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, 2016

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, 103,704,084 shares outstanding as of May 4, 2016.

 

 

 


Table of Contents

POPULAR, INC.

INDEX

 

     Page  

Part I – Financial Information

  

Item 1. Financial Statements

  

Unaudited Consolidated Statements of Financial Condition at March  31, 2016 and December 31, 2015

     5   

Unaudited Consolidated Statements of Operations for the quarters ended March 31, 2016 and 2015

     6   

Unaudited Consolidated Statements of Comprehensive Income for the quarters ended March 31, 2016 and 2015

     7   

Unaudited Consolidated Statements of Changes in Stockholders’ Equity for the quarters ended March 31, 2016 and 2015

     8   

Unaudited Consolidated Statements of Cash Flows for the quarters ended March 31, 2016 and 2015

     9   

Notes to Unaudited Consolidated Financial Statements

     10   

Item  2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     121   

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     170   

Item 4. Controls and Procedures

     170   

Part II – Other Information

  

Item 1. Legal Proceedings

     171   

Item 1A. Risk Factors

     171   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     172   

Item 6. Exhibits

     173   

Signatures

     174   

 

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 in the geographic areas we serve;

 

    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 and the impact of proposed capital standards on our capital ratios;

 

    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 impact of the Commonwealth of Puerto Rico’s fiscal crisis, and the measures taken and to be taken by the Puerto Rico Government, on the economy and our business, and the ability of the Government to manage this crisis in an orderly manner;

 

    the performance of the stock and bond markets;

 

    competition in the financial services industry;

 

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

 

    possible legislative, tax or regulatory changes; and

 

    risks related to the Doral Transaction, including (a) our ability to maintain customer relationships and (b) risks associated with the limited amount of diligence able to be conducted by a buyer in an FDIC transaction.

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 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;

 

    risks associated with maintaining customer relationships from our acquisition of certain assets and deposits (other than certain brokered deposits) of Doral Bank from the FDIC as receiver;

 

    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;

 

3


Table of Contents
    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;

 

    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, juries and arbitrators. Investors should refer to the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2015 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 Form 10-Q are based upon information available to Popular as of the date of this Form 10-Q, 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.

 

4


Table of Contents

POPULAR, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(UNAUDITED)

 

     March 31,     December 31,  

(In thousands, except share information)

   2016     2015  

Assets:

    

Cash and due from banks

   $ 409,623      $ 363,674   
  

 

 

   

 

 

 

Money market investments:

    

Securities purchased under agreements to resell

     97,830        96,338   

Time deposits with other banks

     1,819,630        2,083,754   
  

 

 

   

 

 

 

Total money market investments

     1,917,460        2,180,092   
  

 

 

   

 

 

 

Trading account securities, at fair value:

    

Pledged securities with creditors’ right to repledge

     20,085        19,506   

Other trading securities

     51,199        52,153   

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

    

Pledged securities with creditors’ right to repledge

     734,168        739,045   

Other investment securities available-for-sale

     5,915,662        5,323,947   

Investment securities held-to-maturity, at amortized cost (fair value 2016—$80,914; 2015—$82,889)

     99,216        100,903   

Other investment securities, at lower of cost or realizable value (realizable value 2016—$167,111; 2015—$175,291)

     164,024        172,248   

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

     125,315        137,000   
  

 

 

   

 

 

 

Loans held-in-portfolio:

    

Loans not covered under loss-sharing agreements with the FDIC

     22,618,488        22,453,813   

Loans covered under loss-sharing agreements with the FDIC

     625,130        646,115   

Less–Unearned income

     110,751        107,698   

Allowance for loan losses

     538,472        537,111   
  

 

 

   

 

 

 

Total loans held-in-portfolio, net

     22,594,395        22,455,119   
  

 

 

   

 

 

 

FDIC loss-share asset

     219,448        310,221   

Premises and equipment, net

     527,493        502,611   

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

     165,960        155,231   

Other real estate covered under loss-sharing agreements with the FDIC

     36,397        36,685   

Accrued income receivable

     120,308        124,234   

Mortgage servicing assets, at fair value

     205,051        211,405   

Other assets

     2,156,030        2,193,162   

Goodwill

     631,095        626,388   

Other intangible assets

     54,080        58,109   
  

 

 

   

 

 

 

Total assets

   $ 36,147,009      $ 35,761,733   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Liabilities:

    

Deposits:

    

Non-interest bearing

   $ 6,384,093      $ 6,401,515   

Interest bearing

     21,142,500        20,808,208   
  

 

 

   

 

 

 

Total deposits

     27,526,593        27,209,723   
  

 

 

   

 

 

 

Federal funds purchased and assets sold under agreements to repurchase

     760,154        762,145   

Other short-term borrowings

     6,370        1,200   

Notes payable

     1,583,468        1,662,508   

Other liabilities

     1,018,309        1,019,018   

Liabilities from discontinued operations (Refer to Note 4)

     1,815        1,815   
  

 

 

   

 

 

 

Total liabilities

     30,896,709        30,656,409   
  

 

 

   

 

 

 

Commitments and contingencies (Refer to Note 23)

    

Stockholders’ equity:

    

Preferred stock, 30,000,000 shares authorized; 2,006,391shares issued and outstanding

     50,160        50,160   

Common stock, $0.01 par value; 170,000,000 shares authorized;

    

103,895,642 shares issued (2015—103,816,185) and 103,670,005 shares outstanding (2015—103,618,976)

     1,039        1,038   

Surplus

     4,231,233        4,229,156   

Retained earnings

     1,156,476        1,087,957   

Treasury stock—at cost, 225,637 shares (2015—197,209)

     (6,858     (6,101

Accumulated other comprehensive loss, net of tax

     (181,750     (256,886
  

 

 

   

 

 

 

Total stockholders’ equity

     5,250,300        5,105,324   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 36,147,009      $ 35,761,733   
  

 

 

   

 

 

 

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

 

5


Table of Contents

POPULAR, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

     Quarters ended March 31,  

(In thousands, except per share information)

   2016     2015  

Interest income:

    

Loans

   $ 363,197      $ 355,631   

Money market investments

     2,863        1,446   

Investment securities

     36,271        30,301   

Trading account securities

     1,689        2,696   
  

 

 

   

 

 

 

Total interest income

     404,020        390,074   
  

 

 

   

 

 

 

Interest expense:

    

Deposits

     29,874        25,864   

Short-term borrowings

     1,861        1,734   

Long-term debt

     19,873        19,281   
  

 

 

   

 

 

 

Total interest expense

     51,608        46,879   
  

 

 

   

 

 

 

Net interest income

     352,412        343,195   

Provision for loan losses—non-covered loans

     47,940        29,711   

Provision (reversal) for loan losses—covered loans

     (3,105     10,324   
  

 

 

   

 

 

 

Net interest income after provision for loan losses

     307,577        303,160   
  

 

 

   

 

 

 

Service charges on deposit accounts

     39,862        39,017   

Other service fees (Refer to Note 29)

     53,382        53,626   

Mortgage banking activities (Refer to Note 12)

     10,551        12,852   

Trading account (loss) profit

     (162     414   

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

     (304     (79

Adjustments (expense) to indemnity reserves on loans sold

     (4,098     (4,526

FDIC loss share (expense) income (Refer to Note 30)

     (3,146     4,139   

Other operating income

     15,545        9,792   
  

 

 

   

 

 

 

Total non-interest income

     111,630        115,235   
  

 

 

   

 

 

 

Operating expenses:

    

Personnel costs

     127,091        116,458   

Net occupancy expenses

     20,430        21,709   

Equipment expenses

     14,548        13,411   

Other taxes

     10,195        8,574   

Professional fees

     75,459        75,528   

Communications

     6,320        6,176   

Business promotion

     11,110        10,813   

FDIC deposit insurance

     7,370        6,398   

Other real estate owned (OREO) expenses

     9,141        23,069   

Other operating expenses

     17,165        17,349   

Amortization of intangibles

     3,114        2,104   

Restructuring costs

     —          10,753   
  

 

 

   

 

 

 

Total operating expenses

     301,943        312,342   
  

 

 

   

 

 

 

Income from continuing operations before income tax

     117,264        106,053   

Income tax expense

     32,265        32,568   
  

 

 

   

 

 

 

Income from continuing operations

     84,999        73,485   

Income from discontinued operations, net of tax

     —          1,341   
  

 

 

   

 

 

 

Net Income

   $ 84,999      $ 74,826   
  

 

 

   

 

 

 

Net Income Applicable to Common Stock

   $ 84,068      $ 73,896   
  

 

 

   

 

 

 

Net Income per Common Share – Basic

    

Net income from continuing operations

     0.81        0.71   

Net income from discontinued operations

     —          0.01   
  

 

 

   

 

 

 

Net Income per Common Share – Basic

   $ 0.81      $ 0.72   
  

 

 

   

 

 

 

Net Income per Common Share – Diluted

    

Net income from continuing operations

     0.81        0.71   

Net income from discontinued operations

     —          0.01   
  

 

 

   

 

 

 

Net Income per Common Share – Diluted

   $ 0.81      $ 0.72   
  

 

 

   

 

 

 

Dividends Declared per Common Share

   $ 0.15      $ —     
  

 

 

   

 

 

 

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

 

6


Table of Contents

POPULAR, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

 

     Quarters ended March 31,  

(In thousands)

   2016     2015  

Net income

   $ 84,999      $ 74,826   
  

 

 

   

 

 

 

Other comprehensive income before tax:

    

Foreign currency translation adjustment

     (705     (581

Amortization of net losses on pension and postretirement benefit plans

     5,486        5,025   

Amortization of prior service cost of pension and postretirement benefit plans

     (950     (950

Unrealized holding gains on investments arising during the period

     76,236        35,342   

Unrealized net losses on cash flow hedges

     (2,000     (2,535

Reclassification adjustment for net losses included in net income

     1,545        1,358   
  

 

 

   

 

 

 

Other comprehensive income before tax

     79,612        37,659   

Income tax expense

     (4,476     (2,187
  

 

 

   

 

 

 

Total other comprehensive income, net of tax

     75,136        35,472   
  

 

 

   

 

 

 

Comprehensive income, net of tax

   $ 160,135      $ 110,298   
  

 

 

   

 

 

 
Tax effect allocated to each component of other comprehensive income:    Quarters ended March 31,  

(In thousands)

   2016     2015  

Amortization of net losses on pension and postretirement benefit plans

   $ (2,140   $ (1,960

Amortization of prior service cost of pension and postretirement benefit plans

     370        371   

Unrealized holding gains on investments arising during the period

     (2,885     (1,057

Unrealized net losses on cash flow hedges

     781        989   

Reclassification adjustment for net losses included in net income

     (602     (530
  

 

 

   

 

 

 

Income tax expense

   $ (4,476   $ (2,187
  

 

 

   

 

 

 

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

 

7


Table of Contents

POPULAR, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)

 

                                     Accumulated        
                                     other        
     Common      Preferred            Retained     Treasury     comprehensive        

(In thousands)

   stock      stock      Surplus     earnings     stock     loss     Total  

Balance at December 31, 2014

   $ 1,036       $ 50,160       $ 4,196,458      $ 253,717      $ (4,117   $ (229,872   $ 4,267,382   

Net income

             74,826            74,826   

Issuance of stock

     1            1,405              1,406   

Tax windfall benefit on vesting of restricted stock

           69              69   

Dividends declared:

                

Preferred stock

             (930         (930

Common stock purchases

               (1,123       (1,123

Common stock reissuance

               18          18   

Other comprehensive income, net of tax

                 35,472        35,472   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2015

   $ 1,037       $ 50,160       $ 4,197,932      $ 327,613      $ (5,222   $ (194,400   $ 4,377,120   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2015

   $ 1,038       $ 50,160       $ 4,229,156      $ 1,087,957      $ (6,101   $ (256,886   $ 5,105,324   

Net income

             84,999            84,999   

Issuance of stock

     1            2,108              2,109   

Tax shortfall expense on vesting of restricted stock

           (31           (31

Dividends declared:

                

Common stock

             (15,549         (15,549

Preferred stock

             (931         (931

Common stock purchases

               (764       (764

Common stock reissuance

               7          7   

Other comprehensive income, net of tax

                 75,136        75,136   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2016

   $ 1,039       $ 50,160       $ 4,231,233      $ 1,156,476      $ (6,858   $ (181,750   $ 5,250,300   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
                                     March 31,     March 31,  

Disclosure of changes in number of shares:

                                   2016     2015  

Preferred Stock:

                

Balance at beginning and end of period

                 2,006,391        2,006,391   
              

 

 

   

 

 

 

Common Stock – Issued:

                

Balance at beginning of period

                 103,816,185        103,614,553   

Issuance of stock

                 79,457        42,621   
              

 

 

   

 

 

 

Balance at end of the period

                 103,895,642        103,657,174   

Treasury stock

                 (225,637     (170,247
              

 

 

   

 

 

 

Common Stock – Outstanding

                 103,670,005        103,486,927   
              

 

 

   

 

 

 

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

 

 

8


Table of Contents

POPULAR, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

     Quarter ended March 31,  

(In thousands)

   2016     2015  

Cash flows from operating activities:

    

Net income

   $ 84,999      $ 74,826   
  

 

 

   

 

 

 

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

    

Provision for loan losses

     44,835        40,035   

Amortization of intangibles

     3,114        2,104   

Depreciation and amortization of premises and equipment

     11,707        11,919   

Net accretion of discounts and amortization of premiums and deferred fees

     (11,158     (19,100

Fair value adjustments on mortgage servicing rights

     8,477        4,929   

FDIC loss share expense (income)

     3,146        (4,139

Adjustments (expense) to indemnity reserves on loans sold

     4,098        4,526   

Earnings from investments under the equity method

     (7,089     (2,301

Deferred income tax expense

     23,218        23,380   

(Gain) loss on:

    

Disposition of premises and equipment and other productive assets

     (1,946     (978

Sale of loans, including valuation adjustments on loans held-for-sale and mortgage banking activities

     (7,101     (7,222

Sale of foreclosed assets, including write-downs

     2,802        14,851   

Acquisitions of loans held-for-sale

     (66,451     (121,929

Proceeds from sale of loans held-for-sale

     22,253        27,547   

Net originations on loans held-for-sale

     (110,528     (179,604

Net decrease (increase) in:

    

Trading securities

     176,598        177,942   

Accrued income receivable

     3,926        (13

Other assets

     20,996        (28,027

Net (decrease) increase in:

    

Interest payable

     (12,261     (10,216

Pension and other postretirement benefits obligation

     1,536        1,019   

Other liabilities

     (17,010     (19,377
  

 

 

   

 

 

 

Total adjustments

     93,162        (84,654
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     178,161        (9,828
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Net decrease (increase) in money market investments

     262,632        (484,829

Purchases of investment securities:

    

Available-for-sale

     (742,859     (411,189

Held-to-maturity

     —          (250

Other

     (59,786     (2,520

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

    

Available-for-sale

     239,399        385,672   

Held-to-maturity

     2,108        2,231   

Other

     41,664        30,785   

Proceeds from sale of investment securities:

    

Other

     26,346        1,388   

Net repayments on loans

     13,335        154,794   

Proceeds from sale of loans

     1,128        19,127   

Acquisition of loan portfolios

     (212,798     (49,510

Net payments from FDIC under loss sharing agreements

     88,588        132,265   

Net cash received and acquired from business combination

     —          711,051   

Return of capital from equity method investments

     206        —     

Mortgage servicing rights purchased

     —          (2,400

Acquisition of premises and equipment

     (38,819     (10,231

Proceeds from sale of:

    

Premises and equipment and other productive assets

     5,092        3,093   

Foreclosed assets

     14,513        40,161   
  

 

 

   

 

 

 

Net cash (used in) provided by investing activities

     (359,251     519,638   
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Net increase (decrease) in:

    

Deposits

     318,550        265,906   

Federal funds purchased and assets sold under agreements to repurchase

     (1,991     (139,013

Other short-term borrowings

     5,170        (148,215

Payments of notes payable

     (108,452     (419,487

Proceeds from issuance of notes payable

     28,883        46,000   

Proceeds from issuance of common stock

     2,109        1,405   

Dividends paid

     (16,473     (620

Net payments for repurchase of common stock

     (757     (1,105
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     227,039        (395,129
  

 

 

   

 

 

 

Net increase in cash and due from banks

     45,949        114,681   

Cash and due from banks at beginning of period

     363,674        381,095   
  

 

 

   

 

 

 

Cash and due from banks at the end of the period

   $ 409,623      $ 495,776   
  

 

 

   

 

 

 

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

During the quarter ended March 31, 2016 there have not been any cash flows associated with discontinued operations. The Consolidated Statement of Cash Flows for the quarter ended March 31, 2015 includes the cash flows from operating, investing and financing activities associated with discontinued operations.

 

 

9


Table of Contents

Notes to Consolidated Financial Statements (Unaudited)

 

Note 1 - Nature of operations

     11   

Note 2 - Basis of presentation and summary of significant accounting policies

     12   

Note 3 - New accounting pronouncements

     13   

Note 4 - Discontinued operations and restructuring plan

     16   

Note 5 - Business combination

     17   

Note 6 - Restrictions on cash and due from banks and certain securities

     19   

Note 7 - Investment securities available-for-sale

     20   

Note 8 - Investment securities held-to-maturity

     24   

Note 9 - Loans

     26   

Note 10 - Allowance for loan losses

     36   

Note 11 - FDIC loss share asset and true-up payment obligation

     53   

Note 12 - Mortgage banking activities

     55   

Note 13 - Transfers of financial assets and mortgage servicing assets

     56   

Note 14 - Other real estate owned

     59   

Note 15 - Other assets

     60   

Note 16 - Goodwill and other intangible assets

     61   

Note 17 - Deposits

     63   

Note 18 - Borrowings

     64   

Note 19 - Offsetting of financial assets and liabilities

     66   

Note 20 - Stockholders’ equity

     68   

Note 21 - Other comprehensive loss

     69   

Note 22 - Guarantees

     71   

Note 23 - Commitments and contingencies

     73   

Note 24 - Non-consolidated variable interest entities

     80   

Note 25 - Related party transactions

     84   

Note 26 - Fair value measurement

     87   

Note 27 - Fair value of financial instruments

     93   

Note 28 - Net income per common share

     99   

Note 29 - Other service fees

     100   

Note 30 - FDIC loss share (expense) income

     101   

Note 31 - Pension and postretirement benefits

     102   

Note 32 - Stock-based compensation

     103   

Note 33 - Income taxes

     106   

Note 34 - Supplemental disclosure on the consolidated statements of cash flows

     109   

Note 35 - Segment reporting

     110   

Note 36 - Condensed consolidating financial information of guarantor and issuers of registered guaranteed securities

     114   

 

 

10


Table of Contents

Note 1 – 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 and the Caribbean. In Puerto Rico, the Corporation provides retail, mortgage, and commercial banking services through its principal banking subsidiary, Banco Popular de Puerto Rico (“BPPR”), as well as 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, New Jersey and South Florida under the name of Popular Community Bank. E-LOAN markets deposit accounts under its name for the benefit of BPNA. Refer to Note 4 for discussion of the sales of the California, Illinois and Central Florida regional operations during 2014. Note 35 to the consolidated financial statements presents information about the Corporation’s business segments.

On February 27, 2015, BPPR, in an alliance with other bidders, including BPNA, acquired certain assets and all deposits (other than certain brokered deposits) of former Doral Bank (“Doral”) from the Federal Deposit Insurance Corporation (FDIC), as receiver (the “Doral Bank Transaction”). Under the FDIC’s bidding format, BPPR was the lead bidder and party to the purchase and assumption agreement with the FDIC covering all assets and deposits acquired by it and its alliance co-bidders. BPPR entered into back to back purchase and assumption agreements with the alliance co-bidders for the transfer of certain assets and deposits. The other co-bidders that formed part of the alliance led by BPPR were First Bank Puerto Rico, Centennial Bank, and a vehicle formed by J.C. Flowers III L.P. BPPR entered into transition service agreements with each of the alliance co-bidders. Refer to Note 5 for further details on the Doral Bank Transaction.

 

11


Table of Contents

Note 2 – Basis of Presentation and Summary of Significant Accounting Policies

Principles of Consolidation and Basis of Presentation

The consolidated interim financial statements have been prepared without audit. The consolidated statement of financial condition data at December 31, 2015 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 2015 consolidated financial statements and notes to the financial statements to conform with the 2016 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, 2015, included in the Corporation’s 2015 Form 10-K. 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.

 

12


Table of Contents

Note 3 – New accounting pronouncements

Recently Adopted Accounting Standards Updates

FASB Accounting Standards Update 2015-03, Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”)

The FASB issued ASU 2015-03 in April 2015, which simplified the presentation of debt issuance costs. The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct reduction from the carrying amount of that debt liability.

The amendments of this Update, which are required to be applied on a retrospective basis, are effective for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015.

Since the Corporation‘s policy was to record debt issuance costs as a deferred asset, it reclassified $7.3 million (December 31, 2015—$7.8 million) of debt issuance costs as a result of the adoption of this accounting pronouncement during the first quarter of 2016 and adjusted prior periods accordingly.

Additionally, adoption of the following standards effective during the first quarter of 2016 did not have a significant impact on the presentation and disclosures in its consolidated financial statements:

 

    FASB Accounting Standards Update 2014-12, Compensation – Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (“ASU 2014-12”)

 

    FASB Accounting Standards Update 2014-13, Consolidation (Topic 810): Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financial Entity (“ASU 2014-13”)

 

    FASB Accounting Standards Update 2014-16, Derivatives and Hedging (Topic 815): Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share is more Akin to Debt or to Equity (“ASU 2014-16”)

 

    FASB Accounting Standards Update 2015-01, Income Statement – Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items (“ASU 2015-01”)

 

    FASB Accounting Standards Update 2015-02, Consolidation (Topic 810): Amendment to the Consolidation Analysis (“ASU 2015-02”)

 

    FASB Accounting Standards Update 2015-04, Compensation – Retirement Benefits (Topic 715): Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation and Plan Assets (“ASU 2015-04”)

 

    FASB Accounting Standards Update 2015-05, Intangibles – Goodwill and Other Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement (“ASU 2015-05”)

 

    FASB Accounting Standards Update 2015-07, Fair Value Measurement – (Topic 820): Disclosures for Investment in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) (“ASU 2015-07”)

 

    FASB Accounting Standards Update 2015-09, Insurance—(Topic 944): Disclosures about Short-Duration Contracts

Recently Issued Accounting Standards Updates

FASB Accounting Standards Update (“ASU”) 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing

The FASB issued ASU 2016-10 in April 2016 which clarifies two aspects of Topic 606, in particular, the identification of performance obligations. Among other things, an entity is not required to assess whether promised goods or services are performance obligations if they are immaterial in the context of the contract with the customer. In addition, in determining whether promises to transfer goods or services are separately identifiable, an entity should determine whether the nature of its promise in the contract is to transfer each of the goods or services or whether the promise is to transfer a combined item (or items) to which the promised goods and/or services are inputs.

The amendments of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017 (same effective date as ASU 2015-14).

 

13


Table of Contents

FASB Accounting Standards Update (“ASU”) 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting

The FASB issued ASU 2016-09 in March 2016 which simplifies multiple aspects of the accounting for share-based payment transactions, including the recognition of excess tax benefits and deficiencies as an income tax benefit or expense in the income statement and classification in the statement of cash flows as an operating activity, allowing entities to elect as an accounting policy to account for forfeitures when they occur, permitting entities to withhold up to the maximum individual statutory rate without classifying the awards as a liability, and requiring that the cash paid to satisfy the statutory income tax withholding obligation be classified as a financing activity.

The amendments of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted.

The Corporation does not anticipate that the adoption of this accounting pronouncement will have a material effect on its consolidated statements of financial condition, results of operations, cash flows or presentation and disclosures.

FASB Accounting Standards Update (“ASU”) 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)

The FASB issued ASU 2016-08 in March 2016, which amends the implementation guidance in ASU 2014-09 by clarifying, among other things, that an entity should determine the nature of the goods or services provided to the customer and whether it controls each specified good or service before it is transferred to the customer, that an entity can be a principal for some goods or services and an agent for others with the same contract, and that an entity is a principal if it controls the goods or services before transferring them to the customer.

The amendments of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017 (same effective date as ASU 2015-14).

The Corporation is currently evaluating the impact that the adoption of this guidance will have on its consolidated statements of financial condition or results of operations.

FASB Accounting Standards Update (“ASU”) 2016-07, Investments – Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting

The FASB issued ASU 2016-07 in March 2016, which eliminates the requirement to retroactively adopt the equity method of accounting. Therefore, as of the date the investment becomes qualified for equity method accounting, an entity should add the cost of acquiring the additional interest in the investee to the current basis of its previously held interest. For available-for-sale securities, an entity should recognize through earnings the unrealized holding gains/losses in accumulated other comprehensive income/loss as of that date.

The amendments of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted.

The Corporation does not anticipate that the adoption of this accounting pronouncement will have a material effect on its consolidated statements of financial condition or results of operations.

FASB Accounting Standards Update (“ASU”) 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments

The FASB issued ASU 2016-06 in March 2016, which clarifies that in assessing whether an embedded contingent put or call option is not clearly and closely related to the debt instrument, which is part of the assessment made to determine whether an embedded derivative must be bifurcated from the host contract, an entity is required to perform only the four step decision sequence. The four-step decision sequence requires an entity to consider whether (1) the payoff is adjusted based on changes in an index, (2) the payoff is indexed to an underlying other than interest rates or credit risk, (3) the debt involves a substantial premium or discount and (4) the put or call option is contingently exercisable. It does not have to separately assess whether the event that triggers its ability to exercise the contingent option itself is indexed only to interest rates and credit risk.

 

14


Table of Contents

The amendments of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted.

The Corporation does not anticipate that the adoption of this accounting pronouncement will have a material effect on its consolidated statements of financial condition or results of operations.

FASB Accounting Standards Update (“ASU”) 2016-05, Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships

The FASB issued ASU 2016-05 in March 2016, which clarifies that a novation, or a change in the counterparty to the derivative instrument that has been designated as a hedging instrument under Topic 815 does not, in and of itself, require de-designation of that hedging relationship, and therefore discontinuance of the application of hedge accounting, provided that all other hedge accounting criteria continue to be met.

The amendments of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted.

The Corporation does not anticipate that the adoption of this accounting pronouncement will have a material effect on its consolidated statements of financial condition or results of operations.

For recently issued Accounting Standards Updates not yet effective, refer to Note 3 to the consolidated financial statements included in the 2015 Form 10-K.

 

15


Table of Contents

Note 4 – Discontinued operations and restructuring plan

During the year ended December 31, 2014, the Corporation completed the sale of its California, Illinois and Central Florida regional operations and relocated certain back office operations to Puerto Rico and New York.

As defined in ASC 805-10-55, the regional operations sold constituted a business, and for financial reporting purposes, the results of the discontinued operations are presented as “Assets / Liabilities from discontinued operations” in the consolidated statement of condition and “(Loss) income from discontinued operations, net of tax” in the consolidated statement of operations.

As of March 31, 2016 and December 31, 2015, there were no assets held within the discontinued operations and liabilities within discontinued operations amounted to approximately $1.8 million, mainly comprised of the indemnity reserve related to the California regional sale.

There were no activities from the discontinued operations for the quarter ended March 31, 2016. Net income from the discontinued operations amounted to $1.3 million for the quarter ended March 31, 2015.

Also, in connection with the sale, the Corporation has undertaken a restructuring plan (the “PCB Restructuring Plan”) which has been completed as of March 31, 2016. The Corporation incurred restructuring charges of $45.1 million. During the quarter ended March 31, 2015, the Corporation incurred $10.8 million in restructuring costs, mostly comprised of $9.4 million in personnel costs.

The following table presents the activity in the reserve for the restructuring costs associated with the PCB Restructuring Plan:

 

     Quarters ended March 31,  

(In thousands)

   2016      2015  

Beginning balance

   $ 620       $ 13,536   

Charges expensed during the period

     —           6,297   

Payments made during the period

     (263      (9,030
  

 

 

    

 

 

 

Ending balance

   $ 357       $ 10,803   
  

 

 

    

 

 

 

 

16


Table of Contents

Note 5 Business combination

On February 27, 2015, BPPR, in an alliance with co-bidders, including BPNA, acquired certain assets and all deposits (other than certain brokered deposits) of former Doral Bank from the FDIC, as receiver. Under the FDIC’s bidding format, BPPR was the lead bidder and party to the purchase and assumption agreement with the FDIC covering all assets and deposits acquired by it and its alliance co-bidders. BPPR entered into back to back purchase and assumption agreements with the alliance co-bidders for the transfer of certain assets and deposits. BPPR entered into transition service agreements with each of the alliance co-bidders. There is no loss-sharing arrangement with the FDIC on the acquired assets.

The following table presents the fair values of major classes of identifiable assets acquired and liabilities assumed by the Corporation as of February 27, 2015.

 

(In thousands)

   Book value prior to
purchase accounting
adjustments
     Fair value
adjustments
     Additional
consideration[1]
     As recorded by
Popular, Inc.
 

Assets:

           

Cash and due from banks

   $ 339,633       $ —         $ —         $ 339,633   

Investment in available-for-sale securities

     172,706         —           —           172,706   

Investments in FHLB stock

     30,785         —           —           30,785   

Loans

     1,679,792         (165,925      —           1,513,867   

Accrued income receivable

     7,808         —           —           7,808   

Receivable from the FDIC

     —           —           480,137         480,137   

Core deposit intangible

     23,572         (10,762      —           12,810   

Other assets

     67,676         7,569         —           75,245   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 2,321,972       $ (169,118    $ 480,137       $ 2,632,991   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Deposits

   $ 2,193,404       $ 9,987       $ —         $ 2,203,391   

Advances from the Federal Home Loan Bank

     542,000         5,187         —           547,187   

Other liabilities

     50,728         (511      —           50,217   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 2,786,132       $ 14,663       $ —         $ 2,800,795   
  

 

 

    

 

 

    

 

 

    

 

 

 

Excess of liabilities assumed over assets acquired

   $ 464,160            

Aggregate fair value adjustments

      $ (183,781      
     

 

 

    

 

 

    

Additional consideration

         $ 480,137      
        

 

 

    

 

 

 

Goodwill on acquisition

            $ 167,804   
           

 

 

 

 

[1] The additional consideration represents the cash to be received from the FDIC for the difference between the net liabilities assumed and the net premium paid on the transaction.

In accordance with ASC Topic 805, the fair values assigned to the assets acquired and liabilities assumed are subject to refinement up to one year after the closing date of the acquisition as new information relative to closing date fair values become available, and thus the recognized goodwill may increase or decrease. During the second and third quarters of 2015, retrospective adjustments were made to the estimated fair values of certain assets acquired and liabilities assumed as part of the Doral Bank Transaction to reflect new information obtained about facts and circumstances that existed as of the acquisition date. The retrospective adjustments resulted in a decrease of $2.1 million to the initial fair value estimate of the mortgage servicing rights, a decrease in other liabilities assumed of $0.5 million and, an increase of $2.6 million in the receivable from the FDIC related to the acquisition cost of deposits, all of which were adjusted against goodwill.

During the fourth quarter of 2015 the Corporation early adopted ASU 2015-16 “Business Combination”. Accordingly, adjustments to the initial fair value estimates identified during the measurement period were recognized in the reporting period in which the adjustment amounts were determined. Pursuant to ASU 2015-16, adjustments were made effective in the fourth quarter of 2015 to the estimated fair values of assets and liabilities assumed with the Doral Bank Transaction to reflect new information obtained during the measurement period about facts and circumstances that existed as of the acquisition date that, if known, would have affected the acquisition-date fair value measurements.

 

17


Table of Contents

During the quarter ended March 31, 2016, the Corporation recorded adjustments to its initial fair value estimates in connection with the Doral Bank Transaction. As a result, the discount on the loans increased by $4.7 million with a corresponding increase to goodwill.

The following table presents the principal changes in fair value and the revised amounts recorded during the measurement period.

 

(In thousands)

   February 27, 2015
As recasted[a]
     February 27, 2015
As previously
reported[b]
     Change  

Assets:

        

Loans

   $ 1,513,867       $ 1,665,756       $ (151,889

Goodwill

     167,804         41,633         126,171   

Core deposit intangible

     12,810         23,572         (10,762

Receivable from the FDIC

     480,137         441,721         38,416   

Other assets

     626,177         626,177         —     
  

 

 

    

 

 

    

 

 

 

Total assets

   $ 2,800,795       $ 2,798,859       $ 1,936   
  

 

 

    

 

 

    

 

 

 

Liabilities:

        

Deposits

   $ 2,203,391       $ 2,201,455       $ 1,936   

Advances from the Federal Home Loan Bank

     547,187         547,187         —     

Other liabilities

     50,217         50,217         —     
  

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 2,800,795       $ 2,798,859       $ 1,936   
  

 

 

    

 

 

    

 

 

 

 

[a] Amounts reported include retrospective adjustments during the measurement period, in accordance with U.S. GAAP, related to the Doral Bank Transaction.
[b] Amounts are presented as previously reported as of September 30, 2015.

The impact in the results of operations for the quarter ended March 31, 2015 as a result of the recasting was an increase in net income of approximately $0.6 million as detailed in the following table:

 

     Quarter ended March 31, 2015  

(In thousands)

   As recasted      As reported      Difference  

Net Interest Income

   $ 10,306       $ 9,768       $ 538   

Non-Interest Income

     4,262         4,262         —     

Operating Expenses

     14,398         14,488         (90
  

 

 

    

 

 

    

 

 

 

Income Before Taxes

   $ 170       $ (458    $ 628   
  

 

 

    

 

 

    

 

 

 

 

 

18


Table of Contents

Note 6 – 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 $ 1.1 billion at March 31, 2016 (December 31, 2015—$ 1.1 billion). 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, 2016, the Corporation held $52 million in restricted assets in the form of funds deposited in money market accounts, trading account securities and investment securities available for sale (December 31, 2015—$44 million). The amounts held in trading account securities and investment securities available for sale consist primarily of restricted assets held for the Corporation’s non-qualified retirement plans and fund deposits guaranteeing possible liens or encumbrances over the title of insured properties.

 

19


Table of Contents

Note 7 – 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, 2016 and December 31, 2015.

 

     At March 31, 2016  

(In thousands)

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

U.S. Treasury securities

              

Within 1 year

   $ 24,665       $ 143       $ —         $ 24,808         4.92

After 1 to 5 years

     1,281,481         6,792         —           1,288,273         1.03   

After 5 to 10 years

     9,939         332         —           10,271         1.99   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total U.S. Treasury securities

     1,316,085         7,267         —           1,323,352         1.11   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Obligations of U.S. Government sponsored entities

              

After 1 to 5 years

     904,631         5,221         109         909,743         1.33   

After 5 to 10 years

     250         3         —           253         5.64   

After 10 years

     23,000         —           58         22,942         3.24   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total obligations of U.S. Government sponsored entities

     927,881         5,224         167         932,938         1.38   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Obligations of Puerto Rico, States and political subdivisions

              

After 1 to 5 years

     7,292         —           176         7,116         3.88   

After 5 to 10 years

     5,925         1         1,963         3,963         4.02   

After 10 years

     18,604         1         5,954         12,651         6.99   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total obligations of Puerto Rico, States and political subdivisions

     31,821         2         8,093         23,730         5.72   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Collateralized mortgage obligations—federal agencies

              

Within 1 year

     282         —           —           282         0.95   

After 1 to 5 years

     20,257         918         —           21,175         2.86   

After 5 to 10 years

     41,078         818         —           41,896         2.86   

After 10 years

     1,447,516         14,027         11,325         1,450,218         1.98   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total collateralized mortgage obligations—federal agencies

     1,509,133         15,763         11,325         1,513,571         2.01   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Mortgage-backed securities

              

Within 1 year

     25         —           —           25         4.80   

After 1 to 5 years

     20,808         990         6         21,792         4.64   

After 5 to 10 years

     281,359         6,195         2         287,552         2.43   

After 10 years

     2,485,109         50,510         1,282         2,534,337         2.76   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage-backed securities

     2,787,301         57,695         1,290         2,843,706         2.74   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Equity securities (without contractual maturity)

     1,351         1,090         2         2,439         7.82   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other

              

After 1 to 5 years

     8,819         10         —           8,829         1.72   

After 5 to 10 years

     1,220         45         —           1,265         3.62   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total other

     10,039         55         —           10,094         1.95   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities available-for-sale[1]

   $ 6,583,611       $ 87,096       $ 20,877       $ 6,649,830         2.07
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

[1] Includes $2.2 billion pledged to secure public and trust deposits, assets sold under agreements to repurchase, credit facilities and loan servicing agreements that the secured parties are not permitted to sell or repledge the collateral, of which $1.3 billion serve as collateral for public funds.

 

20


Table of Contents
     At December 31, 2015  

(In thousands)

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

U.S. Treasury securities

              

Within 1 year

   $ 24,861       $ 335       $ —         $ 25,196         4.31

After 1 to 5 years

     1,149,807         365         1,999         1,148,173         1.03   

After 5 to 10 years

     9,937         22         —           9,959         1.99   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total U.S. Treasury securities

     1,184,605         722         1,999         1,183,328         1.11   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Obligations of U.S. Government sponsored entities

              

After 1 to 5 years

     919,819         1,337         4,808         916,348         1.33   

After 5 to 10 years

     250         1         —           251         5.64   

After 10 years

     23,000         42         —           23,042         3.22   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total obligations of U.S. Government sponsored entities

     943,069         1,380         4,808         939,641         1.38   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Obligations of Puerto Rico, States and political subdivisions

              

After 1 to 5 years

     7,227         —           199         7,028         3.94   

After 5 to 10 years

     5,925         —           2,200         3,725         4.02   

After 10 years

     18,585         —           6,979         11,606         6.99   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total obligations of Puerto Rico, States and political subdivisions

     31,737         —           9,378         22,359         5.74   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Collateralized mortgage obligations—federal agencies

              

After 1 to 5 years

     21,446         594         37         22,003         2.81   

After 5 to 10 years

     44,585         733         —           45,318         2.85   

After 10 years

     1,518,662         8,137         33,283         1,493,516         1.99   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total collateralized mortgage obligations—federal agencies

     1,584,693         9,464         33,320         1,560,837         2.02   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Mortgage-backed securities

              

After 1 to 5 years

     22,015         987         8         22,994         4.65   

After 5 to 10 years

     256,097         4,866         1,197         259,766         2.51   

After 10 years

     2,039,217         34,839         12,620         2,061,436         2.83   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage-backed securities

     2,317,329         40,692         13,825         2,344,196         2.81   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Equity securities (without contractual maturity)

     1,350         1,053         5         2,398         7.92   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other

              

After 1 to 5 years

     8,911         —           28         8,883         1.71   

After 5 to 10 years

     1,311         39         —           1,350         3.62   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total other

     10,222         39         28         10,233         1.95   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities available-for-sale[1]

   $ 6,073,005       $ 53,350       $ 63,363       $ 6,062,992         2.07
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

[1] Includes $2.4 billion pledged to secure public and trust deposits, assets sold under agreements to repurchase, credit facilities and loan servicing agreements that the secured parties are not permitted to sell or repledge the collateral, of which $1.5 billion serve as collateral for public funds.

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, 2016 and 2015.

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, 2016 and December 31, 2015.

 

21


Table of Contents
     At March 31, 2016  
     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

   $ 73,342       $ 113       $ 19,376       $ 54       $ 92,718       $ 167   

Obligations of Puerto Rico, States and political subdivisions

     6,229         10         15,515         8,083         21,744         8,093   

Collateralized mortgage obligations—federal agencies

     —           —           656,971         11,325         656,971         11,325   

Mortgage-backed securities

     231,705         816         80,005         474         311,710         1,290   

Equity securities

     48         2         —           —           48         2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

   $ 311,324       $ 941       $ 771,867       $ 19,936       $ 1,083,191       $ 20,877   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     At December 31, 2015  
     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
 

U.S. Treasury securities

   $ 589,689       $ 1,999       $ —         $ —         $ 589,689       $ 1,999   

Obligations of U.S. Government sponsored entities

     390,319         2,128         181,744         2,680         572,063         4,808   

Obligations of Puerto Rico, States and political subdivisions

     884         164         19,490         9,214         20,374         9,378   

Collateralized mortgage obligations—federal agencies

     331,501         4,446         814,195         28,874         1,145,696         33,320   

Mortgage-backed securities

     1,641,663         12,992         22,362         833         1,664,025         13,825   

Equity securities

     45         5         —           —           45         5   

Other

     8,883         28         —           —           8,883         28   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

   $ 2,962,984       $ 21,762       $ 1,037,791       $ 41,601       $ 4,000,775       $ 63,363   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

As of March 31, 2016, the available-for-sale investment portfolio reflects gross unrealized losses of approximately $21 million, driven by U.S. Agency collateralized mortgage obligations, mortgage-backed securities and obligations of the Puerto Rico Government and its political subdivisions. As part of its analysis for all U.S. Agencies’ securities, management considers the U.S. Agency guarantee. The portfolio of obligations of the Puerto Rico Government is mostly comprised of securities with specific sources of income or revenues identified for repayments. The Corporation performs periodic credit quality reviews on these issuers.

Management evaluates investment securities for other-than-temporary (“OTTI”) declines in fair value on a quarterly basis. Once a decline in value is determined to be other-than-temporary, the value of a debt security is reduced and a corresponding charge to earnings is recognized for anticipated credit losses. Also, for equity securities that are considered other-than-temporarily impaired, the excess of the 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, 2016, 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. However, further negative evidence impacting the factors described above with respect to the “Obligations of Puerto Rico, States and political subdivisions”, could result in a charge to earnings to recognize estimated credit losses determined to be other-than-temporary. At March 31, 2016, the Corporation did not have the intent to sell debt securities in an unrealized loss position and it is more likely than not that the Corporation will not have to sell the investment securities prior to recovery of their amortized cost basis.

 

22


Table of Contents

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, 2016      December 31, 2015  

(In thousands)

   Amortized cost      Fair value      Amortized cost      Fair value  

FNMA

   $ 2,799,998       $ 2,824,458       $ 2,649,860       $ 2,633,899   

FHLB

     329,822         331,546         340,119         338,700   

Freddie Mac

     1,221,128         1,228,096         1,088,691         1,079,956   

 

23


Table of Contents

Note 8 – 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, 2016 and December 31, 2015.

 

     At March 31, 2016  
            Gross      Gross             Weighted  
     Amortized      unrealized      unrealized      Fair      average  

(In thousands)

   cost      gains      losses      value      yield  

Obligations of Puerto Rico, States and political subdivisions

              

Within 1 year

   $ 3,050       $ —         $ 1,601       $ 1,449         5.91

After 1 to 5 years

     14,270         —           5,910         8,360         6.00   

After 5 to 10 years

     18,930         —           7,716         11,214         6.17   

After 10 years

     60,880         5,266         8,320         57,826         1.99   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total obligations of Puerto Rico, States and political subdivisions

     97,130         5,266         23,547         78,849         3.52   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Collateralized mortgage obligations—federal agencies

              

After 5 to 10 years

     86         5         —           91         5.45   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total collateralized mortgage obligations—federal agencies

     86         5         —           91         5.45   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other

              

After 1 to 5 years

     2,000         —           26         1,974         1.81   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total other

     2,000         —           26         1,974         1.81   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities held-to-maturity[1]

   $ 99,216       $ 5,271       $ 23,573       $ 80,914         3.49
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

[1] Includes $97.5 million pledged to secure public and trust deposits that the secured parties are not permitted to sell or repledge the collateral.

 

     At December 31, 2015  
            Gross      Gross             Weighted  
     Amortized      unrealized      unrealized      Fair      average  

(In thousands)

   cost      gains      losses      value      yield  

Obligations of Puerto Rico, States and political subdivisions

              

Within 1 year

   $ 2,920       $ —         $ 291       $ 2,629         5.90

After 1 to 5 years

     13,655         —           5,015         8,640         5.98   

After 5 to 10 years

     20,020         —           8,020         12,000         6.14   

After 10 years

     62,222         3,604         8,280         57,546         2.08   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total obligations of Puerto Rico, States and political subdivisions

     98,817         3,604         21,606         80,815         3.55   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Collateralized mortgage obligations—federal agencies

              

After 5 to 10 years

     86         5         —           91         5.45   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total collateralized mortgage obligations—federal agencies

     86         5         —           91         5.45   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other

              

After 1 to 5 years

     2,000         —           17         1,983         1.81   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total other

     2,000         —           17         1,983         1.81   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities held-to-maturity[1]

   $ 100,903       $ 3,609       $ 21,623       $ 82,889         3.52
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

[1] Includes $57.2 million pledged to secure public and trust deposits that the secured parties are not permitted to sell or repledge the collateral.

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, 2016 and December 31, 2015.

 

24


Table of Contents
     At March 31, 2016  
     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

   $ —         $ —         $ 31,393       $ 23,547       $ 31,393       $ 23,547   

Other

     1,724         26         —           —           1,724         26   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

   $ 1,724       $ 26       $ 31,393       $ 23,547       $ 33,117       $ 23,573   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     At December 31, 2015  
     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

   $ —         $ —         $ 33,334       $ 21,606       $ 33,334       $ 21,606   

Other

     1,483         17         —           —           1,483         17   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

   $ 1,483       $ 17       $ 33,334       $ 21,606       $ 34,817       $ 21,623   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

As indicated in Note 7 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, 2016 are primarily associated with securities issued by municipalities of Puerto Rico and are generally not rated by a credit rating agency. This includes $55 million of securities issued by three municipalities of Puerto Rico that are payable from the real and personal property taxes collected within such municipalities. These bonds have seniority to the payment of operating cost and expenses of the municipality. The portfolio also includes approximately $42 million in securities for which the underlying source of payment is not the central government, but in which it provides a guarantee in the event of default.

The Corporation performs periodic credit quality reviews on these issuers. Based on the quarterly analysis performed, management concluded that no individual debt security was other-than-temporarily impaired at March 31, 2016. Further deterioration of the fiscal crisis of the Government of Puerto Rico could further affect the value of these securities, resulting in losses to the Corporation. The Corporation does not have the intent to sell securities held-to-maturity and it is more likely than not that the Corporation will not have to sell these investment securities prior to recovery of their amortized cost basis.

 

25


Table of Contents

Note 9 – Loans

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 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”. The FDIC loss sharing agreements expired on June 30, 2015 for commercial (including construction) and consumer loans, and expires on June 30, 2020 for single-family residential mortgage loans, as explained in Note 11.

For a summary of the accounting policies related to loans, interest recognition and allowance for loan losses refer to Note 2—Summary of significant accounting policies, of the 2015 Form 10-K.

During the quarter ended March 31, 2016, the Corporation recorded purchases (including repurchases) of mortgage loans amounting to $122 million, consumer loans of $106 million and commercial loans amounting to $51 million. Excluding the impact of the Doral Bank Transaction, during the quarter ended March 31, 2015, the Corporation recorded purchases of mortgage loans amounting to $169 million. Refer to Note 5 for information on loans acquired as part of the Doral Bank Transaction.

The Corporation performed whole-loan sales involving approximately $21 million of residential mortgage loans during the quarter ended March 31, 2016 (March 31, 2015—$39 million). Also, during the quarter ended March 31, 2016, the Corporation securitized approximately $134 million of mortgage loans into Government National Mortgage Association (“GNMA”) mortgage-backed securities and $36 million of mortgage loans into Federal National Mortgage Association (“FNMA”) mortgage-backed securities, compared to $156 million and $47 million, respectively, during the quarter ended March 31, 2015.

Non-covered loans

The following table presents the composition of non-covered loans held-in-portfolio (“HIP”), net of unearned income, by past due status at March 31, 2016 and December 31, 2015, including loans previously covered by the commercial FDIC loss sharing agreements.

 

26


Table of Contents

March 31, 2016

 

Puerto Rico

 
     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

   $ 652       $ 168       $ 1,418       $ 2,238       $ 172,413       $ 174,651   

Commercial real estate non-owner occupied

     46,119         3,102         103,719         152,940         2,506,513         2,659,453   

Commercial real estate owner occupied

     16,339         6,608         141,443         164,390         1,703,399         1,867,789   

Commercial and industrial

     7,267         4,297         39,529         51,093         2,615,305         2,666,398   

Construction

     678         372         13,133         14,183         90,961         105,144   

Mortgage

     352,313         134,842         823,440         1,310,595         4,789,164         6,099,759   

Leasing

     7,209         1,598         3,419         12,226         630,916         643,142   

Consumer:

                 

Credit cards

     10,915         7,159         18,864         36,938         1,061,845         1,098,783   

Home equity lines of credit

     82         141         280         503         9,126         9,629   

Personal

     12,963         7,693         20,495         41,151         1,150,239         1,191,390   

Auto

     32,638         6,029         10,844         49,511         776,794         826,305   

Other

     1,337         282         19,220         20,839         162,145         182,984   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 488,512       $ 172,291       $ 1,195,804       $ 1,856,607       $ 15,668,820       $ 17,525,427   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

March 31, 2016

 

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

   $ 32       $ —         $ 246       $ 278       $ 762,276       $ 762,554   

Commercial real estate non-owner occupied

     9,556         —           11,155         20,711         969,937         990,648   

Commercial real estate owner occupied

     3,817         —           193         4,010         219,791         223,801   

Commercial and industrial

     16,935         156         84,086         101,177         781,918         883,095   

Construction

     15,091         —           671         15,762         613,952         629,714   

Mortgage

     18,877         514         12,069         31,460         847,982         879,442   

Legacy

     3,119         400         4,046         7,565         53,479         61,044   

Consumer:

                 

Credit cards

     187         157         382         726         12,292         13,018   

Home equity lines of credit

     1,701         845         4,309         6,855         287,405         294,260   

Personal

     1,624         639         1,429         3,692         240,722         244,414   

Auto

     —           —           6         6         18         24   

Other

     —           —           10         10         286         296   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 70,939       $ 2,711       $ 118,602       $ 192,252       $ 4,790,058       $ 4,982,310   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

27


Table of Contents

March 31, 2016

 

Popular, Inc.

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

(In thousands)

   days      days      or more      past due      Current      Popular, Inc.[1] [2]  

Commercial multi-family

   $ 684       $ 168       $ 1,664       $ 2,516       $ 934,689       $ 937,205   

Commercial real estate non-owner occupied

     55,675         3,102         114,874         173,651         3,476,450         3,650,101   

Commercial real estate owner occupied

     20,156         6,608         141,636         168,400         1,923,190         2,091,590   

Commercial and industrial

     24,202         4,453         123,615         152,270         3,397,223         3,549,493   

Construction

     15,769         372         13,804         29,945         704,913         734,858   

Mortgage

     371,190         135,356         835,509         1,342,055         5,637,146         6,979,201   

Leasing

     7,209         1,598         3,419         12,226         630,916         643,142   

Legacy[3]

     3,119         400         4,046         7,565         53,479         61,044   

Consumer:

                 

Credit cards

     11,102         7,316         19,246         37,664         1,074,137         1,111,801   

Home equity lines of credit

     1,783         986         4,589         7,358         296,531         303,889   

Personal

     14,587         8,332         21,924         44,843         1,390,961         1,435,804   

Auto

     32,638         6,029         10,850         49,517         776,812         826,329   

Other

     1,337         282         19,230         20,849         162,431         183,280   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 559,451       $ 175,002       $ 1,314,406       $ 2,048,859       $ 20,458,878       $ 22,507,737   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

[1] Non-covered loans held-in-portfolio are net of $111 million in unearned income and exclude $125 million in loans held-for-sale.
[2] Includes $7.7 billion pledged to secure credit facilities and public funds that the secured parties are not permitted to sell or repledge the collateral, of which $4.7 billion were pledged at the FHLB as collateral for borrowings, $2.5 billion at the FRB for discount window borrowings and $0.5 billion serve as collateral for public funds.
[3] 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 segment.

 

December 31, 2015

 

Puerto Rico

 
     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

   $ 459       $ 217       $ 1,316       $ 1,992       $ 130,154       $ 132,146   

Commercial real estate non-owner occupied

     166,732         12,520         84,982         264,234         2,404,858         2,669,092   

Commercial real estate owner occupied

     14,245         5,624         138,778         158,647         1,750,597         1,909,244   

Commercial and industrial

     6,010         6,059         38,464         50,533         2,607,204         2,657,737   

Construction

     238         253         13,738         14,229         86,719         100,948   

Mortgage

     344,858         162,341         863,869         1,371,068         4,756,423         6,127,491   

Leasing

     7,844         1,630         3,009         12,483         615,167         627,650   

Consumer:

                 

Credit cards

     11,078         9,414         19,098         39,590         1,088,755         1,128,345   

Home equity lines of credit

     186         292         394         872         9,816         10,688   

Personal

     13,756         7,889         22,625         44,270         1,158,565         1,202,835   

Auto

     33,554         7,500         11,640         52,694         763,256         815,950   

Other

     1,069         298         19,232         20,599         167,885         188,484   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 600,029       $ 214,037       $ 1,217,145       $ 2,031,211       $ 15,539,399       $ 17,570,610   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

28


Table of Contents

December 31, 2015

 

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

   $ 33       $ 253       $ —         $ 286       $ 693,647       $ 693,933   

Commercial real estate non-owner occupied

     160         —           253         413         962,610         963,023   

Commercial real estate owner occupied

     1,490         429         221         2,140         200,204         202,344   

Commercial and industrial

     13,647         1,526         75,575         90,748         780,896         871,644   

Construction

     —           —           —           —           580,158         580,158   

Mortgage

     18,957         3,424         13,538         35,919         872,671         908,590   

Legacy

     1,160         662         3,649         5,471         58,965         64,436   

Consumer:

                 

Credit cards

     327         134         437         898         13,037         13,935   

Home equity lines of credit

     3,149         1,114         4,176         8,439         296,045         304,484   

Personal

     1,836         690         1,240         3,766         168,860         172,626   

Auto

     —           —           6         6         22         28   

Other

     —           10         5         15         289         304   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 40,759       $ 8,242       $ 99,100       $ 148,101       $ 4,627,404       $ 4,775,505   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2015

 

Popular, Inc.

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

(In thousands)

   days      days      or more      past due      Current      Popular, Inc.[1] [2]  

Commercial multi-family

   $ 492       $ 470       $ 1,316       $ 2,278       $ 823,801       $ 826,079   

Commercial real estate non-owner occupied

     166,892         12,520         85,235         264,647         3,367,468         3,632,115   

Commercial real estate owner occupied

     15,735         6,053         138,999         160,787         1,950,801         2,111,588   

Commercial and industrial

     19,657         7,585         114,039         141,281         3,388,100         3,529,381   

Construction

     238         253         13,738         14,229         666,877         681,106   

Mortgage

     363,815         165,765         877,407         1,406,987         5,629,094         7,036,081   

Leasing

     7,844         1,630         3,009         12,483         615,167         627,650   

Legacy[3]

     1,160         662         3,649         5,471         58,965         64,436   

Consumer:

                 

Credit cards

     11,405         9,548         19,535         40,488         1,101,792         1,142,280   

Home equity lines of credit

     3,335         1,406         4,570         9,311         305,861         315,172   

Personal

     15,592         8,579         23,865         48,036         1,327,425         1,375,461   

Auto

     33,554         7,500         11,646         52,700         763,278         815,978   

Other

     1,069         308         19,237         20,614         168,174         188,788   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 640,788       $ 222,279       $ 1,316,245       $ 2,179,312       $ 20,166,803       $ 22,346,115   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

[1] Non-covered loans held-in-portfolio are net of $108 million in unearned income and exclude $137 million in loans held-for-sale.
[2] Includes $7.3 billion pledged to secure credit facilities and public funds that the secured parties are not permitted to sell or repledge the collateral, of which $4.3 billion were pledged at the FHLB as collateral for borrowings, $2.5 billion at the FRB for discount window borrowings and $0.5 billion serve as collateral for public funds.
[3] 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 segment.

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, 2016 and 2015. 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.

 

29


Table of Contents

At March 31, 2016

 
     Puerto Rico      U.S. mainland      Popular, Inc.  
            Accruing loans             Accruing loans             Accruing loans  
     Non-accrual      past-due 90      Non-accrual      past-due 90      Non-accrual      past-due 90  

(In thousands)

   loans      days or more [1]      loans      days or more [1]      loans      days or more [1]  

Commercial multi-family

   $ 1,178       $ —         $ 246       $ —         $ 1,424       $ —     

Commercial real estate non-owner occupied

     32,310         —           11,155         —           43,465         —     

Commercial real estate owner occupied

     110,972         —           193         —           111,165         —     

Commercial and industrial

     38,179         332         3,398         —           41,577         332   

Construction

     3,270         —           671         —           3,941         —     

Mortgage[3]

     322,838         406,327         12,069         —           334,907         406,327   

Leasing

     3,419         —           —           —           3,419         —     

Legacy

     —           —           4,046         —           4,046         —     

Consumer:

                 

Credit cards

     —           18,864         382         —           382         18,864   

Home equity lines of credit

     —           280         4,309         —           4,309         280   

Personal

     20,023         46         1,429         —           21,452         46   

Auto

     10,844         —           6         —           10,850         —     

Other

     18,579         588         10         —           18,589         588   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total[2]

   $ 561,612       $ 426,437       $ 37,914       $ —         $ 599,526       $ 426,437   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

[1] Non-covered loans of $288 million 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 analysis.
[2] For purposes of this table non-performing loans exclude $ 43 million in non-performing loans held-for-sale.
[3] It is the Corporation’s policy to report delinquent residential mortgage loans insured by FHA or guaranteed by the VA as accruing loans past due 90 days or more as opposed to non-performing since the principal repayment is insured. These balances include $161 million of residential mortgage loans in Puerto Rico insured by FHA or guaranteed by the VA that are no longer accruing interest as of March 31, 2016. Furthermore, the Corporation has approximately $68 million in reverse mortgage loans in Puerto Rico which are guaranteed by FHA, but which are currently not accruing interest. Due to the guaranteed nature of the loans, it is the Corporation’s policy to exclude these balances from non-performing assets.

 

At December 31, 2015

 
     Puerto Rico      U.S. mainland      Popular, Inc.  
            Accruing loans             Accruing loans             Accruing loans  
     Non-accrual      past-due 90      Non-accrual      past-due 90      Non-accrual      past-due 90  

(In thousands)

   loans      days or more [1]      loans      days or more [1]      loans      days or more [1]  

Commercial multi-family

   $ 1,062       $ —         $ —         $ —         $ 1,062       $ —     

Commercial real estate non-owner occupied

     33,720         —           253         —           33,973         —     

Commercial real estate owner occupied

     106,449         —           221         —           106,670         —     

Commercial and industrial

     36,671         555         3,440         —           40,111         555   

Construction

     3,550         —           —           —           3,550         —     

Mortgage[3]

     337,933         426,094         13,538         —           351,471         426,094   

Leasing

     3,009         —           —           —           3,009         —     

Legacy

     —           —           3,649         —           3,649         —     

Consumer:

                 

Credit cards

     —           19,098         437         —           437         19,098   

Home equity lines of credit

     —           394         4,176         —           4,176         394   

Personal

     22,102         523         1,240         —           23,342         523   

Auto

     11,640         —           6         —           11,646         —     

Other

     18,698         61         5         —           18,703         61   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total[2]

   $ 574,834       $ 446,725       $ 26,965       $ —         $ 601,799       $ 446,725   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

[1] Non-covered loans by $268 million 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 analysis.
[2] For purposes of this table non-performing loans exclude $ 45 million in non-performing loans held-for-sale.
[3] It is the Corporation’s policy to report delinquent residential mortgage loans insured by FHA or guaranteed by the VA as accruing loans past due 90 days or more as opposed to non-performing since the principal repayment is insured. These balances include $164 million of residential mortgage loans in Puerto Rico insured by FHA or guaranteed by the VA that are no longer accruing interest as of December 31, 2015. Furthermore, the Corporation has approximately $70 million in reverse mortgage loans in Puerto Rico which are guaranteed by FHA, but which are currently not accruing interest. Due to the guaranteed nature of the loans, it is the Corporation’s policy to exclude these balances from non-performing assets.

 

30


Table of Contents

The following table provides a breakdown of loans held-for-sale (“LHFS”) at March 31, 2016 and December 31, 2015 by main categories.

 

(In thousands)

   March 31, 2016      December 31, 2015  

Commercial

   $ 42,771       $ 45,074   

Construction

     2         95   

Mortgage

     82,542         91,831   
  

 

 

    

 

 

 

Total loans held-for-sale

   $ 125,315       $ 137,000   
  

 

 

    

 

 

 

The following table provides a breakdown of loans held-for-sale (“LHFS”) in non-performing status at March 31, 2016 and December 31, 2015 by main categories.

 

(In thousands)

   March 31, 2016      December 31, 2015  

Commercial

   $ 42,741       $ 45,074   

Construction

     2         95   
  

 

 

    

 

 

 

Total

   $ 42,743       $ 45,169   
  

 

 

    

 

 

 

The following table presents loans acquired as part of the Doral Bank Transaction accounted for under ASC subtopic 310-20 as of the February 27, 2015 acquisition date:

 

(In thousands)

      

Fair value of loans accounted under ASC Subtopic 310-20

   $ 1,178,543   
  

 

 

 

Gross contractual amounts receivable (principal and interest)

   $ 1,666,695   
  

 

 

 

Estimate of contractual cash flows not expected to be collected

   $ 34,646   
  

 

 

 

Covered loans

The following tables present the composition of loans by past due status at March 31, 2016 and December 31, 2015 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, 2016

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

(In thousands)

   days      days      or more      past due      Current      loans HIP [1]  

Mortgage

   $ 29,539       $ 15,953       $ 77,968       $ 123,460       $ 483,251       $ 606,711   

Consumer

     1,108         324         1,389         2,821         15,598         18,419   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total covered loans

   $ 30,647       $ 16,277       $ 79,357       $ 126,281       $ 498,849       $ 625,130   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

[1] Includes $374 million pledged to secure credit facilities at the FHLB which are not permitted to sell or repledge the collateral.

 

31


Table of Contents

December 31, 2015

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

(In thousands)

   days      days      or more      past due      Current      loans HIP [1]  

Mortgage

   $ 31,413       $ 16,593       $ 83,132       $ 131,138       $ 495,964       $ 627,102   

Consumer

     1,246         444         1,283         2,973         16,040         19,013   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total covered loans

   $ 32,659       $ 17,037       $ 84,415       $ 134,111       $ 512,004       $ 646,115   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

[1] Includes $386 million pledged to secure credit facilities at the FHLB which are not permitted to sell or repledge the collateral.

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, 2016 and December 31, 2015.

 

     March 31, 2016      December 31, 2015  
     Non-accrual      Accruing loans past      Non-accrual      Accruing loans past  

(In thousands)

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

Mortgage

   $ 3,408       $ —         $ 3,790       $ —     

Consumer

     111         —           97         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total[1]

   $ 3,519       $ —         $ 3,887       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

[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.

The Corporation accounts for lines of credit with revolving privileges under the accounting guidance of ASC Subtopic 310-20, which requires that any differences between the contractually required loans payment receivable in excess of the initial investment in the loans be accreted into interest income over the life of the loans, if the loan is accruing interest. Covered loans accounted for under ASC Subtopic 310-20 amounted to $10 million at March 31, 2016 (December 31, 2015—$10 million).

Loans acquired with deteriorated credit quality accounted for under ASC 310-30

The following provides information of loans acquired with evidence of credit deterioration as of the acquisition date, accounted for under the guidance of ASC 310-30.

Loans acquired from Westernbank as part of an FDIC-assisted transaction

The carrying amount of the Westernbank 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.

 

32


Table of Contents
     March 31, 2016 [1]     December 31, 2015 [1]  
     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

   $ 1,104,257      $ 30,090      $ 1,134,347      $ 1,114,368      $ 35,393      $ 1,149,761   

Commercial and industrial

     83,267        519        83,786        84,765        519        85,284   

Construction

     8,479        6,026        14,505        8,943        6,027        14,970   

Mortgage

     647,739        31,627        679,366        667,023        33,090        700,113   

Consumer

     22,198        1,239        23,437        23,047        1,326        24,373   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Carrying amount

     1,865,940        69,501        1,935,441        1,898,146        76,355        1,974,501   

Allowance for loan losses

     (58,703     (4,264     (62,967     (59,753     (3,810     (63,563
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Carrying amount, net of allowance

   $ 1,807,237      $ 65,237      $ 1,872,474      $ 1,838,393      $ 72,545      $ 1,910,938   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

[1] The carrying amount of loans acquired from Westernbank and accounted for under ASC 310-30 which remains subject to the loss sharing agreement with the FDIC amounted to approximately $615 million as of March 31, 2016 and $636 million as of December 31, 2015.

The outstanding principal balance of Westernbank loans accounted pursuant to ASC Subtopic 310-30, amounted to $2.4 billion at March 31, 2016 (December 31, 2015—$2.4 billion). At March 31, 2016, 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 Westernbank loans accounted pursuant to the ASC Subtopic 310-30, for the quarters ended March 31, 2016 and 2015, were as follows:

 

     Activity in the accretable yield  
     Westernbank loans ASC 310-30  
     For the quarters ended  
     March 31, 2016           March 31, 2015        
     Non-credit     Credit           Non-credit     Credit        

(In thousands)

   impaired loans     impaired loans     Total     impaired loans     impaired loans     Total  

Beginning balance

   $ 1,105,732      $ 6,726      $ 1,112,458      $ 1,265,752      $ 5,585      $ 1,271,337   

Accretion

     (42,000     (1,533     (43,533     (53,776     (1,921     (55,697

Change in expected cash flows

     54,544        5,339        59,883        42,273        1,035        43,308   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 1,118,276      $ 10,532      $ 1,128,808      $ 1,254,249      $ 4,699      $ 1,258,948   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

33


Table of Contents
     Carrying amount of Westernbank loans accounted for pursuant to ASC 310-30  
     For the quarters ended  
     March 31, 2016 [1]           March 31, 2015        
     Non-credit     Credit           Non-credit     Credit        

(In thousands)

   impaired loans     impaired loans     Total     impaired loans     impaired loans     Total  

Beginning balance

   $ 1,898,146      $ 76,355      $ 1,974,501      $ 2,272,142      $ 172,030      $ 2,444,172   

Accretion

     42,000        1,533        43,533        53,776        1,921        55,697   

Collections and charge-offs

     (74,206     (8,387     (82,593     (114,137     (18,636     (132,773
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 1,865,940      $ 69,501      $ 1,935,441      $ 2,211,781      $ 155,315      $ 2,367,096   

Allowance for loan losses ASC 310-30 Westernbank loans

     (58,703     (4,264     (62,967     (49,750     (18,636     (68,386
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance, net of ALLL

   $ 1,807,237      $ 65,237      $ 1,872,474      $ 2,162,031      $ 136,679      $ 2,298,710   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

[1] The carrying amount of loans acquired from Westernbank and accounted for under ASC 310-30 which remain subject to the loss sharing agreement with the FDIC amounted to approximately $ 615 million as of March 31, 2016.

Other loans acquired with deteriorated credit quality

The outstanding principal balance of other acquired loans accounted pursuant to ASC Subtopic 310-30, amounted to $713 million at March 31, 2016 (December 31, 2015—$710 million). At March 31, 2016, none of the other acquired loans accounted under ASC Subtopic 310-30 were considered non-performing loans. Therefore, interest income, through accretion of the difference between the carrying amount of the loans and the expected cash flows, was recognized on all acquired loans.

Changes in the carrying amount and the accretable yield for the other acquired loans accounted pursuant to the ASC Subtopic 310-30, for the quarters ended March 31, 2016 and 2015 were as follows:

 

Activity in the accretable yield - Other acquired loans ASC 310-30

 
     For the quarters ended  

(In thousands)

   March 31, 2016      March 31, 2015  

Beginning balance

   $ 221,128       $ 116,304   

Additions

     4,340         50,662   

Accretion

     (8,555      (3,223

Change in expected cash flows

     50,855         (5,319
  

 

 

    

 

 

 

Ending balance

   $ 267,768       $ 158,424   
  

 

 

    

 

 

 

Carrying amount of other acquired loans accounted for pursuant to ASC 310-30

 
     For the quarters ended  

(In thousands)

   March 31, 2016      March 31, 2015  

Beginning balance

   $ 564,050       $ 212,763   

Purchase accounting adjustments related to the Doral Bank Transaction (Refer to Note 5)

     (4,707      —     

Additions

     10,051         157,091   

Accretion

     8,555         3,223   

Collections and charge-offs

     (15,226      (9,980
  

 

 

    

 

 

 

Ending balance

   $ 562,723       $ 363,097   

Allowance for loan losses ASC 310-30 non-covered loans

     (15,258      (16,092
  

 

 

    

 

 

 

Ending balance, net of allowance for loan losses

   $ 547,465       $ 347,005   
  

 

 

    

 

 

 

 

34


Table of Contents

The following table presents loans acquired as part of the Doral Bank Transaction accounted for pursuant to ASC Subtopic 310-30 at the February 27, 2015 acquisition date.

 

(In thousands)

      

Contractually-required principal and interest

   $ 560,833   

Non-accretable difference

     112,153   
  

 

 

 

Cash flows expected to be collected

     448,680   

Accretable yield

     113,977   
  

 

 

 

Fair value of loans accounted for under ASC Subtopic 310-30

   $ 334,703   
  

 

 

 

 

35


Table of Contents

Note 10 – Allowance for loan losses

The Corporation follows a systematic methodology to establish and evaluate the adequacy of the allowance for loan losses to provide for inherent losses in the loan portfolio. This methodology includes the consideration of factors such as current economic conditions, portfolio risk characteristics, prior loss experience and results of periodic credit reviews of individual loans. The provision for loan losses charged to current operations is based on this methodology. Loan losses are charged and recoveries are credited to the allowance for loan losses.

The Corporation’s assessment of the allowance for loan losses is determined in accordance with the guidance of loss contingencies in ASC Subtopic 450-20 and loan impairment guidance in ASC Section 310-10-35. Also, the Corporation determines the allowance for loan losses on purchased impaired loans and purchased loans accounted for under ASC Subtopic 310-30, by evaluating decreases in expected cash flows after the acquisition date.

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:

 

    Base net loss rates, which are based on the moving average of annualized net loss rates computed over a 5-year historical loss period for the commercial and construction loan portfolios, and an 18-month period for the consumer and mortgage loan portfolios. The base net loss rates are applied by loan type and by legal entity.

 

    Recent loss trend adjustment, which replaces the base loss rate with a 12-month average loss rate, when these trends are higher than the respective base loss rates. The objective of this adjustment is to allow for a more recent loss trend to be captured and reflected in the ALLL estimation process.

For the period ended March 31, 2016, 44% (March 31, 2015–59%) of the ALLL for non-covered BPPR segment loan portfolios utilized the recent loss trend adjustment instead of the base loss. The effect of replacing the base loss with the recent loss trend adjustment was mainly concentrated in the mortgage, commercial multi-family and commercial and industrial loan portfolios for 2016, and in the consumer and mortgage loan portfolios for 2015.

For the period ended March 31, 2016, 2% (March 31, 2015—13%) of the ALLL for BPNA segment loan portfolios utilized the recent loss trend adjustment instead of the base loss. The effect of replacing the base loss with the recent loss trend adjustment was concentrated in the consumer loan portfolio for 2016 and in the consumer loan portfolio for 2015.

Environmental factors, which include credit and macroeconomic indicators such as unemployment rate, economic activity index and delinquency rates, 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 the historical loss rate applied to each group. Environmental factors provide updated perspective on credit and economic conditions. Regression analysis is used to select these indicators and quantify the effect on the general reserve of the allowance for loan losses.

 

36


Table of Contents

The following tables present the changes in the allowance for loan losses, loan ending balances and whether such loans and the allowance pertain to loans individually or collectively evaluated for impairment for the quarters ended March 31, 2016 and 2015.

 

For the quarter ended March 31, 2016

 

Puerto Rico - Non-covered loans

 

(In thousands)

   Commercial     Construction     Mortgage     Leasing     Consumer     Total  

Allowance for credit losses:

            

Beginning balance

   $ 186,925      $ 4,957      $ 128,327      $ 10,993      $ 138,721      $ 469,923   

Provision (reversal of provision)

     13,369        (409     10,869        1,680        18,362        43,871   

Charge-offs

     (8,968     (544     (15,972     (2,127     (27,379     (54,990

Recoveries

     6,264        233        1,276        489        6,081        14,343   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 197,590      $ 4,237      $ 124,500      $ 11,035      $ 135,785      $ 473,147   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Specific ALLL

   $ 55,098      $ 172      $ 41,660      $ 608      $ 24,326      $ 121,864   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

General ALLL

   $ 142,492      $ 4,065      $ 82,840      $ 10,427      $ 111,459      $ 351,283   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans held-in-portfolio:

            

Impaired non-covered loans

   $ 338,980      $ 2,020      $ 471,183      $ 2,391      $ 109,920      $ 924,494   

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

     7,029,311        103,124        5,628,576        640,751        3,199,171        16,600,933   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-covered loans held-in-portfolio

   $ 7,368,291      $ 105,144      $ 6,099,759      $ 643,142      $ 3,309,091      $ 17,525,427   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the quarter ended March 31, 2016

 

Puerto Rico - Covered loans

 

(In thousands)

   Commercial     Construction     Mortgage     Leasing     Consumer     Total  

Allowance for credit losses:

            

Beginning balance

   $ —        $ —        $ 33,967      $ —        $ 209      $ 34,176   

Provision (reversal of provision)

     —          —          (3,149     —          44        (3,105

Charge-offs

     —          —          (1,221     —          (33     (1,254

Recoveries

     —          —          225        —          3        228   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ —        $ —        $ 29,822      $ —        $ 223      $ 30,045   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Specific ALLL

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

General ALLL

   $ —        $ —        $ 29,822      $ —        $ 223      $ 30,045   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans held-in-portfolio:

            

Impaired covered loans

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

Covered loans held-in-portfolio excluding impaired loans

     —          —          606,711        —          18,419        625,130   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total covered loans held-in-portfolio

   $ —        $ —        $ 606,711      $ —        $ 18,419      $ 625,130   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the quarter ended March 31, 2016

 

U.S. Mainland

 

(In thousands)

   Commercial     Construction     Mortgage     Legacy     Consumer     Total  

Allowance for credit losses:

            

Beginning balance

   $ 9,908      $ 3,912      $ 4,985      $ 2,687      $ 11,520      $ 33,012   

Provision (reversal of provision)

     (116     827        344        (450     3,464        4,069   

Charge-offs

     (495     —          (441     (109     (2,648     (3,693

Recoveries

     290        —          211        356        1,035        1,892   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 9,587      $ 4,739      $ 5,099      $ 2,484      $ 13,371      $ 35,280   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Specific ALLL

   $ —        $ —        $ 1,592      $ —        $ 581      $ 2,173   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

General ALLL

   $ 9,587      $ 4,739      $ 3,507      $ 2,484      $ 12,790      $ 33,107   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans held-in-portfolio:

            

Impaired loans

   $ —        $ —        $ 7,909      $ —        $ 2,247      $ 10,156   

Loans held-in-portfolio excluding impaired loans

     2,860,098        629,714        871,533        61,044        549,765        4,972,154   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans held-in-portfolio

   $ 2,860,098      $ 629,714      $ 879,442      $ 61,044      $ 552,012      $ 4,982,310   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

37


Table of Contents

For the quarter ended March 31, 2016

 

Popular, Inc.

 

(In thousands)

   Commercial     Construction     Mortgage     Legacy     Leasing     Consumer     Total  

Allowance for credit losses:

              

Beginning balance

   $ 196,833      $ 8,869      $ 167,279      $ 2,687      $ 10,993      $ 150,450      $ 537,111   

Provision (reversal of provision)

     13,253        418        8,064        (450     1,680        21,870        44,835   

Charge-offs

     (9,463     (544     (17,634     (109     (2,127     (30,060     (59,937

Recoveries

     6,554        233        1,712        356        489        7,119        16,463   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 207,177      $ 8,976      $ 159,421      $ 2,484      $ 11,035      $ 149,379      $ 538,472   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Specific ALLL

   $ 55,098      $ 172      $ 43,252      $ —        $ 608      $ 24,907      $ 124,037   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

General ALLL

   $ 152,079      $ 8,804      $ 116,169      $ 2,484      $ 10,427      $ 124,472      $ 414,435   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans held-in-portfolio:

              

Impaired loans

   $ 338,980      $ 2,020      $ 479,092      $ —        $ 2,391      $ 112,167      $ 934,650   

Loans held-in-portfolio excluding impaired loans

     9,889,409        732,838        7,106,820        61,044        640,751        3,767,355        22,198,217   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans held-in-portfolio

   $ 10,228,389      $ 734,858      $ 7,585,912      $ 61,044      $ 643,142      $ 3,879,522      $ 23,132,867   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

For the quarter ended March 31, 2015

 

Puerto Rico - Non-covered loans

 

(In thousands)

   Commercial     Construction     Mortgage     Leasing     Consumer     Total  

Allowance for credit losses:

            

Beginning balance

   $ 201,589      $ 5,483      $ 120,860      $ 7,131      $ 154,072      $ 489,135   

Provision (reversal of provision)

     (1,321     (6,813     16,192        846        23,009        31,913   

Charge-offs

     (9,572     —          (10,973     (1,237     (29,699     (51,481

Recoveries

     4,770        2,925        500        468        6,046        14,709   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 195,466      $ 1,595      $ 126,579      $ 7,208      $ 153,428      $ 484,276   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Specific ALLL

   $ 69,946      $ 158      $ 42,229      $ 687      $ 25,223      $ 138,243   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

General ALLL

   $ 125,520      $ 1,437      $ 84,350      $ 6,521      $ 128,205      $ 346,033   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans held-in-portfolio:

            

Impaired non-covered loans

   $ 417,377      $ 9,838      $ 445,506      $ 2,924      $ 114,416      $ 990,061   

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

     5,984,132        88,868        5,725,741        578,195        3,237,790        15,614,726   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-covered loans held-in-portfolio

   $ 6,401,509      $ 98,706      $ 6,171,247      $ 581,119      $ 3,352,206      $ 16,604,787   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the quarter ended March 31, 2015

 

Puerto Rico - Covered Loans

 

(In thousands)

   Commercial     Construction     Mortgage     Leasing     Consumer     Total  

Allowance for credit losses:

            

Beginning balance

   $ 30,871      $ 7,202      $ 40,948      $ —        $ 3,052      $ 82,073   

Provision (reversal of provision)

     1,995        6,276        2,802        —          (749     10,324   

Charge-offs

     (14,239     (9,046     (3,386     —          —          (26,671

Recoveries

     2,640        3,275        105        —          727        6,747   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 21,267      $ 7,707      $ 40,469      $ —        $ 3,030      $ 72,473   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Specific ALLL

   $ 1,473      $ —        $ —        $ —        $ —        $ 1,473   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

General ALLL

   $ 19,794      $ 7,707      $ 40,469      $ —        $ 3,030      $ 71,000   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans held-in-portfolio:

            

Impaired covered loans

   $ 8,394      $ 2,336      $ —        $ —        $ —        $ 10,730   

Covered loans held-in-portfolio excluding impaired loans

     1,562,753        55,489        795,477        —          32,103        2,445,822   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total covered loans held-in-portfolio

   $ 1,571,147      $ 57,825      $ 795,477      $ —        $ 32,103      $ 2,456,552   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

38


Table of Contents

For the quarter ended March 31, 2015

 

U.S. Mainland - Continuing Operations

 

(In thousands)

   Commercial     Construction      Mortgage     Legacy     Consumer     Total  

Allowance for credit losses:

             

Beginning balance

   $ 9,648      $ 1,187       $ 2,462      $ 2,944      $ 14,343      $ 30,584   

Provision (reversal of provision)

     299        662         (6,127     (1,810     4,774        (2,202

Charge-offs

     (450     —           (221     (474     (2,518     (3,663

Recoveries

     929        —           67        2,302        1,251        4,549   

Net recoveries (write-down)

     —          —           6,081        —          (3,401     2,680   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 10,426      $ 1,849       $ 2,262      $ 2,962      $ 14,449      $ 31,948   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Specific ALLL

   $ —        $ —         $ 341      $ —        $ 381      $ 722   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

General ALLL

   $ 10,426      $ 1,849       $ 1,921      $ 2,962      $ 14,068      $ 31,226   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Loans held-in-portfolio:

             

Impaired loans

   $ —        $ —         $ 5,106      $ —        $ 2,048      $ 7,154   

Loans held-in-portfolio excluding impaired loans

     2,252,052        592,022         1,012,874        77,675        466,366        4,400,989   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total loans held-in-portfolio

   $ 2,252,052      $ 592,022       $ 1,017,980      $ 77,675      $ 468,414      $ 4,408,143   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

For the quarter ended March 31, 2015

 

Popular, Inc.

 

(In thousands)

   Commercial     Construction     Mortgage     Legacy     Leasing     Consumer     Total  

Allowance for credit losses:

              

Beginning balance

   $ 242,108      $ 13,872      $ 164,270      $ 2,944      $ 7,131      $ 171,467      $ 601,792   

Provision (reversal of provision)

     973        125        12,867        (1,810     846        27,034        40,035   

Charge-offs

     (24,261     (9,046     (14,580     (474     (1,237     (32,217     (81,815

Recoveries

     8,339        6,200        672        2,302        468        8,024        26,005   

Net recoveries (write-down)

     —          —          6,081        —          —          (3,401     2,680   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 227,159      $ 11,151      $ 169,310      $ 2,962      $ 7,208      $ 170,907      $ 588,697   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Specific ALLL

   $ 71,419      $ 158      $ 42,570      $ —        $ 687      $ 25,604      $ 140,438   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

General ALLL

   $ 155,740      $ 10,993      $ 126,740      $ 2,962      $ 6,521      $ 145,303      $ 448,259   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans held-in-portfolio:

              

Impaired loans

   $ 425,771      $ 12,174      $ 450,612      $ —        $ 2,924      $ 116,464      $ 1,007,945   

Loans held-in-portfolio excluding impaired loans

     9,798,937        736,379        7,534,092        77,675        578,195        3,736,259        22,461,537   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans held-in-portfolio

   $ 10,224,708      $ 748,553      $ 7,984,704      $ 77,675      $ 581,119      $ 3,852,723      $ 23,469,482   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

     ASC 310-30 Westernbank loans  
     For the quarters ended  

(In thousands)

   March 31, 2016      March 31, 2015  

Balance at beginning of period

   $ 63,563       $ 78,846   

Provision for loan losses

     1,791         8,601   

Net charge-offs

     (2,387      (19,061
  

 

 

    

 

 

 

Balance at end of period

   $ 62,967       $ 68,386   
  

 

 

    

 

 

 

 

39


Table of Contents

Impaired loans

The following tables present loans individually evaluated for impairment at March 31, 2016 and December 31, 2015.

 

March 31, 2016

 

Puerto Rico

 
     Impaired Loans – With an      Impaired Loans                       
     Allowance      With No Allowance      Impaired Loans - Total  
            Unpaid                    Unpaid             Unpaid         
     Recorded      principal      Related      Recorded      principal      Recorded      principal      Related  

(In thousands)

   investment      balance      allowance      investment      balance      investment      balance      allowance  

Commercial real estate non-owner occupied

   $ 107,706       $ 112,100       $ 37,638       $ 13,636       $ 23,754       $ 121,342       $ 135,854       $ 37,638   

Commercial real estate owner occupied

     120,121         139,841         10,888         38,763         63,165         158,884         203,006         10,888   

Commercial and industrial

     39,347         40,849         6,572         19,407         21,525         58,754         62,374         6,572   

Construction

     2,020         5,472         172         —           —           2,020         5,472         172   

Mortgage

     418,321         460,813         41,660         52,862         62,090         471,183         522,903         41,660   

Leasing

     2,391         2,391         608         —           —           2,391         2,391         608   

Consumer:

                       

Credit cards

     37,778         37,778         5,963         —           —           37,778         37,778         5,963   

Personal

     67,834         67,834         17,517         —           —           67,834         67,834         17,517   

Auto

     3,863         3,863         771         —           —           3,863         3,863         771   

Other

     445         445         75         —           —           445         445         75   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Puerto Rico

   $ 799,826       $ 871,386       $ 121,864       $ 124,668       $ 170,534       $ 924,494       $ 1,041,920       $ 121,864   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

March 31, 2016

 

U.S. mainland

 
     Impaired Loans – With an      Impaired Loans                       
     Allowance      With No Allowance      Impaired Loans - Total  
            Unpaid                    Unpaid             Unpaid         
     Recorded      principal      Related      Recorded      principal      Recorded      principal      Related  

(In thousands)

   investment      balance      allowance      investment      balance      investment      balance      allowance  

Mortgage

   $ 4,774       $ 5,487       $ 1,592       $ 3,135       $ 3,903       $ 7,909       $ 9,390       $ 1,592   

Consumer:

                       

HELOCs

     921         921         352         715         715         1,636         1,636         352   

Personal

     530         530         229         81         81         611         611         229   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total U.S. mainland

   $ 6,225       $ 6,938       $ 2,173       $ 3,931       $ 4,699       $ 10,156       $ 11,637       $ 2,173   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

March 31, 2016

 

Popular, Inc.

 
     Impaired Loans – With an      Impaired Loans                       
     Allowance      With No Allowance      Impaired Loans - Total  
            Unpaid                    Unpaid             Unpaid         
     Recorded      principal      Related      Recorded      principal      Recorded      principal      Related  

(In thousands)

   investment      balance      allowance      investment      balance      investment      balance      allowance  

Commercial real estate non-owner occupied

   $ 107,706       $ 112,100       $ 37,638       $ 13,636       $ 23,754       $ 121,342       $ 135,854       $ 37,638   

Commercial real estate owner occupied

     120,121         139,841         10,888         38,763         63,165         158,884         203,006         10,888   

Commercial and industrial

     39,347         40,849         6,572         19,407         21,525         58,754         62,374         6,572   

Construction

     2,020         5,472         172         —           —           2,020         5,472         172   

Mortgage

     423,095         466,300         43,252         55,997         65,993         479,092         532,293         43,252   

Leasing

     2,391         2,391         608         —           —           2,391         2,391         608   

Consumer:

                       

Credit Cards

     37,778         37,778         5,963         —           —           37,778         37,778         5,963   

HELOCs

     921         921         352         715         715         1,636         1,636         352   

Personal

     68,364         68,364         17,746         81         81         68,445         68,445         17,746   

Auto

     3,863         3,863         771         —           —           3,863         3,863         771   

Other

     445         445         75         —           —           445         445         75   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Popular, Inc.

   $ 806,051       $ 878,324       $ 124,037       $ 128,599       $ 175,233       $ 934,650       $ 1,053,557       $ 124,037   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

40


Table of Contents

December 31, 2015

 

Puerto Rico

 
     Impaired Loans – With an      Impaired Loans                       
     Allowance      With No Allowance      Impaired Loans - Total  
            Unpaid                    Unpaid             Unpaid         
     Recorded      principal      Related      Recorded      principal      Recorded      principal      Related  

(In thousands)

   investment      balance      allowance      investment      balance      investment      balance      allowance  

Commercial real estate non-owner occupied

   $ 102,199       $ 106,466       $ 30,980       $ 13,779       $ 23,896       $ 115,978       $ 130,362       $ 30,980   

Commercial real estate owner occupied

     118,253         137,193         12,564         38,955         63,383         157,208         200,576         12,564   

Commercial and industrial

     42,043         43,629         5,699         21,904         32,922         63,947         76,551         5,699   

Construction

     2,481         7,878         264         —           —           2,481         7,878         264   

Mortgage

     424,885         468,240         42,965         40,232         45,881         465,117         514,121         42,965   

Leasing

     2,404         2,404         573         —           —           2,404         2,404         573   

Consumer:

                       

Credit cards

     38,734         38,734         6,675         —           —           38,734         38,734         6,675   

Personal

     68,509         68,509         16,365         —           —           68,509         68,509         16,365   

Auto

     1,893         1,893         338         —           —           1,893         1,893         338   

Other

     524         525         100         —           —           524         525         100   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Puerto Rico

   $ 801,925       $ 875,471       $ 116,523       $ 114,870       $ 166,082       $ 916,795       $ 1,041,553       $ 116,523   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2015

 

U.S. mainland

 
     Impaired Loans – With an      Impaired Loans                       
     Allowance      With No Allowance      Impaired Loans - Total  
            Unpaid                    Unpaid             Unpaid         
     Recorded      principal      Related      Recorded      principal      Recorded      principal      Related  

(In thousands)

   investment      balance      allowance      investment      balance      investment      balance      allowance  

Mortgage

   $ 4,143       $ 5,018       $ 1,064       $ 2,672       $ 3,574       $ 6,815       $ 8,592       $ 1,064   

Consumer:

                       

HELOCs

     778         796         259         783         783         1,561         1,579         259   

Personal

     534         534         226         81         81         615         615         226   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total U.S. mainland

   $ 5,455       $ 6,348       $ 1,549       $ 3,536       $ 4,438       $ 8,991       $ 10,786       $ 1,549   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2015

 

Popular, Inc.

 
     Impaired Loans – With an      Impaired Loans                       
     Allowance      With No Allowance      Impaired Loans - Total  
            Unpaid                    Unpaid             Unpaid         
     Recorded      principal      Related      Recorded      principal      Recorded      principal      Related  

(In thousands)

   investment      balance      allowance      investment      balance      investment      balance      allowance  

Commercial real estate non-owner occupied

   $ 102,199       $ 106,466       $ 30,980       $ 13,779       $ 23,896       $ 115,978       $ 130,362       $ 30,980   

Commercial real estate owner occupied

     118,253         137,193         12,564         38,955         63,383         157,208         200,576         12,564   

Commercial and industrial

     42,043         43,629         5,699         21,904         32,922         63,947         76,551         5,699   

Construction

     2,481         7,878         264         —           —           2,481         7,878         264   

Mortgage

     429,028         473,258         44,029         42,904         49,455         471,932         522,713         44,029   

Leasing

     2,404         2,404         573         —           —           2,404         2,404         573   

Consumer:

                       

Credit Cards

     38,734         38,734         6,675         —           —           38,734         38,734         6,675   

HELOCs

     778         796         259         783         783         1,561         1,579         259   

Personal

     69,043         69,043         16,591         81         81         69,124         69,124         16,591   

Auto

     1,893         1,893         338         —           —           1,893         1,893         338   

Other

     524         525         100         —           —           524         525         100   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Popular, Inc.

   $ 807,380       $ 881,819       $ 118,072       $ 118,406       $ 170,520       $ 925,786       $ 1,052,339       $ 118,072   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

41


Table of Contents

The following tables present the average recorded investment and interest income recognized on impaired loans for the quarters ended March 31, 2016 and 2015.

 

For the quarter ended March 31, 2016

 
     Puerto Rico      U.S. Mainland      Popular, Inc.  
     Average      Interest      Average      Interest      Average      Interest  
     recorded      income      recorded      income      recorded      income  

(In thousands)

   investment      recognized      investment      recognized      investment      recognized  

Commercial real estate non-owner occupied

   $ 118,660       $ 1,159       $ —         $ —         $ 118,660       $ 1,159   

Commercial real estate owner occupied

     158,046         1,393         —           —           158,046         1,393   

Commercial and industrial

     61,351         516         —           —           61,351         516   

Construction

     2,251         21         —           —           2,251         21   

Mortgage

     468,150         3,387         7,362         —           475,512         3,387   

Leasing

     2,398         —           —           —           2,398         —     

Consumer:

                 

Credit cards

     38,256         —           —           —           38,256         —     

Helocs

     —           —           1,599         —           1,599         —     

Personal

     68,172         —           613         —           68,785         —     

Auto

     2,878         —           —           —           2,878         —     

Other

     485         —           —           —           485         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Popular, Inc.

   $ 920,647       $ 6,476       $ 9,574       $ —         $ 930,221       $ 6,476   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

For the quarter ended March 31, 2015

 
     Puerto Rico      U.S. Mainland      Popular, Inc.  
     Average      Interest      Average      Interest      Average      Interest  
     recorded      income      recorded      income      recorded      income  

(In thousands)

   investment      recognized      investment      recognized      investment      recognized  

Commercial multi-family

   $ 276       $ —         $ —         $ —         $ 276       $ —     

Commercial real estate non-owner occupied

     88,773         1,140         —           —           88,773         1,140   

Commercial real estate owner occupied

     127,969         2,166         —           —           127,969         2,166   

Commercial and industrial

     170,127         4,432         125         —           170,252         4,432   

Construction

     11,553         —           —           —           11,553         —     

Mortgage

     438,538         4,453         4,681         13         443,219         4,466   

Leasing

     2,974         —           —           —           2,974         —     

Consumer:

                 

Credit cards

     41,337         —           —           —           41,337         —     

Helocs

     —           —           1,762         —           1,762         —     

Personal

     71,241         —           206         —           71,447         —     

Auto

     1,984         —           —           —           1,984         —     

Other

     526         —           44         —           570         —     

Covered loans

     8,818         35         —           —           8,818         35   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Popular, Inc.

   $ 964,116       $ 12,226       $ 6,818       $ 13       $ 970,934       $ 12,239   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Modifications

Troubled debt restructurings related to non-covered loan portfolios amounted to $ 1.2 billion at March 31, 2016 (December 31, 2015—$ 1.2 billion). The amount of outstanding commitments to lend additional funds to debtors owing receivables whose terms have been modified in troubled debt restructurings amounted $9 million related to the commercial loan portfolio at March 31, 2016 (December 31, 2015—$11 million).

A modification of a loan constitutes a troubled debt restructuring (“TDR”) when a borrower is experiencing financial difficulty and the modification constitutes a concession. For a summary of the accounting policy related to TDRs, refer to the summary of significant accounting policies included in Note 2 of the 2015 Form 10-K.

 

42


Table of Contents

The following tables present the non-covered and covered loans classified as TDRs according to their accruing status at March 31, 2016 and December 31, 2015.

 

     Popular, Inc.  
     Non-Covered Loans  
     March 31, 2016      December 31, 2015  

(In thousands)

   Accruing      Non-Accruing      Total      Related
Allowance
     Accruing      Non-Accruing      Total      Related
Allowance
 

Commercial

   $ 170,534       $ 87,841       $ 258,375       $ 47,571       $ 166,415       $ 88,117       $ 254,532       $ 37,355   

Construction

     194         1,826         2,020         172         221         2,259         2,480         264   

Mortgage

     679,719         120,694         800,413         43,252         644,013         130,483         774,496         44,029   

Leases

     1,749         642         2,391         608         1,791         609         2,400         573   

Consumer

     104,133         12,576         116,709         24,907         104,630         12,805         117,435         23,963   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 956,329       $ 223,579       $ 1,179,908       $ 116,510       $ 917,070       $ 234,273       $ 1,151,343       $ 106,184   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Popular, Inc.  
     Covered Loans  
     March 31, 2016      December 31, 2015  

(In thousands)

   Accruing      Non-Accruing      Total      Related
Allowance
     Accruing      Non-Accruing      Total      Related
Allowance
 

Mortgage

   $ 2,958       $ 2,500       $ 5,458       $ —         $ 3,328       $ 3,268       $ 6,596       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,958       $ 2,500       $ 5,458       $ —         $ 3,328       $ 3,268       $ 6,596       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following tables present the loan count by type of modification for those loans modified in a TDR during the quarters ended March 31, 2016 and 2015.

 

Puerto Rico

 

For the quarter ended March 31, 2016

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

Commercial real estate non-owner occupied

     1         1         —           —     

Commercial real estate owner occupied

     16         1         —           —     

Commercial and industrial

     6         —           —           —     

Mortgage

     20         10         112         54   

Consumer:

           

Credit cards

     175         —           —           174   

Personal

     261         5         —           —     

Auto

     —           2         2         —     

Other

     10         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     489         19         114         228   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

43


Table of Contents

U.S. mainland

 

For the quarter ended March 31, 2016

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

Mortgage

     —           —           11         1   

Consumer:

           

HELOCs

     —           —           1         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     —           —           12         1   
  

 

 

    

 

 

    

 

 

    

 

 

 

Popular, Inc.

 

For the quarter ended March 31, 2016

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

Commercial real estate non-owner occupied

     1         1         —           —     

Commercial real estate owner occupied

     16         1         —           —     

Commercial and industrial

     6         —           —           —     

Mortgage

     20         10         123         55   

Leasing

     —           —           —           —     

Consumer:

           

Credit cards

     175         —           —           174   

HELOCs

     —           —           1         —     

Personal

     261         5         —           —     

Auto

     —           2         2         —     

Other

     10         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     489         19         126         229   
  

 

 

    

 

 

    

 

 

    

 

 

 

Puerto Rico

 

For the quarter ended March 31, 2015

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

Commercial multi-family

     —           2         —           —     

Commercial real estate non-owner occupied

     2         1         —           —     

Commercial real estate owner occupied

     2         3         —           —     

Commercial and industrial

     5         5         —           —     

Construction

     1         —           —           —     

Mortgage

     13         19         98         15   

Leasing

     —           1         12         —     

Consumer:

           

Credit cards

     228         —           —           187   

Personal

     228         14         —           —     

Auto

     —           2         2         —     

Other

     11         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     490         47         112         202   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

44


Table of Contents

U.S. mainland

 

For the quarter ended March 31, 2015

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

Mortgage

     —           1         8         —     

Consumer:

           

HELOCs

     —           —           —           1   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     —           1         8         1   
  

 

 

    

 

 

    

 

 

    

 

 

 

Popular, Inc.

 

For the quarter ended March 31, 2015

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

Commercial multi-family

     —           2         —           —     

Commercial real estate non-owner occupied

     2         1         —           —     

Commercial real estate owner occupied

     2         3         —           —     

Commercial and industrial

     5         5         —           —     

Construction

     1         —           —           —     

Mortgage

     13         20         106         15   

Leasing

     —           1         12         —     

Consumer:

           

Credit cards

     228         —           —           187   

HELOCs

     —           —           —           1   

Personal

     228         14         —           —     

Auto

     —           2         2         —     

Other

     11         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     490         48         120         203   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following tables present by class, quantitative information related to loans modified as TDRs during the quarters ended March 31, 2016 and 2015.

 

Puerto Rico

 

For the quarter ended March 31, 2016

 

(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 real estate non-owner occupied

     2       $ 6,323       $ 6,307       $ 4,163   

Commercial real estate owner occupied

     17         3,095         3,149         136   

Commercial and industrial

     6         2,529         2,527         5   

Mortgage

     196         24,405         23,244         1,806   

Consumer:

           

Credit cards

     349         3,256         3,665         576   

Personal

     266         4,413         4,411         887   

Auto

     4         72         76         12   

Other

     10         23         24         4   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     850       $ 44,116       $ 43,403       $ 7,589   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

45


Table of Contents

U.S. Mainland

 

For the quarter ended March 31, 2016

 

(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
 

Mortgage

     12       $ 1,167       $ 1,230       $ 423   

Consumer:

           

HELOCs

     1         147         147         77   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     13       $ 1,314       $ 1,377       $ 500   
  

 

 

    

 

 

    

 

 

    

 

 

 

Popular, Inc.

 

For the quarter ended March 31, 2016

 

(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 real estate non-owner occupied

     2       $ 6,323       $ 6,307       $ 4,163   

Commercial real estate owner occupied

     17         3,095         3,149         136   

Commercial and industrial

     6         2,529         2,527         5   

Mortgage

     208         25,572         24,474         2,229   

Consumer:

           

Credit cards

     349         3,256         3,665         576   

HELOCs

     1         147         147         77   

Personal

     266         4,413         4,411         887   

Auto

     4         72         76         12   

Other

     10         23         24         4   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     863       $ 45,430       $ 44,780       $ 8,089   
  

 

 

    

 

 

    

 

 

    

 

 

 

Puerto Rico

 

For the quarter ended March 31, 2015

 

(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

     2       $ 551       $ 551       $ 2   

Commercial real estate non-owner occupied

     3         18,000         17,998         2,986   

Commercial real estate owner occupied

     5         4,759         4,552         171   

Commercial and industrial

     10         5,534         5,889         224   

Construction

     1         268         259         (166

Mortgage

     145         15,902         16,766         1,339   

Leasing

     13         323         325         73   

Consumer:

           

Credit cards

     415         3,617         4,066         629   

Personal

     242         4,502         4,500         967   

Auto

     4         —           51         8   

Other

     11         29         29         5   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     851       $ 53,485       $ 54,986       $ 6,238   
  

 

 

    

 

 

    

 

 

    

 

 

 

U.S. Mainland

 

For the quarter ended March 31, 2015

 

(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
 

Mortgage

     9       $ 468       $ 1,465       $ 82   

Consumer:

           

HELOCs

     1         —           92         9   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     10       $ 468       $ 1,557       $ 91   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

46


Table of Contents

Popular, Inc.

 

For the quarter ended March 31, 2015

 

(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

     2       $ 551       $ 551       $ 2   

Commercial real estate non-owner occupied

     3         18,000         17,998         2,986   

Commercial real estate owner occupied

     5         4,759         4,552         171   

Commercial and industrial

     10         5,534         5,889         224   

Construction

     1         268         259         (166

Mortgage

     154         16,370         18,231         1,421   

Leasing

     13         323         325         73   

Consumer:

           

Credit cards

     415         3,617         4,066         629   

HELOCs

     1         —           92         9   

Personal

     242         4,502         4,500         967   

Auto

     4         —           51         8   

Other

     11         29         29         5   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     861       $ 53,953       $ 56,543       $ 6,329   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following tables present by class, TDRs that were subject to payment default 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, 2016 is inclusive of all partial paydowns and charge-offs since the modification date. Loans modified as a TDR that were fully paid down, charged-off or foreclosed upon by period end are not reported.

 

Puerto Rico

 

Defaulted during the quarter ended March 31, 2016

 

(Dollars in thousands)

   Loan count      Recorded investment
as of first default date
 

Commercial real estate non-owner occupied

     2       $ 327   

Commercial real estate owner occupied

     6         2,456   

Mortgage

     27         3,235   

Consumer:

     

Credit cards

     106         1,122   

Personal

     43         1,139   

Auto

     1         17   

Other

     1         4   
  

 

 

    

 

 

 

Total [1]

     186       $ 8,300   
  

 

 

    

 

 

 

 

[1] Excludes loans for which the Corporation has entered into liquidation agreements with borrowers and guarantors and is accepting payments which differ from the contractual payment schedule. The Corporation considers these as defaulted loans and does not intent to return them to accrual status.

 

47


Table of Contents

During the quarter ended March 31, 2016, there were no U.S. mainland TDRs that were subject to payment default and that had been modified as a TDR during the twelve months preceding the default date.

 

Popular, Inc.

 

Defaulted during the quarter ended March 31, 2016

 

(Dollars In thousands)

   Loan count      Recorded investment
as of first default date
 

Commercial real estate non-owner occupied

     2       $ 327   

Commercial real estate owner occupied

     6         2,456   

Mortgage

     27         3,235   

Consumer:

     

Credit cards

     106         1,122   

Personal

     43         1,139   

Auto

     1         17   

Other

     1         4   
  

 

 

    

 

 

 

Total

     186       $ 8,300   
  

 

 

    

 

 

 

Puerto Rico

 

Defaulted during the quarter ended March 31, 2015

 

(Dollars In thousands)

   Loan count      Recorded investment
as of first default date
 

Commercial real estate owner occupied

     1       $ 291   

Commercial and industrial

     1         90   

Construction

     2         1,192   

Mortgage

     22         1,695   

Consumer:

     

Credit cards

     153         1,792   

Personal

     22         178   

Auto

     5         96   

Other

     2         2   
  

 

 

    

 

 

 

Total [1]

     208       $ 5,336   
  

 

 

    

 

 

 

 

[1] Exclude loans for which the Corporation has entered into liquidation agreements with borrowers and guarantors and is accepting payments which differ from the contractual payment schedule. The Corporation considers these as defaulted loans and does not intent to return them to accrual status.

During the quarter ended March 31, 2015, there were no U.S. mainland TDRs that were subject to payment default and that had been modified as a TDR during the twelve months preceding the default date.

 

Popular, Inc.

 

Defaulted during the quarter ended March 31, 2015

 

(Dollars In thousands)

   Loan count      Recorded investment
as of first default date
 

Commercial real estate owner occupied

     1       $ 291   

Commercial and industrial

     1         90   

Construction

     2         1,192   

Mortgage

     22         1,695   

Consumer:

     

Credit cards

     153         1,792   

Personal

     22         178   

Auto

     5         96   

Other

     2         2   
  

 

 

    

 

 

 

Total

     208       $ 5,336   
  

 

 

    

 

 

 

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 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, 2016 and December 31, 2015.

 

48


Table of Contents

March 31, 2016

 
            Special                                  Pass/         

(In thousands)

   Watch      Mention      Substandard      Doubtful      Loss      Sub-total      Unrated      Total  

Puerto Rico[1]

                       

Commercial multi-family

   $ 2,899       $ 1,021       $ 6,917       $ —         $ —         $ 10,837       $ 163,814       $ 174,651   

Commercial real estate non-owner occupied

     320,015         417,911         389,243         —           —           1,127,169         1,532,284         2,659,453   

Commercial real estate owner occupied

     355,306         145,492         431,370         2,056         —           934,224         933,565         1,867,789   

Commercial and industrial

     174,205         135,002         247,095         635         45         556,982         2,109,416         2,666,398   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Commercial

     852,425         699,426         1,074,625         2,691         45         2,629,212         4,739,079         7,368,291   

Construction

     4,015         6,028         18,165         —           —           28,208         76,936         105,144   

Mortgage

     4,566         3,337         218,542         —           —           226,445         5,873,314         6,099,759   

Leasing

     —           —           3,399         —           20         3,419         639,723         643,142   

Consumer:

                       

Credit cards

     —           —           18,864         —           —           18,864         1,079,919         1,098,783   

HELOCs

     —           —           280         —           —           280         9,349         9,629   

Personal

     1,668         1,066         21,013         —           —           23,747         1,167,643         1,191,390   

Auto

     —           —           10,811         —           33         10,844         815,461         826,305   

Other

     —           —           18,727         —           440         19,167         163,817         182,984   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Consumer

     1,668         1,066         69,695         —           473         72,902         3,236,189         3,309,091   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Puerto Rico

   $ 862,674       $ 709,857       $ 1,384,426       $ 2,691       $ 538       $ 2,960,186       $ 14,565,241       $ 17,525,427   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

U.S. mainland

                       

Commercial multi-family

   $ 12,264       $ 7,147       $ 985       $ —         $ —         $ 20,396       $ 742,158       $ 762,554   

Commercial real estate non-owner occupied

     38,732         4,054         25,414         —           —           68,200         922,448         990,648   

Commercial real estate owner occupied

     7,386         204         3,882         —           —           11,472         212,329         223,801   

Commercial and industrial

     9,671         3,759         131,844         —           —           145,274         737,821         883,095   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Commercial

     68,053         15,164         162,125         —           —           245,342         2,614,756         2,860,098   

Construction

     —           32,041         22,456         —           —           54,497         575,217         629,714   

Mortgage

     —           —           12,068         —           —           12,068         867,374         879,442   

Legacy

     1,678         1,186         6,200         —           —           9,064         51,980         61,044   

Consumer:

                       

Credit cards

     —           —           382         —           —           382         12,636         13,018   

HELOCs

     —           —           2,013         —           2,296         4,309         289,951         294,260   

Personal

     —           —           689         —           740         1,429         242,985         244,414   

Auto

     —           —           6         —           —           6         18         24   

Other

     —           —           —           —           10         10         286         296   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Consumer

     —           —           3,090         —           3,046         6,136         545,876         552,012   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total U.S. mainland

   $ 69,731       $ 48,391       $ 205,939       $ —         $ 3,046       $ 327,107       $ 4,655,203       $ 4,982,310   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Popular, Inc.

                       

Commercial multi-family

   $ 15,163       $ 8,168       $ 7,902       $ —         $ —         $ 31,233       $ 905,972       $ 937,205   

Commercial real estate non-owner occupied

     358,747         421,965         414,657         —           —           1,195,369         2,454,732         3,650,101   

Commercial real estate owner occupied

     362,692         145,696         435,252         2,056         —           945,696         1,145,894         2,091,590   

Commercial and industrial

     183,876         138,761         378,939         635         45         702,256         2,847,237         3,549,493   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Commercial

     920,478         714,590         1,236,750         2,691         45         2,874,554         7,353,835         10,228,389   

Construction

     4,015         38,069         40,621         —           —           82,705         652,153         734,858   

Mortgage

     4,566         3,337         230,610         —           —           238,513         6,740,688         6,979,201   

Legacy

     1,678         1,186         6,200         —           —           9,064         51,980         61,044   

Leasing

     —           —           3,399         —           20         3,419         639,723         643,142   

Consumer:

                       

Credit cards

     —           —           19,246         —           —           19,246         1,092,555         1,111,801   

HELOCs

     —           —           2,293         —           2,296         4,589         299,300         303,889   

Personal

     1,668         1,066         21,702         —           740         25,176         1,410,628         1,435,804   

Auto

     —           —           10,817         —           33         10,850         815,479         826,329   

Other

     —           —           18,727         —           450         19,177         164,103         183,280   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Consumer

     1,668         1,066         72,785         —           3,519         79,038         3,782,065         3,861,103   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Popular, Inc.

   $ 932,405       $ 758,248       $ 1,590,365       $ 2,691       $ 3,584       $ 3,287,293       $ 19,220,444       $ 22,507,737   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

49


Table of Contents

The following table presents the weighted average obligor risk rating at March 31, 2016 for those classifications that consider a range of rating scales.

 

Weighted average obligor risk rating    (Scales 11 and 12)      (Scales 1 through 8)  
Puerto Rico:[1]    Substandard      Pass  

Commercial multi-family

     11.17         6.04   

Commercial real estate non-owner occupied

     11.08         6.67   

Commercial real estate owner occupied

     11.25         7.05   

Commercial and industrial

     11.14         7.10   
  

 

 

    

 

 

 

Total Commercial

     11.16         6.93   
  

 

 

    

 

 

 

Construction

     11.18         7.50   
  

 

 

    

 

 

 
U.S. mainland:    Substandard      Pass  

Commercial multi-family

     11.25         7.15   

Commercial real estate non-owner occupied

     11.44         6.98   

Commercial real estate owner occupied

     11.05         6.94   

Commercial and industrial

     11.63         6.16   
  

 

 

    

 

 

 

Total Commercial

     11.59         6.80   
  

 

 

    

 

 

 

Construction

     11.03         7.76   
  

 

 

    

 

 

 

Legacy

     11.18         7.78   
  

 

 

    

 

 

 

 

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

 

50


Table of Contents

December 31, 2015

 
            Special                                  Pass/         

(In thousands)

   Watch      Mention      Substandard      Doubtful      Loss      Sub-total      Unrated      Total  

Puerto Rico[1]

                       

Commercial multi-family

   $ 1,750       $ 1,280       $ 8,103       $ —         $ —         $ 11,133       $ 121,013       $ 132,146   

Commercial real estate non-owner occupied

     319,564         423,095         399,076         —           —           1,141,735         1,527,357         2,669,092   

Commercial real estate owner occupied

     316,079         162,395         436,442         1,915         —           916,831         992,413         1,909,244   

Commercial and industrial

     187,620         146,216         256,821         690         29         591,376         2,066,361         2,657,737   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Commercial

     825,013         732,986         1,100,442         2,605         29         2,661,075         4,707,144         7,368,219   

Construction

     7,269         5,522         19,806         —           —           32,597         68,351         100,948   

Mortgage

     4,810         2,794         238,002         —           —           245,606         5,881,885         6,127,491   

Leasing

     —           —           3,009         —           —           3,009         624,641         627,650   

Consumer:

                       

Credit cards

     —           —           19,098         —           —           19,098         1,109,247         1,128,345   

HELOCs

     —           —           394         —           —           394         10,294         10,688   

Personal

     1,606         1,448         23,116         —           —           26,170         1,176,665         1,202,835   

Auto

     —           —           11,609         —           30         11,639         804,311         815,950   

Other

     —           —           18,656         —           575         19,231         169,253         188,484   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Consumer

     1,606         1,448         72,873         —           605         76,532         3,269,770         3,346,302   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Puerto Rico

   $ 838,698       $ 742,750       $ 1,434,132       $ 2,605       $ 634       $ 3,018,819       $ 14,551,791       $ 17,570,610   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

U.S. mainland

                       

Commercial multi-family

   $ 14,129       $ 7,189       $ 427       $ —         $ —         $ 21,745       $ 672,188       $ 693,933   

Commercial real estate non-owner occupied

     57,450         6,741         16,646         —           —           80,837         882,186         963,023   

Commercial real estate owner occupied

     11,978         1,074         2,967         —           —           16,019         186,325         202,344   

Commercial and industrial

     10,827         5,344         131,933         —           —           148,104         723,540         871,644   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Commercial

     94,384         20,348         151,973         —           —           266,705         2,464,239         2,730,944   

Construction

     15,091         16,948         18,856         —           —           50,895         529,263         580,158   

Mortgage

     —           —           13,537         —           —           13,537         895,053         908,590   

Legacy

     1,823         1,973         6,134         —           —           9,930         54,506         64,436   

Consumer:

                       

Credit cards

     —           —           —           —           —           —           13,935         13,935   

HELOCs

     —           —           1,550         —           2,626         4,176         300,308         304,484   

Personal

     —           —           637         —           603         1,240         171,386         172,626   

Auto

     —           —           —           —           —           —           28         28   

Other

     —           —           —           —           5         5         299         304   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Consumer

     —           —           2,187         —           3,234         5,421         485,956         491,377   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total U.S. mainland

   $ 111,298       $ 39,269       $ 192,687       $ —         $ 3,234       $ 346,488       $ 4,429,017       $ 4,775,505   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Popular, Inc.

                       

Commercial multi-family

   $ 15,879       $ 8,469       $ 8,530       $ —         $ —         $ 32,878       $ 793,201       $ 826,079   

Commercial real estate non-owner occupied

     377,014         429,836         415,722         —           —           1,222,572         2,409,543         3,632,115   

Commercial real estate owner occupied

     328,057         163,469         439,409         1,915         —           932,850         1,178,738         2,111,588   

Commercial and industrial

     198,447         151,560         388,754         690         29         739,480         2,789,901         3,529,381   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Commercial

     919,397         753,334         1,252,415         2,605         29         2,927,780         7,171,383         10,099,163   

Construction

     22,360         22,470         38,662         —           —           83,492         597,614         681,106   

Mortgage

     4,810         2,794         251,539         —           —           259,143         6,776,938         7,036,081   

Legacy

     1,823         1,973         6,134         —           —           9,930         54,506         64,436   

Leasing

     —           —           3,009         —           —           3,009         624,641         627,650   

Consumer:

                       

Credit cards

     —           —           19,098         —           —           19,098         1,123,182         1,142,280   

HELOCs

     —           —           1,944         —           2,626         4,570         310,602         315,172   

Personal

     1,606         1,448         23,753         —           603         27,410         1,348,051         1,375,461   

Auto

     —           —           11,609         —           30         11,639         804,339         815,978   

Other

     —           —           18,656         —           580         19,236         169,552         188,788   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Consumer

     1,606         1,448         75,060         —           3,839         81,953         3,755,726         3,837,679   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Popular, Inc.

   $ 949,996       $ 782,019       $ 1,626,819       $ 2,605       $ 3,868       $ 3,365,307       $ 18,980,808       $ 22,346,115   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

51


Table of Contents

The following table presents the weighted average obligor risk rating at December 31, 2015 for those classifications that consider a range of rating scales.

 

Weighted average obligor risk rating    (Scales 11 and 12)      (Scales 1 through 8)  
Puerto Rico:[1]    Substandard      Pass  

Commercial multi-family

     11.13         6.04   

Commercial real estate non-owner occupied

     11.09         6.67   

Commercial real estate owner occupied

     11.23         7.08   

Commercial and industrial

     11.15         7.13   
  

 

 

    

 

 

 

Total Commercial

     11.16         6.95   
  

 

 

    

 

 

 

Construction

     11.18         7.56   
  

 

 

    

 

 

 
U.S. mainland:    Substandard      Pass  

Commercial multi-family

     11.00         7.15   

Commercial real estate non-owner occupied

     11.02         6.92   

Commercial real estate owner occupied

     11.07         7.23   

Commercial and industrial

     11.57         6.24   
  

 

 

    

 

 

 

Total Commercial

     11.50         6.81   
  

 

 

    

 

 

 

Construction

     11.00         7.79   
  

 

 

    

 

 

 

Legacy

     11.11         7.78   
  

 

 

    

 

 

 

 

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

 

52


Table of Contents

Note 11 FDIC loss-share asset and true-up payment obligation

In connection with the Westernbank FDIC-assisted transaction, BPPR entered into loss-share arrangements with the FDIC with respect to the covered loans and other real estate owned. Pursuant to the terms of the loss-share arrangements, 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 80% reimbursement under loss-share arrangements. The loss-share agreement applicable to single-family residential mortgage loans provides for FDIC loss and recoveries sharing for ten years expiring at the end of the quarter ending June 30, 2020. The loss-share arrangements applicable to commercial (including construction) and consumer loans expired during the quarter ended June 30, 2015 and provide for reimbursement to the FDIC through the quarter ending June 30, 2018.

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

 

     Quarters ended March 31,  

(In thousands)

   2016      2015  

Balance at beginning of period

   $ 310,221       $ 542,454   

Amortization of loss share indemnification asset

     (4,042      (27,316

Credit impairment losses (reversal) to be covered under loss-sharing agreements

     (2,093      8,246   

Reimbursable expenses

     3,950         21,545   

Net payments from FDIC under loss-sharing agreements

     (88,588      (132,265

Other adjustments attributable to FDIC loss-sharing agreements

     —           (2,820
  

 

 

    

 

 

 

Balance at end of period

   $ 219,448       $ 409,844   
  

 

 

    

 

 

 

As a result of the expiration of the shared-loss arrangement under the commercial loss-share agreement on June 30, 2015, loans with a carrying amount at June 30, 2015 of approximately $248.7 million, which were reclassified to “non-covered” in the accompanying statement of financial condition, are subject to the resolution of several arbitration proceedings currently ongoing with the FDIC related primarily to (i) the FDIC’s denial of reimbursements for certain charge-offs claimed by BPPR with respect to certain loans and the treatment of those loans as “shared-loss assets” under the commercial loss-share agreement; and (ii) the denial by the FDIC of portfolio sale proposals submitted by BPPR pursuant to the applicable commercial shared-loss agreement provision governing portfolio sales. Until the disputes described above are finally resolved, the terms of the commercial loss-share agreement will remain in effect with respect to any such items under dispute. As of March 31, 2016, losses amounting to $149 million related to these assets are reflected in the FDIC indemnification asset as a receivable from the FDIC. Refer to additional information of these disputes on Note 23, Commitments and Contingencies.

The weighted average life of the single family loan portfolio accounted for under ASC 310-30 subject to the FDIC loss-sharing agreement at March 31, 2016 is 7.92 years.

As part of the loss-share agreements, BPPR has agreed to make a true-up payment to the FDIC on the date that is 45 days following the last day (such day, 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%).

 

53


Table of Contents

Of the four components used to estimate the true-up payment obligation (intrinsic loss estimate, asset discount, cumulative shared-loss payments, and period servicing amounts) only the cumulative shared-loss payments and the period servicing amounts will change on a quarterly basis. These two variables are the main drivers of changes in the undiscounted true-up payment obligation. In order to estimate the true-up obligation, actual and expected portfolio performance for loans under both the commercial and residential loss sharing agreement are contemplated. The cumulative shared loss payments and cumulative servicing amounts are derived from our quarterly loss reassessment process for covered loans accounted for under ASC 310-30.

Once the undiscounted true-up payment obligation is determined, the fair value is estimated based on the contractual remaining term to settle the obligation and a discount rate that is composed of the sum of the interpolated U.S. Treasury Note (“T Note”), defined by the remaining term of the true-up payment obligation, and a risk premium determined by the spread of the Corporation’s outstanding senior unsecured debt over the equivalent T Note.

The following table provides the fair value and the undiscounted amount of the true-up payment obligation at March 31, 2016 and December 31, 2015.

 

(In thousands)

   March 31, 2016      December 31, 2015  

Carrying amount (fair value)

   $ 120,188       $ 119,745   

Undiscounted amount

   $ 168,525       $ 168,692   

The increase in the fair value of the true-up payment obligation was principally driven by the regular accretion of the instrument, which was partially offset by an increase in the discount rate from 7.64% in 2015 to 7.98% in 2016. An enhancement in the methodology used to calculate the discount rate, incorporating a volume weighted adjusted price, was the driver of the increase in the discount rate.

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.

Refer to Note 23, Commitment and Contingencies, for additional information on the settlement of the arbitration proceedings with the FDIC regarding the commercial loss-share agreement.

 

54


Table of Contents

Note 12 – Mortgage banking activities

Income from mortgage banking activities includes mortgage servicing fees earned in connection with administering residential mortgage loans and valuation adjustments on mortgage servicing rights. It also includes gain on sales and securitizations of residential mortgage loans and trading gains and losses on derivative contracts used to hedge the Corporation’s securitization activities. In addition, lower-of-cost-or-market valuation adjustments to residential mortgage loans held for sale, if any, are recorded as part of the mortgage banking activities.

The following table presents the components of mortgage banking activities:

 

     Quarters ended March 31,  

(In thousands)

   2016      2015  

Mortgage servicing fees, net of fair value adjustments:

     

Mortgage servicing fees

   $ 14,802       $ 12,248   

Mortgage servicing rights fair value adjustments

     (8,477      (4,929
  

 

 

    

 

 

 

Total mortgage servicing fees, net of fair value adjustments

     6,325         7,319   
  

 

 

    

 

 

 

Net gain on sale of loans, including valuation on loans

     7,110         7,280   
  

 

 

    

 

 

 

Trading account (loss):

     

Unrealized (losses) gains on outstanding derivative positions

     (80      17   

Realized losses on closed derivative positions

     (2,804      (1,764
  

 

 

    

 

 

 

Total trading account loss

     (2,884      (1,747
  

 

 

    

 

 

 

Total mortgage banking activities

   $ 10,551       $ 12,852   
  

 

 

    

 

 

 

 

55


Table of Contents

Note 13 – Transfers of financial assets and mortgage servicing assets

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 Note 22 to the consolidated financial statements for a description of such arrangements.

No liabilities were incurred as a result of these securitizations during the quarters ended March 31, 2016 and 2015 because they did not contain any credit recourse arrangements. During the quarter ended March 31, 2016 the Corporation recorded a net gain of $6.4 million (March 31, 2015—$6.4 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 during the quarters ended March 31, 2016 and 2015.

 

     Proceeds Obtained During the Quarter Ended March 31, 2016  

(In thousands)

   Level 1      Level 2      Level 3      Initial Fair Value  

Assets

           

Trading account securities:

           

Mortgage-backed securities—GNMA

   $ —         $ 134,012       $ —         $ 134,012   

Mortgage-backed securities—FNMA

     —           36,236         —           36,236   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total trading account securities

   $ —         $ 170,248       $ —         $ 170,248   
  

 

 

    

 

 

    

 

 

    

 

 

 

Mortgage servicing rights

   $ —         $ —         $ 1,870       $ 1,870   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 170,248       $ 1,870       $ 172,118   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Proceeds Obtained During the Quarter Ended March 31, 2015  

(In thousands)

   Level 1      Level 2      Level 3      Initial Fair Value  

Assets

           

Trading account securities:

           

Mortgage-backed securities—GNMA

   $ —         $ 156,456       $ —         $ 156,456   

Mortgage-backed securities—FNMA

     —           46,958         —           46,958   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total trading account securities

   $ —         $ 203,414       $ —         $ 203,414   
  

 

 

    

 

 

    

 

 

    

 

 

 

Mortgage servicing rights

   $ —         $ —         $ 2,562       $ 2,562   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 203,414       $ 2,562       $ 205,976   
  

 

 

    

 

 

    

 

 

    

 

 

 

During the quarter ended March 31, 2016, the Corporation retained servicing rights on whole loan sales involving approximately $18.5 million in principal balance outstanding (March 31, 2015—$22 million), with realized gains of approximately $0.7 million (March 31, 2015—gains of $1.0 million). All loan sales performed during the quarters ended March 31, 2016 and 2015 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.

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.

 

56


Table of Contents

The following table presents the changes in MSRs measured using the fair value method for the quarters ended March 31, 2016 and 2015.

 

Residential MSRs

 

(In thousands)

   March 31, 2016      March 31, 2015  

Fair value at beginning of period

   $ 211,405       $ 148,694   

Additions

     2,123         5,259   

Changes due to payments on loans[1]

     (4,254      (3,789

Reduction due to loan repurchases

     (357      (456

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

     (3,866      (684
  

 

 

    

 

 

 

Fair value at end of period

   $ 205,051       $ 149,024   
  

 

 

    

 

 

 

 

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

Mortgage servicing rights as of March 31, 2016 include those acquired as part of the Doral Bank Transaction.

Residential mortgage loans serviced for others were $20.3 billion at March 31, 2016 (December 31, 2015—$20.6 billion).

Net mortgage servicing fees, a component of mortgage banking activities in the consolidated statements of operations, include the changes from period to period in the fair value of the MSRs, including changes due to collection / realization of expected cash flows. Mortgage servicing fees, excluding fair value adjustments, for the quarter ended March 31, 2016 amounted to $14.8 million (March 31, 2015—$12.2 million). The banking subsidiaries receive servicing fees based on a percentage of the outstanding loan balance. At March 31, 2016, those weighted average mortgage servicing fees were 0.29% (March 31, 2015 – 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, 2016 and 2015 were as follows:

 

     Quarters ended  
     March 31, 2016     March 31, 2015  

Prepayment speed

     5.4     7.3

Weighted average life

     10.0  years      13.7  years 

Discount rate (annual rate)

     11.1     10.9

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:

 

57


Table of Contents
Originated MSRs  

(In thousands)

   March 31, 2016     December 31, 2015  
  

 

 

   

 

 

 

Fair value of servicing rights

   $ 95,043      $ 98,648   

Weighted average life

     7.3  years      7.3  years 

Weighted average prepayment speed (annual rate)

     6.0     6.0

Impact on fair value of 10% adverse change

   $ (2,376   $ (2,488

Impact on fair value of 20% adverse change

   $ (4,982   $ (5,241

Weighted average discount rate (annual rate)

     11.5     11.5

Impact on fair value of 10% adverse change

   $ (3,853   $ (4,083

Impact on fair value of 20% adverse change

   $ (7,723   $ (8,206

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, 2016     December 31, 2015  

Fair value of servicing rights

   $ 110,008      $ 112,757   

Weighted average life

     6.2  years      6.2  years 

Weighted average prepayment speed (annual rate)

     6.7     6.9

Impact on fair value of 10% adverse change

   $ (2,795   $ (2,871

Impact on fair value of 20% adverse change

   $ (5,842   $ (6,034

Weighted average discount rate (annual rate)

     11.0     11.0

Impact on fair value of 10% adverse change

   $ (4,077   $ (4,211

Impact on fair value of 20% adverse change

   $ (8,221   $ (8,525

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, 2016, the Corporation serviced $1.8 billion (December 31, 2015—$1.9 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, 2016, the Corporation had recorded $146 million in mortgage loans on its consolidated statements of financial condition related to this buy-back option program (December 31, 2015—$140 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. During the quarter ended March 31, 2016, the Corporation repurchased approximately $ 17 million (March 31, 2015—$24 million) of mortgage loans under the GNMA buy-back option program. The determination to repurchase these loans was based on the economic benefits of the transaction, which results in a reduction of the servicing costs for these severely delinquent loans, mostly related to principal and interest advances. Furthermore, due to their guaranteed nature, the risk associated with the loans is minimal. The Corporation places these loans under its loss mitigation programs and once brought back to current status, these may be either retained in portfolio or re-sold in the secondary market.

 

58


Table of Contents

Note 14 – Other real estate owned

The following tables present the activity related to Other Real Estate Owned (“OREO”), for the quarters ended March 31, 2016 and 2015.

 

     For the quarter ended March 31, 2016  
     Non-covered      Non-covered      Covered         
     OREO      OREO      OREO         

(In thousands)

   Commercial/ Construction      Mortgage      Mortgage      Total  

Balance at beginning of period

   $ 32,471       $ 122,760       $ 36,685       $ 191,916   

Write-downs in value

     (1,717      (2,016      (500      (4,233

Additions

     1,810         24,276         4,483         30,569   

Sales

     (1,595      (8,500      (3,649      (13,744

Other adjustments

     (615      (914      (622      (2,151
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance

   $ 30,354       $ 135,606       $ 36,397       $ 202,357   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     For the quarter ended March 31, 2015  
     Non-covered     Non-covered     Covered     Covered        
     OREO     OREO     OREO     OREO        

(In thousands)

   Commercial/ Construction     Mortgage     Commercial/ Construction     Mortgage     Total  

Balance at beginning of period

   $ 38,983      $ 96,517      $ 85,394      $ 44,872      $ 265,766   

Write-downs in value

     (5,887     (1,372     (9,395     (1,282     (17,936

Additions

     2,035        21,075        4,038        5,381        32,529   

Sales

     (9,427     (13,086     (9,464     (5,822     (37,799

Other adjustments

     (96     (572     —          (165     (833
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 25,608      $ 102,562      $ 70,573      $ 42,984      $ 241,727   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

59


Table of Contents

Note 15 – Other assets

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

 

(In thousands)

   March 31, 2016      December 31, 2015  

Net deferred tax assets (net of valuation allowance)

   $ 1,275,017       $ 1,302,452   

Investments under the equity method

     216,076         212,838   

Prepaid taxes

     174,558         180,969   

Other prepaid expenses

     81,300         79,215   

Derivative assets

     15,012         16,959   

Trades receivable from brokers and counterparties

     87,590         78,759   

Others

     306,477         321,970   
  

 

 

    

 

 

 

Total other assets

   $ 2,156,030       $ 2,193,162   
  

 

 

    

 

 

 

 

60


Table of Contents

Note 16 – Goodwill and other intangible assets

Goodwill

The changes in the carrying amount of goodwill for the quarters ended March 31, 2016 and 2015, allocated by reportable segments, were as follows (refer to Note 35 for the definition of the Corporation’s reportable segments):

 

2016

 
                   Purchase         
     Balance at      Goodwill on      accounting      Balance at  

(In thousands)

   January 1, 2016      acquisition      adjustments      March 31, 2016  

Banco Popular de Puerto Rico

   $ 280,221       $ —         $ —         $ 280,221   

Banco Popular North America

     346,167         —           4,707         350,874   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Popular, Inc.

   $ 626,388       $ —         $ 4,707       $ 631,095   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

2015

 
                   Purchase         
     Balance at      Goodwill on      accounting      Balance at  

(In thousands)

   January 1, 2015      acquisition      adjustments      March 31, 2015  

Banco Popular de Puerto Rico

   $ 250,109       $ 3,899       $ —         $ 254,008   

Banco Popular North America

     215,567         38,735         —           254,302   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Popular, Inc.

   $ 465,676       $ 42,634       $ —         $ 508,310   
  

 

 

    

 

 

    

 

 

    

 

 

 

During the quarter ended March 31, 2016, the Corporation recorded adjustments to its initial fair value estimates in connection with the Doral Bank Transaction. As a result, the discount on the loans increased by $4.7 million with a corresponding increase to goodwill. The goodwill recorded during the first quarter of 2015 was related to the Doral Bank Transaction. Refer to Note 5, Business Combination, for additional information.

The following tables present the gross amount of goodwill and accumulated impairment losses by reportable segments.

 

March 31, 2016

 
     Balance at             Balance at      Balance at             Balance at  
     January 1,      Accumulated      January 1,      March 31,      Accumulated      March 31,  
     2016      impairment      2016      2016      impairment      2016  

(In thousands)

   (gross amounts)      losses      (net amounts)      (gross amounts)      losses      (net amounts)  

Banco Popular de Puerto Rico

   $ 280,221       $ —         $ 280,221       $ 280,221       $ —         $ 280,221   

Banco Popular North America

     510,578         164,411         346,167         515,285         164,411         350,874   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Popular, Inc.

   $ 790,799       $ 164,411       $ 626,388       $ 795,506       $ 164,411       $ 631,095   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

61


Table of Contents

December 31, 2015

 
     Balance at             Balance at      Balance at             Balance at  
     January 1,      Accumulated      January 1,      December 31,      Accumulated      December 31,  
     2015      impairment      2015      2015      impairment      2015  

(In thousands)

   (gross amounts)      losses      (net amounts)      (gross amounts)      losses      (net amounts)  

Banco Popular de Puerto Rico

   $ 250,109       $ —         $ 250,109       $ 280,221       $ —         $ 280,221   

Banco Popular North America

     379,978         164,411         215,567         510,578         164,411         346,167   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Popular, Inc.

   $ 630,087       $ 164,411       $ 465,676       $ 790,799       $ 164,411       $ 626,388   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other Intangible Assets

At March 31, 2016 and December 31, 2015, the Corporation had $ 6.1 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:

 

     Gross             Net  
     Carrying      Accumulated      Carrying  

(In thousands)

   Amount      Amortization      Value  

March 31, 2016

        

Core deposits

   $ 63,539       $ 40,132       $ 23,407   

Other customer relationships

     36,786         12,227         24,559   
  

 

 

    

 

 

    

 

 

 

Total other intangible assets

   $ 100,325       $ 52,359       $ 47,966   
  

 

 

    

 

 

    

 

 

 

December 31, 2015

        

Core deposits

   $ 63,539       $ 38,464       $ 25,075   

Other customer relationships

     37,665         10,745         26,920   
  

 

 

    

 

 

    

 

 

 

Total other intangible assets

   $ 101,204       $ 49,209       $ 51,995   
  

 

 

    

 

 

    

 

 

 

During the quarter ended March 31, 2016, the Corporation recognized $ 3.1 million in amortization expense related to other intangible assets with definite useful lives (March 31, 2015—$ 2.1 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 2016

   $ 9,030   

Year 2017

     9,378   

Year 2018

     9,286   

Year 2019

     9,042   

Year 2020

     4,967   

Year 2021

     2,157   

 

62


Table of Contents

Note 17 – Deposits

Total interest bearing deposits as of the end of the periods presented consisted of:

 

(In thousands)

   March 31, 2016      December 31, 2015  

Savings accounts

   $ 7,307,272       $ 7,010,391   

NOW, money market and other interest bearing demand deposits

     5,957,465         5,632,449   
  

 

 

    

 

 

 

Total savings, NOW, money market and other interest bearing demand deposits

     13,264,737         12,642,840   
  

 

 

    

 

 

 

Certificates of deposit:

     

Under $100,000

     3,798,028         4,014,359   

$100,000 and over

     4,079,735         4,151,009   
  

 

 

    

 

 

 

Total certificates of deposit

     7,877,763         8,165,368   
  

 

 

    

 

 

 

Total interest bearing deposits

   $ 21,142,500       $ 20,808,208   
  

 

 

    

 

 

 

A summary of certificates of deposit by maturity at March 31, 2016 follows:

 

(In thousands)

      

2016

   $ 3,780,813   

2017

     1,452,245   

2018

     800,872   

2019

     517,844   

2020

     974,612   

2021 and thereafter

     351,377   
  

 

 

 

Total certificates of deposit

   $ 7,877,763   
  

 

 

 

At March 31, 2016, the Corporation had brokered deposits amounting to $ 0.9 billion (December 31, 2015—$ 1.3 billion).

The aggregate amount of overdrafts in demand deposit accounts that were reclassified to loans was $9 million at March 31, 2016 (December 31, 2015—$11 million).

 

63


Table of Contents

Note 18 – Borrowings

The following table presents the composition of fed funds purchased and assets sold under agreements to repurchase at March 31, 2016 and December 31, 2015.

 

(In thousands)

   March 31, 2016      December 31, 2015  

Federal funds purchased

   $ 50,000       $ 50,000   

Assets sold under agreements to repurchase

     710,154         712,145   
  

 

 

    

 

 

 

Total federal funds purchased and assets sold under agreements to repurchase

   $ 760,154       $ 762,145   
  

 

 

    

 

 

 

The following table presents information related to the Corporation’s repurchase transactions accounted for as secured borrowings that are collateralized with investment securities available-for-sale, other assets held-for-trading purposes or which have been obtained under agreements to resell. 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.

Repurchase agreements accounted for as secured borrowings

 

     March 31, 2016      December 31, 2015  
     Repurchase      Repurchase  

(In thousands)

   liability      liability  

Obligations of U.S. government sponsored entities

     

Within 30 days

   $ 87,809       $ 243,708   

After 30 to 90 days

     54,361         —     

After 90 days

     192,238         23,366   
  

 

 

    

 

 

 

Total obligations of U.S. government sponsored entities

     334,408         267,074   
  

 

 

    

 

 

 

Mortgage-backed securities

     

Within 30 days

     28,340         124,878   

After 30 to 90 days

     57,224         154,582   

After 90 days

     264,321         142,441   
  

 

 

    

 

 

 

Total mortgage-backed securities

     349,885         421,901   
  

 

 

    

 

 

 

Collateralized mortgage obligations

     

Within 30 days

     10,458         10,298   

After 30 to 90 days

     —           12,872   

After 90 days

     15,403         —     
  

 

 

    

 

 

 

Total collateralized mortgage obligations

     25,861         23,170   
  

 

 

    

 

 

 

Total

   $ 710,154       $ 712,145   
  

 

 

    

 

 

 

Repurchase agreements in portfolio are generally short-term, often overnight and Popular acts as borrowers transferring assets to the counterparty. As such our risk is very limited. We manage the liquidity risks arising from secured funding by sourcing funding globally from a diverse group of counterparties, providing a range of securities collateral and pursuing longer durations, when appropriate.

The following table presents the composition of other short-term borrowings at March 31, 2016 and December 31, 2015.

 

(In thousands)

   March 31, 2016      December 31, 2015  

Securities sold not yet purchased

   $ 5,170       $ —     

Others

     1,200         1,200   
  

 

 

    

 

 

 

Total other short-term borrowings

   $ 6,370       $ 1,200   
  

 

 

    

 

 

 

Note: Refer to the Corporation’s 2015 Form 10-K for rates information at December 31, 2015.

 

64


Table of Contents

The following table presents the composition of notes payable at March 31, 2016 and December 31, 2015.

 

(In thousands)

   March 31, 2016      December 31, 2015  

Advances with the FHLB with maturities ranging from 2016 through 2029 paying interest at monthly fixed rates ranging from 0.71% to 4.19 % (2015—0.45% to 4.19%)

   $ 638,848       $ 747,072   

Advances with the FHLB maturing on 2019 paying interest monthly at a floating rate of 0.34% over the 1 month LIBOR

     13,000         —     

Advances with the FHLB with maturities ranging from 2017 through 2019 paying interest quarterly at a floating rate from 0.01% to 0.24% over the 3 month LIBOR

     30,313         14,429   

Unsecured senior debt securities maturing on 2019 paying interest semiannually at a fixed rate of 7.00%, net of debt issuance costs of $6,775 (2015—$7,296)

     443,225         442,704   

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%, net of debt issuance costs of $497 (2015—$505)

     439,303         439,295   

Others

     18,779         19,008   
  

 

 

    

 

 

 

Total notes payable

   $ 1,583,468       $ 1,662,508   
  

 

 

    

 

 

 

Note: Refer to the Corporation’s 2015 Form 10-K for rates information at December 31, 2015.

At March 31, 2016, the Corporation’s banking subsidiaries had credit facilities authorized with the FHLB and the Federal Reserve discount window aggregating to $4.1 billion and $1.3 billion (December 31, 2015—$3.9 billion and $1.3 billion, respectively), which were collateralized by loans held-in-portfolio. At March 31, 2016, the Corporation used $922 million of the available credit facility with the FHLB (December 31, 2015—$762 million), which includes $240 million used for a municipal letter of credit to secure deposits, while the borrowing capacity at the discount window remains unused.

A breakdown of borrowings by contractual maturities at March 31, 2016 is included in the table below.

 

     Fed funds purchased                       
     and assets sold under      Short-term                

(In thousands)

   agreements to repurchase      borrowings      Notes payable      Total  

Year

           

2016

   $ 760,154       $ 6,370       $ 145,402       $ 911,926   

2017

     —           —           90,939         90,939   

2018

     —           —           144,503         144,503   

2019

     —           —           551,314         551,314   

2020

     —           —           92,529         92,529   

Later years

     —           —           558,781         558,781   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total borrowings

   $ 760,154       $ 6,370       $ 1,583,468       $ 2,349,992   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

65


Table of Contents

Note 19 – Offsetting of financial assets and liabilities

The following tables present the potential effect of rights of setoff associated with the Corporation’s recognized financial assets and liabilities at March 31, 2016 and December 31, 2015.

 

As of March 31, 2016

 
                          Gross Amounts Not Offset in the Statement of
Financial Position
 

(In thousands)

   Gross Amount
of Recognized
Assets
     Gross Amounts
Offset in the
Statement of
Financial
Position
     Net Amounts of
Assets
Presented in the
Statement of
Financial
Position
     Financial
Instruments
     Securities
Collateral
Received
     Cash
Collateral
Received
     Net
Amount
 

Derivatives

   $ 15,012       $ —         $ 15,012       $ 35       $ —         $ —         $ 14,977   

Reverse repurchase agreements

     97,830         —           97,830         —           97,830         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 112,842       $ —         $ 112,842       $ 35       $ 97,830       $ —         $ 14,977   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

As of March 31, 2016

 
                          Gross Amounts Not Offset in the Statement of
Financial Position
 

(In thousands)

   Gross Amount
of Recognized
Liabilities
     Gross Amounts
Offset in the
Statement of
Financial
Position
     Net Amounts of
Liabilities
Presented in the
Statement of
Financial
Position
     Financial
Instruments
     Securities
Collateral
Pledged
     Cash
Collateral
Pledged
     Net
Amount
 

Derivatives

   $ 12,068       $ —         $ 12,068       $ 35       $ 3,153       $ —         $ 8,880   

Repurchase agreements

     710,154         —           710,154         —           710,154         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 722,222       $ —         $ 722,222       $ 35       $ 713,307       $ —         $ 8,880   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

As of December 31, 2015

 
                          Gross Amounts Not Offset in the Statement of
Financial Position
 

(In thousands)

   Gross Amount
of Recognized
Assets
     Gross Amounts
Offset in the
Statement of
Financial
Position
     Net Amounts of
Assets
Presented in the
Statement of
Financial
Position
     Financial
Instruments
     Securities
Collateral
Received
     Cash
Collateral
Received
     Net
Amount
 

Derivatives

   $ 16,959       $ —         $ 16,959       $ 114       $ —         $ —         $ 16,845   

Reverse repurchase agreements

     96,338         —           96,338         —           96,338         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 113,297       $ —         $ 113,297       $ 114       $ 96,338       $ —         $ 16,845   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

66


Table of Contents

As of December 31, 2015

 
                          Gross Amounts Not Offset in the Statement of
Financial Position
 

(In thousands)

   Gross Amount
of Recognized
Liabilities
     Gross Amounts
Offset in the
Statement of
Financial
Position
     Net Amounts of
Liabilities
Presented in the
Statement of
Financial
Position
     Financial
Instruments
     Securities
Collateral
Pledged
     Cash
Collateral
Received
     Net
Amount
 

Derivatives

   $ 14,343       $ —         $ 14,343       $ 114       $ 4,050       $ —         $ 10,179   

Repurchase agreements

     712,145         —           712,145         —           712,145         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 726,488       $ —         $ 726,488       $ 114       $ 716,195       $ —         $ 10,179   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The Corporation’s derivatives are subject to agreements which allow a right of set-off with each respective counterparty. In addition, the Corporation’s Repurchase Agreements and Reverse Repurchase Agreements have a right of set-off with the respective counterparty under the supplemental terms of the Master Repurchase Agreements. In an event of default each party has a right of set-off against the other party for amounts owed in the related agreement and any other amount or obligation owed in respect of any other agreement or transaction between them.

 

67


Table of Contents

Note 20 – Stockholders’ equity

During the quarter ended March 31, 2016 the Corporation declared a cash dividend of $0.15 per share on its outstanding common stock, which was paid on April 1, 2016 to shareholders of record at the close of business on March 11, 2016. This represents a payout of approximately $15.5 million.

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 $495 million at March 31, 2016 (December 31, 2015—$495 million). There were no transfers between the statutory reserve account and the retained earnings account during the quarters ended March 31, 2016 and March 31, 2015.

 

68


Table of Contents

Note 21 – Other comprehensive loss

The following table presents changes in accumulated other comprehensive loss by component for the quarters ended March 31, 2016 and 2015.

 

    

Changes in Accumulated Other Comprehensive Loss by Component [1]

 
          Quarters ended March 31,  

(In thousands)

        2016     2015  

Foreign currency translation

  

Beginning Balance

   $ (35,930   $ (32,832
     

 

 

   

 

 

 
  

Other comprehensive loss before reclassifications

     (705     (581
  

Amounts reclassified from accumulated other comprehensive loss

     —          —     
     

 

 

   

 

 

 
  

Net change

     (705     (581
     

 

 

   

 

 

 
  

Ending balance

   $ (36,635   $ (33,413
     

 

 

   

 

 

 

Adjustment of pension and postretirement benefit plans

  

Beginning Balance

   $ (211,276   $ (205,187
     

 

 

   

 

 

 
  

Amounts reclassified from accumulated other comprehensive loss for amortization of net losses

     3,346        3,065   
  

Amounts reclassified from accumulated other comprehensive loss for amortization of prior service cost

     (580     (579
     

 

 

   

 

 

 
  

Net change

     2,766        2,486   
     

 

 

   

 

 

 
  

Ending balance

   $ (208,510   $ (202,701
     

 

 

   

 

 

 

Unrealized net holding gains on investments

  

Beginning Balance

   $ (9,560   $ 8,465   
     

 

 

   

 

 

 
  

Other comprehensive income before reclassifications

     73,351        34,285   
     

 

 

   

 

 

 
  

Net change

     73,351        34,285   
     

 

 

   

 

 

 
  

Ending balance

   $ 63,791      $ 42,750   
     

 

 

   

 

 

 

Unrealized net losses on cash flow hedges

  

Beginning Balance

   $ (120   $ (318
     

 

 

   

 

 

 
  

Other comprehensive loss before reclassifications

     (1,219     (1,546
  

Amounts reclassified from other accumulated other comprehensive loss

     943        828   
     

 

 

   

 

 

 
  

Net change

     (276     (718
     

 

 

   

 

 

 
  

Ending balance

   $ (396   $ (1,036
     

 

 

   

 

 

 
  

Total

   $ (181,750   $ (194,400
     

 

 

   

 

 

 

 

[1] All amounts presented are net of tax.

 

69


Table of Contents

The following table presents the amounts reclassified out of each component of accumulated other comprehensive loss during the quarters ended March 31, 2016 and 2015.

 

    

Reclassifications Out of Accumulated Other Comprehensive Loss

 
     Affected Line Item in the    Quarters ended March 31,  

(In thousands)

  

Consolidated Statements of Operations

   2016     2015  

Adjustment of pension and postretirement benefit plans

       

Amortization of net losses

  

Personnel costs

   $ (5,486   $ (5,025

Amortization of prior service cost

  

Personnel costs

     950        950   
     

 

 

   

 

 

 
  

Total before tax

     (4,536     (4,075
     

 

 

   

 

 

 
  

Income tax benefit

     1,770        1,589   
     

 

 

   

 

 

 
  

Total net of tax

   $ (2,766   $ (2,486
     

 

 

   

 

 

 

Unrealized net losses on cash flow hedges

       

Forward contracts

  

Mortgage banking activities

   $ (1,545   $ (1,358
     

 

 

   

 

 

 
  

Total before tax

     (1,545     (1,358
     

 

 

   

 

 

 
  

Income tax benefit

     602        530   
     

 

 

   

 

 

 
  

Total net of tax

   $ (943   $ (828
     

 

 

   

 

 

 
  

Total reclassification adjustments, net of tax

   $ (3,709   $ (3,314
     

 

 

   

 

 

 

 

70


Table of Contents

Note 22 – Guarantees

At March 31, 2016 the Corporation recorded a liability of $0.7 million (December 31, 2015—$0.5 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. At March 31, 2016 the Corporation serviced $1.8 billion (December 31, 2015—$1.9 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, 2016, the Corporation repurchased approximately $ 13 million of unpaid principal balance in mortgage loans subject to the credit recourse provisions (March 31, 2015$ 16 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, 2016 the Corporation’s liability established to cover the estimated credit loss exposure related to loans sold or serviced with credit recourse amounted to $ 58 million (December 31, 2015—$ 59 million).

The following table shows the changes in the Corporation’s liability of estimated losses related to loans serviced with credit recourse provisions during the quarters ended March 31, 2016 and 2015.

 

     March 31,  

(In thousands)

   2016      2015  

Balance as of beginning of period

   $ 58,663       $ 59,438   

Provision for recourse liability

     3,920         6,500   

Net charge-offs

     (4,589      (6,553
  

 

 

    

 

 

 

Balance as of end of period

   $ 57,994       $ 59,385   
  

 

 

    

 

 

 

When the Corporation sells or securitizes mortgage loans, it generally makes customary representations and warranties regarding the characteristics of the loans sold. 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. During the quarters ended March 31, 2016 and March 31, 2015, BPPR did not repurchase loans under representation and warranty arrangements. 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.

From time to time, the Corporation sells loans and agrees to indemnify the purchaser for credit losses or any breach of certain representations and warranties made in connection with the sale. The following table presents the changes in the Corporation’s liability for estimated losses associated with indemnifications and representations and warranties related to loans sold by BPPR for the quarters ended March 31, 2016 and 2015.

 

71


Table of Contents

(In thousands)

   2016      2015  

Balance as of beginning of period

   $ 8,087       $ 15,959   

Provision (reversal) for representation and warranties

     106         (1,901

Net charge-offs

     (191      (14
  

 

 

    

 

 

 

Balance as of end of period

   $ 8,002       $ 14,044   
  

 

 

    

 

 

 

In addition, at March 31, 2016, the Corporation has reserves for customary representations and warranties related to loans sold by its U.S. subsidiary E-LOAN prior to 2009. These loans were 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 with these loans. At March 31, 2016, the Corporation’s reserve for estimated losses from such representation and warranty arrangements amounted to $ 4 million, which was included as part of other liabilities in the consolidated statement of financial condition (December 31, 2015—$ 4 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.

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, 2016, the Corporation serviced $20.3 billion in mortgage loans for third-parties, including the loans serviced with credit recourse (December 31, 2015—$20.6 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 respect to that loan. At March 31, 2016, the outstanding balance of funds advanced by the Corporation under such mortgage loan servicing agreements was approximately $76 million, including advances on the portfolio acquired from Doral Bank (March 31, 2015—$31 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.

Popular, Inc. Holding Company (“PIHC”) fully and unconditionally guarantees certain borrowing obligations issued by certain of its wholly-owned consolidated subsidiaries amounting to $ 0.2 billion at March 31, 2016 (December 31, 2015—$ 0.2 billion). In addition, at March 31, 2016 and December 31, 2015, PIHC fully and unconditionally guaranteed on a subordinated basis $ 0.4 billion and $ 0.4 billion, respectively, of capital securities (trust preferred securities) issued by wholly-owned issuing trust entities to the extent set forth in the applicable guarantee agreement.

 

72


Table of Contents

Note 23 – 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, 2016      December 31, 2015  

Commitments to extend credit:

     

Credit card lines

   $ 4,562,439       $ 4,552,331   

Commercial and construction lines of credit

     2,711,061         2,619,092   

Other consumer unused credit commitments

     259,134         262,685   

Commercial letters of credit

     1,560         2,040   

Standby letters of credit

     36,252         49,670   

Commitments to originate or fund mortgage loans

     25,079         21,311   

At March 31, 2016 and December 31, 2015, the Corporation maintained a reserve of approximately $10 million for potential losses associated with unfunded loan commitments related to commercial and consumer lines of credit.

Other commitments

At March 31, 2016 and December 31, 2015, the Corporation also maintained other non-credit commitments for approximately $9 million, primarily for the acquisition of other investments.

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 35 to the consolidated financial statements.

Since February 2014, the three principal rating agencies (Moody’s, S&P and Fitch) have lowered their ratings on the General Obligation bonds of the Commonwealth and the bonds of several other Commonwealth instrumentalities to non-investment grade ratings. In connection with their rating actions, the rating agencies noted various factors, including high levels of public debt, the lack of a clear economic growth catalyst, recurring fiscal budget deficits, the financial condition of the public sector employee pension plans and, more recently, liquidity concerns regarding the Commonwealth and the GDB and their ability to access the capital markets. Currently, the Commonwealth’s general obligation ratings are as follows: S&P, ‘CC’, Moody’s, ‘Caa3’, and Fitch, ‘CC’.

At March 31, 2016, the Corporation’s direct exposure to the Puerto Rico government and its instrumentalities and municipalities amounted to $ 656 million, of which approximately $ 565 million is outstanding ($669 million and $ 578 million, respectively, at December 31, 2015). Of the amount outstanding, $ 490 million consists of loans and $ 75 million are securities ($ 502 million and $ 76 million at December 31, 2015). Also, of the amount outstanding, $ 61 million represents obligations from the Government of Puerto Rico and public corporations that have a specific source of income or revenues identified for their repayment ($ 76 million at December 31, 2015). Some of these obligations consist of senior and subordinated loans to public corporations that obtain

 

73


Table of Contents

revenues from rates charged for services or products, such as public utilities. Public corporations have varying degrees of independence from the central Government and many receive appropriations or other payments from it. The remaining $ 504 million outstanding represents obligations from 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 ($ 502 million at December 31, 2015). 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. These loans have seniority to the payment of operating cost and expenses of the municipality. Further deterioration of the fiscal crisis of the Government of Puerto Rico could further affect the value of these loans and securities, resulting in losses to us. At March 31, 2016, BPPR is a lender in a syndicated credit facility to PREPA and its exposure was of $40.9 million. The facility is classified as held-for-sale as BPPR has the ability and intent to sell the loan. The following table details the loans and investments representing the Corporation’s direct exposure to the Puerto Rico government according to their maturities:

 

(In thousands)

   Investment
Portfolio
     Loans      Total
Outstanding
     Total
Exposure
 

Central Government

           

Within 1 year

   $ —         $ —         $ —         $ 50,794   

After 1 to 5 years

     887         —           887         887   

After 5 to 10 years

     3,044         —           3,044         3,044   

After 10 years

     13,688         —           13,688         13,688   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Central Government

     17,619         —           17,619         68,413   
  

 

 

    

 

 

    

 

 

    

 

 

 

Government Development Bank (GDB)

           

Within 1 year

     3         —           3         3   

After 1 to 5 years

     1,092         —           1,092         1,092   

After 5 to 10 years

     360         —           360         360   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Government Development Bank (GDB)

     1,455         —           1,455         1,455   
  

 

 

    

 

 

    

 

 

    

 

 

 

Public Corporations:

           

Puerto Rico Aqueduct and Sewer Authority

           

Within 1 year

     —           —           —           27,186   

After 10 years

     464         —           464         464   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Puerto Rico Aqueduct and Sewer Authority

     464         —           464         27,650   
  

 

 

    

 

 

    

 

 

    

 

 

 

Puerto Rico Electric Power Authority

           

Within 1 year

     —           40,914         40,914         40,914   

After 10 years

     22         —           22         22   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Puerto Rico Electric Power Authority

     22         40,914         40,936         40,936   
  

 

 

    

 

 

    

 

 

    

 

 

 

Puerto Rico Highways and Transportation Authority

           

After 5 to 10 years

     4         —           4         4   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Puerto Rico Highways and Transportation Authority

     4         —           4         4   
  

 

 

    

 

 

    

 

 

    

 

 

 

Municipalities

           

Within 1 year

     3,050         56,956         60,006         73,324   

After 1 to 5 years

     14,270         130,935         145,205         145,205   

After 5 to 10 years

     18,930         138,187         157,117         157,117   

After 10 years

     18,690         123,371         142,061         142,061   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Municipalities

     54,940         449,449         504,389         517,707   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Direct Government Exposure

   $ 74,504       $ 490,363       $ 564,867       $ 656,165   
  

 

 

    

 

 

    

 

 

    

 

 

 

In addition, at March 31, 2016, the Corporation had $417 million in indirect exposure to loans or securities that are payable by non-governmental entities, but which carry a government guarantee to cover any shortfall in collateral in the event of borrower default ($394 million at December 31, 2015). These included $339 million in residential mortgage loans that are guaranteed by the Puerto Rico Housing Finance Authority (December 31, 2015—$316 million). These mortgage loans are secured by the underlying properties and the guarantees serve to cover shortfalls in collateral in the event of a borrower default. Under recently enacted legislation, the Governor is authorized to impose a temporary moratorium on the financial obligations of Puerto Housing Finance Authority. Also, the Corporation had $51 million in Puerto Rico pass-through housing bonds backed by FNMA, GNMA or residential loans CMO’s, and $27 million of commercial real estate notes ($50 million and $28 million at December 31, 2015, respectively).

 

74


Table of Contents

Other contingencies

As indicated in Note 11 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 fair value of the true-up payment obligation was estimated at $ 120 million at March 31, 2016 (December 31, 2015—$ 120 million). For additional information refer to Note 11.

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 interest 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 that the aggregate range of reasonably possible losses (with respect to those matters where such limits may be determined, in excess of amounts accrued), for current legal proceedings ranges from $0 to approximately $37.3 million as of March 31, 2016. 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.

Set forth below are descriptions of the Corporation’s material legal proceedings.

PCB has been named a defendant in a putative class action complaint captioned Josefina Valle, et al. v. Popular Community Bank, filed in November 2012 in the New York State Supreme Court (New York County). Plaintiffs, PCB customers, allege among other things that PCB has engaged in unfair and deceptive acts and trade practices in connection with the assessment of overdraft fees and payment processing on consumer deposit accounts. The complaint further alleges that PCB improperly disclosed its consumer overdraft policies and, additionally, that the overdraft rates and fees assessed by PCB violate New York’s usury laws. The complaint seeks unspecified damages, including punitive damages, interest, disbursements, and attorneys’ fees and costs.

PCB removed the case to federal court (SDNY) and plaintiffs subsequently filed a motion to remand the action to state court, which the Court granted on August 6, 2013. A motion to dismiss was filed on September 9, 2013. On October 25, 2013, plaintiffs filed an amended complaint seeking to limit the putative class to New York account holders. A motion to dismiss the amended complaint was filed in February 2014. In August 2014, the Court entered an order granting in part PCB’s motion to dismiss. The sole surviving claim relates to PCB’s item processing policy. On September 10, 2014, plaintiffs filed a motion for leave to file a second amended complaint to correct certain deficiencies noted in the court’s decision and order. PCB subsequently filed a motion in opposition to

 

75


Table of Contents

plaintiff’s motion for leave to amend and further sought to compel arbitration. In June 2015, this matter was reassigned to a new judge and on July 22, 2015, such Court denied PCB’s motion to compel arbitration and granted plaintiffs’ motion for leave to amend the complaint to replead certain claims based on item processing reordering, misstatement of balance information and failure to notify customers in advance of potential overdrafts. The Court did not, however, allow plaintiffs to replead their claim for the alleged breach of the implied covenant of good faith and fair dealing. On August 12, 2015, the Plaintiffs filed a second amended complaint. On August 24, 2015, PCB filed a Notice of Appeal as to the order granting leave to file the second amended complaint and on September 17, 2015, it filed a motion to dismiss the second amended complaint. On February 18, 2016, the Court granted in part and denied in part PCB’s pending motion to dismiss. The Court dismissed plaintiffs’ unfair and deceptive acts and trade practices claim to the extent it sought to recover overdraft fees incurred prior to September 2011. On March 28, 2016, PCB filed an answer to second amended complaint and on April 7, 2016, it filed a notice of appeal the partial denial of PCB’s motion to dismiss. Plaintiffs are to file a motion requesting class certification by August 19, 2016. Discovery is ongoing.

BPPR has been named a defendant in a putative class action complaint captioned Neysha Quiles et al. v. Banco Popular de Puerto Rico et al., filed in December 2013 in the United States District Court for the District of Puerto Rico (USDC-PR). Plaintiffs essentially allege that they and others, who have been employed by the Defendants as “bank tellers” and other similarly titled positions, have been paid only for scheduled work time, rather than time actually worked. The complaint seeks to maintain a collective action under the Fair Labor Standards Act (“FLSA”) on behalf of all individuals formerly or currently employed by BPPR in Puerto Rico and the Virgin Islands as hourly paid, non-exempt, bank tellers or other similarly titled positions at any time during the past three years. Specifically, the complaint alleges that BPPR violated FLSA by willfully failing to pay overtime premiums. Similar claims were brought under Puerto Rico law. On January 31, 2014, the Popular defendants filed an answer to the complaint. On January 9, 2015, plaintiffs submitted a motion for conditional class certification, which BPPR opposed. On February 18, 2015, the Court entered an order whereby it granted plaintiffs’ request for conditional certification of the FLSA action. Following the Court’s order, plaintiffs sent out notices to all purported class members with instructions for opting into the class. Approximately sixty potential class members opted into the class prior to the expiration of the opt-in period. On June 25, 2015, the Court denied with prejudice plaintiffs’ motion for class certification under Rule 23 of the Federal Rules of Civil Procedure. On October 20, 2015, the parties reached an agreement in principle to resolve the referenced action for an immaterial amount, subject to their reaching an agreement on the payment of reasonable attorneys’ fees. The parties submitted briefing to the Court on this issue and are currently awaiting the Court’s final determination.

BPPR and Popular Securities have also been named defendants in a putative class action complaint captioned Nora Fernandez, et al. v. UBS, et al., filed in the United States District Court for the Southern District of New York (SDNY) on May 5, 2014 on behalf of investors in 23 Puerto Rico closed-end investment companies. UBS Financial Services Incorporated of Puerto Rico, another named defendant, is the sponsor and co-sponsor of all 23 funds, while BPPR was co-sponsor, together with UBS, of nine (9) of those funds. Plaintiffs allege breach of fiduciary duty and breach of contract against Popular Securities, aiding and abetting breach of fiduciary duty against BPPR, and similar claims against the UBS entities. The complaint seeks unspecified damages, including disgorgement of fees and attorneys’ fees. On May 30, 2014, plaintiffs voluntarily dismissed their class action in the SDNY and on that same date, they filed a virtually identical complaint in the USDC-PR and requested that the case be consolidated with the matter of In re: UBS Financial Services Securities Litigation, a class action currently pending before the USDC-PR in which neither BPPR nor Popular Securities are parties. The UBS defendants filed an opposition to the consolidation request and moved to transfer the case back to the SDNY on the ground that the relevant agreements between the parties contain a choice of forum clause, with New York as the selected forum. The Popular defendants joined this opposition and motion. By order dated January 30, 2015, the court denied the plaintiffs’ motion to consolidate. By order dated March 30, 2015, the court granted defendants’ motion to transfer. On May 8, 2015, plaintiffs filed an amended complaint in the SDNY containing virtually identical allegations with respect to Popular Securities and BPPR. Defendants filed motions to dismiss the amended complaint on June 18, 2015. Those motions remain pending to date.

BPPR has been named a defendant in a putative class action complaint titled In re 2014 RadioShack ERISA Litigation, filed in U.S. District Court for the Northern District of Texas. The complaint alleges that certain employees of RadioShack incurred losses in their 401(k) plans because various fiduciaries elected to retain RadioShack’s company stock in the portfolio of potential investment options. The complaint further asserts that once RadioShack’s financial situation began to deteriorate in 2011, the fiduciaries of the RadioShack 401(k) Plan and the RadioShack Puerto Rico 1165(e) Plan (collectively, “the Plans”) should have removed RadioShack company stock from the portfolio of potential investment options.

 

76


Table of Contents

Popular was a directed trustee, and therefore a fiduciary, of the RadioShack Puerto Rico 1165(e) Plan (“PR Plan”). Even though the PR Plan directed BPPR to retain RadioShack company stock within the portfolio of investment options, the complaint alleges that a trustee’s duty of prudence requires it to disregard plan documents or directives that it knows or reasonably should know would lead to an imprudent result or would otherwise harm plan participants or beneficiaries. It further alleges that BPPR breached its fiduciary duties by (i) failing to take any meaningful steps to protect plan participants from losses that it knew would occur; (ii) failing to divest the PR Plan of company stock; and (iii) participating in the decisions of another trustee (Wells Fargo) to protect the Plans from inevitable losses.

On November 23, 2015, the parties attended a mediation session, as a result of which the parties agreed to settle this matter for an immaterial amount, with BPPR contributing approximately $45,000. On February 22, 2016, the RadioShack defendants submitted an opposition to the bar provisions of BPPR’s proposed settlement whereby they conditioned such settlement to BPPR’s agreement to a proportional methodology to any subsequent settlement. Under this scenario, BPPR could remain potentially liable for an additional proportional amount, should plaintiffs appeal the dismissal of their claim and win on appeal. A settlement fairness hearing has been set for July 18, 2016.

Other Matters

The volatility in prices and declines in value that Puerto Rico municipal bonds and closed-end investment companies that invest primarily in Puerto Rico municipal bonds have experienced since August 2013 have led to regulatory inquiries, customer complaints and arbitrations for most broker-dealers in Puerto Rico, including Popular Securities, a wholly owned subsidiary of the Corporation. Popular Securities has received customer complaints and is named as a respondent (among other broker-dealers) in 56 arbitration proceedings with aggregate claimed damages of approximately $136 million, including one arbitration with claimed damages of $78 million in which one other Puerto Rico broker-dealer is a co-defendant. The proceedings are in their early stages and it is the view of the Corporation that Popular Securities has meritorious defenses to the claims asserted. The Government’s recent announcements regarding its ability to pay its debt and its intention to pursue a comprehensive debt restructuring, including specifically its decision on May 2, 2016 to declare a moratorium on certain principal payments on bonds issued by Government Development Bank for Puerto Rico (the “GDB”), may increase the number of customer complaints (and claimed damages) against Popular Securities concerning Puerto Rico bonds, including bonds issued by GDB, and closed-end investment companies that invest primarily in Puerto Rico bonds. An adverse result in the matters described above or a significant increase in customer complaints could have a material adverse effect on Popular.

As mortgage lenders, the Corporation and its subsidiaries from time to time receive requests for information from departments of the U.S. government that investigate mortgage-related conduct. In particular, the BPPR has received subpoenas and other requests for information from the Federal Housing Finance Agency’s Office of the Inspector General, the Civil Division of the Department of Justice and the Special Inspector General for the Troubled Asset Relief Program concerning mortgages and real estate appraisals in Puerto Rico. The Corporation is cooperating with these requests.

Other Significant Proceedings

As described under “Note 11 – FDIC loss share asset and true-up payment obligation”, in connection with the Westernbank FDIC-assisted transaction, on April 30, 2010, BPPR entered into loss share agreements with the FDIC with respect to the covered loans and other real estate owned “(OREO”) that it acquired in the transaction. 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 80% reimbursement under those loss share agreements. 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 for losses from the FDIC. BPPR believes that it has complied with such terms and conditions. The loss share agreement applicable to the covered commercial and OREO described below provides for loss sharing by the FDIC through the quarter ending June 30, 2015 and for reimbursement to the FDIC for recoveries through the quarter ending June 30, 2018.

For the quarters ended June 30, 2010 through March 31, 2012, BPPR received reimbursement for loss-share claims submitted to the FDIC, including charge-offs for certain commercial late stage real-estate-collateral-dependent loans and OREO calculated in accordance with BPPR’s charge-off policy for non-covered assets. When BPPR submitted its shared-loss claim in connection with the June 30, 2012 quarter, however, the FDIC refused to reimburse BPPR for a portion of the claim because of a difference related to the methodology for the computation of charge-offs for certain commercial late stage real-estate-collateral-dependent loans and

 

77


Table of Contents

OREO. In accordance with the terms of the commercial loss share agreement, BPPR applied a methodology for charge-offs for late stage real-estate-collateral-dependent loans that conforms to its regulatory supervisory criteria and is calculated in accordance with BPPR’s charge-off policy for non-covered assets. The FDIC stated that it believed that BPPR should use a different methodology for those charge-offs. Notwithstanding the FDIC’s refusal to reimburse BPPR for certain shared-loss claims, BPPR had continued to calculate shared-loss claims for quarters subsequent to June 30, 2012 in accordance with its charge-off policy for non-covered assets.

BPPR’s loss share agreements with the FDIC specify that disputes can be submitted to arbitration before a review board under the commercial arbitration rules of the American Arbitration Association. On July 31, 2013, BPPR filed a statement of claim with the American Arbitration Association requesting that a review board determine certain matters relating to the loss-share claims under its commercial loss share agreement with the FDIC, including that the review board award BPPR the amounts owed under its unpaid quarterly certificates. The statement of claim also included requests for reimbursement of certain valuation adjustments for discounts to appraised values, costs to sell troubled assets and other items. The review board was comprised of one arbitrator appointed by BPPR, one arbitrator appointed by the FDIC and a third arbitrator selected by agreement of those arbitrators.

On October 17, 2014, BPPR and the FDIC settled all claims and counterclaims that had been submitted to the review board. The settlement provides for an agreed valuation methodology for reimbursement of charge-offs for late stage real-estate-collateral-dependent loans and resulting OREO. BPPR applied this valuation methodology to charge-offs claimed on late stage real-estate-collateral-dependent loans and resulting OREO during the remaining term of the commercial loss-sharing agreement which expired on June 30, 2015.

On November 25, 2014, the FDIC notified BPPR that it (a) would not reimburse BPPR under the commercial loss share agreement for a $66.6 million loss claim on eight related real estate loans that BPPR restructured and consolidated (collectively, the “Disputed Asset”), and (b) would no longer treat the Disputed Asset as a “Shared-Loss Asset” under the commercial loss share agreement. The FDIC alleged that BPPR’s restructure and modification of the underlying loans did not constitute a “Permitted Amendment” under the commercial loss share agreement, thereby causing the bank to breach Article III of the commercial loss share agreement. BPPR disagrees with the FDIC’s determinations relating to the Disputed Asset, and accordingly, on December 19, 2014, delivered to the FDIC a notice of dispute under the commercial loss share agreement.

On March 19, 2015, BPPR filed a statement of claim with the American Arbitration Association requesting that a review board determine BPPR and the FDIC’s disputes concerning the Disputed Asset. The statement of claim requests a declaration that the Disputed Asset is a “Shared-Loss Asset” under the commercial loss share agreement, a declaration that the restructuring is a “Permitted Amendment” under the commercial loss share agreement, and an order that the FDIC reimburse the bank for approximately $53.3 million for the Charge-Off of the Disputed Asset, plus interest at the applicable rate. On April 1, 2015, the FDIC notified BPPR that it was clawing back approximately $1.7 million in reimbursable expenses relating to the Disputed Asset that the FDIC had previously paid to BPPR. Thus, on April 13, 2015, BPPR notified the American Arbitration Association and the FDIC of an increase in the amount of its damages by approximately $1.7 million. The review board in the arbitration concerning the Disputed Asset is comprised of one arbitrator appointed by BPPR, one arbitrator appointed by the FDIC and a third arbitrator selected by agreement of those arbitrators. The arbitration hearing has been scheduled for August 2016.

In addition, in November and December 2014, BPPR proposed separate portfolio sales of Shared-Loss Assets to the FDIC. The FDIC refused to consent to either sale, stating that those sales did not represent best efforts to maximize collections on Shared-Loss Assets under the commercial loss share agreement. In March 2015, BPPR proposed a third portfolio sale to the FDIC, and in May 2015, BPPR proposed a fourth portfolio sale to the FDIC.

BPPR disagrees with the FDIC’s characterization of the November and December 2014 portfolio sale proposals and with the FDIC’s interpretation of the commercial loss share agreement provision governing portfolio sales. Accordingly, on March 13, 2015, BPPR delivered to the FDIC a notice of dispute under the commercial loss share agreement. On June 8, 2015, BPPR filed a statement of claim with the American Arbitration Association requesting that a review board resolve the disputes concerning those proposed portfolio sales. On June 15, 2015, BPPR amended its statement of claim to include a claim for the FDIC-R’s refusal to timely concur in the third sale proposed in March 2015. On June 29, 2015, the FDIC informed BPPR that it would reimburse the bank for losses arising from the primary portfolio of the third proposed sale, but only subject to conditions to which BPPR objected. The FDIC also informed BPPR that it would not concur in the sale of the remainder (the “secondary portfolio”) of the third proposed sale or in the fourth proposed sale. On September 4, 2015, BPPR filed a second amended statement of claim concerning the FDIC’s refusal to

 

78


Table of Contents

concur in the third and fourth portfolio sales as proposed by BPPR. On November 25, 2015, BPPR conducted an auction sale of the loans in the primary portfolio of the third proposed sale and intends to submit a claim for reimbursement of the losses arising from that sale. The review board in the arbitration concerning the proposed portfolio sales is comprised of one arbitrator appointed by BPPR, one arbitrator appointed by the FDIC and a third arbitrator selected by agreement of those arbitrators. The arbitration hearing is scheduled to be held in the fall of 2016.

On November 12, 2015, the FDIC notified BPPR that it (a) would deny certain claims included in BPPR’s Second Quarter 2015 Quarterly Certificate and (b) withhold payment of approximately $5.5 million attributed to the $6.9 million in losses claimed under the denied claims. In support of its denial, the FDIC alleged that BPPR did not comply with its obligation under the commercial loss share agreement, including compliance with certain provisions of GAAP, acting in accordance with prudent banking practices, managing Shared-Loss Assets in the same manner as BPPR’s non-Shared-Loss Assets, and using best efforts to maximize collections on the Shared-Loss Assets. BPPR disagrees with the FDIC’s allegations relating to the denied claims included in BPPR’s Second Quarter 2015 Quarterly Certificate, and accordingly, on January 27, 2016 delivered to the FDIC a notice of dispute under the commercial loss share agreement.

The shared-loss arrangement described above expired on June 30, 2015. As of March 31, 2016, BPPR had unreimbursed loss claims related to the commercial loss-sharing arrangement amounting to approximately $149 million, reflected in the FDIC indemnification asset as a receivable from the FDIC, which are subject to the arbitration proceedings described above. This figure may continue to increase to the extent that the assets that are the subject of the portfolio sales arbitration further decline in value. Until these disputes are finally resolved, the terms of the commercial loss share agreement will remain in effect with respect to any such items under dispute. No assurance can be given that we will receive reimbursement from the FDIC with respect to the foregoing items, which could require us to make a material adjustment to the value of our loss share asset and the related true up payment obligation to the FDIC and could have a material adverse effect on our financial results for the period in which such adjustment is taken.

The loss sharing agreement applicable to single-family residential mortgage loans provides for FDIC loss sharing and BPPR reimbursement to the FDIC for ten years (ending on June 30, 2020), and the loss sharing agreement applicable to commercial and other assets provides for FDIC loss sharing and BPPR reimbursement to the FDIC for five years (which ended on June 30, 2015), with additional recovery sharing for three years thereafter. As of March 31, 2016, the carrying value of covered loans approximated $625 million, mainly comprised of single-family residential mortgage loans. To the extent that estimated losses on covered loans are not realized before the expiration of the applicable loss sharing agreement, such losses would not be subject to reimbursement from the FDIC and, accordingly, would require us to make a material adjustment in the value of our loss share asset and the related true up payment obligation to the FDIC and could have a material adverse effect on our financial results for the period in which such adjustment is taken.

 

79


Table of Contents

Note 24 – Non-consolidated variable interest entities

The Corporation is involved with four statutory trusts which it established to issue trust preferred securities to the public. 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. Furthermore, 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.

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. 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.

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, 2016.

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 26 to the consolidated financial statements for additional information on the debt securities outstanding at March 31, 2016 and December 31, 2015, 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.

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, 2016 and December 31, 2015.

 

80


Table of Contents

(In thousands)

   March 31, 2016      December 31, 2015  

Assets

     

Servicing assets:

     

Mortgage servicing rights

   $ 156,250       $ 163,224   
  

 

 

    

 

 

 

Total servicing assets

   $ 156,250       $ 163,224   
  

 

 

    

 

 

 

Other assets:

     

Servicing advances

   $ 21,941       $ 24,431   
  

 

 

    

 

 

 

Total other assets

   $ 21,941       $ 24,431   
  

 

 

    

 

 

 

Total assets

   $ 178,191       $ 187,655   
  

 

 

    

 

 

 

Maximum exposure to loss

   $ 178,191       $ 187,655   
  

 

 

    

 

 

 

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 $12.7 billion at March 31, 2016 (December 31, 2015—$12.8 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, 2016 and December 31, 2015, 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 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 it is not the primary beneficiary. All decisions are made by Caribbean Property Group (“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.

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.

 

81


Table of Contents

The initial fair value of the Corporation’s equity interest in the joint venture was determined based on the fair value of the loans and real estate owned transferred to the joint venture of $148 million which represented the purchase price of the loans agreed by the

parties and was an arm’s-length transaction between market participants in accordance with ASC Topic 820, reduced by the acquisition loan provided by BPPR to the joint venture, for a total net equity of $63 million. Accordingly, the 24.9% equity interest held by the Corporation was valued at $16 million. Thus, the fair value of the equity interest is considered a Level 2 fair value measurement since the inputs were based on observable market inputs.

The following table presents the carrying amount and classification of the assets and liabilities 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, 2016 and December 31, 2015.

 

(In thousands)

   March 31, 2016      December 31, 2015  

Assets

     

Loans held-in-portfolio:

     

Advances under the working capital line

   $ —         $ 579   

Advances under the advance facility

     —           401   
  

 

 

    

 

 

 

Total loans held-in-portfolio

   $ —         $ 980   
  

 

 

    

 

 

 

Accrued interest receivable

   $ —         $ 10   

Other assets:

     

Investment in PRLP 2011 Holdings LLC

   $ 10,749       $ 13,069   
  

 

 

    

 

 

 

Total assets

   $ 10,749       $ 14,059   
  

 

 

    

 

 

 

Deposits

   $ (3,347    $ (18,808
  

 

 

    

 

 

 

Total liabilities

   $ (3,347    $ (18,808
  

 

 

    

 

 

 

Total net assets (liabilities)

   $ 7,402       $ (4,749
  

 

 

    

 

 

 

Maximum exposure to loss

   $ 7,402       $ —     
  

 

 

    

 

 

 

The Corporation determined that the maximum exposure to loss under a worst case scenario at March 31, 2016 would be not recovering the equity interest held by the Corporation, net of the deposits.

On March 25, 2013, BPPR completed a sale of assets with a book value of $509.0 million, of which $500.6 million were in non-performing status, comprised of commercial and construction loans, and commercial and single family real estate owned, with a combined unpaid principal balance on loans and appraised value of other real estate owned of approximately $987.0 million to a newly created joint venture, PR Asset Portfolio 2013-1. 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 assets in an amount equal to the sum of 57 % of the purchase price of the assets, and closing costs, for a total acquisition loan of $182.4 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 $35.0 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 $30.0 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 March 2013, BPPR received $92.3 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 and real estate owned sold.

 

82


Table of Contents

The Corporation has determined that PR Asset Portfolio 2013-1 International, 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 PR Asset Portfolio Servicing International, LLC, an affiliate of CPG.

The initial fair value of the Corporation’s equity interest in the joint venture was determined based on the fair value of the loans and real estate owned transferred to the joint venture of $306 million which represented the purchase price of the loans agreed by the parties and was an arm’s-length transaction between market participants in accordance with ASC Topic 820, reduced by the acquisition loan provided by BPPR to the joint venture, for a total net equity of $124 million. Accordingly, the 24.9% equity interest held by the Corporation was valued at $31 million. Thus, the fair value of the equity interest is considered a Level 2 fair value measurement since the inputs were based on observable market inputs.

The Corporation holds variable interests in this VIE in the form of the 24.9 % equity interest (the “Investment in PR Asset Portfolio 2013-1 International, 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 related to the Corporation’s variable interests in the non-consolidated VIE, PR Asset Portfolio 2013-1 International, LLC, and its maximum exposure to loss at March 31, 2016 and December 31, 2015.

 

(In thousands)

   March 31, 2016      December 31, 2015  

Assets

  

  

Loans held-in-portfolio:

     

Acquisition loan

   $ 9,932       $ 35,121   

Advances under the working capital line

     829         885   

Advances under the advance facility

     24,267         22,296   
  

 

 

    

 

 

 

Total loans held-in-portfolio

   $ 35,028       $ 58,302   
  

 

 

    

 

 

 

Accrued interest receivable

   $ 130       $ 169   

Other assets:

     

Investment in PR Asset Portfolio 2013-1 International, LLC

   $ 24,572       $ 25,094   
  

 

 

    

 

 

 

Total assets

   $ 59,730       $ 83,565   
  

 

 

    

 

 

 

Deposits

   $ (10,360    $ (11,772
  

 

 

    

 

 

 

Total liabilities

   $ (10,360    $ (11,772
  

 

 

    

 

 

 

Total net assets

   $ 49,370       $ 71,793   
  

 

 

    

 

 

 

Maximum exposure to loss

   $ 49,370       $ 71,793   
  

 

 

    

 

 

 

The Corporation determined that the maximum exposure to loss under a worst case scenario at March 31, 2016 would be not recovering the carrying amount of the acquisition loan, the advances on the advance facility and working capital line, if any, and the equity interest held by the Corporation, net of the deposits.

 

 

83


Table of Contents

Note 25 – Related party transactions

EVERTEC

The Corporation has an investment in EVERTEC, Inc. (“EVERTEC”), which provides 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. As of March 31, 2016, the Corporation’s stake in EVERTEC was 15.58%.The Corporation continues to have significant influence over EVERTEC. Accordingly, 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.

As disclosed in its recent SEC filings, EVERTEC has announced that it will restate its financial statements as of December 31, 2014 and 2013 and for the three year period ending in December 31, 2014 and as of the end of and for each quarterly period in 2014 and 2015. Specifically, EVERTEC identified an accounting position that required reevaluation with respect to a net operating loss pertaining to certain 2010 expenditures. These expenditures resulted in a deferred tax asset of approximately $14 million as of December 31, 2010 which is being reevaluated along with any additional related tax liabilities and the impact in subsequent periods. As of the date of this filing, EVERTEC has not completed its restatement of its financial statements and therefore Popular’s results for the first quarter of 2016 do not include the impact of any related adjustments, which would be limited to our 15.58% ownership stake. Popular does not expect that the impact of these adjustments will have a material effect on its financial statements.

The Corporation received $ 1.2 million in dividend distributions during the quarter ended March 31, 2016 from its investments in EVERTEC’s holding company (March 31, 2015—$ 1.2 million). The Corporation’s equity in EVERTEC is presented in the table which follows and is included as part of “other assets” in the consolidated statements of financial condition.

 

(In thousands)

   March 31, 2016      December 31, 2015  

Equity investment in EVERTEC

   $ 35,162       $ 33,590   

The Corporation had the following financial condition balances outstanding with EVERTEC at March 31, 2016 and December 31, 2015. Items that represent liabilities to the Corporation are presented with parenthesis.

 

(In thousands)

   March 31, 2016      December 31, 2015  

Accounts receivable (Other assets)

   $ 2,980       $ 3,148   

Deposits

     (21,322      (23,973

Accounts payable (Other liabilities)

     (17,480      (16,192
  

 

 

    

 

 

 

Net total

   $ (35,822    $ (37,017
  

 

 

    

 

 

 

The Corporation’s proportionate share of income or loss from EVERTEC is included in other operating income in the consolidated statements of operations. The Corporation’s proportionate share of EVERTEC’s income and changes in stockholders’ equity was immaterial for the quarters ended March 31, 2016 and 2015.

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, 2016 and 2015. Items that represent expenses to the Corporation are presented with parenthesis.

 

84


Table of Contents
     Quarters ended March 31,       

(In thousands)

   2016      2015     

Category

Interest expense on deposits

   $ (19    $ (11    Interest expense

ATH and credit cards interchange income from services to EVERTEC

     6,918         6,487       Other service fees

Rental income charged to EVERTEC

     1,736         1,724       Net occupancy

Processing fees on services provided by EVERTEC

     (43,516      (39,504    Professional fees

Other services provided to EVERTEC

     256         324       Other operating expenses
  

 

 

    

 

 

    

Total

   $ (34,625    $ (30,980   
  

 

 

    

 

 

    

EVERTEC had a letter of credit issued by BPPR for an amount of $ 4.2 million at December 31, 2015, which expired on February 10, 2016.

PRLP 2011 Holdings, LLC

As indicated in Note 24 to the consolidated financial statements, the Corporation holds a 24.9 % equity interest in PRLP 2011 Holdings, LLC and currently holds certain deposits from the entity.

The Corporation’s equity in PRLP 2011 Holdings, LLC is presented in the table which follows and is included as part of “other assets” in the consolidated statements of financial condition.

 

(In thousands)

   March 31, 2016      December 31, 2015  

Equity investment in PRLP 2011 Holdings, LLC

   $ 10,749       $ 13,069   

The Corporation had the following financial condition balances outstanding with PRLP 2011 Holdings, LLC at March 31, 2016 and December 31, 2015.

 

(In thousands)

   March 31, 2016      December 31, 2015  

Loans

   $ —         $ 980   

Accrued interest receivable

     —           10   

Deposits (non-interest bearing)

     (3,347      (18,808
  

 

 

    

 

 

 

Net total

   $ (3,347    $ (17,818
  

 

 

    

 

 

 

The Corporation’s proportionate share of income or loss from PRLP 2011 Holdings, LLC is included in other operating income in the consolidated statements of operations. The following table presents the Corporation’s proportionate share of income (loss) from PRLP 2011 Holdings, LLC for the quarters ended March 31, 2016 and 2015.

 

     Quarters ended March 31,  

(In thousands)

   2016      2015  

Share of (loss) income from the equity investment in PRLP 2011 Holdings, LLC

   $ (542    $ 1,033   
  

 

 

    

 

 

 

 

85


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 quarters ended March 31, 2016 and 2015.

 

     Quarters ended March 31,         

(In thousands)

   2016      2015      Category  

Interest income on loan to PRLP 2011 Holdings, LLC

   $ 11       $ 62         Interest income   

PR Asset Portfolio 2013-1 International, LLC

As indicated in Note 24 to the consolidated financial statements, effective March 2013 the Corporation holds a 24.9 % equity interest in PR Asset Portfolio 2013-1 International, LLC and currently provides certain financing to the joint venture as well as holds certain deposits from the entity.

The Corporation’s equity in PR Asset Portfolio 2013-1 International, LLC is presented in the table which follows and is included as part of “other assets” in the consolidated statements of financial condition.

 

(In thousands)

   March 31, 2016      December 31, 2015  

Equity investment in PR Asset Portfolio 2013-1 International, LLC

   $ 24,572       $ 25,094   

The Corporation had the following financial condition balances outstanding with PR Asset Portfolio 2013-1 International, LLC, at March 31, 2016 and December 31, 2015.

 

(In thousands)

   March 31, 2016      December 31, 2015  

Loans

   $ 35,028       $ 58,302   

Accrued interest receivable

     130         169   

Deposits

     (10,360      (11,772
  

 

 

    

 

 

 

Net total

   $ 24,798       $ 46,699   
  

 

 

    

 

 

 

The Corporation’s proportionate share of income or loss from PR Asset Portfolio 2013-1 International, LLC is included in other operating income in the consolidated statements of operations. The following table presents the Corporation’s proportionate share of loss from PR Asset Portfolio 2013-1 International, LLC for quarters ended March 31, 2016 and 2015.

 

     Quarters ended March 31,  

(In thousands)

   2016      2015  

Share of loss from the equity investment in PR Asset Portfolio 2013-1 International, LLC

   $ (522    $ (4,335

The following table presents transactions between the Corporation and PR Asset Portfolio 2013-1 International, LLC and their impact on the Corporation’s results of operations for the quarters ended March 31, 2016 and 2015.

 

     Quarters ended March 31,         

(In thousands)

   2016      2015      Category  

Interest income on loan to PR Asset Portfolio 2013-1 International, LLC

   $ 445       $ 866         Interest income   

Interest expense on deposits

     (1      —           Interest expense   
  

 

 

    

 

 

    

Total

   $ 444       $ 866      
  

 

 

    

 

 

    

 

86


Table of Contents

Note 26 – 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. There have been no changes in the Corporation’s methodologies used to estimate the fair value of assets and liabilities from those disclosed in the 2015 Form 10-K.

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.

 

87


Table of Contents

Fair Value on a Recurring and Nonrecurring 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, 2016 and December 31, 2015:

 

At March 31, 2016

 

(In thousands)

   Level 1      Level 2      Level 3      Total  

RECURRING FAIR VALUE MEASUREMENTS

           

Assets

           

Investment securities available-for-sale:

           

U.S. Treasury securities

   $ —         $ 1,323,352       $ —         $ 1,323,352   

Obligations of U.S. Government sponsored entities

     —           932,938         —           932,938   

Obligations of Puerto Rico, States and political subdivisions

     —           23,730         —           23,730   

Collateralized mortgage obligations—federal agencies

     —           1,513,571         —           1,513,571   

Mortgage-backed securities

     —           2,842,284         1,422         2,843,706   

Equity securities

     285         2,154         —           2,439   

Other

     —           10,094         —           10,094   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities available-for-sale

   $ 285       $ 6,648,123       $ 1,422       $ 6,649,830   
  

 

 

    

 

 

    

 

 

    

 

 

 

Trading account securities, excluding derivatives:

           

Obligations of Puerto Rico, States and political subdivisions

   $ —         $ 4,307       $ —         $ 4,307   

Collateralized mortgage obligations

     —           217         1,783         2,000   

Mortgage-backed securities—federal agencies

     —           46,716         5,397         52,113   

Other

     —           12,201         663         12,864   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total trading account securities

   $ —         $ 63,441       $ 7,843       $ 71,284   
  

 

 

    

 

 

    

 

 

    

 

 

 

Mortgage servicing rights

   $ —         $ —         $ 205,051       $ 205,051   

Derivatives

     —           15,012         —           15,012   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets measured at fair value on a recurring basis

   $ 285       $ 6,726,576       $ 214,316       $ 6,941,177   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Derivatives

   $ —         $ (12,068    $ —         $ (12,068

Contingent consideration

     —           —           (120,823      (120,823
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities measured at fair value on a recurring basis

   $ —         $ (12,068    $ (120,823    $ (132,891
  

 

 

    

 

 

    

 

 

    

 

 

 

 

88


Table of Contents

At December 31, 2015

 

(In thousands)

   Level 1      Level 2      Level 3      Total  

RECURRING FAIR VALUE MEASUREMENTS

           

Assets

           

Investment securities available-for-sale:

           

U.S. Treasury securities

   $ —         $ 1,183,328       $ —         $ 1,183,328   

Obligations of U.S. Government sponsored entities

     —           939,641         —           939,641   

Obligations of Puerto Rico, States and political subdivisions

     —           22,359         —           22,359   

Collateralized mortgage obligations—federal agencies

     —           1,560,837         —           1,560,837   

Mortgage-backed securities

     —           2,342,762         1,434         2,344,196   

Equity securities

     276         2,122         —           2,398   

Other

     —           10,233         —           10,233   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities available-for-sale

   $ 276       $ 6,061,282       $ 1,434       $ 6,062,992   
  

 

 

    

 

 

    

 

 

    

 

 

 

Trading account securities, excluding derivatives:

           

Obligations of Puerto Rico, States and political subdivisions

   $ —         $ 4,590       $ —         $ 4,590   

Collateralized mortgage obligations

     —           223         1,831         2,054   

Mortgage-backed securities—federal agencies

     —           44,701         6,454         51,155   

Other

     —           13,173         687         13,860   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total trading account securities

   $ —         $ 62,687       $ 8,972       $ 71,659   
  

 

 

    

 

 

    

 

 

    

 

 

 

Mortgage servicing rights

   $ —         $ —         $ 211,405       $ 211,405   

Derivatives

     —           16,959         —           16,959   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets measured at fair value on a recurring basis

   $ 276       $ 6,140,928       $ 221,811       $ 6,363,015   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Derivatives

   $ —         $ (14,343    $ —         $ (14,343

Contingent consideration

     —           —           (120,380      (120,380
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities measured at fair value on a recurring basis

   $ —         $ (14,343    $ (120,380    $ (134,723
  

 

 

    

 

 

    

 

 

    

 

 

 

The fair value information included in the following table is not as of period end, but as of the date that the fair value measurement was recorded during the quarters ended March 31, 2016 and 2015 and excludes nonrecurring fair value measurements of assets no longer held by the Corporation.

 

Quarter ended March 31, 2016

 

(In thousands)

   Level 1      Level 2      Level 3      Total         

NONRECURRING FAIR VALUE MEASUREMENTS

              

Assets

                 Write-downs   

Loans[1]

   $ —         $ —         $ 30,785       $ 30,785       $ (22,850

Loans held-for-sale[2]

     —           —           1,829         1,829         (296

Other real estate owned[3]

     —           —           18,592         18,592         (3,920

Other foreclosed assets[3]

     —           —           66         66         (11
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total assets measured at fair value on a nonrecurring basis

   $ —         $ —         $ 51,272       $ 51,272       $ (27,077
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

[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. Costs to sell are excluded from the reported fair value amount.
[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. Costs to sell are excluded from the reported fair value amount.
[3] Represents the fair value of foreclosed real estate and other collateral owned that were written down to their fair value. Costs to sell are excluded from the reported fair value amount.

 

89


Table of Contents

Quarter ended March 31, 2015

 

(In thousands)

   Level 1      Level 2      Level 3      Total         

NONRECURRING FAIR VALUE MEASUREMENTS

              

Assets

                 Write-downs   

Loans[1]

   $ —         $ —         $ 132,007       $ 132,007       $ (26,817

Other real estate owned[3]

     —           6,098         30,304         36,402         (17,936

Other foreclosed assets[3]

     —           20         131         151         (608
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total assets measured at fair value on a nonrecurring basis

   $ —         $ 6,118       $ 162,442       $ 168,560       $ (45,361
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

[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.Costs to sell are excluded from the reported fair value amount.
[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. Costs to sell are excluded from the reported fair value amount.
[3] Represents the fair value of foreclosed real estate and other collateral owned that were written down to their fair value. Costs to sell are excluded from the reported fair value amount.

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, 2016 and 2015.

 

Quarter ended March 31, 2016

 

(In thousands)

   MBS
classified
as investment
securities
available-
for-sale
    CMOs
classified
as trading
account
securities
    MBS
classified as
trading account
securities
    Other
securities
classified
as trading
account
securities
    Mortgage
servicing
rights
    Total
assets
    Contingent
consideration
    Total
liabilities
 

Balance at January 1, 2016

   $ 1,434      $ 1,831      $ 6,454      $ 687      $ 211,405      $ 221,811      $ (120,380   $ (120,380

Gains (losses) included in earnings

     (2     (6     89        (24     (8,477     (8,420     (443     (443

Gains (losses) included in OCI

     15        —          —          —          —          15        —          —     

Additions

     —          174        338        —          2,123        2,635        —          —     

Sales

     —          (106     (1,120     —          —          (1,226     —          —     

Settlements

     (25     (110     (364     —          —          (499     —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2016

   $ 1,422      $ 1,783      $ 5,397      $ 663      $ 205,051      $ 214,316      $ (120,823   $ (120,823
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Changes in unrealized gains (losses) included in earnings relating to assets still held at March 31, 2016

   $ —        $ (3   $ 86      $ 11      $ (3,866   $ (3,772   $ (443   $ (443
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

90


Table of Contents
     Quarter ended March 31, 2015  

(In thousands)

   MBS
classified as
securities
available-
for-sale
    CMOs
classified as
trading
account
securities
    MBS
classified as
trading
account
securities
    Other
securities
classified
as trading
account
securities
    Mortgage
servicing
rights
    Total
assets
    Contingent
consideration
    Total
liabilities
 

Balance at January 1, 2015

   $ 1,325      $ 1,375      $ 6,229      $ 1,563      $ 148,694      $ 159,186      $ (133,634   $ (133,634

Gains (losses) included in earnings

     (8     (2     16        (19     (4,929     (4,942     4,164        4,164   

Additions

     118        —          130        —          5,259        5,507        —          —     

Sales

     —          (44     (80     —          —          (124     —          —     

Settlements

     —          (87     (74     —          —          (161     —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2015

   $ 1,435      $ 1,242      $ 6,221      $ 1,544      $ 149,024      $ 159,466      $ (129,470   $ (129,470
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Changes in unrealized gains (losses) included in earnings relating to assets still held at March 31, 2015

   $ —        $ (2   $ 18      $ 23      $ (684   $ (645   $ 4,164      $ 4,164   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

There were no transfers in and/or out of Level 1, Level 2, or Level 3 for financial instruments measured at fair value on a recurring basis during the quarters ended March 31, 2016 and 2015.

Gains and losses (realized and unrealized) included in earnings for the quarters ended March 31, 2016 and 2015 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, 2016      Quarter ended March 31, 2015  

(In thousands)

   Total gains
(losses) included
in earnings
     Changes in unrealized
gains (losses) relating
to assets still held at
reporting date
     Total gains
(losses) included
in earnings
     Changes in unrealized
gains (losses) relating to
assets still held at
reporting date
 

Interest income

   $ (2    $ —         $ (8    $ —     

FDIC loss share (expense) income

     (443      (443      4,164         4,164   

Other service fees

     (8,477      (3,866      (4,929      (684

Trading account (loss) profit

     59         94         (5      39   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ (8,863    $ (4,215    $ (778    $ 3,519   
  

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

91


Table of Contents
     Fair value
at March 31,
                   

(In thousands)

   2016     Valuation technique     

Unobservable inputs

   Weighted average (range)  

CMO’s - trading

   $ 1,783        Discounted cash flow model       Weighted average life      2.9 years (0.4 - 4.6 years)   
        Yield      3.8% (1.1% - 4.7%)   
        Prepayment speed      20.8% (18.0% - 24.1%)   

Other - trading

   $ 663        Discounted cash flow model       Weighted average life      5.4  years 
        Yield      12.2%   
        Prepayment speed      10.8%   

Mortgage servicing rights

   $ 205,051        Discounted cash flow model       Prepayment speed      6.4% (0.2% - 12.0%)   
        Weighted average life      6.6 years (0.1 - 15.8 years)   
        Discount rate      11.2% (9.5% - 15.0%)   

Contingent consideration

   $ (120,188     Discounted cash flow model       Credit loss rate on covered loans      2.9% (0.0% - 100.0%)   
        Risk premium component   
        of discount rate      6.9%   

Loans held-in-portfolio

   $ 30,785 [1]      External appraisal       Haircut applied on   
        external appraisals      40.0% (39.7% - 40.0%)   

Other real estate owned

   $ 18,368 [2]      External appraisal       Haircut applied on   
        external appraisals      20.1% (10.0% - 40.0%)   

 

[1] Loans held-in-portfolio in which haircuts were not applied to external appraisals were excluded from this table.
[2] Other real estate owned in which haircuts were not applied to external appraisals were excluded from this table.

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 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 service provider on a quarterly basis. In addition, an analytical review of prepayment speeds is performed quarterly by the Corporate Comptroller’s 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 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.

 

92


Table of Contents

Note 27 – Fair value of financial instruments

The fair value of financial instruments is the amount at which an assets or obligations could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. 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. Many of these estimates involve various assumptions and may vary significantly from amounts that could be realized in actual transactions.

The fair values reflected herein have been determined based on the prevailing rate environment at March 31, 2016 and December 31, 2015, 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.

The following tables present the carrying amount, or notional amounts, as applicable, and estimated fair values of financial instruments with their corresponding level in the fair value hierarchy. The aggregate fair value amounts of the financial instruments disclosed do not represent management’s estimate of the underlying value of the Corporation.

 

     March 31, 2016  

(In thousands)

   Carrying
amount
     Level 1      Level 2      Level 3      Fair value  

Financial Assets:

              

Cash and due from banks

   $ 409,623       $ 409,623       $ —         $ —         $ 409,623   

Money market investments

     1,917,460         1,808,513         108,947         —           1,917,460   

Trading account securities, excluding derivatives[1]

     71,284         —           63,441         7,843         71,284   

Investment securities available-for-sale[1]

     6,649,830         285         6,648,123         1,422         6,649,830   

Investment securities held-to-maturity:

              

Obligations of Puerto Rico, States and political subdivisions

   $ 97,130       $ —         $ —         $ 78,849       $ 78,849   

Collateralized mortgage obligation-federal agency

     86         —           —           91         91   

Other

     2,000         —           1,736         238         1,974   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities held-to-maturity

   $ 99,216       $ —         $ 1,736       $ 79,178       $ 80,914   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other investment securities:

              

FHLB stock

   $ 55,817       $ —         $ 55,817       $ —         $ 55,817   

FRB stock

     93,086         —           93,086         —           93,086   

Trust preferred securities

     13,198         —           13,198         —           13,198   

Other investments

     1,923         —           —           5,010         5,010   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total other investment securities

   $ 164,024       $ —         $ 162,101       $ 5,010       $ 167,111   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans held-for-sale

   $ 125,315       $ —         $ —         $ 126,872       $ 126,872   

Loans not covered under loss sharing agreement with the FDIC

     21,999,310         —           —           20,633,219         20,633,219   

Loans covered under loss sharing agreements with the FDIC

     595,085         —           —           553,280         553,280   

FDIC loss share asset

     219,448         —           —           235,943         235,943   

Mortgage servicing rights

     205,051         —           —           205,051         205,051   

Derivatives

     15,012         —           15,012         —           15,012   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

93


Table of Contents
     March 31, 2016  

(In thousands)

   Carrying
amount
     Level 1      Level 2      Level 3      Fair value  

Financial Liabilities:

              

Deposits:

              

Demand deposits

   $ 19,648,830       $ —         $ 19,648,830       $ —         $ 19,648,830   

Time deposits

     7,877,763         —           7,855,406         —           7,855,406   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total deposits

   $ 27,526,593       $ —         $ 27,504,236       $ —         $ 27,504,236   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Federal funds purchased and assets sold under agreements to repurchase

   $ 760,154       $ —         $ 762,053       $ —         $ 762,053   

Other short-term borrowings[2]

   $ 6,370       $ —         $ 6,370       $ —         $ 6,370   

Notes payable:

              

FHLB advances

   $ 682,161       $ —         $ 708,394       $ —         $ 708,394   

Unsecured senior debt securities

     443,225         —           421,463         —           421,463   

Junior subordinated deferrable interest debentures (related to trust preferred securities)

     439,303         —           351,345         —           351,345   

Others

     18,779         —           —           18,779         18,779   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total notes payable

   $ 1,583,468       $ —         $ 1,481,202       $ 18,779       $ 1,499,981   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Derivatives

   $ 12,068       $ —         $ 12,068       $ —         $ 12,068   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Contingent consideration

   $ 120,823       $ —         $ —         $ 120,823       $ 120,823   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
(In thousands)    Notional
amount
     Level 1      Level 2      Level 3      Fair value  

Commitments to extend credit

   $ 7,532,634       $ —         $ —         $ 518       $ 518   

Letters of credit

     37,812         —           —           767         767   

 

94


Table of Contents
     December 31, 2015  
     Carrying                              

(In thousands)

   amount      Level 1      Level 2      Level 3      Fair value  

Financial Assets:

              

Cash and due from banks

   $ 363,674       $ 363,674       $ —         $ —         $ 363,674   

Money market investments

     2,180,092         2,083,839         96,253         —           2,180,092   

Trading account securities, excluding derivatives[1]

     71,659         —           62,687         8,972         71,659   

Investment securities available-for-sale[1]

     6,062,992         276         6,061,282         1,434         6,062,992   

Investment securities held-to-maturity:

              

Obligations of Puerto Rico, States and political subdivisions

     98,817         —           —           80,815         80,815   

Collateralized mortgage obligation-federal agency

     86         —           —           91         91   

Other

     2,000         —           1,740         243         1,983   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities held-to-maturity

   $ 100,903       $ —         $ 1,740       $ 81,149       $ 82,889   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other investment securities:

              

FHLB stock

   $ 59,387       $ —         $ 59,387       $ —         $ 59,387   

FRB stock

     97,740         —           97,740         —           97,740   

Trust preferred securities

     13,198         —           13,198         —           13,198   

Other investments

     1,923         —           —           4,966         4,966   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total other investment securities

   $ 172,248       $ —         $ 170,325       $ 4,966       $ 175,291   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans held-for-sale

   $ 137,000       $ —         $ 1,364       $ 138,031       $ 139,395   

Loans not covered under loss sharing agreement with the FDIC

     21,843,180         —           —           20,849,150         20,849,150   

Loans covered under loss sharing agreements with the FDIC

     611,939         —           —           593,002         593,002   

FDIC loss share asset

     310,221         —           —           313,224         313,224   

Mortgage servicing rights

     211,405         —           —           211,405         211,405   

Derivatives

     16,959         —           16,959         —           16,959   
     December 31, 2015  
     Carrying                              

(In thousands)

   amount      Level 1      Level 2      Level 3      Fair value  

Financial Liabilities:

              

Deposits:

              

Demand deposits

   $ 19,044,355       $ —         $ 19,044,355       $ —         $ 19,044,355   

Time deposits

     8,165,368         —           8,134,029         —           8,134,029   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total deposits

   $ 27,209,723       $ —         $ 27,178,384       $ —         $ 27,178,384   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Federal funds purchased and assets sold under agreements to repurchase

   $ 762,145       $ —         $ 764,599       $ —         $ 764,599   

Other short-term borrowings[2]

   $ 1,200       $ —         $ 1,200       $ —         $ 1,200   

Notes payable:

              

FHLB advances

     761,501         —           780,411         —           780,411   

Unsecured senior debt

     442,704         —           435,186         —           435,186   

Junior subordinated deferrable interest debentures (related to trust preferred securities)

     439,295         —           352,673         —           352,673   

Others

     19,008         —           —           19,008         19,008   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total notes payable

   $ 1,662,508       $ —         $ 1,568,270       $ 19,008       $ 1,587,278   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Derivatives

   $ 14,343       $ —         $ 14,343       $ —         $ 14,343   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Contingent consideration

   $ 120,380       $ —         $ —         $ 120,380       $ 120,380   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

95


Table of Contents

(In thousands)

   Notional
amount
     Level 1      Level 2      Level 3      Fair value  

Commitments to extend credit

   $ 7,434,108       $ —         $ —         $ 1,080       $ 1,080   

Letters of credit

     51,710         —           —           572         572   

 

[1] Refer to Note 26 to the consolidated financial statements for the fair value by class of financial asset and its hierarchy level.
[2] Refer to Note 18 to the consolidated financial statements for the composition of short-term borrowings.

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.

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 include 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 cash balances, including those held at the Federal Reserve. These money market investments are classified as Level 2, except for cash balances which generate interest, including those held at the Federal Reserve, which are classified as Level 1.

Investment securities held-to-maturity

 

    Obligations of Puerto Rico, States and political subdivisions: 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.

 

    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 debt and a private non-profit institution security. Given that the fair value was based on quoted prices for similar instruments, foreign debt is classified as Level 2. Since the fair value of the private non-profit institution security was internally derived using a price/yield methodology, in which the spread was defined based on the obligor risk rating and the corresponding transfer price, this security 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.

 

96


Table of Contents
    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: These securities represent the equity-method investment in the common stock of these trusts. Book value is the same as fair value for these securities since the fair value of the junior subordinated debentures is the same amount as the fair value of the trust preferred securities issued to the public. The equity-method investment in the common stock of these trusts is classified as Level 2.

 

    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

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.

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.

 

97


Table of Contents

Assets sold under agreements to repurchase

 

    Securities sold under agreements to repurchase: 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. In determining the non-performance credit risk valuation adjustment, the collateralization levels of these long-term securities sold under agreements to repurchase were considered. Securities sold under agreements to repurchase 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.

 

    Unsecured senior debt securities: The fair value of publicly-traded unsecured senior debt securities was determined using recent trades of similar transactions. Publicly-traded unsecured senior debt securities are classified as Level 2.

 

    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.

 

    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.

 

98


Table of Contents

Note 28 – 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, 2016 and 2015:

 

     Quarters ended March 31,  

(In thousands, except per share information)

   2016      2015  

Net income from continuing operations

   $ 84,999       $ 73,485   

Net income from discontinued operations

     —           1,341   

Preferred stock dividends

     (931      (930
  

 

 

    

 

 

 

Net income applicable to common stock

   $ 84,068       $ 73,896   
  

 

 

    

 

 

 

Average common shares outstanding

     103,188,815         102,939,928   

Average potential dilutive common shares

     80,998         196,381   
  

 

 

    

 

 

 

Average common shares outstanding—assuming dilution

     103,269,813         103,136,309   
  

 

 

    

 

 

 

Basic EPS from continuing operations

   $ 0.81       $ 0.71   
  

 

 

    

 

 

 

Basic EPS from discontinued operations

   $ —         $ 0.01   
  

 

 

    

 

 

 

Total Basic EPS

   $ 0.81       $ 0.72   
  

 

 

    

 

 

 

Diluted EPS from continuing operations

   $ 0.81       $ 0.71   
  

 

 

    

 

 

 

Diluted EPS from discontinued operations

   $ —         $ 0.01   
  

 

 

    

 

 

 

Total Diluted EPS

   $ 0.81       $ 0.72   
  

 

 

    

 

 

 

For the quarter ended March 31, 2016 the Corporation calculated the impact of potential dilutive common shares under the treasury method, consistent with the method used for the preparation of the financial statements for the year ended December 31, 2015. For a discussion of the calculation under the treasury stock method, refer to Note 37 of the consolidated financial statements included in the 2015 Form 10-K.

For the quarters ended March 31, 2016 and 2015, there were no stock options outstanding.

 

99


Table of Contents

Note 29 – Other service fees

The caption of other services fees in the consolidated statements of operations consists of the following major categories:

 

     Quarters ended March 31,  

(In thousands)

   2016      2015  

Insurance fees

   $ 12,850       $ 12,041   

Credit card fees

     16,858         16,149   

Debit card fees

     11,287         11,125   

Sale and administration of investment products

     4,839         5,930   

Trust fees

     4,235         4,602   

Other fees

     3,313         3,779   
  

 

 

    

 

 

 

Total other service fees

   $ 53,382       $ 53,626   
  

 

 

    

 

 

 

 

100


Table of Contents

Note 30 – 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)

   2016      2015  

Amortization of loss share indemnification asset

   $ (4,042    $ (27,316

80% mirror accounting on credit impairment losses (reversal)[1]

     (2,093      8,246   

80% mirror accounting on reimbursable expenses

     3,950         21,545   

80% mirror accounting on recoveries on covered assets, including rental income on OREOs, subject to reimbursement to the FDIC

     (645      (2,619

Change in true-up payment obligation

     (443      4,164   

Other

     127         119   
  

 

 

    

 

 

 

Total FDIC loss share (expense) income

   $ (3,146    $ 4,139   
  

 

 

    

 

 

 

 

[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.

 

101


Table of Contents

Note 31 – 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)

   2016      2015      2016      2015  

Interest cost

   $ 6,291       $ 7,403       $ 348       $ 407   

Expected return on plan assets

     (9,623      (11,056      (538      (589

Amortization of net loss

     4,880         4,465         331         311   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total net periodic pension cost (benefit)

   $ 1,548       $ 812       $ 141       $ 129   
  

 

 

    

 

 

    

 

 

    

 

 

 

During the quarter ended March 31, 2016 the Corporation made a contribution to the benefit restoration plans of $43 thousand. The total contributions expected to be paid during the year 2016 for the pension and benefit restoration plans amount to approximately $173 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)

   2016      2015  

Service cost

   $ 289       $ 368   

Interest cost

     1,505         1,589   

Amortization of prior service cost

     (950      (950

Amortization of net loss

     275         249   
  

 

 

    

 

 

 

Total postretirement cost

   $ 1,119       $ 1,256   
  

 

 

    

 

 

 

Contributions made to the postretirement benefit plan for the quarter ended March 31, 2016 amounted to approximately $1.6 million. The total contributions expected to be paid during the year 2016 for the postretirement benefit plan amount to approximately $6.4 million.

 

102


Table of Contents

Note 32 – 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.

As of March 31, 2016 there were no stock options outstanding. During the quarter ended March 31, 2015, all stock options outstanding which amounted to 44,797 with a weighted average exercise price of $ 272 expired.

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 vesting schedule for restricted shares granted on or after 2014 was modified as follows, the first part ratably over four years commencing at the date of the grant and the second part is vested at termination of employment after attainment of the earlier of 55 years of age and 10 years of service or 60 years of age and 5 years of service. The four year vesting part is accelerated at termination of employment after attaining the earlier of 55 years of age and 10 years of service or 60 years of age and 5 years of service. The restricted shares granted consistent with the requirements of the TARP Interim Final Rule vest in two years from grant date.

 

103


Table of Contents

The following table summarizes the restricted stock activity under the Incentive Plan for members of management.

 

(Not in thousands)

   Shares      Weighted-Average
Grant Date Fair
Value
 

Non-vested at December 31, 2014

     628,009       $ 27.13   

Granted

     323,814         33.37   

Vested

     (430,646      30.45   

Forfeited

     (25,446      28.65   
  

 

 

    

 

 

 

Non-vested at December 31, 2015

     495,731       $ 28.25   

Granted

     226,098         24.05   

Quantity adjusted by TSR factor

     (8,914      28.47   

Vested

     (256,501      25.90   
  

 

 

    

 

 

 

Non-vested at March 31, 2016

     456,414       $ 27.12   
  

 

 

    

 

 

 

During the quarter ended March 31, 2016, 161,500 shares of restricted stock were awarded to management under the Incentive Plan. During the quarter ended March 31, 2015, no shares of restricted stock were awarded to management. No shares were awarded consistent with the requirements of the TARP Interim Final Rule for the quarters ended March 31, 2016 and 2015.

Beginning in 2015, 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 goals during a three-year performance cycle. The goals will be based on two metrics weighted equally: the Relative Total Shareholder Return (“TSR”) and the Absolute Earnings per Share (“EPS”) goals. The TSR metric is considered to be a market condition under ASC 718. For equity settled awards based on a market condition, the fair value is determined as of the grant date and is not subsequently revised based on actual performance. The EPS performance metric is considered to be a performance condition under ASC 718. The fair value is determined based on the probability of achieving the EPS goal as of each reporting period. The TSR and EPS metrics are equally weighted and work independently. The number of shares that will ultimately vest ranges from 50% to a 150% of target based on both market (TSR) and performance (EPS) conditions. The performance shares vest at the end of the three-year performance cycle. The vesting is accelerated at termination of employment after attaining the earlier of 55 years of age and 10 years of service or 60 years of age and 5 years of service. For the quarter ended March 31, 2016, 64,598 performance shares were granted under this plan.

During the quarter ended March 31, 2016, the Corporation recognized $ 3.7 million of restricted stock expense related to management incentive awards, with a tax benefit of $ 0.5 million (March 31, 2015—$ 2.0 million, with a tax benefit of $ 0.3 million). For the quarter ended March 31, 2016, the fair market value of the restricted stock vested was $3.6 million at grant date and $3.3 million at vesting date. This triggers a shortfall, of $0.1 million of which $31 thousand was recorded against the windfall pool in additional paid in capital. No additional shortfall was recorded for the remaining $79 thousand due to the valuation allowance of the deferred tax asset. For the quarter ended March 31, 2016, the Corporation recognized $1.0 million of performance shares expense, with a tax benefit of $0.1 million. The total unrecognized compensation cost related to non-vested restricted stock awards and performance shares to members of management at March 31, 2016 was $ 8.2 million and is expected to be recognized over a weighted-average period of 2.3 years.

 

104


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, 2014

     —         $ —     

Granted

     22,119         32.29   

Vested

     (22,119      32.29   

Forfeited

     —           —     
  

 

 

    

 

 

 

Non-vested at December 31, 2015

     —         $ —     

Granted

     2,338         23.95   

Vested

     (2,338      23.95   

Forfeited

     —           —     
  

 

 

    

 

 

 

Non-vested at March 31, 2016

     —         $ —     
  

 

 

    

 

 

 

During the quarter ended March 31, 2016, the Corporation granted 2,338 shares of restricted stock to members of the Board of Directors of Popular, Inc., which became vested at grant date (March 31, 2015 – 2,643). During this period, the Corporation recognized $0.1 million of restricted stock expense related to these restricted stock grants, with a tax benefit of $15 thousand (March 31, 2015—$0.1 million, with a tax benefit of $16 thousand). The fair value at vesting date of the restricted stock vested during the quarter ended March 31, 2016 for directors was $ 56 thousand.

 

105


Table of Contents

Note 33 – Income taxes

The reason for the difference between the income tax expense applicable to income before provision for income taxes and the amount computed by applying the statutory tax rate in Puerto Rico, were as follows:

 

     Quarters ended  
     March 31, 2016     March 31, 2015  

(In thousands)

   Amount     % of pre-tax
income
    Amount     % of pre-tax
income
 

Computed income tax expense at statutory rates

   $ 45,733        39   $ 41,361        39

Net benefit of tax exempt interest income

     (15,584     (13     (15,027     (14

Deferred tax asset valuation allowance

     5,273        5        5,639        5   

Difference in tax rates due to multiple jurisdictions

     (864     (1     (275     —     

Effect of income subject to preferential tax rate

     (3,414     (3     (2,471     (2

State and local taxes

     2,927        3        1,331        1   

Others

     (1,806     (2     2,010        2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income tax expense

   $ 32,265        28   $ 32,568        31
  

 

 

   

 

 

   

 

 

   

 

 

 

The following table presents a breakdown of the significant components of the Corporation’s deferred tax assets and liabilities.

 

(In thousands)

   March 31, 2016      December 31, 2015  

Deferred tax assets:

     

Tax credits available for carryforward

   $ 13,651       $ 13,651   

Net operating loss and other carryforward available

     1,264,077         1,262,197   

Postretirement and pension benefits

     114,866         116,036   

Deferred loan origination fees

     6,063         6,420   

Allowance for loan losses

     658,220         670,592   

Deferred gains

     5,688         5,966   

Accelerated depreciation

     8,209         8,335   

Intercompany deferred gains

     2,492         2,743   

Difference in outside basis from pass-through entities

     11,889         12,684   

Other temporary differences

     30,348         29,208   
  

 

 

    

 

 

 

Total gross deferred tax assets

     2,115,503         2,127,832   
  

 

 

    

 

 

 

Deferred tax liabilities:

     

FDIC-assisted transaction

     92,156         90,778   

Indefinite-lived intangibles

     66,175         63,573   

Unrealized net gain on trading and available-for-sale securities

     37,662         22,281   

Other temporary differences

     7,232         6,670   
  

 

 

    

 

 

 

Total gross deferred tax liabilities

     203,225         183,302   
  

 

 

    

 

 

 

Valuation allowance

     637,911         642,727   
  

 

 

    

 

 

 

Net deferred tax asset

   $ 1,274,367       $ 1,301,803   
  

 

 

    

 

 

 

The net deferred tax asset shown in the table above at March 31, 2016 is reflected in the consolidated statements of financial condition as $1.3 billion in net deferred tax assets in the “Other assets” caption (December 31, 2015—$1.3 billion) and $649 thousand in deferred tax liabilities in the “Other liabilities” caption (December 31, 2015—$649 thousand), 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

 

106


Table of Contents

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.

During the year ended December 31, 2015, after weighting all positive and negative evidence, the Corporation concluded that it is more likely than not that a portion of the total deferred tax asset from the U.S. operations, amounting to $1.2 billion and comprised mainly of net operating losses, will be realized. The Corporation based this determination on its estimated earnings for the remaining carryforward period of eighteen years beginning with the 2016 fiscal year, available to utilize the deferred tax asset, to reduce its income tax obligations. The recent historical level of book income adjusted by permanent differences, together with the estimated earnings after the reorganization of the U.S. operations and additional estimated earnings from the Doral Bank Transaction were objective positive evidence considered by the Corporation. As of March 31, 2016 the U.S. operations are not in a three year cumulative loss position, taking into account taxable income exclusive of reversing temporary differences. All of these factors lead management to conclude that it is more likely than not that a portion of the deferred tax asset from its U.S. operations will be realized. Management will continue to evaluate the realization of the deferred tax asset each quarter and adjust as deemed necessary. At March 31, 2016 a valuation allowance is recorded on the deferred tax asset of the U.S. operation in the amount of $602 million.

At March 31, 2016, the Corporation’s net deferred tax assets related to its Puerto Rico operations amounted to $730 million.

The Corporation’s Puerto Rico Banking operation is not in a cumulative three year loss position, taking into account taxable income exclusive of reversing temporary differences, and has sustained profitability for the three year period ended March 31, 2016. This is considered a strong piece of objectively verifiable positive evidence that outweights any negative evidence considered by management in the evaluation of the realization of the deferred tax asset. Based on this evidence and management’s estimate of future taxable income, the Corporation has concluded that it is more likely than not that such net deferred tax asset of the Puerto Rico Banking operations will be realized.

The Holding Company operation is not in a cumulative loss taking into account taxable income exclusive of reversing temporary differences, for the three year period ended March 31, 2016. However, it has sustained losses for year ended December 31, 2015 and the period ended March 31, 2016. Management expect these losses will be a trend in early future years. The losses in recent periods together with the expected losses in future years is considered by management a strong negative evidence that will suggest that income in future years will be insufficient to support the realization of all deferred tax asset. After weighting of all positive and negative evidence management concluded, as of the reporting date, that it is more likely than not that the Holding Company will not be able to realize any portion of the deferred tax assets, considering the criteria of ASC Topic 740. Accordingly, a full valuation allowance is recorded on the deferred tax asset at the Holding Company, which amounted to $36 million as of March 31, 2016.

The reconciliation of unrecognized tax benefits was as follows:

 

(In millions)

   2016      2015  

Balance at January 1

   $ 9.0       $ 8.0   

Additions for tax positions - January through March

     0.4         0.3   

Reduction as a result of settlements - January through March

     —           (0.5
  

 

 

    

 

 

 

Balance at March 31

   $ 9.4       $ 7.8   
  

 

 

    

 

 

 

At March 31, 2016, the total amount of interest recognized in the statement of financial condition approximated $3.7 million (December 31, 2015—$3.2 million). The total interest expense recognized at March 31, 2016 was $485 thousand (December 31, 2015—$57 thousand). Management determined that at March 31, 2016 and December 31, 2015 there was no need to accrue for the payment of penalties. The Corporation’s policy is to report interest related to unrecognized tax benefits in income tax expense, whiles the penalties, if any, are reported in other operating expenses in the consolidated statements of operations.

 

107


Table of Contents

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 $12.0 million at March 31, 2016 (December 31, 2015—$11.2 million).

The amount of unrecognized tax benefits may increase or decrease in the future for various reasons including adding amounts for current tax year positions, expiration of open income tax returns due to the statutes of limitation, changes in 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, 2016, the following years remain subject to examination in the U.S. Federal jurisdiction: 2012 and thereafter; and in the Puerto Rico jurisdiction, 2010 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 $3.3 million.

 

108


Table of Contents

Note 34 – 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, 2016 and March 31, 2015 are listed in the following table:

 

(In thousands)

   March 31, 2016      March 31, 2015  

Non-cash activities:

     

Loans transferred to other real estate

   $ 26,919       $ 30,802   

Loans transferred to other property

     7,693         8,979   
  

 

 

    

 

 

 

Total loans transferred to foreclosed assets

     34,612         39,781   

Transfers from loans held-in-portfolio to loans held-for-sale

     —           10,839   

Transfers from loans held-for-sale to loans held-in-portfolio

     3,821         4,858   

Loans securitized into investment securities[1]

     170,248         203,414   

Trades receivable from brokers and counterparties

     87,590         112,287   

Trades payable to brokers and counterparties

     32,774         19,097   

Recognition of mortgage servicing rights on securitizations or asset transfers

     2,136         2,859   

 

[1] Includes loans securitized into trading securities and subsequently sold before quarter end.

As previously disclosed in Note 5, Business Combination, on February 27, 2015, the Corporation’s Puerto Rico banking subsidiary, BPPR, in an alliance with co-bidders, including the Corporation’s U.S. mainland banking subsidiary, BPNA, acquired certain assets and all deposits (other than certain brokered deposits) of Doral Bank from the FDIC as receiver. As part of this transaction, BPPR received during the quarter ended March 31, 2015 net cash proceeds of approximately $ 711 million for consideration of the assets and liabilities acquired.

 

109


Table of Contents

Note 35 – Segment reporting

The Corporation’s corporate structure consists of two reportable segments – Banco Popular de Puerto Rico and Banco Popular North America. These reportable segments pertain only to the continuing operations of Popular, Inc. As previously indicated in Note 4 to the consolidated financial statements, the regional operations in California, Illinois and Central Florida were classified as discontinued operations and sold during 2014.

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, 2016, 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 under the name of Popular Community Bank, while E-LOAN supports BPNA’s deposit gathering through its online platform. All direct lending activities at E-LOAN were ceased during 2008. During the third quarter of 2015, BPNA and E-LOAN completed an asset purchase and sale transaction in which E-LOAN sold to BPNA all of its outstanding loan portfolio, including residential mortgage loans and home equity lines of credit, which had a carrying value of approximately $213 million. Prior to this transaction, the Corporation provided additional disclosures for the BPNA reportable segment related to E-LOAN. After the close of the above mentioned asset purchase and sale transaction, additional disclosures with respect to E-LOAN are no longer considered relevant to the financial statements and accordingly are not presented. 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.

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.

 

110


Table of Contents

The tables that follow present the results of operations and total assets by reportable segments:

2016

 

For the quarter ended March 31, 2016

 
     Banco Popular      Banco Popular      Intersegment  

(In thousands)

   de Puerto Rico      North America      Eliminations  

Net interest income

   $ 305,350       $ 62,257       $ —     

Provision for loan losses

     40,800         4,069         —     

Non-interest income

     98,566         4,950         —     

Amortization of intangibles

     2,948         166         —     

Depreciation expense

     10,197         1,333         —     

Other operating expenses

     224,669         41,331         —     

Income tax expense

     31,877         8,456         —     
  

 

 

    

 

 

    

 

 

 

Net income

   $ 93,425       $ 11,852       $ —     
  

 

 

    

 

 

    

 

 

 

Segment assets

   $ 28,108,702       $ 7,880,357       $ (52,740
  

 

 

    

 

 

    

 

 

 

 

For the quarter ended March 31, 2016

 

(In thousands)

   Reportable
Segments
     Corporate      Eliminations      Total Popular, Inc.  

Net interest income (expense)

   $ 367,607       $ (15,195    $ —         $ 352,412   

Provision (reversal of provision) for loan losses

     44,869         (34      —           44,835   

Non-interest income

     103,516         8,177         (63      111,630   

Amortization of intangibles

     3,114         —           —           3,114   

Depreciation expense

     11,530         177         —           11,707   

Other operating expenses

     266,000         21,731         (609      287,122   

Income tax expense (benefit)

     40,333         (8,281      213         32,265   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss)

   $ 105,277       $ (20,611    $ 333       $ 84,999   
  

 

 

    

 

 

    

 

 

    

 

 

 

Segment assets

   $ 35,936,319       $ 4,938,750       $ (4,728,060    $ 36,147,009   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

111


Table of Contents

2015

 

For the quarter ended March 31, 2015

 
     Banco Popular      Banco Popular      Intersegment  

(In thousands)

   de Puerto Rico      North America      Eliminations  

Net interest income

   $ 306,611       $ 52,101       $ —     

Provision (reversal of provision) for loan losses

     42,237         (2,202      —     

Non-interest income

     103,529         6,167         —     

Amortization of intangibles

     1,998         106         —     

Depreciation expense

     10,108         1,617         —     

Other operating expenses

     227,576         54,484         —     

Income tax expense

     37,448         937         —     
  

 

 

    

 

 

    

 

 

 

Net income

   $ 90,773       $ 3,326       $ —     
  

 

 

    

 

 

    

 

 

 

Segment assets

   $ 28,803,521       $ 6,717,758       $ (128,481
  

 

 

    

 

 

    

 

 

 

 

For the quarter ended March 31, 2015

 
     Reportable                       

(In thousands)

   Segments      Corporate      Eliminations      Total Popular, Inc.  

Net interest income (expense)

   $ 358,712       $ (15,517    $ —         $ 343,195   

Provision for loan losses

     40,035         —           —           40,035   

Non-interest income

     109,696         5,643         (104      115,235   

Amortization of intangibles

     2,104         —           —           2,104   

Depreciation expense

     11,725         194         —           11,919   

Other operating expenses

     282,061         16,990         (732      298,319   

Income tax expense (benefit)

     38,385         (6,062      245         32,568   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss)

   $ 94,098       $ (20,996    $ 383       $ 73,485   
  

 

 

    

 

 

    

 

 

    

 

 

 

Segment assets

   $ 35,392,798       $ 4,896,192       $ (4,673,543    $ 35,615,447   
  

 

 

    

 

 

    

 

 

    

 

 

 

Additional disclosures with respect to the Banco Popular de Puerto Rico reportable segment are as follows:

2016

 

For the quarter ended March 31, 2016

 

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

   $ 114,903       $ 187,195       $ 1,615       $ 1,637      $ 305,350   

Provision for loan losses

     14,908         25,892         —           —          40,800   

Non-interest income

     21,731         55,608         21,311         (84     98,566   

Amortization of intangibles

     22         1,836         1,090         —          2,948   

Depreciation expense

     4,275         5,691         231         —          10,197   

Other operating expenses

     57,232         150,212         17,309         (84     224,669   

Income tax expense

     18,169         12,379         1,329         —          31,877   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Net income

   $ 42,028       $ 46,793       $ 2,967       $ 1,637      $ 93,425   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Segment assets

   $ 11,273,486       $ 17,090,030       $ 342,867       $ (597,681   $ 28,108,702   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

112


Table of Contents

2015

 

For the quarter ended March 31, 2015

 

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

   $ 118,475      $ 186,252       $ 1,880       $ 4      $ 306,611   

(Reversal of provision) provision for loan losses

     (3,556     45,793         —           —          42,237   

Non-interest income

     27,150        56,004         20,470         (95     103,529   

Amortization of intangibles

     29        1,772         197         —          1,998   

Depreciation expense

     4,320        5,512         276         —          10,108   

Other operating expenses

     65,856        145,068         16,747         (95     227,576   

Income tax expense

     26,053        9,778         1,617         —          37,448   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Net income

   $ 52,923      $ 34,333       $ 3,513       $ 4      $ 90,773   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Segment assets

   $ 10,056,505      $ 20,053,145       $ 486,998       $ (1,793,127   $ 28,803,521   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Geographic Information

 

     Quarter ended  

(In thousands)

   March 31, 2016      March 31, 2015  

Revenues:[1]

     

Puerto Rico

   $ 380,036       $ 385,054   

United States

     64,640         56,710   

Other

     19,366         16,666   
  

 

 

    

 

 

 

Total consolidated revenues

   $ 464,042       $ 458,430   
  

 

 

    

 

 

 

 

[1] Total revenues include net interest income (expense), service charges on deposit accounts, other service fees, mortgage banking activities, net gain (loss) and valuation adjustments on investment securities, trading account (loss) profit, net (loss) 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 and other operating income.

Selected Balance Sheet Information:

 

(In thousands)

   March 31, 2016      December 31, 2015  

Puerto Rico

     

Total assets

   $ 27,150,601       $ 26,764,184   

Loans

     17,370,172         17,477,070   

Deposits

     21,015,800         20,893,232   

United States

     

Total assets

   $ 8,063,912       $ 7,859,217   

Loans

     5,121,648         4,873,504   

Deposits

     5,445,760         5,288,886   

Other

     

Total assets

   $ 932,496       $ 1,138,332   

Loans

     766,362         778,656   

Deposits [1]

     1,065,033         1,027,605   

 

[1] Represents deposits from BPPR operations located in the U.S. and British Virgin Islands.

 

113


Table of Contents

Note 36 – 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 North America, Inc. (“PNA”) and all other subsidiaries of the Corporation at March 31, 2016 and 2015, and the results of their operations and cash flows for periods ended March 31, 2016 and December 31, 2015.

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 BPNA’s 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.

 

114


Table of Contents

Condensed Consolidating Statement of Financial Condition (Unaudited)

 

     At March 31, 2016  
                 All other              
     Popular Inc.     PNA     subsidiaries and     Elimination     Popular, Inc.  

(In thousands)

   Holding Co.     Holding Co.     eliminations     entries     Consolidated  

Assets:

          

Cash and due from banks

   $ 21,133      $ 598      $ 409,315      $ (21,423   $ 409,623   

Money market investments

     255,251        18,519        1,917,209        (273,519     1,917,460   

Trading account securities, at fair value

     2,121        —          69,163        —          71,284   

Investment securities available-for-sale, at fair value

     227        —          6,649,603        —          6,649,830   

Investment securities held-to-maturity, at amortized cost

     —          —          99,216        —          99,216   

Other investment securities, at lower of cost or realizable value

     9,850        4,492        149,682        —          164,024   

Investment in subsidiaries

     5,679,385        1,819,384        —          (7,498,769     —     

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

     —          —          125,315        —          125,315   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans held-in-portfolio:

          

Loans not covered under loss-sharing agreements with the FDIC

     1,167        —          22,617,321        —          22,618,488   

Loans covered under loss-sharing agreements with the FDIC

     —          —          625,130        —          625,130   

Less—Unearned income

     —          —          110,751        —          110,751   

Allowance for loan losses

     2        —          538,470        —          538,472   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans held-in-portfolio, net

     1,165        —          22,593,230        —          22,594,395   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

FDIC loss-share asset

     —          —          219,448        —          219,448   

Premises and equipment, net

     2,999        —          524,494        —          527,493   

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

     566        —          165,394        —          165,960   

Other real estate covered under loss-sharing agreements with the FDIC

     —          —          36,397        —          36,397   

Accrued income receivable

     73        36        120,229        (30     120,308   

Mortgage servicing assets, at fair value

     —          —          205,051        —          205,051   

Other assets

     57,670        23,453        2,091,857        (16,950     2,156,030   

Goodwill

     —          —          631,095        —          631,095   

Other intangible assets

     553        —          53,527        —          54,080   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 6,030,993      $ 1,866,482      $ 36,060,225      $ (7,810,691   $ 36,147,009   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

          

Liabilities:

          

Deposits:

          

Non-interest bearing

   $ —        $ —        $ 6,405,516      $ (21,423   $ 6,384,093   

Interest bearing

     —          —          21,416,019        (273,519     21,142,500   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total deposits

     —          —          27,821,535        (294,942     27,526,593   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Federal funds purchased and assets sold under agreements to repurchase

     —          —          760,154        —          760,154   

Other short-term borrowings

     —          —          6,370        —          6,370   

Notes payable

     734,036        148,492        700,940        —          1,583,468   

Other liabilities

     46,657        3,591        985,598        (17,537     1,018,309   

Liabilities from discontinued operations

     —          —          1,815        —          1,815   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     780,693        152,083        30,276,412        (312,479     30,896,709   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Stockholders’ equity:

          

Preferred stock

     50,160        —          —          —          50,160   

Common stock

     1,039        2        56,307        (56,309     1,039   

Surplus

     4,222,706        4,111,208        5,712,604        (9,815,285     4,231,233   

Retained earnings (accumulated deficit)

     1,165,003        (2,409,905     195,181        2,206,197        1,156,476   

Treasury stock, at cost

     (6,858     —          —          —          (6,858

Accumulated other comprehensive loss, net of tax

     (181,750     13,094        (180,279     167,185        (181,750
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

     5,250,300        1,714,399        5,783,813        (7,498,212     5,250,300   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 6,030,993      $ 1,866,482      $ 36,060,225      $ (7,810,691   $ 36,147,009   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

115


Table of Contents

Condensed Consolidating Statement of Financial Condition (Unaudited)

 

     At December 31, 2015  
                 All other              
     Popular, Inc.     PNA     subsidiaries and     Elimination     Popular, Inc.  

(In thousands)

   Holding Co.     Holding Co.     eliminations     entries     Consolidated  

Assets:

          

Cash and due from banks

   $ 24,298      $ 600      $ 363,620      $ (24,844   $ 363,674   

Money market investments

     262,204        23,931        2,179,887        (285,930     2,180,092   

Trading account securities, at fair value

     2,020        —          69,639        —          71,659   

Investment securities available-for-sale, at fair value

     216        —          6,062,776        —          6,062,992   

Investment securities held-to-maturity, at amortized cost

     —          —          100,903        —          100,903   

Other investment securities, at lower of cost or realizable value

     9,850        4,492        157,906        —          172,248   

Investment in subsidiaries

     5,539,325        1,789,512        —          (7,328,837     —     

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

     —          —          137,000        —          137,000   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans held-in-portfolio:

          

Loans not covered under loss-sharing agreements with the FDIC

     1,176        —          22,452,637        —          22,453,813   

Loans covered under loss-sharing agreements with the FDIC

     —          —          646,115        —          646,115   

Less—Unearned income

     —          —          107,698        —          107,698   

Allowance for loan losses

     3        —          537,108        —          537,111   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans held-in-portfolio, net

     1,173        —          22,453,946        —          22,455,119   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

FDIC loss-share asset

     —          —          310,221        —          310,221   

Premises and equipment, net

     2,823        —          499,788        —          502,611   

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

     532        —          154,699        —          155,231   

Other real estate covered under loss- sharing agreements with the FDIC

     —          —          36,685        —          36,685   

Accrued income receivable

     85        115        124,070        (36     124,234   

Mortgage servicing assets, at fair value

     —          —          211,405        —          211,405   

Other assets

     54,908        23,596        2,132,616        (17,958     2,193,162   

Goodwill

     —          —          626,388        —          626,388   

Other intangible assets

     554        —          57,555        —          58,109   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 5,897,988      $ 1,842,246      $ 35,679,104      $ (7,657,605   $ 35,761,733   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

          

Liabilities:

          

Deposits:

          

Non-interest bearing

   $ —        $ —        $ 6,426,359      $ (24,844   $ 6,401,515   

Interest bearing

     —          —          21,094,138        (285,930     20,808,208   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total deposits

     —          —          27,520,497        (310,774     27,209,723   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Federal funds purchased and assets sold under agreements to repurchase

     —          —          762,145        —          762,145   

Other short-term borrowings

     —          —          1,200        —          1,200   

Notes payable

     733,516        148,483        780,509        —          1,662,508   

Other liabilities

     59,148        6,659        971,429        (18,218     1,019,018   

Liabilities from discontinued operations

     —          —          1,815        —          1,815   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     792,664        155,142        30,037,595        (328,992     30,656,409   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Stockholders’ equity:

          

Preferred stock

     50,160        —          —          —          50,160   

Common stock

     1,038        2        56,307        (56,309     1,038   

Surplus

     4,220,629        4,111,208        5,712,635        (9,815,316     4,229,156   

Retained earnings (accumulated deficit)

     1,096,484        (2,416,251     128,459        2,279,265        1,087,957   

Treasury stock, at cost

     (6,101     —          —          —          (6,101

Accumulated other comprehensive loss, net of tax

     (256,886     (7,855     (255,892     263,747        (256,886
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

     5,105,324        1,687,104        5,641,509        (7,328,613     5,105,324   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 5,897,988      $ 1,842,246      $ 35,679,104      $ (7,657,605   $ 35,761,733   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

116


Table of Contents

Condensed Consolidating Statement of Operations (Unaudited)

 

     Quarter ended March 31, 2016  
                 All other              
     Popular, Inc.     PNA     subsidiaries and     Elimination     Popular, Inc.  

(In thousands)

   Holding Co.     Holding Co.     eliminations     entries     Consolidated  

Interest and dividend income:

          

Dividend income from subsidiaries

   $ 29,700      $ —        $ —        $ (29,700   $ —     

Loans

     19        —          363,178        —          363,197   

Money market investments

     255        21        2,863        (276     2,863   

Investment securities

     238        80        35,953        —          36,271   

Trading account securities

     —          —          1,689        —          1,689   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest and dividend income

     30,212        101        403,683        (29,976     404,020   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense:

          

Deposits

     —          —          30,150        (276     29,874   

Short-term borrowings

     —          —          1,861        —          1,861   

Long-term debt

     13,117        2,693        4,063        —          19,873   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     13,117        2,693        36,074        (276     51,608   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (expense)

     17,095        (2,592     367,609        (29,700     352,412   

Provision (reversal) for loan losses- non-covered loans

     (34     —          47,974        —          47,940   

Provision (reversal) for loan losses- covered loans

     —          —          (3,105     —          (3,105
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (expense) after provision for loan losses

     17,129        (2,592     322,740        (29,700     307,577   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Service charges on deposit accounts

     —          —          39,862        —          39,862   

Other service fees

     —          —          53,439        (57     53,382   

Mortgage banking activities

     —          —          10,551        —          10,551   

Trading account profit (loss)

     24        —          (186     —          (162

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

     —          —          (304     —          (304

Adjustments (expense) to indemnity reserves on loans sold

     —          —          (4,098     —          (4,098

FDIC loss-share expense

     —          —          (3,146     —          (3,146

Other operating income

     3,256        (1,303     13,599        (7     15,545   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest income

     3,280        (1,303     109,717        (64     111,630   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

          

Personnel costs

     15,421        —          111,670        —          127,091   

Net occupancy expenses

     916        —          19,514        —          20,430   

Equipment expenses

     445        —          14,103        —          14,548   

Other taxes

     47        —          10,148        —          10,195   

Professional fees

     2,881        30        72,605        (57     75,459   

Communications

     137        —          6,183        —          6,320   

Business promotion

     465        —          10,645        —          11,110   

FDIC deposit insurance

     —          —          7,370        —          7,370   

Other real estate owned (OREO) expenses

     —          —          9,141        —          9,141   

Other operating expenses

     (20,428     39        38,106        (552     17,165   

Amortization of intangibles

     —          —          3,114        —          3,114   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     (116     69        302,599        (609     301,943   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax and equity in earnings of subsidiaries

     20,525        (3,964     129,858        (29,155     117,264   

Income tax expense (benefit)

     3        (1,387     33,436        213        32,265   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before equity in earnings of subsidiaries

     20,522        (2,577     96,422        (29,368     84,999   

Equity in undistributed earnings of subsidiaries

     64,477        8,923        —          (73,400     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

   $ 84,999      $ 6,346      $ 96,422      $ (102,768   $ 84,999   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income, net of tax

   $ 160,135      $ 27,295      $ 172,035      $ (199,330   $ 160,135   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

117


Table of Contents

Condensed Consolidating Statement of Operations (Unaudited)

 

     Quarter ended March 31, 2015  
                 All other              
     Popular, Inc.     PNA     subsidiaries and     Elimination     Popular, Inc.  

(In thousands)

   Holding Co.     Holding Co.     eliminations     entries     Consolidated  

Interest income:

          

Dividend income from subsidiaries

   $ 1,500      $ —        $ —        $ (1,500   $ —     

Loans

     140        —          355,613        (122     355,631   

Money market investments

     2        2        1,444        (2     1,446   

Investment securities

     143        81        30,077        —          30,301   

Trading account securities

     —          —          2,696        —          2,696   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     1,785        83        389,830        (1,624     390,074   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense:

          

Deposits

     —          —          25,866        (2     25,864   

Short-term borrowings

     —          101        1,755        (122     1,734   

Long-term debt

     13,118        2,695        3,468        —          19,281   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     13,118        2,796        31,089        (124     46,879   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest (expense) income

     (11,333     (2,713     358,741        (1,500     343,195   

Provision for loan losses- non-covered loans

     —          —          29,711        —          29,711   

Provision for loan losses- covered loans

     —          —          10,324        —          10,324   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest (expense) income after provision for loan losses

     (11,333     (2,713     318,706        (1,500     303,160   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Service charges on deposit accounts

     —          —          39,017        —          39,017   

Other service fees

     —          —          53,714        (88     53,626   

Mortgage banking activities

     —          —          12,852        —          12,852   

Trading account profit

     40        —          374        —          414   

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

     —          —          (79     —          (79

Adjustments (expense) to indemnity reserves on loans sold

     —          —          (4,526     —          (4,526

FDIC loss-share income

     —          —          4,139        —          4,139   

Other operating income

     2,968        (828     7,668        (16     9,792   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest income

     3,008        (828     113,159        (104     115,235   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

          

Personnel costs

     11,908        —          104,550        —          116,458   

Net occupancy expenses

     980        —          20,729        —          21,709   

Equipment expenses

     545        —          12,866        —          13,411   

Other taxes

     (1,458     —          10,032        —          8,574   

Professional fees

     2,774        410        72,432        (88     75,528   

Communications

     117        —          6,059        —          6,176   

Business promotion

     436        —          10,377        —          10,813   

FDIC deposit insurance

     —          —          6,398        —          6,398   

Other real estate owned (OREO) expenses

     —          —          23,069        —          23,069   

Other operating expenses

     (16,935     109        34,819        (644     17,349   

Amortization of intangibles

     —          —          2,104        —          2,104   

Restructuring cost

     —          —          10,753        —          10,753   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     (1,633     519        314,188        (732     312,342   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income tax and equity in earnings of subsidiaries

     (6,692     (4,060     117,677        (872     106,053   

Income tax expense

     47        —          32,276        245        32,568   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before equity in earnings of subsidiaries

     (6,739     (4,060     85,401        (1,117     73,485   

Equity in undistributed earnings of subsidiaries

     80,224        1,269        —          (81,493     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     73,485        (2,791     85,401        (82,610     73,485   

Income from discontinued operations, net of tax

     —          —          1,341        —          1,341   

Equity in undistributed earnings of discontinued operations

     1,341        1,341        —          (2,682     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income (loss)

   $ 74,826      $ (1,450   $ 86,742      $ (85,292   $ 74,826   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income, net of tax

   $ 110,298      $ 11,841      $ 122,078      $ (133,919   $ 110,298   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

118


Table of Contents

Condensed Consolidating Statement of Cash Flows (Unaudited)

 

     Quarter ended March 31,2016  
                 All other              
     Popular, Inc.     PNA     subsidiaries     Elimination     Popular, Inc.  

(In thousands)

   Holding Co.     Holding Co.     and eliminations     entries     Consolidated  

Cash flows from operating activities:

          

Net income

   $ 84,999      $ 6,346      $ 96,422      $ (102,768   $ 84,999   

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

          

Equity in undistributed earnings of subsidiaries

     (64,477     (8,923     —          73,400        —     

Provision (reversal) for loan losses

     (34     —          44,869        —          44,835   

Amortization of intangibles

     —          —          3,114        —          3,114   

Depreciation and amortization of premises and equipment

     177        —          11,530        —          11,707   

Net accretion of discounts and amortization of premiums and deferred fees

     521        8        (11,687     —          (11,158

Fair value adjustments on mortgage servicing rights

     —          —          8,477        —          8,477   

FDIC loss-share income

     —          —          3,146        —          3,146   

Adjustments (expense) to indemnity reserves on loans sold

     —          —          4,098        —          4,098   

(Earnings) losses from investments under the equity method

     (3,256     1,303        (5,136     —          (7,089

Deferred income tax expense (benefit)

     3        (1,387     24,389        213        23,218   

(Gain) loss on:

          

Disposition of premises and equipment and other productive assets

     —          —          (1,946     —          (1,946

Sale of loans, including valuation adjustments on loans held for sale and mortgage banking activities

     —          —          (7,101     —          (7,101

Sale of foreclosed assets, including write-downs

     —          —          2,802        —          2,802   

Acquisitions of loans held-for-sale

     —          —          (66,451     —          (66,451

Proceeds from sale of loans held-for-sale

     —          —          22,253        —          22,253   

Net originations on loans held-for-sale

     —          —          (110,528     —          (110,528

Net (increase) decrease in:

          

Trading securities

     (101     —          176,699        —          176,598   

Accrued income receivable

     12        79        3,842        (7     3,926   

Other assets

     1        21        22,194        (1,220     20,996   

Net (decrease) increase in:

          

Interest payable

     (7,875     (2,685     (1,708     7        (12,261

Pension and other postretirement benefits obligations

     —          —          1,536        —          1,536   

Other liabilities

     (4,622     (382     (12,681     675        (17,010
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total adjustments

     (79,651     (11,966     111,711        73,068        93,162   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     5,348        (5,620     208,133        (29,700     178,161   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

          

Net decrease in money market investments

     6,952        5,412        262,679        (12,411     262,632   

Purchases of investment securities:

          

Available-for-sale

     —          —          (742,859     —          (742,859

Other

     —          —          (59,786     —          (59,786

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

          

Available-for-sale

     —          —          239,399        —          239,399   

Held-to-maturity

     —          —          2,108        —          2,108   

Other

     —          —          41,664        —          41,664   

Proceeds from sale of investment securities:

          

Other

     —          —          26,346        —          26,346   

Net repayments on loans

     8        —          13,327        —          13,335   

Proceeds from sale of loans

     —          —          1,128        —          1,128   

Acquisition of loan portfolios

     —          —          (212,798     —          (212,798

Net payments from FDIC under loss-sharing

          

agreements

     —          —          88,588        —          88,588   

Return of capital from equity method investments

     —          206        —          —          206   

Acquisition of premises and equipment

     (398     —          (38,421     —          (38,819

Proceeds from sale of:

          

Premises and equipment and other productive assets

     46        —          5,046        —          5,092   

Foreclosed assets

     —          —          14,513        —          14,513   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     6,608        5,618        (359,066     (12,411     (359,251
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

          

Net increase (decrease) in:

          

Deposits

     —          —          302,718        15,832        318,550   

Federal funds purchased and assets sold under agreements to repurchase

     —          —          (1,991     —          (1,991

Other short-term borrowings

     —          —          5,170        —          5,170   

Payments of notes payable

     —          —          (108,452     —          (108,452

Proceeds from issuance of notes payable

     —          —          28,883        —          28,883   

Proceeds from issuance of common stock

     2,109        —          —          —          2,109   

Dividends paid to parent company

     —          —          (29,700     29,700        —     

Dividends paid

     (16,473     —          —          —          (16,473

Net payments for repurchase of common stock

     (757     —          —          —          (757
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (15,121     —          196,628        45,532        227,039   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (decrease) increase in cash and due from banks

     (3,165     (2     45,695        3,421        45,949   

Cash and due from banks at beginning of period

     24,298        600        363,620        (24,844     363,674   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and due from banks at end of period

   $ 21,133      $ 598      $ 409,315      $ (21,423   $ 409,623   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

During the quarter ended March 31, 2016 there have not been any cash flows associated with discontinued operations.

 

119


Table of Contents

Condensed Consolidating Statement of Cash Flows (Unaudited)

 

     Quarter ended March 31, 2015  
                 All other              
     Popular, Inc.     PNA     subsidiaries     Elimination     Popular, Inc.  

(In thousands)

   Holding Co.     Holding Co.     and eliminations     entries     Consolidated  

Cash flows from operating activities:

          

Net income (loss)

   $ 74,826      $ (1,450   $ 86,742      $ (85,292   $ 74,826   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

          

Equity in undistributed (earnings) losses of subsidiaries

     (81,565     (2,610     —          84,175        —     

Provision for loan losses

     —          —          40,035        —          40,035   

Amortization of intangibles

     —          —          2,104        —          2,104   

Depreciation and amortization of premises and equipment

     194        —          11,725        —          11,919   

Net accretion of discounts and amortization of premiums and deferred fees

     —          —          (19,100     —          (19,100

Fair value adjustments on mortgage servicing rights

     —          —          4,929        —          4,929   

FDIC loss-share income

     —          —          (4,139     —          (4,139

Adjustments (expense) to indemnity reserves on loans sold

     —          —          4,526        —          4,526   

Earnings from investments under the equity method

     (2,968     828        (161     —          (2,301

Deferred income tax expense

     —          —          23,135        245        23,380   

(Gain) loss on:

          

Disposition of premises and equipment

     —          —          (978     —          (978

Sale of loans, including valuation adjustments on loans held for sale and mortgage banking activities

     —          —          (7,222     —          (7,222

Sale of foreclosed assets, including write-downs

     —          —          14,851        —          14,851   

Acquisitions of loans held-for-sale

     —          —          (121,929     —          (121,929

Proceeds from sale of loans held-for-sale

     —          —          27,547        —          27,547   

Net originations on loans held-for-sale

     —          —          (179,604     —          (179,604

Net (increase) decrease in:

          

Trading securities

     (126     —          178,068        —          177,942   

Accrued income receivable

     (56     81        (94     56        (13

Other assets

     3,716        28        (27,900     (3,871     (28,027

Net (decrease) increase in:

          

Interest payable

     (7,875     (2,629     344        (56     (10,216

Pension and other postretirement benefits obligations

     —          —          1,019        —          1,019   

Other liabilities

     (12,816     (7     (9,797     3,243        (19,377
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total adjustments

     (101,496     (4,309     (62,641     83,792        (84,654
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by operating activities

     (26,670     (5,759     24,101        (1,500     (9,828
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

          

Net (increase) decrease in money market investments

     (38     (1,457     (484,791     1,457        (484,829

Purchases of investment securities:

          

Available-for-sale

     —          —          (411,189     —          (411,189

Held-to-maturity

     —          —          (250     —          (250

Other

     —          —          (2,520     —          (2,520

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

          

Available-for-sale

     —          —          385,672        —          385,672   

Held-to-maturity

     —          —          2,231        —          2,231   

Other

     —          —          30,785        —          30,785   

Proceeds from sale of investment securities:

          

Other

     —          —          1,388        —          1,388   

Net repayments on loans

     10,392        —          154,788        (10,386     154,794   

Proceeds from sale of loans

     —          —          19,127        —          19,127   

Acquisition of loan portfolios

     —          —          (49,510     —          (49,510

Net payments from FDIC under loss-sharing agreements

     —          —          132,265        —          132,265   

Net cash received and acquired from business combination

     —          —          711,051        —          711,051   

Mortgage servicing rights purchased

     —          —          (2,400     —          (2,400

Acquisition of premises and equipment

     (242     —          (9,989     —          (10,231

Proceeds from sale of:

          

Premises and equipment

     3        —          3,090        —          3,093   

Foreclosed assets

     —          —          40,161        —          40,161   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     10,115        (1,457     519,909        (8,929     519,638   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

          

Net increase (decrease) in:

          

Deposits

     —          —          250,582        15,324        265,906   

Federal funds purchased and assets sold under agreements to repurchase

     —          —          (139,013     —          (139,013

Other short-term borrowings

     —          7,214        (165,815     10,386        (148,215

Payments of notes payable

     —          —          (419,487     —          (419,487

Proceeds from issuance of notes payable

     —          —          46,000        —          46,000   

Proceeds from issuance of common stock

     1,405        —          —          —          1,405   

Dividends paid to parent company

     —          —          (1,500     1,500        —     

Dividends paid

     (620     —          —          —          (620

Net payments for repurchase of common stock

     (1,105     —          —          —          (1,105
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (320     7,214        (429,233     27,210        (395,129
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (decrease) increase in cash and due from banks

     (16,875     (2     114,777        16,781        114,681   

Cash and due from banks at beginning of period

     20,448        608        380,890        (20,851     381,095   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and due from banks at end of period

   $ 3,573      $ 606      $ 495,667      $ (4,070   $ 495,776   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The Condensed Consolidating Statements of Cash Flows include the cash flows from operating, investing and financing activities associated with discontinued operations.

 

 

120


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, mortgage, and commercial banking services through its principal banking subsidiary, Banco Popular de Puerto Rico (“BPPR”), as well as 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, New Jersey and Southern Florida under the name of Popular Community Bank (“PCB”). E-LOAN markets deposit accounts under its name for the benefit of BPNA. Note 35 to the consolidated financial statements presents information about the Corporation’s business segments. As of March 31, 2016, the Corporation had a 15.58% interest in the holding company of 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. At March 31, 2016, the Corporation’s investment in EVERTEC had a carrying amount of $35.2 million. Also, the Corporation had a 15.84% stake in Centro Financiero BHD Leon, S.A. (“BHD Leon”), one of the largest banking and financial services groups in the Dominican Republic. During the quarter ended March 31, 2016 the Corporation recorded $6.2 million in earnings from its investment in BHD Leon, which had a carrying amount of $122.6 million, as of the end of the quarter.

OVERVIEW

For the quarter ended March 31, 2016, the Corporation recorded net income of $85.0 million, compared to a net income of $74.8 million for the same quarter of the previous year. The increase of $10.2 million in net income was driven by higher net interest income and lower operating expenses, partially offset by a higher provision for loan losses and lower non-interest income.

Table 1 provides selected financial data and performance indicators for the quarters ended March 31, 2016 and 2015.

Table 1—Financial highlights

 

Financial Condition Highlights

                       Average for the First Quarter  

(In thousands)

   March 31,
2016
     December 31,
2015
     Variance     March 31,
2016
     March 31,
2015
     Variance  

Money market investments

   $ 1,917,460       $ 2,180,092       $ (262,632   $ 2,186,771       $ 1,930,393       $ 256,378   

Investment and trading securities

     6,984,354         6,407,802         576,552        6,764,453         5,836,371         928,082   

Loans

     23,258,182         23,129,230         128,952        22,985,578         22,504,974         480,604   

Earning assets

     32,159,996         31,717,124         442,872        31,936,802         30,271,738         1,665,064   

Total assets

     36,147,009         35,761,733         385,276        35,891,768         33,806,058         2,085,710   

Deposits

     27,526,593         27,209,723         316,870        27,337,586         25,585,108         1,752,478   

Borrowings

     2,349,992         2,425,853         (75,861     2,440,979         2,876,718         (435,739

Stockholders’ equity

     5,250,300         5,105,324         144,976        5,191,395         4,321,095         870,300   

Liabilities from discontinued operations

     1,815         1,815         —          1,815         2,894         (1,079

 

121


Table of Contents

Operating Highlights

   First Quarter  

(In thousands, except per share information)

   2016      2015      Variance  

Net interest income

   $ 352,412       $ 343,195       $ 9,217   

Provision for loan losses—non-covered loans

     47,940         29,711         18,229   

Provision for loan losses—covered loans

     (3,105      10,324         (13,429

Non-interest income

     111,630         115,235         (3,605

Operating expenses

     301,943         312,342         (10,399
  

 

 

    

 

 

    

 

 

 

Income from continuing operations before income tax

     117,264         106,053         11,211   

Income tax expense

     32,265         32,568         (303
  

 

 

    

 

 

    

 

 

 

Income from continuing operations

   $ 84,999       $ 73,485       $ 11,514   
  

 

 

    

 

 

    

 

 

 

Income from discontinued operations, net of tax

     —           1,341         (1,341
  

 

 

    

 

 

    

 

 

 

Net income

   $ 84,999       $ 74,826       $ 10,173   
  

 

 

    

 

 

    

 

 

 

Net income applicable to common stock

   $ 84,068       $ 73,896       $ 10,172   
  

 

 

    

 

 

    

 

 

 

Net income from continuing operations

   $ 0.81       $ 0.71       $ 0.10   
  

 

 

    

 

 

    

 

 

 

Net income from discontinued operations

   $ —         $ 0.01       $ (0.01
  

 

 

    

 

 

    

 

 

 

Net income per common share—Basic

   $ 0.81       $ 0.72       $ 0.09   
  

 

 

    

 

 

    

 

 

 

Net income from continuing operations

   $ 0.81       $ 0.71       $ 0.10   
  

 

 

    

 

 

    

 

 

 

Net income from discontinued operations

   $ —         $ 0.01       $ (0.01
  

 

 

    

 

 

    

 

 

 

Net income per common share—Diluted

   $ 0.81       $ 0.72       $ 0.09   
  

 

 

    

 

 

    

 

 

 

Dividends declared per common share—Basic

   $ 0.15       $ —         $ 0.15   
  

 

 

    

 

 

    

 

 

 

 

     First Quarter  

Selected Statistical Information

   2016     2015  

Common Stock Data

    

Market price

    

High

   $ 28.80      $ 35.58   

Low

     22.62        30.52   

End

     28.61        34.39   

Book value per common share at period end

     50.16        41.81   
  

 

 

   

 

 

 

Profitability Ratios

    

Return on assets

     0.95     0.90

Return on common equity

     6.58        7.02   

Net interest spread (taxable equivalent)

     4.47        4.64   

Net interest margin (taxable equivalent)

     4.70        4.85   
  

 

 

   

 

 

 

Capitalization Ratios

    

Average equity to average assets

     14.46     12.78

Common equity Tier 1 capital

     15.79        15.74   

Tier I capital

     15.79        16.11   

Total capital

     18.78        18.71   

Tier 1 leverage

     11.46        11.80   
  

 

 

   

 

 

 

Adjusted results of operations – Non-GAAP financial measure

The Corporation prepares its Consolidated Financial Statements using accounting principles generally accepted in the U.S. (“U.S. GAAP”), or the (“reported basis”). In addition to analyzing the Corporation’s results on a reported basis, management monitors the performance of the Corporation on an “adjusted basis” and excludes the impact of certain transactions on the results of its operations. Throughout this MD&A, the Corporation presents a discussion of its financial results excluding the impact of these events to arrive at the “adjusted results”. Management believes that the “adjusted results” provide meaningful information about the underlying performance of the Corporation’s ongoing operations. The “adjusted results” are a Non-GAAP financial measure. Refer to tables 40 and 41 for a reconciliation of the reported results for the quarter ended March 31, 2015. No adjustments are included for the quarter ended March 31, 2016.

Non-GAAP financial measures used by the Corporation may not be comparable to similarly named non-GAAP financial measures used by other companies.

 

122


Table of Contents

Financial highlights for the quarter ended March 31, 2016

 

    The Corporation recorded net income of $85.0 million, compared to a net income of $74.8 million for the same quarter of the previous year. The adjusted net income for the first quarter of 2015 was $90.3 million. Refer to table 41 for a detail of the adjustments to arrive at the adjusted net income.

 

    Net interest income, on a taxable equivalent basis, increased by $9.7 million, driven by higher volume of investment securities and loans which benefited from the acquisition of the Doral Bank portfolio. The income from the WB loans declined as the portfolio continues its expected run off. Net interest margin, on a taxable equivalent basis, for the first quarter of 2016 was 4.70% compared to 4.85% in the same quarter of 2015. An unfavorable variance in the FDIC loss share expense and lower mortgage banking income drove non-interest income down, which was partially offset by higher income from equity method investments, for a net decline of $2.5 million on an adjusted basis. The total provision for loan losses increased by $4.8 million, reflecting the prevailing economic conditions in Puerto Rico and growth in the U.S. portfolio, mainly on commercial loans. Operating expenses increased by $10.4 million, mainly from higher personnel costs, including incentives and the impact of actuarial revisions for pension costs, offset by lower OREO expenses. Refer to the Operating Results Analysis section of this MD&A for additional information.

Total non-performing assets, including covered, were $848 million at March 31, 2016, an increase of $5 million, or 1%, from December 31, 2015. The increase was mainly due to higher OREOs at BPPR and the impact of a single $11 million credit relationship at BPNA, partially offset by lower mortgage NPLs at BPPR driven by improved collection efforts. At March 31, 2016, NPLs to total loans held-in-portfolio remained flat at 2.7% from December 31, 2015. Refer to the Credit Risk Management and Loan Quality section of this MD&A for an explanation of the main factors impacting the provision for loan losses and a detailed analysis of net charge-offs, non-performing assets, the allowance for loan losses and selected loan losses statistics.

 

    The Corporation’s total assets at March 31, 2016 amounted to $36.1 billion, compared to $35.8 billion, at December 31, 2015. Money market and investment securities increased by $323.8 million, due mainly to purchases of mortgage backed securities. The loan portfolios experienced an increase of $129 million, mainly from growth in the U.S. commercial, construction and consumer portfolios. Total deposits increased by $316.9 million, mainly from government deposit accounts at BPPR and money market accounts at BPNA, offset by lower brokered CDs. Total borrowings declined by $76 million due to maturities of advances from the Federal Home Loan Bank of New York.

 

    Stockholders’ equity totalled $5.3 billion at March 31, 2016, compared with $5.1 billion at December 31, 2015. The increase resulted from the Corporation’s net income of $85 million, a favorable variance of $73 million in unrealized gains on securities available-for-sale, partially offset by payments of dividends of $15.5 million on common stock of $0.15 per share and $0.9 million in dividends on preferred stock.

Refer to the Financial Condition Analysis section of this MD&A for additional information.

 

    Capital ratios continued to be strong. As of March 31, 2016, the Corporation’s Common equity Tier 1 Capital ratio was 15.79% while the tangible common equity ratio was 12.73%. Refer to Table 13 for capital ratios and Table 14 for Non-GAAP reconciliations.

 

123


Table of Contents

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 2015 Form 10-K, 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 2015 Form 10-K. Also, refer to Note 2 to the consolidated financial statements included in the 2015 Form 10-K for a summary of the Corporation’s significant accounting policies.

OPERATING RESULTS ANALYSIS

Net interest income

Net interest income on a taxable equivalent basis-Non-GAAP financial measure

Net interest income, on a taxable equivalent basis, is presented with its different components on Table 2 for the quarter ended March 31, 2016 as compared with the same period in 2015, segregated by major categories of interest earning assets and interest bearing liabilities.

The interest earning assets include investment securities and loans that are exempt from income tax, principally in Puerto Rico. 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 and assets held by the Corporation’s international banking entities. 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 period. The taxable

 

124


Table of Contents

equivalent computation considers the interest expense and other related expense disallowances required by the Puerto Rico tax law. Under this law, the exempt interest can be deducted up to the amount of taxable income. Net interest income on a taxable equivalent basis is a non-GAAP financial measure. Management believes that this presentation provides meaningful information since it facilitates the comparison of revenues arising from taxable and exempt sources.

Average outstanding securities balances are based on amortized cost excluding any unrealized gains or losses on securities available-for-sale. Non-accrual loans have been included in the respective average loans and leases categories. Loan fees collected and costs incurred in the origination of loans are deferred and amortized over the term of the loan as an adjustment to interest yield. Prepayment penalties, late fees collected and the amortization of premiums / discounts on purchased loans are also included as part of the loan yield. Interest income for the quarter ended March 31, 2016 included a favorable impact, excluding the discount accretion on covered loans accounted for under Subtopic ASC 310-30, of $4.8 million, related to those items, compared with a favorable impact of $1.6 million in the same period in 2015; the increase is driven by the amortizations related to Doral acquired loans.

Net interest margin, on a taxable equivalent basis, for the first quarter of 2016 was 4.70% compared to 4.85% in the same quarter of 2015, a decrease of 15 basis points. Net interest income increased by $9.7 million compared to the same quarter in the previous year. The main drivers of the increase in net interest income and decrease in net interest margin are:

Positive variances:

 

    Higher interest income from investment securities due mainly to higher volumes of mortgage backed securities as part of the Corporation’s investment strategy.

 

    Increase in interest income from loans excluding Westernbank Bank (WB) loans mostly related to the acquisition of Doral Bank in February 27, 2015 and higher volume of auto loans due to improved lending activity at Popular Auto.

These positive variances were partially offset by:

 

    Lower interest income from WB loans related to a lower volume as part of the normal portfolio run-off and lower yields, reflecting the impact on the quarterly recast process.

 

    Higher interest expense on deposits mainly due to higher average volumes also related to the Doral Bank acquisition and to fund U.S. loan growth, partially offset by a decrease in broker CDs. The increase in deposit cost is mostly related to a higher cost of time deposits and money markets in the U.S.

 

125


Table of Contents

Table 2—Analysis of Levels & Yields on a Taxable Equivalent Basis for Continuing Operations

Quarters ended March 31,

 

                                                          Variance  
Average Volume     Average Yields / Costs         Interest     Attributable to  
2016     2015     Variance     2016     2015     Variance         2016     2015     Variance     Rate     Volume  
($ in millions)                           (In thousands)  
$ 2,187      $ 1,930      $ 257        0.53     0.30     0.23  

Money market investments

  $ 2,863      $ 1,447      $ 1,416      $ 1,332      $ 84   
  6,641        5,637        1,004        2.90        2.67        0.23     

Investment securities

    48,117        37,643        10,474        175        10,299   
  123        200        (77     7.08        6.77        0.31     

Trading securities

    2,172        3,344        (1,172     176        (1,348

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  8,951        7,767        1,184        2.38        2.19        0.19     

Total money market, investment and trading securities

    53,152        42,434        10,718        1,683        9,035   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
           

Loans:

         
  8,957        8,383        574        5.12        5.17        (0.05  

Commercial

    114,091        106,887        7,204        (97     7,301   
  704        435        269        5.30        5.67        (0.37  

Construction

    9,288        6,076        3,212        (361     3,573   
  630        569        61        6.78        7.01        (0.23  

Leasing

    10,675        9,974        701        (339     1,040   
  6,830        6,733        97        5.50        5.35        0.15     

Mortgage

    93,895        90,042        3,853        2,543        1,310   
  3,807        3,845        (38     10.51        10.36        0.15     

Consumer

    99,520        98,249        1,271        1,786        (515

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  20,928        19,965        963        6.28        6.29        (0.01  

Sub-total loans

    327,469        311,228        16,241        3,532        12,709   
  2,058        2,540        (482     8.76        9.14        (0.38  

WB loans

    44,904        57,431        (12,527     (1,780     (10,747

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  22,986        22,505        481        6.50        6.62        (0.12  

Total loans

    372,373        368,659        3,714        1,752        1,962   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
$ 31,937      $ 30,272      $ 1,665        5.35     5.48     (0.13 )%   

Total earning assets

  $ 425,525      $ 411,093      $ 14,432      $ 3,435      $ 10,997   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
           

Interest bearing deposits:

         
$ 5,712      $ 4,983      $ 729        0.39     0.34     0.05  

NOW and money market [1]

  $ 5,607      $ 4,219      $ 1,388      $ 602      $ 786   
  7,275        6,892        383        0.23        0.23        —       

Savings

    4,248        3,924        324        43        281   
  8,058        7,747        311        1.00        0.93        0.07     

Time deposits

    20,019        17,721        2,298        1,081        1,217   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  21,045        19,622        1,423        0.57        0.53        0.04     

Total deposits

    29,874        25,864        4,010        1,726        2,284   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  812        1,114        (302     0.92        0.63        0.29     

Short-term borrowings

    1,861        1,734        127        767        (640
  1,629        1,763        (134     4.90        4.39        0.51     

Other medium and long-term debt

    19,873        19,281        592        1,551        (959

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  23,486        22,499        987        0.88        0.84        0.04     

Total interest bearing liabilities

    51,608        46,879        4,729        4,044        685   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  6,293        5,963        330           

Non-interest bearing demand deposits

         
  2,158        1,810        348           

Other sources of funds

         

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
$ 31,937      $ 30,272      $ 1,665        0.65     0.63     0.02  

Total source of funds

    51,608        46,879        4,729        4,044        685   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

             
        4.70     4.85     (0.15 )%   

Net interest margin

         
     

 

 

   

 

 

   

 

 

             
           

Net interest income on a taxable equivalent basis

    373,917        364,214        9,703      $ (609   $ 10,312   
        4.47     4.64     (0.17 )%   

Net interest spread

         
     

 

 

   

 

 

   

 

 

             
           

Taxable equivalent adjustment

    21,505        21,019        486       
           

Net interest income

  $ 352,412      $ 343,195      $ 9,217       
             

 

 

   

 

 

   

 

 

     

 

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.
[1] Includes interest bearing demand deposits corresponding to certain government entities in Puerto Rico.

 

126


Table of Contents

Provision for Loan Losses

The Corporation’s total provision for loan losses was $44.8 million for the quarter ended March 31, 2016, compared to $40.0 million for the same quarter of the previous year, an increase of $4.8 million.

The provision for loan losses for the non-covered loan portfolio totaled $47.9 million, compared to $29.7 million for the same quarter in 2015, increasing by $18.2 million. Net charge-offs increased by $6.6 million from the same quarter of the prior year.

The provision for loan losses for the non-covered loan portfolio at the BPPR segment increased by $12.0 million from the first quarter of 2015. Net charge-offs increased by $3.9 million from the same quarter of the prior year. In addition, the provision for the first quarter of 2016 includes $2.7 million related to commercial Westernbank loans previously covered under the shared loss agreement with the FDIC which expired on June 30, 2015.

The provision for loan losses for the BPNA segment was $4.1 million, compared to a $2.2 million reversal of provision during the same quarter in 2015. Credit trends for the BPNA segment continued stable with minimal net charge-offs. Provision increase was mainly driven by loan growth.

For the covered portfolio, the Corporation recorded a reserve release of $3.1 million in the first quarter of 2016, compared to $10.3 million provision expense for the same quarter in 2015, mostly reflective of the reclassification to non-covered loans of the non-single family loans that were previously covered by the commercial loss agreement with the FDIC during the second quarter of 2015, as mentioned above.

Refer to the Credit Risk Management and Loan Quality sections 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

Non-interest income was $111.6 million for the first quarter of 2016, a decrease of $3.6 million when compared with the same quarter of the previous year. Excluding the impact of the transactions detailed in the Adjusted Results Non-GAAP tables, non-interest income decreased by $2.5 million when compared to the previous year, driven primarily by the following:

 

    Unfavorable variance in FDIC loss share (expense) income of $7.3 million as a result of lower mirror accounting on reimbursable expenses and credit impairment losses, and an unfavorable change in the fair value of the true-up payment obligation, partially offset by lower amortization of the indemnification asset. Refer to Table 3 for a breakdown of FDIC loss share (expense) income by major categories.

 

    Lower income from mortgage banking activities by $2.3 million as a result of higher trading account loss due to higher realized losses on closed derivative positions and higher unfavorable fair value adjustments on mortgage servicing rights, partially offset by higher mortgage servicing fees, including those from the portfolio acquired from Doral Bank. Refer to Note 12 for details of mortgage banking activities.

These decreases were partially offset by:

 

    Favorable variance in other non-interest income by $7.1 million due to higher earnings from investments under the equity method.

 

127


Table of Contents

Table 3—Financial Information—Westernbank FDIC-Assisted Transaction

 

     Quarters ended March 31,  

(In thousands)

   2016      2015  

Interest income on WB loans

   $ 44,904       $ 57,431   
  

 

 

    

 

 

 

FDIC loss share (expense) income:

     

Amortization of loss share indemnification asset

     (4,042      (27,316

80% mirror accounting on credit impairment losses (reversal)[1]

     (2,093      8,246   

80% mirror accounting on reimbursable expenses

     3,950         21,545   

80% mirror accounting on recoveries on covered assets, including rental income on OREOs, subject to reimbursement to the FDIC

     (645      (2,619

Change in true-up payment obligation

     (443      4,164   

Other

     127         119   
  

 

 

    

 

 

 

Total FDIC loss share (expense) income

     (3,146      4,139   
  

 

 

    

 

 

 

Total revenues

     41,758         61,570   
  

 

 

    

 

 

 

Provision (reversal) for loan losses- WB loans

     (356      10,324   
  

 

 

    

 

 

 

Total revenues less provision (reversal) for loan losses

   $ 42,114       $ 51,246   
  

 

 

    

 

 

 

 

[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)

   2016      2015  

Loans

   $ 2,058       $ 2,540   

FDIC loss share asset

     233         429   

Operating Expenses

Operating expenses for the quarter ended March 31, 2016 decreased by $ 10.4 million when compared with the same quarter of 2015. Excluding the impact of certain transactions, as detailed in Tables 40 through 41, operating expenses increased by $10.4 million due mainly to the following factors:

 

    Higher personnel cost by $13.1 million due to the grant of employee restricted stock and performance shares awards during the quarter, higher salaries impacted by the higher headcount as a result of the Doral Bank Transaction, and higher pension cost due to changes in actuarial assumptions;

 

    Higher professional fees by $6.9 million, due to higher programming, application processing and hosting expenses including the impact of the enacted business-to-business sales tax in Puerto Rico;

 

    Higher other taxes by $1.6 million, as a result of higher municipal license tax;

 

    Higher equipment expenses by $1.1 million, principally due to higher software maintenance expense at BPPR; and

 

    Higher amortization of intangibles by $1.0 million, mainly due to the amortization of the customer relationship intangible of the Doral Insurance portfolio, which was acquired on May 2015.

These increases were partially offset by the following decreases:

 

    Lower other real estate owned expenses by $13.9 million, due to lower commercial and construction write-downs at BPPR.

 

128


Table of Contents

Table 4—Operating Expenses

 

     Quarters ended March 31,  

(In thousands)

   2016      2015      Variance  

Personnel costs:

        

Salaries

   $ 77,298       $ 72,394       $ 4,904   

Commissions, incentives and other bonuses

     20,769         18,458         2,311   

Pension, postretirement and medical insurance

     13,111         12,013         1,098   

Other personnel costs, including payroll taxes

     15,913         13,593         2,320   
  

 

 

    

 

 

    

 

 

 

Total personnel costs

     127,091         116,458         10,633   
  

 

 

    

 

 

    

 

 

 

Net occupancy expenses

     20,430         21,709         (1,279

Equipment expenses

     14,548         13,411         1,137   

Other taxes

     10,195         8,574         1,621   

Professional fees:

        

Collections, appraisals and other credit related fees

     4,500         5,923         (1,423

Programming, processing and other technology services

     49,864         45,161         4,703   

Other professional fees

     21,095         24,444         (3,349
  

 

 

    

 

 

    

 

 

 

Total professional fees

     75,459         75,528         (69
  

 

 

    

 

 

    

 

 

 

Communications

     6,320         6,176         144   

Business promotion

     11,110         10,813         297   

FDIC deposit insurance

     7,370         6,398         972   

Other real estate owned (OREO) expenses

     9,141         23,069         (13,928

Other operating expenses:

        

Credit and debit card processing, volume and interchange expenses

     5,722         4,821         901   

Transportation and travel

     1,449         1,739         (290

Printing and supplies

     624         819         (195

Operational losses

     2,661         3,249         (588

All other

     6,709         6,721         (12
  

 

 

    

 

 

    

 

 

 

Total other operating expenses

     17,165         17,349         (184
  

 

 

    

 

 

    

 

 

 

Amortization of intangibles

     3,114         2,104         1,010   

Restructuring Cost

     —           10,753         (10,753
  

 

 

    

 

 

    

 

 

 

Total operating expenses

   $ 301,943       $ 312,342       $ (10,399
  

 

 

    

 

 

    

 

 

 

INCOME TAXES

For the quarter ended March 31, 2016, the Corporation recorded an income tax expense of $32.3 million, compared to $32.6 million for the same quarter of the previous year. Adjusting for the tax effect of certain transactions detailed in Table 40, Non-GAAP results, the income tax expense for the first quarter of 2015 was of $35.5 million.

The effective income tax rate for the first quarter of 2016 was 28%, flat when compared to the same quarter of the previous year, on an adjusted basis. The effective tax rate is impacted by the composition and source of the taxable income. The increase in the income tax expense at the U.S. operations during the first quarter of 2016 was offset by a lower tax provision at the P.R. operations during such period. The Corporation is subject to a 39% statutory income tax rate in Puerto Rico. For the first quarter 2016, the effective tax rate was 28%, reflecting the impact of net exempt interest income and other items which reduce the rate. The impact of these was partially offset by an effective tax rate for the U.S. operations of approximately 47%.

Refer to Note 33 to the consolidated financial statements for a reconciliation of the statutory income tax rate to the effective tax rate and additional information on income taxes.

 

129


Table of Contents

REPORTABLE SEGMENT RESULTS

The Corporation’s reportable segments for managerial reporting purposes consist of Banco Popular de Puerto Rico and Banco Popular North America. These reportable segments pertain only to the continuing operations of Popular, Inc. As previously indicated in Note 4 to the consolidated financial statements, the regional operations in California, Illinois and Central Florida were classified as discontinued operations and sold during 2014.

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 35 to the consolidated financial statements.

The Corporate group reported a net loss of $20.6 million for the quarter ended March 31, 2016, compared with a net loss of $21.0 million for the quarter ended March 31, 2015.

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 $93.4 million for the quarter ended March 31, 2016, compared with a net income of $90.8 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 $1.3 million mostly due to:

 

    A decrease $12.5 million in income from the WB loans portfolio due to lower yields by 38 basis points and lower average balances by $481 million as part of the normal portfolio run-off and loan resolutions.

Partially offset by:

 

    An increase of $5.2 million in income from mortgage loans mostly due to higher average balances by $248 million, which benefited from the portfolio acquired as part of the Doral Bank Transaction; and

 

    Higher income from investment securities by $5.6 million mostly due to higher average balances by $979 million.

The net interest margin was 4.87% for the quarter ended March 31, 2016, compared to 5.00% for the same period in 2016.

 

    Provision for loan losses of $40.8 million, a decrease of $1.4 million, driven by a reserve release of $3.1 million in the covered loans portfolio, partially offset by higher provision for the non-covered loans portfolio;

 

    Lower non-interest income by $5.0 million mainly due to:

 

    Negative variance in FDIC loss share expense of $7.3 million due to lower mirror accounting, mainly on credit impairment losses and OREO losses, partially offset by lower amortization of the loss share asset; and

 

    Lower mortgage banking activities revenues by $2.4 million due to unfavorable variances of $3.6 million in the MSR valuation and $1.1 million in realized losses on closed derivative positions, partially offset by higher mortgage servicing fees by $2.6 million including those from the portfolio acquired from Doral Bank.

Partially offset by:

 

    Higher other operating income by $3.8 million mostly due to a favorable variance of $2.2 million in income from equity method investments and higher gains on sales of daily rental autos by $0.8 million; and

 

    Higher service charges on deposit accounts by $0.8 million mainly from retail banking customers.

 

130


Table of Contents
    Operating expenses were lower by $1.9 million mainly due to:

 

    OREO expenses favorable variance of $10.5 million as a result of lower write-downs on commercial and construction properties.

Partially offset by:

 

    Higher personnel costs by $6.8 million driven by a higher headcount impacted by the Doral Bank Transaction and higher pension costs due to changes in actuarial assumptions and higher savings plan contributions due to a higher headcount and an increase in employer matching contributions effective July 2015; and

 

    Higher equipment expenses by $1.8 million mostly due to higher software packages expense.

 

    Lower income tax expense by $5.6 million.

Banco Popular North America

For the quarter ended March 31, 2016, the reportable segment of Banco Popular North America reported net income of $11.9 million, compared to net income from continuing operations of $3.3 million for the same quarter of the previous year. The principal factors that contributed to the variance in the financial results included the following:

 

    Net interest income was $62.3 million, an increase of $10.2 million compared to the same quarter of the previous year. The net interest income improvement is mostly due to higher income from loans by $15.0 million, mainly commercial, construction and consumer, due to higher volumes by $1.0 billion which benefited from the loans acquired as part of the Doral Bank Transaction. This increase was partially offset by higher interest expense from deposits by $4.5 million due to higher average balances by $1.2 billion largely due to the deposits assumed as part of the Doral Bank Transaction. Net interest margin was 3.70% compared to 3.82% for the same quarter of the previous year;

 

    Provision for loan losses higher by $6.3 million mainly driven by loan growth;

 

    Lower non-interest income by $1.2 million, mostly due to lower other service fees by $0.4 million, mainly lower insurance and banking fees, and lower other operating income by $0.6 million mainly due to servicing income recognized in March 2015 as BPNA was servicing on an interim basis the loans sold to JC Flowers and Centennial Bank as part of the Doral Bank Transaction;

 

    Lower operating expenses by $13.4 million mainly due to restructuring costs of $10.8 million in the first quarter of 2015 and lower OREO expenses by $3.4 million mainly due lower write-downs of commercial OREO properties; and

 

    Unfavorable variance in income tax expense of $7.5 million since for the quarter ended March 31, 2015 the U.S. operations had a full valuation allowance on its deferred tax asset.

FINANCIAL CONDITION ANALYSIS

Assets

The Corporation’s total assets were $36.1 billion at March 31, 2016 compared to $35.8 billion at December 31, 2015. Refer to the consolidated financial statements included in this report for the Corporation’s consolidated statements of financial condition as of such dates.

Money market investments, trading and investment securities

Money market investments totaled $1.9 billion at March 31, 2016, compared to $2.2 billion at December 31, 2015. The decrease was mainly at BPNA by $212 million and at BPPR by $50 million and is mostly related to purchases of mortgage backed securities (“MBS”) as discussed below.

Trading account securities amounted to $71 million at March 31, 2016, relatively flat when compared to $72 million at December 31, 2015. Refer to the Market Risk section of this MD&A for a table that provides a breakdown of the trading portfolio by security type.

Investment securities available-for-sale and held-to-maturity amounted to $6.7 billion at March 31, 2016, compared with $6.2 billion at December 31, 2015. The increase of $585 million is mainly due to purchases of MBS at both BPPR and BPNA.

 

131


Table of Contents

Table 5 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 7 and 8 to the consolidated financial statements provide additional information with respect to the Corporation’s investment securities AFS and HTM. The portfolio of obligations of the Puerto Rico Government is mainly comprised of securities with specific sources of income or revenues identified for repayments.

Table 5—Breakdown of Investment Securities Available-for-Sale and Held-to-Maturity

 

(In thousands)

   March 31, 2016      December 31, 2015  

U.S. Treasury securities

   $ 1,323,352       $ 1,183,328   

Obligations of U.S. Government sponsored entities

     932,938         939,641   

Obligations of Puerto Rico, States and political subdivisions

     120,860         121,176   

Collateralized mortgage obligations

     1,513,657         1,560,923   

Mortgage-backed securities

     2,843,706         2,344,196   

Equity securities

     2,439         2,398   

Others

     12,094         12,233   
  

 

 

    

 

 

 

Total investment securities AFS and HTM

   $ 6,749,046       $ 6,163,895   
  

 

 

    

 

 

 

Loans

Refer to Table 6 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 separately in Table 6. The risks on covered loans are significantly different as a result of the loss protection provided by the FDIC. As of March 31, 2016, the Corporation’s covered loans portfolio amounted to $625 million, comprised mainly of residential mortgage loans.

Refer to Note 9 for detailed information about the Corporation’s loan portfolio composition and loan purchases and sales.

The Corporation’s total loan portfolio amounted to $23.3 billion at March 31, 2016, compared to $23.1 billion at December 31, 2015. The total loans portfolio increased by $129 million, mainly from commercial, construction and consumer loans at BPNA.

 

 

132


Table of Contents

Table 6—Loans Ending Balances

 

(In thousands)

   March 31, 2016      December 31, 2015      Variance  

Loans not covered under FDIC loss sharing agreements:

        

Commercial

   $ 10,228,389       $ 10,099,163       $ 129,226   

Construction

     734,858         681,106         53,752   

Legacy[1]

     61,044         64,436         (3,392

Lease financing

     643,142         627,650         15,492   

Mortgage

     6,979,201         7,036,081         (56,880

Consumer

     3,861,103         3,837,679         23,424   
  

 

 

    

 

 

    

 

 

 

Total non-covered loans held-in-portfolio

     22,507,737         22,346,115         161,622   
  

 

 

    

 

 

    

 

 

 

Loans covered under FDIC loss sharing agreements:

        

Mortgage

     606,711         627,102         (20,391

Consumer

     18,419         19,013         (594
  

 

 

    

 

 

    

 

 

 

Total covered loans held-in-portfolio

     625,130         646,115         (20,985
  

 

 

    

 

 

    

 

 

 

Total loans held-in-portfolio

     23,132,867         22,992,230         140,637   
  

 

 

    

 

 

    

 

 

 

Loans held-for-sale:

        

Commercial

     42,771         45,074         (2,303

Construction

     2         95         (93

Mortgage

     82,542         91,831         (9,289
  

 

 

    

 

 

    

 

 

 

Total loans held-for-sale

     125,315         137,000         (11,685
  

 

 

    

 

 

    

 

 

 

Total loans

   $ 23,258,182       $ 23,129,230       $ 128,952   
  

 

 

    

 

 

    

 

 

 

 

[1] 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 segment.

Non-covered loans

The non-covered loans held-in-portfolio increased by $162 million to $22.5 billion at March 31, 2016. The increase is mainly at BPNA by $207 million, driven by growth in the commercial, construction and consumer loan portfolios, which include consumer loan portfolio purchases of $86 million, partially offset by a decrease of $45 million at BPPR mainly due to lower originations of credit cards and residential mortgages.

The loans held-for-sale portfolio decreased by $12 million from December 31, 2015, mainly at BPPR due mostly to lower originations of mortgage loans held-for-sale.

Covered loans

The covered loans portfolio amounted to $625 million at March 31, 2016, compared to $646 million at December 31, 2015. The decrease of $21 million is mostly from residential mortgage loans due to loan resolutions and the normal portfolio run-off. Refer to Table 6 for a breakdown of the covered loans by major loan type categories.

Tables 7 and 8 provide the activity in the carrying amount and outstanding discount on the Westernbank loans accounted for under ASC 310-30. The outstanding accretable discount is impacted by increases in cash flow expectations on the loan pool 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.

 

133


Table of Contents

Table 7—Activity in the Carrying Amount of Westernbank Loans Accounted for Under ASC 310-30

 

     Quarters ended  
     March 31,  

(In thousands)

   2016      2015  

Beginning balance

   $ 1,974,501       $ 2,444,172   

Accretion

     43,533         55,697   

Collections / charge-offs

     (82,593      (132,773
  

 

 

    

 

 

 

Ending balance

   $ 1,935,441       $ 2,367,096   

Allowance for loan losses (ALLL)

     (62,967      (68,386
  

 

 

    

 

 

 

Ending balance, net of ALLL

   $ 1,872,474       $ 2,298,710   
  

 

 

    

 

 

 

Table 8—Activity in the Accretable Yield on Westernbank Loans Accounted for Under ASC 310-30

 

     Quarters ended March 31,  

(In thousands)

   2016      2015  

Beginning balance

   $ 1,112,458       $ 1,271,337   

Accretion [1]

     (43,533      (55,697

Change in expected cash flows

     59,883         43,308   
  

 

 

    

 

 

 

Ending balance

   $ 1,128,808       $ 1,258,948   
  

 

 

    

 

 

 

 

[1] Positive to earnings, which is included in interest income.

FDIC loss share asset

Table 9 sets forth the activity in the FDIC loss share asset for the quarters ended March 31, 2016 and 2015.

Table 9—Activity of Loss Share Asset

 

     Quarters ended March 31,  

(In thousands)

   2016      2015  

Balance at beginning of period

   $ 310,221       $ 542,454   

Amortization of loss share indemnification asset

     (4,042      (27,316

Credit impairment losses (reversal) to be covered under loss-sharing agreements

     (2,093      8,246   

Reimbursable expenses

     3,950         21,545   

Net payments from FDIC under loss-sharing agreements

     (88,588      (132,265

Other adjustments attributable to FDIC loss-sharing agreements

     —           (2,820
  

 

 

    

 

 

 

Balance at end of period

   $ 219,448       $ 409,844   
  

 

 

    

 

 

 

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 10 presents the activity associated with the outstanding balance of the FDIC loss share asset amortization (or negative discount) for the periods presented.

Table 10—Activity in the Remaining FDIC Loss Share Asset Discount

 

     Quarters ended March 31,  

(In thousands)

   2016      2015  

Balance at beginning of period[1]

   $ 26,100       $ 53,095   

Amortization of negative discount[2]

     (4,042      (27,316

Impact of lower projected losses

     3,147         12,908   
  

 

 

    

 

 

 

Balance at end of period

   $ 25,205       $ 38,687   
  

 

 

    

 

 

 

 

[1] Positive balance represents negative discount (debit to assets), while a negative balance represents a discount (credit to assets).
[2] Amortization results in a negative impact to non-interest income, while a positive balance results in a positive impact to non-interest income, particularly FDIC loss share income / expense.

 

134


Table of Contents

The Corporation revises its expected cash flows and estimated credit losses on a quarterly basis. The lowered loss estimates requires the Corporation to amortize the loss share asset to its currently lower expected collectible balance, thus resulting in negative accretion. Due to the shorter life of the indemnity asset compared with the expected life of the covered loans, this negative accretion temporarily offsets the benefit of higher cash flows accounted through the accretable yield on the loans.

Other real estate owned

Other real estate owned represents real estate property received in satisfaction of debt. At March 31, 2016, OREO increased to $202 million from $192 million at March 31, 2015 mainly at BPPR. Refer to Note 14 to the consolidated financial statements for the activity in other real estate owned. The amounts included as “covered other real estate” are subject to the FDIC loss sharing agreements.

Other assets

Refer to Note 15 for a breakdown of the principal categories that comprise the caption of “Other Assets” in the consolidated statements of financial condition at March 31, 2016 and December 31, 2015. Other assets decreased by $37 million from December 31, 2015 to March 31, 2016, due mostly to a decrease in the deferred tax asset of $27 million and prepaid taxes of $6 million.

Goodwill

Goodwill increased by $5 million from December 31, 2015 to March 31, 2016, due to a goodwill adjustment related to the Doral Bank Transaction. Refer to Note 16 to the consolidated financial statements for detailed information on the Corporation’s goodwill.

Liabilities

The Corporation’s total liabilities were $30.9 billion at March 31, 2016 compared to $30.7 billion at December 31, 2015. Refer to the Corporation’s consolidated statements of financial condition included in this Form 10-Q.

Deposits and Borrowings

The composition of the Corporation’s financing sources to total assets at March 31, 2016 and December 31, 2015 is included in Table 11.

Table 11—Financing to Total Assets

 

     March 31,      December 31,      % increase (decrease)     % of total assets  

(In millions)

   2016      2015      from 2015 to 2016     2016     2015  

Non-interest bearing deposits

   $ 6,384       $ 6,402         (0.3 )%      17.7     17.9

Interest-bearing core deposits

     16,281         15,641         4.1        45.0        43.7   

Other interest-bearing deposits

     4,862         5,167         (5.9     13.5        14.4   

Fed funds purchased and repurchase agreements

     760         762         (0.3     2.1        2.1   

Other short-term borrowings

     6         1         500.0        —          —     

Notes payable

     1,584         1,663         (4.8     4.4        4.7   

Other liabilities

     1,018         1,019         (0.1     2.8        2.9   

Liabilities from discontinued operations

     2         2         —          —          —     

Stockholders’ equity

     5,250         5,105         2.8        14.5        14.3   

 

135


Table of Contents

Deposits

The Corporation’s deposits totaled $27.5 billion at March 31, 2016 compared to $27.2 billion at December 31, 2015. The deposits increase of $317 million is mainly at BPPR by $189 million largely due to increases in government deposit accounts and at BPNA by $128 million mainly from money market accounts and time deposits growth offset by a decline in brokered CD’s. Refer to Table 12 for a breakdown of the Corporation’s deposits at March 31, 2016 and December 31, 2015.

Table 12—Deposits Ending Balances

 

(In thousands)

   March 31, 2016      December 31, 2015      Variance  

Demand deposits [1]

   $ 7,324,982       $ 7,221,238       $ 103,744   

Savings, NOW and money market deposits (non-brokered)

     11,940,103         11,440,693         499,410   

Savings, NOW and money market deposits (brokered)

     383,745         382,424         1,321   

Time deposits (non-brokered)

     7,348,132         7,274,157         73,975   

Time deposits (brokered CDs)

     529,631         891,211         (361,580
  

 

 

    

 

 

    

 

 

 

Total deposits

   $ 27,526,593       $ 27,209,723       $ 316,870   
  

 

 

    

 

 

    

 

 

 

 

[1] Includes interest and non-interest bearing demand deposits.

Borrowings

The Corporation’s borrowings amounted to $2.3 billion at March 31, 2016, compared to $2.4 billion at December 31, 2015. The decrease of $76 million is mainly due to maturities of advances from the Federal Home Loan Bank (“FHLB”). Refer to Note 18 to the consolidated financial statements for detailed information on the Corporation’s borrowings. Also, refer to the Liquidity section in this MD&A for additional information on the Corporation’s funding sources.

Stockholders’ Equity

Stockholders’ equity totaled $5.3 billion at March 31, 2016, compared with $5.1 billion at December 31, 2015. The increase resulted from the Corporation’s net income of $85 million, a favorable variance of $73 million in unrealized gains on securities available-for-sale, partially offset by payments of dividends of $15.5 million on common stock of $0.15 per share and $0.9 million in dividends on preferred stock. Refer to the consolidated statements of financial condition, comprehensive income and of changes in stockholders’ equity for information on the composition of stockholders’ equity.

REGULATORY CAPITAL

On January 1, 2015, the Corporation, BPPR and BPNA became subject to Basel III capital requirements, which include a revised minimum and well capitalized regulatory capital ratios and compliance with the standardized approach for determining risk-weighted assets. As of March 31, 2016, the Corporation continues to exceed the well-capitalized adequacy requirements promulgated by the U.S. federal bank regulatory agencies.

Basel III capital rules require the phase out of non-qualifying Tier 1 capital instruments such as trust preferred securities. At March 31, 2016, the Corporation had $427 million in trust preferred securities outstanding which no longer qualified for Tier 1 capital treatment, but instead qualify for Tier 2 capital treatment. At December 31, 2015, approximately $107 million of these trust preferred securities outstanding still qualified as Tier I capital.

As part of the adoption of Basel III Capital Rules, the Corporation, as well as its banking subsidiaries, made the one-time permanent election to exclude the effects on regulatory capital computations of certain accumulated other comprehensive income (loss) (“AOCI”) items as permitted under the Basel III capital rules.

 

136


Table of Contents

Risk-based capital ratios presented in Table 13, which include common equity tier 1, Tier 1 capital, total capital and leverage capital as of March 31, 2016, are calculated based on the Basel III regulatory guidance related to the measurement of capital, risk-weighted assets and average assets.

Table 13—Capital Adequacy Data

 

(Dollars in thousands)

  March 31, 2016     December 31, 2015  

Common equity tier 1 capital:

   

Common stockholders equity—GAAP basis

  $ 5,200,140      $ 5,055,164   

AOCI related adjustments due to opt-out election

    145,115        220,956   

Goodwill, net of associated deferred tax liability (DTL)

    (566,284     (564,323

Intangible assets, net of associated DTLs

    (31,080     (22,222

Deferred tax assets and other deductions

    (794,966     (639,999
 

 

 

   

 

 

 

Common equity tier 1 capital

  $ 3,952,925      $ 4,049,576   
 

 

 

   

 

 

 

Additional tier 1 capital:

   

Preferred stock

    50,160        50,160   

Trust preferred securities subject to phase out of additional tier 1

    —          106,650   

Other additional tier 1 capital deductions

    (50,160     (156,810
 

 

 

   

 

 

 

Tier 1 capital

  $ 3,952,925      $ 4,049,576   
 

 

 

   

 

 

 

Tier 2 capital:

   

Trust preferred securities subject to phase in as tier 2

    426,602        319,952   

Other inclusions (deductions), net

    322,511        322,881   
 

 

 

   

 

 

 

Tier 2 capital

  $ 749,113      $ 642,833   
 

 

 

   

 

 

 

Total risk-based capital

  $ 4,702,038      $ 4,692,409   
 

 

 

   

 

 

 

Minimum total capital requirement to be well capitalized

  $ 2,504,106      $ 2,498,714   
 

 

 

   

 

 

 

Excess total capital over minimum well capitalized

  $ 2,197,932      $ 2,193,695   
 

 

 

   

 

 

 

Total risk-weighted assets

  $ 25,041,059      $ 24,987,144   
 

 

 

   

 

 

 

Total assets for leverage ratio

  $ 34,508,214      $ 34,253,625   
 

 

 

   

 

 

 

Risk-based capital ratios:

   

Common equity tier 1 capital

    15.79     16.21

Tier 1 capital

    15.79        16.21   

Total capital

    18.78        18.78   

Tier 1 leverage

    11.46        11.82   

The Basel III Capital Rules provide that a depository institution will be deemed to be well capitalized if it maintains a leverage ratio of at least 5%, a common equity Tier 1 ratio of at least 6.5%, a Tier 1 capital ratio of at least 8% and a total risk-based ratio of at least 10%. Management has determined that as of March 31, 2016, the Corporation, BPPR and BPNA were well-capitalized under Basel III Capital Rules.

The reduction in the common equity tier I capital ratio, tier I capital ratio and the leverage ratios on March 31, 2016 as compared to December 31, 2015 was mostly due to the complete phase out of the trust preferred securities which at December 31, 2015 allowed approximately $107 million to be included as tier I capital. Total capital ratio was not impacted by the phase out of the trust preferred securities since they qualified as tier 2 capital and therefore included as part of the total capital ratio.

Non-GAAP financial measures

The tangible common equity ratio, tangible assets 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

 

137


Table of Contents

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 as of March 31, 2016, and December 31, 2015.

Table 14—Reconciliation of Tangible Common Equity and Tangible Assets

 

(In thousands, except share or per share information)

   March 31, 2016     December 31, 2015  

Total stockholders’ equity

   $ 5,250,300      $ 5,105,324   

Less: Preferred stock

     (50,160     (50,160

Less: Goodwill

     (631,095     (626,388

Less: Other intangibles

     (54,080     (58,109
  

 

 

   

 

 

 

Total tangible common equity

   $ 4,514,965      $ 4,370,667   
  

 

 

   

 

 

 

Total assets

   $ 36,147,009      $ 35,761,733   

Less: Goodwill

     (631,095     (626,388

Less: Other intangibles

     (54,080     (58,109
  

 

 

   

 

 

 

Total tangible assets

   $ 35,461,834      $ 35,077,236   
  

 

 

   

 

 

 

Tangible common equity to tangible assets

     12.73     12.46

Common shares outstanding at end of period

     103,670,005        103,618,976   

Tangible book value per common share

   $ 43.55      $ 42.18   
  

 

 

   

 

 

 

OFF-BALANCE SHEET ARRANGEMENTS AND OTHER COMMITMENTS

In the ordinary course of business, the Corporation engages in financial transactions that are not recorded on the balance sheet, or may be recorded on the balance sheet in amounts that are different than the full contract or notional amount of the transaction. As a provider of financial services, the Corporation routinely enters into commitments with off-balance sheet risk to meet the financial needs of its customers. These commitments may include loan commitments and standby letters of credit. These commitments are subject to the same credit policies and approval process used for on-balance sheet instruments. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the statement of financial position. Other types of off-balance sheet arrangements that the Corporation enters in the ordinary course of business include derivatives, operating leases and provision of guarantees, indemnifications, and representation and warranties. Refer to Note 22 for a detailed discussion related to the Corporation’s obligations under credit recourse and representation and warranties arrangements.

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, 2016, 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. Purchase obligations amounted to $192 million at March 31, 2016 of which approximately 70% mature in 2016, 15% in 2017, 7% in 2018 and 8% thereafter.

 

138


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.

Refer to Note 18 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.

Table 15 presents the contractual amounts related to the Corporation’s off-balance sheet lending and other activities at March 31, 2016.

Table 15—Off-Balance Sheet Lending and Other Activities

 

     Amount of commitment—Expiration Period  

(In millions)

   Remaining
2016
     Years 2017 -
2018
     Years 2019 -
2020
     Years 2021 -
thereafter
     Total  

Commitments to extend credit

   $ 6,389       $ 990       $ 80       $ 74       $ 7,533   

Commercial letters of credit

     2         —           —           —           2   

Standby letters of credit

     21         15         —           —           36   

Commitments to originate or fund mortgage loans

     19         6         —           —           25   

Unfunded investment obligations

     9         —           —           —           9   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,440       $ 1,011       $ 80       $ 74       $ 7,605   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At March 31, 2016 and December 31, 2015, the Corporation maintained a reserve of approximately $10 million for probable losses associated with unfunded loan commitments related to commercial and consumer lines of credit. The estimated reserve is principally based on the expected draws on these facilities using historical trends and the application of the corresponding reserve factors determined under the 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 23 to the consolidated financial statements for additional information on credit commitments and contingencies.

MARKET RISK

The financial results and capital levels of the Corporation are constantly exposed to market risk. Market risk represents the risk of loss due to adverse movements in market rates or financial asset prices, which include interest rates, foreign exchange rates, and bond and equity security 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.

 

139


Table of Contents

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 mostly on a weekly basis and reviews the Corporation’s current and forecasted asset and liability levels as well as desired pricing strategies and other relevant financial management and interest rate and risks topics. Also, on a monthly basis the ALCO reviews various interest rate risk sensitivity metrics, 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. Management utilizes various tools to assess IRR, including simulation modeling, static gap analysis, and Economic Value of Equity (“EVE”). The three methodologies complement each other and are used jointly in the evaluation of the Corporation’s IRR. Simulation modeling is prepared for a five year period, which in conjunction with the EVE analysis, provides Management a better view of long term IRR.

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 is performed under a static balance sheet assumption, and the Corporation also runs scenarios that incorporate 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 by comparing various net interest income simulations under different interest rate scenarios that differ in direction of interest rate changes, the degree of change over time, the speed of change and the projected shape of the yield curve. For example, the types of rate scenarios processed during the year included economic most likely scenarios, flat rates, yield curve twists, parallel ramps and parallel shocks. Management also performs analyses to isolate and measure basis and prepayment risk exposures.

The asset and liability management group performs validation procedures on various assumptions used as part of the sensitivity analysis as well as validations of results on a monthly basis. In addition, the model and processes used to assess IRR are subject to third-party validations according to the guidelines established in the Model Governance and Validation policy. 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. 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.

The Corporation processes net interest income simulations under interest rate scenarios in which the yield curve is assumed to rise and decline instantaneously by the same amount. The rising rate scenarios considered in these market risk simulations reflect parallel changes of 200 and 400 basis points during the twelve-month period ending March 31, 2017. Under a 200 basis points rising rate scenario, 2016 projected net interest income increases by $96 million, while under a 400 basis points rising rate scenario, 2016 projected net interest income increases by $188 million. These scenarios were compared against the Corporation’s flat or unchanged interest rates forecast scenario. Simulation analyses are based on many assumptions, including relative levels of market interest rates, interest rate spreads, loan prepayments and deposit decay. Thus, they should not be relied upon as indicative of actual results. 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 shock scenarios consist of a +/- 200 and 400 basis point parallel shocks. Management has defined limits for the increases/decreases in EVE sensitivity resulting from the shock scenarios.

 

140


Table of Contents

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.

The Corporation’s loan and investment portfolios are subject to prepayment risk, which results from the ability of a third-party to repay debt obligations prior to maturity. Prepayment risk also could have a significant impact on the duration of mortgage-backed securities and collateralized mortgage obligations, since prepayments could shorten (or lower prepayments could extend) the weighted average life of these portfolios.

Trading

The Corporation engages in trading activities in the ordinary course of business at its subsidiaries, Banco Popular de Puerto Rico (“BPPR”) and Popular Securities. Popular Securities’ trading activities consist primarily of market-making activities to meet expected customers’ needs related to its retail securities 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. BPPR’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, BPPR uses forward contracts or TBAs to hedge its securitization pipeline. Risks related to variations in interest rates and market volatility is hedged with TBAs that have characteristics similar to that of the forecasted security and its conversion timeline.

At March 31, 2016, the Corporation held trading securities with a fair value of $71 million, representing approximately 0.2% of the Corporation’s total assets, compared with $72 million and 0.2% at December 31, 2015. As shown in Table 16, the trading portfolio consists principally of mortgage-backed securities relating to BPPR’s mortgage activities described above, which at March 31, 2016 were investment grade securities. As of March 31, 2016, the trading portfolio also included $5.7 million in Puerto Rico government obligations and shares of Closed-end funds that invest primarily in Puerto Rico government obligations (December 31, 2015—$6.0 million). 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 $162 thousand for the quarter ended March 31, 2016 and a trading account gain of $414 thousand for the quarter ended March 31, 2015.

Table 16—Trading Portfolio

 

     March 31, 2016     December 31, 2015  

(Dollars in thousands)

   Amount      Weighted
Average Yield [1]
    Amount      Weighted
Average Yield [1]
 

Mortgage-backed securities

   $ 52,113         5.07   $ 51,155         5.22

Collateralized mortgage obligations

     2,000         5.03        2,054         5.06   

Puerto Rico government obligations

     4,307         5.41        4,590         5.41   

Interest-only strips

     663         12.15        687         12.10   

Other

     12,201         2.03        13,173         3.31   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 71,284         4.63   $ 71,659         4.94
  

 

 

    

 

 

   

 

 

    

 

 

 

 

[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.

The Corporation’s trading portfolio had a 5-day VAR of approximately $0.5 million for the last week in March 2016. 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.

 

141


Table of Contents

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 fair value of assets and liabilities may include market or credit related adjustments, where appropriate. During the quarter ended March 31, 2016, inclusion of credit risk in the fair value of the derivatives resulted in a net gain of $34 thousand recorded in the other operating income and interest expense captions of the consolidated statement of operations, which consisted of a loss of $8 thousand resulting from the Corporation’s own credit standing adjustment and a gain of $42 thousand from the assessment of the counterparties’ credit risk.

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 26 to the consolidated financial statements for information on the Corporation’s fair value measurement required by the applicable accounting standard. At March 31, 2016, approximately $ 6.7 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.

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 $ 16 million at March 31, 2016, of which $ 7 million were Level 3 assets and $ 9 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.

Refer to Note 34 to the consolidated financial statements in the 2015 Form 10-K for a description of the Corporation’s valuation methodologies used for the assets and liabilities measured at fair value. Also, refer to the Critical Accounting Policies / Estimates in the 2015 Form 10-K for additional information on the accounting guidance and the Corporation’s policies or procedures related to fair value measurements.

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, 2016, 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. In addition, during the quarter ended March 31, 2016 the Corporation did not adjust any prices obtained from pricing service providers or broker dealers for its trading account securities and investment securities available-for-sale.

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.

 

142


Table of Contents

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 fair value hierarchy for each asset or liability measured. The fair value measurement analysis performed by the Corporation includes validation procedures with alternate pricing sources when available and review of market changes, pricing methodology, assumption and level hierarchy changes, and evaluation of distressed transactions. 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.

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. The Board is responsible for establishing the Corporation’s tolerance for liquidity risk, including approving relevant risk limits and policies. The Board has delegated the monitoring of these risks to the RMC and the ALCO. The management of liquidity risk, on a long-term and day-to-day basis, is the responsibility of the Corporate Treasury Division. The Corporation’s Corporate Treasurer is responsible for implementing the policies and procedures approved by the Board and for monitoring the Corporation’s liquidity position on an ongoing basis. Also, the Corporate Treasury Division coordinates corporate wide liquidity management strategies and activities with the reportable segments, oversees policy breaches and manages the escalation process. The Financial and Operational Risk Management Division is responsible for the independent monitoring and reporting of adherence with established policies.

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. Factors that the Corporation does not control, such as the economic outlook, adverse ratings of its principal markets and regulatory changes, could also affect its ability to obtain funding.

Liquidity is managed by the Corporation at the level of the holding companies that own the banking and non-banking subsidiaries. It is also 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 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.

A cash dividend of $0.15 per share was paid on April 1, 2016 to shareholders of record at the close of business on March 11, 2016. This represents a quarterly payout of approximately $15.5 million.

As discussed in Note 5—Business Combinations, on February 27, 2015 the Corporation acquired certain assets and all deposits (except brokered deposits) from Doral Bank. This included approximately $ 1.5 billion in loans, approximately $ 173 million in securities available for sale and $ 2.2 billion in deposits.

Deposits, including customer deposits, brokered deposits and public funds deposits, continue to be the most significant source of funds for the Corporation, funding 76% of the Corporation’s total assets at March 31, 2016 and December 31, 2015. The ratio of total ending loans to deposits was 84% at March 31, 2016, compared to 85% at December 31, 2015. In addition to traditional deposits, the Corporation maintains borrowing arrangements. At March 31, 2016, these borrowings consisted primarily of $ 710 million in assets sold under agreement to repurchase, $682 million in advances with the FHLB, $439 million in junior subordinated deferrable interest debentures (net of debt issuance cost) related to trust preferred securities and $ 443 million in term notes (net of debt issuance cost) issued to partially fund the repayment of TARP funds. A detailed description of the Corporation’s borrowings, including their terms, is included in Note 18 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.

The following sections provide further information on the Corporation’s major funding activities and needs, as well as the risks involved in these activities. A detailed description of the Corporation’s borrowings and available lines of credit, including its terms, is included in Note 18 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.

 

143


Table of Contents

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, 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.

During the quarter ended March 31, 2016, BPPR declared a cash dividend of $19.7 million, a portion of which was used by Popular, Inc. for the payment of the cash dividend on its outstanding common stock made on April 1, 2016, as mentioned above.

Note 36 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.

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 potential 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. Core deposits include all non-interest bearing deposits, savings deposits and certificates of deposit under $100,000, excluding 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 $ 22.7 billion, or 82% of total deposits, at March 31, 2016, compared with $22.0 billion, or 81% of total deposits, at December 31, 2015. Core deposits financed 70 % of the Corporation’s earning assets at March 31, 2016, compared with 69% at December 31, 2015.

Certificates of deposit with denominations of $100,000 and over at March 31, 2016 totaled $4.1 billion, or 15% of total deposits (December 31, 2015—$4.2 billion, or 15% of total deposits). Their distribution by maturity at March 31, 2016 is presented in the table that follows:

Table 17—Distribution by Maturity of Certificate of Deposits of $100,000 and Over

 

(In thousands)

      

3 months or less

   $ 1,528,149   

3 to 6 months

     485,079   

6 to 12 months

     753,089   

Over 12 months

     1,313,418   
  

 

 

 

Total

   $ 4,079,735   
  

 

 

 

At March 31, 2016 approximately 3 % of the Corporation’s assets were financed by brokered deposits, as compared to 4% at December 31, 2015. The Corporation had $ 0.9 billion in brokered deposits at March 31, 2016, compared with $1.3 billion at December 31, 2015. In the event that any of the Corporation’s banking subsidiaries’ regulatory capital ratios fall below those

 

144


Table of Contents

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, 2016 and December 31, 2015, the banking subsidiaries had credit facilities authorized with the FHLB aggregating to $4.1 billion and $3.9 billion, respectively, based on assets pledged with the FHLB at those dates. Outstanding borrowings under these credit facilities totaled $682 million at March 31, 2016 and $762 million at December 31, 2015. Such advances are collateralized by loans held-in-portfolio, do not have restrictive covenants and do not have any callable features. At March 31, 2016 the credit facilities authorized with the FHLB were collateralized by $5.0 billion in loans held-in-portfolio, compared with $4.7 billion at December 31, 2015. Refer to Note 18 to the consolidated financial statements for additional information on the terms of FHLB advances outstanding.

At March 31, 2016 and December 31, 2015, the Corporation’s borrowing capacity at the Fed’s Discount Window amounted to approximately $1.3 billion which remained unused as of both dates. This facility is a collateralized source of credit that is highly reliable even under difficult market conditions. The amount available under this borrowing facility is dependent upon the balance of performing loans, securities pledged as collateral and the haircuts assigned to such collateral. At March 31, 2016 and December 31, 2015, this credit facility with the Fed was collateralized by $2.5 billion in loans held-in-portfolio.

At March 31, 2016, 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 deteriorate. 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 financing needs 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 market changes, 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 meet its future growth, revenues may not increase proportionately to cover costs. In this case, profitability would be adversely affected.

Westernbank FDIC-assisted Transaction and Impact on Liquidity

The effects of the loss sharing agreements on cash flows and operating results will depend primarily on the ability of the borrowers whose loans are covered by the loss sharing agreements to make payments over time and our ability to receive reimbursements for losses from the FDIC. As the loss sharing agreements are in effect for a period of ten years for one-to-four family loans and five years for commercial, construction and consumer loans (with periods commencing on April 30, 2010), changing economic conditions will likely impact the timing of future charge-offs and the resulting reimbursements from the FDIC. Management believes that any recapture of interest income and recognition of cash flows from the borrowers or received from the FDIC on the claims filed may be recognized unevenly over this period, as management exhausts its collection efforts under the Corporation’s normal practices.

BPPR’s liquidity may also be impacted by the loan payment performance and timing of claims made and receipt of reimbursements under the FDIC loss sharing agreements. Please refer to the Legal Proceedings section of Note 23 to the consolidated financial statements and to Part II, Item 1A- Risk factors herein for a discussion of the settlement of a contractual dispute between BPPR and the FDIC which has impacted the timing of the payment of claims under the loss share agreements.

Bank Holding Companies

The principal sources of funding for the holding companies include cash on hand, investment securities, dividends received from banking and non-banking subsidiaries (subject to regulatory limits and authorizations) asset sales, credit facilities available from affiliate banking subsidiaries and proceeds from potential securities offerings.

 

145


Table of Contents

The principal use of these funds include the repayment of debt, and interest payments to holders of senior debt and junior subordinated deferrable interest (related to trust preferred securities) and capitalizing its banking subsidiaries.

During quarter ended March 31, 2016, PIHC received $19.7 million in dividends from BPPR and $ 1.2 million in dividends from EVERTEC’s parent company. PIHC also received $10.0 million in dividends from its non-banking subsidiaries.

Another use of liquidity at the parent holding company is the payment of dividends on its outstanding stock. A cash dividend of $0.15 per share was paid on April 1, 2016 to shareholders of record at the close of business on March 11, 2016. This represents a quarterly payout of approximately $15.5 million. The dividends for the Corporation’s Series A and Series B preferred stock amounted to $0.9 million for the quarter ended March 31, 2016.

The BHC’s have in the past borrowed in the money markets and in the corporate debt market primarily to finance their non-banking subsidiaries, however, the cash needs of the Corporation’s non-banking subsidiaries other than to repay indebtedness and interest are now minimal. These sources of funding have become more costly due to the reductions in the Corporation’s credit ratings. The Corporation’s principal credit ratings are below “investment grade” which affects the Corporation’s ability to raise funds in the capital markets. The Corporation has an automatic shelf registration statement filed and effective with the Securities and Exchange Commission, which permits the Corporation to issue an unspecified amount of debt or equity securities.

Note 36 to the consolidated financial statements provides a statement of condition, of operations and of cash flows for the two BHC’s. The loans held-in-portfolio in such financial statements is principally associated with intercompany transactions.

The outstanding balance of notes payable at the BHC’s amounted to $883 million at March 31, 2016 and $882 million at December 31, 2015, net of debt issuance cost. The repayment of the BHC’s obligations represents a potential cash need which is expected to be met with a combination of internal liquidity resources stemming mainly from future dividend receipts and new borrowings.

The contractual maturities of the BHC’s notes payable at March 31, 2016 are presented in Table 18.

Table 18 —Distribution of BHC’s Notes Payable by Contractual Maturity

 

Year

   (In thousands)  

2016

   $ —     

2017

     —     

2018

     —     

2019

     443,224   

2020

     —     

Later years

     439,304   
  

 

 

 

Total

   $ 882,528   
  

 

 

 

As indicated previously, the BHC did not issue new registered debt in the capital markets during the quarter ended March 31, 2016.

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.

Non-banking subsidiaries

The principal sources of funding for the non-banking subsidiaries include internally generated cash flows from operations, loan sales, repurchase agreements, and borrowed funds from their direct parent companies or the holding companies. The principal uses of funds for the non-banking subsidiaries include repayment of maturing debt, operational expenses and payment of dividends to the BHCs. The liquidity needs of the non-banking subsidiaries are minimal since most of them are funded internally from operating cash flows or from intercompany borrowings from their holding companies, BPPR or BPNA.

Other Funding Sources and Capital

The investment securities portfolio provides an additional source of liquidity, which may be realized through either securities sales or repurchase agreements. The Corporation’s investment securities portfolio consists primarily of liquid U.S. government investment securities, sponsored U.S. agency securities, government sponsored mortgage-backed securities, and collateralized mortgage obligations that can be used to raise funds in the repo markets. The availability of the repurchase agreement would be subject to having sufficient unpledged collateral available at the time the transactions are to be consummated, in addition to overall liquidity

 

146


Table of Contents

and risk appetite of the various counterparties. The Corporation’s unpledged investment and trading securities, excluding other investment securities, amounted to $3.8 billion at March 31, 2016 and $3.0 billion at December 31, 2015. A substantial portion of these securities could be used to raise financing quickly in the U.S. money markets or from secured lending sources.

Additional liquidity may be provided through loan maturities, prepayments and sales. The loan portfolio can also be used to obtain funding in the capital markets. In particular, mortgage loans and some types of consumer loans, have secondary markets which the Corporation could use.

Risks to Liquidity

Total lines of credit outstanding are not necessarily a measure of the total credit available on a continuing basis. Some of these lines could be subject to collateral requirements, standards of creditworthiness, leverage ratios and other regulatory requirements, among other factors. Derivatives, such as those embedded in long-term repurchase transactions or interest rate swaps, and off-balance sheet exposures, such as recourse, performance bonds or credit card arrangements, are subject to collateral requirements. As their fair value increases, the collateral requirements may increase, thereby reducing the balance of unpledged securities.

The importance of the Puerto Rico market for the Corporation is an additional risk factor that could affect its financing activities. In the case of a deterioration in economic conditions in Puerto Rico, the credit quality of the Corporation could be affected and result in higher credit costs. The Puerto Rico economy continues to face various challenges, including significant pressures in some sectors of the residential real estate market. Refer to the Geographic and Government Risk section of this MD&A for some highlights on the current status of the Puerto Rico economy.

Factors that the Corporation does not control, such as the economic outlook and credit ratings of its principal markets and regulatory changes, could also affect its ability to obtain funding. In order to prepare for the possibility of such scenario, management has adopted contingency plans for raising financing under stress scenarios when important sources of funds that are usually fully available are temporarily unavailable. These plans call for using alternate funding mechanisms, such as the pledging of certain asset classes and accessing secured credit lines and loan facilities put in place with the FHLB and the Fed.

The credit ratings of Popular’s debt obligations are a relevant factor for liquidity because they impact the Corporation’s ability to borrow in the capital markets, its cost and access to funding sources. Credit ratings are based on the financial strength, credit quality and concentrations in the loan portfolio, the level and volatility of earnings, capital adequacy, the quality of management, the liquidity of the balance sheet, the availability of a significant base of core retail and commercial deposits, and the Corporation’s ability to access a broad array of wholesale funding sources, among other factors.

The Corporation’s banking subsidiaries have historically not used unsecured capital market borrowings to finance its operations, and therefore are less sensitive to the level and changes in the Corporation’s overall credit ratings. At the BHCs, the volume of capital market borrowings has declined substantially, as the non-banking lending businesses that it had historically funded have been shut down and the need to raise unsecured senior debt has been substantially reduced.

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 $20 million in deposits at March 31, 2016 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 $3 million at March 31, 2016, with the Corporation providing collateral totaling $10 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. In the event of a credit rating downgrade, 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 Note 22 to the consolidated financial statements, 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 amounted to approximately $76 million at March 31, 2016. 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.

 

147


Table of Contents

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 19.

On June 30, 2015, the shared-loss arrangement under the commercial loss share agreement with the FDIC related to the loans acquired from Westernbank as part of the FDIC assisted transaction in 2010 expired. Loans and OREO’s that remain covered under the terms of the single-family loss share agreement continue to be presented as covered assets in the accompanying tables and credit metrics as of March 31, 2016.

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. The Corporation believes the inclusion of these loans in certain asset quality ratios in the numerator or denominator (or both) would result in a 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 the single-family loan portfolios which includes 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.

Despite challenging economic and fiscal conditions in Puerto Rico, non-performing assets remained stable during the first quarter of 2016. Total non-performing assets, including covered assets, were $848 million at March 31, 2016, increasing by $5 million, or 1%, from December 31, 2015, of which $11 million were related to higher BPPR residential OREOs. Non-covered non-performing loans held-in-portfolio decreased by $2 million when compared to December 31, 2015, mainly driven by lower mortgage non-performing loans of $17 million, offset by higher commercial non-performing loans of $16 million. Mortgage decrease was mostly driven by improvements in the BPPR mortgage portfolio due to the improved collection efforts. This decrease was offset in part by an increase in commercial NPLs driven by a single $11 million borrower in the BPNA segment. At March 31, 2016, NPLs to total loans held-in-portfolio remained flat at 2.7% from December 31, 2015.

At March 31, 2016, non-performing loans secured by real estate held-in-portfolio, excluding covered loans, amounted to $495 million in the Puerto Rico operations and $33 million in the U.S. operations. These figures compare to $504 million in the Puerto Rico operations and $22 million in the U.S. operations at December 31, 2015. In addition to the non-performing loans included in Table 19, at March 31, 2016, there were $162 million of non-covered performing loans, mostly commercial loans, which in management’s opinion, are currently subject to potential future classification as non-performing and are considered impaired, compared with $160 million at December 31, 2015.

 

148


Table of Contents

Table 19—Non-Performing Assets

 

(Dollars in thousands)

   March 31,
2016
    As a % of loans
HIP by
category [4]
    December 31,
2015
    As a % of loans
HIP by
category [4]
 

Commercial

   $ 197,631        1.9   $ 181,816        1.8

Construction

     3,941        0.5        3,550        0.5   

Legacy[1]

     4,046        6.6        3,649        5.7   

Leasing

     3,419        0.5        3,009        0.5   

Mortgage

     334,907        4.8        351,471        5.0   

Consumer

     55,582        1.4        58,304        1.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-performing loans held-in- portfolio, excluding covered loans

     599,526        2.7     601,799        2.7

Non-performing loans held-for-sale [2]

     42,743          45,169     

Other real estate owned (“OREO”), excluding covered OREO

     165,960          155,231     
  

 

 

     

 

 

   

Total non-performing assets, excluding covered assets

   $ 808,229        $ 802,199     

Covered loans and OREO [3]

     39,916          40,571     
  

 

 

     

 

 

   

Total non-performing assets

   $ 848,145        $ 842,770     
  

 

 

     

 

 

   

Accruing loans past due 90 days or more[5] [6]

   $ 426,437        $ 446,725     
  

 

 

     

 

 

   

Ratios excluding covered loans:[7]

        

Non-performing loans held-in-portfolio to loans held-in-portfolio

     2.66       2.69  

Allowance for loan losses to loans held-in-portfolio

     2.26          2.25     

Allowance for loan losses to non-performing loans, excluding held-for-sale

     84.80          83.57     
  

 

 

     

 

 

   

Ratios including covered loans:

        

Non-performing assets to total assets

     2.35       2.36  

Non-performing loans held-in-portfolio to loans held-in-portfolio

     2.61          2.63     

Allowance for loan losses to loans held-in-portfolio

     2.33          2.34     

Allowance for loan losses to non-performing loans, excluding held-for-sale

     89.29          88.68     
  

 

 

     

 

 

   

HIP = “held-in-portfolio”

[1] 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 segment.
[2] Non-performing loans held-for-sale consist $42.7 million in commercial loans and $2 thousand in construction loans as of March 31, 2016 (December 31, 2015—$45 million in commercial loans and $95 thousand in construction loans).
[3] The amount consists of $4 million in non-performing covered loans accounted for under ASC Subtopic 310-20 and $36 million in covered OREO as of March 31, 2016 (December 31, 2015—$4 million and $37 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.
[4] Loans held-in-portfolio used in the computation exclude $625 million in covered loans at March 31, 2016 (December 31, 2015—$646 million).
[5] The carrying value of loans accounted for under ASC Sub-topic 310-30 that are contractually 90 days or more past due was $364 million at March 31, 2016 (December 31, 2015—$349 million). This amount is excluded from the above table as the loans’ accretable yield interest recognition is independent from the underlying contractual loan delinquency status.
[6] It is the Corporation’s policy to report delinquent residential mortgage loans insured by FHA or guaranteed by the VA as accruing loans past due 90 days or more as opposed to non-performing since the principal repayment is insured. These balances include $161 million of residential mortgage loans insured by FHA or guaranteed by the VA that are no longer accruing interest as of March 31, 2016 (December 31, 2015—$164 million). Furthermore, the Corporation has approximately $68 million in reverse mortgage loans which are guaranteed by FHA, but which are currently not accruing interest. Due to the guaranteed nature of the loans, it is the Corporation’s policy to exclude these balances from non-performing assets (December 31, 2015—$70 million).
[7] 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.

 

149


Table of Contents

Table 20—Activity in Non-Performing Loans Held-in-Portfolio (Excluding Consumer and Covered Loans)

 

     For the quarter ended March 31, 2016  

(Dollars in thousands)

   BPPR      BPNA      Popular, Inc.  

Beginning balance

   $ 519,385       $ 21,101       $ 540,486   

Plus:

        

New non-performing loans

     100,543         23,259         123,802   

Advances on existing non-performing loans

     —           3         3   

Less:

        

Non-performing loans transferred to OREO

     (10,633      —           (10,633

Non-performing loans charged-off

     (15,948      (657      (16,605

Loans returned to accrual status / loan collections

     (84,600      (11,928      (96,528
  

 

 

    

 

 

    

 

 

 

Ending balance NPLs

   $ 508,747       $ 31,778       $ 540,525   
  

 

 

    

 

 

    

 

 

 

Table 21—Activity in Non-Performing Loans Held-in-Portfolio (Excluding Consumer and Covered Loans)

 

     For the quarter ended March 31, 2015  

(Dollars in thousands)

   BPPR      BPNA      Popular, Inc.  

Beginning balance

   $ 567,351       $ 13,144       $ 580,495   

Plus:

        

New non-performing loans

     135,267         15,262         150,529   

Advances on existing non-performing loans

     —           33         33   

Less:

        

Non-performing loans transferred to OREO

     (5,914      —           (5,914

Non-performing loans charged-off

     (16,533      (690      (17,223

Loans returned to accrual status / loan collections

     (82,172      (9,231      (91,403

Loans transferred to held-for-sale

     —           2,038         2,038   
  

 

 

    

 

 

    

 

 

 

Ending balance NPLs

   $ 597,999       $ 20,556       $ 618,555   
  

 

 

    

 

 

    

 

 

 

For the quarter ended March 31, 2016, total non-performing loan inflows, excluding consumer loans, decreased by $27 million, or 18%, when compared to the inflows for the same quarter in 2015. Inflows of non-performing loans held-in-portfolio at the BPPR segment decreased by $35 million, or 26%, compared to the inflows for the first quarter of 2015, mostly related to lower mortgage inflows of $29 million in the BPPR segment. Refer to Tables 20 and 21 for more information in the non-performing loans activity for the quarters ended March 31, 2016 and 2015.

Refer to Table 22 for a summary of the activity in the allowance for loan losses and selected loan losses statistics for the quarters ended March 31, 2016 and 2015.

 

150


Table of Contents

Table 22—Allowance for Loan Losses and Selected Loan Losses Statistics—Quarterly Activity

 

     Quarters ended March 31,  
     2016     2016     2016     2015     2015     2015  

(Dollars in thousands)

   Non-covered
loans
    Covered
loans
    Total     Non-covered
loans
    Covered
loans
    Total  

Balance at beginning of period

   $ 502,935      $ 34,176      $ 537,111      $ 519,719      $ 82,073      $ 601,792   

Provision (reversal) for loan losses

     47,940        (3,105     44,835        29,711        10,324        40,035   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     550,875        31,071        581,946        549,430        92,397        641,827   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Charged-offs:

            

Commercial

     9,463        —          9,463        10,022        14,239        24,261   

Construction

     544        —          544        —          9,046        9,046   

Leases

     2,127        —          2,127        1,237        —          1,237   

Legacy[1]

     109        —          109        474        —          474   

Mortgage

     16,413        1,221        17,634        11,194        3,385        14,579   

Consumer

     30,027        33        30,060        32,217        —          32,217   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     58,683        1,254        59,937        55,144        26,670        81,814   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Recoveries:

            

Commercial

     6,554        —          6,554        5,699        2,640        8,339   

Construction

     233        —          233        2,925        3,275        6,200   

Leases

     489        —          489        468        —          468   

Legacy[1]

     356        —          356        2,302        —          2,302   

Mortgage

     1,487        225        1,712        567        104        671   

Consumer

     7,116        3        7,119        7,297        727        8,024   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     16,235        228        16,463        19,258        6,746        26,004   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loans charged-offs (recovered):

            

Commercial

     2,909        —          2,909        4,323        11,599        15,922   

Construction

     311        —          311        (2,925     5,771        2,846   

Leases

     1,638        —          1,638        769        —          769   

Legacy[1]

     (247     —          (247     (1,828     —          (1,828

Mortgage

     14,926        996        15,922        10,627        3,281        13,908   

Consumer

     22,911        30        22,941        24,920        (727     24,193   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     42,448        1,026        43,474        35,886        19,924        55,810   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net recoveries (write-downs)

     —          —          —          2,680        —          2,680   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 508,427      $ 30,045      $ 538,472      $ 516,224      $ 72,473      $ 588,697   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ratios:

            

Annualized net charge-offs to average loans held-in-portfolio[2]

     0.76       0.76     0.72       1.00

Provision for loan losses to net charge-offs[2]

     1.13       1.03     0.83       0.72

 

[1] 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 segment.
[2] Excluding provision for loan losses and net write-down related to loans sold during the quarter ended March 31, 2015.

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.

The following table 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, 2016 and 2015.

 

151


Table of Contents

Table 23 —Annualized Net Charge-offs (Recoveries) to Average Loans Held-in-Portfolio (Non-Covered Loans)

 

     Quarters ended
March 31,
 
     2016     2015  

Commercial

     0.11     0.21

Construction

     0.18        (2.79

Leases

     1.04        0.54   

Legacy

     (1.57     (9.23

Mortgage

     0.87        0.64   

Consumer

     2.40        2.59   
  

 

 

   

 

 

 

Total annualized net charge-offs to average loans held-in-portfolio

     0.76     0.72
  

 

 

   

 

 

 

Net charge-offs, excluding covered loans, for the quarter ended March 31, 2016, increased by $6.6 million when compared to the first quarter of 2015, mainly reflective of higher mortgage net charge-offs in the BPPR segment.

The Corporation continued to exhibit a stable credit performance despite a challenging operating environment in Puerto Rico, reflective of the improved risk profile of the loan portfolios. The Corporation continues to be attentive to changes in credit quality trends and is focused in taking measures to minimize risks. The U.S. operation continued to reflect strong credit quality with low level of charge-offs and non-performing loans.

The discussions in the sections that follow assess credit quality performance for the first quarter of 2016 for most of the Corporation’s non-covered loan portfolios.

Commercial loans

Non-covered non-performing commercial loans held-in-portfolio increased by $16 million, or 9%, from December 31, 2015, mainly driven by a single $11 million relationship in the BPNA segment which impacted the results for the quarter. The percentage of non-performing commercial loans held-in-portfolio to commercial loans held-in-portfolio increased to 1.93% at March 31, 2016 from 1.80% at December 31, 2015.

Tables 24 and 25 present the changes in the non-performing commercial loans held-in-portfolio for the quarters ended March 31, 2016 and 2015 for the BPPR (excluding covered loans) and BPNA segments. For the quarter ended March 31, 2016, inflows of commercial non-performing loans held-in-portfolio at the BPPR segment decreased by $6 million, when compared to inflows for the same period in 2015. Inflows of commercial non-performing loans held-in-portfolio at the BPNA segment increased by $7 million, compared to inflows for the same quarter in 2015, driven by the abovementioned $11 million relationship.

Table 24—Activity in Non-Performing Commercial Loans Held-In-Portfolio (Excluding Covered Loans)

 

     For the quarter ended March 31, 2016  

(In thousands)

   BPPR      BPNA      Popular, Inc.  

Beginning Balance—NPLs

   $ 177,902       $ 3,914       $ 181,816   

Plus:

        

New non-performing loans

     21,657         15,064         36,721   

Advances on existing non-performing loans

     —           1         1   

Less:

        

Non-performing loans transferred to OREO

     (1,103      —           (1,103

Non-performing loans charged-off

     (4,949      (381      (5,330

Loans returned to accrual status / loan collections

     (10,868      (3,606      (14,474
  

 

 

    

 

 

    

 

 

 

Ending balance—NPLs

   $ 182,639       $ 14,992       $ 197,631   
  

 

 

    

 

 

    

 

 

 

 

152


Table of Contents

Table 25—Activity in Non-Performing Commercial Loans Held-In-Portfolio (Excluding Covered Loans)

 

     For the quarter ended March 31, 2015  

(In thousands)

   BPPR      BPNA      Popular, Inc.  

Beginning Balance—NPLs

   $ 257,910       $ 2,315       $ 260,225   

Plus:

        

New non-performing loans[1]

     27,426         8,030         35,456   

Less:

        

Non-performing loans transferred to OREO

     (1,069      —           (1,069

Non-performing loans charged-off

     (8,375      (426      (8,801

Loans returned to accrual status / loan collections

     (11,261      (112      (11,373
  

 

 

    

 

 

    

 

 

 

Ending balance—NPLs

   $ 264,631       $ 9,807       $ 274,438   
  

 

 

    

 

 

    

 

 

 

 

[1] New non-performing loans includes $1.2 million at BPPR and $7.4 million at BPNA from Doral Acquisition.

There are two commercial loan relationships greater than $10 million in non-accrual status at March 31, 2016 and one relationship at December 31, 2015, with an outstanding aggregate balance of $45 million and $36 million, respectively.

Commercial loan net charge-offs, excluding net charge-offs for covered loans, decreased by $1.4 million, when compared to the same period in 2015. This decrease was mostly driven by lower net charge-offs in the BPPR segment of $2.1 million for the quarter ended March 31, 2016, when compared with the same period in 2015. For the quarter ended March 31, 2016, the charge-offs associated with collateral dependent impaired commercial loans amounted to approximately $1.3 million at the BPPR segment. The BPNA segment continued to show low levels of charge-offs reflective of improvements in credit quality.

The Corporation’s commercial loan portfolio secured by real estate (“CRE”), excluding covered loans, amounted to $6.7 billion at March 31, 2016, of which $2.1 billion was secured with owner occupied properties, compared with $6.6 billion and $2.1 billion, respectively, at December 31, 2015. CRE non-performing loans, excluding covered loans, amounted to $156 million at March 31, 2016, compared with $142 million at December 31, 2015. Increase was driven by the $11 million relationship in the BPNA segment. The CRE non-performing loans ratios for the BPPR and BPNA segments were 3.07% and 0.59%, respectively, at March 31, 2016, compared with 3.00% and 0.03%, respectively, at December 31, 2015.

Table 26—Non-Performing Commercial Loans and Net Charge-offs (Excluding Covered Loans)

 

     BPPR     BPNA     Popular, Inc.  

(Dollars in thousands)

   March 31,
2016
    December 31,
2015
    March 31,
2016
    December 31,
2015
    March 31,
2016
    December 31,
2015
 

Non-performing commercial loans

   $ 182,639      $ 177,902      $ 14,992      $ 3,914      $ 197,631      $ 181,816   

Non-performing commercial loans to commercial loans HIP

     2.48     2.41     0.52     0.14     1.93     1.80
     BPPR     BPNA     Popular, Inc.  
     For the quarters ended     For the quarters ended     For the quarters ended  

(Dollars in thousands)

   March 31,
2016
    March 31,
2015
    March 31,
2016
    March 31,
2015
    March 31,
2016
    March 31,
2015
 

Commercial loan net charge-offs (recoveries)

   $ 2,704      $ 4,802      $ 205      $ (479   $ 2,909      $ 4,323   

Commercial loan net charge-offs (recoveries)

            

(annualized) to average commercial loans HIP

     0.15     0.30     0.03     (0.10 )%      0.11     0.21

 

153


Table of Contents

Construction loans

Non-covered non-performing construction loans held-in-portfolio increased by $391 thousand when compared with December 31, 2015, mostly concentrated in the BPPR segment. Stable credit trends in the construction portfolio are the result of de-risking strategies executed by the Corporation over the past several years. The ratio of non-performing construction loans to construction loans held-in-portfolio, excluding covered loans, increased to 0.54% at March 31, 2016 from 0.52% at December 31, 2015.

Tables 27 and 28 present changes in non-performing construction loans held-in-portfolio for the quarters ended March 31, 2016 and 2015 for the BPPR (excluding covered loans) and BPNA segments.

Table 27—Activity in Non-Performing Construction Loans Held-In-Portfolio (Excluding Covered Loans)

 

     For the quarter ended March 31, 2016  

(In thousands)

   BPPR      BPNA      Popular, Inc.  

Beginning Balance—NPLs

   $ 3,550       $ —         $ 3,550   

Plus:

        

New non-performing loans

     207         671         878   

Less:

        

Non-performing loans transferred to OREO

     (304      —           (304

Non-performing loans charged-off

     (110      —           (110

Loans returned to accrual status / loan collections

     (73      —           (73
  

 

 

    

 

 

    

 

 

 

Ending balance—NPLs

   $ 3,270       $ 671       $ 3,941   
  

 

 

    

 

 

    

 

 

 

Table 28—Activity in Non-Performing Construction Loans Held-In-Portfolio (Excluding Covered Loans)

 

     For the quarter ended March 31, 2015  

(In thousands)

   BPPR      BPNA      Popular, Inc.  

Beginning Balance—NPLs

   $ 13,812       $ —         $ 13,812   

Plus:

        

New non-performing loans

     456         —           456   

Less:

        

Loans returned to accrual status / loan collections

     (1,054      —           (1,054
  

 

 

    

 

 

    

 

 

 

Ending balance—NPLs

   $ 13,214       $ —         $ 13,214   
  

 

 

    

 

 

    

 

 

 

Construction loan net charge-offs (recoveries), excluding net charge-offs for covered loans, amounted to $311 thousand for the quarter ended March 31, 2016, compared to recoveries of $2.9 million for the quarter ended March 31, 2015. For the quarter ended March 31, 2016, charge-offs associated with collateral dependent impaired construction loans were $110 thousand in the BPPR segment and none in the BPNA segment.

Table 29 provides information on construction non-performing loans and net charge-offs for the BPPR and BPNA (excluding the covered loan portfolio) segments.

 

154


Table of Contents

Table 29—Non-Performing Construction Loans and Net Charge-offs (Excluding Covered Loans)

 

     BPPR     BPNA     Popular, Inc.  

(Dollars in thousands)

   March 31,
2016
    December 31,
2015
    March 31,
2016
    December 31,
2015
    March 31,
2016
    December 31,
2015
 

Non-performing construction loans

   $ 3,270      $ 3,550      $ 671      $ —        $ 3,941      $ 3,550   

Non-performing construction loans to construction loans HIP

     3.11     3.52     0.11     —       0.54     0.52
     BPPR     BPNA     Popular, Inc.  
     For the quarters ended     For the quarters ended     For the quarters ended  

(Dollars in thousands)

   March 31,
2016
    March 31,
2015
    March 31,
2016
    March 31,
2015
    March 31,
2016
    March 31,
2015
 

Construction loan net charge-offs (recoveries)

   $ 311      $ (2,925   $ —        $ —        $ 311      $ (2,925

Construction loan net charge-offs (recoveries)

            

(annualized) to average construction loans HIP

     1.13     (7.76 )%      —       —       0.18     (2.79 )% 

Mortgage loans

Non-covered non-performing mortgage loans held-in-portfolio decreased by $17 million from December 31, 2015, driven by improvements in the BPPR segment, reflective of the improved risk profile of the portfolio, as well as aggressive loss mitigation and collection efforts.

The percentage of non-performing mortgage loans held-in-portfolio to mortgage loans held-in-portfolio decreased to 4.80% at March 31, 2016 from 5.00% at December 31, 2015. Tables 30 and 31 present changes in non-performing mortgage loans held-in-portfolio for the BPPR (excluding covered loans) and BPNA segments.

Table 30—Activity in Non-Performing Mortgage Loans Held-in-Portfolio (Excluding Covered Loans)

 

     For the quarter ended March 31, 2016  

(Dollars in thousands)

   BPPR      BPNA      Popular, Inc.  

Beginning balance—NPLs

   $ 337,933       $ 13,538       $ 351,471   

Plus:

        

New non-performing loans

     78,679         6,920         85,599   

Less:

        

Non-performing loans transferred to OREO

     (9,226      —           (9,226

Non-performing loans charged-off

     (10,889      (276      (11,165

Loans returned to accrual status / loan collections

     (73,659      (8,113      (81,772
  

 

 

    

 

 

    

 

 

 

Ending balance—NPLs

   $ 322,838       $ 12,069       $ 334,907   
  

 

 

    

 

 

    

 

 

 

 

155


Table of Contents

Table 31—Activity in Non-Performing Mortgage Loans Held-in-Portfolio (Excluding Covered Loans)

 

     For the quarter ended March 31, 2015  

(Dollars in thousands)

   BPPR      BPNA      Popular, Inc.  

Beginning balance—NPLs

   $ 295,629       $ 9,284       $ 304,913   

Plus:

        

New non-performing loans[1]

     107,385         6,232         113,617   

Less:

        

Non-performing loans transferred to OREO

     (4,845      —           (4,845

Non-performing loans charged-off

     (8,158      (123      (8,281

Loans returned to accrual status / loan collections

     (69,857      (8,970      (78,827

Loans in accrual status transferred to held-for-sale

     —           2,038         2,038   
  

 

 

    

 

 

    

 

 

 

Ending balance—NPLs

   $ 320,154       $ 8,461       $ 328,615   
  

 

 

    

 

 

    

 

 

 

 

[1] New non-performing loans includes $16.6 million of loans previous serviced by Doral.

For the quarter ended March 31, 2016, inflows of mortgage non-performing loans held-in-portfolio at the BPPR segment decreased by $29 million, or 27%, when compared to inflows for the same period in 2015. The first quarter of 2015 included the addition of $17 million of loans previously guaranteed by Doral Bank under servicing agreement that required Doral to advance principal and interest payments irrespective of borrower delinquencies. Excluding this impact, mortgage inflows decreased by $12 million when compared to the first quarter of 2015. Inflows of mortgage non-performing loans held-in-portfolio at the BPNA segment increased by $688 thousand when compared to inflows for the same period in 2015.

Mortgage loan net charge-offs, excluding net charge-offs for covered loans, increased by $4.3 million when compared with the quarter ended March 31, 2015. Net charge-off activity derived mainly from loans in the BPPR segment. The net charge-offs in the BPNA segment continued at low levels, reflective of the improved risk profile of the portfolio, strengthened by the sale of certain non-performing and classified assets during the year 2014. For the quarter ended March 31, 2016, charge-offs associated with mortgage loans individually evaluated for impairment amounted to $3.4 million in the BPPR segment.

Table 32 provides information on mortgage non-performing loans and net charge-offs for the BPPR and BPNA segments (excluding the covered loan portfolio).

Table 32—Non-Performing Mortgage Loans and Net Charge-Offs (Excluding Covered Loans)

 

     BPPR     BPNA     Popular, Inc.  

(Dollars in thousands)

   March 31,
2016
    December 31,
2015
    March 31,
2016
    December 31,
2015
    March 31,
2016
    December 31,
2015
 

Non-performing mortgage loans

   $ 322,838      $ 337,933      $ 12,069      $ 13,538      $ 334,907      $ 351,471   

Non-performing mortgage loans to mortgage loans HIP

     5.29     5.52     1.37     1.49     4.80     5.00
     BPPR     BPNA     Popular, Inc.  
     For the quarters ended     For the quarters ended     For the quarters ended  

(Dollars in thousands)

   March 31,
2016
    March 31,
2015
    March 31,
2016
    March 31,
2015
    March 31,
2016
    March 31,
2015
 

Mortgage loan net charge-offs

   $ 14,696      $ 10,473      $ 230      $ 154      $ 14,926      $ 10,627   

Mortgage loan net charge-offs (annualized) to average mortgage loans HIP

     0.98     0.75     0.10     0.06     0.87     0.64

Consumer loans

Non-covered non-performing consumer loans held-in-portfolio decreased by $3 million when compared to December 31, 2015, primarily as a result of a decrease of $3 million in the BPPR segment, mainly related to personal loans.

 

156


Table of Contents

For the quarter ended March 31, 2016, the BPPR segment inflows of consumer non-performing loans held-in-portfolio amounted to $23 million, flat when compared to inflows for the same period of 2015. Inflows of consumer non-performing loans held-in-portfolio at the BPNA segment remained flat at $4 million, when compared to inflows for the same period of 2015.

The Corporation’s consumer net charge-offs decreased by $2 million, when compared with the same period of 2015. For the quarter ended March 31, 2016, charge-offs associated with consumer loans individually evaluated for impairment amounted to $3.5 million in the BPPR segment.

Table 33 provides information on consumer non-performing loans and net charge-offs by segments.

Table 33—Non-Performing Consumer Loans and Net Charge-Offs (Excluding Covered Loans)

 

     BPPR     BPNA     Popular, Inc.  

(Dollars in thousands)

   March 31,
2016
    December 31,
2015
    March 31,
2016
    December 31,
2015
    March 31,
2016
    December 31,
2015
 

Non-performing consumer loans

   $ 49,446      $ 52,440      $ 6,136      $ 5,864      $ 55,582      $ 58,304   

Non-performing consumer loans to consumer loans HIP

     1.49     1.57     1.11     1.19     1.44     1.52
     BPPR     BPNA     Popular, Inc.  
     For the quarters ended     For the quarters ended     For the quarters ended  

(Dollars in thousands)

   March 31,
2016
    March 31,
2015
    March 31,
2016
    March 31,
2015
    March 31,
2016
    March 31,
2015
 

Consumer loan net charge-offs

   $ 21,298      $ 23,653      $ 1,613      $ 1,267      $ 22,911      $ 24,920   

Consumer loan net charge-offs (annualized) to average consumer loans HIP

     2.57     2.81     1.28     1.07     2.40     2.59

Troubled debt restructurings

The Corporation’s TDR loans, excluding covered loans, increased by $29 million, or 2%, from December 31, 2015. TDRs in accruing status increased by $39 million from December 31, 2015, due to sustained borrower performance, while non-accruing TDRs decreased by $11 million.

At March 31, 2016, commercial loan TDRs, excluding covered loans, for the BPPR segment amounted to $258 million of which $88 million were in non-performing status. This compares with $255 million, of which $88 million were in non-performing status at December 31, 2015.

At March 31, 2016 and December 31, 2015, construction loan TDRs, excluding covered loans, for the BPPR segment amounted to $2 million, which were in non-performing status.

At March 31, 2016, the mortgage loan TDRs for the BPPR and BPNA segments amounted to $793 million (including $376 million guaranteed by U.S. sponsored entities) and $8 million, respectively, of which $119 million and $2 million, respectively, were in non-performing status. This compares with $768 million (including $359 million guaranteed by U.S. sponsored entities) and $7 million, respectively, of which $128 million and $2 million were in non-performing status at December 31, 2015.

At March 31, 2016, the consumer loan TDRs for the BPPR and BPNA segments amounted to $114 million and $2 million, respectively, of which $12 million and $255 thousand, respectively, were in non-performing status, compared with $115 million and $2 million, respectively, of which $12 million and $239 thousand, respectively, were in non-performing status at December 31, 2015.

Refer to Note 10 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.

 

157


Table of Contents

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. Refer to Note 2 of the 2015 Form 10-K for a description of the Corporation’s allowance for loan losses methodology.

The following tables set forth information concerning the composition of the Corporation’s allowance for loan losses (“ALLL”) at March 31, 2016 and December 31, 2015 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.

 

158


Table of Contents

Table 34—Composition of ALLL

 

March 31, 2016

 

(Dollars in thousands)

  Commercial     Construction     Legacy [3]     Leasing     Mortgage     Consumer     Total[2]  

Specific ALLL

  $ 55,098      $ 172      $ —        $ 608      $ 43,252      $ 24,907      $ 124,037   

Impaired loans [1]

  $ 338,980      $ 2,020      $ —        $ 2,391      $ 479,092      $ 112,167      $ 934,650   

Specific ALLL to impaired loans [1]

    16.25     8.51     —       25.43     9.03     22.21     13.27
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

General ALLL

  $ 152,079      $ 8,804      $ 2,484      $ 10,427      $ 86,347      $ 124,249      $ 384,390   

Loans held-in-portfolio, excluding impaired loans [1]

  $ 9,889,409      $ 732,838      $ 61,044      $ 640,751      $ 6,500,109      $ 3,748,936      $ 21,573,087   

General ALLL to loans held-in-portfolio, excluding impaired loans [1]

    1.54     1.20     4.07     1.63     1.33     3.31     1.78
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ALLL

  $ 207,177      $ 8,976      $ 2,484      $ 11,035      $ 129,599      $ 149,156      $ 508,427   

Total non-covered loans held-in-portfolio [1]

  $ 10,228,389      $ 734,858      $ 61,044      $ 643,142      $ 6,979,201      $ 3,861,103      $ 22,507,737   

ALLL to loans held-in-portfolio [1]

    2.03     1.22     4.07     1.72     1.86     3.86     2.26
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

[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, 2016, the general allowance on the covered loans amounted to $30 million.
[3] 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 segment.

Table 35—Composition of ALLL

 

December 31, 2015

 

(Dollars in thousands)

  Commercial     Construction     Legacy[3]     Leasing     Mortgage     Consumer     Total[2]  

Specific ALLL

  $ 49,243      $ 264      $ —        $ 573      $ 44,029      $ 23,963      $ 118,072   

Impaired loans [1]

  $ 337,133      $ 2,481      $ —        $ 2,404      $ 471,932      $ 111,836      $ 925,786   

Specific ALLL to impaired loans [1]

    14.61     10.64     —       23.84     9.33     21.43     12.75
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

General ALLL

  $ 147,590      $ 8,605      $ 2,687      $ 10,420      $ 89,283      $ 126,278      $ 384,863   

Loans held-in-portfolio, excluding impaired loans [1]

  $ 9,762,030      $ 678,625      $ 64,436      $ 625,246      $ 6,564,149      $ 3,725,843      $ 21,420,329   

General ALLL to loans held-in-portfolio, excluding impaired loans [1]

    1.51     1.27     4.17     1.67     1.36     3.39     1.80
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ALLL

  $ 196,833      $ 8,869      $ 2,687      $ 10,993      $ 133,312      $ 150,241      $ 502,935   

Total non-covered loans held-in-portfolio [1]

  $ 10,099,163      $ 681,106      $ 64,436      $ 627,650      $ 7,036,081      $ 3,837,679      $ 22,346,115   

ALLL to loans held-in-portfolio [1]

    1.95     1.30     4.17     1.75     1.89     3.91     2.25
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

[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, 2015, the general allowance on the covered loans amounted to $34.2 million.
[3] 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 segment.

At March 31, 2016, the allowance for loan losses, excluding covered loans, increased by $6 million when compared with December 31, 2015, mostly driven by higher specific reserve. The ratio of the allowance for loan losses to loans held-in-portfolio increased to 2.26% of non-covered loans held-in-portfolio at March 31, 2016, compared with 2.25% at December 31, 2015. The ratio of the allowance to non-performing loans held-in-portfolio was stable at 84.80% at March 31, 2016, compared with 83.57% at December 31, 2015.

 

159


Table of Contents

At March 31, 2016, the allowance for loan losses for non-covered loans at the BPPR segment remained stable at $473 million, or 2.70% of non-covered loans held-in-portfolio, compared with $470 million, or 2.67% of non-covered loans held-in-portfolio, at December 31, 2015. The ratio of the allowance to non-performing loans held-in-portfolio was 84.25% at March 31, 2016, compared with 81.75% at December 31, 2015.

The allowance for loan losses at the BPNA segment increased slightly to $35 million, or 0.71% of loans held-in-portfolio, compared with $33 million, or 0.69% of loans held-in-portfolio, at December 31, 2015, mostly driven by organic commercial and construction loan growth. The ratio of the allowance to non-performing loans held-in-portfolio was 93.05% at March 31, 2016, compared with 122.43% at December 31, 2015.

The allowance for loan losses for commercial loans held-in-portfolio, excluding covered loans, increased by $10 million from December 31, 2015. The allowance for loan losses for the commercial loan portfolio in the BPPR segment, excluding the allowance for covered loans, totaled $198 million, or 2.68% of non-covered commercial loans held-in-portfolio, at March 31, 2016, compared with $187 million, or 2.54%, at December 31, 2015. Increase of $11 million includes $6 million related to higher specific reserves. At the BPNA segment, the allowance for loan losses of the commercial loan portfolio amounted to $10 million at March 31, 2016, flat when compared to December 31, 2015. The allowance for loan losses for commercial loans held-in-portfolio at the BPNA segment was 0.34% of commercial loans held-in-portfolio, at March 31, 2016, compared with 0.36%, at December 31, 2015. The Corporation’s ratio of allowance to non-performing loans held-in-portfolio in the commercial loan category was 104.83% at March 31, 2016, compared with 108.26% at December 31, 2015.

The allowance for loan losses for construction loans held-in-portfolio, excluding covered loans, amounted to $9 million, or 1.22% of that portfolio, at March 31, 2016, compared with $9 million, or 1.30%, at December 31, 2015. The allowance for loan losses corresponding to the construction loan portfolio for the BPPR segment, excluding the allowance for covered loans, totaled $4 million, or 4.03% of non-covered construction loans held-in-portfolio, at March 31, 2016, compared with $5 million, or 4.91%, at December 31, 2015. At the BPNA segment, the allowance for loan losses of the construction loan portfolio totaled $5 million, or 0.75% of construction loans held-in-portfolio, at March 31, 2016, compared with $4 million, or 0.67%, at December 31, 2015. The Corporation’s ratio of allowance to non-performing loans held-in portfolio in the construction loan category was 227.76% at March 31, 2016, compared with 249.83% at December 31, 2015. Stable allowance levels in the construction portfolio result from the de-risking strategies executed by the Corporation over the past several years.

The allowance for loan losses for mortgage loans held-in-portfolio, excluding covered loans, decreased by $4 million from December 31, 2015. The allowance for loan losses corresponding to the mortgage loan portfolio at the BPPR segment totaled $125 million, or 2.04% of mortgage loans held-in-portfolio, excluding covered loans, at March 31, 2016, compared with $128 million, or 2.09%, respectively, at December 31, 2015. This decrease was prompted by a decline in the allowance for purchased credit impaired loans (ASC 310-30) and lower specific reserves. At the BPNA segment, the allowance for loan losses corresponding to the mortgage loan portfolio remained unchanged at $5 million, or 0.58% of mortgage loans held-in-portfolio, at March 31, 2016, compared 0.55% of mortgage loans held-in-portfolio, at December 31, 2015.

The allowance for loan losses for the consumer portfolio, excluding covered loans, decreased slightly to $149 million, or 3.86% of that portfolio, at March 31, 2016, compared to $150 million, or 3.91%, at December 31, 2015. The allowance for loan losses of the non-covered consumer loan portfolio in the BPPR segment totaled $136 million, or 4.10% of that portfolio, at March 31, 2016, compared with $139 million, or 4.15%, at December 31, 2015. At the BPNA segment, the allowance for loan losses of the consumer loan portfolio totaled $13 million, or 2.42% of consumer loans, at March 31, 2016, compared with $12 million, or 2.34%, at December 31, 2015.

Table 36—Impaired Loans (Non-Covered Loans) and the Related Valuation Allowance

 

     March 31, 2016      December 31, 2015  

(In millions)

   Recorded
Investment
     Valuation
Allowance
     Recorded
Investment
     Valuation
Allowance
 

Impaired loans:

           

Valuation allowance

   $ 806.1       $ 124.0       $ 807.4       $ 118.1   

No valuation allowance required

     128.6         —           118.4         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 934.7       $ 124.0       $ 925.8       $ 118.1   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

160


Table of Contents

The following tables set forth the activity in the specific reserves for non-covered impaired loans for the quarters ended March 31, 2016 and 2015.

Table 37—Activity in Specific ALLL for the Quarter Ended March 31, 2016

 

(In thousands)

   Commercial     Construction     Mortgage     Legacy      Consumer     Leasing     Total  

Beginning balance

   $ 49,243      $ 264      $ 44,029      $ —         $ 23,963      $ 573      $ 118,072   

Provision for impaired loans

     7,137        18        2,610        —           4,429        36        14,230   

Less: Net charge-offs

     (1,282     (110     (3,387     —           (3,485     (1     (8,265
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Specific allowance for loan losses at March 31, 2016

   $ 55,098      $ 172      $ 43,252      $ —         $ 24,907      $ 608      $ 124,037   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Table 38—Activity in Specific ALLL for the Quarter Ended March 31, 2015

 

(In thousands)

   Commercial     Construction     Mortgage     Legacy      Consumer     Leasing     Total  

Beginning balance

   $ 64,736      $ 363      $ 46,111      $ —         $ 28,161      $ 770      $ 140,141   

Provision for impaired loans

     9,483        (205     (1,221     —           1,238        (62     9,233   

Less: Net charge-offs

     (4,273     —          (2,320     —           (3,795     (21     (10,409
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Specific allowance for loan losses at March 31, 2015

   $ 69,946      $ 158      $ 42,570      $ —         $ 25,604      $ 687      $ 138,965   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

For the quarter ended March 31, 2016, total net charge-offs for individually evaluated impaired loans amounted to approximately $8.3 million related to the BPPR segment.

The table that follows presents the approximate amount and percentage of non-covered commercial impaired loans for which the Corporation relied on appraisals dated more than one year old for purposes of impairment requirements at March 31, 2016 and December 31, 2015.

Table 39—Non-Covered Impaired Loans with Appraisals Dated 1 year or Older

 

March 31, 2016

 
     Total Impaired Loans – Held-in-
portfolio (HIP)
        

(In thousands)

   Loan Count      Outstanding Principal
Balance
     Impaired Loans with
Appraisals Over
One-Year Old [1]
 

Commercial

     120       $ 283,501         23
  

 

 

    

 

 

    

 

 

 

 

[1] Based on outstanding balance of total impaired loans.

 

December 31, 2015

 
     Total Impaired Loans – Held-in-
portfolio (HIP)
        

(In thousands)

   Loan Count      Outstanding Principal
Balance
     Impaired Loans with
Appraisals Over
One-Year Old [1]
 

Commercial

     118       $ 281,478         29
  

 

 

    

 

 

    

 

 

 

 

[1] Based on outstanding balance of total impaired loans.

 

161


Table of Contents

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 $30 million at March 31, 2016, compared to $34 million at December 31, 2015. This allowance covers the estimated credit loss exposure related to acquired loans accounted for under ASC Subtopic 310-30, which required an allowance for loan losses of $30 million at March 31, 2016, compared with $34 million at December 31, 2015.

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 geographic and government risk. The Corporation’s assets and revenue composition by geographical area and by business segment reporting are presented in Note 35 to the consolidated financial statements. A significant portion of our financial activities and credit exposure is concentrated in Puerto Rico, which entered into recession in the second quarter of 2006. Puerto Rico’s gross national product contracted in real terms in every year between fiscal year 2007 and fiscal year 2011 (inclusive), grew by 0.5% in fiscal year 2012 and decreased by 0.2% and 0.9% in fiscal years 2013 and 2014, respectively. The changes in the gross national product in fiscal years 2012, 2013 and 2014 also have to be analyzed in light of the large amount of governmental stimulus and deficit spending in those fiscal years. According to the Puerto Rico Planning Board’s baseline scenario projections, for fiscal years 2015 and 2016, gross national product is projected to further contract by 0.9% and 1.2%, respectively. The latest Government Development Bank for Puerto Rico (“GDB”) Economic Activity Index, which is an indicator of general economic activity and not a direct measurement of gross national product, reflected a 1.8% reduction in the average for fiscal year 2015 (July 2014 to June 2015), compared to the prior fiscal year. For the first nine months of fiscal year 2016, the Economic Activity Index decreased approximately 1.3%, compared to the same period of the prior fiscal year.

The Commonwealth of Puerto Rico (the “Commonwealth”) is experiencing a severe fiscal crisis resulting from persistent and significant budget deficits, a high debt burden, the continuing economic contraction and lack of access to the capital markets, among other factors. Budget deficits were historically covered with bond financings, loans from GDB and extraordinary one-time revenue measures. GDB has traditionally served as the principal depositary of public funds and lender to the Commonwealth, its public corporations and municipalities. As a result of multiple downgrades of the Commonwealth and its instrumentalities’ obligations to below investment grade ratings since February 2014 and ongoing liquidity constraints at the Commonwealth central government and GDB, the Commonwealth’s ability to finance future budget deficits is expected to be very limited, if any.

The Government’s most recent estimate of the budget deficit for fiscal year 2015 is approximately $703 million. For fiscal year 2016, the Government approved a $9.8 billion budget, which is $235 million higher than the approved budget for fiscal year 2015 due primarily to a significant increase in debt service payments and special pension contributions. In December 2015, however, the Government revised its revenue estimate for fiscal year 2016 downward by $508 million, to approximately $9.3 billion.

In order to confront its liquidity constraints and this decrease in revenues, while continuing to provide essential services, the Government has been forced to implement certain extraordinary measures. These measures include, among others: (i) requiring advance payment to the Treasury Department from the two largest government retirement systems of funds required for the payment of retirement benefits to participants (instead of the usual reimbursements made by the retirement systems to the Treasury Department for pension benefit payments made by the Treasury Department on behalf of the retirement systems); (ii) placing $400 million of tax and revenue anticipation notes with certain Commonwealth instrumentalities to fund fiscal year 2016 working capital needs; (iii) suspending during fiscal year 2016 Commonwealth set-asides required by Act No. 39 of May 13, 1976, as amended, for the payment of its general obligation debt; (iv) retaining certain tax revenues that were assigned to particular public corporations and redirecting those revenues to pay general obligation debt of the Commonwealth (commonly referred to as the exercise of the clawback of revenues); (v) delaying the payment of third-party payables or amounts due to public corporations; (vi) deferring the disbursement of certain budgetary appropriations; and (vii) delaying the payment of income tax refunds. Some of these measures are unsustainable and have significant negative economic effects.

 

162


Table of Contents

The Commonwealth also did not appropriate in the approved budget for fiscal year 2016 the funds necessary to pay principal of and interest on bonds issued by the Puerto Rico Public Finance Corporation (“PFC”), a subsidiary of GDB, which further reflects the Commonwealth’s serious liquidity constraints. As a result, in fiscal year 2016, PFC has not paid debt service on approximately $1.1 billion of bonds payable solely from Commonwealth legislative appropriations. As of May 1, 2016, missed payments amounted to approximately $90 million. In addition, as a result of the clawback of revenues mentioned above, other public corporations (including the Infrastructure Financing Authority, the Highways and Transportation Authority and the Convention Center District Authority) were not able to meet their debt obligations due on January 1, 2016 or did so using moneys previously held by the bond indenture trustees in reserves or other accounts. Pursuant to Act 21-2016, further discussed below, on April 30, 2016, the Governor signed an executive order whereby he declared a moratorium on certain obligations of GDB and, pursuant to such executive order, on May 1, 2016, GDB failed to make a principal payment of approximately $367 million in respect of its notes.

Further in response to the fiscal crisis, the Commonwealth has also enacted various revenue raising and expense reduction measures, the principal one on the revenue side being an increase in the sales and use tax (“SUT”) rate pursuant to Act 72-2015, enacted on May 29, 2015. Effective July 1, 2015, transactions that were subject to the 7% SUT have been subject to an 11.5% SUT (10.5% collected on behalf of the Puerto Rico Sales Tax Financing Corporation and the Commonwealth, of which 0.5% goes to a special fund for the benefit of the municipalities, and 1% collected by the municipalities). Act 72-2015 also provides for a transition to a value added tax (“VAT”), scheduled for May 31, 2016, to substitute the central government’s portion of the SUT. In addition, from October 1, 2015 and until May 31, 2016: (i) business-to-business transactions that were taxable prior to July 1, 2015 are subject to an 11.5% SUT, (ii) certain business-to-business services and designated professional services that were previously exempt from SUT are subject to a Commonwealth SUT of 4% (but no municipal SUT will apply to these services), and (iii) specific services are exempt from SUT. After May 31, 2016, all transactions subject to the SUT will be subject to a new VAT of 10.5% plus a 1% municipal SUT (except certain business-to-business and designated professional services that were exempt prior to July 1, 2015, to which no municipal SUT will apply). On May 5, 2016, the Commonwealth’s Legislative Assembly approved a bill that would eliminate the VAT system, including the business-to-business tax increase from 4% to 10.5%. The Governor has expressed his intent to veto such bill. At this time, however, it is uncertain whether the Governor will veto the bill and, if so, whether the Legislative Assembly will override such veto.

On the expense side, the measures have included a comprehensive reform of the principal pension system of the Commonwealth, which is severely underfunded and faces asset depletion in the near future, and the enactment of a fiscal emergency law that freezes benefits under collective bargaining agreements and formula appropriations to various governmental entities and other branches of the central government, among various expense control measures.

All of these measures, however, have been insufficient to address the current fiscal crisis and the Commonwealth has indicated that it will not have sufficient liquidity before the end of this fiscal year (ending on June 30, 2016) to meet all of its debt service obligations while continuing to provide essential services to the residents of Puerto Rico.

In response to the continued fiscal and economic challenges, the Government of Puerto Rico engaged a group of former IMF economists to analyze the Commonwealth’s economic and financial stability and growth prospects. The group’s final report, commonly known as the “Krueger Report,” was delivered to the Governor of Puerto Rico on June 28, 2015 and states that Puerto Rico faces an acute crisis in the face of faltering economic activity, faltering fiscal solvency and debt sustainability, and faltering institutional credibility. Some of the report’s principal conclusions are as follows: (i) the economic problems of Puerto Rico are structural, not cyclical, and are not going away without structural reforms, (ii) fiscal deficits are much larger than assumed and are set to deteriorate, (iii) the central government deficits (as measured in the report) over the coming years imply an unsustainable trajectory of large financing gaps, and (iv) Puerto Rico’s public debt cannot be made sustainable without growth, nor can growth occur in the face of structural obstacles and doubts about debt sustainability.

The report concludes that, even after factoring in a substantial fiscal effort, a large residual financing gap persists into the next decade, implying a need for debt relief. To close the financing gap, the government would need to seek relief from a significant but progressively declining proportion of principal and interest due during fiscal years 2016 to 2024. The report acknowledges that any debt restructuring would be challenging as there is no precedent of this scale and scope, but concludes that, from an economic perspective, the fact remains that the central government faces large financing gaps even with substantial adjustment efforts (as there are limits to how much expenditures can be cut or taxes raised).

On June 29, 2015, the Governor of Puerto Rico issued an Executive Order to create the Puerto Rico Fiscal and Economic Recovery Working Group (the “Working Group”). The Working Group was created to consider the measures necessary, including the measures recommended in the Krueger Report, to address the fiscal crisis of the Commonwealth and to develop and recommend to the Governor of Puerto Rico a fiscal and economic adjustment plan.

 

163


Table of Contents

On September 9, 2015, the Working Group presented a draft of the Fiscal and Economic Growth Plan (the “FEGP”), which was subsequently updated on January 18, 2016. The FEGP projects that, absent further corrective action, the Commonwealth’s cumulative five-year financing gap for fiscal years 2016 to 2020 will be approximately $27.9 billion ($63.4 billion for the ten-year projection period), and that this financing gap could be reduced to approximately $16.1 billion ($23.9 billion for the ten-year projection period) through a combination of identified revenue increases and expense reduction measures and assuming a level of economic growth. With approximately $33 billion of debt service over the next ten years, the FEGP concludes that the Commonwealth will not have sufficient projected surplus to pay its scheduled debt service and that a debt restructuring is necessary to avoid a disorderly default and allow the Commonwealth to implement the structural reforms and growth initiatives identified in the FEGP. The FEGP also concludes that, unless economic growth can be achieved, the Commonwealth’s debt is not sustainable. The FEGP also states that without the emergency measures taken in fiscal year 2016, which have significantly increased the economic burden on taxpayers and third party suppliers, the Commonwealth would have already exhausted its liquidity and that, in any case, it will not have sufficient resources at the end of the fiscal year to meet its debt obligations. The FEGP does not include the debt of Puerto Rico’s municipalities. The FEGP contemplates, however, as part of the expense reduction measures, that the government will gradually reduce subsidies provided to the municipalities by the central government. The FEGP is publicly available in GDB’s website.

In January 2016, Government officials and advisors met with the advisors to the Commonwealth’s creditors to present the Commonwealth’s initial restructuring proposal, which was subsequently made public. A revised proposal was presented in March 2016 and was also subsequently made public. Such proposal seeks an orderly restructuring of the Commonwealth’s direct debt and other tax-supported debt issued by certain public corporations, amounting to approximately $49.2 billion, in order to provide the Commonwealth the necessary debt relief to enable it to confront the significant projected shortfalls contemplated in the FEGP. The revised proposal contemplates an exchange of existing securities for two new classes of securities, a “base bond” with a fixed interest rate and amortization schedule and a capital appreciation bond with a 49-year maturity. The proposal also contemplates no principal payments until fiscal year 2021. The proposal would have the following benefits for the Commonwealth, among others: (1) preservation of the ability to provide essential goods and services to the residents of Puerto Rico, (2) time and capital necessary to implement the FEGP’s structural reforms and “growth” initiatives, (3) financial flexibility to rebuild depleted cash resources and pay down suppliers whose payables are past due and taxpayers to whom refunds are owed, as well as making adequate pension contributions, and (4) achievement of a sustainable debt structure for the long term. The Commonwealth believes the proposal also offers creditor significant benefits, including improved liquidity and better collateral security for the restructured debt, as well as a structure to resolve potential inter-creditor disputes. There can be no assurance, however, that the Commonwealth will be able to successfully consummate its proposal or any other debt restructuring without some Federal restructuring authority, in particular given the large amount of targeted debt and extremely complex nature of these credits.

On October 21, 2015, the Obama Administration released a proposal to address Puerto Rico’s urgent fiscal crisis. The proposal states that Puerto Rico is in the midst of an economic and fiscal crisis that requires Congressional action and makes the following recommendations: (i) Congress should extend Chapter 9 of the U.S. Bankruptcy Code to Puerto Rico, and also provide a broader legal framework to allow for a comprehensive restructuring of Puerto Rico’s liabilities, (ii) Congress should provide independent fiscal oversight to ensure Puerto Rico adheres to its recovery plan and fully implements proposed reforms, (iii) Congress should provide a long-term solution to Puerto Rico’s historically inadequate Medicaid treatment, and (iv) Congress should extend to Puerto Rico certain proven measures to reward work and stimulate growth, such as the Earned Income Tax Credit. Since October 2015, the two houses of the United States Congress have held various hearings on Puerto Rico’s economy and debt, and various options to address Puerto Rico’s fiscal crisis are under consideration, including the establishment of a Federal fiscal control board and providing broad based restructuring authority. The Committee of Natural Resources of the United States House of Representatives is currently considering House Bill 4900, which, among other things, seeks to create a federal control board with legal authority over certain matters of the Commonwealth and which would provide a process for the restructuring of certain obligations of the Commonwealth and its public corporations and municipalities. Such bill is expected to suffer additional changes and, at this time, it is unclear whether or when it will be approved.

The Commonwealth’s public corporations and instrumentalities are also facing financial challenges. On June 28, 2014, Governor Alejandro García Padilla signed into law the Puerto Rico Public Corporation Debt Enforcement and Recovery Act (the “Recovery Act”) which provides a framework for certain public corporations, including the Puerto Rico Electric Power Authority (“PREPA”), the Puerto Rico Aqueduct and Sewer Authority and the Puerto Rico Highways and Transportation Authority, to restructure their debt obligations in order to ensure that the services they provide to the public are not interrupted. Puerto Rico’s municipalities were not made eligible for the Recovery Act.

In July 2014, certain holders of PREPA bonds and an investment manager, on behalf of funds which hold PREPA bonds, filed separate lawsuits in the United States District Court for the District of Puerto Rico (the “District Court”) seeking a declaratory judgment that the Recovery Act violates several provisions of the United States Constitution. The District Court consolidated the actions. On February 6, 2015, the District Court issued an opinion and order declaring the Recovery Act unconstitutional and stating that it was preempted by the federal Bankruptcy Code. The District Court permanently enjoined the Commonwealth officers from enforcing the Recovery Act. The Commonwealth filed an expedited appeal before the United States Court of Appeals for the First Circuit and, on July 6, 2015, the Court of Appeals affirmed the lower court’s decision. The Commonwealth filed a petition for certiorari in the United States Supreme Court, which was granted on December 4, 2015. The United States Supreme Court held oral arguments in this case on March 22, 2016 and is expected to issue its decision this summer.

 

164


Table of Contents

In August 2014, as a result of PREPA’s inability to comply with certain scheduled debt payments, PREPA entered into forbearance agreements with certain bondholders, municipal bond insurers, and lenders (including BPPR) pursuant to which the forbearing creditors agreed to forbear from exercising certain rights and remedies under their applicable debt instruments. On November 5, 2015, PREPA announced that it had entered into a restructuring support agreement with certain creditors setting forth the economic terms of a recovery plan. Execution of the transactions set forth in the restructuring support agreement was subject to a number of material conditions, including the enactment of legislation by January 22, 2016. When such condition was not met, the restructuring support agreement automatically terminated. On January 27, 2016, PREPA and certain creditors, including monoline bond insurers that were not party to the original restructuring support agreement, entered into a new restructuring support agreement, also subject to various material conditions, including the approval of legislation by February 16, 2016. With respect to PREPA’s credit facilities, the restructuring support agreement contemplates that the lenders, which hold approximately $700 million of matured debt, would convert their existing credit facilities into term loans to be repaid over six years in accordance with an amortization schedule. Although legislation was approved by the February 16, 2016 deadline, there can be no assurance, however, that the conditions to the restructuring support agreement will be met. At March 31, 2016, BPPR is a lender in PREPA’s syndicated credit facility and BPPR’s exposure was $40.9 million, as shown in Note 23 to the consolidated financial statements.

On April 6, 2016, the Commonwealth enacted Act 21-2016, entitled the “Puerto Rico Emergency Moratorium and Financial Rehabilitation Act” (“Act 21”). Act 21 authorizes the Governor to, among other things, declare a stay on certain litigation, suspend certain creditor remedies, and impose a moratorium on debt service payments of the Commonwealth and certain public corporations through January 31, 2017, with a possible two month extension, in the Governor’s discretion. Act 21 also permits the Governor to take other actions to allow GDB to continue carrying out its operations. On April 8, 2016, the Governor signed an executive order declaring GDB to be in a state of emergency pursuant to Act 21 and implementing a framework governing GDB’s operations, including imposing restrictions on the withdrawal of funds held on deposit at GDB and suspending loan disbursements by GDB. Further, on April 30, 2016, the Governor signed a second executive order under Act 21 declaring an emergency period with respect to certain obligations of the Puerto Rico Infrastructure Financing Authority and declaring a moratorium on the payment of certain obligations of GDB. Act 21 also included amendments to the receivership provision in GDB’s organic act and authorized the creation of a temporary “bridge bank” to carry out GDB’s functions.

The lingering effects of the prolonged recession are still reflected in limited loan demand, an increase in the rate of foreclosures and delinquencies on mortgage loans granted in Puerto Rico. If global or local economic conditions worsen or the Government of Puerto Rico is unable to manage its fiscal crisis in an orderly manner, including consummating an orderly restructuring of its debt obligations while continuing to provide essential services, those adverse effects could continue or worsen in ways that we are not able to predict. Any reduction in consumer spending as a result of these issues may also adversely impact our non-interest income.

At March 31, 2016, the Corporation’s direct exposure to the Puerto Rico government and its instrumentalities and municipalities amounted to $656 million, of which approximately $565 million is outstanding ($669 million and $578 million, respectively, at December 31, 2015). Of the amount outstanding, $490 million consists of loans and $75 million are securities ($502 million and $76 million, respectively, at December 31, 2015). Of the amount outstanding, $61 million represents obligations from the Government of Puerto Rico and public corporations that have a specific source of income or revenues identified for their repayment ($76 million at December 31, 2015). 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 public utilities. Public corporations have varying degrees of independence from the central Government and many receive appropriations or other payments from it. The remaining $504 million represents obligations from 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 ($502 million at December 31, 2015). 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. These loans have seniority to the payment of operating costs and expenses of the municipality. The Corporation performs periodic credit quality reviews on these issuers. Further deterioration of the fiscal crisis of the Government of Puerto Rico could further affect the value of these loans and securities, resulting in losses to us.

Although the obligations of Puerto Rico’s municipalities are not included in the debt restructuring proposed by the Government, the municipalities could nonetheless be affected by general economic conditions and the Government of Puerto Rico’s fiscal crisis.

 

165


Table of Contents

Furthermore, as part of various measures to address its limited liquidity and fiscal crisis, the Government may take measures that have a direct or indirect adverse impact on the municipalities. The first executive order issued by the Governor pursuant to Act 21 could adversely affect various municipalities by limiting their ability to withdraw funds on deposit at GDB and to obtain new loans or continue receiving undisbursed loans from GDB. In addition, pending federal legislation described above would provide a process for restructuring obligations of such municipalities.

In addition, at March 31, 2016, the Corporation had $417 million in indirect exposure to loans or securities that are payable by non-governmental entities, but which carry a government guarantee to cover any shortfall in collateral in the event of borrower default ($394 million at December 31, 2015). These included $339 million in residential mortgage loans that are guaranteed by the Puerto Rico Housing Finance Authority (December 31, 2015—$316 million). These mortgage loans are secured by the underlying properties and the guarantees serve to cover shortfalls in collateral in the event of a borrower default. Under recently enacted Act 21, the Governor is authorized to impose a temporary moratorium on the financial obligations of Puerto Housing Finance Authority. Also, the Corporation had $51 million in Puerto Rico pass-through housing bonds backed by FNMA, GNMA or residential loans CMO’s, and $27 million of industrial development notes ($50 million and $28 million, respectively, at December 31, 2015).

As further detailed in Notes 7 and 8 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, $873 million of residential mortgages and $102 million in commercial loans were insured or guaranteed by the U.S. Government or its agencies at March 31, 2016. The Corporation does not have any exposure to European sovereign debt.

 

166


Table of Contents

ADOPTION OF NEW ACCOUNTING STANDARDS AND ISSUED BUT NOT YET EFFECTIVE ACCOUNTING STANDARDS

Refer to Note 3, “New Accounting Pronouncements” to the consolidated financial statements.

 

167


Table of Contents

Adjusted results of operations – Non-GAAP Financial Measure

The Corporation prepares its Consolidated Financial Statements using accounting principles generally accepted in the U.S. (“U.S. GAAP” or the “reported basis”). In addition to analyzing the Corporation’s results on a reported basis, management monitors the performance of the Corporation on an “adjusted basis” and excludes the impact of certain transactions on the results of its operations. Through this MD&A, the Corporation presents a discussion of its financial results excluding the impact of these events to arrive at the “adjusted results”. Management believes that the “adjusted basis” provides meaningful information about the underlying performance of the Corporation’s ongoing operations. The “adjusted results” are a Non-GAAP financial measure. Refer to the following tables for a reconciliation of the reported results to the “adjusted results” for the quarters ended March 31, 2016, and 2015. No adjustments are reflected for the first quarter of 2016 results.

 

168


Table of Contents

Table 40—Adjusted Consolidated Statement of Operations for the Quarter Ended March 31, 2015 (Non-GAAP)

 

(Unaudited)

   Quarter ended March 31, 2015  

(In thousands)

   Actual Results
(U.S. GAAP)
     BPNA Reorganization
[2]
    Doral
Acquisition [3]
    Adjusted
Results
(Non-GAAP)
 

Net interest income

   $ 343,195       $ —        $ —        $ 343,195   

Provision for loan losses – non-covered loans

     29,711         —          —          29,711   

Provision for loan losses – covered loans [1]

     10,324         —          —          10,324   
  

 

 

    

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

     303,160         —          —          303,160   

Mortgage banking activities

     12,852         —          —          12,852   

FDIC loss-share income

     4,139         —          —          4,139   

Other non-interest income

     98,244         —          1,121        97,123   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total non-interest income

     115,235         —          1,121        114,114   
  

 

 

    

 

 

   

 

 

   

 

 

 

Personnel costs

     116,458         —          2,432        114,026   

Net occupancy expenses

     21,709         —          643        21,066   

Equipment expenses

     13,411         —          —          13,411   

Professional fees

     75,528         —          6,997        68,531   

Communications

     6,176         —          —          6,176   

Business promotion

     10,813         —          —          10,813   

Other real estate owned (OREO) expenses

     23,069         —          —          23,069   

Restructuring costs

     10,753         10,753        —          —     

Other operating expenses

     34,425         —          —          34,425   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total operating expenses

     312,342         10,753        10,072        291,517   
  

 

 

    

 

 

   

 

 

   

 

 

 

Income from continuing operations before income tax

     106,053         (10,753     (8,951     125,757   

Income tax expense

     32,568         —          (2,896     35,464   
  

 

 

    

 

 

   

 

 

   

 

 

 

Income from continuing operations

   $ 73,485       $ (10,753   $ (6,055   $ 90,293   
  

 

 

    

 

 

   

 

 

   

 

 

 

Income from discontinued operations, net of tax

   $ 1,341       $ 1,341      $ —        $ —     
  

 

 

    

 

 

   

 

 

   

 

 

 

Net income

   $ 74,826       $ (9,412   $ (6,055   $ 90,293   
  

 

 

    

 

 

   

 

 

   

 

 

 

 

[1] Covered loans represent loans acquired in the Westernbank FDIC-assisted transaction that are covered under an FDIC loss-sharing agreement.
[2] Represents restructuring charges associated with the reorganization of BPNA.
[3] Includes $1.1 million on fees charged for serviced provided to the alliance co-bidders, including loan servicing and other interim services, personnel cost related to Doral employees retained on a temporary basis and non-recurring incentive compensation for an aggregate of $2.4 million, building rent expense of Doral’s administrative offices for $0.6 million and professional and legal fees directly associated with the Doral acquisition for $7.0 million.

 

169


Table of Contents

Table 41—Adjusted Consolidated Statement of Operations (Non-GAAP)—Comparative Quarters

 

(Unaudited)

   As Reported
(U.S. GAAP)
    Adjusted Results
(Non-GAAP)
        
     For the quarters ended         

(In thousands)

   March 31, 2016     March 31, 2015      Variance  

Net interest income

   $ 352,412      $ 343,195       $ 9,217   

Provision for loan losses – non-covered loans

     47,940        29,711         18,229   

Provision (reversal) for loan losses – covered loans [1]

     (3,105     10,324         (13,429
  

 

 

   

 

 

    

 

 

 

Net interest income after provision for loan losses

     307,577        303,160         4,417   

Mortgage banking activities

     10,551        12,852         (2,301

FDIC loss-share (expense) income

     (3,146     4,139         (7,285

Other non-interest income

     104,225        97,123         7,102   
  

 

 

   

 

 

    

 

 

 

Total non-interest income

     111,630        114,114         (2,484
  

 

 

   

 

 

    

 

 

 

Personnel costs

     127,091        114,026         13,065   

Net occupancy expenses

     20,430        21,066         (636

Equipment expenses

     14,548        13,411         1,137   

Professional fees

     75,459        68,531         6,928   

Communications

     6,320        6,176         144   

Business promotion

     11,110        10,813         297   

Other real estate owned (OREO) expenses

     9,141        23,069         (13,928

Other operating expenses

     37,844        34,425         3,419   
  

 

 

   

 

 

    

 

 

 

Total operating expenses

     301,943        291,517         10,426   
  

 

 

   

 

 

    

 

 

 

Income from continuing operations before income tax

     117,264        125,757         (8,493

Income tax expense

     32,265        35,464         (3,199
  

 

 

   

 

 

    

 

 

 

Income from continuing operations

   $ 84,999      $ 90,293       $ (5,294
  

 

 

   

 

 

    

 

 

 

Net income

   $ 84,999      $ 90,293       $ (5,294
  

 

 

   

 

 

    

 

 

 

 

[1] Covered loans represent loans acquired in the Westernbank FDIC-assisted transaction that are covered under an FDIC loss-sharing agreement.

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 2015 Form 10-K.

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.

 

170


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 March 31, 2016 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 23, “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 2015 Form 10-K. 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 7 – 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 2015 Form 10-K.

There have been no material changes to the risk factors previously disclosed under Item 1A of the Corporation’s 2015 Form 10-K.

The risks described in our 2015 Form 10-K and in this report are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or results of operations.

 

171


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. As of March 31, 2016 the maximum number of shares of common stock that may have been granted under this plan was 3,500,000.

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 Corporation terminated its participation in the Troubled Asset Relief Program, after the repurchase on July 23, 2014, of the outstanding warrants issued to the U.S. Treasury.

The following table sets forth the details of purchases of Common Stock during the quarter ended March 31, 2016 under the 2004 Omnibus Incentive Plan.

 

    Issuer Purchases of Equity Securities  

Not in thousands

                       

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
 

January 1- January 31

    163,838      $ 24.81        —          —     

February 1- February 29

    —          —          —          —     

March 1- March 31

    —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Total March 31, 2016

    163,838      $ 24.81        —          —     
 

 

 

   

 

 

   

 

 

   

 

 

 

 

172


Table of Contents

Item 6. Exhibits

 

Exhibit No.

 

Exhibit Description

  10.1   Form of Director Compensation Letter, Election Form and Restricted Stock Agreement, effective April 26, 2016(1)
  12.1   Computation of the ratios of earnings to fixed charges and preferred stock dividends(1)
  31.1   Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(1)
  31.2   Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(1)
  32.1   Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(1)
  32.2   Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(1)
101.INS   XBRL Instance Document(1)
101.SCH   XBRL Taxonomy Extension Schema Document(1)
101.CAL XBRL   Taxonomy Extension Calculation Linkbase Document(1)
101.DEF XBRL   Taxonomy Extension Definitions Linkbase Document(1)
101.LAB XBRL   Taxonomy Extension Label Linkbase Document(1)
101.PRE XBRL   Taxonomy Extension Presentation Linkbase Document(1)

 

(1) Included herewith

 

173


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, 2016   By:  

/s/ Carlos J. Vázquez

  Carlos J. Vázquez
  Executive Vice President & Chief Financial Officer
Date: May 10, 2016   By:  

/s/ Jorge J. García

  Jorge J. García
  Senior Vice President & Corporate Comptroller

 

174