

Previously, the Corporation used a trend factor based on 6 months of net charge-offs as it aligned the estimation of inherent losses for the Corporation’s commercial and construction loan portfolios with deteriorating trends.

Given the current overall commercial and construction credit quality improvements noted on recent periods in terms of loss trends, non-performing loan balances and non-performing loan inflows, management concluded that a 12-month look-back period for the trend factor aligns the Corporation’s allowance for loan losses methodology to current credit quality trends.

The increase in the historical look-back period for determining the loss trend factor resulted in a decrease to the allowance for loan losses of $28.1 million at March 31, 2012, of which $24.0 million related to the BPPR reportable segment and $4.1 million to the BPNA reportable segment.

 

121


Table of Contents

There were additional enhancements to the allowance for loan losses methodology which accounted for a reduction to the allowance for loan losses of $4.5 million at March 31, 2012, of which $3.9 million related to the BPNA reportable segment and $0.6 million to the BPPR reportable segment. This reduction related to loan portfolios with minimal or zero loss history.

There were no changes in the methodology for environmental factor reserves. There were no changes to the allowance for loan losses methodology for the Corporation’s consumer and mortgage loan portfolios during the first quarter of 2012.

Refer to Note 2 “Summary of Significant Accounting Policies” and the Critical Accounting Policies / Estimates section of the MD&A included in the Corporation’s 2011 Annual Report for additional information on the Corporation’s credit accounting policies, including interest recognition, troubled debt restructuring, accounting for impaired loans and other information with respect to the determination of specific reserves for loans individually evaluated for impairment.

STATEMENT OF OPERATIONS ANALYSIS

NET INTEREST INCOME

Net interest income, on a taxable equivalent basis, is presented with its different components on Table 2 for the quarter ended March 31, 2012 as compared with the same period in 2011, segregated by major categories of interest earning assets and interest bearing liabilities.

The interest earning assets include the investment securities and loans that are exempt from income tax, principally in Puerto Rico. The main sources of tax-exempt interest income are certain investments in obligations of the U.S. Government, its agencies and sponsored entities, and certain obligations of the Commonwealth of Puerto Rico and its agencies. To facilitate the comparison of all interest related to these assets, the interest income has been converted to a taxable equivalent basis, using the applicable statutory income tax rates for each quarter. The taxable equivalent computation considers the interest expense disallowance required by the Puerto Rico tax law. During the third quarter of 2010, BPPR’s tax position changed and, as a result, the benefit that would have been obtained from exempt investments was not applicable. However, BPPR’s tax position inverted during the second quarter of 2011, and is currently deriving a tax benefit from exempt investments. This explains the increase in the taxable equivalent adjustment shown in Table 2.

Average outstanding securities balances are based upon amortized cost excluding any unrealized gains or losses on securities available-for-sale. Non-accrual loans have been included in the respective average loans and lease categories. Loan fees collected and costs incurred in the origination of loans are deferred and amortized over the term of the loan as an adjustment to interest yield. Prepayment penalties, late fees collected and the amortization of premiums / discounts on purchased loans are also included as part of the loan yield. Interest income for the quarter ended March 31, 2012 included a favorable impact, excluding the discount accretion on covered loans accounted for under ASC 310-20 and ASC 310-30, of $5.1 million, related to those items, compared with a favorable impact of $5.0 million for the same period in 2011. The interest income for covered loans for the quarter ended March 31, 2011 was favorably impacted by the discount accretion on covered loans accounted for under ASC 310-20 (revolving lines of credit), which amounted to $24.4 million for that period. This discount had been fully accreted as of the end of the third quarter of 2011.

The increase in the net interest margin, on a taxable equivalent basis, for the quarter ended March 31, 2012, compared with the same period in 2011, was mostly related to a decrease in deposit costs as the Corporation continues its effort to reduce the average cost of this funding base. Increases in the average balances of NOW, money market, savings and demand deposits have assisted in controlling the reduction within the time deposits category, and in lowering the average cost of the deposit portfolio. Also contributing to the increase in net interest margin was a higher yield for the construction loan portfolio as a result of loan collections in the U.S. mainland operations that had been previously placed in non-accrual status.

The above positive variances were in part offset by a decrease in the yield on earning assets. The yield for the covered loan portfolio had a reduction of approximately 161 basis points, related mostly to the accretion of the discount on covered loans accounted for under ASC 310-20 that was non-existent in 2012 and which, as previously indicated, amounted to $24.4 million for the first quarter of 2011. This negative variance in the yield on covered loans was partially mitigated by the positive effects of the loss reassessment process for loans accounted for under ASC310-30. The accretable amount for the loans accounted for under ASC 310-30 has increased by $633 million because of the improvement in expected cash flows on the loan pools. This benefit is being recorded through interest income on an effective yield basis throughout the life of the different loan pools. In addition, the mortgage loan yield was negatively impacted by originations in a lower rate environment and interest reversals for delinquent loans. Furthermore, the yield for the consumer loan portfolio was mainly impacted by a reduction in the yield for credit cards as a result of lower balances subject to the penalty rate and reductions in client rates due to improved credit conditions and restrictions on fees as required by regulations.

 

122


Table of Contents

The average loan balance for the quarter ended March 31, 2012 experienced a substantial reduction when compared with the quarter ended March 31, 2011. Throughout 2011, the commercial and construction loan portfolios were impacted by reduced origination activity, charge-offs and sales of non-performing loans. Additionally, the normal amortization of the covered loan portfolio contributed to the reduction in the Corporation’s average loan balances. In contrast, the increase experienced by the mortgage loan category reflects primarily the effect of loan purchases made throughout 2011 within the Puerto Rico portfolio, principally from bulk purchases of performing mortgage loans and loans purchased under credit recourse agreements. Investment securities decreased in average balance as a result of maturities and prepayments of mortgage related investment securities, which funds were not reinvested due to deleveraging strategies. The borrowings category reflects the reduction of $2.3 billion in the average balance of the note issued to the FDIC. This note was repaid during 2011. The other sources of funds category in Table 2 reflects the reduction in the indemnification asset, in part as a result of collections made during the year for claims filed with the FDIC.

 

123


Table of Contents

Table 2 - Analysis of Levels & Yields on a Taxable Equivalent Basis

Quarters ended March 31,

 

Average Volume     Average Yields / Costs         Interest    

Variance

Attributable to

 
2012     2011     Variance     2012     2011     Variance         2012     2011     Variance     Rate     Volume  
                                                                   
($ in millions)               (In thousands)  
  $1,095       $1,124       $(29)        0.35     0.34      0.01   

Money market investments

    $948       $947       $1       $(40)        $41  
  5,215       5,663       (448     3.75       3.71       0.04    

Investment securities

    48,940       52,457       (3,517     1,342       (4,859
  451       682       (231     6.01       5.67       0.34    

Trading securities

    6,730       9,540       (2,810     610       (3,420
  6,761       7,469       (708     3.35       3.38       (0.03  

Total money market, investment and trading securities

    56,618       62,944       (6,326     1,912       (8,238
           

Loans:

         
  10,444       11,255       (811     4.96       5.02       (0.06  

Commercial

    128,866       139,179       (10,313     (315     (9,998
  523       863       (340     5.03       1.56       3.47    

Construction

    6,535       3,311       3,224       4,968       (1,744
  555       592       (37     8.67       9.01       (0.34  

Leasing

    12,021       13,318       (1,297     (491     (806
  5,464       4,753       711       5.72       6.09       (0.37  

Mortgage

    78,146       72,316       5,830       (4,526     10,356  
  3,661       3,668       (7     10.17       10.36       (0.19  

Consumer

    92,591       93,706       (1,115     (2,336     1,221  
  20,647       21,131       (484     6.19       6.15       0.04    

Sub-total loans

    318,159       321,830       (3,671     (2,700     (971
  4,292       4,815       (523     7.00       8.61       (1.61  

Covered loans

    74,764       102,548       (27,784     (17,134     (10,650
  24,939       25,946       (1,007     6.33       6.61       (0.28  

Total loans

    392,923       424,378       (31,455     (19,834     (11,621
  $31,700     $ 33,415     $ (1,715     5.69      5.89      (0.20 )%   

Total earning assets

  $ 449,541     $ 487,322     $ (37,781   $ (17,922   $ (19,859
  $5,246     $ 4,977     $ 269       0.47      0.73      (0.26 )%   

Interest bearing deposits: NOW and money market*

  $ 6,071     $ 8,915     $ (2,844   $ (3,239   $ 395  
  6,507       6,242       265       0.39       0.82       (0.43  

Savings

    6,265       12,557       (6,292     (6,879     587  
  10,291       11,135       (844     1.54       2.02       (0.48  

Time deposits

    39,343       55,407       (16,064     (11,639     (4,425
                     
  22,044       22,354       (310     0.94       1.39       (0.45  

Total deposits

    51,679       76,879       (25,200     (21,757     (3,443
                     
  2,511       2,743       (232     2.18       2.07       0.11    

Short-term borrowings

    13,583       14,015       (432     2,430       (2,862
  —          2,293       (2,293     —          2.34       (2.34  

FDIC note

    —          13,395       (13,395     —          (13,395
  473       447       26       15.91       15.88       0.03    

TARP funds**

    18,796       17,752       1,044       30       1,014  
           

Other medium and

         
  1,381       1,263       118       5.28       6.37       (1.09  

long-term debt

    18,211       20,051       (1,840     (648     (1,192
           

Total interest bearing

         
  26,409       29,100       (2,691     1.55       1.97       (0.42  

liabilities

    102,269       142,092       (39,823     (19,945     (19,878
  5,213        4,926        287           

Non-interest bearing demand deposits

         
  78       (611)        689    

 

 

   

 

 

   

 

 

   

Other sources of funds

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $31,700     $ 33,415     $ (1,715     1.30      1.72      (0.42 )%   

Total source of funds

    102,269       142,092       (39,823     (19,945     (19,878
        4.39      4.17      0.22   

Net interest margin

         
           

Net interest income on a taxable equivalent basis

    347,272       345,230       2,042     $ 2,023     $ 19  
        4.14      3.92      0.22   

Net interest spread

         
           

Taxable equivalent

adjustment

    9,690       1,871       7,819      
           

Net interest income

    $337,582       $343,359       $(5,777    

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 interest bearing demand deposits corresponding to certain government entities in Puerto Rico.
** Junior subordinated deferrable interest debentures held by the U.S. Treasury

 

 

124


Table of Contents

PROVISION FOR LOAN LOSSES

The Corporation’s provision for loan losses totaled $100.7 million for the quarter ended March 31, 2012 compared with $75.3 million for the same period in 2011. Refer to the Overview section of this MD&A for an explanation of the principal factors causing the increase in the provision for loan losses for the quarter as well as the Credit Risk Management and Loan Quality Section of this MD&A for a detailed analysis of net charge-offs, non-performing assets, the allowance for loan losses and selected loan losses statistics.

NON-INTEREST INCOME

Refer to Table 3.A for a breakdown on non-interest income by major categories for the quarters ended March 31, 2012 and 2011.

Table 3.A - Non-interest income

 

     Quarter ended March 31,  

(In thousands)

   2012     2011     Variance  

Service charges on deposit accounts

   $ 46,589     $ 45,630     $ 959  
  

 

 

   

 

 

   

 

 

 

Other service fees:

      

Mortgage servicing fees, net of fair value adjustments

     12,931       6,260       6,671  

Insurance fees

     12,390       11,926       464  

Credit card fees and discounts

     11,892       10,576       1,316  

Debit card fees

     9,832       12,925       (3,093

Sale and administration of investment products

     8,889       7,130       1,759  

Trust fees

     4,081       3,495       586  

Processing fees

     1,774       1,697       77  

Other fees

     4,250       4,643       (393
  

 

 

   

 

 

   

 

 

 

Total other service fees

     66,039       58,652       7,387  
  

 

 

   

 

 

   

 

 

 

Trading account loss

     (2,143     (499     (1,644

Net gain on sale of loans, including valuation adjustment on loans held-for-sale

     15,471       7,244       8,227  

Adjustment (expense) to indemnity reserves on loans sold

     (3,875     (9,848     5,973  

FDIC loss share (expense) income

     (15,255     16,035       (31,290

Fair value change in equity appreciation instrument

     —          7,745       (7,745

Other operating income

     17,082       39,409       (22,327
  

 

 

   

 

 

   

 

 

 

Total non-interest income

   $ 123,908     $ 164,368     $ (40,460
  

 

 

   

 

 

   

 

 

 

Non-interest income for the quarter ended March 31, 2012, compared with the same quarter in the previous year was mainly impacted by the following positive variances:

 

   

$8.2 million favorable variance in gain on sale of loans, including valuation adjustments on loans held-for-sale, mostly due to higher gains from the Corporation’s mortgage banking business in Puerto Rico, principally related to residential mortgage loans securitized;

 

   

$7.4 million favorable variance in other service fees, mostly due to an increase in the fair value of the Corporation’s mortgage servicing rights, higher fees from the sale and administration of investment products principally related to commissions from the retail business at Popular Securities and higher credit card fees and discounts due to higher interchange fees from increased volume of retail purchases. These favorable variances were partially offset by lower debit card fees mainly due to lower point-on-sale interchange income resulting from the effect of the Durbin Consumer Protection Act of 2010 implemented in October 2011, offset in part by higher transaction volume.

 

125


Table of Contents
   

$6.0 million favorable variance resulting from lower adjustments recorded to indemnity reserves on loans sold by $5.2 million in the BPPR reportable segment and $0.8 million in the BPNA reportable segment and the discontinued operations of Popular Financial Holdings (“PFH”), the latter which is part of the Corporate group. The reduction in the BPPR reportable segment was principally due to improvements in credit quality trends of mortgage loans serviced subject to credit recourse and in the probability of default, foreclosure rate and constant prepayment rate assumptions, as well as a declining portfolio given that the Corporation is no longer selling loans subject to credit recourse.

These favorable variances in non-interest income for the quarter ended March 31, 2012, compared with the same quarter of the previous year, were partially offset by the following unfavorable variances:

 

   

$31.3 million unfavorable variance in FDIC loss share (expense) income. Table 3.B provides a breakdown of the nature of the items that triggered the variance;

Table 3.B - Financial information - Westernbank FDIC-assisted transaction

 

     Quarters ended March 31,  

(In thousands)

   2012     2011     Variance  

Interest income:

      

Interest income on covered loans, except for
discount accretion on ASC 310-20 covered loans

   $ 74,764     $ 78,100     $ (3,336

Discount accretion on ASC 310-20 covered loans

     —          24,448       (24,448
  

 

 

   

 

 

   

 

 

 

Total interest income on covered loans

     74,764       102,548       (27,784
  

 

 

   

 

 

   

 

 

 

FDIC loss share income (expense):

      

(Amortization) accretion of loss share indemnification asset, net

     (29,375     25,796       (55,171

80% mirror accounting on discount accretion on loans and unfunded commitments accounted for under ASC 310-20

     (248     (21,465     21,217  

80% mirror accounting on provision for loan losses for reductions in expected cash flows that are reimbursable by the FDIC [1]

     13,422       12,445       977  

Other

     946       (741     1,687  
  

 

 

   

 

 

   

 

 

 

Total FDIC loss share income (expense)

     (15,255     16,035       (31,290
  

 

 

   

 

 

   

 

 

 

Fair value change in equity appreciation instrument

     —          7,745       (7,745

Amortization of contingent liability on unfunded commitments (included in other operating income)

     310       2,384       (2,074
  

 

 

   

 

 

   

 

 

 

Total revenues

     59,819       128,712       (68,893
    

 

 

   

 

 

 

Provision for loan losses

     18,209       15,557       2,652  
  

 

 

   

 

 

   

 

 

 

Total revenues less provision for loan losses

   $ 41,610     $ 113,155     $ (71,545
  

 

 

   

 

 

   

 

 

 

 

[1] Reductions in expected cash flows for ASC 310-30 loans, which may impact the provision for loan losses, may consider reductions in both principal and interest cash flow expectations. The amount covered under the FDIC loss sharing agreements for interest not collected from borrowers is limited under the agreements (approximately 90 days); accordingly, these amounts are not subject fully to the 80% mirror accounting.

 

 

 

 

 

 

Average balances

     Quarters ended March 31,  

(In millions)

   2012      2011      Variance  

Covered loans

   $ 4,292      $ 4,815      $ (523

FDIC loss share asset

     1,903        2,410        (507

Note issued to the FDIC

     —           2,293        (2,293
  

 

 

    

 

 

    

 

 

 

 

126


Table of Contents
   

$22.3 million unfavorable variance in other operating income due to a $20.6 million gain on the sale of the equity interest in CONTADO in March 2011 and lower income from investments accounted for under the equity method by approximately $4.6 million. The latter was the net effect of higher losses by $9.7 million (including the impact of intra-entity eliminations) from the 49% retained ownership interest in EVERTEC, partially offset by $6.7 million income in the first quarter of 2012 from the equity investment in PRLP 2011 Holdings, LLC, which holds the commercial and construction loans sold by BPPR during 2011, of which BPPR holds a 24.9% equity participation. Table 3.C provides the composition of the income (loss) from the Corporation’s 49% equity interest in EVERTEC.

Table 3.C - Income (loss) from retained ownership interest in EVERTEC

     Quarter ended March 31,  

(In thousands)

   2012     2011  

Share of income from the equity investment in EVERTEC

   $ 1,730     $ 11,792  

Intra-company eliminations considered in other operating income

     (13,345     (13,713
  

 

 

   

 

 

 

Share of income (loss) from the equity investment in EVERTEC, net of eliminations

   $ (11,615   $ (1,921
  

 

 

   

 

 

 

EVERTEC’s results for the first quarter of 2011 included a $13.8 million positive impact related to the reversal of EVERTEC’s deferred tax liability upon application of the Puerto Rico income tax reform. The eliminations in Table 3.C mostly represents the costs that the Corporation records in the professional fees category within operating expenses and that EVERTEC has recognized as part of its net income and must be eliminated as it represents a transaction with an affiliate. Refer to Note 20 to the consolidated financial statements for additional information on the transactions with EVERTEC.

The variance in other operating income includes a $4.6 million gain on the sale of a real estate property owned and previously used by BPPR during the first quarter of 2012.

 

   

$7.7 million unfavorable variance on the fair value of the equity appreciation instrument issued to the FDIC as part of the Westernbank FDIC-assisted transaction as the results for the first quarter of 2011 included a positive impact of valuing the instrument and which expired on May 7, 2011.

 

127


Table of Contents

Operating Expenses

Table 4 provides a breakdown of operating expenses by major categories.

Table 4 - Operating expenses

 

      Quarters ended March 31,  

(In thousands)

   2012      2011      Variance  

Personnel costs:

        

Salaries

   $ 76,899      $ 73,791      $ 3,108  

Commissions, incentives and other bonuses

     12,726        9,924        2,802  

Pension, postretirement and medical insurance

     18,425        11,985        6,440  

Other personnel costs, including payroll taxes

     13,441        10,440        3,001  
  

 

 

    

 

 

    

 

 

 

Total personnel costs

     121,491        106,140        15,351  
  

 

 

    

 

 

    

 

 

 

Net occupancy expenses

     24,162        24,586        (424

Equipment expenses

     11,341        12,036        (695

Other taxes

     13,438        11,972        1,466  

Professional fees:

        

Collections, appraisals and other credit related fees

     8,238        6,765        1,473  

Programming, processing and other technology services

     24,561        24,198        363  

Other professional fees

     15,306        15,725        (419
  

 

 

    

 

 

    

 

 

 

Total professional fees

     48,105        46,688        1,417  
  

 

 

    

 

 

    

 

 

 

Communications

     7,131        7,210        (79

Business promotion

     12,850        9,860        2,990  

FDIC deposit insurance

     24,926        17,673        7,253  

Loss on early extinguishment of debt

     69        8,239        (8,170

Other real estate owned (OREO) expenses

     14,165        2,211        11,954  

Other operating expenses:

        

Credit and debit card processing, volume and interchange expenses

     4,681        3,944        737  

Transportation and travel

     1,471        1,520        (49

Printing and supplies

     1,034        1,223        (189

All other

     8,710        19,492        (10,782
  

 

 

    

 

 

    

 

 

 

Total other operating expenses

     15,896        26,179        (10,283
  

 

 

    

 

 

    

 

 

 

Amortization of intangibles

     2,593        2,255        338  
  

 

 

    

 

 

    

 

 

 

Total operating expenses

   $ 296,167      $ 275,049      $ 21,118  
  

 

 

    

 

 

    

 

 

 

Operating expenses for the quarter ended March 31, 2012 increased by $21.1 million, or 8%, compared with the quarter ended March 31, 2011. This increase in operating expenses was impacted by the following main factors:

 

   

As shown in Table 4, personnel costs increased by $15.4 million, and consisted of the following principal variances:

 

  o higher pension, postretirement and medical insurance expenses by $6.4 million, which included an increase in the net periodic pension cost of $3.4 million, when compared with the quarter ended March 31, 2011, mainly due to the impact of a higher amortization of net losses for the period driven by a decrease in the assumed discount rate of the pension benefit obligation and lower expected return on plan assets. Refer to Note 26 to the consolidated financial statements for a breakdown of the net periodic pension cost. Medical insurance costs increased by $3.0 million resulting from higher claims activity and revised premiums.

 

  o salaries expense increased by $3.1 million. As indicated in the Overview section of this MD&A, there was a reduction in FTEs from March 31, 2011 to the same date in 2012 of 186 FTEs mainly driven by retired employees, but which retirement was not effective until February 1, 2012. The increase in the salaries caption in Table 4 was influenced by new hires during 2011, vacation and other compensation accruals and the additional day in the quarter of 2012 due to the leap year.

 

128


Table of Contents
  o higher other personnel costs, including payroll taxes, by $3.0 million, primarily due to $1.4 million in severance accruals related to an employee exit program that was executed as part of the Corporation’s efficiency efforts and payroll taxes such as unemployment, social security and workers compensation.

 

  o Higher incentives, commission and other bonuses by $2.8 million, mainly due to higher sales incentives and retail commissions and other performance incentives.

 

   

OREO expenses increased by $12.0 million during the first quarter of 2012 as compared to the same period of 2011 mainly as a result of higher write-downs in residential mortgage properties due to downward adjustments to the collateral values of residential properties in the BPPR reportable segment;

 

   

higher FDIC deposit insurance assessments by $7.3 million for the quarter ended March 31, 2012 mainly due to the change in the assessment computation for BPPR which was effective in the second quarter of 2011;

 

   

an increase of $3.0 million in business promotion expense, mainly costs from the AAdvantange credit card reward points program and advertising expenses;

 

   

professional fees increased by $1.4 million mainly related to legal services provided in connection with loan collection efforts and other legal expenses related to litigations; and

 

   

higher other taxes by $1.5 million, principally in municipal and other operating taxes.

These unfavorable variances for the quarter ended March 31, 2012, when compared with the same period of the previous year, were partially offset by the following positive factors:

 

   

the category of all other operating expenses in Table 4 decreased by $10.8 million. Main variances in this category included a positive variance of $12.9 million on impairment losses on assets to be disposed of mainly due to impairment losses recognized during 2011 related to the write-down of the Corporation’s Venezuela operations. Also, there was a positive variance of $4.6 million in the provision for unfunded credit commitments resulting from a combination of a lower loss rate and lower expected disbursements. These positive variances in the other operating expense category were partially offset by higher provision for operational losses by $6.3 million, which included a legal settlement in the Corporation’s U.S. mainland operations of $3.1 million.

 

   

lower loss on early extinguishment of debt by $8.2 million since the results for the quarter ended March 31, 2011 included $8.0 million in prepayment penalties on the repayment of $100 million in medium-term notes.

Income Taxes

Income tax expense amounted to $16.2 million for the quarter ended March 31, 2012, compared with $147.2 million for the same quarter of 2011. In January 2011, the Governor of Puerto Rico signed Act Number 1 (Internal Revenue Code for a New Puerto Rico) which among the most significant changes applicable to corporations was the reduction in the marginal tax rate. Consequently, as a result of this reduction in rate in Puerto Rico, the Corporation recognized during the first quarter of 2011 an income tax expense of $103.3 million and a corresponding reduction in the net deferred tax asset. Also, the decrease in income tax expense was due to lower income before tax on the Puerto Rico operations and an increase in exempt interest income net of disallowance of expenses attributed to such exempt income.

 

129


Table of Contents

The components of income tax for the quarters ended March 31, 2012 and 2011 are included in Table 5.

Table 5—Components of Income Tax Expense (Benefit)

 

     Quarters ended  
     March 31, 2012     March 31, 2011  

(In thousands)

   Amount     % of pre-tax
income
    Amount     % of pre-tax
income
 

Computed income tax at statutory rates

   $ 19,380       30    $ 47,207       30 

Net benefit of net tax exempt interest income

     (7,014     (11     (2,407     (2

Effect of income subject to preferential tax rate

     (971     (2     (232     —     

Deferred tax asset valuation allowance

     1,167       2       (5,305     (3

Non-deductible expenses

     5,639       9       5,326       3  

Difference in tax rates due to multiple jurisdictions

     (3,207     (5     (2,464     (2

Initial adjustment in deferred tax due to change in tax rate

     —          —          103,287       66  

State taxes and others

     1,198       2       1,815       1  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income tax expense

   $ 16,192       25    $ 147,227       93 
  

 

 

   

 

 

   

 

 

   

 

 

 

Refer to Note 28 to the consolidated financial statements for additional information on income taxes, including a breakdown of deferred tax assets.

REPORTABLE SEGMENT RESULTS

The Corporation’s reportable segments for managerial reporting purposes consist of Banco Popular de Puerto Rico and Banco Popular North America. A Corporate group has been defined to support the reportable segments. For managerial reporting purposes, the costs incurred by the Corporate group are not allocated to the reportable segments.

For a description of the Corporation’s reportable segments, including additional financial information and the underlying management accounting process, refer to Note 30 to the consolidated financial statements. The Corporate group reported a net loss of $28.3 million for the quarter ended March 31, 2012, compared with net loss of $16.3 million for the same quarter of the previous year. The unfavorable variance in the Corporate group was the net effect of (i) gain recognized in the first quarter of 2011 from the sale of CONTADO; and (ii) higher loss, net of intra-entity eliminations, from the equity interest in EVERTEC, partially offset by (iii) loss on the early extinguishment of debt incurred in 2011 and (iv) lower impairment losses on assets to be disposed of, particularly related to the investment in TRANRED (Venezuela).

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’s net income amounted to $66.9 million for the quarter ended March 31, 2012, compared with $3.6 million for the same quarter of the previous year. The principal factors that contributed to the variance in the financial results included the following:

 

   

lower net interest income by $5.3 million, or 2%, mostly due to a reduction in income from the covered loan portfolio by $27.8 million. Loan income from covered loans for the first quarter of 2011 included $24.4 million of discount accretion on revolving lines of credit accounted for pursuant to ASC 310-20. As indicated in the Net Interest Income section, the discount associated to those lines of credit was fully accreted during 2011. Also, a reduction of approximately $1.2 billion in the average volume of investment and trading securities resulted in a reduction in income due to volume of $12.2 million. The unfavorable impact resulting from these reductions was partially offset by a $19.0 million reduction in deposit costs and $14.0 million in the cost of borrowings. The latter was mainly associated with the note issued to the FDIC, which was outstanding during 2011. The net interest margin was 4.90% for the quarter ended March 31, 2012, compared with 4.78% for the same period in 2011;

 

   

higher provision for loan losses by $18.6 million, or 28%, mainly due to higher provisioning requirements for the consumer and mortgage loans modified under loss mitigation programs that are considered troubled debt restructurings, and are

 

130


Table of Contents
 

required to be analyzed for specific reserves under ASC Section 310-10-35, and higher general reserve requirements for mortgage loans given the increase in the loss rate and greater volume of delinquent loans. In addition, during first quarter of 2011, there was a reduction of $24 million in the general component of the allowance for loan losses, including covered loans, compared with December 31, 2010 due to lower loss trend from the commercial, construction and consumer loan portfolios. These variances were partially offset by lower net charge-offs by $11.9 million, mainly from the construction and consumer loan portfolios, as well as the net reduction of $7.1 million related to the enhancements to the allowance for loan losses methodology for the commercial and construction loan portfolios net of an increase in the environmental factor reserves described in the Critical Accounting Policies / Estimates section, during the quarter ended March 31, 2012. Refer to Credit Risk Management and Loan Quality section of this MD&A for certain quality indicators and further explanations.

 

   

lower non-interest income by $8.0 million, or 7%, mainly due to FDIC loss share expense of $15.3 million recognized in the first quarter of 2012, compared with FDIC loss share income of $16.0 million for the same quarter previous year. Refer to Table 3.B for components of that latter variance. Also, there was the unfavorable variance of $7.7 million related to the FDIC equity appreciation instrument. These unfavorable variances were partially offset by higher gain on sale of loans by $8.2 million, lower adjustments by $5.2 million to increase the indemnity reserves on loans serviced, and higher other service fees by $8.4 million, mainly from favorable adjustments to the value of mortgage servicing rights, higher fees from the sale of investment banking products and higher credit card fees, partially offset by lower debit card fees. The results for the quarter ended March 31, 2012 also included the $6.7 million income from the equity investment in PRLP 2011 Holdings, LLC and a $4.6 million gain on the sale of a real estate property by BPPR.

 

   

higher operating expenses by $33.6 million, or 17%, mainly due to an increase in FDIC deposit insurance by $10.3 million, increase in other real estate owned costs by $10.2 million, principally due to downward adjustments to collateral values of residential mortgage properties, and higher personnel cost by $10.9 million; and

 

   

lower income tax expense by $128.8 million, mainly due to the $103.3 million reduction in the net deferred tax asset with a corresponding charge to income tax expense during the first quarter of 2011, which was associated with the reduction in the marginal corporate income tax rate due to the Puerto Rico tax reform previously described. Also, the variance was due to a decrease in income before tax and an increase in exempt interest income, net of disallowance of expenses attributed to such exempt income.

Banco Popular North America

For the quarter ended March 31, 2012, the reportable segment of Banco Popular North America reported net income of $9.3 million, compared with $22.3 million for the same quarter of the previous year. The principal factors that contributed to the variance in the financial results included the following:

 

   

lower net interest income by $738 thousand, which was primarily the effect of lower average volume of earning assets by $527 million, partially offset by lower deposit balances. This unfavorable net variance was partially offset by lower deposit costs and collections of interest on construction loans that were previously non-accruing status and which were paid-off during the first quarter of 2012;

 

   

higher provision for loan losses by $6.7 million principally related to reductions of $37 million in the general reserve component from December 31, 2010 to March 31, 2011, prompted by lower net charge-offs and improvements in certain portfolio trends, coupled with signs of economic stabilization. In addition, there was a $13.8 million reduction in the provision for loan losses for the quarter ended March 31, 2011 related to the benefit of the improved pricing from the sale of the non-conventional mortgage loan portfolio. These variances were partially offset by reductions in the provision for loan losses for the quarter ended March 31, 2012 as a result of lower net charge-offs by $21.2 million, combined with a $17.7 million benefit due to the enhancement to the allowance for loan losses methodology for the commercial and construction loan portfolios. Refer to Credit Risk Management and Loan Quality section of this MD&A for certain quality indicators and further explanations, including a summary of the changes and the impact on the Corporation’s allowance for loan losses.

 

   

lower non-interest income by $2.0 million, or 11%, mostly due to lower other service fees by $1.5 million, mostly related to debit card fees and lower other operating income by $1.2 million principally associated with changes in credit risk valuation adjustments on interest rate swaps; and

 

131


Table of Contents
   

higher operating expenses by $3.7 million, or 6%, mainly due to higher other operating expenses by $3.5 million, which included a $3.1 million legal settlement, higher personnel costs by $2.5 million in part due to higher headcount and benefit accruals, and higher other real estate owned costs by $1.8 million. These negative variances were partially offset by lower FDIC deposit insurance assessments by $3.0 million and net occupancy expenses by $1.0 million.

FINANCIAL CONDITION ANALYSIS

Assets

The Corporation’s total assets were $37.0 billion at March 31, 2012, $37.3 billion at December 31, 2011, and $38.8 billion at March 31, 2011. Refer to the consolidated financial statements included in this report for the Corporation’s consolidated statements of financial condition as of such dates.

Trading and Investment securities

Trading account securities amounted to $404 million at March 31, 2012, compared with $436 million at December 31, 2011 and $635 million at March 31, 2011. The decrease in trading account securities from March 31, 2011 to March 31, 2012 was principally due to the sale of mortgage-backed securities in September 2011. The sale was made to take advantage of favorable market conditions for the securities and the proceeds were used to repay short-term debt.

Table 6 provides a breakdown of the Corporation’s portfolio of investment securities available-for-sale (“AFS”) and held-to-maturity (“HTM”) on a combined basis. Also, Notes 5 and 6 to the consolidated financial statements provide additional information with respect to the Corporation’s investment securities AFS and HTM.

Table 6 - Breakdown of investment securities available-for-sale and held-to-maturity

 

(In millions)

   March
31, 2012
     December
31, 2011
     Variance     March
31, 2011
     Variance  

U.S. Treasury securities

   $ 38.1      $ 38.7      $ (0.6   $ 62.4      $ (24.3

Obligations of U.S. Government sponsored entities

     1,091.8        985.5        106.3       1,461.1        (369.3

Obligations of Puerto Rico, States and political subdivisions

     154.6        157.7        (3.1     143.3        11.3  

Collateralized mortgage obligations

     1,913.6        1,755.6        158.0       1,684.7        228.9  

Mortgage-backed securities

     2,004.5        2,139.6        (135.1     2,413.4        (408.9

Equity securities

     7.5        6.9        0.6       9.4        (1.9

Others

     52.9        51.2        1.7       54.1        (1.2
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total investment securities AFS and HTM

   $ 5,263.0      $ 5,135.2      $ 127.8     $ 5,828.4      $ (565.4
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

The increase in investment securities from December 31, 2011 to March 31, 2012 was related to purchases of investment securities by the BPNA reportable segment in order to deploy excess liquidity, mainly in the form of U.S. Government agency-issued collateralized mortgage obligations and U.S. agency securities.

The decrease in investment securities from March 31, 2011 to the same date in 2012 was mainly due to maturities and to prepayments of mortgage related investment securities, which funds were not reinvested due to deleveraging strategies. Also contributing to the decrease was the sale of $234 million in FHLB notes by BPPR during the third quarter of 2011. These decreases were partially offset by purchases of investment securities by the BPNA reportable segment to deploy excess liquidity.

Loans

Refer to Table 7, for a breakdown of the Corporation’s loan portfolio, the principal category of earning assets. Loans covered under the FDIC loss sharing agreements are presented in a separate line item in Table 7. The risks on covered loans are significantly different as a result of the loss protection provided by the FDIC.

In general, the changes in most loan categories generally reflect soft loan demand, the impact of loan charge-offs, portfolio run-off of the exited loan origination channels at the BPNA reportable segment and loan sales. The decreases were partially offset by mortgage loan growth in the Puerto Rico operations due to loans repurchased under credit recourse agreements, loan acquisitions and loan originations.

 

132


Table of Contents

Table 7 - Loans ending balances

 

(in thousands)

   March 31,
2012
     December 31,
2011
     Variance
March 31,
2012 Vs.
December 31,
2011
    March 31,
2011
     Variance
March 31,

2012 Vs.
March 31, 2011
 

Loans not covered under FDIC loss sharing agreements:

             

Commercial

   $ 9,868,242      $ 9,973,327      $ (105,085   $ 10,401,285      $ (533,043

Construction

     236,579        239,939        (3,360     289,883        (53,304

Legacy[2]

     603,874        648,409        (44,535     898,772        (294,898

Lease financing

     543,314        548,706        (5,392     565,881        (22,567

Mortgage

     5,591,745        5,518,460        73,285       4,895,682        696,063  

Consumer

     3,634,920        3,673,755        (38,835     3,625,286        9,634  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total non-covered loans held-in-portfolio

     20,478,674        20,602,596        (123,922     20,676,789        (198,115

Loans covered under FDIC loss sharing agreements[1]

     4,221,788        4,348,703        (126,915     4,729,550        (507,762
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total loans held-in-portfolio

     24,700,462        24,951,299        (250,837     25,406,339        (705,877
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Loans held-for-sale:

             

Commercial

     25,994        26,198        (204     61,276        (35,282

Construction

     206,246        236,045        (29,799     392,113        (185,867

Mortgage

     129,356        100,850        28,506       116,289        13,067  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total loans held-for-sale

     361,596        363,093        (1,497     569,678        (208,082
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total loans

   $ 25,062,058      $ 25,314,392      $ (252,334   $ 25,976,017      $ (913,959
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

[1] Refer to Note 7 to the consolidated financial statements for the composition of the loans covered under FDIC loss sharing agreements.

[2] The legacy portfolio is comprised of commercial loans, construction loans and lease financings related to certain lending products exited by the Corporation as part of restructuring efforts carried out in prior years at the BPNA reportable segment.

 

The explanations for loan portfolio variances discussed below exclude the impact of the covered loans.

The decrease in commercial loans held-in-portfolio from December 31, 2011 to March 31, 2012 was reflected in the BPPR and BPNA reportable segments by $41 million and $64 million, respectively. The decrease was principally the result of portfolio runoff and charge-offs exceeding current year originations. Commercial loans held-in-portfolio at the BPPR and BPNA reportable segments declined by $233 million and $300 million, respectively, from March 31, 2011 to the same date in 2012, which was influenced by the same factors described above.

The BPNA legacy portfolio (refer to footnote 2 in Table 7) reflected declines in commercial loans of $24 million, construction loans of $18 million and lease financings of $3 million from December 31, 2011 to March 31, 2012. These declines were principally related to portfolio run-off. From March 31, 2011 to the same date in 2012, this legacy portfolio experienced declines in commercial loans of $185 million, construction loans of $96 million and lease financings of $14 million.

The decline in the lease financing portfolio corresponded to the BPPR reportable segment since BPNA’s lease financing portfolio is classified as legacy assets. The decline in the Puerto Rico operation is due to a general slowdown in originations.

The increase in mortgage loans held-in-portfolio from December 31, 2011 to March 31, 2012 was principally in the BPPR reportable segment by $71 million mainly associated with loan repurchases under credit recourse agreements, many of which are put under the Corporation’s loss mitigation programs, and loans purchased and originated, partially offset by collections and charge-offs. The Corporation has been successful in maintaining strong origination volumes prompted by government programs to incentivize housing demand and the continuous low interest rate environment. Most new production is securitized into mortgage-backed securities in the secondary markets. The BPNA reportable segment executed purchases of mortgage loans of approximately $21 million during the first quarter of 2012 as part of the Corporation’s strategy to replace loan portfolio run-off with high-quality assets with an adequate return; however, the increase from the loan purchase was offset mostly by loan repayments in the existing portfolio.

 

133


Table of Contents

The increase in the mortgage loans held-in-portfolio from March 31, 2011 to the same date in 2012 was mainly related to the BPPR reportable segment which increased by $729 million mostly from performing loans acquired from another financial institution in Puerto Rico during 2011, loans repurchased under credit recourse arrangements and volume of non-conforming residential mortgage loans originated from residential projects financed by BPPR which were retained in portfolio. This increase in mortgage loans was partially offset by a decline of $33 million in the BPNA reportable segment resulting from collections and charge-offs.

The decrease in consumer loans from December 31, 2011 to March 31, 2012 was derived from the BPPR reportable segment by $19 million and the BPNA reportable segment by $20 million. The decrease in the BPPR reportable segment is mostly attributable to charge-offs in the credit cards and personal loan portfolios. The decrease in the BPNA reportable segment was mainly due to loan run-off of the exited lines of business, including E-LOAN, and charge-offs.

The increase in consumer loans from March 31, 2011 to March 2012 was mainly due to an increase in the BPPR reportable segment of $99 million, mostly due to the acquisition of the AAdvantage co-branded credit card portfolio in August 2011, partially offset by a reduction of $89 million in the BPNA reportable segment mainly due to portfolio run-off at the exited lines of business, including E-LOAN.

The decrease in commercial and construction loans held-for-sale loans from March 31, 2011 to March 31, 2012 was principally driven by the BPPR reportable segment resulting from the loan sale executed in September 2011 to the joint venture PRLC Holdings LLC and to loan collections.

Covered loans were initially recorded at fair value. Their carrying value was approximately $4.2 billion at March 31, 2012, of which approximately 58% pertained to commercial loans, 13% to construction loans, 27% to mortgage loans and 2% to consumer loans. Note 7 to the consolidated financial statements presents the carrying amount of the covered loans broken down by major loan type categories. A substantial amount of the covered loans, or approximately $3.9 billion of their carrying value at March 31, 2012, was accounted for under ASC Subtopic 310-30. The decline in covered loans from December 31, 2011 and March 31, 2011 to March 31, 2012 was principally due to collections, partially offset by discount accretion. The increase in the accretable yield as shown in Table 8 from December 31, 2011 to March 31, 2012 was mainly due to increased cash flow expectations on the loan pools based on quarterly revisions of the portfolio. The increase in the accretable discount is recognized as interest income using the effective yield method over the estimated life of each applicable loan pool.

Table 8 - Activity in the carrying amount and accretable yield of covered loans accounted for under ASC 310-30

 

     Quarter ended     Quarter ended     Quarter ended  
     March 31, 2012     December 31, 2011     March 31, 2011  
           Carrying           Carrying           Carrying  
     Accretable     amount     Accretable     amount     Accretable     amount  

(In thousands)

   Yield     of loans     Yield     of loans     Yield     of loans  

Beginning balance

   $ 1,470,259     $ 3,952,994     $ 1,496,565     $ 4,076,913     $ 1,331,108     $ 4,539,928  

Accretion

     (69,337     69,337       (82,866     82,866       (72,932     72,932  

Changes in expected cash flows

     141,597         56,560        

Collections

       (127,426       (123,308       (189,364
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 1,542,519     $ 3,894,905     $ 1,470,259     $ 4,036,471     $ 1,258,176     $ 4,423,496  

Allowance for loan losses (ALLL)

       (94,559       (83,477       (5,297
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance, net of ALLL

   $ 1,542,519     $ 3,800,346     $ 1,470,259     $ 3,952,994     $ 1,258,176     $ 4,418,199  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

134


Table of Contents

Table 9 sets forth the activity in the FDIC loss share asset for the quarters ended March 31, 2012 and 2011. The FDIC loss share indemnification asset is recognized on the same basis as the assets subject to the loss share protection from the FDIC, except that the amortization / accretion terms differ. Decreases in expected reimbursements from the FDIC due to improvements in expected cash flows to be received from borrowers, as compared with the initial estimates, are recognized as a reduction to non-interest income prospectively over the life of the loss share agreements. This is because the indemnification asset balance is being reduced to the expected reimbursement amount from the FDIC.

Table 9 - Activity of loss share asset

 

     For the quarter ended March 31,  

(In thousands)

   2012     2011  

Balance at beginning of year

   $ 1,915,128     $ 2,410,219  

(Amortization) accretion of loss share indemnification asset, net

     (29,375     25,796  

Credit impairment losses to be covered under loss sharing agreements

     13,422       12,445  

Decrease due to reciprocal accounting on the discount accretion for loans and unfunded

    

commitments accounted for under ASC Subtopic 310-20

     (248     (21,465

Payments received from FDIC under loss sharing agreements

     (20,896     (583

Other adjustments attributable to FDIC loss sharing agreements

     2,326       (107
  

 

 

   

 

 

 

Balance at March 31

   $ 1,880,357     $ 2,426,305  
  

 

 

   

 

 

 

Other assets

Table 10 provides a breakdown of the principal categories that comprise the caption of “Other assets” in the consolidated statements of condition at March 31, 2012, December 31, 2011 and March 31, 2011.

Table 10 - Breakdown of other assets

 

(In thousands)

   March 31,
2012
     December 31,
2011
     Variance
March 31, 2012
vs. December
31, 2011
    March 31,
2011
     Variance
March 31, 2012
vs. March 31,
2011
 

Net deferred tax assets (net of valuation allowance)

   $ 424,193      $ 429,691      $ (5,498   $ 250,568      $ 173,625  

Investments under the equity method

     335,762        313,152        22,610       294,559        41,203  

Bank-owned life insurance program

     238,870        238,077        793       239,103        (233

Prepaid FDIC insurance assessment

     34,634        58,082        (23,448     129,093        (94,459

Other prepaid expenses

     69,524        77,335        (7,811     66,719        2,805  

Derivative assets

     58,604        61,886        (3,282     65,169        (6,565

Securities sold not yet delivered

     71,007        69,535        1,472       37,752        33,255  

Others

     206,938        214,635        (7,697     231,776        (24,838
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total other assets

   $ 1,439,532      $ 1,462,393      $ (22,861   $ 1,314,739      $ 124,793  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

The decrease in other assets from December 31, 2011 to March 31, 2012 included a reduction in the prepaid FDIC insurance assessment due to amortization. This decrease was in part offset by higher investments accounted for under the equity method, mainly related to the 24.9% equity participation in PRLP 2011 Holdings LLC, the joint venture that holds the construction and commercial loans sold during 2011.

Other assets increased from March 31, 2011 to the same date in 2012, mainly as a result of higher net deferred tax assets, principally related to the allowance for loan losses and the treatment of charge-offs for tax purposes after the agreement reached between the Puerto Rico Treasury Department and the Corporation during mid-2011, offset in part by an increase in the deferred tax liability related to the Westernbank FDIC-assisted transaction. The increase in the investments accounted for under the equity method was impacted by the 24.9% ownership interest in PRLP 2011 Holdings LLS which amounted to $43 million at March 31, 2012, and an increase in the equity investment in Centro Financiero BHD, S.A of $12 million, partially offset by a decrease in the equity investment in EVERTEC, net of intra-entity eliminations, of $11 million. The increase in securities sold not yet delivered corresponded to transactions that settle shortly after quarter end. These increases were partially offset by a reduction in the prepaid FDIC insurance assessment due to amortization.

 

135


Table of Contents

Deposits and Borrowings

The composition of the Corporation’s financing to total assets at March 31, 2012 and December 31, 2011 is included in Table 11.

Table 11 - Financing to Total Assets

 

(In millions)

   March 31,
2012
     December 31,
2011
     % increase (decrease)
from 2011 to 2012
    % of total assets
2012
    2011  

Non-interest bearing deposits

   $ 5,367      $ 5,655        (5.1 )%      14.5      15.1 

Interest-bearing core deposits

     15,958        15,690        1.7       43.1       42.0  

Other interest-bearing deposits

     5,873        6,597        (11.0     15.9       17.7  

Repurchase agreements

     2,114        2,141        (1.3     5.7       5.7  

Other short-term borrowings

     751        296        153.7       2.0       0.8  

Notes payable

     1,844        1,856        (0.6     5.0       5.0  

Others

     1,175        1,194        (1.6     3.2       3.2  

Stockholders’ equity

     3,967        3,919        1.2       10.7       10.5  

Deposits

A breakdown of the Corporation’s deposits at period-end is included in Table 12.

Table 12 - Deposits ending balances

 

(In thousands)

   March 31,
2012
     December 31,
2011
     Variance
March 31,
2012 vs.
December
31, 2011
    March 31,
2011
     Variance
March 31,
2012 vs.
March 31,
2011
 

Demand deposits [1]

   $ 6,013,009      $ 6,256,530      $ (243,521   $ 5,496,313      $ 516,696  

Savings, NOW and money market deposits (non-brokered)

     11,048,140        10,762,869        285,271       10,633,029        415,111  

Savings, NOW and money market deposits (brokered)

     212,996        212,688        308       50,000        162,996  

Time deposits (non-brokered)

     7,186,826        7,552,434        (365,608     8,565,437        (1,378,611

Time deposits (brokered CDs)

     2,736,765        3,157,606        (420,841     2,451,895        284,870  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total deposits

   $ 27,197,736      $ 27,942,127      $ (744,391   $ 27,196,674      $ 1,062  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

[1] Includes interest and non-interest bearing demand deposits.

 

 

The decrease in demand deposits from December 31, 2011 to March 31, 2012 of $244 million was principally related to lower balance of deposits in trust by $561 million, partially offset by an increase in commercial accounts. The deposits in trust outstanding as of December 31, 2011 were short-term and were mostly associated with certain Puerto Rico government bond issuances. Brokered time deposits decreased by $421 million, primarily at Banco Popular de Puerto Rico. The Corporation raised brokered deposits in the latter months of 2011 to fund the repayment of the outstanding balance of the note that was issued to the FDIC as part of the Westernbank FDIC-assisted transaction. Following the repayment of the FDIC note, the use of brokered deposits was anticipated to fall and the funds were replaced with FHLB advances. The decrease in non-brokered time deposits of $366 million was principally at BPPR, in part due to lower deposit rate offerings more in line with market rates. Despite the decrease, the Corporation has successfully maintained the Corporation’s main relationships and has been able to substitute funds with other deposit types at lower rates. Also, lower deposit costs have contributed favorably to maintain the Corporation’s net interest margin above 4%. These decreases were partially offset by an increase of $286 million in total savings, NOW and money market deposits, both from the retail and commercial sectors.

 

136


Table of Contents

Borrowings

The Corporation’s borrowings amounted to $4.7 billion at March 31, 2012, compared with $4.3 billion at December 31, 2011 and $6.7 billion at March 31, 2011. The increase from December 31, 2011 to March 31, 2012 was related to higher short-term borrowings of $455 million, primarily in FHLB advances that substituted previous funding through brokered deposits. The decrease in borrowings from March 31, 2011 to the same date in 2012 was mostly related to a reduction of $2.0 billion in the note issued to the FDIC as part of the Westernbank transaction, which was fully repaid as of the end of 2011. Refer to Note 14 to the consolidated financial statements for detailed information on the Corporation’s borrowings at March 31, 2012, December 31, 2011 and March 31, 2011. Also, refer to the Liquidity section in this MD&A for additional information on the Corporation’s funding sources.

Other liabilities

The increase in other liabilities from March 31, 2011 to March 31, 2012 resulted from an increase in the pension plan liability by $120 million primarily due to a lower discount rate and rate of return on plan assets assumed for 2012.

Stockholders’ Equity

Stockholders’ equity totaled $4.0 billion at March 31, 2012, $3.9 billion at December 31, 2011, and $3.8 billion at March 31, 2011. The increase from December 31, 2011 and March 31, 2011 was principally due to internal capital generation. The accumulated deficit was reduced by $47 million and $173 million, respectively. Refer to the consolidated statements of financial condition and of stockholders’ equity for information on the composition of stockholders’ equity. Also, the disclosures of accumulated other comprehensive income (loss), an integral component of stockholders’ equity, are included in the consolidated statements of comprehensive loss.

REGULATORY CAPITAL

The Corporation continues to exceed the well-capitalized guidelines under the federal banking regulations. The regulatory capital ratios and amounts of total risk-based capital, Tier 1 risk-based capital and Tier 1 leverage at March 31, 2012, December 31, 2011, and March 31, 2011 are presented on Table 13. As of such dates, BPPR and BPNA were well-capitalized.

Table 13 - Capital adequacy data

 

(Dollars in thousands)

   March 31,
2012
    December 31,
2011
    March 31,
2011
 

Risk-based capital:

      

Tier I capital

   $ 3,951,825     $ 3,899,593     $ 3,849,940  

Supplementary (Tier II) capital

     306,576       312,477       322,417  
  

 

 

   

 

 

   

 

 

 

Total capital

   $ 4,258,401     $ 4,212,070     $ 4,172,357  
  

 

 

   

 

 

   

 

 

 

Risk-weighted assets:

      

Balance sheet items

   $ 21,400,311     $ 21,775,369     $ 22,367,818  

Off-balance sheet items

     2,534,568       2,638,954       2,917,145  
  

 

 

   

 

 

   

 

 

 

Total risk-weighted assets

   $ 23,934,879     $ 24,414,323     $ 25,284,963  
  

 

 

   

 

 

   

 

 

 

Average assets

   $ 35,598,843     $ 35,783,749     $ 37,921,729  
  

 

 

   

 

 

   

 

 

 

Ratios:

      

Tier I capital (minimum required – 4.00%)

     16.51      15.97      15.23 

Total capital (minimum required – 8.00%)

     17.79       17.25       16.50  

Leverage ratio *

     11.10       10.90       10.15  

 

* All banks are required to have minimum tier I leverage ratio of 3% or 4% of adjusted quarterly average assets, depending on the bank’s classification. At March 31, 2012 the capital adequacy minimum requirement for Popular, Inc., was (in thousands): Total Capital of $1,914,790, Tier I Capital of $957,395, and Tier I Leverage of $1,067,965, based on a 3% ratio, or $1,423,954, based on a 4% ratio, according to the Bank’s classification.

 

 

137


Table of Contents

The improvement in the Corporation’s regulatory capital ratios from December 31, 2011 to March 31, 2012 was principally due to a reduction in assets, changes in balance sheet composition including the increase in lower risk-assets such as mortgage loans, and internal capital generation.

In accordance with the Federal Reserve Board guidance, the trust preferred securities represent restricted core capital elements and qualify as Tier 1 capital, subject to certain quantitative limits. The aggregate amount of restricted core capital elements that may be included in the Tier 1 capital of a banking organization must not exceed 25% of the sum of all core capital elements (including cumulative perpetual preferred stock and trust preferred securities). At March 31, 2012, December 31, 2011 and March 31, 2011, the Corporation’s restricted core capital elements did not exceed the 25% limitation. Thus, all trust preferred securities were allowed as Tier 1 capital. Amounts of restricted core capital elements in excess of this limit generally may be included in Tier 2 capital, subject to further limitations. Effective March 31, 2011, the Federal Reserve Board revised the quantitative limit which would limit restricted core capital elements included in the Tier 1 capital of a bank holding company to 25% of the sum of core capital elements (including restricted core capital elements), net of goodwill less any associated deferred tax liability. Furthermore, the Dodd-Frank Act, enacted in July 2010, has a provision to effectively phase-out the use of trust preferred securities issued before May 19, 2010 as Tier 1 capital over a 3-year period commencing on January 1, 2013. Trust preferred securities issued on or after May 19, 2010 no longer qualify as Tier 1 capital. At March 31, 2012, the Corporation had $427 million in trust preferred securities (capital securities) that are subject to the phase-out. The Corporation has not issued any trust preferred securities since May 19, 2010. At March 31, 2012, the remaining $935 million in trust preferred securities corresponded to capital securities issued to the U.S. Treasury pursuant to the Emergency Economic Stabilization Act of 2008. The Dodd-Frank Act includes an exemption from the phase-out provision that applies to these capital securities.

The Corporation’s tangible common equity to tangible assets ratio was 8.83% at March 31, 2012 and 8.62% at December 31, 2011. The Corporation’s Tier 1 common equity to risk-weighted assets ratio was 12.53% at March 31, 2012, compared with 12.10% at December 31, 2011.

The tangible common equity ratio and tangible book value per common share, which are presented in the table that follows, are non-GAAP measures. Management and many stock analysts use the tangible common equity ratio and tangible book value per common share in conjunction with more traditional bank capital ratios to compare the capital adequacy of banking organizations with significant amounts of goodwill or other intangible assets, typically stemming from the use of the purchase accounting method of accounting for mergers and acquisitions. Neither tangible common equity nor tangible assets or related measures should be considered in isolation or as a substitute for stockholders’ equity, total assets or any other measure calculated in accordance with generally accepted accounting principles in the United States of America (“GAAP”). Moreover, the manner in which the Corporation calculates its tangible common equity, tangible assets and any other related measures may differ from that of other companies reporting measures with similar names.

Table 14 provides a reconciliation of total stockholders’ equity to tangible common equity and total assets to tangible assets at March 31, 2012 and December 31, 2011.

 

Table 14 - Reconciliation of tangible common equity and tangible assets

 

 

(In thousands, except share or per share information)

   March 31,
2012
    December 31,
2011
 

Total stockholders’ equity

   $ 3,967,071     $ 3,918,753  

Less: Preferred stock

     (50,160     (50,160

Less: Goodwill

     (647,911     (648,350

Less: Other intangibles

     (61,798     (63,954
  

 

 

   

 

 

 

Total tangible common equity

   $ 3,207,202     $ 3,156,289  
  

 

 

   

 

 

 

Total assets

   $ 37,049,221     $ 37,348,432  

Less: Goodwill

     (647,911     (648,350

Less: Other intangibles

     (61,798     (63,954
  

 

 

   

 

 

 

Total tangible assets

   $ 36,339,512     $ 36,636,128  
  

 

 

   

 

 

 

Tangible common equity to tangible assets

     8.83      8.62 

Common shares outstanding at end of period

     1,027,117,068       1,025,904,567  

Tangible book value per common share

   $ 3.12     $ 3.08  

 

138


Table of Contents

The Tier 1 common equity to risk-weighted assets ratio is another non-GAAP measure. Ratios calculated based upon Tier 1 common equity have become a focus of regulators and investors, and management believes ratios based on Tier 1 common equity assist investors in analyzing the Corporation’s capital position. In connection with the Supervisory Capital Assessment Program (“SCAP”), the Federal Reserve Board began supplementing its assessment of the capital adequacy of a bank holding company based on a variation of Tier 1 capital, known as Tier 1 common equity.

Because Tier 1 common equity is not formally defined by GAAP or, unlike Tier 1 capital, codified in the federal banking regulations, this measure is considered to be a non-GAAP financial measure. Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied and are not audited. To mitigate these limitations, the Corporation has procedures in place to calculate these measures using the appropriate GAAP or regulatory components. Although these non-GAAP financial measures are frequently used by stakeholders in the evaluation of a company, they have limitations as analytical tools, and should not be considered in isolation, or as a substitute for analyses of results as reported under GAAP.

Table 15 provides a reconciliation of the Corporation’s total common stockholders’ equity (GAAP) to Tier 1 common equity at March 31, 2012 and December 31, 2011, as defined by the Federal Reserve Board, FDIC and other bank regulatory agencies (non-GAAP).

 

Table 15 - Reconciliation Tier 1 common equity

 

            

(In thousands)

   March 31,
2012
    December 31,
2011
 

Common stockholders’ equity

   $ 3,916,911     $ 3,868,593  

Less: Unrealized gains on available-for-sale securities, net of tax[1]

     (196,878     (203,078

Less: Disallowed deferred tax assets[2]

     (257,440     (249,325

Less: Intangible assets:

    

Goodwill

     (647,911     (648,350

Other disallowed intangibles

     (26,149     (29,655

Less: Aggregate adjusted carrying value of all non-financial equity investments

     (1,175     (1,189

Add: Pension liability adjustment, net of tax and accumulated net gains (losses) on cash flow hedges[3]

     211,747       216,798  
  

 

 

   

 

 

 

Total Tier 1 common equity

   $ 2,999,105     $ 2,953,794  
  

 

 

   

 

 

 

 

[1] In accordance with regulatory risk-based capital guidelines, Tier 1 capital excludes net unrealized gains (losses) on available-for-sale debt securities and net unrealized gains on available-for-sale equity securities with readily determinable fair values. In arriving at Tier 1 capital, institutions are required to deduct net unrealized losses on available-for-sale equity securities with readily determinable fair values, net of tax.
[2] Approximately $138 million of the Corporation’s $424 million of net deferred tax assets at March 31, 2012 ($150 million and $430 million, respectively, at December 31, 2011), were included without limitation in regulatory capital pursuant to the risk-based capital guidelines, while approximately $257 million of such assets at March 31, 2012 ($249 million at December 31, 2011) exceeded the limitation imposed by these guidelines and, as “disallowed deferred tax assets”, were deducted in arriving at Tier 1 capital. The remaining $29 million of the Corporation’s other net deferred tax assets at March 31, 2012 ($31 million at December 31, 2011) represented primarily the following items (a) the deferred tax effects of unrealized gains and losses on available-for-sale debt securities, which are permitted to be excluded prior to deriving the amount of net deferred tax assets subject to limitation under the guidelines; (b) the deferred tax asset corresponding to the pension liability adjustment recorded as part of accumulated other comprehensive income; and (c) the deferred tax liability associated with goodwill and other intangibles.
[3] The Federal Reserve Board has granted interim capital relief for the impact of pension liability adjustment.

 

 

Contractual Obligations and Commercial Commitments

The Corporation has various financial obligations, including contractual obligations and commercial commitments, which require future cash payments on debt and lease agreements. Also, in the normal course of business, the Corporation enters into contractual arrangements whereby it commits to future purchases of products or services from third parties. Obligations that are legally binding agreements, whereby the Corporation agrees to purchase products or services with a specific minimum quantity defined at a fixed, minimum or variable price over a specified period of time, are defined as purchase obligations.

Purchase obligations include major legal and binding contractual obligations outstanding at March 31, 2012, primarily for services, equipment and real estate construction projects. Services include software licensing and maintenance, facilities maintenance, supplies purchasing, and other goods or services used in the operation of the business. Generally, these contracts are renewable or cancelable at least annually, although in some cases the Corporation has committed to contracts that may extend for several years to secure favorable pricing concessions.

 

139


Table of Contents

The Corporation also enters into derivative contracts under which it is required either to receive or pay cash, depending on changes in interest rates. These contracts are carried at fair value on the consolidated statement of financial condition with the fair value representing the net present value of the expected future cash receipts and payments based on market rates of interest as of the statement of condition date. The fair value of the contract changes daily as interest rates change. The Corporation may also be required to post additional collateral on margin calls on the derivatives and repurchase transactions.

At March 31, 2012, the aggregate contractual cash obligations, including purchase obligations and borrowings, by maturities, have not changed significantly from December 31, 2011. Refer to Note 14 for a breakdown of long-term borrowings by maturity.

The Corporation utilizes lending-related financial instruments in the normal course of business to accommodate the financial needs of its customers. The Corporation’s exposure to credit losses in the event of nonperformance by the other party to the financial instrument for commitments to extend credit, standby letters of credit and commercial letters of credit is represented by the contractual notional amount of these instruments. The Corporation uses credit procedures and policies in making those commitments and conditional obligations as it does in extending loans to customers. Since many of the commitments may expire without being drawn upon, the total contractual amounts are not representative of the Corporation’s actual future credit exposure or liquidity requirements for these commitments.

The following table presents the contractual amounts related to the Corporation’s off-balance sheet lending and other activities at March 31, 2012.

 

Table 16 - Off-Balance sheet lending and other activities  
     Amount of commitment - Expiration Period  

(In millions)

   Remaining
2012
     Years 2013 -
2015
     Years 2016 -
2018
     Years 2019 -
thereafter
     Total  

Commitments to extend credit

   $ 5,994      $ 352      $ 386      $ 89      $ 6,821  

Commercial letters of credit

     12        —           —           —           12  

Standby letters of credit

     100        21        11        —           132  

Commitments to originate mortgage loans

     56        11        —           —           67  

Unfunded investment obligations

     1        9        —           —           10  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,163      $ 393      $ 397      $ 89      $ 7,042  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At March 31, 2012, the Corporation maintained a reserve of approximately $9 million for potential losses associated with unfunded loan commitments related to commercial and consumer lines of credit, including $3 million of the unamortized balance of the contingent liability on unfunded loan commitments recorded with the Westernbank FDIC-assisted transaction. 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 Corporation’s allowance for loan losses methodology. This reserve for unfunded loan commitments remains separate and distinct from the allowance for loan losses and is reported as part of other liabilities in the consolidated statement of financial condition.

Refer to Note 18 to the consolidated financial statements for additional information on credit commitments and contingencies.

Guarantees associated with loans sold / serviced

At March 31, 2012, the Corporation serviced $3.3 billion in residential mortgage loans subject to lifetime credit recourse provisions, principally loans associated with FNMA and FHLMC residential mortgage loan securitization programs, compared with $3.5 billion at December 31, 2011. The Corporation’s last sale of mortgage loans subject to credit recourse was in 2009.

In the event of any customer default, pursuant to the credit recourse provided, the Corporation is required to repurchase the loan or reimburse the third party investor for the incurred loss. The maximum potential amount of future payments that the Corporation would be required to make under the recourse arrangements in the event of nonperformance by the borrowers is equivalent to the

 

140


Table of Contents

total outstanding balance of the residential mortgage loans serviced with recourse and interest, if applicable. In the event of nonperformance by the borrower, the Corporation has rights to the underlying collateral securing the mortgage loan. The Corporation suffers losses on these loans when the proceeds from a foreclosure sale of the property underlying a defaulted mortgage loan are less than the outstanding principal balance of the loan plus any uncollected interest advanced and the costs of holding and disposing the related property.

In the case of Puerto Rico, most claims are settled by repurchases of delinquent loans, the majority of which are greater than 90 days past due. The average time period to prepare an initial response to a repurchase request is from 30 to 120 days from the initial written notice depending on the type of the repurchase request. Failure by the Corporation to respond to a request for repurchase on a timely basis could result in a deterioration of the seller/servicer relationship and the seller/servicer’s overall standing. In certain instances, investors could require additional collateral to ensure compliance with the servicer’s repurchase obligation or cancel the seller/servicer license and exercise their rights to transfer the servicing to an eligible seller/servicer.

The table below presents the delinquency status of the residential mortgage loans serviced by the Corporation that are subject to lifetime credit recourse provisions.

 

 

Table 17 - Delinquency of residential mortgage loans subject to lifetime credit recourse  

(In thousands)

   March 31, 2012     December 31, 2011  

Total portfolio

   $ 3,294,451     $ 3,456,933  

Days past due:

    

30 days and over

   $ 467,519     $ 500,524  

90 days and over

   $ 196,335     $ 215,597  

As a percentage of total portfolio:

    

30 days past due or more

     14.19      14.48 

90 days past due or more

     5.96      6.24 

During the quarter ended March 31, 2012, the Corporation repurchased approximately $50 million of unpaid principal balance in mortgage loans subject to the credit recourse provisions, compared with $63 million for the same quarter in the previous year. There are no particular loan characteristics, such as loan vintages, loan type, loan-to-value ratio, or other criteria, that denote any specific trend or a concentration of repurchases in any particular segment. Based on historical repurchase experience, the loan delinquency status is the main factor which causes the repurchase request. The current economic situation has provoked a closer monitoring by investors of loan performance and recourse triggers, thus causing an increase in loan repurchases.

At March 31, 2012, there were 23 outstanding unresolved claims related to the credit recourse portfolio with a principal balance outstanding of $3.5 million, compared with 19 and $2.1 million, respectively, at December 31, 2011. The outstanding unresolved claims at March 31, 2012 pertained to FNMA (December 31, 2011 – pertained to FNMA and FHLMC).

At March 31, 2012, the Corporation’s liability established to cover the estimated credit loss exposure related to loans sold or serviced with credit recourse amounted to $56 million, compared with $59 million at December 31, 2011 and $55 million at March 31, 2011.

Table 18 presents the changes in the Corporation’s liability for estimated losses related to loans serviced with credit recourse provisions for the quarters ended March 31, 2012 and 2011.

 

Table 18 – Activity in credit recourse liability  

(In thousands)

   2012     2011  

Balance as of beginning of period

   $ 58,659     $ 53,729  

Additions for new sales

     —          —     

Provision for recourse liability

     4,232       9,765  

Net charge-offs / terminations

     (6,776     (8,176
  

 

 

   

 

 

 

Balance as of end of period

   $ 56,115     $ 55,318  
  

 

 

   

 

 

 

The decrease of $5.5 million in the provision for credit recourse liability experienced for the quarter ended March 31, 2012, when compared with the same quarter in 2011, was mainly driven by the following positive factors: (1) the improvement in the probability

 

141


Table of Contents

of default (PD) component which decreased by 77 basis points, prompted by an improvement in the credit quality of mortgage loans subject to credit recourse provisions, and (2) an improvement of 72 basis points in the foreclosure rate and (3) the improvement in the constant prepayments rates resulting from the current behavior of the market interest rate scenario.

The estimated losses to be absorbed under the credit recourse arrangements are recorded as a liability when the loans are sold or credit recourse is assumed as part of acquired servicing rights and are updated by accruing or reversing expense (categorized in the line item “adjustments (expense) to indemnity reserves on loans sold” in the consolidated statements of operations) throughout the life of the loan, as necessary, when additional relevant information becomes available. The methodology used to estimate the recourse liability is a function of the recourse arrangements given and considers a variety of factors, which include actual defaults and historical loss experience, foreclosure rate, estimated future defaults and the probability that a loan would be delinquent. Statistical methods are used to estimate the recourse liability. Expected loss rates are applied to different loan segmentations. The expected loss, which represents the amount expected to be lost on a given loan, considers the probability of default and loss severity. The probability of default represents the probability that a loan in good standing would become 90 days delinquent within the following twelve-month period. Regression analysis quantifies the relationship between the default event and loan-specific characteristics, including credit scores, loan-to-value ratios and loan aging, among others.

When the Corporation sells or securitizes mortgage loans, it generally makes customary representations and warranties regarding the characteristics of the loans sold. The Corporation’s mortgage operations in Puerto Rico group conforming mortgage loans into pools which are exchanged for FNMA and GNMA mortgage-backed securities, which are generally sold to private investors, or are sold directly to FNMA or other private investors for cash. As required under the government agency programs, quality review procedures are performed by the Corporation to ensure that asset guideline qualifications are met. To the extent the loans do not meet specified characteristics, the Corporation may be required to repurchase such loans or indemnify for losses and bear any subsequent loss related to the loans. Repurchases under representation and warranty arrangements in which the Corporation’s Puerto Rico banking subsidiaries were obligated to repurchase the loans amounted to $0.4 million in unpaid principal balance with losses amounting to $0.1 million for the quarter ended March 31, 2012. A substantial amount of these loans reinstate to performing status or have mortgage insurance, and thus the ultimate losses on the loans are not deemed significant.

During the quarter ended June 30, 2011, the Corporation’s banking subsidiary, BPPR, reached an agreement (the “June 2011 agreement”) with the FDIC, as receiver for a local Puerto Rico institution, and the financial institution with respect to a loan servicing portfolio that BPPR services since 2008, related to FHLMC and GNMA pools. The loans were originated and sold by the financial institution and the servicing rights were transferred to BPPR in 2008. As part of the 2008 servicing agreement, the financial institution was required to repurchase from BPPR any loans that BPPR, as servicer, was required to repurchase from the investors under representation and warranty obligations. As part of the June 2011 agreement, the Corporation received cash to discharge the financial institution from any repurchase obligation and other claims over the serviced portfolio. At March 31, 2012, the related representation and warranty reserve amounted to $8.6 million and the related serviced portfolio approximated $3.4 billion, compared with $8.5 million and $3.5 billion, respectively, at December 31, 2011.

Servicing agreements relating to the mortgage-backed securities programs of FNMA and GNMA, and to mortgage loans sold or serviced to certain other investors, including FHLMC, require the Corporation to advance funds to make scheduled payments of principal, interest, taxes and insurance, if such payments have not been received from the borrowers. At March 31, 2012, the Corporation serviced $17.2 billion in mortgage loans for third-parties, including the loans serviced with credit recourse, compared with $17.3 billion at December 31, 2011. The Corporation generally recovers funds advanced pursuant to these arrangements from the mortgage owner, from liquidation proceeds when the mortgage loan is foreclosed or, in the case of FHA/VA loans, under the applicable FHA and VA insurance and guarantees programs. However, in the meantime, the Corporation must absorb the cost of the funds it advances during the time the advance is outstanding. The Corporation must also bear the costs of attempting to collect on delinquent and defaulted mortgage loans. In addition, if a defaulted loan is not cured, the mortgage loan would be canceled as part of the foreclosure proceedings and the Corporation would not receive any future servicing income with respect to that loan. At March 31, 2012, the outstanding balance of funds advanced by the Corporation under such mortgage loan servicing agreements was approximately $34 million, compared with $32 million at December 31, 2011. To the extent the mortgage loans underlying the Corporation’s servicing portfolio experience increased delinquencies, the Corporation would be required to dedicate additional cash resources to comply with its obligation to advance funds as well as incur additional administrative costs related to increases in collection efforts.

At March 31, 2012, the Corporation has reserves for customary representations and warranties related to loans sold by its U.S. subsidiary E-LOAN prior to 2009. Loans had been sold to investors on a servicing released basis subject to certain representations and warranties. Although the risk of loss or default was generally assumed by the investors, the Corporation made certain

 

142


Table of Contents

representations relating to borrower creditworthiness, loan documentation and collateral, which if not correct, may result in requiring the Corporation to repurchase the loans or indemnify investors for any related losses associated to these loans. At March 31, 2012 and December 31, 2011, the Corporation’s reserve for estimated losses from such representation and warranty arrangements amounted to $11 million. E-LOAN is no longer originating and selling loans since the subsidiary ceased these activities in 2008 and most of the outstanding agreements with major counterparties were settled during during 2010 and 2011.

On a quarterly basis, the Corporation reassesses its estimate for expected losses associated to E-LOAN’s customary representation and warranty arrangements. The analysis incorporates expectations on future disbursements based on quarterly repurchases and make-whole events. The analysis also considers factors such as the average length of time between the loan’s funding date and the loan repurchase date, as observed in the historical loan data. The liability is estimated as follows: (1) three year average of disbursement amounts (two year historical and one year projected) are used to calculate an average quarterly amount; (2) the quarterly average is annualized and multiplied by the repurchase distance, which currently averages approximately three years, to determine a liability amount; and (3) the calculated reserve is compared to current claims and disbursements to evaluate adequacy. The Corporation’s success rate in clearing the claims in full or negotiating lesser payouts has been fairly consistent. On average, the Corporation avoided paying on 49% of claimed amounts during the 24-month period ended March 31, 2012 (51% during the 24-month period ended December 31, 2011). On the remaining 51% of claimed amounts, the Corporation either repurchased the balance in full or negotiated settlements. For the accounts where the Corporation settled, it averaged paying 57% of claimed amounts during the 24-month period ended March 31, 2012 (59% during the 24-month period ended December 31, 2011). In total, during the 24-month period ended March 31, 2012, the Corporation paid an average of 34% of claimed amounts (24-month period ended December 31, 2011 – 33%).

E-LOAN’s outstanding unresolved claims related to representation and warranty obligations from mortgage loan sales prior to 2009 are presented in the table below.

 

 

Table 19 - ELOAN’s outstanding unresolved claims from loans sold  

(In thousands)

   March 31, 2012      December 31, 2011  

By Counterparty:

     

GSEs

   $ 432      $ 432  

Whole loan and private-label securitization investors

     1,055        360  
  

 

 

    

 

 

 

Total outstanding claims by counterparty

   $ 1,487      $ 792  
  

 

 

    

 

 

 

By Product Type:

     

1st lien (Prime loans)

   $ 1,487      $ 792  
  

 

 

    

 

 

 

Total outstanding claims by product type

   $ 1,487      $ 792  
  

 

 

    

 

 

 

The outstanding claims balance from private-label investors are comprised by one counterparty at March 31, 2012 and at December 31, 2011.

In the case of E-LOAN, the Corporation indemnifies the lender, repurchases the loan, or settles the claim, generally for less than the full amount. Each repurchase case is different and each lender / servicer has different requirements. The large majority of the loans repurchased have been greater than 90 days past due at the time of repurchase and are included in the Corporation’s non-performing loans. Historically, claims have been predominantly for first mortgage agency loans and principally consist of underwriting errors related to undisclosed debt or missing documentation. The table that follows presents the changes in the Corporation’s liability for estimated losses associated with customary representations and warranties related to loans sold by E-LOAN for the quarters ended March 31, 2012 and 2011.

 

143


Table of Contents
Table 20 – Changes in liability for estimated losses related to loans sold by E-LOAN  

(In thousands)

   2012      2011  

Balance as of beginning of period

   $ 10,625      $ 30,659  

Additions for new sales

     —           —     

Provision for representation and warranties

     —           83  

Net charge-offs / terminations

     —           (54

Other - settlements paid

     —           —     
  

 

 

    

 

 

 

Balance as of end of period

   $ 10,625      $ 30,688  
  

 

 

    

 

 

 

MARKET RISK

The financial results and capital levels of Popular, Inc. are constantly exposed to market risk. Market risk represents the risk of loss due to adverse movements in market rates or prices, which include interest rates, foreign exchange rates and equity prices; the failure to meet financial obligations coming due because of the inability to liquidate assets or obtain adequate funding; and the inability to easily unwind or offset specific exposures without significantly lowering prices because of inadequate market depth or market disruptions.

While the Corporation is exposed to various business risks, the risks relating to interest rate risk and liquidity are major risks that can materially impact future results of operations and financial condition due to their complexity and dynamic nature.

The Asset Liability Management Committee (“ALCO”) and the Corporate Finance Group are responsible for planning and executing the Corporation’s market, interest rate risk, funding activities and strategy, and for implementing the policies and procedures approved by the Corporation’s Risk Management Committee. In addition, the Risk Management Group independently monitors and reports adherence with established market and liquidity policies and recommends actions to enhance and strengthen controls surrounding interest, liquidity, and market risks. The ALCO meets on a weekly basis and reviews the Corporation’s current and forecasted asset and liability position as well as desired pricing strategies and other relevant topics. Also, on a monthly basis the ALCO reviews various interest rate risk sensitivities, ratios and portfolio information, including but not limited to, the Corporation’s liquidity positions, projected sources and uses of funds, interest rate risk positions and economic conditions.

Interest rate risk (“IRR”), a component of market risk, is considered by management as a predominant market risk in terms of its potential impact on profitability or market value. For a detailed description of the techniques used to measure the potential impact of the Corporation’s exposure to market risk from changing interest rates refer to the 2011 Annual Report.

Net interest income simulation analysis performed by legal entity and on a consolidated basis is a tool used by the Corporation in estimating the potential change in net interest income resulting from hypothetical changes in interest rates. Sensitivity analysis is calculated using a simulation model which incorporates actual balance sheet figures detailed by maturity and interest yields or costs. It also incorporates assumptions on balance sheet growth and expected changes in its composition, estimated prepayments in accordance with projected interest rates, pricing and maturity expectations on new volumes and other non-interest related data. It is a dynamic process, emphasizing future performance under diverse economic conditions.

Management assesses interest rate risk using various interest rate scenarios that differ in magnitude and direction, the speed of change and the projected shape of the yield curve. For example, the types of interest rate scenarios processed include most likely economic scenarios, flat or unchanged rates, yield curve twists, +/- 200 and + 400 basis points parallel ramps and +/- 200 basis points parallel shocks. Management also performs analyses to isolate and measure basis and prepayment risk exposures. The asset and liability management group also evaluates the reasonableness of assumptions used and results obtained in the monthly sensitivity analyses. Due to the importance of critical assumptions in measuring market risk, the risk models incorporate third-party developed data for critical assumptions such as prepayment speeds on mortgage loans and mortgage-backed securities, estimates on the duration of the Corporation’s deposits and interest rate scenarios.

The Corporation runs net interest income simulations under interest rate scenarios in which the yield curve is assumed to rise and decline gradually by the same amount. The rising rate scenarios considered in these market risk disclosures reflect gradual parallel changes of 200 and 400 basis points during the twelve-month period ending March 31, 2013. Under a 200 basis points rising rate

 

144


Table of Contents

scenario, projected net interest income increases by $30.1 million, while under a 400 basis points rising rate scenario, projected net interest income increases by $44.1 million, when compared against the Corporation’s flat or unchanged interest rates forecast scenario. Given the fact that at March 31, 2012 some market interest rates continued to be close to zero, management has focused on measuring the risk on net interest income in rising rate scenarios. These interest rate simulations exclude the impact on loans accounted pursuant to ASC Subtopic 310-30, whose yields are based on management’s current expectation of future cash flows.

Simulation analyses are based on many assumptions, including relative levels of market interest rates, interest rate spreads, loan prepayments and deposit decay. They should not be relied upon as indicative of actual results. Further, the estimates do not contemplate actions that management could take to respond to changes in interest rates. By their nature, these forward-looking computations are only estimates and may be different from what may actually occur in the future.

The Corporation estimates the sensitivity of economic value of equity (“EVE”) to changes in interest rates. EVE is equal to the estimated present value of the Corporation’s assets minus the estimated present value of the liabilities. This sensitivity analysis is a useful tool to measure long-term IRR because it captures the impact of up or down rate changes in expected cash flows, including principal and interest, from all future periods.

EVE sensitivity calculated using interest rate shock scenarios is estimated on a quarterly basis. The current EVE sensitivity is focused on a rising 200 basis point parallel shock. Management has a defined limit for the increase in EVE sensitivity resulting from the shock scenario.

The Corporation maintains an overall interest rate risk management strategy that incorporates the use of derivative instruments to minimize significant unplanned fluctuations in net interest income or market value that are caused by interest rate volatility. The market value of these derivatives is subject to interest rate fluctuations and counterparty credit risk adjustments which could have a positive or negative effect in the Corporation’s earnings.

Trading

The Corporation engages in trading activities in the ordinary course of business at its subsidiaries, Popular Securities and Popular Mortgage. Popular Securities’ trading activities consist primarily of market-making activities to meet expected customers’ needs related to its retail brokerage business and purchases and sales of U.S. Government and government sponsored securities with the objective of realizing gains from expected short-term price movements. Popular Mortgage’s trading activities consist primarily of holding U.S. Government sponsored mortgage-backed securities classified as “trading” and hedging the related market risk with “TBA” (to-be-announced) market transactions. The objective is to derive spread income from the portfolio and not to benefit from short-term market movements. In addition, Popular Mortgage uses forward contracts or TBAs to hedge its securitization pipeline. Risks related to variations in interest rates and market volatility are hedged with TBAs that have characteristics similar to that of the forecasted security and its conversion timeline.

At March 31, 2012, the Corporation held for trading, securities with a fair value of $404 million, representing approximately 1% of the Corporation’s total assets, compared with $436 million and 1% at December 31, 2011. Mortgage-backed securities represented 87% of the trading portfolio at March 31, 2012, compared with 75% at the end of 2011. The mortgage-backed securities are investment grade securities. Trading instruments are recognized at fair value, with changes resulting from fluctuations in market prices, interest rates or exchange rates reported in current period earnings. The Corporation recognized a net trading account loss of $2.1 million for the quarter ended March 31, 2012. Table 21 provides the composition of the trading portfolio at March 31, 2012 and December 31, 2011.

 

145


Table of Contents

 

Table 21 - Trading Portfolio  
     March 31, 2012     December 31, 2011  

(Dollars in thousands)

   Amount      Weighted
Average Yield [1]
    Amount      Weighted
Average Yield [1]
 

Mortgage-backed securities (includes related trading derivatives)

   $ 352,410        4.42    $ 325,205        4.56 

Collateralized mortgage obligations

     3,484        4.40       3,545        4.69  

Puerto Rico and U.S. Government obligations

     28,038        4.89       90,648        4.87  

Interest-only strips

     1,325        12.94       1,378        12.80  

Other

     19,036        5.94       15,555        4.32  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 404,293        4.55    $ 436,331        4.64 
  

 

 

    

 

 

   

 

 

    

 

 

 

 

[1] Not on a taxable equivalent basis.

 

 

The Corporation’s trading activities are limited by internal policies. For each of the two subsidiaries, the market risk assumed under trading activities is measured by the 5-day net value-at-risk (“VAR”), with a confidence level of 99%. The VAR measures the maximum estimated loss that may occur over a 5-day holding period, given a 99% probability. Under the Corporation’s current policies, trading exposures cannot exceed 2% of the trading portfolio market value of each subsidiary, subject to a cap.

The Corporation’s trading portfolio had a 5-day VAR of approximately $2.2 million, assuming a confidence level of 99%, for the last week in March 2012. There are numerous assumptions and estimates associated with VAR modeling, and actual results could differ from these assumptions and estimates. Backtesting is performed to compare actual results against maximum estimated losses, in order to evaluate model and assumptions accuracy.

In the opinion of management, the size and composition of the trading portfolio does not represent a significant source of market risk for the Corporation.

FAIR VALUE MEASUREMENT OF FINANCIAL INSTRUMENTS

The Corporation currently measures at fair value on a recurring basis its trading assets, available-for-sale securities, derivatives, mortgage servicing rights and contingent consideration. Occasionally, the Corporation may be required to record at fair value other assets on a nonrecurring basis, such as loans held-for-sale, impaired loans held-in-portfolio that are collateral dependent and certain other assets. These nonrecurring fair value adjustments typically result from the application of lower of cost or fair value accounting or write-downs of individual assets.

The Corporation categorizes its assets and liabilities measured at fair value under the three-level hierarchy. The level within the hierarchy is based on whether the inputs to the valuation methodology used for fair value measurement are observable.

Refer to Note 21 to the consolidated financial statements for information on the Corporation’s fair value measurement disclosures required by the applicable accounting standard. At March 31, 2012, approximately $5.6 billion, or 97%, of the assets measured at fair value on a recurring basis used market-based or market-derived valuation inputs in their valuation methodology and, therefore, were classified as Level 1 or Level 2. The majority of instruments measured at fair value were classified as Level 2, including U.S. Treasury securities, obligations of U.S. Government sponsored entities, obligations of Puerto Rico, States and political subdivisions, most mortgage-backed securities (“MBS”) and collateralized mortgage obligations (“CMOs”), and derivative instruments.

At March 31, 2012, the remaining 3% of assets measured at fair value on a recurring basis were classified as Level 3 since their valuation methodology considered significant unobservable inputs. The financial assets measured as Level 3 included mostly tax-exempt GNMA mortgage-backed securities and mortgage servicing rights (“MSRs”). Additionally, the Corporation reported $58 million of financial assets that were measured at fair value on a nonrecurring basis at March 31, 2012, all of which were classified as Level 3 in the hierarchy.

 

146


Table of Contents

Broker quotes used for fair value measurements inherently reflect any lack of liquidity in the market since they represent an exit price from the perspective of the market participants. Financial assets that were fair valued using broker quotes amounted to $42 million at March 31, 2012, of which $26 million were Level 3 assets and $16 million were Level 2 assets. Level 3 assets consisted principally of tax-exempt GNMA mortgage-backed securities. Fair value for these securities was based on an internally-prepared matrix derived from an average of two indicative local broker quotes. The main input used in the matrix pricing was non-binding local broker quotes obtained from limited trade activity. Therefore, these securities were classified as Level 3.

There were $2 million in transfers from Level 2 to Level 3 and $8 million in transfers from Level 3 to Level 2 for financial instruments measured at fair value on a recurring basis during the quarter ended March 31, 2012. The transfers from Level 2 to Level 3 of trading mortgage-backed securities were the result of a change in valuation technique to a matrix pricing model, based on indicative prices provided by brokers. The transfers from Level 3 to Level 2 of trading mortgage-backed securities resulted from observable market data becoming available for these securities. There were no transfers in and/or out of Level 1 during the quarter ended March 31, 2012. Refer to Note 21 to the consolidated financial statements for a description of the Corporation’s valuation methodologies used for the assets and liabilities measured at fair value at March 31, 2012. Also, refer to the Critical Accounting Policies / Estimates in the 2011 Annual Report for additional information on the accounting guidance and the Corporation’s policies or procedures related to fair value measurements.

Trading Account Securities and Investment Securities Available-for-Sale

The majority of the values for trading account securities and investment securities available-for-sale are obtained from third-party pricing services and are validated with alternate pricing sources when available. Securities not priced by a secondary pricing source are documented and validated internally according to their significance to the Corporation’s financial statements. Management has established materiality thresholds according to the investment class to monitor and investigate material deviations in prices obtained from the primary pricing service provider and the secondary pricing source used as support for the valuation results. During the quarter ended March 31, 2012, the Corporation did not adjust any prices obtained from pricing service providers or broker dealers.

Inputs are evaluated to ascertain that they consider current market conditions, including the relative liquidity of the market. When a market quote for a specific security is not available, the pricing service provider generally uses observable data to derive an exit price for the instrument, such as benchmark yield curves and trade data for similar products. To the extent trading data is not available, the pricing service provider relies on specific information including dialogue with brokers, buy side clients, credit ratings, spreads to established benchmarks and transactions on similar securities, to draw correlations based on the characteristics of the evaluated instrument. If for any reason the pricing service provider cannot observe data required to feed its model, it discontinues pricing the instrument. During the quarter ended March 31, 2012, none of the Corporation’s investment securities were subject to pricing discontinuance by the pricing service providers. The pricing methodology and approach of our primary pricing service providers is concluded to be consistent with the fair value measurement guidance.

Furthermore, management assesses the fair value of its portfolio of investment securities at least on a quarterly basis, which includes analyzing changes in fair value that have resulted in losses that may be considered other-than-temporary. Factors considered include, for example, the nature of the investment, severity and duration of possible impairments, industry reports, sector credit ratings, economic environment, creditworthiness of the issuers and any guarantees.

Securities are classified in the fair value hierarchy according to product type, characteristics and market liquidity. At the end of each period, management assesses the valuation hierarchy for each asset or liability measured. The fair value measurement analysis performed by the Corporation includes validation procedures and review of market changes, pricing methodology, assumption and level hierarchy changes, and evaluation of distressed transactions.

At March 31, 2012, the Corporation’s portfolio of trading and investment securities available-for-sale amounted to $5.5 billion and represented 96% of the Corporation’s assets measured at fair value on a recurring basis. At March 31, 2012, net unrealized gains on the trading and available-for-sale investment securities portfolios approximated $24 million and $223 million, respectively. Fair values for most of the Corporation’s trading and investment securities available-for-sale were classified as Level 2. Trading and investment securities available-for-sale classified as Level 3, which were the securities that involved the highest degree of judgment, represented less than 1% of the Corporation’s total portfolio of trading and investment securities available-for-sale.

 

147


Table of Contents

Mortgage Servicing Rights

Mortgage servicing rights (“MSRs”), which amounted to $156 million at March 31, 2012, do not trade in an active, open market with readily observable prices. Fair value is estimated based upon discounted net cash flows calculated from a combination of loan level data and market assumptions. The valuation model combines loans with common characteristics that impact servicing cash flows (e.g. investor, remittance cycle, interest rate, product type, etc.) in order to project net cash flows. Market valuation assumptions include prepayment speeds, discount rate, cost to service, escrow account earnings, and contractual servicing fee income, among other considerations. Prepayment speeds are derived from market data that is more relevant to the U.S. mainland loan portfolios and, thus, are adjusted for the Corporation’s loan characteristics and portfolio behavior since prepayment rates in Puerto Rico have been historically lower. Other assumptions are, in the most part, directly obtained from third-party providers. Disclosure of two of the key economic assumptions used to measure MSRs, which are prepayment speed and discount rate, and a sensitivity analysis to adverse changes to these assumptions, is included in Note 10 to the consolidated financial statements.

Derivatives

Derivatives, such as interest rate swaps, interest rate caps and indexed options, are traded in over-the-counter active markets. These derivatives are indexed to an observable interest rate benchmark, such as LIBOR or equity indexes, and are priced using an income approach based on present value and option pricing models using observable inputs. Other derivatives are liquid and have quoted prices, such as forward contracts or “to be announced securities” (“TBAs”). All of these derivatives held by the Corporation were classified as Level 2. Valuations of derivative assets and liabilities reflect the values associated with counterparty risk and nonperformance risk, respectively. The non-performance risk, which measures the Corporation’s own credit risk, is determined using internally-developed models that consider the net realizable value of the collateral posted, remaining term, and the creditworthiness or credit standing of the Corporation. The counterparty risk is also determined using internally-developed models which incorporate the creditworthiness of the entity that bears the risk, net realizable value of the collateral received, and available public data or internally-developed data to determine their probability of default. To manage the level of credit risk, the Corporation employs procedures for credit approvals and credit limits, monitors the counterparties’ credit condition, enters into master netting agreements whenever possible and, when appropriate, requests additional collateral. During the quarter ended March 31, 2012, inclusion of credit risk in the fair value of the derivatives resulted in a net loss of $0.2 million recorded in the other operating income and interest expense captions of the consolidated statement of operations, which consisted of a gain of $0.1 million resulting from the Corporation’s own credit standing adjustment and a loss of $0.3 million from the assessment of the counterparties’ credit risk.

Loans held-in-portfolio considered impaired under ASC Section 310-10-35 that are collateral dependent

The impairment is based on the fair value of the collateral, which is derived from appraisals that take into consideration prices in observed transactions involving similar assets in similar locations, size and supply and demand. Continued deterioration of the housing markets and the economy in general have adversely impacted and continue to affect the market activity related to real estate properties. These collateral dependent impaired loans are classified as Level 3 and are reported as a nonrecurring fair value measurement.

LIQUIDITY

The objective of effective liquidity management is to ensure that the Corporation has sufficient liquidity to meet all of its financial obligations, finance expected future growth and maintain a reasonable safety margin for cash commitments under both normal and stressed market conditions. An institution’s liquidity may be pressured if, for example, its credit rating is downgraded, it experiences a sudden and unexpected substantial cash outflow, or some other event causes counterparties to avoid exposure to the institution. An institution is also exposed to liquidity risk if the markets on which it depends are subject to occasional disruptions.

Factors that the Corporation does not control, such as the economic outlook of its principal markets and regulatory changes, could affect its ability to obtain funding. In order to prepare for the possibility of such scenario, management has adopted contingency plans for raising financing under stress scenarios when important sources of funds that are usually fully available are temporarily unavailable. These plans call for using alternate funding mechanisms such as the pledging of certain asset classes and accessing secured credit lines and loan facilities put in place with the Federal Home Loan Bank (“FHLB”) and the Federal Reserve Bank of New York (the “Fed”), in addition to maintaining securities available for pledging in the repo markets.

Liquidity is managed by the Corporation at the level of the holding companies that own the banking and non-banking subsidiaries. Also, it is managed at the level of the banking and non-banking subsidiaries. The Corporation has adopted policies and limits to monitor more effectively the Corporation’s liquidity position and that of the banking subsidiaries. Additionally, contingency funding

 

148


Table of Contents

plans are used to model various stress events of different magnitudes and affecting different time horizons that assist management in evaluating the size of the liquidity buffers needed if those stress events occur. However, such models may not predict accurately how the market and customers might react to every event, and are dependent on many assumptions.

Deposits, including customer deposits, brokered deposits, and public funds deposits, continue to be the most significant source of funds for the Corporation, funding 73% of the Corporation’s total assets at March 31, 2012, compared with 75% at December 31, 2011. Refer to the Financial Condition Analysis section of this MD&A for explanations on the variances in the main deposit categories. During 2012, the reduction in deposits, which included brokered deposits, was compensated with funds raised through short-term FHLB advances.

In addition to traditional deposits, the Corporation maintains borrowing arrangements. At March 31, 2012, these borrowings consisted primarily of advances with the FHLB of $1.4 billion, assets sold under agreement to repurchase of $2.1 billion, junior subordinated deferrable interest debentures of $917 million (net of discount) and term notes of $279 million. A detailed description of the Corporation’s borrowings, including their terms, is included in Note 14 to the consolidated financial statements. Also, the consolidated statements of cash flows in the accompanying consolidated financial statements provide information on the Corporation’s cash inflows and outflows.

During 2011 and 2012, the Corporation did not issue new registered debt in the capital markets.

The Corporation’s liquidity position has remained strong. There were no transactions during the first quarter of 2012, outside transactions in the ordinary course of business, that impacted significantly the Corporation’s liquidity position.

Banking Subsidiaries

Primary sources of funding for the Corporation’s banking subsidiaries (BPPR and BPNA), or “the banking subsidiaries,” include retail and commercial deposits, brokered deposits, collateralized borrowings, unpledged investment securities, and, to a lesser extent, loan sales. In addition, the Corporation maintains borrowing facilities with the FHLB and at the Discount Window of the Fed, and has a considerable amount of collateral pledged that can be used to quickly raise funds under these facilities.

The principal uses of funds for the banking subsidiaries include loan originations, investment portfolio purchases, loan purchases and repurchases, repayment of outstanding obligations (including deposits), and operational expenses. Also, the banking subsidiaries assume liquidity risk related to collateral posting requirements for certain activities mainly in connection with contractual commitments, recourse provisions, servicing advances, derivatives, credit card licensing agreements and support to several mutual funds administered by BPPR.

Note 32 to the consolidated financial statements provides a consolidating statement of cash flows which includes the Corporation’s banking subsidiaries as part of the “All other subsidiaries and eliminations” column.

The banking subsidiaries maintain sufficient funding capacity to address large increases in funding requirements such as deposit outflows. This capacity is comprised mainly of available liquidity derived from secured funding sources, as well as on-balance sheet liquidity in the form of cash balances maintained at the Fed and unused secured lines held at the Fed and FHLB, in addition to liquid unpledged securities. The Corporation has established liquidity guidelines that require the banking subsidiaries to have sufficient liquidity to cover all short-term borrowings and a portion of deposits. In addition, the total loan portfolio is funded with deposits.

The Corporation’s ability to compete successfully in the marketplace for deposits, excluding brokered deposits, depends on various factors, including pricing, service, convenience and financial stability as reflected by operating results, credit ratings (by nationally recognized credit rating agencies), and importantly, FDIC deposit insurance. Although a downgrade in the credit ratings of the Corporation’s banking subsidiaries may impact their ability to raise retail and commercial deposits or the rate that it is required to pay on such deposits, management does not believe that the impact should be material. Deposits at all of the Corporation’s banking subsidiaries are federally insured (subject to FDIC limits) and this is expected to mitigate the effect of a downgrade in the credit ratings.

Deposits are a key source of funding as they tend to be less volatile than institutional borrowings and their cost is less sensitive to changes in market rates. Refer to Table 12 for a breakdown of deposits by major types. Core deposits are generated from a large base of consumer, corporate and institutional customers. For purposes of defining core deposits, the Corporation excludes brokered deposits with denominations under $100,000. Core deposits have historically provided the Corporation with a sizable source of relatively stable and low-cost funds. Core deposits totaled $21.3 billion, or 78% of total deposits, at March 31, 2012, compared with $21.3 billion, or 76% of total deposits, at December 31, 2011. Core deposits financed 66% of the Corporation’s earning assets at March 31, 2012 and December 31, 2011.

 

149


Table of Contents

Certificates of deposit with denominations of $100,000 and over at March 31, 2012 totaled $3.9 billion, or 14% of total deposits, compared with $4.2 billion, or 15%, at December 31, 2011. Their distribution by maturity at March 31, 2012 was as follows:

Table 22 - Distribution by maturity of certificate of deposits of $100,000 and over

 

(In thousands)

      

3 months or less

   $ 1,767,374  

3 to 6 months

     717,443  

6 to 12 months

     433,798  

Over 12 months

     938,318  
  

 

 

 
   $ 3,856,933  
  

 

 

 

At March 31, 2012, approximately 8% of the Corporation’s assets were financed by brokered deposits, compared with 9% at December 31, 2011. The Corporation had $2.9 billion in brokered deposits at March 31, 2012, compared with $3.4 billion at December 31, 2011. Brokered deposits, which are typically sold through an intermediary to retail investors, provide access to longer-term funds and provide the ability to raise additional funds without pressuring retail deposit pricing in the Corporation’s local markets. An unforeseen disruption in the brokered deposits market, stemming from factors such as legal, regulatory or financial risks, could adversely affect the Corporation’s ability to fund a portion of the Corporation’s operations and/or meet its obligations.

In the event that any of the Corporation’s banking subsidiaries’ regulatory capital ratios fall below those required by a well-capitalized institution or are subject to capital restrictions by the regulators, that banking subsidiary faces the risk of not being able to raise or maintain brokered deposits and faces limitations on the rate paid on deposits, which may hinder the Corporation’s ability to effectively compete in its retail markets and could affect its deposit raising efforts.

To the extent that the banking subsidiaries are unable to obtain sufficient liquidity through core deposits, the Corporation may meet its liquidity needs through short-term borrowings by pledging securities for borrowings under repurchase agreements, by pledging additional loans and securities through the available secured lending facilities, or by selling liquid assets. These measures are subject to availability of collateral.

The Corporation’s banking subsidiaries have the ability to borrow funds from the FHLB. At March 31, 2012 and December 31, 2011, the banking subsidiaries had credit facilities authorized with the FHLB aggregating $2.5 billion and $2.0 billion, respectively, based on assets pledged with the FHLB at those dates. Outstanding borrowings under these credit facilities totaled $1.4 billion at March 31, 2012 and $0.9 billion at December 31, 2011. Such advances are collateralized by loans held-in-portfolio, do not have restrictive covenants and do not have any callable features. Refer to Note 14 to the consolidated financial statements for additional information on the terms of FHLB advances outstanding.

The banking subsidiaries have borrowing facilities at the Fed’s discount window. The borrowing capacity approximated $3.2 billion at March 31, 2012, compared with $2.6 billion at December 31, 2011, and remained unused as of both dates. These borrowing facilities are a collateralized source of credit that is highly reliable even under difficult market conditions. The amount available under these borrowing facilities is dependent upon the balance of performing loans and securities pledged as collateral and the haircuts assigned to such collateral.

During the quarter ended March 31, 2012, the Corporation’s bank holding companies did not make any capital contributions to BPNA and BPPR.

At March 31, 2012, management believes that the banking subsidiaries had sufficient current and projected liquidity sources to meet their anticipated cash flow obligations, as well as special needs and off-balance sheet commitments, in the ordinary course of business and have sufficient liquidity resources to address a stress event. Although the banking subsidiaries have historically been able to replace maturing deposits and advances if desired, no assurance can be given that they would be able to replace those funds in the future if the Corporation’s financial condition or general market conditions were to change. The Corporation’s financial flexibility will be severely constrained if its banking subsidiaries are unable to maintain access to funding or if adequate financing is not available to accommodate future growth at acceptable interest rates. The banking subsidiaries also are required to deposit cash or qualifying securities to meet margin requirements. To the extent that the value of securities previously pledged as collateral declines because of changes in interest rates, a liquidity crisis or any other factors, the Corporation will be required to deposit additional cash or securities to meet its margin requirements, thereby adversely affecting its liquidity. Finally, if management is required to rely more heavily on more expensive funding sources to support future growth, revenues may not increase proportionately to cover costs. In this case, profitability would be adversely affected.

 

150


Table of Contents

Bank Holding Companies

The Corporation’s bank holding companies (“BHCs”) include Popular, Inc. (“PIHC”), Popular North America, Inc. (“PNA”) and Popular International Bank, Inc. (“PIBI”) The principal sources of funding for the holding companies include cash on hand, investment securities, dividends received from banking and non-banking subsidiaries (subject to regulatory limits and authorizations) and from equity method investees, asset sales, credit facilities available from affiliate banking subsidiaries and proceeds from new borrowings or stock issuances. The Corporation’s banking subsidiaries are required to obtain approval from the Federal Reserve System and their respective applicable state banking regulator prior to declaring or paying dividends to the Corporation.

The principal use of these funds include capitalizing its banking subsidiaries, the repayment of debt, and interest payments to holders of senior debt and junior subordinated deferrable interest debentures (related to trust preferred securities).

Cash outflows and outflows from financing activities at the BHCs during the first quarter of 2012 have not been significant. There was a $50 million capital contribution from PIHC to PNA as part of an internal reorganization. Refer to Note 32 to the consolidated financial statements for a description of the internal reorganization.

Note 32 to the consolidated financial statements provides a consolidating statement of cash flows which includes the Corporation’s holding companies. There were no individual significant cash inflows or outflows outside the normal course of business at the holding companies during the first quarter of 2012. During the first quarter of 2011, the main source of cash flows for the parent holding company was the repayment of loans made to subsidiaries and affiliates, while the principal cash outflow was for the repayment of term notes.

Another use of liquidity at the parent holding company is the payment of dividends on preferred stock. The preferred stock dividends declared amounted to $931 thousand for the quarter ended March 31, 2012, of which $620 thousand were paid during the quarter. The preferred stock dividends paid were financed by issuing new shares of common stock to the participants of the Corporation’s qualified employee savings plans. The Corporation is required to obtain approval from the Federal Reserve System prior to declaring or paying dividends, incurring, increasing or guaranteeing debt or making any distributions on its trust preferred securities or subordinated debt. The Corporation anticipates that any future preferred stock dividend payments would continue to be financed with the issuance of new common stock in connection with its qualified employee savings plans. The Corporation is not paying dividends to holders of its common stock.

The BHCs have in the past borrowed in the money markets and in the corporate debt market primarily to finance their non-banking subsidiaries. These sources of funding have become more costly due to the reductions in the Corporation’s credit ratings together with higher credit spreads in general. The Corporation’s principal credit ratings are below “investment grade” which affects the Corporation’s ability to raise funds in the capital markets. However, the cash needs of the Corporation’s non-banking subsidiaries other than to repay indebtedness and interest are now minimal. The Corporation has an open-ended, automatic shelf registration statement filed and effective with the Securities and Exchange Comission, which permits the Corporation to issue an unspecified amount of debt or equity securities.

A principal use of liquidity at the BHCs is to ensure its banking subsidiaries are adequately capitalized. During 2011 and the first quarter of 2012, the BHCs were not required to make any capital contributions to its banking subsidiaries. Management does not expect either of the banking subsidiaries to require capitalizations for the foreseeable future.

Note 32 to the consolidated financial statements provides a statement of condition, of operations and of cash flows for the three BHCs. The loans held-in-portfolio in such financial statements are principally associated with intercompany transactions. The investment securities held-to-maturity at the parent holding company, amounting to $185 million at March 31, 2012, consisted of subordinated notes from BPPR.

The outstanding balance of notes payable at the BHCs amounted to $1.2 billion at March 31, 2012 and December 31, 2011. These borrowings are principally junior subordinated debentures (related to trust preferred securities), including those issued to the U.S. Treasury as part of the Troubled Asset Relief Program (“TARP”), and unsecured senior debt (term notes). The repayment of the BHCs obligations represents a potential cash need which is expected to be met with internal liquidity resources and new borrowings. Increasing or guaranteeing new debt would be subject to the prior approval from the Fed.

The BHCs liquidity position continues to be adequate with sufficient cash on hand, investments and other sources of liquidity which are expected to be enough to meet all BHCs obligations during the foreseeable future.

As indicated in Note 31 to the consolidated financial statements, in early May 2012, the Corporation received a cash dividend of $131 million from its investment in EVERTEC. As a result of the dividend, the Corporation’s investment in the entity, which as of March 31, 2012 amounted to $192 million (net of intra-entity eliminations), was reduced by the amount of the dividend. The Corporation’s participation interest on the entity continues to be 49%.

 

151


Table of Contents

Obligations Subject to Rating Triggers or Collateral Requirements

The Corporation’s banking subsidiaries currently do not use borrowings that are rated by the major rating agencies, as these banking subsidiaries are funded primarily with deposits and secured borrowings. The banking subsidiaries had $21 million in deposits at March 31, 2012 that are subject to rating triggers.

Some of the Corporation’s derivative instruments include financial covenants tied to the bank’s well-capitalized status and certain formal regulatory actions. These agreements could require exposure collateralization, early termination or both. The fair value of derivative instruments in a liability position subject to financial covenants approximated $52 million at March 31, 2012, with the Corporation providing collateral totaling $65 million to cover the net liability position with counterparties on these derivative instruments.

In addition, certain mortgage servicing and custodial agreements that BPPR has with third parties include rating covenants. Based on BPPR’s failure to maintain the required credit ratings, the third parties have the right to require the institution to engage a substitute cash custodian for escrow deposits and/or increase collateral levels securing the recourse obligations. Also, as discussed in the Guarantees section of this MD&A, the Corporation services residential mortgage loans subject to credit recourse provisions. Certain contractual agreements require the Corporation to post collateral to secure such recourse obligations if the institution’s required credit ratings are not maintained. Collateral pledged by the Corporation to secure recourse obligations approximated $139 million at March 31, 2012. The Corporation could be required to post additional collateral under the agreements. Management expects that it would be able to meet additional collateral requirements if and when needed. The requirements to post collateral under certain agreements or the loss of escrow deposits could reduce the Corporation’s liquidity resources and impact its operating results.

CREDIT RISK MANAGEMENT AND LOAN QUALITY

Non-Performing Assets

Non-performing assets include primarily past-due loans that are no longer accruing interest, renegotiated loans, and real estate property acquired through foreclosure. A summary, including certain credit quality metrics, is presented in Table 23.

The Corporation’s non-accruing and charge-off policies by major categories of loan portfolios are as follows:

 

   

Commercial and construction loans—recognition of interest income on commercial and construction loans is discontinued when the loans are 90 days or more in arrears on payments of principal or interest or when other factors indicate that the collection of principal and interest is doubtful. The impaired portions of secured loans past due as to principal and interest is charged-off not later than 365 days past due. However, in the case of collateral dependent loans individually evaluated for impairment, the excess of the recorded investment over the fair value of the collateral (portion deemed uncollectible) is generally promptly charged-off, but in any event, not later than the quarter following the quarter in which such excess was first recognized. Commercial unsecured loans are charged-off no later than 180 days past due. Overdrafts are generally charged-off no later than 60 days past their due date.

 

   

Lease financing—recognition of interest income for lease financing is ceased when loans are 90 days or more in arrears. Leases are charged-off when they are 120 days in arrears.

 

   

Mortgage loans—recognition of interest income on mortgage loans is generally discontinued when loans are 90 days or more in arrears on payments of principal or interest. The impaired portion of a mortgage loan is charged-off when the loan is 180 days past due. The Corporation discontinues the recognition of interest income on residential mortgage loans insured by the Federal Housing Administration (“FHA”) or guaranteed by the U.S. Department of Veterans Affairs (“VA”) when 18 months delinquent as to principal or interest. The principal repayment on these loans is insured.

 

   

Consumer loans—recognition of interest income on closed-end consumer loans and home-equity lines of credit is discontinued when the loans are 90 days or more in arrears on payments of principal or interest. Income is generally recognized on open-end consumer loans, except for home equity lines of credit, until the loans are charged-off. Closed-end consumer loans are charged-off when they are 120 days in arrears. Open-end consumer loans are charged-off when they are 180 days in arrears. Overdrafts in excess of 60 days are generally charged-off no later than 60 days past their due date.

 

   

Troubled debt restructurings (“TDRs”)—loans classified as TDRs are typically in non-accrual status at the time of the

 

152


Table of Contents
 

modification. The TDR loan continues in non-accrual status until the borrower has demonstrated a willingness and ability to make the restructured loan payments (generally at least six months of sustained performance after the modification (or one year for loans providing for quarterly or semi-annual payments)) and management has concluded that it is probable that the borrower would not be in payment default in the foreseeable future.

 

   

Covered loans acquired in the Westernbank FDIC-assisted transaction, except for revolving lines of credit, are accounted for by the Corporation in accordance with ASC Subtopic 310-30. Under ASC Subtopic 310-30, the acquired loans were aggregated into pools based on similar characteristics. Each loan pool is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows. The covered loans, which are accounted for under ASC Subtopic 310-30 by the Corporation, are not considered non-performing and will continue to have an accretable yield as long as there is a reasonable expectation about the timing and amount of cash flows expected to be collected. Also, loans charged-off against the non-accretable difference established in purchase accounting are not reported as charge-offs. Charge-offs will be recorded only to the extent that losses exceed the purchase accounting estimates.

Because of the application of ASC Subtopic 310-30 to the Westernbank acquired loans and the loss protection provided by the FDIC which limits the risks on the covered loans, the Corporation has determined to provide certain quality metrics in this MD&A that exclude such covered loans to facilitate the comparison between loan portfolios and across periods. Given the significant amount of covered loans that are past due but still accruing due to the accounting under ASC Subtopic 310-30, the Corporation believes the inclusion of these loans in certain asset quality ratios in the numerator or denominator (or both) would result in a significant distortion to these ratios. In addition, because charge-offs related to the acquired loans are recorded against the non-accretable balance, the net charge-off ratio including the acquired loans is lower for portfolios that have significant amounts of covered loans. The inclusion of these loans in the asset quality ratios could result in a lack of comparability across periods, and could negatively impact comparability with other portfolios that were not impacted by acquisition accounting. The Corporation believes that the presentation of asset quality measures, excluding covered loans and related amounts from both the numerator and denominator, provides a better perspective into underlying trends related to the quality of its loan portfolio.

At March 31, 2012, non-performing loans held-in-portfolio secured by real estate, excluding covered loans, amounted to $1.3 billion in the Puerto Rico operations and $291 million in the U.S. mainland operations. These figures compare to $1.3 billion in the Puerto Rico operations and $324 million in the U.S. mainland operations at December 31, 2011.

In addition to the non-performing loans included in Table 23, there were $42 million of non-covered performing loans at March 31, 2012, mostly related to the commercial loan portfolio, which based on management’s opinion, are currently subject to potential future classification to non-performing and are considered impaired, compared with $27 million at December 31, 2011.

 

153


Table of Contents

Table 23 - Non-Performing Assets

 

(Dollars in thousands)

   March 31,
2012
    As a percentage
of loans HIP by
category [2]
    December 31,
2011
    As a percentage
of loans HIP by
category [2]
    March 31,
2011
    As a percentage
of loans HIP by
category [2]
 

Commercial

   $ 818,678       8.3    $ 830,092       8.3    $ 699,993       6.7 

Construction

     69,470       29.4       96,286       40.1       126,549       43.7  

Legacy

     79,077       13.1       75,660       11.7       150,117       16.7  

Lease financing

     5,673       1.0       5,642       1.0       5,151       0.9  

Mortgage

     667,217       11.9       686,502       12.4       578,106       11.8  

Consumer

     41,688       1.1       43,668       1.2       53,896       1.5  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-performing loans held-in-portfolio, excluding covered loans

     1,681,803       8.2      1,737,850       8.4      1,613,812       7.8 

Non-performing loans held-for-sale [5]

     232,293         262,302         464,577    

Other real estate owned (“OREO”), excluding covered OREO

     193,768         172,497         156,888    
  

 

 

     

 

 

     

 

 

   

Total non-performing assets, excluding covered assets

   $ 2,107,864       $ 2,172,649       $ 2,235,277    

Covered loans and OREO [1]

     203,254         192,771         79,075    
  

 

 

     

 

 

     

 

 

   

Total non-performing assets

   $ 2,311,118       $ 2,365,420       $ 2,314,352    
  

 

 

     

 

 

     

 

 

   

Accruing loans past due 90 days or more [3]

   $ 328,757       $ 316,614       $ 332,384    
  

 

 

     

 

 

     

 

 

   

Ratios excluding covered loans[4]:

            

Non-performing loans held-in-portfolio to loans held-in-portfolio

     8.21        8.44        7.80 %  

Allowance for loan losses to loans held-in-portfolio

     3.25         3.35         3.52    

Allowance for loan losses to non-performing loans, excluding held-for-sale

     39.53         39.73         45.07    
  

 

 

     

 

 

     

 

 

   

Ratios including covered loans:

            

Non-performing loans held-in-portfolio to loans held-in-portfolio

     7.18        7.30        6.41 %  

Allowance for loan losses to loans held-in-portfolio

     3.25         3.27         2.90    

Allowance for loan losses to non-performing loans, excluding held-for-sale

     45.27         44.76         45.26    
  

 

 

     

 

 

     

 

 

   

HIP = “held-in-portfolio”

 

[1] The amount consists of $93 million in non-performing covered loans accounted for under ASC Subtopic 310-20 and $110 million in covered OREO as of March 31, 2012 (December 31, 2011—$84 million and $109 million, respectively; March 31, 2011—$13 million and $66 million, respectively). It excludes covered loans accounted for under ASC Subtopic 310-30 as they are considered to be performing due to the application of the accretion method, in which these loans will accrete interest income over the remaining life of the loans using estimated cash flow analyses.
[2] Loans held-in-portfolio used in the computation exclude $4.2 billion in covered loans at March 31, 2012 (December 31, 2011—$4.3 billion; March 31, 2011—$4.7 billion).
[3] The carrying value of covered loans accounted for under ASC Sub-topic 310-30 that are contractually 90 days or more past due was $1.1 billion at March 31, 2012 (December 31, 2011—$1.2 billion; March 31, 2011—$1.1 billion). This amount is excluded from the above table as the covered loans’ accretable yield interest recognition is independent from the underlying contractual loan delinquency status.
[4] These asset quality ratios have been adjusted to remove the impact of covered loans and covered foreclosed property. Appropriate adjustments to the numerator and denominator have been reflected in the calculation of these ratios. Management believes the inclusion of acquired loans in certain asset quality ratios that include non-performing assets, past due loans or net charge-offs in the numerator and denominator results in distortions of these ratios and they may not be comparable to other periods presented or to other portfolios that were not impacted by purchase accounting.
[5] Non-performing loans held-for-sale consist of $206 million in construction loans, $26 million in commercial loans and $53 thousand in mortgage loans as of March 31, 2012 (December 31, 2011—$236 million, $26 million and $59 thousand, respectively; March 31, 2011—$392 million $62 million, and $11 million, respectively).

 

154


Table of Contents

Table 24 summarizes the activity in the allowance for loan losses and selected loan loss statistics for the quarters ended March 31, 2012 and 2011.

Table 24-Allowance for Loan Losses and Selected Loan Losses Statistics

 

     Quarters ended March 31,  

(Dollars in thousands)

   2012     2012      2012     2011     2011      2011  
     Non-covered
loans
    Covered
loans
     Total     Non-covered
loans
    Covered
loans
     Total  

Balance at beginning of period

   $ 690,363      $ 124,945      $ 815,308      $ 793,225       —         $ 793,225  

Provision for loan losses

     82,514       18,209        100,723       59,762      $ 15,557        75,319  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 
     772,877       143,154        916,031       852,987       15,557        868,544  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Losses:

              

Commercial

     67,246       4,102        71,348       65,564       1,707        67,271  

Construction

     1,676       264        1,940       10,736       4,345        15,081  

Lease financing

     1,217       —           1,217       1,946       —           1,946  

Legacy

     8,473       —           8,473       23,504       —           23,504  

Mortgage

     18,823       203        19,026       9,562       —           9,562  

Consumer

     42,596       89        42,685       53,391       346        53,737  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 
     140,031       4,658        144,689       164,703       6,398        171,101  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Recoveries:

              

Commercial

     12,863       —           12,863       9,552       —           9,552  

Construction

     1,881       —           1,881       1,951       —           1,951  

Lease financing

     1,063       —           1,063       767       —           767  

Legacy

     4,915       —           4,915       3,255       —           3,255  

Mortgage

     1,369       —           1,369       1,315       —           1,315  

Consumer

     9,831       —           9,831       8,415       —           8,415  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 
     31,922       —           31,922       25,255       —           25,255  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Net loans charged-off:

              

Commercial

     54,383       4,102        58,485       56,012       1,707        57,719  

Construction

     (205     264        59       8,785       4,345        13,130  

Lease financing

     154       —           154       1,179       —           1,179  

Legacy

     3,558       —           3,558       20,249       —           20,249  

Mortgage

     17,454       203        17,657       8,247       —           8,247  

Consumer

     32,765       89        32,854       44,976       346        45,322  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 
     108,109       4,658        112,767       139,448       6,398        145,846  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Net (recoveries) write-downs related to loans transferred to loans held-for-sale

     —          —           —          13,807       —           13,807  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Balance at end of period

   $ 664,768      $ 138,496      $ 803,264      $ 727,346      $ 9,159      $ 736,505  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Ratios:

              

Annualized net charge-offs to average loans held-in-portfolio

     2.13         1.83      2.74         2.31 

Provision for loan losses to net charge-offs

     0.76 x           0.89 x        0.43 x           0.52 x   

 

 

Refer to the “Allowance for Loan Losses” subsection in this MD&A for tables detailing the composition of the allowance for loan losses between general and specific reserves and for qualitative information on the main factors driving the variances.

 

155


Table of Contents

Table 25 presents annualized net charge-offs to average loans held-in-portfolio (“HIP”) for the non-covered portfolio by loan category for the quarters ended March 31, 2012 and 2011.

Table 25 - Annualized Net Charge-offs to Average Loans HIP (non-covered loans)

 

     Quarter ended March 31,  
     2012     2011  

Commercial

     2.21      2.16 

Construction

     (0.35     11.58  

Lease financing

     0.11       0.84  

Legacy

     2.23       8.31  

Mortgage

     1.29       0.74  

Consumer

     3.58       4.90  
  

 

 

   

 

 

 

Total annualized net charge-offs to average loans held-in-portfolio

     2.13      2.74 
  

 

 

   

 

 

 

Note: Average loans held-in-portfolio excludes covered loans acquired in the Westernbank FDIC-assisted transaction which were recorded at fair value on date of acquisition, and thus, considered a credit discount component.

 

 

The Corporation’s annualized net charge-offs to average non-covered loans held-in-portfolio ratio decreased 61 basis points, from 2.74% for the quarter ended March 31, 2011 to 2.13% for the quarter ended March 31, 2012. Excluding covered loans, net charge-offs for the first quarter of 2012 declined by $31.3 million, compared with the quarter ended March 31, 2011, driven principally by improved credit performance at both the BPPR and BPNA reportable segments.

Improvements in credit quality metrics are mainly driven by steps taken by the Corporation to address problem loans and reduce the overall credit risks of its loan portfolios, as well as certain stabilization in the general economic conditions. These actions included (i) the loan portfolio reclassifications to held-for-sale that took place in the fourth quarter of 2010, (ii) a lower volume of commercial and construction loans, mainly related to certain lending products exited by the Corporation at the BPNA reportable segment, and (iii) intensification of loss mitigation efforts.

Commercial loans

As shown in Table 23, the level of non-performing commercial non-covered loans held-in-portfolio at March 31, 2012, compared to December 31, 2011, decreased on a consolidated basis by $11 million, driven by a decrease of $10 million in the BPPR reportable segment and a decrease of $1 million in the BPNA reportable segment. The percentage of non-performing commercial non-covered loans held-in-portfolio to commercial non-covered loans held-in-portfolio remained unchanged at 8.3% at December 31, 2011 and March 31, 2012. The ratio of non-performing commercial loans to commercial loans held-in-portfolio was 6.7% at March 31, 2011. This increase was mainly attributed to the economic conditions in Puerto Rico, which impacted the commercial loan portfolio. Nevertheless, certain credit quality metrics have been trending in a positive direction at the BPPR reportable segment suggesting the economic conditions are gradually improving.

Commercial non-performing loans held-in-portfolio in the BPPR reportable segment decreased by $10 million from December 31, 2011 to March 31, 2012. This decrease is mostly attributed to one commercial loan with an outstanding principal balance of $20.1 million classified as a troubled-debt restructuring (“TDR”) in 2011, which was returned to accrual status. Although, non-performing commercial loans held-in-portfolio remained at high levels, most credit quality metrics, such as delinquencies and net charge-offs, showed improvements during the first quarter of 2012. The level of non-performing commercial loans held-in-portfolio in the BPNA reportable segment remained stable from December 31, 2011, as the U.S. mainland continued to reflect signs of stabilization.

 

156


Table of Contents

Table 26 provides information on commercial non-performing loans at March 31, 2012, December 31, 2011, and March 31, 2011 and net charge-offs information for the quarters ended March 31, 2012, and March 31, 2011 for the BPPR (excluding the Westernbank covered loan portfolio) and BPNA reportable segments.

Table 26 - Commercial Non-Performing Loans and Net Charge-offs

 

     For the quarters ended  

(Dollars in thousands)

   March 31,
2012
    December 31,
2011
    March 31,
2011
 

BPPR Reportable Segment:

      

Non-performing commercial loans

   $ 620,916      $ 631,171      $ 526,930  

Non-performing commercial loans to commercial loans HIP, both excluding covered loans and loans held-for-sale

     9.66      9.75      7.91 

Commercial loan net charge-offs

   $ 37,518       $ 38,528  

Commercial loan net charge-offs (annualized) to average commercial loans HIP, excluding covered loans and loans held-for-sale

     2.34        2.32 

BPNA Reportable Segment:

      

Non-performing commercial loans

   $ 197,762      $ 198,921      $ 173,063  

Non-performing commercial loans to commercial loans HIP, excluding loans held-for-sale

     5.75      5.68      4.63 

Commercial loan net charge-offs

   $ 16,865       $ 17,484  

Commercial loan net charge-offs (annualized) to average commercial loans HIP, excluding loans held-for-sale

     1.96        1.86 

For the quarter ended March 31, 2012, additions to commercial loans in non-performing status at the BPPR and BPNA reportable segments amounted to $86 million and $31 million, respectively. At the BPPR reportable segment, inflows to non-performing status declined by $37 million, when compared to the quarter ended March 31, 2011, while the BPNA reportable segment continued to show stabilization in terms of delinquencies. As explained before, the commercial loan portfolio for the BPPR reportable segment reflected positive trends due to a moderate improvement in the economic conditions.

Table 27 presents the changes in non-performing commercial non-covered loans held in-portfolio for the quarter ended March 31, 2012 for the BPPR (excluding the Westernbank covered loan portfolio) and BPNA reportable segments.

Table 27 - Commercial Loans HIP

 

     For the quarter ended March 31, 2012  

(Dollars in thousands)

   BPPR     BPNA     Popular, Inc.  

Beginning Balance

   $ 631,171     $ 198,921     $ 830,092  

Plus:

      

New non-performing loans

     86,446       30,608       117,054  

Advances on existing non-performing loans

     —          227       227  

Less:

      

Non-performing loans transferred to OREO

     (5,481     (10,434     (15,915

Non-performing loans charged-off

     (37,924     (15,121     (53,045

Loans returned to accrual status / loan collections

     (53,296     (6,439     (59,735
  

 

 

   

 

 

   

 

 

 

Ending balance March 31, 2012

   $ 620,916     $ 197,762     $ 818,678  
  

 

 

   

 

 

   

 

 

 

In the non-covered loans held-in-portfolio, there were 7 commercial loan relationships greater than $10 million in non-accrual status with an aggregate outstanding balance of approximately $96 million at March 31, 2012, compared with 6 commercial loan relationships with an outstanding balance of approximately $113 million at December 31, 2011.

The Corporation’s commercial loan net charge-offs, excluding net charge-offs for covered loans, for the quarter ended March 31, 2012, decreased by $1.6 million, when compared with the quarter ended March 31, 2011.The decrease is mainly driven by a slight reduction of $1.0 million in the BPPR reportable segment. Commercial net charge-offs at both reportable segments remained relatively stable attributed to lower levels of problem loans and certain stabilization in the economic conditions, evidenced by lower inflows to non-performing loans. For the quarter ended March 31, 2012, the charge-offs associated to collateral dependent commercial loans amounted to approximately $18.0 million in the BPPR reportable segment and $13.2 million in the BPNA reportable segment.

 

157


Table of Contents

The allowance for loan losses corresponding to commercial loans held-in-portfolio, excluding covered loans, amounted to $314 million or 3.18% of that portfolio at March 31, 2012, compared with $369 million or 3.70% at December 31, 2011. The ratio of allowance to non-performing loans held-in portfolio in the commercial loan category was 38.30% at March 31, 2012, compared with 44.50% at December 31, 2011. The decrease in the ratio was principally driven by a lower allowance for loan losses for the commercial loan portfolio at both the BPPR and BPNA reportable segments. The decrease in the allowance for loan losses was mainly related to the enhancement to the allowance for loan losses methodology, during the first quarter of 2012, coupled with a lower loss trend.

The Corporation’s commercial loan portfolio secured by real estate (“CRE”), excluding covered loans, amounted to $6.5 billion at March 31, 2012, of which $3.0 billion was secured with owner occupied properties, compared with $6.7 billion and $3.1 billion, respectively, at December 31, 2011. CRE non-performing loans, excluding covered loans amounted to $671 million at March 31, 2012, compared with $636 million at December 31, 2011. The CRE non-performing loans ratios for the Corporation’s Puerto Rico and U.S. mainland operations were 13.90% and 6.08%, respectively, at March 31, 2012, compared with 12.58% and 5.91%, respectively, at December 31, 2011.

Commercial and industrial loans held-in-portfolio modified in a TDR often involve temporary interest-only payments, term extensions, and converting evergreen revolving lines of credit to long term loans. Commercial real estate loans held-in-portfolio modified in a TDR often involve reducing the interest rate for a limited period of time or the remaining term of the loan, extending the maturity date at an interest rate lower than the current market rate for new debt with similar risk, or reductions in the payment plan. At March 31, 2012, the Corporation’s commercial loans held-in-portfolio, excluding covered loans, included a total of $195 million of loan modifications for the BPPR reportable segment and $13 million for the BPNA reportable segment, which were considered TDRs since they involved granting a concession to borrowers under financial difficulties. The outstanding commitments to lend additional funds to debtors owing loans whose terms have been modified in troubled debt restructurings amounted to $3 million in the BPPR reportable segment and no commitments outstanding in the BPNA reportable segment at March 31, 2012.

The commercial loan TDRs in non-performing status for the BPPR and BPNA reportable segments at March 31, 2012 amounted to $138 million and $13 million, respectively. Commercial loans that have been modified as part of loss mitigation efforts were evaluated for impairment, resulting in a specific reserve of $7 million for the BPPR reportable segment and none for the BPNA reportable segment at March 31, 2012.

Construction loans

As shown in Table 23, non-performing construction loans held-in-portfolio decreased by $27 million from December 31, 2011 to March 31, 2012 mostly related to the BPNA reportable segment, which decreased by $29 million when compared with December 31, 2011. This decrease was principally driven by the resolution of three large construction loans, unit sales on several projects and minimal inflows of new construction non-performing loans. The ratio of non-performing construction loans to construction loans held-in-portfolio, excluding covered loans, decreased from 40.1% at December 31, 2011 to 29.4% at March 31, 2012. The ratio of non-performing construction loans to construction loans held-in-portfolio was 43.7% at March 31, 2011.

For the quarter ended March 31, 2012, non-covered construction loans held-in-portfolio newly classified to non-performing status at the BPPR reportable segment amounted to $6 million, which represented a decrease of $6 million, when compared to the additions for quarter ended March 31, 2011. There were no additions to construction loans held-in-portfolio to non-performing status at the BPNA reportable segment, decreasing by $7 million when compared to the quarter ended March 31, 2011. The decline in non-performing loans inflows is attributable to a lower level of problem loans remaining in the portfolio, principally prompted by a significant portion of the BPPR reportable segment construction non-covered loans being classified as held-for-sale and the downsizing of the construction loan portfolio at the BPNA reportable segment.

 

158


Table of Contents

Table 28 presents the changes in non-performing construction loans held in-portfolio for the quarter ended March 31, 2012 for the BPPR (excluding the Westernbank covered loan portfolio) and BPNA reportable segments.

Table 28 - Construction Loans HIP

 

     For the quarter ended March 31, 2012  

(Dollars in thousands)

   BPPR     BPNA     Popular, Inc.  

Beginning Balance

   $ 53,859     $ 42,427     $ 96,286  

Plus:

      

New non-performing loans

     6,372       —          6,372  

Advances on existing non-performing loans

     —          125       125  

Less:

      

Non-performing loans charged-off

     (371     (1,380     (1,751

Loans returned to accrual status / loan collections

     (3,613     (17,617     (21,230

Loans transferred to held-for-sale

     —          (10,332     (10,332
  

 

 

   

 

 

   

 

 

 

Ending balance March 31, 2012

   $ 56,247     $ 13,223     $ 69,470  
  

 

 

   

 

 

   

 

 

 

In the non-covered loans held-in-portfolio, there were no construction loan relationships greater than $10 million in non-performing status at March 31, 2012, compared with 3 construction loan relationships with an aggregate outstanding principal balance of $38 million at December 31, 2011. Although the portfolio balance of construction loans held-in-portfolio has decreased considerably, the construction loan portfolio is considered one of the high-risk portfolios of the Corporation as it continues to be impacted by current economic and real estate market conditions, particularly in Puerto Rico.

Construction loans net charge-offs for the quarter ended March 31, 2012, compared with the quarter ended March 31, 2011, decreased by $9.0 million, mostly driven by the BPPR, which decreased by $8.4 million. As explained above, this decrease is driven by lower problem loans as a result from the steps taken by the Corporation to mitigate the overall credit risk, and to lower portfolio balances. For the quarter ended March 31, 2012, the charge-offs associated to collateral dependent construction loans amounted to approximately $0.2 million and $1.2 million in the BPPR and BPNA reportable segments, respectively. Management has identified construction loans considered impaired and has charged-off specific reserves based on the value of the collateral.

Tables 29 and 30 provide information on construction non-performing loans at March 31, 2012, December 31, 2011, and March 31, 2011 and net charge-offs information for the quarters ended March 31, 2012, and March 31, 2011 for the BPPR (excluding the Westernbank covered loan portfolio) and BPNA reportable segments.

Table 29 - Construction Non-Performing Loans and Net Charge-offs (BPPR)

 

     For the quarters ended  

(Dollars in thousands)

   March 31,
2012
    December
31, 2011
    March 31,
2011
 

BPPR Reportable Segment:

      

Non-performing construction loans

   $ 56,247      $ 53,859     $ 57,176  

Non-performing construction loans to construction loans HIP, both excluding covered loans and loans held-for-sale

     32.00      33.47      38.30 

Construction loan net charge-offs

   $ (371     $ 8,021  

Construction loan net charge-offs (annualized) to average construction loans HIP, excluding covered loans and loans held-for-sale

     (0.89 )%        22.74 

 

159


Table of Contents

Table 30 - Construction Non-Performing Loans and Net Charge-offs (BPNA)

 

     For the quarters ended  

(Dollars in thousands)

   March 31,
2012
    December 31,
2011
    March 31,
2011
 

BPNA Reportable Segment:

      

Non-performing construction loans

   $ 13,223      $ 42,427      $ 69,373  

Non-performing construction loans to construction loans HIP, excluding loans held-for-sale

     21.74      53.71      49.34 

Construction loan net charge-offs

   $ 166       $ 764  

Construction loan net charge-offs (annualized) to average construction loans HIP, excluding loans held-for-sale

     0.97        1.88 

The allowance for loan losses corresponding to construction loans, represented 3.86% of that portfolio, excluding covered loans, at March 31, 2012, compared with 3.53% at December 31, 2011. The ratio of allowance to non-performing loans held-in-portfolio in the construction loans category was 13.15% at March 31, 2012, compared with 8.81% at December 31, 2011. The increase in the ratio was mostly driven by a lower level of non-performing loans, particularly at the BPNA reportable segment, due to the resolution of certain large impaired construction loans for which no allowance for loan losses was required at December 31, 2011.

The allowance for loan losses corresponding to the construction loan portfolio for the BPPR reportable segment, excluding the allowance for covered loans, totaled $7 million or 3.80% of construction loans held-in-portfolio, excluding covered loans, at March 31, 2012, compared with $6 million or 3.63% at December 31, 2011. At the BPNA reportable segment, the allowance for loan losses corresponding to the construction loan portfolio totaled $2.5 million or 4.05% of construction loans held-in-portfolio at March 31, 2012, compared to $2.6 million or 3.33% at December 31, 2011.

The construction loans held-in-portfolio, excluding covered loans, included $6 million in TDRs for the BPPR reportable segment and $13 million for the BPNA reportable segment at March 31, 2012. These TDRs were in non-performing status as of such date. The outstanding commitments to lend additional funds to debtors owing loans whose terms have been modified in troubled debt restructurings amounted to $97 thousand in the BPPR reportable segment and $348 thousand in the BPNA reportable segment at March 31, 2012. These construction TDR loans from the BPPR and BPNA reportable segments were evaluated for impairment, resulting in a specific reserve of $336 thousand for the BPPR reportable segment and none for the BPNA reportable segment at March 31, 2012.

In the current housing market, the value of the collateral securing the loan has become the most important factor in determining the amount of loss incurred and the appropriate level of the allowance for loan losses. The likelihood of losses that are equal to the entire recorded investment for a real estate loan is remote. However, in some cases during recent quarters declining real estate values have resulted in the determination that the estimated value of the collateral was insufficient to cover all of the recorded investment in the loans.

Legacy loans

The legacy portfolio is comprised of commercial loans and construction loans and lease financings related to certain lending products exited by the Corporation as part of restructuring efforts carried out in prior years at the BPNA reportable segment.

Legacy non-performing loans held-in-portfolio increased by $3 million from December 31, 2011 to March 31, 2012, which included an increase of $6 million in commercial loans, offset by a decline of $3 million in construction loans. Although problem loans have trended downward, reflecting relative improvements in the economic conditions, some borrowers within this portfolio may continue to face business challenges as a result of the economic environment. The percentage of non-performing legacy loans held-in-portfolio to legacy loans held-in-portfolio increased from 11.67% at December 31, 2011 to 13.09% at March 31, 2012. The ratio of non-performing legacy loans to legacy loans held-in-portfolio was 16.70% at March 31, 2011.

For the quarter ended March 31, 2012, additions to legacy loans in non-performing status at the BPNA reportable segment amounted to $17 million, a decrease of $6 million compared with the same quarter in 2011. The decrease in the inflows of non-performing legacy loans is principally driven by lower loan portfolio balance and problem loan resolutions, coupled with certain credit stabilization.

 

160


Table of Contents

Table 31 presents the changes in non-performing legacy loans held in-portfolio for the quarter ended March 31, 2012 for the BPNA reportable segment.

Table 31 - Legacy Loans HIP

 

(Dollars in thousands)

   BPNA  

Beginning Balance

   $ 75,660  

Plus:

  

New non-performing loans

     17,373  

Advances on existing non-performing loans

     16  

Less:

  

Non-performing loans transferred to OREO

     (3,370

Non-performing loans charged-off

     (8,489

Loans returned to accrual status / loan collections

     (1,441

Loans transferred to held-for-sale

     (672
  

 

 

 

Ending balance March 31, 2012

   $ 79,077  
  

 

 

 

In the loans held-in-portfolio, there was one legacy loan relationship greater than $10 million in non-accrual status with an aggregate outstanding balance of approximately $16 million at both March 31, 2012 and December 31, 2011.

For the quarter ended March 31, 2012, legacy net charge-offs decreased by $16.7 million when compared with the quarter ended March 31, 2011, which consisted of commercial and construction loans by $10.4 million and $6.3 million, respectively. The decrease was mainly driven by the fact that prior periods were severely impacted by the U.S. mainland market conditions, as a result of decreases in property values, oversupply in certain areas and reduced absorption rates.

For the quarter ended March 31, 2012, the charge-offs associated to collateral dependent legacy loans amounted to approximately $0.4 million.

As explained above, the legacy loan portfolio has reflected improvements in the credit quality trends, when compared to the same period in 2011, prompted by the run-off of the portfolio, and by certain stabilization observed in the U.S. economic environment.

Table 32 provides information on legacy non-performing loans at March 31, 2012, December 31, 2011, and March 31, 2011 and net charge-offs information for the quarters ended March 31, 2012, and March 31, 2011 for the BPNA reportable segment.

Table 32 - Legacy Non-Performing Loans and Net Charge-offs

 

     For the quarters ended  

(Dollars in thousands)

   March 31,
2012
    December 31,
2011
    March 31,
2011
 

BPNA Reportable Segment:

      

Non-performing legacy loans

   $ 79,077      $ 75,660      $ 150,117  

Non-performing legacy loans to legacy loans HIP, excluding loans held-for-sale

     13.09      11.67      16.70 

Legacy loan net charge-offs

   $ 3,558       $ 20,249  

Legacy loan net charge-offs (annualized) to average legacy loans HIP, excluding loans held-for-sale

     2.23        8.31 

The BPNA reportable segment legacy loan portfolio totaled $604 million at March 31, 2012, compared with $648 million at December 31, 2011. The allowance for loan losses related to legacy loans held-in-portfolio represented 9.06% of that portfolio at March 31, 2012, compared with 7.13% at December 31, 2011. The ratio of allowance to non-performing loans held-in portfolio in the legacy loan category was 69.20% at March 31, 2012, compared with 61.10% at December 31, 2011. Despite improvements in key credit quality metrics, a slow economic recovery at the U.S. mainland can still challenge the legacy loan portfolio, as this portfolio is considered of a higher-risk profile.

Legacy loans held-in-portfolio modified in a TDR often involve reducing the interest rate for a limited period of time or the remaining term of the loan, extending the maturity date at an interest rate lower than the current market rate for new debt with similar risk, or reductions in the payment plan. At March 31, 2012, the Corporation’s legacy loans held-in-portfolio

 

161


Table of Contents

included a total of $26 million of loan modifications for the BPNA reportable segment, which were considered TDRs since they involved granting a concession to borrowers under financial difficulties. There were no commitments outstanding for these legacy loan TDRs in the BPNA reportable segment at March 31, 2012.

The legacy loan TDRs in non-performing status for the BPNA reportable segments at March 31, 2012 amounted to $26 million. Legacy loans that have been modified as part of loss mitigation efforts are evaluated individually for impairment. The legacy loan TDRs were evaluated for impairment requiring no specific reserves at March 31, 2012.

Mortgage loans

Non-performing mortgage loans held-in-portfolio decreased by $19 million from December 31, 2011 to March 31, 2012, primarily as a result of a decrease of $16 million in the BPPR reportable segment, and a decrease of $3 million in the BPNA reportable segment. The decrease in the BPPR reportable segment was principally driven by (i) a reduction of loan repurchases under credit recourse arrangements, (ii) a higher level of residential mortgage TDRs returned to accrual status, and (iii) higher charge-offs. Nonetheless, the mortgage loan portfolio continues to be impacted by the economic conditions in Puerto Rico, as evidenced by high levels of non-performing mortgage loans and delinquency rates.

At March 31, 2012, additions to mortgage non-performing loans at the BPPR and BPNA reportable segments amounted to $187 million and $6 million, respectively. Although the state of the economy in Puerto Rico appears to be gradually improving, the residential real estate market remains distressed.

Table 33 presents the activity in non-performing mortgage loans held-in-portfolio for the BPPR and BPNA segments, and for the Corporation as a whole, for the quarter ended March 31, 2012.

Table 33 - Mortgage Loans HIP

 

     For the quarter ended March 31, 2012  

(Dollars in thousands)

   BPPR     BPNA     Popular, Inc.  

Beginning Balance

   $ 649,279     $ 37,223     $ 686,502  

Plus:

      

New non-performing loans

     186,510       6,256       192,766  

Less:

      

Non-performing loans transferred to OREO

     (21,573     (1,064     (22,637

Non-performing loans charged-off

     (20,427     (3,496     (23,923

Loans returned to accrual status / loan collections

     (160,272     (5,219     (165,491
  

 

 

   

 

 

   

 

 

 

Ending balance March 31, 2012

   $ 633,517     $ 33,700     $ 667,217  
  

 

 

   

 

 

   

 

 

 

For the quarter ended March 31, 2012, the Corporation’s mortgage loan net charge-offs to average mortgage loans held-in-portfolio ratio increased to 1.29%, compared with 0.74% for the quarter ended March 31, 2011. The increase in the mortgage loans net charge-off ratio was mainly due to higher losses in the BPPR and the BPNA reportable segments.

At the BPPR reportable segment, the mortgage loan net charge-offs for the quarter ended March 31, 2012 amounted to $12.2 million, an increase of $4.5 million, when compared to same period in 2011. This increased was not caused by deterioration in the inherent credit quality of this portfolio, but was principally due to revisions to the charge-off policy. During the first quarter of 2012, the Corporation enhanced its charge-off policy for the residential mortgage loan portfolio by including historical losses on recent other real estate owned (“OREO”) sales to determine the net realizable value to assess charge-offs once a loan becomes 180 days past due; previously, this was only done once the loan was foreclosed.

The BPPR reportable segment’s mortgage loans held-in-portfolio totaled $4.8 billion at March 31, 2012, compared with $4.7 billion at December 31, 2011. This slight increase is mainly associated with (i) loans repurchased under credit recourse arrangements and (ii) loans purchased and originated during the quarter ended March 31, 2012. The allowance for loan losses corresponding to the mortgage loan portfolio for the BPPR reportable segment totaled $97 million or 2.03% of mortgage loans held-in-portfolio, excluding covered loans, at March 31, 2012 compared to $72 million or 1.54%, respectively, at December 31, 2011. This increase is principally driven by increases in the general reserve component due to higher level of net charge-offs and higher specific reserves component for residential mortgage loans restructured under loss mitigation programs.

 

162


Table of Contents

Tables 34 and 35 provide information on non-performing mortgage loans at March 31, 2012, December 31, 2011, and March 31, 2011 and net charge-offs information for the quarters ended March 31, 2012 and March 31, 2011 for the both the BPPR (excluding covered loans) and BPNA reportable segments.

Table 34 - Mortgage Non-Performing Loans and Net Charge-offs (BPPR)

 

     For the quarters ended  

(Dollars in thousands)

   March 31,
2012
    December
31, 2011
    March 31,
2011
 

BPPR Reportable Segment:

      

Non-performing mortgage loans

   $ 633,517      $ 649,279      $ 551,756  

Non-performing mortgage loans to mortgage loans HIP, both excluding covered loans and loans held-for-sale

     13.31      13.85      13.69 

Mortgage loan net charge-offs

   $ 12,226       $ 7,677  

Mortgage loan net charge-offs (annualized) to average mortgage loans HIP, excluding covered loans and loans held-for-sale

     1.07        0.85 
  

 

 

   

 

 

   

 

 

 

Table 35 - Mortgage Non-Performing Loans and Net Charge-offs (BPNA)

 

     For the quarters ended  

(Dollars in thousands)

   March 31,
2012
    December
31, 2011
    March 31,
2011
 

BPNA Reportable Segment:

      

Non-performing mortgage loans

   $ 33,700      $ 37,223      $ 26,350  

Non-performing mortgage loans to mortgage loans HIP, excluding loans held-for-sale

     4.05      4.49      3.05 

Mortgage loan net charge-offs

   $ 5,228       $ 570  

Mortgage loan net charge-offs (annualized) to average mortgage loans HIP, excluding loans held-for-sale

     2.53        0.26 

The net charge-offs for BPNA’s mortgage loan portfolio amounted to approximately $5.2 million for the quarter ended March 31, 2012, an increase of $4.7 million when compared to the same quarter in 2011. For the quarter ended March 31, 2011, there were low levels of net charge-offs for BPNA’s non-conventional mortgage loans held in portfolio since most of the non-performing portfolio was classified as held-for-sale and adjusted to fair value in December 2010, and subsequently sold during first quarter of 2011. The increase in BPNA’s mortgage loan net charge-offs for the first quarter of 2012 was due to the normal flow of loans into late stage delinquency.

The BPNA reportable segment mortgage loan portfolio totaled $831 million at March 31, 2012, compared with $829 million at December 31, 2011. BPNA’s non-conventional mortgage loan portfolio outstanding at March 31, 2012 amounted to approximately $483 million with a related allowance for loan losses of $22 million, which represents 4.63% of that particular loan portfolio, compared with $490 million with a related allowance for loan losses of $24 million or 4.81%, respectively, at December 31, 2011. The Corporation is no longer originating non-conventional mortgage loans at BPNA.

The net charge-offs for BPNA’s non-conventional mortgage loan portfolio amounted to approximately $3.5 million or 2.85% of net charge-offs to average non-conventional mortgage loans held-in-portfolio for the quarter ended March 31, 2012. There were no net charge-offs for BPNA’s non-conventional mortgage loan portfolio for the quarter ended March 31, 2011, since this portfolio was classified as held-for-sale and adjusted to fair value in December 31, 2010.

Residential mortgage loans modified in a TDR are primarily comprised of loans where monthly payments are lowered to accommodate the borrowers’ financial needs for a period of time, normally five to ten years, depending on the borrower’s payment capacity. After the lowered monthly payment period ends, the borrower reverts back to paying principal and interest per the original terms with the maturity date adjusted accordingly. At March 31, 2012, the mortgage loan TDRs for the BPPR and BPNA reportable segments amounted to $461 million (including $96 million guaranteed by U.S. sponsored entities) and $52 million, respectively, of which $223 million and $9 million, respectively, were in non-performing status. These mortgage loan TDRs were evaluated for impairment resulting in a specific allowance for loan losses of $27 million and $14 million for the BPPR and BPNA reportable segments, respectively, at March 31, 2012, compared to $15 million and $14 million, respectively, at December 31, 2011.

 

163


Table of Contents

Consumer loans

Non-performing consumer loans, excluding covered loans, decreased by $2 million from December 31, 2011 to March 31, 2012, as a result of a decrease of $4 million in the BPPR reportable segment, partially offset by a slight increase of $2 million in the BPNA reportable segment. The decrease in the BPPR reportable segment was principally related to an overall improvement in the consumer lines of business, mainly personal and auto loans, as the portfolios continue to reflect signs of a more stable credit performance. The slight increase in the BPNA reportable segment was primarily associated with home equity lines of credit and closed-end second mortgages, which are categorized by the Corporation as consumer loans. In overall, this portfolio has experienced improvements in terms of delinquencies and net charge-offs.

Additions to consumer non-performing loans for the quarter ended March 31, 2012 amounted to $27 million and $14 million for the BPPR and BPNA reportable segments, respectively. When compared to the same quarter in 2011, additions to consumer non-performing loans at the BPPR reportable segment increased slightly by $1 million, while additions to consumer non-performing loans at the BPNA reportable segment increased by $3 million, driven principally by the HELOCs portfolio.

The Corporation’s consumer loan net charge-offs as a percentage of average consumer loans held-in-portfolio decreased from 4.90% for the quarter ended March 31, 2011 to 3.58% for the quarter ended March 31, 2012. The decrease in the ratio of consumer loans net charge-offs to average consumer loans held-in-portfolio in both segments was attributable to an improvement in the delinquency levels, as the portfolios continue to reflect signs of a more stable credit performance.

The consumer loans held-in-portfolio, excluding covered loans, included $138 million in TDRs for the BPPR reportable segment and $2 million for the BPNA reportable segment, which were considered TDRs at March 31, 2012. There were $5 million in consumer TDR loans in non-performing status for the BPPR reportable segment and $1 million at the BPNA reportable segment at March 31, 2012.

Tables 36 and 37 provide information on consumer non-performing loans at March 31, 2012, December 31, 2011, and March 31, 2011 and net charge-offs information for the quarters ended March 31, 2012 and March 31, 2011 for the BPPR and BPNA reportable segments.

Table 36 - Consumer Non-Performing Loans and Net Charge-offs (BPPR)

 

     For the quarters ended  

(Dollars in thousands)

   March 31,
2012
    December 31,
2011
    March 31,
2011
 

BPPR Reportable Segment:

      

Non-performing consumer loans

   $ 27,128      $ 31,291      $ 34,585  

Non-performing consumer loans to consumer loans HIP, both excluding covered loans and loans held-for-sale

     0.92      1.05      1.21 

Consumer loan net charge-offs

   $ 24,131       $ 28,414  

Consumer loan net charge-offs (annualized) to average consumer loans HIP, excluding covered loans and loans held-for-sale

     3.25        3.95 

Table 37 - Consumer Non-Performing Loans and Net Charge-offs (BPNA)

 

     For the quarters ended  

(Dollars in thousands)

   March 31,
2012
    December 31,
2011
    March 31,
2011
 

BPNA Reportable Segment:

      

Non-performing consumer loans

   $ 14,560      $ 12,377      $ 19,311  

Non-performing consumer loans to consumer loans HIP, excluding loans held-for-sale

     2.13      1.76      2.50 

Consumer loan net charge-offs

   $ 8,634       $ 16,562  

Consumer loan net charge-offs (annualized) to average consumer loans HIP, excluding loans held-for-sale

     4.97        8.34 

Combined net charge-offs for E-LOAN’s home equity lines of credit and closed-end second mortgages amounted to approximately $4.9 million or 5.45% of those particular average loan portfolios for the quarter ended March 31, 2012, compared with $11.3 million or 10.52%, respectively, for the quarter ended March 31, 2011. With the downsizing of E-LOAN, this subsidiary ceased originating these types of loans in 2008. Home equity lending includes both home equity loans and lines of credit. This type of lending, which is

 

164


Table of Contents

secured by a first or second mortgage on the borrower’s residence, allows customers to borrow against the equity in their home. Real estate market values at the time the loan or line is granted directly affect the amount of credit extended and, in addition, changes in these values impact the severity of losses. E-LOAN’s portfolio of home equity lines of credit and closed-end second mortgages outstanding at March 31, 2012 totaled $353 million with a related allowance for loan losses of $22 million, representing 6.32% of that particular portfolio. E-LOAN’s portfolio of home equity lines of credit and closed-end second mortgages outstanding at December 31, 2011 totaled $365 million with a related allowance for loan losses of $24 million, representing 6.56% of that particular portfolio. At March 31, 2012, home equity lines of credit and closed-end second mortgages in which E-LOAN holds both the first and second lien amounted to $270 thousand and $529 thousand, respectively, representing 0.04% and 0.08%, respectively, of the consumer loan portfolio of the BPNA reportable segment. At March 31, 2012, 42% are paying the minimum amount due on the home equity lines of credit. At March 31, 2012, all closed-end second mortgages in which E-LOAN holds the first lien mortgage were in performing status.

Other real estate

Other real estate represents real estate property acquired through foreclosure. Other real estate not covered under loss sharing agreements with the FDIC increased by $21 million from December 31, 2011 to March 31, 2012. The increase, driven by the impact of the economic conditions, was experienced at both reportable segments and included both residential and commercial real estate properties. Defaulted loans have increased, and these loans move through the foreclosure process to the other real estate classification. The combination of increased flow of defaulted loans from the loan portfolio to other real estate owned and the slowing of the liquidation market has resulted in an increase in the number of other real estate units on hand.

Other real estate covered under loss sharing agreements with the FDIC, comprised principally of repossessed commercial real estate properties, amounted to $111 million at March 31, 2012, compared with $109 million at December 31, 2011. The increase was principally from repossessed commercial real estate properties. Generally, 80% of the write-downs taken on these properties based on appraisals or losses on the sale are covered under the loss sharing agreements.

During the first quarter of 2012, the Corporation recorded additions of $53 million to other real estate, sold $17 million of foreclosed properties, recorded write-downs of $13 million and recognized other negative adjustments of approximately $1 million.

Updated appraisals or third-party opinions of value (“BPOs”) are obtained to adjust the values of the other real estate assets. Commencing in 2011, the appraisal for a commercial or construction other real estate property with a book value greater than $1 million is updated annually and if lower than $1 million it is updated at least every two years. For residential other real estate property, the Corporation requests third-party BPOs or appraisals generally on an annual basis. Appraisals may be adjusted due to age, collateral inspections and property profiles or due to general marked conditions. The adjustments applied are based upon internal information like other appraisals for the type of properties and loss severity information that can provide historical trends in the real estate market, and may change from time to time based on market conditions.

For commercial and construction other real estate properties at the BPPR reportable segment, depending on the type of property and/or the age of the appraisal, downward adjustments currently may range between 10% to 45%, including estimated cost to sell. For commercial and construction properties at the BPNA reportable segment, the most typically applied collateral discount rate is 30%. This discount was determined based on a study of other real estate owned and loan sale transactions during the past two years, comparing net proceeds received by the bank relative to the most recent appraised value of the properties. However, additional haircuts can be applied depending upon the age of appraisal, the region and the condition of the property or project.

In the case of the BPPR reportable segment, appraisals and BPOs of the subject residential properties were subject to downward adjustments of up to approximately 24.26%, including cost to sell of 5%. In the case of the U.S. mainland residential properties, the downward adjustment approximated up to 30%, including cost to sell of 5%.

 

165


Table of Contents

Troubled debt restructurings

Tables 38 and 39 present the loans classified as TDRs according to their accruing status at March 31, 2012 and December 31, 2011.

Table 38 - TDRs (March 31, 2012)

 

            March 31, 2012         

(In thousands)

   Accruing      Non-Accruing      Total  

Commercial

   $ 56,633      $ 151,050      $ 207,683  

Construction

     —           18,713        18,713  

Legacy

     —           26,117        26,117  

Mortgage

     281,570        231,535        513,105  

Leases

     2,503        2,910        5,413  

Consumer

     135,086        5,323        140,409  
  

 

 

    

 

 

    

 

 

 
   $ 475,792      $ 435,648      $ 911,440  
  

 

 

    

 

 

    

 

 

 

Table 39 - TDRs (December 31, 2011)

        
            December 31, 2011         

(In thousands)

   Accruing      Non-Accruing      Total  

Commercial

   $ 36,848      $ 171,520      $ 208,368  

Construction

     —           28,024        28,024  

Legacy

     —           26,906        26,906  

Mortgage

     252,277        218,715        470,992  

Leases

     3,085        3,118        6,203  

Consumer

     134,409        5,848        140,257  
  

 

 

    

 

 

    

 

 

 
   $ 426,619      $ 454,131      $ 880,750  
  

 

 

    

 

 

    

 

 

 

The Corporation’s TDR loans totaled $911 million at March 31, 2012, an increase of $31 million, or 3%, from December 31, 2011. The increase was mainly due to the intensification of loss mitigation efforts on the mortgage loan portfolio. Mortgage TDRs increased by $42 million, or 9%, during the quarter ended on March 31, 2012, including $29 million of accruing loans of which $7 million were guaranteed by U.S. sponsored agencies.

Refer to Note 8 to the consolidated financial statements for additional information on modifications considered troubled debt restructurings, including certain qualitative and quantitative data about troubled debt restructurings performed in the past twelve months.

Allowance for Loan Losses

Non-Covered loan portfolio

The allowance for loan losses, which represents management’s estimate of credit losses inherent in the loan portfolio, is maintained at a sufficient level to provide for estimated credit losses on individually evaluated loans as well as estimated credit losses inherent in the remainder of the loan portfolio. The Corporation’s management evaluates the adequacy of the allowance for loan losses on a quarterly basis. In this evaluation, management considers current economic conditions and the resulting impact on Popular Inc.’s loan portfolio, the composition of the portfolio by loan type and risk characteristics, historical loss experience, results of periodic credit reviews of individual loans, regulatory requirements and loan impairment measurement, among other factors.

The Corporation must rely on estimates and exercise judgment regarding matters where the ultimate outcome is unknown such as economic developments affecting specific customers, industries or markets. Other factors that can affect management’s estimates are the years of historical data when estimating losses, changes in underwriting standards, financial accounting standards and loan impairment measurements, among others. Changes in the financial condition of individual borrowers, in economic conditions, in historical loss experience and in the condition of the various markets in which collateral may be sold may all affect the required level of the allowance for loan losses. Consequently, the business financial condition, liquidity, capital and results of operations could also be affected.

The Corporation’s assessment of the allowance for loan losses is determined in accordance with accounting guidance, specifically guidance of loss contingencies in ASC Subtopic 450-20 and loan impairment guidance in ASC Section 310-10-35. As explained in the Critical Accounting Policies / Estimates section of this MD&A, during the first quarter of 2012, the Corporation revised the estimation process for evaluating the adequacy of its allowance for loan losses for the Corporation’s commercial and construction loan portfolios by by (i) establishing a more granular stratification of the commercial and construction loan portfolios to enhance the homogeneity of the loan classes and (ii) increasing the look-back period for assessing the recent trends applicable to the determination of commercial and construction loan net charge-offs from 6 months to 12 months.

 

166


Table of Contents

Tables 40 to 42 set forth information concerning the composition of the Corporation’s allowance for loan losses (“ALLL”) at March 31, 2012, December 31, 2011, and March 31, 2011 by loan category and by whether the allowance and related provisions were calculated individually pursuant to the requirements for specific impairment or through a general valuation allowance.

 

Table 40 - Composition of ALLL (March 31, 2012)

  

March 31, 2012

 

(Dollars in thousands)

   Commercial     Construction     Legacy     Leasing     Mortgage     Consumer     Total[2]  

Specific ALLL

   $ 12,998     $ 1,013     $ 765     $ 1,344     $ 40,946     $ 18,990     $ 76,056    

Impaired loans [1]

   $ 552,152     $ 64,149     $ 47,731     $ 5,412     $ 450,754     $ 138,200     $ 1,258,398    

Specific ALLL to impaired loans [1]

     2.35      1.58      1.60      24.83      9.08      13.74      6.04 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

General ALLL

   $ 300,581     $ 8,120     $ 53,960     $ 3,623     $ 84,533     $ 137,895     $ 588,712    

Loans held-in-portfolio, excluding impaired loans [1]

   $ 9,316,090     $ 172,430     $ 556,143     $ 537,902     $ 5,140,991     $ 3,496,720     $ 19,220,276    

General ALLL to loans held-in-portfolio, excluding impaired loans [1]

     3.23      4.71      9.70      0.67      1.64      3.94      3.06 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ALLL

   $ 313,579     $ 9,133     $ 54,725     $ 4,967     $ 125,479     $ 156,885     $ 664,768    

Total non-covered loans held-in-portfolio [1]

   $ 9,868,242     $ 236,579     $ 603,874     $ 543,314     $ 5,591,745     $ 3,634,920     $ 20,478,674    

ALLL to loans held-in-portfolio [1]

     3.18      3.86      9.06      0.91      2.24      4.32      3.25 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

[1] Excludes covered loans acquired on the Westernbank FDIC-assisted transaction.
[2] Excludes covered loans acquired on the Westernbank FDIC-assisted transaction. At March 31, 2012, the general allowance on the covered loans amounted to $106 million while the specific reserve amounted to $32 million.

 

Table 41 - Composition of ALLL (December 31, 2011)

  

December 31, 2011

 

(Dollars in thousands)

   Commercial     Construction     Legacy     Leasing     Mortgage     Consumer     Total[2]  

Specific ALLL

   $ 11,738     $ 289     $ 57     $ 793     $ 29,063     $ 17,046     $ 58,986    

Impaired loans [1]

   $ 556,329     $ 91,710     $ 48,890     $ 6,104     $ 382,880     $ 140,108     $ 1,226,021    

Specific ALLL to impaired loans [1]

     2.11      0.32      0.12      12.99      7.59      12.17      4.81 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

General ALLL

   $ 357,694     $ 8,192     $ 46,171     $ 3,858     $ 73,198     $ 142,264     $ 631,377    

Loans held-in-portfolio, excluding impaired loans [1]

   $ 9,416,998     $ 148,229     $ 599,519     $ 542,602     $ 5,135,580     $ 3,533,647     $ 19,376,575    

General ALLL to loans held-in-portfolio, excluding impaired loans [1]

     3.80      5.53      7.70      0.71      1.43      4.03      3.26 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ALLL

   $ 369,432     $ 8,481     $ 46,228     $ 4,651     $ 102,261     $ 159,310     $ 690,363    

Total non-covered loans held-in-portfolio [1]

   $ 9,973,327     $ 239,939     $ 648,409     $ 548,706     $ 5,518,460     $ 3,673,755     $ 20,602,596    

ALLL to loans held-in-portfolio [1]

     3.70      3.53      7.13      0.85      1.85      4.34      3.35 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

[1] Excludes covered loans acquired on the Westernbank FDIC-assisted transaction.
[2] Excludes covered loans acquired on the Westernbank FDIC-assisted transaction. At December 31, 2011, the general allowance on the covered loans amounted to $98 million while the specific reserve amounted to $27 million.

 

167


Table of Contents

Table 42 - Composition of ALLL (March 31, 2011)

  

March 31, 2011

 

(Dollars in thousands)

   Commercial     Construction     Legacy     Leasing     Mortgage     Consumer     Total[2]  

Specific ALLL

   $ 9,726     $ —        $ —        $ —        $ 8,166     $ —        $ 17,892    

Impaired loans [1]

   $ 449,079     $ 124,824     $ 104,017     $ —        $ 147,026     $ —        $ 824,946    

Specific ALLL to impaired loans [1]

     2.17      —       —       —       5.55      —       2.17 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

General ALLL

   $ 337,565     $ 33,577     $ 69,911     $ 6,608     $ 71,944     $ 189,849     $ 709,454    

Loans held-in-portfolio, excluding impaired loans [1]

   $ 9,952,206     $ 165,059     $ 794,755     $ 565,881     $ 4,748,656     $ 3,625,286     $ 19,851,843    

General ALLL to loans held-in-portfolio, excluding impaired loans [1]

     3.39      20.34      8.80      1.17      1.52      5.24      3.57 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ALLL

   $ 347,291     $ 33,577     $ 69,911     $ 6,608     $ 80,110     $ 189,849     $ 727,346    

Total non-covered loans held-in-portfolio [1]

   $ 10,401,285     $ 289,883     $ 898,772     $ 565,881     $ 4,895,682     $ 3,625,286     $ 20,676,789    

ALLL to loans held-in-portfolio [1]

     3.34      11.58      7.78      1.17      1.64      5.24      3.52 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

[1] Excludes covered loans acquired on the Westernbank FDIC-assisted transaction.
[2] Excludes covered loans acquired on the Westernbank FDIC-assisted transaction. At March 31, 2011 the general allowance on the covered loans amounted to $9 million while there was no specific reserve.

 

 

At March 31, 2012, the allowance for loan losses, excluding covered loans, decreased by approximately $26 million from December 31, 2011. It represented 3.25% of non-covered loans held-in-portfolio at March 31, 2012, compared with 3.35% at December 31, 2011. This decrease in the allowance for loan losses considers reductions in the Corporation’s general reserves of approximately $43 million, offset by an increase of $17 million in the specific reserves. The decrease in the Corporation’s allowance for loan losses from December 31, 2011 to March 31, 2012 was primarily driven by the revisions made to the general reserve estimation process for the commercial and construction loan portfolios, as described above. The net effect of these changes amounted to a $24.8 million reduction in the Corporation’s allowance for loan losses, resulting from a reduction of $40.5 million due to the enhancements to the allowance for loan losses methodology, offset in part by a $15.7 million increase in environmental factor reserves due to the Corporation’s decision to monitor recent trends in its commercial loan portfolio at the BPPR reportable segment that although improving, continue to warrant additional scrutiny. The increase from December 31, 2011 to March 31, 2012 in the Corporation’s recorded investment in loans that were individually evaluated for impairment and their specific allowance for loan losses was mainly related to consumer and mortgage TDRs, due to the intensification of loss mitigation efforts.

At March 31, 2012, the allowance for loan losses for non-covered loans of the BPPR reportable segment totaled $448 million or 3.01% of non-covered loans held-in-portfolio, compared with $453 million or 3.06% of non-covered loans held in portfolio at December 31, 2011. The decrease was mainly driven by a reduction of $22 million in the general reserve component, when compared to December 31, 2011, mainly due to a lower net charge-off trend in the commercial loan portfolio. The reduction also includes the aforementioned net benefit of $7.1 million related to the revisions made to the general reserve estimation process for the commercial and construction loan portfolios, net of the increase due to environmental factor reserves. These improvements were partially offset by higher reserve requirements for the consumer and residential mortgage loan portfolios due to higher net charge-offs and specific reserve requirements for loans restructured under loss mitigation programs.

The allowance for loan losses of the BPNA reportable segment totaled $217 million or 3.87% of loans held in portfolio, compared with $237 million or 4.11% of loans held-in-portfolio at December 31, 2011. The decrease was mainly driven by a reduction of $21 million in the general reserve component, when compared to December 31, 2011. This reduction considers a $17.7 million impact related to the enhancements to the allowance for loan losses methodology, coupled with lower loss trends across all portfolios, as the U.S. mainland continues to reflect improved credit performance.

 

168


Table of Contents

Table 43 presents the Corporation’s recorded investment in loans, excluding covered loans, that were considered impaired and the related valuation allowance at March 31, 2012, December 31, 2011, and March 31, 2011.

 

Table 43 - Impaired Loans (Non-covered loans)

  

  
     March 31, 2012      December 31, 2011      March 31, 2011  

(In millions)

   Recorded
Investment
     Valuation
Allowance
     Recorded
Investment
     Valuation
Allowance
     Recorded
Investment
     Valuation
Allowance
 

Impaired loans:

                 

Valuation allowance

   $ 692.3      $ 76.1      $ 632.9      $ 59.0      $ 187.6      $ 17.9  

No valuation allowance required

     566.1        —           593.1        —           637.3        —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 1,258.4      $ 76.1      $ 1,226.0      $ 59.0      $ 824.9      $ 17.9  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With respect to the $566 million portfolio of impaired loans for which no allowance for loan losses was required at March 31, 2012, management followed the guidance for specific impairment of a loan. When a loan is impaired, the measurement of the impairment may be based on: (1) the present value of the expected future cash flows of the impaired loan discounted at the loan’s 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 $566 million impaired loans with no valuation allowance were mostly collateral dependent loans for which management performed an 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 inherent losses at March 31, 2012.

Average impaired loans during the quarters ended March 31, 2012 and March 31, 2011 were $1.2 billion and $812 million, respectively. The Corporation recognized interest income on impaired loans of $8.0 million and $3.3 million for the quarters ended March 31, 2012 and 2011, respectively. This increase was mainly driven by interest income from residential mortgage TDRs of the BPPR reportable segment.

Tables 44 and 45 set forth the activity in the specific reserves for impaired loans, excluding covered loans, for the quarters ended March 31, 2012 and 2011.

 

Table 44 - Activity in Specific ALLL for the Quarter Ended March 31, 2012

  

(In thousands)

   Commercial
Loans
    Construction
Loans
    Mortgage
Loans
    Legacy
Loans
    Consumer
Loans
     Leasing      Total  

Specific allowance for loan losses at December 31, 2011

   $ 11,738     $ 289     $ 29,063     $ 57     $ 17,046      $ 793      $ 58,986  

Provision for impaired loans

     32,494       2,079       13,457       1,065       1,944        551        51,590  

Less: Net charge-offs

     (31,234     (1,355     (1,574     (357     —           —           (34,520
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Specific allowance for loan losses at March 31, 2012

   $ 12,998     $ 1,013     $ 40,946     $ 765     $ 18,990      $ 1,344      $ 76,056  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

 

Table 45 - Activity in Specific ALLL for the Quarter Ended March 31, 2011

  

(In thousands)

   Commercial
Loans
    Construction
Loans
    Mortgage
Loans
    Legacy
Loans
    Total  

Specific allowance for loan losses at December 21, 2010

   $ 8,550     $ 216     $ 5,004     $ —        $ 13,770  

Provision for impaired loans

     38,934       9,203       17,618       1,738       67,493  

Recoveries related to loans transferred to LHFS

     —          —          (13,807     —          (13,807

Less: Net charge-offs

     (37,758     (9,419     (649     (1,738     (49,564
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Specific allowance for loan losses at March 31, 2011

   $ 9,726     $ —        $ 8,166     $ —        $ 17,892  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the quarter ended March 31, 2012, total net charge-offs for individually evaluated impaired loans amounted to approximately $34.5 million, of which $19.8 million pertained to the BPPR reportable segment and $14.7 million to the BPNA reportable segment. Most of these net charge-offs were related both BPPR and BPNA reportable segments commercial loan portfolios. As compared to the quarter ended March 31, 2011, the decrease in charge-offs for construction loans considered impaired was mainly to lower level of problem loans in the remaining portfolio.

 

169


Table of Contents

The Corporation requests updated appraisal reports from pre-approved appraisers for loans that are considered impaired, and individually analyzes them following the Corporation’s reappraisal policy. This policy requires updated appraisals for loans secured by real estate (including construction loans) either annually or every two years depending on the total exposure of the borrower. As a general procedure, the Corporation internally reviews appraisals as part of the underwriting and approval process and also for credits considered impaired. Generally, the specialized appraisal review unit of the Corporation’s Credit Risk Management Division internally reviews appraisals following certain materiality benchmarks. In addition to evaluating the reasonability of the appraisal reports, these reviews monitor that appraisals are performed following the Uniform Standards of Professional Appraisal Practice (“USPAP”).

Appraisals may be adjusted due to age or general market conditions. The adjustments applied are based upon internal information, like other appraisals and/or loss severity information that can provide historical trends in the real estate market. Specifically, in commercial and construction impaired loans for the BPPR reportable segment, and depending on the type of property and/or the age of the appraisal, downward adjustments currently range from 10% to 45% (including costs to sell). At March 31, 2012, the weighted average discount rate for the BPPR reportable segment was 21%.

For commercial and construction loans at the BPNA reportable segment, downward adjustments to the collateral value currently range from 30% to 50% depending on the age of the appraisals and the type, location and condition of the property. This discount used was determined based on a study of other real estate owned and loan sale transactions during the past two years, comparing net proceeds received by the bank relative to the most recent appraised value of the properties. However, additional haircuts can be applied depending upon the age of appraisal, the region and the condition of the project. Factors are based on appraisal changes and/or trends in loss severities. Discount rates discussed above include costs to sell and may change from time to time based on market conditions. At March 31, 2012, the weighted average discount rate for the BPNA reportable segment was 34%.

For mortgage loans secured by residential real estate properties, a current assessment of value is made not later than 180 days past the contractual due date. Any outstanding balance in excess of the estimated value of the collateral property, less estimated costs to sell, is charged-off. For this purpose, the Corporation requests third-party Broker Price Opinion of Value “BPOs” of the subject collateral property at least annually. In the case of the mortgage loan portfolio for the BPPR reportable segment, BPOs of the subject collateral properties are currently subject to downward adjustment (cost to sell) of 5%. In the case of the U.S. mortgage loan portfolio, a 30% haircut is taken, which includes costs to sell.

Discount rates discussed above include costs to sell and may change from time to time based on market conditions.

Table 46 presents the approximate amount and percentage of non-covered impaired loans for which the Corporation relied on appraisals dated more than one year old for purposes of impairment requirements at March 31, 2012.

Table 46 - Non-covered Impaired Loans with Appraisals Dated 1 year or Older

 

March 31, 2012

 
     Total Impaired Loans –
Held-in-portfolio (HIP)
     Impaired Loans with
Appraisals Over One-
Year Old [1]
 

(In thousands)

   # of Loans      Outstanding Principal
Balance
    

Total commercial

     366      $ 498,427        28 

Total construction

     25      $ 61,448        17 

Total legacy

     35      $ 47,731        27  
  

 

 

    

 

 

    

 

 

 

 

[1] Based on outstanding balance of total impaired loans.

 

170


Table of Contents

The percentage of the Corporation’s impaired construction loans that were relied upon “as developed” and “as is” for the period ended March 31, 2012 is presented in Table 47.

Table 47 - Impaired Construction Loans Relied Upon “As is” or “As Developed”

 

     March 31, 2012  
      “As is”     “As developed”  

(In thousands)

   Count      Amount in $      As a % of total
construction
impaired loans HIP
    Count      Amount in $      As a % of total
construction
impaired loans HIP
    Average % of
completion
 

Loans held-in-portfolio [1]

     27      $ 51,253        56     9      $ 40,697        44     91

 

[1] Includes $27.8 million of constructions loans from the BPNA legacy portfolio.

At March 31, 2012, the Corporation accounted for $41 million impaired construction loans under the “as developed” value. This approach is used since the current plan is that the project will be completed and it reflects the best strategy to reduce potential losses based on the prospects of the project. The costs to complete the project and the related increase in debt are considered an integral part of the individual reserve determination.

Costs to complete are deducted from the subject “as developed” collateral value on impaired construction loans. Impairment determinations are calculated following the collateral dependent method, comparing the outstanding principal balance of the respective impaired construction loan against the expected realizable value of the subject collateral. Realizable values of subject collaterals have been defined as the “as developed” appraised value less costs to complete, costs to sell and discount factors. Costs to complete represent an estimate of the amount of money to be disbursed to complete a particular phase of a construction project. Costs to sell have been determined as a percentage of the subject collateral value, to cover related collateral disposition costs (e.g. legal and commission fees). As discussed previously, discount factors may be applied to the appraised amounts due to age or general market conditions.

Allowance for loan losses – Covered loan portfolio

The Corporation’s allowance for loan losses for the covered loan portfolio acquired in the Westernbank FDIC-assisted transaction amounted to $138 million at March 31, 2012, compared to $125 million at December 31, 2011. This allowance covers the estimated credit loss exposure related to: (i) acquired loans accounted for under ASC Subtopic 310-30, which required an allowance for loan losses of $95 million at March 31, 2012; and (ii) acquired loans accounted for under ASC Subtopic 310-20, which required an allowance for loan losses of $43 million at March 31, 2012. Decreases in expected cash flows after the acquisition date for loans (pools) accounted for under ASC Subtopic 310-30 are recognized by recording an allowance for loan losses in the current period. For purposes of loans accounted for under ASC Subtopic 310-20 and new loans originated as a result of loan commitments assumed, the Corporation’s assessment of the allowance for loan losses is determined in accordance with the accounting guidance of loss contingencies in ASC Subtopic 450-20 (general reserve for inherent losses) and loan impairment guidance in ASC Section 310-10-35 for loans individually evaluated for impairment. Concurrently, the Corporation records an increase in the FDIC loss share asset for the expected reimbursement from the FDIC under the loss sharing agreements.

Geographic and government risk

The Corporation is exposed to geographical and government risk. The Corporation’s assets and revenue composition by geographical area and by business segment reporting are presented in Note 30 to the consolidated financial statements. A significant portion of the Corporation’s financial activities and credit exposure is concentrated in Puerto Rico. The Puerto Rico economy has experienced recessionary conditions since 2006. Based on preliminary information published by the Puerto Rico Planning Board (the “Planning Board”), the Puerto Rico real gross national product decreased an estimated 1.5% during fiscal year ended June 30, 2011.

The Planning Board forecasts positive growth in fiscal 2012 and fiscal 2013 with estimates of 0.9% and 1.1%, respectively. Total employment, including self-employed and agriculture, amounted to 1.092 million jobs as of March 2012, compared with 1.097 million jobs in February 2012 and 1.064 million jobs in March 2011. The unemployment rate amounted to 15%, unchanged from February 2012 and down from 16.2% in March 2011.

 

171


Table of Contents

Economic growth is still challenged by a lack of job growth and a housing sector that remains under pressure, but the government has made progress in addressing the budget deficit while the banking sector has been substantially recapitalized and consolidated through FDIC-assisted transactions.

During 2011, the Puerto Rico government signed into law several economic and fiscal measures to help counter the prolonged recession. The implementation of a temporary excise tax on certain multinational manufacturers allowed the government to implement a reduction in individual taxes that is expected to add nearly $1 billion annually to consumers’ purchasing power. The marginal corporate tax rate in Puerto Rico was also reduced from 39% to 30% in January 2011.

General fund net revenues of the government during the first eight months of fiscal year 2012 (July 2011 to February 2012) amounted to $4.95 billion, a 15.2% year-over-year increase. Proceeds slated for infrastructure work from government bond issues held in the fourth quarter of 2011 amounted to approximately $1.5 billion, according to the GDB.

Investment in construction for fiscal year 2011 reached $3.842 billion or 4.7% above fiscal year 2010, according to the Planning Board. In real prices this represented a 2.2% increase during the same period of the previous fiscal year, making it the first positive fiscal year for investment in construction after the values at constant prices fell for seven consecutive years.

In 2010, the government also enacted a housing-incentive law that put into effect temporary measures that seek to stimulate demand for housing and reduce the significant excess supply of new homes. The incentives, which were extended until December 2012 with minor modifications, include reductions in taxes and government closing fees, tax exemption on rental income from new properties for 10 years, exemption on long-term capital gain tax in future sale of new properties and no property taxes for five years on new housing, among others. The incentives, together with the current environment of low interest rates, continue to attract home buyers into the market.

Tourism reflected a significant pickup in visitors during 2011. The monthly average of 183,224 in tourist hotel registrations for 2011 marked a 10-year high. Hotel registrations increased 6.7% on an annual basis during the year 2011, compared with a 4% increase in 2010.

While the higher number of visitors has yet to produce significant job gains in that sector, it has paved the way for more investments in the high-end sector of the market, including The Dorado Beach Ritz Reserve hotel, which is scheduled to open in late 2012.

The Puerto Rico economy, however, continues to be susceptible to fluctuations in the price of crude oil due to its high dependence on fuel oil for energy production. Lingering effects from the prolonged recession are still reflected in limited loan demand and in high levels of non-performing assets, loan loss provisions and charge-offs. If the price of crude oil increases and if global economic conditions worsen, those adverse effects could continue. Also, a potential reduction in consumer spending may also impact growth in the Corporation’s other interest and non-interest revenues.

On April 17, 2012, Moody’s Investors Service placed the ratings of the Puerto Rico Sales Tax Financing Corporation’s (COFINA) outstanding senior and subordinated sales tax revenue bonds on review for possible downgrade. The review falls within the framework of the rating agency’s recently published US Public Finance Special Tax Methodology. The senior and subordinated COFINA bonds are currently rated Aa2 and A1, respectively.

On August 8, 2011, Moody’s Investors Service downgraded the rating of the outstanding general obligation (GO) bonds of the Commonwealth of Puerto Rico from ‘A3’ to ‘Baa1’, with negative outlook. Moody’s new Baa1 rating is at par with Fitch’s BBB+ and one notch above the BBB rating Puerto Rico received from S&P last March when the latter upgraded Puerto Rico’s credit rating for the first time in 28 years.

At March 31, 2012, the Corporation had $1.1 billion of credit facilities granted to or guaranteed by the Puerto Rico Government and its political subdivisions, of which $0.3 billion were uncommitted lines of credit. Of these total credit facilities granted, $0.9 billion were outstanding at March 31, 2012. A substantial portion of the Corporation’s credit exposure to the Government of Puerto Rico is either collateralized loans or obligations that have a specific source of income or revenues identified for their repayment. Some of these obligations consist of senior and subordinated loans to public corporations that obtain revenues from rates charged for services or products, such as water and electric power utilities. Public corporations have varying degrees of independence from the central Government and many receive appropriations or other payments from it. The Corporation also has loans to various municipalities in Puerto Rico for which, in most cases, 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.

 

172


Table of Contents

Furthermore, at March 31, 2012, the Corporation had outstanding $155 million in obligations of Puerto Rico, States and political subdivisions as part of its investment securities portfolio. Of that total, $151 million was exposed to the creditworthiness of the Puerto Rico Government and its municipalities.

As further detailed in Notes 5 and 6 to the consolidated financial statements, a substantial portion of the Corporation’s investment securities represented exposure to the U.S. Government in the form of U.S. Government sponsored entities, as well as agency mortgage-backed and U.S. Treasury securities. In addition, $641 million of residential mortgages and $204 million in commercial loans were insured or guaranteed by the U.S. Government or its agencies at March 31, 2012. On August 5, 2011, Standard & Poor’s lowered its long-term sovereign credit rating on the United States of America from AAA to AA+ and on August 8, 2011, Standard & Poor’s lowered its credit ratings of the obligations of certain U.S. Government sponsored entities, including FNMA, FHLB and FHLMC, and other agencies with securities linked to long-term U.S. government debt. These downgrades could have a material adverse impact on global financial markets and economic conditions, and its ultimate impact is unpredictable and may not be immediately apparent. The Corporation does not have any exposure to European sovereign debt.

ADOPTION OF NEW ACCOUNTING STANDARDS AND ISSUED BUT NOT YET EFFECTIVE ACCOUNTING STANDARDS

FASB Accounting Standards Update 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income (“ASU 2011-05”) and FASB Accounting Standards Update 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 (“ASU 2011-12”)

The FASB issued ASU 2011-05 in June 2011. The amendment of this ASU allows an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments to the Codification in this ASU do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. This ASU also does not change the option for an entity to present components of other comprehensive income either net of related tax effects or before related tax effects, with one amount shown for the aggregate income tax expense or benefit related to the total of other comprehensive income items.

In December 2011, the FASB issued ASU 2011-12, which defers indefinitely the new requirement in ASU 2011-05 to present components of reclassification adjustments out of accumulated other comprehensive income on the face of the income statement by income statement line item.

The Corporation adopted the provisions of these two guidance in the first quarter of 2012. The guidance impacts presentation disclosure only and did not have an impact on the Corporation’s financial condition or results of operations.

FASB Accounting Standards Update 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities (“ASU 2011-11”)

The FASB issued ASU 2011-11 in December 2011. The amendments in this ASU require an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. To meet this objective, entities with financial instruments and derivatives that are either offset on the balance sheet or subject to a master netting arrangement or similar arrangement shall disclose the following quantitative information separately for assets and liabilities in tabular format: a) gross amounts of recognized assets and liabilities; b) amounts offset to determine the net amount presented in the balance sheet; c) net amounts presented in the balance sheet; d) amounts subject to an enforceable master netting agreement or similar arrangement not otherwise included in (b), including: amounts related to recognized financial instruments and other derivatives instruments if either management makes an accounting election not to offset or the amounts do not meet the guidance in ASC Section 210-20-45 or ASC Section 815-10-45, and also amounts related to financial collateral (including cash collateral); and e) the net amount after deducting the amounts in (d) from the amounts in (c).

In addition to these tabular disclosures, entities are required to provide a description of the setoff rights associated with assets and liabilities subject to an enforceable master netting arrangement.

 

173


Table of Contents

An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented.

The provisions of this guidance impact presentation disclosure only and will not have an impact on the Corporation’s financial condition or results of operations.

FASB Accounting Standards Update 2011-10, Property, Plant, and Equipment (Topic 360): Derecognition of in Substance Real Estate-a Scope Clarification (“ASU 2011-10”)

The FASB issued ASU 2011-10 in December 2011. The objective of this ASU is to resolve the diversity in practice about whether the guidance in ASC Subtopic 360-20, “Property, Plant, and Equipment Real Estate Sales” applies to a parent that ceases to have a controlling financial interest in a subsidiary that is in substance real estate as a result of default on the subsidiary’s nonrecourse debt. ASU 2011-10 provides that when a parent (reporting entity) ceases to have a controlling financial interest in a subsidiary that is in substance real estate as a result of default on the subsidiary’s nonrecourse debt, the reporting entity should apply the guidance in ASC Subtopic 360-20 to determine whether it should derecognize the in substance real estate. Generally, a reporting entity would not satisfy the requirements to derecognize the in substance real estate before the legal transfer of the real estate to the lender and the extinguishment of the related nonrecourse indebtedness. That is, even if the reporting entity ceases to have a controlling financial interest under ASC Subtopic 810-10, the reporting entity would continue to include the real estate, debt, and the results of the subsidiary’s operations in its consolidated financial statements until legal title to the real estate is transferred to legally satisfy the debt.

ASU 2011-10 should be applied on a prospective basis to deconsolidation events occurring after the effective date; with prior periods not adjusted even if the reporting entity has continuing involvement with previously derecognized in substance real estate entities. For public entities, ASU 2011-10 is effective for fiscal years, and interim periods within those years, beginning on or after June 15, 2012. Early adoption is permitted; however, the Corporation is not early adopting this ASU.

The adoption of this guidance is not expected to have a material effect on the Corporation’s consolidated financial statements.

FASB Accounting Standards Update 2011-08, Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for Impairment (“ASU 2011-08”)

The FASB issued Accounting Standards Update (“ASU”) No. 2011-08 in September 2011. ASU 2011-08 is intended to simplify how entities test goodwill for impairment. ASU 2011-08 permits an entity the option to first assess qualitative factors to determine whether it is “more likely than not” that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in ASC Topic 350, Intangibles-Goodwill and Other. The more-likely-than-not threshold is defined as having a likelihood of more than 50%. The previous guidance under ASC Topic 350 required an entity to test goodwill for impairment, on at least an annual basis, by comparing the fair value of a reporting unit with its carrying amount, including goodwill (step one). If the fair value of a reporting unit is less than its carrying amount, then the second step of the test must be performed to measure the amount of the impairment loss, if any. Under the amendments in this ASU, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount.

This ASU also removes the guidance that permitted the entities to carry forward the calculation of the fair value of the reporting unit from one year to the next if certain conditions are met. In addition, the new qualitative indicators replace those currently used to determine whether an interim goodwill impairment test is required. These indicators are also applicable for assessing whether to perform step two for reporting units with zero or negative carrying amounts.

ASU 2011-08 was effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption was permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period had not yet been issued. The Corporation did not elect to adopt early the provisions of this ASU.

The Corporation adopted this guidance on January 1, 2012. The provisions of this guidance simplify how entities test for goodwill impairment and it did not impact the Corporation’s consolidated financial statements for the quarter ended March 31, 2012.

 

174


Table of Contents

FASB Accounting Standards Update 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS (“ASU 2011-04”)

The FASB issued ASU 2011-04 in May 2011. The amendment of this ASU provides a consistent definition of fair value between U.S. GAAP and International Financial Reporting Standards (“IFRS”). The ASU modifies some fair value measurement principles and disclosure requirements including the application of the highest and best use and valuation premise concepts, measuring the fair value of an instrument classified in a reporting entity’s shareholders’ equity, measuring the fair value of financial instruments that are managed within a portfolio, application of premiums and discounts in a fair value measurement, disclosing quantitative information about unobservable inputs used in Level 3 fair value measurements, and other additional disclosures about fair value measurements.

The new guidance was effective for the first interim or annual period beginning on or after December 15, 2011. The guidance should be applied prospectively and early application was not permitted.

The Corporation adopted this guidance on the first quarter of 2012. It did not have a material impact on the Corporation’s consolidated financial statements. Refer to Notes 21 and 22 for additional fair value disclosures included for the quarter ended March 31, 2012.

FASB Accounting Standards Update 2011-03, Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements (“ASU 2011-03”)

The FASB issued ASU 2011-03 in April 2011. The amendment of this ASU affects all entities that enter into agreements to transfer financial assets that both entitle and obligate the transferor to repurchase or redeem the financial assets before their maturity. The ASU modifies the criteria for determining when these transactions would be accounted for as financings (secured borrowings / lending agreements) as opposed to sales (purchases) with commitments to repurchase (resell). This ASU does not affect other transfers of financial assets. ASC Topic 860 prescribes when an entity may or may not recognize a sale upon the transfer of financial assets subject to repurchase agreements. That determination is based, in part, on whether the entity has maintained effective control over transferred financial assets.

Specifically, the amendments in this ASU remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the requirement to demonstrate that the transferor possesses adequate collateral to fund substantially all the cost of purchasing replacement financial assets.

The new guidance was effective for the first interim or annual period beginning on or after December 15, 2011. The guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early application was not permitted.

The adoption of this guidance on January 1, 2012 did not have an impact on the Corporation’s consolidated financial statements for the quarter ended March 31, 2012.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Quantitative and qualitative disclosures for the current period can be found in the Market Risk section of this report, which includes changes in market risk exposures from disclosures presented in the Corporation’s 2011 Annual Report.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

The Corporation’s management, with the participation of the Corporation’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Corporation’s 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 Corporation’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Corporation’s 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.

 

175


Table of Contents

Internal Control Over Financial Reporting

There have been no changes in the Corporation’s 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 March 31, 2012 that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

Part II - Other Information

Item 1. Legal Proceedings

For a discussion of Legal Proceedings, see Note 18, “Commitments and Contingencies”, to the Consolidated Financial Statements.

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed under “Part I -Item 1A - Risk Factors” in our 2011 Annual Report. These factors could materially adversely affect our business, financial condition, liquidity, results of operations and capital position, and could cause our actual results to differ materially from our historical results or the results contemplated by the forward-looking statements contained in this report. Also refer to the discussion in “Part I - Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this report for additional information that may supplement or update the discussion of risk factors in our 2011 Annual Report.

There have been no material changes to the risk factors previously disclosed under Item 1A. of the Corporation’s 2011 Annual Report, except for risks relating to the reverse stock split which are included in the disclosures below.

The risks described in our 2011 Annual Report and in this report are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or results of operations.

RISKS RELATING TO THE REVERSE STOCK SPLIT

There can be no assurance that the total market capitalization of our Common Stock (the aggregate value of all Common Stock at the then market price) after the reverse stock split will be equal to or greater than the total market capitalization before the reverse stock split or that the per share market price of Common Stock following the reverse stock split will increase in proportion to the reduction in the number of shares of our common stock outstanding before the reverse stock split.

On April 27, 2012, the stockholders of the Corporation approved an amendment to the Corporation’s Restated Certificate of Incorporation to effect a reverse stock split of the Corporation’s Common Stock of 1-for-10, together with a corresponding reduction in the number of authorized shares of its Common Stock. The amendment will become effective upon the filing of a certificate of amendment to the Restated Certificate of Incorporation with the Puerto Rico Department of State or at such later date and time specified in that certificate of amendment (the “effective date”). The reverse split is expected to become effective at 11:59 p.m. Atlantic Standard Time on May 29, 2012. If effective on that date, the Corporation’s Common Stock will begin trading on a split-adjusted basis when the market opens on May 30, 2012. There can be no assurance that the market price per new share of Common Stock after the reverse stock split will increase in proportion to the reduction in the number of shares of Common Stock outstanding before the reverse stock split. For example, based on the closing price of Common Stock on March 31, 2012 of $2.05 per share, following the effectiveness of the 1-for-10 reverse stock split, there can be no assurance that the post-split market price of Common Stock would be $20.50 per share or greater.

A decline in the market price of our Common Stock after a reverse stock split may result in a greater percentage decline than would occur in the absence of a reverse stock split.

If the market price of our Common Stock declines following the effectiveness of the reverse stock split, the percentage decline may be greater than would occur in the absence of the reverse stock split. However, the market price of our Common Stock will also be based on our performance and other factors, which are unrelated to the number of shares of Common Stock outstanding.

 

176


Table of Contents

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

In April 2004, the Corporation’s shareholders adopted the Popular, Inc. 2004 Omnibus Incentive Plan. The Corporation has to date used shares purchased in the market to make grants under the Plan. The maximum number of shares of common stock that may be granted under this plan is 10,000,000.

In connection with the Corporation’s participation in the Capital Purchase Program under the Troubled Asset Relief Program, the consent of the U.S. Department of the Treasury will be required for the Corporation to repurchase its common stock other than in connection with benefit plans consistent with past practice and certain other specified circumstances.

The following table sets forth the details of purchases of Common Stock during the quarter ended March 31, 2012 under the 2004 Omnibus Incentive Plan.

 

Not in thousands   Issuer Purchases of Equity Securities  

Period

  Total Number of
Shares Purchased
    Average Price
Paid per Share
    Total Number of Shares Purchased
as Part of Publicly Announced
Plans or Programs
    Maximum Number of Shares that
May Yet be Purchased Under the
Plans or Programs [a]
 

January 1 - January 31

    —          —          —          —     

February 1 - February 29

    1,575,655     $ 1.68        —          —     

March 1 - March 31

    —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Total March 31, 2012

    1,575,655     $ 1.68        —          —     
 

 

 

   

 

 

   

 

 

   

 

 

 

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

 

177


Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    POPULAR, INC.
    (Registrant)
Date: May 10, 2012     By:   /s/ Jorge A. Junquera
      Jorge A. Junquera
      Senior Executive Vice President &
      Chief Financial Officer

 

Date: May 10, 2012     By:   /s/ Jorge J. García
      Jorge J. García
      Senior Vice President & Corporate Comptroller

 

178