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 June 30, 2015
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
(Registrants telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 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 issuers classes of common stock, as of the latest practicable date: Common Stock, $0.01 par value, 103,533,636 shares outstanding as of August 4, 2015.
INDEX
Page | ||||||
Part I Financial Information |
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Item 1. |
Financial Statements |
|||||
Unaudited Consolidated Statements of Financial Condition at June 30, 2015 and December 31, 2014 |
5 | |||||
6 | ||||||
7 | ||||||
8 | ||||||
Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2015 and 2014 |
9 | |||||
10 | ||||||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
147 | ||||
Item 3. |
223 | |||||
Item 4. |
223 | |||||
Item 1. |
223 | |||||
Item 1A. |
224 | |||||
Item 2. |
228 | |||||
Item 3. |
229 | |||||
Item 4. |
229 | |||||
Item 5. |
229 | |||||
Item 6. |
230 | |||||
231 |
2
Forward-Looking Information
The information included in this Form 10-Q contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may relate to Popular, Inc.s (the Corporation, 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 Corporations financial condition and results of operations. All statements contained herein that are not clearly historical in nature are forward-looking, and the words anticipate, believe, continues, expect, estimate, intend, project and similar expressions and future or conditional verbs such as will, would, should, could, might, can, may or similar expressions are generally intended to identify forward-looking statements.
These statements are not guarantees of future performance and involve certain risks, uncertainties, estimates and assumptions by management that are difficult to predict.
Various factors, some of which are beyond Populars control, could cause actual results to differ materially from those expressed in, or implied by, such forward-looking statements. Factors that might cause such a difference include, but are not limited to:
| the rate of growth in the economy and employment levels, as well as general business and economic conditions; |
| 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 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 ability of the Government of Puerto Rico to manage its fiscal situation; |
| 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, including managing any potential customer confusion caused by the alliance structure, (b) risks associated with the limited amount of diligence able to be conducted by a buyer in an FDIC transaction and (c) difficulties in converting or integrating the Doral branches or difficulties in providing transition support to alliance co-bidders. |
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; 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; 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 managements ability to identify and manage these and other risks. Moreover, the outcome of legal proceedings, as discussed in Part II, Item I. Legal Proceedings, is inherently uncertain and depends on judicial interpretations of law and the findings of regulators, judges and juries. Investors should refer to the Corporations Annual Report on Form 10-K for the year ended December 31, 2014 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.
3
All forward-looking statements included in this document are based upon information available to the Corporation as of the date of this document, and other than as required by law, including the requirements of applicable securities laws, we assume no obligation to update or revise any such forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements.
4
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
(In thousands, except share information) |
June 30, 2015 |
December 31, 2014 |
||||||
Assets: |
||||||||
Cash and due from banks |
$ | 557,248 | $ | 381,095 | ||||
|
|
|
|
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Money market investments: |
||||||||
Securities purchased under agreements to resell |
138,067 | 151,134 | ||||||
Time deposits with other banks |
3,116,872 | 1,671,252 | ||||||
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|
|
|
|||||
Total money market investments |
3,254,939 | 1,822,386 | ||||||
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|
|
|
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Trading account securities, at fair value: |
||||||||
Pledged securities with creditors right to repledge |
54,413 | 80,945 | ||||||
Other trading securities |
87,182 | 57,582 | ||||||
Investment securities available-for-sale, at fair value: |
||||||||
Pledged securities with creditors right to repledge |
997,324 | 1,020,529 | ||||||
Other investment securities available-for-sale |
4,587,754 | 4,294,630 | ||||||
Investment securities held-to-maturity, at amortized cost (fair value 2015 - $83,941; 2014 - $94,199) |
101,861 | 103,170 | ||||||
Other investment securities, at lower of cost or realizable value (realizable value 2015 - $168,592; 2014 - $165,024) |
165,505 | 161,906 | ||||||
Loans held-for-sale, at lower of cost or fair value |
202,287 | 106,104 | ||||||
|
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|
|
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Loans held-in-portfolio: |
||||||||
Loans not covered under loss sharing agreements with the FDIC |
22,535,008 | 19,498,286 | ||||||
Loans covered under loss sharing agreements with the FDIC |
689,650 | 2,542,662 | ||||||
Less Unearned income |
99,863 | 93,835 | ||||||
Allowance for loan losses |
550,813 | 601,792 | ||||||
|
|
|
|
|||||
Total loans held-in-portfolio, net |
22,573,982 | 21,345,321 | ||||||
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|
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FDIC loss share asset |
392,947 | 542,454 | ||||||
Premises and equipment, net |
497,078 | 494,581 | ||||||
Other real estate not covered under loss sharing agreements with the FDIC |
142,255 | 135,500 | ||||||
Other real estate covered under loss sharing agreements with the FDIC |
33,504 | 130,266 | ||||||
Accrued income receivable |
130,281 | 121,818 | ||||||
Mortgage servicing assets, at fair value |
206,357 | 148,694 | ||||||
Other assets |
2,184,907 | 1,646,443 | ||||||
Goodwill |
505,435 | 465,676 | ||||||
Other intangible assets |
74,854 | 37,595 | ||||||
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|
|
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Total assets |
$ | 36,750,113 | $ | 33,096,695 | ||||
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|
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Liabilities and Stockholders Equity |
||||||||
Liabilities: |
||||||||
Deposits: |
||||||||
Non-interest bearing |
$ | 6,305,986 | $ | 5,783,748 | ||||
Interest bearing |
21,444,708 | 19,023,787 | ||||||
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|
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Total deposits |
27,750,694 | 24,807,535 | ||||||
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|
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Federal funds purchased and assets sold under agreements to repurchase |
1,121,244 | 1,271,657 | ||||||
Other short-term borrowings |
101,200 | 21,200 | ||||||
Notes payable |
1,804,028 | 1,711,828 | ||||||
Other liabilities |
1,021,540 | 1,012,029 | ||||||
Liabilities from discontinued operations (Refer to Note 4) |
1,754 | 5,064 | ||||||
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|
|
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Total liabilities |
31,800,460 | 28,829,313 | ||||||
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|
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Commitments and contingencies (Refer to Note 26) |
||||||||
Stockholders equity: |
||||||||
Preferred stock, 30,000,000 shares authorized; 2,006,391 shares issued and outstanding |
50,160 | 50,160 | ||||||
Common stock, $0.01 par value; 170,000,000 shares authorized; |
||||||||
103,690,759 shares issued (2014 103,614,553) and 103,503,014 shares outstanding (2014 103,476,847) |
1,037 | 1,036 | ||||||
Surplus |
4,199,165 | 4,196,458 | ||||||
Retained earnings |
924,134 | 253,717 | ||||||
Treasury stock at cost, 187,745 shares (2014 137,706) |
(5,812 | ) | (4,117 | ) | ||||
Accumulated other comprehensive loss, net of tax |
(219,031 | ) | (229,872 | ) | ||||
|
|
|
|
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Total stockholders equity |
4,949,653 | 4,267,382 | ||||||
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|
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Total liabilities and stockholders equity |
$ | 36,750,113 | $ | 33,096,695 | ||||
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|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
5
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Quarters ended June 30, | Six months ended June 30, | |||||||||||||||
(In thousands, except per share information) |
2015 | 2014 | 2015 | 2014 | ||||||||||||
Interest income: |
||||||||||||||||
Loans |
$ | 374,133 | $ | 380,986 | $ | 729,764 | $ | 758,588 | ||||||||
Money market investments |
1,845 | 1,131 | 3,291 | 2,104 | ||||||||||||
Investment securities |
31,297 | 33,989 | 61,598 | 69,116 | ||||||||||||
Trading account securities |
3,026 | 5,344 | 5,722 | 10,601 | ||||||||||||
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|
|
|
|
|
|
|||||||||
Total interest income |
410,301 | 421,450 | 800,375 | 840,409 | ||||||||||||
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|
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Interest expense: |
||||||||||||||||
Deposits |
26,258 | 26,223 | 52,122 | 53,081 | ||||||||||||
Short-term borrowings |
1,863 | 8,892 | 3,597 | 17,932 | ||||||||||||
Long-term debt |
19,627 | 445,716 | 38,908 | 477,606 | ||||||||||||
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|
|
|||||||||
Total interest expense |
47,748 | 480,831 | 94,627 | 548,619 | ||||||||||||
|
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|
|
|
|||||||||
Net interest income (expense) |
362,553 | (59,381 | ) | 705,748 | 291,790 | |||||||||||
Provision for loan losses - non-covered loans |
60,468 | 50,074 | 90,179 | 104,196 | ||||||||||||
Provision for loan losses - covered loans |
15,766 | 11,604 | 26,090 | 37,318 | ||||||||||||
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|
|
|
|
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|
|||||||||
Net interest income (expense) after provision for loan losses |
286,319 | (121,059 | ) | 589,479 | 150,276 | |||||||||||
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|
|
|
|||||||||
Service charges on deposit accounts |
40,138 | 39,237 | 79,155 | 78,596 | ||||||||||||
Other service fees (Refer to Note 32) |
59,421 | 56,468 | 113,047 | 109,286 | ||||||||||||
Mortgage banking activities (Refer to Note 14) |
21,325 | 3,788 | 34,177 | 7,466 | ||||||||||||
Net gain and valuation adjustments on investment securities |
5 | | 5 | | ||||||||||||
Other-than-temporary impairment losses on investment securities |
(14,445 | ) | | (14,445 | ) | | ||||||||||
Trading account (loss) profit |
(3,108 | ) | 1,055 | (2,694 | ) | 3,032 | ||||||||||
Net gain on sale of loans, including valuation adjustments on loans held-for-sale |
681 | 9,659 | 602 | 14,052 | ||||||||||||
Adjustments (expense) to indemnity reserves on loans sold |
419 | (7,454 | ) | (4,107 | ) | (17,801 | ) | |||||||||
FDIC loss share income (expense) (Refer to Note 33) |
19,075 | (55,261 | ) | 23,214 | (79,467 | ) | ||||||||||
Other operating income |
17,248 | 15,297 | 27,040 | 43,657 | ||||||||||||
|
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|
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|
|
|||||||||
Total non-interest income |
140,759 | 62,789 | 255,994 | 158,821 | ||||||||||||
|
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|
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|
|||||||||
Operating expenses: |
||||||||||||||||
Personnel costs |
120,977 | 99,100 | 237,435 | 203,401 | ||||||||||||
Net occupancy expenses |
23,286 | 20,267 | 44,995 | 41,627 | ||||||||||||
Equipment expenses |
15,925 | 12,044 | 29,336 | 23,456 | ||||||||||||
Other taxes |
11,113 | 13,543 | 19,687 | 27,206 | ||||||||||||
Professional fees |
78,449 | 67,024 | 153,977 | 134,023 | ||||||||||||
Communications |
6,153 | 6,425 | 12,329 | 13,110 | ||||||||||||
Business promotion |
13,776 | 16,038 | 24,589 | 27,424 | ||||||||||||
FDIC deposit insurance |
8,542 | 10,480 | 14,940 | 21,458 | ||||||||||||
Other real estate owned (OREO) expenses |
44,816 | 3,410 | 67,885 | 9,850 | ||||||||||||
Other operating expenses |
31,082 | 20,509 | 48,430 | 42,858 | ||||||||||||
Amortization of intangibles |
2,881 | 2,025 | 4,985 | 4,051 | ||||||||||||
Restructuring costs (Refer to Note 6) |
6,174 | 4,574 | 16,927 | 4,574 | ||||||||||||
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|
|||||||||
Total operating expenses |
363,174 | 275,439 | 675,515 | 553,038 | ||||||||||||
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|
|||||||||
Income (loss) from continuing operations before income tax |
63,904 | (333,709 | ) | 169,958 | (243,941 | ) | ||||||||||
Income tax (benefit) expense |
(533,533 | ) | (4,124 | ) | (500,964 | ) | 19,140 | |||||||||
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|
|||||||||
Income (loss) from continuing operations |
597,437 | (329,585 | ) | 670,922 | (263,081 | ) | ||||||||||
Income (loss) from discontinued operations, net of tax (Refer to Note 4) |
15 | (181,729 | ) | 1,356 | (161,824 | ) | ||||||||||
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|
|||||||||
Net Income (Loss) |
$ | 597,452 | $ | (511,314 | ) | $ | 672,278 | $ | (424,905 | ) | ||||||
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|
|||||||||
Net Income (Loss) Applicable to Common Stock |
$ | 596,521 | $ | (512,245 | ) | $ | 670,417 | $ | (426,767 | ) | ||||||
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|
|||||||||
Net Income (Loss) per Common Share Basic |
||||||||||||||||
Net income (loss) from continuing operations |
$ | 5.80 | (3.21 | ) | 6.51 | (2.58 | ) | |||||||||
Net income (loss) from discontinued operations |
- | (1.77 | ) | 0.01 | (1.57 | ) | ||||||||||
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|
|||||||||
Net Income (Loss) per Common Share Basic |
$ | 5.80 | $ | (4.98 | ) | $ | 6.52 | $ | (4.15 | ) | ||||||
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Net Income (Loss) per Common Share Diluted |
||||||||||||||||
Net income (loss) from continuing operations |
$ | 5.79 | (3.21 | ) | 6.49 | (2.58 | ) | |||||||||
Net income (loss) from discontinued operations |
| (1.77 | ) | 0.01 | (1.57 | ) | ||||||||||
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Net Income (Loss) per Common Share Diluted |
$ | 5.79 | $ | (4.98 | ) | $ | 6.50 | $ | (4.15 | ) | ||||||
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The accompanying notes are an integral part of these consolidated financial statements.
6
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
Quarters ended, June 30, |
Six months ended, June 30, |
|||||||||||||||
(In thousands) |
2015 | 2014 | 2015 | 2014 | ||||||||||||
Net income (loss) |
$ | 597,452 | $ | (511,314 | ) | $ | 672,278 | $ | (424,905 | ) | ||||||
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Other comprehensive income (loss) before tax: |
||||||||||||||||
Foreign currency translation adjustment |
(1,092 | ) | (603 | ) | (1,673 | ) | (2,718 | ) | ||||||||
Reclassification adjustment for losses included in net income |
| | | 7,718 | ||||||||||||
Amortization of net losses of pension and postretirement benefit plans |
5,025 | 2,126 | 10,050 | 4,252 | ||||||||||||
Amortization of prior service cost of pension and postretirement benefit plans |
(950 | ) | (950 | ) | (1,900 | ) | (1,900 | ) | ||||||||
Unrealized holding (losses) gains on investments arising during the period |
(41,191 | ) | 27,084 | (5,849 | ) | 54,666 | ||||||||||
Other-than-temporary impairment included in net income |
14,445 | | 14,445 | | ||||||||||||
Reclassification adjustment for gains included in net income |
(5 | ) | | (5 | ) | | ||||||||||
Unrealized net gains (losses) on cash flow hedges |
1,004 | (2,548 | ) | (1,530 | ) | (4,273 | ) | |||||||||
Reclassification adjustment for net losses included in net income |
951 | 1,800 | 2,309 | 3,624 | ||||||||||||
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|
|
|
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|
|||||||||
Other comprehensive (loss) income before tax |
(21,813 | ) | 26,909 | 15,847 | 61,369 | |||||||||||
Income tax expense |
(2,818 | ) | (925 | ) | (5,006 | ) | (2,915 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total other comprehensive (loss) income, net of tax |
(24,631 | ) | 25,984 | 10,841 | 58,454 | |||||||||||
|
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|
|
|
|
|
|||||||||
Comprehensive income (loss), net of tax |
$ | 572,821 | $ | (485,330 | ) | $ | 683,119 | $ | (366,451 | ) | ||||||
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|
|
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|
|||||||||
Tax effect allocated to each component of other comprehensive loss: | ||||||||||||||||
Quarters ended June 30, |
Six months ended, June 30, |
|||||||||||||||
(In thousands) |
2015 | 2014 | 2015 | 2014 | ||||||||||||
Amortization of net losses of pension and postretirement benefit plans |
$ | (1,960 | ) | $ | (829 | ) | $ | (3,920 | ) | $ | (1,658 | ) | ||||
Amortization of prior service cost of pension and postretirement benefit plans |
371 | 370 | 742 | 741 | ||||||||||||
Unrealized holding (losses) gains on investments arising during the period |
2,019 | (758 | ) | 962 | (2,251 | ) | ||||||||||
Other-than-temporary impairment included in net income |
(2,486 | ) | | (2,486 | ) | | ||||||||||
Reclassification adjustment for gains included in net income |
1 | | 1 | | ||||||||||||
Unrealized net gains (losses) on cash flow hedges |
(392 | ) | 994 | 597 | 1,666 | |||||||||||
Reclassification adjustment for net losses included in net income |
(371 | ) | (702 | ) | (902 | ) | (1,413 | ) | ||||||||
|
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|
|
|
|
|
|
|||||||||
Income tax expense |
$ | (2,818 | ) | $ | (925 | ) | $ | (5,006 | ) | $ | (2,915 | ) | ||||
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|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
7
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
(UNAUDITED)
(In thousands) |
Common stock |
Preferred stock |
Surplus | Retained earnings |
Treasury stock |
Accumulated other comprehensive loss |
Total | |||||||||||||||||||||
Balance at December 31, 2013 |
$ | 1,034 | $ | 50,160 | $ | 4,170,152 | $ | 594,430 | $ | (881 | ) | $ | (188,745 | ) | $ | 4,626,150 | ||||||||||||
Net (loss) |
(424,905 | ) | (424,905 | ) | ||||||||||||||||||||||||
Issuance of stock |
1 | 3,047 | 3,048 | |||||||||||||||||||||||||
Tax windfall benefit on vesting of restricted stock |
417 | 417 | ||||||||||||||||||||||||||
Dividends declared: |
| |||||||||||||||||||||||||||
Preferred stock |
(1,862 | ) | (1,862 | ) | ||||||||||||||||||||||||
Common stock purchases |
(872 | ) | (872 | ) | ||||||||||||||||||||||||
Common stock reissuance |
11 | 11 | ||||||||||||||||||||||||||
Other comprehensive income, net of tax |
58,454 | 58,454 | ||||||||||||||||||||||||||
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|
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|
|||||||||||||||
Balance at June 30, 2014 |
$ | 1,035 | $ | 50,160 | $ | 4,173,616 | $ | 167,663 | $ | (1,742 | ) | $ | (130,291 | ) | $ | 4,260,441 | ||||||||||||
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|||||||||||||||
Balance at December 31, 2014 |
$ | 1,036 | $ | 50,160 | $ | 4,196,458 | $ | 253,717 | $ | (4,117 | ) | $ | (229,872 | ) | $ | 4,267,382 | ||||||||||||
Net income |
672,278 | 672,278 | ||||||||||||||||||||||||||
Issuance of stock |
1 | 2,536 | 2,537 | |||||||||||||||||||||||||
Tax windfall benefit on vesting of restricted stock |
171 | 171 | ||||||||||||||||||||||||||
Dividends declared: |
||||||||||||||||||||||||||||
Preferred stock |
(1,861 | ) | (1,861 | ) | ||||||||||||||||||||||||
Common stock purchases |
(1,741 | ) | (1,741 | ) | ||||||||||||||||||||||||
Common stock reissuance |
46 | 46 | ||||||||||||||||||||||||||
Other comprehensive income, net of tax |
10,841 | 10,841 | ||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Balance at June 30, 2015 |
$ | 1,037 | $ | 50,160 | $ | 4,199,165 | $ | 924,134 | $ | (5,812 | ) | $ | (219,031 | ) | $ | 4,949,653 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Disclosure of changes in number of shares: |
June 30, 2015 | June 30, 2014 | ||||||
Preferred Stock: |
||||||||
Balance at beginning and end of period |
2,006,391 | 2,006,391 | ||||||
|
|
|
|
|||||
Common Stock Issued: |
||||||||
Balance at beginning of period |
103,614,553 | 103,435,967 | ||||||
Issuance of stock |
76,206 | 103,416 | ||||||
|
|
|
|
|||||
Balance at end of the period |
103,690,759 | 103,539,383 | ||||||
Treasury stock |
(187,745 | ) | (66,404 | ) | ||||
|
|
|
|
|||||
Common Stock Outstanding |
103,503,014 | 103,472,979 | ||||||
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
8
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six months ended June 30, | ||||||||
(In thousands) |
2015 | 2014 | ||||||
Cash flows from operating activities: |
||||||||
Net income (loss) |
$ | 672,278 | $ | (424,905 | ) | |||
|
|
|
|
|||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
||||||||
Provision for loan losses |
116,269 | 134,750 | ||||||
Goodwill impairment losses |
| 186,511 | ||||||
Amortization of intangibles |
4,985 | 5,007 | ||||||
Depreciation and amortization of premises and equipment |
23,949 | 23,832 | ||||||
Net accretion of discounts and amortization of premiums and deferred fees |
(42,167 | ) | 324,779 | |||||
Other-than-temporary impairment on investment securities |
14,445 | | ||||||
Fair value adjustments on mortgage servicing rights |
6,846 | 15,836 | ||||||
FDIC loss share (income) expense |
(23,214 | ) | 79,467 | |||||
Adjustments (expense) to indemnity reserves on loans sold |
4,107 | 17,801 | ||||||
Earnings from investments under the equity method |
(9,806 | ) | (24,355 | ) | ||||
Deferred income tax (benefit) expense |
(511,128 | ) | 2,689 | |||||
(Gain) loss on: |
||||||||
Disposition of premises and equipment |
(1,429 | ) | (2,551 | ) | ||||
Sale and valuation adjustments of investment securities |
(5 | ) | | |||||
Sale of loans, including valuation adjustments on loans held-for-sale and mortgage banking activities |
(15,034 | ) | (42,413 | ) | ||||
Sale of foreclosed assets, including write-downs |
54,711 | (2,035 | ) | |||||
Acquisitions of loans held-for-sale |
(249,059 | ) | (159,727 | ) | ||||
Proceeds from sale of loans held-for-sale |
51,062 | 72,757 | ||||||
Net originations on loans held-for-sale |
(379,264 | ) | (338,672 | ) | ||||
Net (increase) decrease in: |
||||||||
Trading securities |
481,271 | 459,792 | ||||||
Accrued income receivable |
(656 | ) | 6,721 | |||||
Other assets |
33,552 | (48,455 | ) | |||||
Net increase (decrease) in: |
||||||||
Interest payable |
475 | 633 | ||||||
Pension and other postretirement benefits obligation |
1,641 | (3,096 | ) | |||||
Other liabilities |
(41,438 | ) | 30,260 | |||||
|
|
|
|
|||||
Total adjustments |
(479,887 | ) | 739,531 | |||||
|
|
|
|
|||||
Net cash provided by operating activities |
192,391 | 314,626 | ||||||
|
|
|
|
|||||
Cash flows from investing activities: |
||||||||
Net increase in money market investments |
(1,432,552 | ) | (808,491 | ) | ||||
Purchases of investment securities: |
||||||||
Available-for-sale |
(985,427 | ) | (1,079,586 | ) | ||||
Held-to-maturity |
(250 | ) | | |||||
Other |
(12,805 | ) | (51,097 | ) | ||||
Proceeds from calls, paydowns, maturities and redemptions of investment securities: |
||||||||
Available-for-sale |
867,168 | 816,830 | ||||||
Held-to-maturity |
2,389 | 27,029 | ||||||
Other |
31,592 | 64,724 | ||||||
Proceeds from sale of investment securities: |
||||||||
Available-for-sale |
70,005 | | ||||||
Other |
8,399 | | ||||||
Net repayments on loans |
374,224 | 473,336 | ||||||
Proceeds from sale of loans |
27,780 | 87,983 | ||||||
Acquisition of loan portfolios |
(140,671 | ) | (289,292 | ) | ||||
Net payments from FDIC under loss sharing agreements |
164,423 | 110,618 | ||||||
Net cash received and acquired from business combination |
738,296 | | ||||||
Acquisition of servicing advances |
(3,897 | ) | | |||||
Cash paid related to business acquisition |
(17,250 | ) | | |||||
Mortgage servicing rights purchased |
(2,400 | ) | | |||||
Acquisition of premises and equipment |
(30,817 | ) | (20,333 | ) | ||||
Proceeds from sale of: |
||||||||
Premises and equipment |
7,901 | 8,631 | ||||||
Foreclosed assets |
98,287 | 81,010 | ||||||
|
|
|
|
|||||
Net cash used in investing activities |
(235,605 | ) | (578,638 | ) | ||||
|
|
|
|
|||||
Cash flows from financing activities: |
||||||||
Net increase (decrease) in: |
||||||||
Deposits |
745,787 | 252,715 | ||||||
Federal funds purchased and assets sold under agreements to repurchase |
(150,413 | ) | 418,381 | |||||
Other short-term borrowings |
(48,215 | ) | (370,000 | ) | ||||
Payments of notes payable |
(430,003 | ) | (111,030 | ) | ||||
Proceeds from issuance of notes payable |
103,231 | 31,905 | ||||||
Proceeds from issuance of common stock |
2,536 | 3,048 | ||||||
Dividends paid |
(1,861 | ) | (1,862 | ) | ||||
Net payments for repurchase of common stock |
(1,695 | ) | (861 | ) | ||||
|
|
|
|
|||||
Net cash provided by financing activities |
219,367 | 222,296 | ||||||
|
|
|
|
|||||
Net increase (decrease) in cash and due from banks |
176,153 | (41,716 | ) | |||||
Cash and due from banks at beginning of period |
381,095 | 423,211 | ||||||
|
|
|
|
|||||
Cash and due from banks at the end of period, including discontinued operations |
557,248 | 381,495 | ||||||
Less: cash from discontinued operations |
| 18,923 | ||||||
|
|
|
|
|||||
Cash and due from banks at the end of the period |
$ | 557,248 | $ | 362,572 | ||||
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
The Consolidated Statements of Cash Flows for the six months ended June 30, 2015 and 2014 include the cash flows from operating, investing and financing activities associated with discontinued operations.
9
Notes to Consolidated Financial
Statements (Unaudited)
Note 1 - |
11 | |||||
Note 2 - |
Basis of presentation and summary of significant accounting policies |
12 | ||||
Note 3 - |
13 | |||||
Note 4 - |
18 | |||||
Note 5 - |
19 | |||||
Note 6 - |
22 | |||||
Note 7 - |
Restrictions on cash and due from banks and certain securities |
23 | ||||
Note 8 - |
24 | |||||
Note 9 - |
25 | |||||
Note 10 - |
29 | |||||
Note 11 - |
31 | |||||
Note 12 - |
43 | |||||
Note 13 - |
68 | |||||
Note 14 - |
70 | |||||
Note 15 - |
71 | |||||
Note 16 - |
76 | |||||
Note 17 - |
77 | |||||
Note 18 - |
78 | |||||
Note 19 - |
80 | |||||
Note 20 - |
81 | |||||
Note 21 - |
83 | |||||
Note 22 - |
85 | |||||
Note 23 - |
86 | |||||
Note 24 - |
87 | |||||
Note 25 - |
89 | |||||
Note 26 - |
92 | |||||
Note 27 - |
98 | |||||
Note 28 - |
Related party transactions with affiliated company / joint venture |
102 | ||||
Note 29 - |
106 | |||||
Note 30 - |
112 | |||||
Note 31 - |
118 | |||||
Note 32 - |
119 | |||||
Note 33 - |
120 | |||||
Note 34 - |
121 | |||||
Note 35 - |
122 | |||||
Note 36 - |
125 | |||||
Note 37 - |
Supplemental disclosure on the consolidated statements of cash flows |
128 | ||||
Note 38 - |
129 | |||||
Note 39 - |
136 |
10
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, including mortgage loan originations, 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. 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 38 to the consolidated financial statements presents information about the Corporations 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 FDICs 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
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, 2014 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 2014 consolidated financial statements and notes to the financial statements to conform with the 2015 presentation. As discussed in Note 4, current and prior periods presented in the consolidated statement of operations as well as the related note disclosures covering income and expense amounts have been retrospectively adjusted for the impact of the discontinued operations for comparative purposes. The consolidated statement of financial condition and related note disclosure for prior periods do not reflect the reclassification of BPNAs assets and liabilities to discontinued operations.
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, 2014, included in the Corporations 2014 Annual Report (the 2014 Annual Report). Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Business Combination
The Corporation determined that the acquisition of certain assets and assumption of certain liabilities in connection with the Doral Bank Transaction constitutes a business combination as defined by the Financial Accounting Standards Board (FASB) Codification (ASC) Topic 805 Business Combinations. The assets and liabilities, both tangible and intangible, were initially recorded at their estimated fair values. Fair values were determined based on the requirements of FASB Codification Topic 820 Fair Value Measurements. These fair value estimates are preliminary and subject to refinement for up to one year after the closing date of the acquisition as additional information regarding the closing date fair value becomes available. Acquisition-related costs are expensed as incurred. Refer to Note 5, Business Combination, for additional information of assets acquired and liabilities assumed in connection with this transaction.
Loans acquired as part of the Doral Bank Transaction
Loans acquired in a business acquisition are recorded at their fair value at the acquisition date. Credit discounts are included in the determination of fair value; therefore, an allowance for loan losses is not recorded at the acquisition date.
Approximately $162 million of residential mortgage loans acquired as part of the Doral Bank Transaction were considered impaired. Accordingly, the Corporation applied the guidance of ASC Subtopic 310-30. Under this guidance, the loans acquired from the FDIC were aggregated into pools based on similar characteristics, including factors such as loan type, interest rate type, accruing status, and amortization type. Each loan pool is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows. Under ASC Subtopic 310-30, the difference between the undiscounted cash flows expected at acquisition and the fair value in the loans, or the accretable yield, is recognized as interest income using the effective yield method over the estimated life of the loan if the timing and amount of the future cash flows of the pool is reasonably estimable. The non-accretable difference represents the difference between contractually required principal and interest and the cash flows expected to be collected. Subsequent to the acquisition date, increases in cash flows over those expected at the acquisition date are recognized as interest income prospectively. Decreases in expected cash flows after the acquisition date are recognized by recording an allowance for loan losses.
12
Note 3 New accounting pronouncements
FASB Accounting Standards Update 2015-09, Insurance - (Topic 944): Disclosures about Short-Duration Contracts
In June 2015, the FASB issued Accounting Standards Update 2015-09, Disclosure about Short-Duration Contracts, which applies to all insurance entities that issue short-duration contracts. The amendment requires, among other things, additional disclosures about the liability for unpaid claims and claim adjustment expenses. The amendments also require insurance entities to disclose information about significant changes in methodologies and assumptions used to calculate the liability for unpaid claims and claim adjustment expenses, including reasons for the change and the effects on the financial statements.
The amendments in this update are effective for annual periods beginning after December 15, 2015, and interim periods within annual periods beginning after December 15, 2016.
The Corporation does not anticipate that the adoption of this accounting pronouncement will have a significant impact on its consolidated financial statements.
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)
The FASB issued ASU 2015-07 in May 2015, which removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. Currently, investments valued using the practical expedient are categorized within the fair value hierarchy on the basis of whether the investment is redeemable with the investee at net asset value on the measurement date, never redeemable with the investee at net asset value, or redeemable with the investee at a future date. For investments that are redeemable with the investee at a future date, a reporting entity must take into account the length of time until those investments become redeemable to determine the classification within the fair value hierarchy. There is diversity in practice related to how certain investment measured at net asset value with redemption dates in the future are categorized within the fair value hierarchy.
The amendments also remove the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. Those disclosures are limited to investments for which the entity has elected to measure the fair value using that practical expedient.
The amendments of this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 31, 2015. Early adoption is permitted. A reporting entity should apply the amendments retrospectively to all periods presented. The retrospective approach requires that an investment for which fair value is measured using the net asset value per share practical expedient be removed from the fair value hierarchy in all periods presented in an entitys financial statements.
The adoption of this guidance impacts presentation disclosures only and will not have an impact on the Corporations consolidated statement of financial condition or results of operations.
FASB Accounting Standards Update 2015-05, Intangibles Goodwill and Other Internal-Use Software (Subtopic 350-40): Customers Accounting for Fees Paid in a Cloud Computing Arrangement (ASU 2015-05)
The FASB issued ASU 2015-05 in April 2015, which provides guidance about a customers accounting for fees paid in a cloud computing arrangement. The amendments in this ASU provide guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. This guidance will not change the accounting for service contracts. All software licenses within the scope of ASC Subtopic 350-40 will be accounted for consistent with other licenses of intangible assets.
The amendments of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 31, 2015. Early adoption is permitted. An entity can adopt the amendments either prospectively to all arrangements entered into or materially modified after the effective date, or retrospectively.
The Corporation is currently evaluating the impact that the adoption of this accounting pronouncement will have on its consolidated financial statements.
13
FASB Accounting Standards Update 2015-04, Compensation Retirement Benefits (Topic 715): Practical Expedient for the Measurement Date of an Employers Defined Benefit Obligation and Plan Assets (ASU 2015-04)
The FASB issued ASU 2015-04 in April 2015, which simplifies the measurement of benefit plan assets and obligations. For an entity with a fiscal year-end that does not coincide with a month-end, the amendments in this ASU provides a practical expedient that permits the entity to measure defined benefit plan assets and obligations using the month-end that is closest to the entitys fiscal year-end and apply that practical expedient from year to year. The practical expedient should be applied consistently to all plans if an entity has more than one plan.
For an entity that has a significant event in an interim period that calls for a remeasurement of defined benefit plan assets and obligation, the amendments in this ASU also provide a practical expedient that permits the entity to remeasure define plan assets and obligations using the month-end that is closest to the date of the significant event.
An entity is required to disclose the accounting policy election and the date used to measure defined benefit plan assets and obligations in accordance with the amendments of this ASU. Employee benefit plans are not within the scope of these amendments.
The amendments of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 31, 2015. Early adoption is permitted. The amendments in this ASU should be applied prospectively.
The Corporation does not expect that the adoption of this accounting pronouncement will have a significant impact on its financial statements.
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 simplifies 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, consistent with debt discounts. Having different balance sheet presentation requirements for debt issuance costs and debt discount and premium creates unnecessary complexity. The recognition and measurement guidance for debt issuance costs are not affected by the amendments of this Update.
The amendments of this Update are effective for financial statements issued for fiscal years beginning after December 31, 2015, and interim periods within fiscal years beginning after December 31, 2016. Early adoption is permitted for financial statements that have not been previously issued.
An entity should apply the new guidance on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. Upon transition, an entity is required to comply with the applicable disclosures for a change in an accounting principle.
The Corporations current policy is to record debt issuance costs as a deferred asset, and accordingly, it will need to reclassify this balance upon adoption. However, this balance sheet reclassification is not expected to have a material impact in the Corporations consolidated financial statements.
FASB Accounting Standards Update 2015-02, Consolidation (Topic 810): Amendment to the Consolidation Analysis (ASU 2015-02)
The FASB issued ASU 2015-02 in February 2015, which changes the analysis that a reporting entity must perform to determine whether it should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. Specifically, the amendments:
1) | Modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities |
2) | Eliminate the presumption that a general partner should consolidate a limited partnership |
3) | Affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships |
4) | Provide a scope exception from consolidation guidance for reporting entities with interest in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. |
14
The amendments of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 31, 2015. Early adoption is permitted, including adoption in an interim period. If an entity early adopts in an interim period, any adjustment should be reflected as of the beginning of the fiscal year of that includes that interim period.
The amendments may be applied using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption. A reporting entity may also apply the amendments of this ASU retrospectively.
The Corporation is currently evaluating the impact that the adoption of this accounting pronouncement will have on its consolidated financial statements.
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)
The FASB issued ASU 2015-01 in January 2015, which eliminates from GAAP the concept of extraordinary items. Presently, an event or transaction is presumed to be an ordinary and usual activity of the reporting entity unless evidence clearly supports the classification as an extraordinary item. If an event or transaction meets the criteria for extraordinary classification, an entity is required to segregate the extraordinary item from the results of ordinary operations and show the item separately in the income statement, net of tax, after income from continuing operations. The entity is also required to disclose applicable income taxes and either present or disclose earnings-per-share data applicable to the extraordinary item.
Eliminating the concept of extraordinary items will save time and reduce costs for preparers because they will not have to assess whether a particular event or transaction event is extraordinary. This will alleviate uncertainty for preparers, auditors, and regulators because auditors and regulators no longer will need to evaluate whether a preparer treated an unusual and/or infrequent item appropriately.
The presentation and disclosure guidance for items that are unusual in nature and occur infrequently will be retained and will be expanded to include items that are both unusual in nature and infrequently occurring.
The amendments of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 31, 2015. The amendments may be applied prospectively or retrospectively to all prior periods presented in the financial statements. Early adoption is permitted provided is applied from the beginning of the fiscal year of adoption.
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 or presentation and disclosures.
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)
The FASB issued ASU 2014-16 in November 2014, which intends to eliminate the use of different methods in practice and thereby reduce existing diversity under GAAP in the accounting for hybrid financial instruments issued in the form of a share. An entity should determine the nature of the host contract by considering the economic characteristics and risks of the entire hybrid financial instrument, including the embedded derivative feature that is being evaluated for separate accounting from the host contract. In evaluating the stated and implied substantive terms and features, the existence or omission of any single term or feature does not necessarily determine the economic characteristics and risks of the host contract. Although an individual term or feature may weigh more heavily in the evaluation on the basis of facts and circumstances, an entity should use judgment based on an evaluation of all relevant terms and features.
The amendment in this ASU does not change the current criteria in GAAP for determining when separation of certain embedded derivative features in a hybrid financial instrument is required. An entity will continue to evaluate whether the economic characteristics and risks of the embedded derivative feature are clearly and closely related to those of the host contract, among other relevant criteria.
The amendments in the ASU are effective for annual periods, and interim periods within those annual periods, beginning in the first quarter of 2016. Early adoption is permitted. The effects of initially adopting the amendments of this ASU should be applied on a modified retrospective basis to existing hybrid financial instruments issued in the form of a share as of the beginning of the fiscal year for which the amendments are effective. Retrospective application is permitted to all relevant prior periods.
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.
15
FASB Accounting Standards Update 2014-15, Presentation of Financial Statements Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entitys Ability as a Going Concern (ASU 2014-15)
The FASB issued ASU 2014-15 in August 2014, which provides guidance in GAAP about managements responsibility to evaluate whether there is substantial doubt about an entitys ability to continue as a going concern and to provide the related footnote disclosures. These amendments should reduce diversity in the timing and content of footnote disclosures.
In connection with preparing financial statements for each annual and interim reporting period, an entitys management should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entitys ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable).
When management identifies conditions or events that raise substantial doubt about an entitys ability to continue as a going concern, management should consider whether its plans that are intended to mitigate those relevant conditions or events will alleviate the substantial doubt. The mitigating effect of managements plans should be considered only to the extent that (1) it is probable that the plans will be effectively implemented and, if so, (2) it is probable that the plans will mitigate the conditions or events that raise substantial doubt about the entitys ability to continue as a going concern.
The amendments in this Update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted.
The Corporation does not anticipate that the adoption of this guidance will have a material effect on its consolidated statements of financial condition, results of operations or presentation and disclosures.
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)
The FASB issued ASU 2014-13 in August 2014, which intends to clarify that when a reporting entity that consolidates a collateralized financing entity may elect to measure the financial assets and the financial liabilities of that collateralized financing entity using either the measurement alternative included in this Update or Topic 820 on fair value measurement. When the measurement alternative is not elected, the amendments of this Update clarify that the fair value of the financial assets and the fair value of the financial liabilities of the consolidated collateralized financing entity should be measured using the requirements of Topic 820 and any differences in the fair value of the financial assets and the fair value of the financial liabilities of that entity should be reflected in earnings and attributed to the reporting entity in the consolidated statement of income.
When a reporting entity elects the measurement alternative included in this Update for a collateralized financing entity, the reporting entity should measure both the financial assets and the financial liabilities of that entity in its consolidated financial statements using the more observable of the fair value of the financial assets and the fair value of the financial liabilities.
The amendments in the ASU are effective in the first quarter of 2016. Early adoption is permitted as of the beginning of an annual period. The amendments of this ASU can be applied using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the annual period of adoption. A reporting entity also may apply the amendments retrospectively to all relevant prior periods beginning with the annual period in which the amendments of ASU 2009-17 were initially adopted.
The Corporation does not anticipate that the adoption of this accounting pronouncement guidance will have a material effect on its consolidated statements of financial condition or results of operations.
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)
The FASB issued ASU 2014-12 in June 2014, which intends to resolve the diverse accounting treatment of awards with a performance target that could be achieved after an employee completes the requisite service period. That is, the employee would be eligible to vest in the award regardless of whether the employee is rendering service on the date the performance target is achieved.
16
The amendments of the ASU require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant-date fair value of the award.
Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the periods for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period.
The amendments in the ASU are effective in the first quarter of 2016. Early adoption is permitted. The amendments of this ASU can be applied (a) prospectively to all awards granted or modified after the effective date or (b) retrospectively to all awards with performance targets outstanding at the beginning of the period of adoption and to all new or modified awards thereafter.
The Corporation does not anticipate that the adoption of this guidance will have a material effect on its consolidated statements of financial condition or results of operations.
FASB Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606); (ASU 2014-09)
The FASB issued ASU 2014-09 in May 2014, which clarifies the principles for recognizing revenue and develop a common revenue standard that would (1) remove inconsistencies and weaknesses in revenue requirements, (2) provide a more robust framework for addressing revenue issues, (3) improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets, (4) provide more useful information to users of financial statement through improved disclosure requirements and (5) simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer. ASU 2014-09 amends the ASC Codification and creates a new Topic 606, Revenue from Contracts with Customers.
The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
In addition, the new guidance requires disclosures to enable users of financial statements to understand the nature, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Qualitative and quantitative information is required about contract with customers, significant judgments and changes in judgments, and assets recognized from the cost to obtain or fulfill a contract.
The amendments in this ASU were originally effective in the first quarter of 2017, however, on July 9, 2015, the FASB voted to approve a deferral of the effective date of this new revenue standard by one year until January 1, 2018.
The Corporation is currently evaluating the impact that the adoption of this guidance will have on the presentation and disclosures in its consolidated financial statements.
17
Note 4 Discontinued operations
During the year ended December 31, 2014, the Corporation completed the sale of its California, Illinois and Central Florida regional operations to three different buyers.
In connection with these transactions, the Corporation is relocating certain back office operations to Puerto Rico and New York. The Corporation incurred restructuring charges of $16.9 million during the six months period ended June 30, 2015. Additional restructuring charges amounting to approximately $3.2 million are expected to be incurred in the year 2015. Refer to Note 6, for restructuring charges incurred during the quarter and six months ended June 30, 2015.
The regional operations sold constituted a business, as defined in ASC 805-10-55. Accordingly, the decision to sell these businesses resulted in the discontinuance of each of their respective operations and classification as held-for-sale. 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 required by ASC 205-20, current and prior periods presented in the consolidated statement of operations as well as the related note disclosures covering income and expense amounts have been retrospectively adjusted for the impact of the discontinued operations for comparative purposes. The consolidated statement of financial condition and related note disclosure for prior periods do not reflect the reclassification of these assets and liabilities to discontinued operations.
During the quarter ended June 30, 2014, the Corporation recorded non-cash impairment charge of $187 million related to the goodwill allocated, on a relative fair value basis, to these operations. However, this non-cash charge had no impact on the Corporations tangible capital or regulatory capital ratios.
After the sale of these three regions, at June 30, 2015, there were no assets held within the discontinued operations. Liabilities within discontinued operations amounted to approximately $1.8 million, mainly comprised of the indemnity reserve related to the California regional sale.
The following table provides the components of net income from the discontinued operations for the quarters and six months ended June 30, 2015 and 2014.
Quarters ended June 30, | Six month period ended June 30, | |||||||||||||||
(In thousands) |
2015 | 2014 | 2015 | 2014 | ||||||||||||
Net interest income |
$ | | $ | 19,092 | $ | | $ | 40,889 | ||||||||
Provision (reversal) for loan losses |
| | | (6,764 | ) | |||||||||||
Other non-interest income |
| 9,388 | | 19,921 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total non-interest income |
| 9,388 | | 19,921 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Operating expenses: |
||||||||||||||||
Personnel costs |
(9 | ) | 12,117 | (9 | ) | 20,969 | ||||||||||
Net occupancy expenses |
| 2,845 | | 7,176 | ||||||||||||
Professional fees |
(7 | ) | 5,903 | (1,348 | ) | 8,696 | ||||||||||
Goodwill impairment charge |
| 186,511 | | 186,511 | ||||||||||||
Other operating expenses |
1 | 2,833 | 1 | 6,046 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total operating expenses |
(15 | ) | 210,209 | (1,356 | ) | 229,398 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) from discontinued operations |
$ | 15 | $ | (181,729 | ) | $ | 1,356 | $ | (161,824 | ) | ||||||
|
|
|
|
|
|
|
|
18
On February 27, 2015, BPPR, the Corporations Puerto Rico banking subsidiary, in an alliance with co-bidders, including BPNA, the Corporations U.S. mainland banking subsidiary, acquired certain assets and all deposits (other than certain brokered deposits) of former Doral Bank from the Federal Deposit Insurance Corporation (FDIC), as receiver.
Under the FDICs 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 FirstBank Puerto Rico, Centennial Bank, and a vehicle formed by J.C. Flowers III LP. BPPR entered into transition service agreements with each of the alliance co-bidders.
After taking into account the transfers to the unaffiliated alliance co-bidders, BPPR and BPNA assumed an aggregate of approximately $2.2 billion in deposits and acquired an aggregate of approximately $1.7 billion in commercial and residential loans.
BPPR assumed approximately $574 million in deposits associated with eight Puerto Rico branches of Doral Bank and approximately $425 million from its online deposit platform, and approximately $827 million in Puerto Rico residential and commercial loans.
BPNA assumed approximately $1.2 billion in deposits in three New York branches of Doral Bank, and acquired approximately $891 million in commercial loans primarily in the New York metropolitan area.
There is no loss-sharing arrangement with the FDIC on the acquired assets.
On February 27, 2015, the FDIC, as receiver for Doral Bank, accepted BPPRs bid for the purchase of the mortgage servicing rights on three pools of residential mortgage loans of approximately $5.0 billion in unpaid principal balance for a purchase price initially estimated at $48.6 million. As of February 27, 2015, the transfers of the mortgage servicing rights were subject to a number of specified closing conditions, including the consent of each of Ginnie Mae, Fannie Mae and Freddie Mac in a form acceptable to BPPR, and other customary closing conditions. Therefore, the fair value as of March 31, 2015 was recorded as a contingent asset as part of other assets in the Consolidated Statement of Condition. During the second quarter of 2015, BPPR completed the acquisition of the mortgage servicing rights pools on the three pools for an aggregate purchase price of $56.2 million, including certain servicing advances purchased. As a result of the completion of these transactions, during the second quarter of 2015 BPPR reclassified the contingent asset from other assets to mortgage servicing rights.
During the second quarter of 2015, retrospective adjustments were made to the estimated fair values of certain assets and liabilities assumed with the Doral Bank Transaction to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the acquisition-date fair value measurements. The retrospective adjustments were for the mortgage servicing rights, which resulted in a decrease in the initial fair value estimate by $2.1 million, and for the acquisition costs on deposits which resulted in an increase of $2.6 million in the receivable from the FDIC, both of which were adjusted against goodwill.
19
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, which includes updated fair value adjustments of the mortgage servicing rights initially recorded as a contingent asset and of the deposits.
(In thousands) |
Book value prior to purchase accounting adjustments |
Fair value adjustments |
Additional consideration[1] |
As recorded by Popular, Inc. on February 27, 2015 |
||||||||||||
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 |
1,718,208 | (52,452 | ) | | 1,665,756 | |||||||||||
Accrued income receivable |
7,808 | | | 7,808 | ||||||||||||
Receivable from the FDIC |
| | 441,721 | 441,721 | ||||||||||||
Core deposit intangible |
23,572 | | | 23,572 | ||||||||||||
Other assets |
67,676 | 7,569 | | 75,245 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total assets |
$ | 2,360,388 | $ | (44,883 | ) | $ | 441,721 | $ | 2,757,226 | |||||||
|
|
|
|
|
|
|
|
|||||||||
Liabilities: |
||||||||||||||||
Deposits |
$ | 2,193,404 | $ | 8,051 | $ | | $ | 2,201,455 | ||||||||
Advances from the Federal Home Loan Bank |
542,000 | 5,187 | | 547,187 | ||||||||||||
Other liabilities |
50,728 | | | 50,728 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total liabilities |
$ | 2,786,132 | $ | 13,238 | $ | | $ | 2,799,370 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Excess of liabilities assumed over assets acquired |
$ | 425,744 | ||||||||||||||
Aggregate fair value adjustments |
$ | (58,121 | ) | |||||||||||||
Additional consideration |
$ | 441,721 | ||||||||||||||
Goodwill on acquisition |
$ | 42,144 |
[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. |
The fair values assigned to the assets acquired and liabilities assumed are preliminary and subject to refinement for up to one year after the closing date of the acquisition as new information relative to closing date fair values becomes available. Because of the short time period between the February 27, 2015 closing of the transaction and the June 30, 2015 reporting date, the Corporation continues to analyze its estimates of fair value on loans and other assets acquired as well as the deposits and other liabilities assumed. As the Corporation finalizes its analyses of these assets and liabilities, there may be additional adjustments to the recorded carrying values, and thus the recognized goodwill may increase or decrease.
The following is a description of the methods used to determine the fair values of significant assets acquired and liabilities assumed on the Doral Bank Transaction:
Loans
Fair values of loans were based on a discounted cash flow methodology. Certain loans were valued individually, while other loans were valued as pools. Aggregation into pools considered characteristics such as loan type, payment term, rate type and accruing status. Principal and interest projections considered prepayment rates and credit loss expectations. The discount rates were developed based on the relative risk of the cash flows, taking into account principally the loan type, market rates as of the valuation date, liquidity expectations, and the expected life of the loans.
Mortgage Servicing Rights (recorded as Contingent Asset at February 27, 2015)
The Corporation uses a discounted cash flow model to estimate the fair value of mortgage servicing rights. The discounted cash flow model incorporates assumptions that market participants would use in estimating future net servicing income, including
20
estimates of prepayment speeds, discount rate, cost to service, escrow account earnings, contractual servicing fee income, prepayment and late fees, among other considerations. The mortgage servicing rights from the Doral Bank Transaction were recorded at the BPPR reportable segment.
Goodwill
The amount of goodwill is the residual difference in the fair value of liabilities assumed and net consideration paid to the FDIC over the fair value of the assets acquired. The goodwill created by this transaction is driven by the deployment of capital with meaningful earnings accretion and significant cost savings opportunities. In addition to strengthening the Corporations Puerto Rico franchise, the transaction grows the U.S. business through the addition of an attractive commercial platform. The goodwill is deductible for income tax purposes. The goodwill from the Doral Bank Transaction was assigned to the BPPR and BPNA reportable segments based on the relative fair value of the assets acquired and liabilities assumed.
Core deposit intangible
This intangible asset represents the value of the relationships that Doral Bank had with its deposit customers. The fair value of this intangible asset was estimated based on a discounted cash flow methodology that gave appropriate consideration to expected customer attrition rates, cost of the core deposit base, interest costs, and the net maintenance cost attributable to customer deposits, and the cost of alternative funds. The core deposit intangible asset will be amortized over a period of fifteen years.
Deposits
The fair values used for the demand deposits that comprise the transaction accounts acquired, which have no stated maturity and include non-interest bearing demand deposits, savings, NOW, and money market accounts, by definition equal the amount payable on demand at the reporting date. The fair values for time deposits were estimated using a discounted cash flow calculation that applies interest rates currently offered to comparable time deposits with similar maturities, and also accounts for the non-performance risk by using internally-developed models that consider, where applicable, the remaining term and the credit premium of the institution.
Deferred taxes
Deferred taxes relate to a difference between the financial statement and tax basis of the assets acquired and assumed liabilities assumed in the transaction. Deferred taxes were reported based upon the principles in ASC Topic 740 Income Taxes, and were measured using the enacted statutory income tax rate to be in effect for BPPR and BPNA at the time the deferred tax is expected to reverse.
For income tax purposes, the Doral Bank Transaction was accounted for as an asset purchase and the tax bases of assets acquired were allocated based on fair values using a modified residual method. Under this method, the purchase price was allocated among the assets in order of liquidity (the most liquid first) up to its fair market value.
The operating results of the Corporation for the quarter and six months periods ended on June 30, 2015 include the operating results produced by the acquired assets and assumed liabilities. This includes approximately $34.4 million and $48.4 million in gross revenues and approximately $26.8 million and $41.3 million in operating expenses for the quarter and six months periods ended on June 30, 2015, respectively. The Corporation believes that given the amount of assets and liabilities assumed, the size of the operations acquired in relation to Populars operations and the significant amount of fair value adjustments, the historical results of Doral Bank are not meaningful to Populars results, and thus no pro forma information is presented.
21
As discussed in Note 4, in connection with the sale of the operations of the California, Illinois and Central Florida regions, the Corporation is relocating certain back office operations, previously conducted in these regions, to Puerto Rico and New York. The Corporation has undertaken a restructuring plan (the PCB Restructuring Plan) to eliminate and re-locate employment positions, terminate contracts and incur other costs associated with moving the operations to Puerto Rico and New York. The Corporation estimates that it will incur restructuring charges of approximately $46.8 million, of which approximately $26.7 million were incurred during 2014; $16.9 million during the six months ended June 30, 2015 and the remaining $3.2 million are expected to be incurred during 2015. The remaining costs for 2015 are primarily related to personnel and occupancy related expenses.
The following table details the expenses recorded by the Corporation that were associated with the PCB Restructuring Plan:
(In thousands) |
Quarter ended June 30, 2015 |
Six months ended June 30, 2015 |
||||||
|
|
|
|
|||||
Personnel costs |
$ | 2,866 | $ | 12,232 | ||||
Net occupancy expenses |
2,660 | 3,046 | ||||||
Equipment expenses |
66 | 224 | ||||||
Professional fees |
315 | 781 | ||||||
Other operating expenses |
267 | 644 | ||||||
|
|
|
|
|||||
Total restructuring costs |
$ | 6,174 | $ | 16,927 | ||||
|
|
|
|
The following table presents the activity in the reserve for the restructuring costs associated with the PCB Restructuring Plan:
(In thousands) |
||||
Balance at January 1, 2015 |
$ | 13,536 | ||
Charges expensed during the period |
8,312 | |||
Payments made during the period |
(18,759 | ) | ||
|
|
|||
Balance at June 30, 2015 |
$ | 3,089 | ||
|
|
22
Note 7 - Restrictions on cash and due from banks and certain securities
The Corporations 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 June 30, 2015 (December 31, 2014 - $ 1.0 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 June 30, 2015, the Corporation held $27 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, 2014 - $45 million). The amounts held in trading account securities and investment securities available for sale consist primarily of restricted assets held for the Corporations non-qualified retirement plans and fund deposits guaranteeing possible liens or encumbrances over the title of insured properties.
23
Certain securities and loans were pledged to secure public and trust deposits, assets sold under agreements to repurchase, other borrowings and credit facilities available, derivative positions, and loan servicing agreements. The classification and carrying amount of the Corporations pledged assets, in which the secured parties are not permitted to sell or repledge the collateral, were as follows:
(In thousands) |
June 30,2015 | December 31,2014 | ||||||
Investment securities available-for-sale, at fair value |
$ | 2,286,368 | $ | 1,700,820 | ||||
Investment securities held-to-maturity, at amortized cost |
58,910 | 60,515 | ||||||
Loans held-in-portfolio covered under loss sharing agreements with the FDIC |
411,597 | 480,441 | ||||||
Loans held-in-portfolio not covered under loss sharing agreements with the FDIC |
8,488,262 | 8,820,204 | ||||||
|
|
|
|
|||||
Total pledged assets |
$ | 11,245,137 | $ | 11,061,980 | ||||
|
|
|
|
Pledged securities that the creditor has the right by custom or contract to repledge are presented separately on the consolidated statements of financial condition.
At June 30, 2015, the Corporation had $ 1.4 billion in investment securities available-for-sale and $ 0.5 billion in loans that served as collateral to secure public funds (December 31, 2014 - $ 0.7 billion and $ 0.7 billion, respectively).
At June 30, 2015, the Corporations banking subsidiaries had short-term and long-term credit facilities authorized with the Federal Home Loan Bank system (the FHLB) aggregating to $3.7 billion (December 31, 2014 - $3.7 billion). Refer to Note 20 to the consolidated financial statements for borrowings outstanding under these credit facilities. At June 30, 2015, the credit facilities authorized with the FHLB were collateralized by $ 4.5 billion in loans held-in-portfolio (December 31, 2014 - $ 4.5 billion). Also, at June 30, 2015, the Corporations banking subsidiaries had a borrowing capacity at the Federal Reserve (Fed) discount window of $1.3 billion, which remained unused as of such date (December 31, 2014 - $2.1 billion). The amount available under these credit facilities with the Fed is dependent upon the balance of loans and securities pledged as collateral. At June 30, 2015, the credit facilities with the Fed discount window were collateralized by $ 3.9 billion in loans held-in-portfolio (December 31, 2014 - $ 4.1 billion). These pledged assets are included in the above table and were not reclassified and separately reported in the consolidated statements of financial condition.
24
Note 9 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 June 30, 2015 and December 31, 2014.
At June 30, 2015 | ||||||||||||||||||||
(In thousands) |
Amortized cost |
Gross unrealized gains |
Gross unrealized losses |
Fair value |
Weighted average yield |
|||||||||||||||
U.S. Treasury securities |
||||||||||||||||||||
Within 1 year |
$ | 25,279 | $ | 795 | $ | | $ | 26,074 | 3.99 | % | ||||||||||
After 1 to 5 years |
942,596 | 5,111 | 58 | 947,649 | 1.00 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total U.S. Treasury securities |
967,875 | 5,906 | 58 | 973,723 | 1.08 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Obligations of U.S. Government sponsored entities |
||||||||||||||||||||
Within 1 year |
35,180 | 116 | | 35,296 | 1.85 | |||||||||||||||
After 1 to 5 years |
1,049,241 | 2,390 | 4,450 | 1,047,181 | 1.36 | |||||||||||||||
After 5 to 10 years |
5,110 | 26 | 17 | 5,119 | 5.04 | |||||||||||||||
After 10 years |
23,000 | | 224 | 22,776 | 3.20 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total obligations of U.S. Government sponsored entities |
1,112,531 | 2,532 | 4,691 | 1,110,372 | 1.43 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Obligations of Puerto Rico, States and political subdivisions |
||||||||||||||||||||
Within 1 year |
2,751 | | 11 | 2,740 | 3.85 | |||||||||||||||
After 1 to 5 years |
7,099 | | 234 | 6,865 | 4.05 | |||||||||||||||
After 5 to 10 years |
14,363 | | 2,123 | 12,240 | 6.48 | |||||||||||||||
After 10 years |
36,757 | | 6,488 | 30,269 | 6.24 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total obligations of Puerto Rico, States and political subdivisions |
60,970 | | 8,856 | 52,114 | 5.94 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Collateralized mortgage obligations - federal agencies |
||||||||||||||||||||
After 1 to 5 years |
18,353 | 752 | | 19,105 | 2.98 | |||||||||||||||
After 5 to 10 years |
48,183 | 1,172 | | 49,355 | 2.72 | |||||||||||||||
After 10 years |
1,689,483 | 11,405 | 32,519 | 1,668,369 | 1.99 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total collateralized mortgage obligations - federal agencies |
1,756,019 | 13,329 | 32,519 | 1,736,829 | 2.02 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Mortgage-backed securities |
||||||||||||||||||||
After 1 to 5 years |
22,848 | 1,069 | 7 | 23,910 | 3.58 | |||||||||||||||
After 5 to 10 years |
225,725 | 6,723 | 280 | 232,168 | 3.29 | |||||||||||||||
After 10 years |
1,410,769 | 40,954 | 8,957 | 1,442,766 | 3.07 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total mortgage-backed securities |
1,659,342 | 48,746 | 9,244 | 1,698,844 | 3.11 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Equity securities (without contractual maturity) |
1,350 | 1,247 | 3 | 2,594 | 0.98 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Other |
||||||||||||||||||||
After 1 to 5 years |
9,095 | | 14 | 9,081 | 1.69 | |||||||||||||||
After 5 to 10 years |
1,485 | 36 | | 1,521 | 3.62 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total other |
10,580 | 36 | 14 | 10,602 | 1.96 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total investment securities available-for-sale |
$ | 5,568,667 | $ | 71,796 | $ | 55,385 | $ | 5,585,078 | 2.11 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|
25
At December 31, 2014 | ||||||||||||||||||||
(In thousands) |
Amortized cost |
Gross unrealized gains |
Gross unrealized losses |
Fair value |
Weighted average yield |
|||||||||||||||
U.S. Treasury securities |
||||||||||||||||||||
After 1 to 5 years |
$ | 698,003 | $ | 2,226 | $ | 75 | $ | 700,154 | 1.14 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total U.S. Treasury securities |
698,003 | 2,226 | 75 | 700,154 | 1.14 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Obligations of U.S. Government sponsored entities |
||||||||||||||||||||
Within 1 year |
42,140 | 380 | | 42,520 | 1.61 | |||||||||||||||
After 1 to 5 years |
1,603,245 | 1,168 | 9,936 | 1,594,477 | 1.26 | |||||||||||||||
After 5 to 10 years |
67,373 | 58 | 2,271 | 65,160 | 1.72 | |||||||||||||||
After 10 years |
23,000 | | 184 | 22,816 | 3.18 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total obligations of U.S. Government sponsored entities |
1,735,758 | 1,606 | 12,391 | 1,724,973 | 1.31 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Obligations of Puerto Rico, States and political subdivisions |
||||||||||||||||||||
Within 1 year |
2,765 | 17 | | 2,782 | 3.83 | |||||||||||||||
After 1 to 5 years |
1,024 | 38 | | 1,062 | 8.40 | |||||||||||||||
After 5 to 10 years |
22,552 | 2 | 2,331 | 20,223 | 5.82 | |||||||||||||||
After 10 years |
48,823 | 40 | 11,218 | 37,645 | 6.22 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total obligations of Puerto Rico, States and political subdivisions |
75,164 | 97 | 13,549 | 61,712 | 6.04 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Collateralized mortgage obligations - federal agencies |
||||||||||||||||||||
After 1 to 5 years |
3,687 | 87 | | 3,774 | 2.66 | |||||||||||||||
After 5 to 10 years |
25,202 | 985 | | 26,187 | 2.93 | |||||||||||||||
After 10 years |
1,905,763 | 13,109 | 38,803 | 1,880,069 | 2.03 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total collateralized mortgage obligations - federal agencies |
1,934,652 | 14,181 | 38,803 | 1,910,030 | 2.04 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Mortgage-backed securities |
||||||||||||||||||||
After 1 to 5 years |
27,339 | 1,597 | | 28,936 | 4.68 | |||||||||||||||
After 5 to 10 years |
147,182 | 7,314 | 1 | 154,495 | 3.51 | |||||||||||||||
After 10 years |
676,567 | 45,047 | 683 | 720,931 | 3.93 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total mortgage-backed securities |
851,088 | 53,958 | 684 | 904,362 | 3.88 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Equity securities (without contractual maturity) |
1,351 | 1,271 | | 2,622 | 5.03 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Other |
||||||||||||||||||||
After 1 to 5 years |
9,277 | 10 | | 9,287 | 1.69 | |||||||||||||||
After 5 to 10 years |
1,957 | 62 | | 2,019 | 3.63 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total other |
11,234 | 72 | | 11,306 | 2.03 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total investment securities available-for-sale |
$ | 5,307,250 | $ | 73,411 | $ | 65,502 | $ | 5,315,159 | 2.04 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|
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.
During the quarter ended June 30, 2015, the Corporation sold U.S. agency securities with an approximate amortized cost of $70 million at the BPPR segment. The proceeds from this sale were $ 70.0 million. The Corporation realized a gain of $5 thousand on this transaction. There were no sales of investment securities available-for-sale during the six months ended June 30, 2014.
26
The following tables present the Corporations fair value and gross unrealized losses of investment securities available-for-sale, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2015 and December 31, 2014.
At June 30, 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 |
$ | 39,918 | $ | 58 | $ | | $ | | $ | 39,918 | $ | 58 | ||||||||||||
Obligations of U.S. Government sponsored entities |
372,506 | 1,723 | 271,839 | 2,968 | 644,345 | 4,691 | ||||||||||||||||||
Obligations of Puerto Rico, States and political subdivisions |
15,820 | 6,528 | 8,735 | 2,328 | 24,555 | 8,856 | ||||||||||||||||||
Collateralized mortgage obligations - federal agencies |
303,544 | 3,252 | 907,897 | 29,267 | 1,211,441 | 32,519 | ||||||||||||||||||
Mortgage-backed securities |
862,115 | 8,323 | 23,780 | 921 | 885,895 | 9,244 | ||||||||||||||||||
Equity securities |
47 | 3 | | | 47 | 3 | ||||||||||||||||||
Other |
9,081 | 14 | | | 9,081 | 14 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total investment securities available-for-sale in an unrealized loss position |
$ | 1,603,031 | $ | 19,901 | $ | 1,212,251 | $ | 35,484 | $ | 2,815,282 | $ | 55,385 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
At December 31, 2014 | ||||||||||||||||||||||||
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 |
$ | 49,465 | $ | 75 | $ | | $ | | $ | 49,465 | $ | 75 | ||||||||||||
Obligations of U.S. Government sponsored entities |
888,325 | 6,866 | 429,835 | 5,525 | 1,318,160 | 12,391 | ||||||||||||||||||
Obligations of Puerto Rico, States and political subdivisions |
14,419 | 3,031 | 41,084 | 10,518 | 55,503 | 13,549 | ||||||||||||||||||
Collateralized mortgage obligations - federal agencies |
539,658 | 13,774 | 733,814 | 25,029 | 1,273,472 | 38,803 | ||||||||||||||||||
Mortgage-backed securities |
457 | 4 | 25,486 | 680 | 25,943 | 684 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total investment securities available-for-sale in an unrealized loss position |
$ | 1,492,324 | $ | 23,750 | $ | 1,230,219 | $ | 41,752 | $ | 2,722,543 | $ | 65,502 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2015, the available-for-sale investment portfolio reflects gross unrealized losses of approximately $55 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 US 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 securitys carrying value over its fair value at the evaluation date is accounted for as a loss in the results of operations. The OTTI analysis requires management to consider various factors, which include, but are not limited to: (1) the length of time and the extent to which fair value has been less than the amortized cost basis, (2) the financial condition of the issuer or issuers, (3) actual collateral attributes, (4) the payment structure of the debt security and the likelihood of the issuer being able to make payments, (5) any rating changes by a rating agency, (6) adverse conditions specifically related to the security, industry, or a geographic area, and (7) managements intent to sell the debt security or whether it is more likely than not that the Corporation would be required to sell the debt security before a forecasted recovery occurs. At June 30, 2015, management performed its quarterly analysis of all debt securities in an unrealized loss position.
27
During the second quarter of 2015, the Corporation recognized an other-than-temporary impairment charge of $14.4 million on its portfolio of investment securities available-for-sale classified as obligations from the Puerto Rico government and its political subdivisions. At June 30, 2015 these securities were rated Caa2 and CCC- by Moodys and S&P, respectively. Notwithstanding the payment priorities established by the Puerto Rico Constitution for these securities, Puerto Ricos fiscal and economic situation, together with the Governments recent announcements regarding its ability to pay its debt and its intention to pursue a comprehensive debt restructuring, led management to conclude that the unrealized losses on these government securities were other-than-temporary. The Corporation determined that the entire balance of the unrealized loss carried by these securities was attributed to estimated credit losses. Accordingly, the other-than-temporary impairment was recognized in its entirety in the accompanying consolidated statement of operations and no amount remained recognized in the accompanying statement of other comprehensive income related to these specific securities.
Prospectively, for debt securities for which other-than-temporary impairments were recognized in earnings, the difference between the new amortized cost basis and the cash flows expected to be collected shall be accreted as interest income. If upon subsequent evaluation, there is a significant increase in the cash flows expected to be collected or if actual cash flows are significantly greater than cash flows previously expected, such changes shall be accounted for as a prospective adjustment to the accretable yield. Subsequent increases and decreases (if not an other-than-temporary impairment) in the fair value of available-for-sale securities shall be included in other comprehensive income.
Further negative evidence impacting the liquidity and sources of repayment of the obligations of Puerto Rico and its political subdivisions, could result in a further charge to earnings to recognize estimated credit losses determined to be other-than-temporary. At June 30, 2015, the Corporation did not have the intent to sell debt securities in an unrealized loss position and it is not more likely than not that the Corporation will have to sell the investment securities prior to recovery of their amortized cost basis.
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.
June 30, 2015 | December 31, 2014 | |||||||||||||||
(In thousands) |
Amortized cost | Fair value | Amortized cost | Fair value | ||||||||||||
FNMA |
$ | 2,274,845 | $ | 2,264,445 | $ | 1,746,807 | $ | 1,736,987 | ||||||||
FHLB |
445,169 | 444,409 | 737,149 | 732,894 | ||||||||||||
Freddie Mac |
962,147 | 959,054 | 1,117,865 | 1,112,485 |
28
Note 10 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 June 30, 2015 and December 31, 2014.
At June 30, 2015 | ||||||||||||||||||||
(In thousands) |
Amortized cost |
Gross unrealized gains |
Gross unrealized losses |
Fair value |
Weighted average yield |
|||||||||||||||
Obligations of Puerto Rico, States and political subdivisions |
||||||||||||||||||||
Within 1 year |
$ | 2,865 | $ | | $ | 85 | $ | 2,780 | 5.88 | % | ||||||||||
After 1 to 5 years |
13,400 | | 3,758 | 9,642 | 5.97 | |||||||||||||||
After 5 to 10 years |
20,310 | | 8,561 | 11,749 | 6.12 | |||||||||||||||
After 10 years |
63,695 | 3,200 | 8,720 | 58,175 | 2.13 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total obligations of Puerto Rico, States and political subdivisions |
100,270 | 3,200 | 21,124 | 82,346 | 3.56 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Collateralized mortgage obligations - federal agencies |
||||||||||||||||||||
After 5 to 10 years |
91 | 5 | | 96 | 5.45 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total collateralized mortgage obligations - federal agencies |
91 | 5 | | 96 | 5.45 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Other |
||||||||||||||||||||
After 1 to 5 years |
1,500 | | 1 | 1,499 | 1.21 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total other |
1,500 | | 1 | 1,499 | 1.21 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total investment securities held-to-maturity |
$ | 101,861 | $ | 3,205 | $ | 21,125 | $ | 83,941 | 3.53 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
At December 31, 2014 | ||||||||||||||||||||
(In thousands) |
Amortized cost |
Gross unrealized gains |
Gross unrealized losses |
Fair value |
Weighted average yield |
|||||||||||||||
Obligations of Puerto Rico, States and political subdivisions |
||||||||||||||||||||
Within 1 year |
$ | 2,740 | $ | | $ | 8 | $ | 2,732 | 5.84 | % | ||||||||||
After 1 to 5 years |
12,830 | | 764 | 12,066 | 5.95 | |||||||||||||||
After 5 to 10 years |
21,325 | | 6,003 | 15,322 | 6.09 | |||||||||||||||
After 10 years |
64,678 | 3,342 | 5,543 | 62,477 | 2.22 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total obligations of Puerto Rico, States and political subdivisions |
101,573 | 3,342 | 12,318 | 92,597 | 3.60 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Collateralized mortgage obligations - federal agencies |
||||||||||||||||||||
After 5 to 10 years |
97 | 5 | | 102 | 5.45 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total collateralized mortgage obligations - federal agencies |
97 | 5 | | 102 | 5.45 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Other |
||||||||||||||||||||
Within 1 year |
250 | | | 250 | 1.33 | |||||||||||||||
After 1 to 5 years |
1,250 | | | 1,250 | 1.10 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total other |
1,500 | | | 1,500 | 1.14 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total investment securities held-to-maturity |
$ | 103,170 | $ | 3,347 | $ | 12,318 | $ | 94,199 | 3.57 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|
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.
29
The following tables present the Corporations fair value and gross unrealized losses of investment securities held-to-maturity, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2015 and December 31, 2014.
At June 30, 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 |
||||||||||||||||||
Obligations of Puerto Rico, States and political subdivisions |
$ | | $ | | $ | 37,161 | $ | 21,124 | $ | 37,161 | $ | 21,124 | ||||||||||||
Other |
1,249 | 1 | | | 1,249 | 1 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total investment securities held-to-maturity in an unrealized loss position |
$ | 1,249 | $ | 1 | $ | 37,161 | $ | 21,124 | $ | 38,410 | $ | 21,125 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
At December 31, 2014 | ||||||||||||||||||||||||
Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||
(In thousands) |
Fair value |
Gross unrealized losses |
Fair value |
Gross unrealized losses |
Fair value |
Gross unrealized losses |
||||||||||||||||||
Obligations of Puerto Rico, States and political subdivisions |
$ | 373 | $ | 2 | $ | 45,969 | $ | 12,316 | $ | 46,342 | $ | 12,318 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total investment securities held-to-maturity in an unrealized loss position |
$ | 373 | $ | 2 | $ | 45,969 | $ | 12,316 | $ | 46,342 | $ | 12,318 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
As indicated in Note 9 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 June 30, 2015 are primarily associated with securities issued by municipalities of Puerto Rico and are generally not rated by a credit rating agency. This includes $59 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. The Corporation does not have the intent to sell securities held-to-maturity and it is not more likely than not that the Corporation will have to sell these investment securities prior to recovery of their amortized cost basis.
30
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 Corporations 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 Corporations 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 13.
As a result of the expiration of the shared-loss arrangement under the commercial loss share agreement on June 30, 2015, approximately $1.5 billion in loans and $18 million in OREOs have been reclassified as non-covered in the accompanying statement of financial condition as of June 30, 2015, because they are no longer subject to the shared-loss payments by the FDIC. However, included in these balances are approximately $248.7 million of loans that are subject to the resolution of several arbitration proceedings currently ongoing with the FDIC related primarily to (i) the FDICs 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. Refer to additional information of these disputes on Note 26, Commitment and Contingencies.
For a summary of the accounting policy related to loans, interest recognition and allowance for loan losses refer to the summary of significant accounting policies included in Note 2 to the consolidated financial statements included in 2014 Annual Report.
31
The following table presents the composition of non-covered loans held-in-portfolio (HIP), net of unearned income, at June 30, 2015 and December 31, 2014.
(In thousands) |
June 30, 2015 | December 31, 2014 | ||||||
Commercial multi-family |
$ | 663,100 | $ | 487,280 | ||||
Commercial real estate non-owner occupied |
3,445,267 | 2,526,146 | ||||||
Commercial real estate owner occupied |
2,177,604 | 1,667,267 | ||||||
Commercial and industrial |
3,718,745 | 3,453,574 | ||||||
Construction |
696,010 | 251,820 | ||||||
Mortgage |
7,225,823 | 6,502,886 | ||||||
Leasing |
592,816 | 564,389 | ||||||
Legacy[2] |
72,502 | 80,818 | ||||||
Consumer: |
||||||||
Credit cards |
1,152,367 | 1,155,229 | ||||||
Home equity lines of credit |
340,785 | 366,162 | ||||||
Personal |
1,352,343 | 1,375,452 | ||||||
Auto |
799,843 | 767,369 | ||||||
Other |
197,940 | 206,059 | ||||||
|
|
|
|
|||||
Total loans held-in-portfolio[1] |
$ | 22,435,145 | $ | 19,404,451 | ||||
|
|
|
|
[1] | Non-covered loans held-in-portfolio at June 30, 2015 are net of $100 million in unearned income and exclude $202 million in loans held-for-sale (December 31, 2014 - $94 million in unearned income and $106 million in loans held-for-sale). |
[2] | The legacy portfolio is comprised of commercial loans, construction loans and lease financings related to certain lending products exited by the Corporation as part of restructuring efforts carried out in prior years at the BPNA segment. |
32
The following table presents the composition of covered loans at June 30, 2015 and December 31, 2014.
(In thousands) |
June 30, 2015 | December 31, 2014 | ||||||
Commercial real estate |
$ | 3 | $ | 1,511,472 | ||||
Commercial and industrial |
| 103,309 | ||||||
Construction |
| 70,336 | ||||||
Mortgage |
671,074 | 822,986 | ||||||
Consumer |
18,573 | 34,559 | ||||||
|
|
|
|
|||||
Total covered loans held-in-portfolio |
$ | 689,650 | $ | 2,542,662 | ||||
|
|
|
|
The following table provides a breakdown of loans held-for-sale (LHFS) at June 30, 2015 and December 31, 2014 by main categories.
(In thousands) |
June 30, 2015 | December 31, 2014 | ||||||
Commercial |
$ | 48,969 | $ | 309 | ||||
Construction |
1,681 | | ||||||
Legacy |
| 319 | ||||||
Mortgage |
151,637 | 100,166 | ||||||
Consumer |
| 5,310 | ||||||
|
|
|
|
|||||
Total loans held-for-sale |
$ | 202,287 | $ | 106,104 | ||||
|
|
|
|
During the quarter and six months ended June 30, 2015, the Corporation recorded purchases (including repurchases) of mortgage loans amounting to $213 million and $382 million, respectively (June 30, 2014 - $169 million and $331 million, respectively), excluding the impact of the Doral Bank Transaction. The Corporation did not record purchases of consumer loans during the six months ended June 30, 2015 (June 30, 2014 - $92 million). In addition, during the six months ended June 30, 2015, the Corporation did not record purchases of commercial loans (during the quarter and six months ended June 30, 2014 - $21 million). The Corporation recorded purchases amounting to $164 thousand of lease financing during the six months ended June 30, 2015 and none during the six months ended June 30, 2014.
The Corporation sold approximately $25 million and $65 million of residential mortgage loans (on a whole loan basis) during the quarter and six months ended June 30, 2015, respectively (June 30, 2014 - $27 million and $70 million, respectively). Also, the Corporation securitized approximately $ 243 million and $ 400 million of mortgage loans into Government National Mortgage Association (GNMA) mortgage-backed securities during the quarter and six months ended June 30, 2015, respectively (June 30, 2014 - $ 184 million and $ 350 million, respectively). Furthermore, the Corporation securitized approximately $ 70 million and $ 117 million of mortgage loans into Federal National Mortgage Association (FNMA) mortgage-backed securities during the quarter and six months ended June 30, 2015, respectively (June 30, 2014 - $ 60 million and $ 123 million, respectively). The Corporation sold commercial and construction loans with a book value of approximately $8 million and $9 million during the quarter and six months ended June 30, 2015, respectively (June 30, 2014 - $30 million and $61 million, respectively).
Non-covered loans
The following tables present non-covered loans held-in-portfolio by loan class that are in non-performing status or are accruing interest but are past due 90 days or more at June 30, 2015 and December 31, 2014. 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 Corporations financial statements pursuant to GNMAs buy-back option program. Servicers of loans underlying GNMA mortgage-backed securities must report as their own assets the defaulted loans that they have the option (but not the obligation) to repurchase, even when they elect not to exercise that option. Also, accruing loans past due 90 days or more include residential conventional loans purchased from another financial institution that, although delinquent, the Corporation has received timely payment from the seller / servicer, and, in some instances, have partial guarantees under recourse agreements. However, residential conventional loans purchased from another financial institution, which are in the process of foreclosure, are classified as non-performing mortgage loans.
33
At June 30, 2015 |
||||||||||||||||||||||||
Puerto Rico | U.S. mainland | Popular, Inc. | ||||||||||||||||||||||
(In thousands) |
Non-accrual loans |
Accruing loans past-due 90 days or more [1] |
Non-accrual loans |
Accruing loans past-due 90 days or more |
Non-accrual loans |
Accruing loans past-due 90 days or more |
||||||||||||||||||
Commercial multi-family |
$ | 1,071 | $ | | $ | 171 | $ | | $ | 1,242 | $ | | ||||||||||||
Commercial real estate non-owner occupied |
43,436 | | | | 43,436 | | ||||||||||||||||||
Commercial real estate owner occupied |
85,065 | | 750 | | 85,815 | | ||||||||||||||||||
Commercial and industrial |
49,827 | 330 | 9,974 | | 59,801 | 330 | ||||||||||||||||||
Construction |
4,756 | | 671 | | 5,427 | | ||||||||||||||||||
Mortgage[3] |
318,773 | 416,175 | 12,048 | | 330,821 | 416,175 | ||||||||||||||||||
Leasing |
2,328 | | | | 2,328 | | ||||||||||||||||||
Legacy |
| | 4,686 | | 4,686 | | ||||||||||||||||||
Consumer: |
||||||||||||||||||||||||
Credit cards |
| 18,545 | 343 | | 343 | 18,545 | ||||||||||||||||||
Home equity lines of credit |
4 | 61 | 4,247 | | 4,251 | 61 | ||||||||||||||||||
Personal |
22,949 | | 1,334 | | 24,283 | | ||||||||||||||||||
Auto |
11,158 | | | | 11,158 | | ||||||||||||||||||
Other |
2,400 | 664 | 6 | | 2,406 | 664 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total[2] |
$ | 541,767 | $ | 435,775 | $ | 34,230 | $ | | $ | 575,997 | $ | 435,775 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
[1] | Non-covered loans of $269 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 $ 51 million in non-performing loans held-for-sale. |
[3] | It is the Corporations 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 $133 million of residential mortgage loans in Puerto Rico insured by FHA or guaranteed by the VA that are no longer accruing interest as of June 30, 2015. Furthermore, the Corporation has approximately $72 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 Corporations policy to exclude these balances from non-performing assets. |
At December 31, 2014 |
||||||||||||||||||||||||
Puerto Rico | U.S. mainland | Popular, Inc. | ||||||||||||||||||||||
(In thousands) |
Non-accrual loans |
Accruing loans past-due 90 days or more [1] |
Non-accrual loans |
Accruing loans past-due 90 days or more |
Non-accrual loans |
Accruing loans past-due 90 days or more |
||||||||||||||||||
Commercial multi-family |
$ | 2,199 | $ | | $ | | $ | | $ | 2,199 | $ | | ||||||||||||
Commercial real estate non-owner occupied |
33,452 | | | | 33,452 | | ||||||||||||||||||
Commercial real estate owner occupied |
92,648 | | 805 | | 93,453 | | ||||||||||||||||||
Commercial and industrial |
129,611 | 494 | 1,510 | | 131,121 | 494 | ||||||||||||||||||
Construction |
13,812 | | | | 13,812 | | ||||||||||||||||||
Mortgage[3] |
295,629 | 426,387 | 9,284 | | 304,913 | 426,387 | ||||||||||||||||||
Leasing |
3,102 | | | | 3,102 | | ||||||||||||||||||
Legacy |
| | 1,545 | | 1,545 | | ||||||||||||||||||
Consumer: |
||||||||||||||||||||||||
Credit cards |
| 20,368 | 449 | | 449 | 20,368 | ||||||||||||||||||
Home equity lines of credit |
| 21 | 4,090 | | 4,090 | 21 | ||||||||||||||||||
Personal |
25,678 | 10 | 1,410 | | 27,088 | 10 | ||||||||||||||||||
Auto |
11,387 | | | | 11,387 | | ||||||||||||||||||
Other |
3,865 | 682 | 7 | | 3,872 | 682 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total[2] |
$ | 611,383 | $ | 447,962 | $ | 19,100 | $ | | $ | 630,483 | $ | 447,962 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
[1] | Non-covered loans by $59 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 $ 19 million in non-performing loans held-for-sale. |
[3] | It is the Corporations 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 $125 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, 2014. Furthermore, the Corporation has approximately $66 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 Corporations policy to exclude these balances from non-performing assets. |
34
The following tables present loans by past due status at June 30, 2015 and December 31, 2014 for non-covered loans held-in-portfolio (net of unearned income).
June 30, 2015 |
||||||||||||||||||||||||
Puerto Rico |
||||||||||||||||||||||||
Past due | Non-covered | |||||||||||||||||||||||
(In thousands) |
30-59 days |
60-89 days |
90 days or more |
Total past due |
Current | loans HIP Puerto Rico |
||||||||||||||||||
Commercial multi-family |
$ | 80 | $ | | $ | 1,847 | $ | 1,927 | $ | 90,560 | $ | 92,487 | ||||||||||||
Commercial real estate non-owner occupied |
4,131 | 7,940 | 141,389 | 153,460 | 2,589,719 | 2,743,179 | ||||||||||||||||||
Commercial real estate owner occupied |
10,409 | 11,478 | 133,950 | 155,837 | 1,801,259 | 1,957,096 | ||||||||||||||||||
Commercial and industrial |
6,222 | 4,747 | 53,586 | 64,555 | 2,711,693 | 2,776,248 | ||||||||||||||||||
Construction |
875 | 467 | 32,229 | 33,571 | 79,875 | 113,446 | ||||||||||||||||||
Mortgage |
327,662 | 172,133 | 825,127 | 1,324,922 | 4,919,461 | 6,244,383 | ||||||||||||||||||
Leasing |
6,653 | 1,899 | 2,328 | 10,880 | 581,936 | 592,816 | ||||||||||||||||||
Consumer: |
||||||||||||||||||||||||
Credit cards |
11,391 | 8,954 | 18,545 | 38,890 | 1,099,550 | 1,138,440 | ||||||||||||||||||
Home equity lines of credit |
397 | 200 | 65 | 662 | 12,034 | 12,696 | ||||||||||||||||||
Personal |
13,892 | 8,197 | 23,358 | 45,447 | 1,201,072 | 1,246,519 | ||||||||||||||||||
Auto |
33,813 | 7,745 | 11,158 | 52,716 | 747,047 | 799,763 | ||||||||||||||||||
Other |
963 | 300 | 3,064 | 4,327 | 193,280 | 197,607 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 416,488 | $ | 224,060 | $ | 1,246,646 | $ | 1,887,194 | $ | 16,027,486 | $ | 17,914,680 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2015 |
||||||||||||||||||||||||
U.S. mainland |
||||||||||||||||||||||||
Past due | ||||||||||||||||||||||||
(In thousands) |
30-59 days |
60-89 days |
90 days or more |
Total past due |
Current | Loans HIP U.S. mainland |
||||||||||||||||||
Commercial multi-family |
$ | | $ | | $ | 171 | $ | 171 | $ | 570,442 | $ | 570,613 | ||||||||||||
Commercial real estate non-owner occupied |
| 360 | | 360 | 701,728 | 702,088 | ||||||||||||||||||
Commercial real estate owner occupied |
5,302 | | 750 | 6,052 | 214,456 | 220,508 | ||||||||||||||||||
Commercial and industrial |
998 | 1,022 | 9,974 | 11,994 | 930,503 | 942,497 | ||||||||||||||||||
Construction |
| | 671 | 671 | 581,893 | 582,564 | ||||||||||||||||||
Mortgage |
2,234 | 5,749 | 12,048 | 20,031 | 961,409 | 981,440 | ||||||||||||||||||
Legacy |
68 | 698 | 4,686 | 5,452 | 67,050 | 72,502 | ||||||||||||||||||
Consumer: |
||||||||||||||||||||||||
Credit cards |
225 | 153 | 343 | 721 | 13,206 | 13,927 | ||||||||||||||||||
Home equity lines of credit |
2,907 | 758 | 4,247 | 7,912 | 320,177 | 328,089 | ||||||||||||||||||
Personal |
589 | 716 | 1,334 | 2,639 | 103,185 | 105,824 | ||||||||||||||||||
Auto |
| 7 | | 7 | 73 | 80 | ||||||||||||||||||
Other |
| | 6 | 6 | 327 | 333 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 12,323 | $ | 9,463 | $ | 34,230 | $ | 56,016 | $ | 4,464,449 | $ | 4,520,465 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
35
June 30, 2015 |
||||||||||||||||||||||||
Popular, Inc. |
||||||||||||||||||||||||
Past due | Non-covered | |||||||||||||||||||||||
(In thousands) |
30-59 days |
60-89 days |
90 days or more |
Total past due |
Current | loans HIP Popular, Inc. |
||||||||||||||||||
Commercial multi-family |
$ | 80 | $ | | $ | 2,018 | $ | 2,098 | $ | 661,002 | $ | 663,100 | ||||||||||||
Commercial real estate non-owner occupied |
4,131 | 8,300 | 141,389 | 153,820 | 3,291,447 | 3,445,267 | ||||||||||||||||||
Commercial real estate owner occupied |
15,711 | 11,478 | 134,700 | 161,889 | 2,015,715 | 2,177,604 | ||||||||||||||||||
Commercial and industrial |
7,220 | 5,769 | 63,560 | 76,549 | 3,642,196 | 3,718,745 | ||||||||||||||||||
Construction |
875 | 467 | 32,900 | 34,242 | 661,768 | 696,010 | ||||||||||||||||||
Mortgage |
329,896 | 177,882 | 837,175 | 1,344,953 | 5,880,870 | 7,225,823 | ||||||||||||||||||
Leasing |
6,653 | 1,899 | 2,328 | 10,880 | 581,936 | 592,816 | ||||||||||||||||||
Legacy |
68 | 698 | 4,686 | 5,452 | 67,050 | 72,502 | ||||||||||||||||||
Consumer: |
||||||||||||||||||||||||
Credit cards |
11,616 | 9,107 | 18,888 | 39,611 | 1,112,756 | 1,152,367 | ||||||||||||||||||
Home equity lines of credit |
3,304 | 958 | 4,312 | 8,574 | 332,211 | 340,785 | ||||||||||||||||||
Personal |
14,481 | 8,913 | 24,692 | 48,086 | 1,304,257 | 1,352,343 | ||||||||||||||||||
Auto |
33,813 | 7,752 | 11,158 | 52,723 | 747,120 | 799,843 | ||||||||||||||||||
Other |
963 | 300 | 3,070 | 4,333 | 193,607 | 197,940 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 428,811 | $ | 233,523 | $ | 1,280,876 | $ | 1,943,210 | $ | 20,491,935 | $ | 22,435,145 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2014 |
||||||||||||||||||||||||
Puerto Rico |
||||||||||||||||||||||||
Past due | Non-covered | |||||||||||||||||||||||
(In thousands) |
30-59 days |
60-89 days |
90 days or more |
Total past due |
Current | loans HIP Puerto Rico |
||||||||||||||||||
Commercial multi-family |
$ | 221 | $ | 69 | $ | 2,199 | $ | 2,489 | $ | 77,588 | $ | 80,077 | ||||||||||||
Commercial real estate non-owner occupied |
9,828 | 121 | 33,452 | 43,401 | 1,970,178 | 2,013,579 | ||||||||||||||||||
Commercial real estate owner occupied |
8,954 | 7,709 | 92,648 | 109,311 | 1,364,051 | 1,473,362 | ||||||||||||||||||
Commercial and industrial |
18,498 | 5,269 | 130,105 | 153,872 | 2,653,913 | 2,807,785 | ||||||||||||||||||
Construction |
2,497 | | 13,812 | 16,309 | 143,075 | 159,384 | ||||||||||||||||||
Mortgage |
304,319 | 167,219 | 780,678 | 1,252,216 | 4,198,285 | 5,450,501 | ||||||||||||||||||
Leasing |
6,779 | 1,246 | 3,102 | 11,127 | 553,262 | 564,389 | ||||||||||||||||||
Consumer: |
||||||||||||||||||||||||
Credit cards |
13,715 | 9,290 | 20,368 | 43,373 | 1,096,791 | 1,140,164 | ||||||||||||||||||
Home equity lines of credit |
137 | 159 | 21 | 317 | 13,083 | 13,400 | ||||||||||||||||||
Personal |
13,479 | 6,646 | 25,688 | 45,813 | 1,216,720 | 1,262,533 | ||||||||||||||||||
Auto |
34,238 | 8,397 | 11,387 | 54,022 | 713,274 | 767,296 | ||||||||||||||||||
Other |
1,009 | 209 | 4,547 | 5,765 | 199,879 | 205,644 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 413,674 | $ | 206,334 | $ | 1,118,007 | $ | 1,738,015 | $ | 14,200,099 | $ | 15,938,114 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
36
December 31, 2014 |
||||||||||||||||||||||||
U.S. mainland |
||||||||||||||||||||||||
Past due | ||||||||||||||||||||||||
(In thousands) |
30-59 days |
60-89 days |
90 days or more |
Total past due |
Current | Loans HIP U.S. mainland |
||||||||||||||||||
Commercial multi-family |
$ | 87 | $ | 376 | $ | | $ | 463 | $ | 406,740 | $ | 407,203 | ||||||||||||
Commercial real estate non-owner occupied |
1,478 | | | 1,478 | 511,089 | 512,567 | ||||||||||||||||||
Commercial real estate owner occupied |
45 | 3,631 | 805 | 4,481 | 189,424 | 193,905 | ||||||||||||||||||
Commercial and industrial |
1,133 | 123 | 1,510 | 2,766 | 643,023 | 645,789 | ||||||||||||||||||
Construction |
810 | | | 810 | 91,626 | 92,436 | ||||||||||||||||||
Mortgage |
29,582 | 8,646 | 9,284 | 47,512 | 1,004,873 | 1,052,385 | ||||||||||||||||||
Legacy |
929 | 1,931 | 1,545 | 4,405 | 76,413 | 80,818 | ||||||||||||||||||
Consumer: |
||||||||||||||||||||||||
Credit cards |
314 | 246 | 449 | 1,009 | 14,056 | 15,065 | ||||||||||||||||||
Home equity lines of credit |
5,036 | 1,025 | 4,090 | 10,151 | 342,611 | 352,762 | ||||||||||||||||||
Personal |
2,476 | 893 | 1,410 | 4,779 | 108,140 | 112,919 | ||||||||||||||||||
Auto |
| | | | 73 | 73 | ||||||||||||||||||
Other |
10 | 4 | 7 | 21 | 394 | 415 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 41,900 | $ | 16,875 | $ | 19,100 | $ | 77,875 | $ | 3,388,462 | $ | 3,466,337 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2014 |
||||||||||||||||||||||||
Popular, Inc. |
||||||||||||||||||||||||
Past due | Non-covered | |||||||||||||||||||||||
(In thousands) |
30-59 days |
60-89 days |
90 days or more |
Total past due |
Current | loans HIP Popular, Inc. |
||||||||||||||||||
Commercial multi-family |
$ | 308 | $ | 445 | $ | 2,199 | $ | 2,952 | $ | 484,328 | $ | 487,280 | ||||||||||||
Commercial real estate non-owner occupied |
11,306 | 121 | 33,452 | 44,879 | 2,481,267 | 2,526,146 | ||||||||||||||||||
Commercial real estate owner occupied |
8,999 | 11,340 | 93,453 | 113,792 | 1,553,475 | 1,667,267 | ||||||||||||||||||
Commercial and industrial |
19,631 | 5,392 | 131,615 | 156,638 | 3,296,936 | 3,453,574 | ||||||||||||||||||
Construction |
3,307 | | 13,812 | 17,119 | 234,701 | 251,820 | ||||||||||||||||||
Mortgage |
333,901 | 175,865 | 789,962 | 1,299,728 | 5,203,158 | 6,502,886 | ||||||||||||||||||
Leasing |
6,779 | 1,246 | 3,102 | 11,127 | 553,262 | 564,389 | ||||||||||||||||||
Legacy |
929 | 1,931 | 1,545 | 4,405 | 76,413 | 80,818 | ||||||||||||||||||
Consumer: |
||||||||||||||||||||||||
Credit cards |
14,029 | 9,536 | 20,817 | 44,382 | 1,110,847 | 1,155,229 | ||||||||||||||||||
Home equity lines of credit |
5,173 | 1,184 | 4,111 | 10,468 | 355,694 | 366,162 | ||||||||||||||||||
Personal |
15,955 | 7,539 | 27,098 | 50,592 | 1,324,860 | 1,375,452 | ||||||||||||||||||
Auto |
34,238 | 8,397 | 11,387 | 54,022 | 713,347 | 767,369 | ||||||||||||||||||
Other |
1,019 | 213 | 4,554 | 5,786 | 200,273 | 206,059 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 455,574 | $ | 223,209 | $ | 1,137,107 | $ | 1,815,890 | $ | 17,588,561 | $ | 19,404,451 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides a breakdown of loans held-for-sale (LHFS) in non-performing status at June 30, 2015 and December 31, 2014 by main categories.
(In thousands) |
June 30, 2015 | December 31, 2014 | ||||||
Commercial |
$ | 48,969 | $ | 309 | ||||
Construction |
1,681 | | ||||||
Mortgage |
225 | 14,041 | ||||||
Consumer |
| 4,549 | ||||||
|
|
|
|
|||||
Total |
$ | 50,875 | $ | 18,899 | ||||
|
|
|
|
37
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 |
$ | 1,521,524 | ||
Gross contractual amounts receivable (principal and interest) |
$ | 2,014,755 | ||
Estimate of contractual cash flows not expected to be collected |
$ | 39,348 |
Covered loans
The following table presents covered loans in non-performing status and accruing loans past-due 90 days or more by loan class at June 30, 2015 and December 31, 2014.
June 30, 2015 | December 31, 2014 | |||||||||||||||
(In thousands) |
Non-accrual loans |
Accruing loans past due 90 days or more |
Non-accrual loans |
Accruing loans past due 90 days or more |
||||||||||||
Commercial real estate |
$ | | $ | | $ | 8,810 | $ | | ||||||||
Commercial and industrial |
| | 1,142 | | ||||||||||||
Construction |
| | 2,770 | | ||||||||||||
Mortgage |
3,794 | | 4,376 | 28 | ||||||||||||
Consumer |
69 | | 735 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total[1] |
$ | 3,863 | $ | | $ | 17,833 | $ | 28 | ||||||||
|
|
|
|
|
|
|
|
[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 following tables present loans by past due status at June 30, 2015 and December 31, 2014 for covered loans held-in-portfolio. The information considers covered loans accounted for under ASC Subtopic 310-20 and ASC Subtopic 310-30.
June 30, 2015 |
||||||||||||||||||||||||
Past due | ||||||||||||||||||||||||
(In thousands) |
30-59 days |
60-89 days |
90 days or more |
Total past due |
Current | Covered loans HIP |
||||||||||||||||||
Commercial real estate |
$ | | $ | | $ | 3 | $ | 3 | $ | | $ | 3 | ||||||||||||
Mortgage |
6,223 | 16,771 | 96,097 | 119,091 | 551,983 | 671,074 | ||||||||||||||||||
Consumer |
10 | 482 | 1,231 | 1,723 | 16,850 | 18,573 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total covered loans |
$ | 6,233 | $ | 17,253 | $ | 97,331 | $ | 120,817 | $ | 568,833 | $ | 689,650 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
38
December 31, 2014 |
||||||||||||||||||||||||
Past due | ||||||||||||||||||||||||
(In thousands) |
30-59 days |
60-89 days |
90 days or more |
Total past due |
Current | Covered loans HIP |
||||||||||||||||||
Commercial real estate |
$ | 98,559 | $ | 12,597 | $ | 291,010 | $ | 402,166 | $ | 1,109,306 | $ | 1,511,472 | ||||||||||||
Commercial and industrial |
512 | 7 | 7,756 | 8,275 | 95,034 | 103,309 | ||||||||||||||||||
Construction |
| 384 | 58,665 | 59,049 | 11,287 | 70,336 | ||||||||||||||||||
Mortgage |
45,764 | 23,531 | 143,140 | 212,435 | 610,551 | 822,986 | ||||||||||||||||||
Consumer |
1,884 | 747 | 2,532 | 5,163 | 29,396 | 34,559 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total covered loans |
$ | 146,719 | $ | 37,266 | $ | 503,103 | $ | 687,088 | $ | 1,855,574 | $ | 2,542,662 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
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 June 30, 2015 (December 31, 2014 - $0.1 billion).
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.
June 30, 2015 [1] | December 31, 2014 | |||||||||||||||||||||||
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 |
$ | 1,130,829 | $ | 56,764 | $ | 1,187,593 | $ | 1,392,482 | $ | 90,202 | $ | 1,482,684 | ||||||||||||
Commercial and industrial |
135,539 | 1,275 | 136,814 | 57,059 | 2,197 | 59,256 | ||||||||||||||||||
Construction |
17,075 | 16,966 | 34,041 | 32,836 | 32,409 | 65,245 | ||||||||||||||||||
Mortgage |
715,756 | 38,417 | 754,173 | 764,148 | 45,829 | 809,977 | ||||||||||||||||||
Consumer |
23,294 | 1,163 | 24,457 | 25,617 | 1,393 | 27,010 | ||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Carrying amount |
2,022,493 | 114,585 | 2,137,078 | 2,272,142 | 172,030 | 2,444,172 | ||||||||||||||||||
Allowance for loan losses |
(42,503 | ) | (4,546 | ) | (47,049 | ) | (52,798 | ) | (26,048 | ) | (78,846 | ) | ||||||||||||
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|
|
|
|
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|
|
|
|
|
|||||||||||||
Carrying amount, net of allowance |
$ | 1,979,990 | $ | 110,039 | $ | 2,090,029 | $ | 2,219,344 | $ | 145,982 | $ | 2,365,326 | ||||||||||||
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|
|
[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 $680 million as of June 30, 2015. |
The outstanding principal balance of Westernbank loans accounted pursuant to ASC Subtopic 310-30, amounted to $2.6 billion at June 30, 2015 (December 31, 2014 - $3.1 billion). At June 30, 2015, 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.
39
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 June 30, 2015 and 2014, were as follows:
Activity in the accretable yield | ||||||||||||||||||||||||
Westernbank loans ASC 310-30 | ||||||||||||||||||||||||
For the quarters ended | ||||||||||||||||||||||||
June 30, 2015 | June 30, 2014 | |||||||||||||||||||||||
(In thousands) |
Non-credit impaired loans |
Credit impaired loans |
Total | Non-credit impaired loans |
Credit impaired loans |
Total | ||||||||||||||||||
Beginning balance |
$ | 1,254,249 | $ | 4,699 | $ | 1,258,948 | $ | 1,212,706 | $ | 5,506 | $ | 1,218,212 | ||||||||||||
Accretion |
(50,228 | ) | (3,766 | ) | (53,994 | ) | (77,316 | ) | (2,547 | ) | (79,863 | ) | ||||||||||||
Change in expected cash flows |
35,755 | 5,215 | 40,970 | 135,812 | 6,597 | 142,409 | ||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Ending balance |
$ | 1,239,776 | $ | 6,148 | $ | 1,245,924 | $ | 1,271,202 | $ | 9,556 | $ | 1,280,758 | ||||||||||||
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|
|
|
Activity in the accretable yield | ||||||||||||||||||||||||
Westernbank loans ASC 310-30 | ||||||||||||||||||||||||
For the six months ended | ||||||||||||||||||||||||
June 30, 2015 | June 30, 2014 | |||||||||||||||||||||||
(In thousands) |
Non-credit impaired loans |
Credit impaired loans |
Total | Non-credit impaired loans |
Credit impaired loans |
Total | ||||||||||||||||||
Beginning balance |
$ | 1,265,752 | $ | 5,585 | $ | 1,271,337 | $ | 1,297,725 | $ | 11,480 | $ | 1,309,205 | ||||||||||||
Accretion |
(104,004 | ) | (5,687 | ) | (109,691 | ) | (149,868 | ) | (9,113 | ) | (158,981 | ) | ||||||||||||
Change in expected cash flows |
78,028 | 6,250 | 84,278 | 123,345 | 7,189 | 130,534 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Ending balance |
$ | 1,239,776 | $ | 6,148 | $ | 1,245,924 | $ | 1,271,202 | $ | 9,556 | $ | 1,280,758 | ||||||||||||
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|
|
|
|
Carrying amount of Westernbank loans accounted for pursuant to ASC 310-30 | ||||||||||||||||||||||||
For the quarters ended | ||||||||||||||||||||||||
June 30, 2015 [1] | June 30, 2014 | |||||||||||||||||||||||
(In thousands) |
Non-credit impaired loans |
Credit impaired loans |
Total | Non-credit impaired loans |
Credit impaired loans |
Total | ||||||||||||||||||
Beginning balance |
$ | 2,211,781 | $ | 155,315 | $ | 2,367,096 | $ | 2,469,453 | $ | 263,669 | $ | 2,733,122 | ||||||||||||
Accretion |
50,228 | 3,766 | 53,994 | 77,316 | 2,547 | 79,863 | ||||||||||||||||||
Collections and charge-offs |
(239,516 | ) | (44,496 | ) | (284,012 | ) | (158,858 | ) | (43,463 | ) | (202,321 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Ending balance |
$ | 2,022,493 | $ | 114,585 | $ | 2,137,078 | $ | 2,387,911 | $ | 222,753 | $ | 2,610,664 | ||||||||||||
Allowance for loan losses ASC 310-30 Westernbank loans |
(42,503 | ) | (4,546 | ) | (47,049 | ) | (50,609 | ) | (40,283 | ) | (90,892 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Ending balance, net of ALLL |
$ | 1,979,990 | $ | 110,039 | $ | 2,090,029 | $ | 2,337,302 | $ | 182,470 | $ | 2,519,772 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
[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 $680 million as of June 30, 2015. |
40
Carrying amount of Westernbank loans accounted for pursuant to ASC 310-30 | ||||||||||||||||||||||||
For the six months ended | ||||||||||||||||||||||||
June 30, 2015 [1] | June 30, 2014 | |||||||||||||||||||||||
(In thousands) |
Non-credit impaired loans |
Credit impaired loans |
Total | Non-credit impaired loans |
Credit impaired loans |
Total | ||||||||||||||||||
Beginning balance |
$ | 2,272,142 | $ | 172,030 | $ | 2,444,172 | $ | 2,509,075 | $ | 318,872 | $ | 2,827,947 | ||||||||||||
Accretion |
104,004 | 5,687 | 109,691 | 149,868 | 9,113 | 158,981 | ||||||||||||||||||
Collections and charge offs |
(353,653 | ) | (63,132 | ) | (416,785 | ) | (271,032 | ) | (105,232 | ) | (376,264 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Ending balance |
$ | 2,022,493 | $ | 114,585 | $ | 2,137,078 | $ | 2,387,911 | $ | 222,753 | $ | 2,610,664 | ||||||||||||
Allowance for loan losses ASC 310-30 Westernbank loans |
(42,503 | ) | (4,546 | ) | (47,049 | ) | (50,609 | ) | (40,283 | ) | (90,892 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Ending balance, net of ALLL |
$ | 1,979,990 | $ | 110,039 | $ | 2,090,029 | $ | 2,337,302 | $ | 182,470 | $ | 2,519,772 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
[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 $680 million as of June 30, 2015. |
Other loans acquired with deteriorated credit quality
The outstanding principal balance of other acquired loans accounted pursuant to ASC Subtopic 310-30, amounted to $421 million at June 30, 2015 (December 31, 2014 - $243 million). At June 30, 2015, 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 June 30, 2015 and 2014 were as follows:
Activity in the accretable discount - other acquired loans ASC 310-30 |
||||||||
(In thousands) |
For the quarter ended June 30, 2015 |
For the quarter ended June 30, 2014 |
||||||
Beginning balance |
$ | 158,424 | $ | 67,285 | ||||
Additions |
5,406 | 4,060 | ||||||
Accretion |
(4,633 | ) | (2,552 | ) | ||||
Change in expected cash flows |
2,962 | 8,034 | ||||||
|
|
|
|
|||||
Ending balance |
$ | 162,159 | $ | 76,827 | ||||
|
|
|
|
|||||
Activity in the accretable discount - other acquired loans ASC 310-30 |
||||||||
(In thousands) |
For the six months ended June 30, 2015 |
For the six months ended June 30, 2014 |
||||||
Beginning balance |
$ | 116,304 | $ | 49,398 | ||||
Additions |
56,068 | 11,144 | ||||||
Accretion |
(7,856 | ) | (4,926 | ) | ||||
Change in expected cash flows |
(2,357 | ) | 21,211 | |||||
|
|
|
|
|||||
Ending balance |
$ | 162,159 | $ | 76,827 | ||||
|
|
|
|
41
Carrying amount of other acquired loans accounted for pursuant to ASC 310-30 |
||||||||
(In thousands) |
For the quarter ended June 30, 2015 |
For the quarter ended June 30, 2014 |
||||||
Beginning balance |
$ | 363,097 | 190,216 | |||||
Additions |
17,089 | 13,139 | ||||||
Accretion |
4,633 | 2,552 | ||||||
Collections and charge-offs |
(16,532 | ) | (6,866 | ) | ||||
|
|
|
|
|||||
Ending balance |
$ | 368,287 | $ | 199,041 | ||||
Allowance for loan losses ASC 310-30 other acquired loans |
(16,842 | ) | (15,751 | ) | ||||
|
|
|
|
|||||
Ending balance, net of ALLL |
$ | 351,445 | $ | 183,290 | ||||
|
|
|
|
|||||
Carrying amount of other acquired loans accounted for pursuant to ASC 310-30 |
||||||||
(In thousands) |
For the six months ended June 30, 2015 |
For the six months ended June 30, 2014 |
||||||
Beginning balance |
$ | 212,763 | $ | 173,659 | ||||
Additions |
174,180 | 33,181 | ||||||
Accretion |
7,856 | 4,926 | ||||||
Collections and charge-offs |
(26,512 | ) | (12,725 | ) | ||||
|
|
|
|
|||||
Ending balance |
$ | 368,287 | $ | 199,041 | ||||
Allowance for loan losses ASC 310-30 other acquired loans |
(16,842 | ) | (15,751 | ) | ||||
|
|
|
|
|||||
Ending balance, net of ALLL |
$ | 351,445 | $ | 183,290 | ||||
|
|
|
|
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 |
$ | 233,987 | ||
Non-accretable difference |
43,904 | |||
|
|
|||
Cash flows expected to be collected |
190,083 | |||
Accretable yield |
46,150 | |||
|
|
|||
Fair value of loans accounted for under ASC Subtopic 310-30 |
$ | 143,933 | ||
|
|
42
Note 12 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 Corporations 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 analogy, 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 June 30, 2015, 32% (June 30, 2014 - 28%) of the ALLL for BPPR non-covered 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 and commercial multi-family loan portfolios for 2015, and in the commercial multi-family, commercial and industrial, personal and auto loan portfolios for 2014.
For the period ended June 30, 2015, 19% (June 30, 2014 - 23%) of the ALLL for BPNA 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 2015 and in the commercial multi-family, commercial and industrial and legacy loan portfolios for 2014.
| 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. |
During the second quarter of 2015, management completed the annual review of the components of the ALLL models. As part of this review management updated core metrics and revised certain components related to the estimation process for evaluating the adequacy of the general reserve of the allowance for loan losses. These enhancements to the ALLL methodology, which are described in the paragraphs below, were implemented as of June 30, 2015 and resulted in a net decrease to the allowance for loan losses of $ 1.9 million for the non-covered portfolio. The effect of the aforementioned enhancements was immaterial for the covered loans portfolio.
Management made the following principal enhancements to the methodology during the second quarter of 2015:
| Increased the historical look-back period for determining the base loss rates for commercial and construction loans. The Corporation increased the look-back period for assessing historical loss trends applicable to the determination of commercial and construction loan net charge-offs from 36 months to 60 months. Given the current overall commercial and construction credit quality improvements, including lower loss trends, management concluded that a 60-month look-back period for the base loss rates aligns the Corporations allowance for loan losses methodology to maintain adequate loss observations in its main general reserve component. |
43
The combined effect of the aforementioned enhancements to the base loss rates resulted in an increase to the allowance for loan losses of $19.6 million at June 30, 2015, of which $17.9 million related to the non-covered BPPR segment and $1.7 million related to the BPNA segment.
| Annual review and recalibration of the environmental factors adjustment. The environmental factor adjustments are developed by performing regression analyses on selected credit and economic indicators for each applicable loan segment. During the second quarter of 2015, the environmental factor models used to account for changes in current credit and macroeconomic conditions were reviewed and recalibrated based on the latest applicable trends. |
The combined effect of the aforementioned recalibration and enhancements to the environmental factors adjustment resulted in a decrease to the allowance for loan losses of $21.4 million at June 30, 2015, of which $20.5 million related to the non-covered BPPR segment and $1 million related to the BPNA segment.
The following tables present the changes in the allowance for loan losses for the quarters ended June 30, 2015 and 2014.
For the quarter ended June 30, 2015 |
||||||||||||||||||||||||
Puerto Rico - Non-covered loans |
||||||||||||||||||||||||
(In thousands) |
Commercial | Construction | Mortgage | Leasing | Consumer | Total | ||||||||||||||||||
Allowance for credit losses: |
||||||||||||||||||||||||
Beginning balance |
$ | 195,466 | $ | 1,595 | $ | 126,579 | $ | 7,208 | $ | 153,428 | $ | 484,276 | ||||||||||||
Provision (reversal of provision) |
50,231 | 5,260 | 9,755 | 2,925 | (7,642 | ) | 60,529 | |||||||||||||||||
Charge-offs |
(23,323 | ) | (2,194 | ) | (11,361 | ) | (1,693 | ) | (24,182 | ) | (62,753 | ) | ||||||||||||
Recoveries |
6,264 | 473 | 622 | 720 | 9,528 | 17,607 | ||||||||||||||||||
Net write-down related to loans transferred to held-for-sale |
(29,996 | ) | | | | | (29,996 | ) | ||||||||||||||||
Allowance transferred from covered loans |
8,453 | 1,424 | 582 | | 2,578 | 13,037 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Ending balance |
$ | 207,095 | $ | 6,558 | $ | 126,177 | $ | 9,160 | $ | 133,710 | $ | 482,700 | ||||||||||||
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|
|
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|
|
|
|
|
For the quarter ended June 30, 2015 |
||||||||||||||||||||||||
Puerto Rico - Covered loans |
||||||||||||||||||||||||
(In thousands) |
Commercial | Construction | Mortgage | Leasing | Consumer | Total | ||||||||||||||||||
Allowance for credit losses: |
||||||||||||||||||||||||
Beginning balance |
$ | 21,267 | $ | 7,707 | $ | 40,469 | $ | | $ | 3,030 | $ | 72,473 | ||||||||||||
Provision (reversal of provision) |
8,120 | 8,874 | (1,734 | ) | | 506 | 15,766 | |||||||||||||||||
Charge-offs |
(23,697 | ) | (16,040 | ) | (520 | ) | | (767 | ) | (41,024 | ) | |||||||||||||
Recoveries |
3,864 | 1,425 | 342 | | 88 | 5,719 | ||||||||||||||||||
Net recoveries (write-down) |
(1,101 | ) | (542 | ) | (160 | ) | | (20 | ) | (1,823 | ) | |||||||||||||
Allowance transferred to non-covered loans |
(8,453 | ) | (1,424 | ) | (582 | ) | | (2,578 | ) | (13,037 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Ending balance |
$ | | $ | | $ | 37,815 | $ | | $ | 259 | $ | 38,074 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
For the quarter ended June 30, 2015 |
||||||||||||||||||||||||
U.S. Mainland |
||||||||||||||||||||||||
(In thousands) |
Commercial | Construction | Mortgage | Legacy | Consumer | Total | ||||||||||||||||||
Allowance for credit losses: |
||||||||||||||||||||||||
Beginning balance |
$ | 10,426 | $ | 1,849 | $ | 2,262 | $ | 2,962 | $ | 14,449 | $ | 31,948 | ||||||||||||
Provision (reversal of provision) |
(2,680 | ) | 580 | 2,236 | 383 | (580 | ) | (61 | ) | |||||||||||||||
Charge-offs |
(432 | ) | | (340 | ) | (480 | ) | (2,974 | ) | (4,226 | ) | |||||||||||||
Recoveries |
1,311 | | 164 | 450 | 1,005 | 2,930 | ||||||||||||||||||
Net recoveries (write-down) |
| | (552 | ) | | | (552 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Ending balance |
$ | 8,625 | $ | 2,429 | $ | 3,770 | $ | 3,315 | $ | 11,900 | $ | 30,039 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
44
For the quarter ended June 30, 2015 |
||||||||||||||||||||||||||||
Popular, Inc. |
||||||||||||||||||||||||||||
(In thousands) |
Commercial | Construction | Mortgage | Legacy | Leasing | Consumer | Total | |||||||||||||||||||||
Allowance for credit losses: |
||||||||||||||||||||||||||||
Beginning balance |
$ | 227,159 | $ | 11,151 | $ | 169,310 | $ | 2,962 | $ | 7,208 | $ | 170,907 | $ | 588,697 | ||||||||||||||
Provision (reversal of provision) |
55,671 | 14,714 | 10,257 | 383 | 2,925 | (7,716 | ) | 76,234 | ||||||||||||||||||||
Charge-offs |
(47,452 | ) | (18,234 | ) | (12,221 | ) | (480 | ) | (1,693 | ) | (27,923 | ) | (108,003 | ) | ||||||||||||||
Recoveries |
11,439 | 1,898 | 1,128 | 450 | 720 | 10,621 | 26,256 | |||||||||||||||||||||
Net recoveries (write-down) |
(31,097 | ) | (542 | ) | (712 | ) | | | (20 | ) | (32,371 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Ending balance |
$ | 215,720 | $ | 8,987 | $ | 167,762 | $ | 3,315 | $ | 9,160 | $ | 145,869 | $ | 550,813 | ||||||||||||||
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|
|
|
|
|
|
For the six months ended June 30, 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) |
48,910 | (1,553 | ) | 25,947 | 3,771 | 15,367 | 92,442 | |||||||||||||||||
Charge-offs |
(32,895 | ) | (2,194 | ) | (22,334 | ) | (2,930 | ) | (53,881 | ) | (114,234 | ) | ||||||||||||
Recoveries |
11,034 | 3,398 | 1,122 | 1,188 | 15,574 | 32,316 | ||||||||||||||||||
Net write-downs related to loans transferred to held-for-sale |
(29,996 | ) | | | | | (29,996 | ) | ||||||||||||||||
Allowance transferred from covered loans |
8,453 | 1,424 | 582 | | 2,578 | 13,037 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Ending balance |
$ | 207,095 | $ | 6,558 | $ | 126,177 | $ | 9,160 | $ | 133,710 | $ | 482,700 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30, 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) |
10,115 | 15,150 | 1,068 | | (243 | ) | 26,090 | |||||||||||||||||
Charge-offs |
(37,936 | ) | (25,086 | ) | (3,906 | ) | | (767 | ) | (67,695 | ) | |||||||||||||
Recoveries |
6,504 | 4,700 | 447 | | 815 | 12,466 | ||||||||||||||||||
Net recoveries (write-down) |
(1,101 | ) | (542 | ) | (160 | ) | | (20 | ) | (1,823 | ) | |||||||||||||
Allowance transferred to non-covered loans |
(8,453 | ) | (1,424 | ) | (582 | ) | | (2,578 | ) | (13,037 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Ending balance |
$ | | $ | | $ | 37,815 | $ | | $ | 259 | $ | 38,074 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30, 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) |
(2,381 | ) | 1,242 | (3,891 | ) | (1,427 | ) | 4,194 | (2,263 | ) | ||||||||||||||
Charge-offs |
(882 | ) | | (561 | ) | (954 | ) | (5,492 | ) | (7,889 | ) | |||||||||||||
Recoveries |
2,240 | | 231 | 2,752 | 2,256 | 7,479 | ||||||||||||||||||
Net recoveries (write-down) |
| | 5,529 | | (3,401 | ) | 2,128 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Ending balance |
$ | 8,625 | $ | 2,429 | $ | 3,770 | $ | 3,315 | $ | 11,900 | $ | 30,039 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
45
For the six months ended June 30, 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) |
56,644 | 14,839 | 23,124 | (1,427 | ) | 3,771 | 19,318 | 116,269 | ||||||||||||||||||||
Charge-offs |
(71,713 | ) | (27,280 | ) | (26,801 | ) | (954 | ) | (2,930 | ) | (60,140 | ) | (189,818 | ) | ||||||||||||||
Recoveries |
19,778 | 8,098 | 1,800 | 2,752 | 1,188 | 18,645 | 52,261 | |||||||||||||||||||||
Net recoveries (write-down) |
(31,097 | ) | (542 | ) | 5,369 | | | (3,421 | ) | (29,691 | ) | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Ending balance |
$ | 215,720 | $ | 8,987 | $ | 167,762 | $ | 3,315 | $ | 9,160 | $ | 145,869 | $ | 550,813 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the quarter ended June 30, 2014 |
||||||||||||||||||||||||
Puerto Rico - Non-covered loans |
||||||||||||||||||||||||
(In thousands) |
Commercial | Construction | Mortgage | Leasing | Consumer | Total | ||||||||||||||||||
Allowance for credit losses: |
||||||||||||||||||||||||
Beginning balance |
$ | 124,134 | $ | 5,079 | $ | 137,796 | $ | 10,483 | $ | 157,248 | $ | 434,740 | ||||||||||||
Provision (reversal of provision) |
69,410 | (503 | ) | (7,471 | ) | (3,380 | ) | 16,805 | 74,861 | |||||||||||||||
Charge-offs |
(16,218 | ) | (42 | ) | (10,083 | ) | (1,754 | ) | (29,941 | ) | (58,038 | ) | ||||||||||||
Recoveries |
6,909 | 657 | 157 | 610 | 6,370 | 14,703 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Ending balance |
$ | 184,235 | $ | 5,191 | $ | 120,399 | $ | 5,959 | $ | 150,482 | $ | 466,266 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
For the quarter ended June 30, 2014 |
||||||||||||||||||||||||
Puerto Rico - Covered Loans |
||||||||||||||||||||||||
(In thousands) |
Commercial | Construction | Mortgage | Leasing | Consumer | Total | ||||||||||||||||||
Allowance for credit losses: |
||||||||||||||||||||||||
Beginning balance |
$ | 38,589 | $ | 15,966 | $ | 38,848 | $ | | $ | 4,370 | $ | 97,773 | ||||||||||||
Provision (reversal of provision) |
13,542 | (3,270 | ) | 2,344 | 1 | (1,013 | ) | 11,604 | ||||||||||||||||
Charge-offs |
(5,993 | ) | (6,427 | ) | (2,262 | ) | (2 | ) | 677 | (14,007 | ) | |||||||||||||
Recoveries |
555 | 2,727 | 11 | 1 | 1 | 3,295 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Ending balance |
$ | 46,693 | $ | 8,996 | $ | 38,941 | $ | | $ | 4,035 | $ | 98,665 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
For the quarter ended June 30, 2014 |
||||||||||||||||||||||||
U.S. Mainland - Continuing Operations |
||||||||||||||||||||||||
(In thousands) |
Commercial | Construction | Mortgage | Legacy | Consumer | Total | ||||||||||||||||||
Allowance for credit losses: |
||||||||||||||||||||||||
Beginning balance |
$ | 31,505 | $ | 196 | $ | 25,167 | $ | 11,872 | $ | 18,893 | $ | 87,633 | ||||||||||||
Provision (reversal of provision) |
(12,321 | ) | (45 | ) | (7,245 | ) | (3,734 | ) | (1,442 | ) | (24,787 | ) | ||||||||||||
Charge-offs |
(5,672 | ) | | (914 | ) | (1,347 | ) | (3,997 | ) | (11,930 | ) | |||||||||||||
Recoveries |
4,762 | | 521 | 2,552 | 1,229 | 9,064 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Ending balance |
$ | 18,274 | $ | 151 | $ | 17,529 | $ | 9,343 | $ | 14,683 | $ | 59,980 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
For the quarter ended June 30, 2014 |
||||||||||||||||||||||||
U.S. Mainland - Discontinued Operations |
||||||||||||||||||||||||
(In thousands) |
Commercial | Construction | Mortgage | Legacy | Consumer | Total | ||||||||||||||||||
Allowance for credit losses: |
||||||||||||||||||||||||
Beginning balance |
$ | 16,375 | $ | 27 | $ | | $ | 1,400 | $ | 2,400 | $ | 20,202 | ||||||||||||
Net write-down related to loans transferred to discontinued operations |
(16,375 | ) | (27 | ) | | (1,400 | ) | (2,400 | ) | (20,202 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Ending balance |
$ | | $ | | $ | | $ | | $ | | $ | | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
46
For the quarter ended June 30, 2014 |
||||||||||||||||||||||||||||
Popular, Inc. |
||||||||||||||||||||||||||||
(In thousands) |
Commercial | Construction | Mortgage | Legacy | Leasing | Consumer | Total | |||||||||||||||||||||
Allowance for credit losses: |
||||||||||||||||||||||||||||
Beginning balance |
$ | 210,603 | $ | 21,268 | $ | 201,811 | $ | 13,272 | $ | 10,483 | $ | 182,911 | $ | 640,348 | ||||||||||||||
Provision (reversal of provision) |
70,631 | (3,818 | ) | (12,372 | ) | (3,734 | ) | (3,379 | ) | 14,350 | 61,678 | |||||||||||||||||
Charge-offs |
(27,883 | ) | (6,469 | ) | (13,259 | ) | (1,347 | ) | (1,756 | ) | (33,261 | ) | (83,975 | ) | ||||||||||||||
Recoveries |
12,226 | 3,384 | 689 | 2,552 | 611 | 7,600 | 27,062 | |||||||||||||||||||||
Net write-down related to loans transferred to discontinued operations |
(16,375 | ) | (27 | ) | | (1,400 | ) | | (2,400 | ) | (20,202 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Ending balance |
$ | 249,202 | $ | 14,338 | $ | 176,869 | $ | 9,343 | $ | 5,959 | $ | 169,200 | $ | 624,911 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30, 2014 |
||||||||||||||||||||||||
Puerto Rico - Non-covered loans |
||||||||||||||||||||||||
(In thousands) |
Commercial | Construction | Mortgage | Leasing | Consumer | Total | ||||||||||||||||||
Allowance for credit losses: |
||||||||||||||||||||||||
Beginning balance |
$ | 128,150 | $ | 5,095 | $ | 130,330 | $ | 10,622 | $ | 152,578 | $ | 426,775 | ||||||||||||
Provision (reversal of provision) |
80,566 | (1,897 | ) | 8,511 | (2,863 | ) | 44,458 | 128,775 | ||||||||||||||||
Charge-offs |
(38,334 | ) | (458 | ) | (18,809 | ) | (2,721 | ) | (59,137 | ) | (119,459 | ) | ||||||||||||
Recoveries |
13,853 | 2,451 | 367 | 921 | 12,583 | 30,175 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Ending balance |
$ | 184,235 | $ | 5,191 | $ | 120,399 | $ | 5,959 | $ | 150,482 | $ | 466,266 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30, 2014 |
||||||||||||||||||||||||
Puerto Rico - Covered Loans |
||||||||||||||||||||||||
(In thousands) |
Commercial | Construction | Mortgage | Leasing | Consumer | Total | ||||||||||||||||||
Allowance for credit losses: |
||||||||||||||||||||||||
Beginning balance |
$ | 42,198 | $ | 19,491 | $ | 36,006 | $ | | $ | 4,397 | $ | 102,092 | ||||||||||||
Provision (reversal of provision) |
17,581 | 14,297 | 6,842 | 1 | (1,403 | ) | 37,318 | |||||||||||||||||
Charge-offs |
(13,961 | ) | (29,408 | ) | (3,918 | ) | (2 | ) | 972 | (46,317 | ) | |||||||||||||
Recoveries |
875 | 4,616 | 11 | 1 | 69 | 5,572 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Ending balance |
$ | 46,693 | $ | 8,996 | $ | 38,941 | $ | | $ | 4,035 | $ | 98,665 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30, 2014 |
||||||||||||||||||||||||
U.S. Mainland - Continuing Operations |
||||||||||||||||||||||||
(In thousands) |
Commercial | Construction | Mortgage | Legacy | Consumer | Total | ||||||||||||||||||
Allowance for credit losses: |
||||||||||||||||||||||||
Beginning balance |
$ | 24,930 | $ | 214 | $ | 26,599 | $ | 11,335 | $ | 19,205 | $ | 82,283 | ||||||||||||
Allowance transferred from discontinued operations |
7,984 | | | | | 7,984 | ||||||||||||||||||
Provision (reversal of provision) |
(11,742 | ) | (239 | ) | (7,807 | ) | (7,406 | ) | 2,615 | (24,579 | ) | |||||||||||||
Charge-offs |
(10,664 | ) | | (2,452 | ) | (4,331 | ) | (9,073 | ) | (26,520 | ) | |||||||||||||
Recoveries |
7,766 | 176 | 1,189 | 9,745 | 1,936 | 20,812 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Ending balance |
$ | 18,274 | $ | 151 | $ | 17,529 | $ | 9,343 | $ | 14,683 | $ | 59,980 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30, 2014 |
||||||||||||||||||||||||
U.S. Mainland - Discontinued Operations |
||||||||||||||||||||||||
(In thousands) |
Commercial | Construction | Mortgage | Legacy | Consumer | Total | ||||||||||||||||||
Allowance for credit losses: |
||||||||||||||||||||||||
Beginning balance |
$ | 21,902 | $ | 33 | $ | | $ | 2,369 | $ | 5,101 | $ | 29,405 | ||||||||||||
Allowance transferred to continuing operations |
(7,984 | ) | | | | | (7,984 | ) | ||||||||||||||||
Provision (reversal of provision) |
(2,831 | ) | (226 | ) | | (1,812 | ) | (1,895 | ) | (6,764 | ) | |||||||||||||
Charge-offs |
(2,995 | ) | | | (557 | ) | (900 | ) | (4,452 | ) | ||||||||||||||
Recoveries |
8,283 | 220 | | 1,400 | 94 | 9,997 | ||||||||||||||||||
Net write-downs related to loans transferred to discontinued operations |
(16,375 | ) | (27 | ) | | (1,400 | ) | (2,400 | ) | (20,202 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Ending balance |
$ | | $ | | $ | | $ | | $ | | $ | | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
47
For the six months ended June 30, 2014 |
||||||||||||||||||||||||||||
Popular, Inc. |
||||||||||||||||||||||||||||
(In thousands) |
Commercial | Construction | Mortgage | Legacy | Leasing | Consumer | Total | |||||||||||||||||||||
Allowance for credit losses: |
||||||||||||||||||||||||||||
Beginning balance |
$ | 217,180 | $ | 24,833 | $ | 192,935 | $ | 13,704 | $ | 10,622 | $ | 181,281 | $ | 640,555 | ||||||||||||||
Provision (reversal of provision) |
83,574 | 11,935 | 7,546 | (9,218 | ) | (2,863 | ) | 43,775 | 134,749 | |||||||||||||||||||
Charge-offs |
(65,954 | ) | (29,866 | ) | (25,179 | ) | (4,888 | ) | (2,721 | ) | (68,138 | ) | (196,746 | ) | ||||||||||||||
Recoveries |
30,777 | 7,463 | 1,567 | 11,145 | 921 | 14,682 | 66,555 | |||||||||||||||||||||
Net write-downs related to loans transferred to discontinued operations |
(16,375 | ) | (27 | ) | | (1,400 | ) | | (2,400 | ) | (20,202 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Ending balance |
$ | 249,202 | $ | 14,338 | $ | 176,869 | $ | 9,343 | $ | 5,959 | $ | 169,200 | $ | 624,911 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 | ||||||||||||||||
For the quarters ended | For the six months ended | |||||||||||||||
(In thousands) |
June 30, 2015 | June 30, 2014 | June 30, 2015 | June 30, 2014 | ||||||||||||
Balance at beginning of period |
$ | 68,386 | $ | 90,371 | $ | 78,846 | $ | 93,915 | ||||||||
Provision for loan losses |
12,269 | 10,951 | 20,870 | 35,506 | ||||||||||||
Net charge-offs |
(33,606 | ) | (10,430 | ) | (52,667 | ) | (38,529 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance at end of period |
$ | 47,049 | $ | 90,892 | $ | 47,049 | $ | 90,892 | ||||||||
|
|
|
|
|
|
|
|
The following tables present information at June 30, 2015 and December 31, 2014 regarding loan ending balances and the allowance for loan losses by portfolio segment and whether such loans and the allowance pertains to loans individually or collectively evaluated for impairment.
At June 30, 2015 |
||||||||||||||||||||||||
Puerto Rico |
||||||||||||||||||||||||
(In thousands) |
Commercial | Construction | Mortgage | Leasing | Consumer | Total | ||||||||||||||||||
Allowance for credit losses: |
||||||||||||||||||||||||
Specific ALLL non-covered loans |
$ | 68,456 | $ | 725 | $ | 43,749 | $ | 607 | $ | 24,615 | $ | 138,152 | ||||||||||||
General ALLL non-covered loans |
138,639 | 5,833 | 82,428 | 8,553 | 109,095 | 344,548 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
ALLL - non-covered loans |
207,095 | 6,558 | 126,177 | 9,160 | 133,710 | 482,700 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Specific ALLL covered loans |
| | | | | | ||||||||||||||||||
General ALLL covered loans |
| | 37,815 | | 259 | 38,074 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
ALLL - covered loans |
| | 37,815 | | 259 | 38,074 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total ALLL |
$ | 207,095 | $ | 6,558 | $ | 163,992 | $ | 9,160 | $ | 133,969 | $ | 520,774 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Loans held-in-portfolio: |
||||||||||||||||||||||||
Impaired non-covered loans |
$ | 337,577 | $ | 3,627 | $ | 450,789 | $ | 2,554 | $ | 112,733 | $ | 907,280 | ||||||||||||
Non-covered loans held-in-portfolio excluding impaired loans |
7,231,433 | 109,819 | 5,793,594 | 590,262 | 3,282,292 | 17,007,400 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Non-covered loans held-in-portfolio |
7,569,010 | 113,446 | 6,244,383 | 592,816 | 3,395,025 | 17,914,680 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Impaired covered loans |
| | | | | | ||||||||||||||||||
Covered loans held-in-portfolio excluding impaired loans |
3 | | 671,074 | | 18,573 | 689,650 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Covered loans held-in-portfolio |
3 | | 671,074 | | 18,573 | 689,650 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total loans held-in-portfolio |
$ | 7,569,013 | $ | 113,446 | $ | 6,915,457 | $ | 592,816 | $ | 3,413,598 | $ | 18,604,330 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
48
At June 30, 2015 |
||||||||||||||||||||||||
U.S. Mainland |
||||||||||||||||||||||||
(In thousands) |
Commercial | Construction | Mortgage | Legacy | Consumer | Total | ||||||||||||||||||
Allowance for credit losses: |
||||||||||||||||||||||||
Specific ALLL |
$ | | $ | | $ | 413 | $ | 34 | $ | 412 | $ | 859 | ||||||||||||
General ALLL |
8,625 | 2,429 | 3,357 | 3,281 | 11,488 | 29,180 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total ALLL |
$ | 8,625 | $ | 2,429 | $ | 3,770 | $ | 3,315 | $ | 11,900 | $ | 30,039 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Loans held-in-portfolio: |
||||||||||||||||||||||||
Impaired loans |
$ | | $ | | $ | 5,045 | $ | 1,357 | $ | 2,144 | $ | 8,546 | ||||||||||||
Loans held-in-portfolio, excluding impaired loans |
2,435,706 | 582,564 | 976,395 | 71,145 | 446,109 | 4,511,919 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total loans held-in-portfolio |
$ | 2,435,706 | $ | 582,564 | $ | 981,440 | $ | 72,502 | $ | 448,253 | $ | 4,520,465 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2015 |
||||||||||||||||||||||||||||
Popular, Inc. |
||||||||||||||||||||||||||||
(In thousands) |
Commercial | Construction | Mortgage | Legacy | Leasing | Consumer | Total | |||||||||||||||||||||
Allowance for credit losses: |
||||||||||||||||||||||||||||
Specific ALLL non-covered loans |
$ | 68,456 | $ | 725 | $ | 44,162 | $ | 34 | $ | 607 | $ | 25,027 | $ | 139,011 | ||||||||||||||
General ALLL non-covered loans |
147,264 | 8,262 | 85,785 | 3,281 | 8,553 | 120,583 | 373,728 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
ALLL - non-covered loans |
215,720 | 8,987 | 129,947 | 3,315 | 9,160 | 145,610 | 512,739 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Specific ALLL covered loans |
| | | | | | | |||||||||||||||||||||
General ALLL covered loans |
| | 37,815 | | | 259 | 38,074 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
ALLL - covered loans |
| | 37,815 | | | 259 | 38,074 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total ALLL |
$ | 215,720 | $ | 8,987 | $ | 167,762 | $ | 3,315 | $ | 9,160 | $ | 145,869 | $ | 550,813 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Loans held-in-portfolio: |
||||||||||||||||||||||||||||
Impaired non-covered loans |
$ | 337,577 | $ | 3,627 | $ | 455,834 | $ | 1,357 | $ | 2,554 | $ | 114,877 | $ | 915,826 | ||||||||||||||
Non-covered loans held-in-portfolio excluding impaired loans |
9,667,139 | 692,383 | 6,769,989 | 71,145 | 590,262 | 3,728,401 | 21,519,319 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Non-covered loans held-in-portfolio |
10,004,716 | 696,010 | 7,225,823 | 72,502 | 592,816 | 3,843,278 | 22,435,145 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Impaired covered loans |
| | | | | | | |||||||||||||||||||||
Covered loans held-in-portfolio excluding impaired loans |
3 | | 671,074 | | | 18,573 | 689,650 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Covered loans held-in-portfolio |
3 | | 671,074 | | | 18,573 | 689,650 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total loans held-in-portfolio |
$ | 10,004,719 | $ | 696,010 | $ | 7,896,897 | $ | 72,502 | $ | 592,816 | $ | 3,861,851 | $ | 23,124,795 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2014 |
||||||||||||||||||||||||
Puerto Rico |
||||||||||||||||||||||||
(In thousands) |
Commercial | Construction | Mortgage | Leasing | Consumer | Total | ||||||||||||||||||
Allowance for credit losses: |
||||||||||||||||||||||||
Specific ALLL non-covered loans |
$ | 64,736 | $ | 363 | $ | 45,838 | $ | 770 | $ | 27,796 | $ | 139,503 | ||||||||||||
General ALLL non-covered loans |
136,853 | 5,120 | 75,022 | 6,361 | 126,276 | 349,632 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
ALLL - non-covered loans |
201,589 | 5,483 | 120,860 | 7,131 | 154,072 | 489,135 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Specific ALLL covered loans |
5 | | | | | 5 | ||||||||||||||||||
General ALLL covered loans |
30,866 | 7,202 | 40,948 | | 3,052 | 82,068 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
ALLL - covered loans |
30,871 | 7,202 | 40,948 | | 3,052 | 82,073 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total ALLL |
$ | 232,460 | $ | 12,685 | $ | 161,808 | $ | 7,131 | $ | 157,124 | $ | 571,208 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Loans held-in-portfolio: |
||||||||||||||||||||||||
Impaired non-covered loans |
$ | 356,911 | $ | 13,268 | $ | 431,569 | $ | 3,023 | $ | 115,759 | $ | 920,530 | ||||||||||||
Non-covered loans held-in-portfolio excluding impaired loans |
6,017,892 | 146,116 | 5,018,932 | 561,366 | 3,273,278 | 15,017,584 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Non-covered loans held-in-portfolio |
6,374,803 | 159,384 | 5,450,501 | 564,389 | 3,389,037 | 15,938,114 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Impaired covered loans |
4,487 | 2,419 | | | | 6,906 | ||||||||||||||||||
Covered loans held-in-portfolio excluding impaired loans |
1,610,294 | 67,917 | 822,986 | | 34,559 | 2,535,756 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Covered loans held-in-portfolio |
1,614,781 | 70,336 | 822,986 | | 34,559 | 2,542,662 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total loans held-in-portfolio |
$ | 7,989,584 | $ | 229,720 | $ | 6,273,487 | $ | 564,389 | $ | 3,423,596 | $ | 18,480,776 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
49
At December 31, 2014 |
||||||||||||||||||||||||
U.S. Mainland |
||||||||||||||||||||||||
(In thousands) |
Commercial | Construction | Mortgage | Legacy | Consumer | Total | ||||||||||||||||||
Allowance for credit losses: |
||||||||||||||||||||||||
Specific ALLL |
$ | | $ | | $ | 273 | $ | | $ | 365 | $ | 638 | ||||||||||||
General ALLL |
9,648 | 1,187 | 2,189 | 2,944 | 13,978 | 29,946 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total ALLL |
$ | 9,648 | $ | 1,187 | $ | 2,462 | $ | 2,944 | $ | 14,343 | $ | 30,584 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Loans held-in-portfolio: |
||||||||||||||||||||||||
Impaired loans |
$ | 250 | $ | | $ | 4,255 | $ | | $ | 1,973 | $ | 6,478 | ||||||||||||
Loans held-in-portfolio, excluding impaired loans |
1,759,214 | 92,436 | 1,048,130 | 80,818 | 479,261 | 3,459,859 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total loans held-in-portfolio |
$ | 1,759,464 | $ | 92,436 | $ | 1,052,385 | $ | 80,818 | $ | 481,234 | $ | 3,466,337 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2014 |
||||||||||||||||||||||||||||
Popular, Inc. |
||||||||||||||||||||||||||||
(In thousands) |
Commercial | Construction | Mortgage | Legacy | Leasing | Consumer | Total | |||||||||||||||||||||
Allowance for credit losses: |
||||||||||||||||||||||||||||
Specific ALLL non-covered loans |
$ | 64,736 | $ | 363 | $ | 46,111 | $ | | $ | 770 | $ | 28,161 | $ | 140,141 | ||||||||||||||
General ALLL non-covered loans |
146,501 | 6,307 | 77,211 | 2,944 | 6,361 | 140,254 | 379,578 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
ALLL - non-covered loans |
211,237 | 6,670 | 123,322 | 2,944 | 7,131 | 168,415 | 519,719 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Specific ALLL covered loans |
5 | | | | | | 5 | |||||||||||||||||||||
General ALLL covered loans |
30,866 | 7,202 | 40,948 | | | 3,052 | 82,068 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
ALLL - covered loans |
30,871 | 7,202 | 40,948 | | | 3,052 | 82,073 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total ALLL |
$ | 242,108 | $ | 13,872 | $ | 164,270 | $ | 2,944 | $ | 7,131 | $ | 171,467 | $ | 601,792 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Loans held-in-portfolio: |
||||||||||||||||||||||||||||
Impaired non-covered loans |
$ | 357,161 | $ | 13,268 | $ | 435,824 | $ | | $ | 3,023 | $ | 117,732 | $ | 927,008 | ||||||||||||||
Non-covered loans held-in-portfolio excluding impaired loans |
7,777,106 | 238,552 | 6,067,062 | 80,818 | 561,366 | 3,752,539 | 18,477,443 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Non-covered loans held-in-portfolio |
8,134,267 | 251,820 | 6,502,886 | 80,818 | 564,389 | 3,870,271 | 19,404,451 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Impaired covered loans |
4,487 | 2,419 | | | | | 6,906 | |||||||||||||||||||||
Covered loans held-in-portfolio excluding impaired loans |
1,610,294 | 67,917 | 822,986 | | | 34,559 | 2,535,756 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Covered loans held-in-portfolio |
1,614,781 | 70,336 | 822,986 | | | 34,559 | 2,542,662 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total loans held-in-portfolio |
$ | 9,749,048 | $ | 322,156 | $ | 7,325,872 | $ | 80,818 | $ | 564,389 | $ | 3,904,830 | $ | 21,947,113 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
Impaired loans
The following tables present loans individually evaluated for impairment at June 30, 2015 and December 31, 2014.
June 30, 2015 |
||||||||||||||||||||||||||||||||
Puerto Rico |
||||||||||||||||||||||||||||||||
Impaired Loans With an Allowance |
Impaired Loans With No Allowance |
Impaired Loans - Total | ||||||||||||||||||||||||||||||
(In thousands) |
Recorded investment |
Unpaid principal balance |
Related allowance |
Recorded investment |
Unpaid principal balance |
Recorded investment |
Unpaid principal balance |
Related allowance |
||||||||||||||||||||||||
Commercial multi-family |
$ | 99 | $ | 99 | $ | 4 | $ | | $ | | $ | 99 | $ | 99 | $ | 4 | ||||||||||||||||
Commercial real estate non-owner occupied |
109,047 | 109,977 | 37,993 | 8,985 | 11,921 | 118,032 | 121,898 | 37,993 | ||||||||||||||||||||||||
Commercial real estate owner occupied |
105,349 | 130,894 | 18,025 | 15,085 | 22,343 | 120,434 | 153,237 | 18,025 | ||||||||||||||||||||||||
Commercial and industrial |
73,865 | 76,038 | 12,434 | 25,147 | 38,795 | 99,012 | 114,833 | 12,434 | ||||||||||||||||||||||||
Construction |
3,627 | 10,276 | 725 | | | 3,627 | 10,276 | 725 | ||||||||||||||||||||||||
Mortgage |
410,228 | 447,040 | 43,749 | 40,561 | 45,005 | 450,789 | 492,045 | 43,749 | ||||||||||||||||||||||||
Leasing |
2,554 | 2,554 | 607 | | | 2,554 | 2,554 | 607 | ||||||||||||||||||||||||
Consumer: |
||||||||||||||||||||||||||||||||
Credit cards |
39,998 | 39,998 | 7,207 | | | 39,998 | 39,998 | 7,207 | ||||||||||||||||||||||||
Personal |
69,960 | 69,960 | 16,914 | | | 69,960 | 69,960 | 16,914 | ||||||||||||||||||||||||
Auto |
2,122 | 2,122 | 368 | | | 2,122 | 2,122 | 368 | ||||||||||||||||||||||||
Other |
653 | 653 | 126 | | | 653 | 653 | 126 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total Puerto Rico |
$ | 817,502 | $ | 889,611 | $ | 138,152 | $ | 89,778 | $ | 118,064 | $ | 907,280 | $ | 1,007,675 | $ | 138,152 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
June 30, 2015 |
||||||||||||||||||||||||||||||||
U.S. mainland |
||||||||||||||||||||||||||||||||
Impaired Loans With an Allowance |
Impaired Loans With No Allowance |
Impaired Loans - Total | ||||||||||||||||||||||||||||||
(In thousands) |
Recorded investment |
Unpaid principal balance |
Related allowance |
Recorded investment |
Unpaid principal balance |
Recorded investment |
Unpaid principal balance |
Related allowance |
||||||||||||||||||||||||
Mortgage |
$ | 3,069 | $ | 3,716 | $ | 413 | $ | 1,976 | $ | 2,762 | $ | 5,045 | $ | 6,478 | $ | 413 | ||||||||||||||||
Legacy |
1,357 | 1,357 | 34 | | | 1,357 | 1,357 | 34 | ||||||||||||||||||||||||
Consumer: |
||||||||||||||||||||||||||||||||
HELOCs |
865 | 882 | 251 | 787 | 787 | 1,652 | 1,669 | 251 | ||||||||||||||||||||||||
Personal |
409 | 409 | 161 | 83 | 83 | 492 | 492 | 161 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total U.S. mainland |
$ | 5,700 | $ | 6,364 | $ | 859 | $ | 2,846 | $ | 3,632 | $ | 8,546 | $ | 9,996 | $ | 859 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
June 30, 2015 |
||||||||||||||||||||||||||||||||
Popular, Inc. |
||||||||||||||||||||||||||||||||
Impaired Loans With an Allowance |
Impaired Loans With No Allowance |
Impaired Loans - Total | ||||||||||||||||||||||||||||||
(In thousands) |
Recorded investment |
Unpaid principal balance |
Related allowance |
Recorded investment |
Unpaid principal balance |
Recorded investment |
Unpaid principal balance |
Related allowance |
||||||||||||||||||||||||
Commercial multi-family |
$ | 99 | $ | 99 | $ | 4 | $ | | $ | | $ | 99 | $ | 99 | $ | 4 | ||||||||||||||||
Commercial real estate non-owner occupied |
109,047 | 109,977 | 37,993 | 8,985 | 11,921 | 118,032 | 121,898 | 37,993 | ||||||||||||||||||||||||
Commercial real estate owner occupied |
105,349 | 130,894 | 18,025 | 15,085 | 22,343 | 120,434 | 153,237 | 18,025 | ||||||||||||||||||||||||
Commercial and industrial |
73,865 | 76,038 | 12,434 | 25,147 | 38,795 | 99,012 | 114,833 | 12,434 | ||||||||||||||||||||||||
Construction |
3,627 | 10,276 | 725 | | | 3,627 | 10,276 | 725 | ||||||||||||||||||||||||
Mortgage |
413,297 | 450,756 | 44,162 | 42,537 | 47,767 | 455,834 | 498,523 | 44,162 | ||||||||||||||||||||||||
Legacy |
1,357 | 1,357 | 34 | | | 1,357 | 1,357 | 34 | ||||||||||||||||||||||||
Leasing |
2,554 | 2,554 | 607 | | | 2,554 | 2,554 | 607 | ||||||||||||||||||||||||
Consumer: |
||||||||||||||||||||||||||||||||
Credit Cards |
39,998 | 39,998 | 7,207 | | | 39,998 | 39,998 | 7,207 | ||||||||||||||||||||||||
HELOCs |
865 | 882 | 251 | 787 | 787 | 1,652 | 1,669 | 251 | ||||||||||||||||||||||||
Personal |
70,369 | 70,369 | 17,075 | 83 | 83 | 70,452 | 70,452 | 17,075 | ||||||||||||||||||||||||
Auto |
2,122 | 2,122 | 368 | | | 2,122 | 2,122 | 368 | ||||||||||||||||||||||||
Other |
653 | 653 | 126 | | | 653 | 653 | 126 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total Popular, Inc. |
$ | 823,202 | $ | 895,975 | $ | 139,011 | $ | 92,624 | $ | 121,696 | $ | 915,826 | $ | 1,017,671 | $ | 139,011 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51
December 31, 2014 |
||||||||||||||||||||||||||||||||
Puerto Rico |
||||||||||||||||||||||||||||||||
Impaired Loans With an Allowance |
Impaired Loans With No Allowance |
Impaired Loans - Total | ||||||||||||||||||||||||||||||
(In thousands) |
Recorded investment |
Unpaid principal balance |
Related allowance |
Recorded investment |
Unpaid principal balance |
Recorded investment |
Unpaid principal balance |
Related allowance |
||||||||||||||||||||||||
Commercial real estate non-owner occupied |
$ | 50,324 | $ | 53,154 | $ | 5,182 | $ | 7,929 | $ | 7,929 | $ | 58,253 | $ | 61,083 | $ | 5,182 | ||||||||||||||||
Commercial real estate owner occupied |
114,163 | 127,855 | 16,770 | 14,897 | 16,110 | 129,060 | 143,965 | 16,770 | ||||||||||||||||||||||||
Commercial and industrial |
145,633 | 148,204 | 42,784 | 23,965 | 31,722 | 169,598 | 179,926 | 42,784 | ||||||||||||||||||||||||
Construction |
2,575 | 7,980 | 363 | 10,693 | 28,994 | 13,268 | 36,974 | 363 | ||||||||||||||||||||||||
Mortgage |
395,911 | 426,502 | 45,838 | 35,658 | 39,248 | 431,569 | 465,750 | 45,838 | ||||||||||||||||||||||||
Leasing |
3,023 | 3,023 | 770 | | | 3,023 | 3,023 | 770 | ||||||||||||||||||||||||
Consumer: |
||||||||||||||||||||||||||||||||
Credit cards |
41,477 | 41,477 | 8,023 | | | 41,477 | 41,477 | 8,023 | ||||||||||||||||||||||||
Personal |
71,825 | 71,825 | 19,410 | | | 71,825 | 71,825 | 19,410 | ||||||||||||||||||||||||
Auto |
1,932 | 1,932 | 262 | | | 1,932 | 1,932 | 262 | ||||||||||||||||||||||||
Other |
525 | 525 | 101 | | | 525 | 525 | 101 | ||||||||||||||||||||||||
Covered loans |
2,419 | 7,500 | 5 | 4,487 | 4,487 | 6,906 | 11,987 | 5 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total Puerto Rico |
$ | 829,807 | $ | 889,977 | $ | 139,508 | $ | 97,629 | $ | 128,490 | $ | 927,436 | $ | 1,018,467 | $ | 139,508 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
December 31, 2014 |
||||||||||||||||||||||||||||||||
U.S. mainland |
||||||||||||||||||||||||||||||||
Impaired Loans With an Allowance |
Impaired Loans With No Allowance |
Impaired Loans - Total | ||||||||||||||||||||||||||||||
(In thousands) |
Recorded investment |
Unpaid principal balance |
Related allowance |
Recorded investment |
Unpaid principal balance |
Recorded investment |
Unpaid principal balance |
Related allowance |
||||||||||||||||||||||||
Commercial and industrial |
$ | | $ | | $ | | $ | 250 | $ | 250 | $ | 250 | $ | 250 | $ | | ||||||||||||||||
Mortgage |
3,049 | 3,443 | 273 | 1,206 | 2,306 | 4,255 | 5,749 | 273 | ||||||||||||||||||||||||
Consumer: |
||||||||||||||||||||||||||||||||
HELOCs |
1,095 | 1,095 | 362 | 791 | 791 | 1,886 | 1,886 | 362 | ||||||||||||||||||||||||
Other |
3 | 3 | 3 | 84 | | 87 | 3 | 3 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total U.S. mainland |
$ | 4,147 | $ | 4,541 | $ | 638 | $ | 2,331 | $ | 3,347 | $ | 6,478 | $ | 7,888 | $ | 638 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
December 31, 2014 |
||||||||||||||||||||||||||||||||
Popular, Inc. |
||||||||||||||||||||||||||||||||
Impaired Loans With an Allowance |
Impaired Loans With No Allowance |
Impaired Loans - Total | ||||||||||||||||||||||||||||||
(In thousands) |
Recorded investment |
Unpaid principal balance |
Related allowance |
Recorded investment |
Unpaid principal balance |
Recorded investment |
Unpaid principal balance |
Related allowance |
||||||||||||||||||||||||
Commercial real estate non-owner occupied |
$ | 50,324 | $ | 53,154 | $ | 5,182 | $ | 7,929 | $ | 7,929 | $ | 58,253 | $ | 61,083 | $ | 5,182 | ||||||||||||||||
Commercial real estate owner occupied |
114,163 | 127,855 | 16,770 | 14,897 | 16,110 | 129,060 | 143,965 | 16,770 | ||||||||||||||||||||||||
Commercial and industrial |
145,633 | 148,204 | 42,784 | 24,215 | 31,972 | 169,848 | 180,176 | 42,784 | ||||||||||||||||||||||||
Construction |
2,575 | 7,980 | 363 | 10,693 | 28,994 | 13,268 | 36,974 | 363 | ||||||||||||||||||||||||
Mortgage |
398,960 | 429,945 | 46,111 | 36,864 | 41,554 | 435,824 | 471,499 | 46,111 | ||||||||||||||||||||||||
Leasing |
3,023 | 3,023 | 770 | | | 3,023 | 3,023 | 770 | ||||||||||||||||||||||||
Consumer: |
||||||||||||||||||||||||||||||||
Credit Cards |
41,477 | 41,477 | 8,023 | | | 41,477 | 41,477 | 8,023 | ||||||||||||||||||||||||
HELOCs |
1,095 | 1,095 | 362 | 791 | 791 | 1,886 | 1,886 | 362 | ||||||||||||||||||||||||
Personal |
71,825 | 71,825 | 19,410 | | | 71,825 | 71,825 | 19,410 | ||||||||||||||||||||||||
Auto |
1,932 | 1,932 | 262 | | | 1,932 | 1,932 | 262 | ||||||||||||||||||||||||
Other |
528 | 528 | 104 | 84 | | 612 | 528 | 104 | ||||||||||||||||||||||||
Covered loans |
2,419 | 7,500 | 5 | 4,487 | 4,487 | 6,906 | 11,987 | 5 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total Popular, Inc. |
$ | 833,954 | $ | 894,518 | $ | 140,146 | $ | 99,960 | $ | 131,837 | $ | 933,914 | $ | 1,026,355 | $ | 140,146 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52
The following tables present the average recorded investment and interest income recognized on impaired loans for the quarter and six months ended June 30, 2015 and 2014.
For the quarter ended June 30, 2015 |
||||||||||||||||||||||||
Puerto Rico | U.S. Mainland | Popular, Inc. | ||||||||||||||||||||||
(In thousands) |
Average recorded investment |
Interest income recognized |
Average recorded investment |
Interest income recognized |
Average recorded investment |
Interest income recognized |
||||||||||||||||||
Commercial multi-family |
$ | 325 | $ | | $ | | $ | | $ | 325 | $ | | ||||||||||||
Commercial real estate non-owner occupied |
118,663 | 1,307 | | | 118,663 | 1,307 | ||||||||||||||||||
Commercial real estate owner occupied |
123,656 | 1,211 | | | 123,656 | 1,211 | ||||||||||||||||||
Commercial and industrial |
134,834 | 2,369 | | | 134,834 | 2,369 | ||||||||||||||||||
Construction |
6,733 | | | | 6,733 | | ||||||||||||||||||
Mortgage |
448,148 | 4,112 | 5,076 | 16 | 453,224 | 4,128 | ||||||||||||||||||
Legacy |
| | 679 | | 679 | | ||||||||||||||||||
Leasing |
2,739 | | | | 2,739 | | ||||||||||||||||||
Consumer: |
||||||||||||||||||||||||
Credit cards |
40,598 | | | | 40,598 | | ||||||||||||||||||
Helocs |
| | 1,645 | | 1,645 | | ||||||||||||||||||
Personal |
70,309 | | 452 | | 70,761 | | ||||||||||||||||||
Auto |
2,079 | | | | 2,079 | | ||||||||||||||||||
Other |
590 | | | | 590 | | ||||||||||||||||||
Covered loans |
5,365 | 74 | | | 5,365 | 74 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total Popular, Inc. |
$ | 954,039 | $ | 9,073 | $ | 7,852 | $ | 16 | $ | 961,891 | $ | 9,089 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
For the quarter ended June 30, 2014 |
||||||||||||||||||||||||
Puerto Rico | U.S. Mainland | Popular, Inc. | ||||||||||||||||||||||
(In thousands) |
Average recorded investment |
Interest income recognized |
Average recorded investment |
Interest income recognized |
Average recorded investment |
Interest income recognized |
||||||||||||||||||
Commercial multi-family |
$ | 2,144 | $ | | $ | 2,808 | $ | | $ | 4,952 | $ | | ||||||||||||
Commercial real estate non-owner occupied |
77,906 | 696 | 9,653 | 24 | 87,559 | 720 | ||||||||||||||||||
Commercial real estate owner occupied |
113,400 | 728 | 6,632 | 30 | 120,032 | 758 | ||||||||||||||||||
Commercial and industrial |
112,697 | 1,717 | 1,122 | | 113,819 | 1,717 | ||||||||||||||||||
Construction |
21,553 | | | | 21,553 | | ||||||||||||||||||
Mortgage |
410,345 | 5,081 | 52,034 | 485 | 462,379 | 5,566 | ||||||||||||||||||
Legacy |
| | 3,123 | | 3,123 | | ||||||||||||||||||
Leasing |
2,554 | | | | 2,554 | | ||||||||||||||||||
Consumer: |
||||||||||||||||||||||||
Credit cards |
43,241 | | | | 43,241 | | ||||||||||||||||||
Helocs |
| | 2,431 | | 2,431 | | ||||||||||||||||||
Personal |
74,918 | | | | 74,918 | | ||||||||||||||||||
Auto |
1,910 | | 87 | | 1,997 | | ||||||||||||||||||
Other |
880 | | 6 | | 886 | | ||||||||||||||||||
Covered loans |
5,391 | 118 | | | 5,391 | 118 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total Popular, Inc. |
$ | 866,939 | $ | 8,340 | $ | 77,896 | $ | 539 | $ | 944,835 | $ | 8,879 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
53
For the six months ended June 30, 2015 |
||||||||||||||||||||||||
Puerto Rico | U.S. Mainland | Popular, Inc. | ||||||||||||||||||||||
(In thousands) |
Average recorded investment |
Interest income recognized |
Average recorded investment |
Interest income recognized |
Average recorded investment |
Interest income recognized |
||||||||||||||||||
Commercial multi-family |
$ | 217 | $ | | $ | | $ | | $ | 217 | $ | | ||||||||||||
Commercial real estate non-owner occupied |
98,526 | 2,582 | | | 98,526 | 2,582 | ||||||||||||||||||
Commercial real estate owner occupied |
125,457 | 2,422 | | | 125,457 | 2,422 | ||||||||||||||||||
Commercial and industrial |
146,422 | 4,749 | 83 | | 146,505 | 4,749 | ||||||||||||||||||
Construction |
8,911 | | | | 8,911 | | ||||||||||||||||||
Mortgage |
442,621 | 8,565 | 4,802 | 29 | 447,423 | 8,594 | ||||||||||||||||||
Legacy |
| | 452 | | 452 | | ||||||||||||||||||
Leasing |
2,834 | | | | 2,834 | | ||||||||||||||||||
Consumer: |
||||||||||||||||||||||||
Credit cards |
40,891 | | | | 40,891 | | ||||||||||||||||||
HELOCs |
| | 1,725 | | 1,725 | | ||||||||||||||||||
Personal |
70,814 | | 301 | | 71,115 | | ||||||||||||||||||
Auto |
2,030 | | | | 2,030 | | ||||||||||||||||||
Other |
568 | | 29 | | 597 | | ||||||||||||||||||
Covered loans |
5,879 | 153 | | | 5,879 | 153 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total Popular, Inc. |
$ | 945,170 | $ | 18,471 | $ | 7,392 | $ | 29 | $ | 952,562 | $ | 18,500 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30, 2014 |
||||||||||||||||||||||||
Puerto Rico | U.S. Mainland | Popular, Inc. | ||||||||||||||||||||||
(In thousands) |
Average recorded investment |
Interest income recognized |
Average recorded investment |
Interest income recognized |
Average recorded investment |
Interest income recognized |
||||||||||||||||||
Commercial multi-family |
$ | 2,564 | $ | | $ | 4,428 | $ | | $ | 6,992 | $ | | ||||||||||||
Commercial real estate non-owner occupied |
74,059 | 8 | 15,440 | 24 | 89,499 | 32 | ||||||||||||||||||
Commercial real estate owner occupied |
105,458 | 1,191 | 9,629 | 30 | 115,087 | 1,221 | ||||||||||||||||||
Commercial and industrial |
103,810 | 1,581 | 1,357 | | 105,167 | 1,581 | ||||||||||||||||||
Construction |
19,976 | 3,329 | 1,888 | | 21,864 | 3,329 | ||||||||||||||||||
Mortgage |
406,679 | 10,263 | 52,264 | 992 | 458,943 | 11,255 | ||||||||||||||||||
Legacy |
| | 4,097 | | 4,097 | | ||||||||||||||||||
Leasing |
2,667 | | | | 2,667 | | ||||||||||||||||||
Consumer: |
||||||||||||||||||||||||
Credit cards |
43,832 | | | | 43,832 | | ||||||||||||||||||
HELOCs |
| | 1,687 | | 1,687 | | ||||||||||||||||||
Personal |
76,104 | | | | 76,104 | | ||||||||||||||||||
Auto |
1,724 | | 87 | | 1,811 | | ||||||||||||||||||
Other |
752 | | 696 | | 1,448 | | ||||||||||||||||||
Covered loans |
10,576 | 234 | | | 10,576 | 234 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total Popular, Inc. |
$ | 848,201 | $ | 16,606 | $ | 91,573 | $ | 1,046 | $ | 939,774 | $ | 17,652 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Modifications
Troubled debt restructurings related to non-covered loan portfolios amounted to $ 1.2 billion at June 30, 2015 (December 31, 2014 - $ 1.1 billion). The amount of outstanding commitments to lend additional funds to debtors owing receivables whose terms have been modified in troubled debt restructurings amounted $2 million related to the commercial loan portfolio and $1 million related to the construction loan portfolio at June 30, 2015 (December 31, 2014 - $5 million and $1 million, respectively).
A modification of a loan constitutes a troubled debt restructuring (TDR) when a borrower is experiencing financial difficulty and the modification constitutes a concession.
Commercial and industrial loans modified in a TDR often involve temporary interest-only payments, term extensions, and converting evergreen revolving credit lines to long-term loans. Commercial real estate (CRE), which includes multifamily, owner-occupied and non-owner occupied CRE, and construction loans modified in a TDR often involve reducing the interest rate for a limited period of time or the remaining term of the loan, extending the maturity date at an interest rate lower than the current market rate for new debt with similar risk, or reductions in the payment plan. Construction loans modified in a TDR may also involve extending the interest-only payment period.
Residential mortgage loans modified in a TDR are primarily comprised of loans where monthly payments are lowered to accommodate the borrowers financial needs for a period of time, normally five years to ten years. After the lowered monthly payment period ends, the borrower reverts back to paying principal and interest per the original terms with the maturity date adjusted accordingly.
54
Home equity loans modifications are made infrequently and are not offered if the Corporation also holds the first mortgage. Home equity loans modifications are uniquely designed to meet the specific needs of each borrower. Automobile loans modified in a TDR are primarily comprised of loans where the Corporation has lowered monthly payments by extending the term. Credit cards modified in a TDR are primarily comprised of loans where monthly payments are lowered to accommodate the borrowers financial needs for a period of time, normally up to 24 months.
As part of its NPL reduction strategy and in order to expedite the resolution of delinquent construction and commercial loans, commencing in 2012, the Corporation routinely enters into liquidation agreements with borrowers and guarantors through the regular legal process, bankruptcy procedures and in certain occasions, out of court transactions. These liquidation agreements, in general, contemplate the following conditions: (1) consent to judgment by the borrowers and guarantors; (2) acknowledgement by the borrower of the debt, its liquidity and maturity; and (3) acknowledgment of the default in payments. The contractual interest rate is not reduced and continues to accrue during the term of the agreement. At the end of the period, the borrower is obligated to remit all amounts due or be subject to the Corporations exercise of its foreclosure rights and further collection efforts. Likewise, the borrowers failure to make stipulated payments will grant the Corporation the ability to exercise its foreclosure rights. This strategy tends to expedite the foreclosure process, resulting in a more effective and efficient collection process. Although in general, these liquidation agreements do not contemplate the forgiveness of principal or interest as debtor is required to cover all outstanding amounts when the agreement becomes due, it could be construed that the Corporation has granted a concession by temporarily accepting a payment schedule that is different from the contractual payment schedule. Accordingly, loans under these program agreements are considered TDRs.
Loans modified in a TDR that are not accounted pursuant to ASC Subtopic 310-30 are typically already in non-accrual status at the time of the modification and partial charge-offs have in some cases already been taken against the outstanding loan balance. The TDR loan continues in non-accrual status until the borrower has demonstrated a willingness and ability to make the restructured loan payments (generally at least six months of sustained performance after the modification (or one year for loans providing for quarterly or semi-annual payments)) and management has concluded that it is probable that the borrower would not be in payment default in the foreseeable future.
Loans modified in a TDR may have the financial effect to the Corporation of increasing the specific allowance for loan losses associated with the loan. Consumer and residential mortgage loans modified under the Corporations loss mitigation programs that are determined to be TDRs are individually evaluated for impairment based on an analysis of discounted cash flows.
For consumer and mortgage loans that are modified with regard to payment terms and which constitute TDRs, the discounted cash flow value method is used as the impairment valuation is more appropriately calculated based on the ongoing cash flow from the individuals rather than the liquidation of the asset. The computations give consideration to probability of defaults and loss-given-foreclosure on the related estimated cash flows.
Commercial and construction loans that have been modified as part of loss mitigation efforts are evaluated individually for impairment. The vast majority of the Corporations modified commercial loans are measured for impairment using the estimated fair value of the collateral, as these are normally considered as collateral dependent loans. The Corporation may also measure commercial loans at their estimated realizable values determined by discounting the expected future cash flows. Construction loans that have been modified are also accounted for as collateral dependent loans. The Corporation determines the fair value measurement dependent upon its exit strategy for the particular asset(s) acquired in foreclosure.
55
The following tables present the non-covered and covered loans classified as TDRs according to their accruing status at June 30, 2015 and December 31, 2014.
Popular, Inc. | ||||||||||||||||||||||||
Non-Covered Loans | ||||||||||||||||||||||||
June 30, 2015 | December 31, 2014 | |||||||||||||||||||||||
(In thousands) |
Accruing | Non-Accruing | Total | Accruing | Non-Accruing | Total | ||||||||||||||||||
Commercial |
$ | 214,907 | $ | 85,388 | $ | 300,295 | $ | 153,380 | $ | 150,069 | $ | 303,449 | ||||||||||||
Construction |
275 | 5,023 | 5,298 | 453 | 5,488 | 5,941 | ||||||||||||||||||
Mortgage |
603,105 | 126,052 | 729,157 | 556,346 | 116,465 | 672,811 | ||||||||||||||||||
Leases |
2,229 | 325 | 2,554 | 775 | 2,248 | 3,023 | ||||||||||||||||||
Consumer |
105,237 | 14,019 | 119,256 | 107,530 | 14,848 | 122,378 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 925,753 | $ | 230,807 | $ | 1,156,560 | $ | 818,484 | $ | 289,118 | $ | 1,107,602 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Popular, Inc. | ||||||||||||||||||||||||
Covered Loans | ||||||||||||||||||||||||
June 30, 2015 | December 31, 2014 | |||||||||||||||||||||||
(In thousands) |
Accruing | Non-Accruing | Total | Accruing | Non-Accruing | Total | ||||||||||||||||||
Commercial |
$ | | $ | | $ | | $ | 1,689 | $ | 3,257 | $ | 4,946 | ||||||||||||
Construction |
| | | | 2,419 | 2,419 | ||||||||||||||||||
Mortgage |
1,749 | 2,969 | 4,718 | 3,629 | 3,990 | 7,619 | ||||||||||||||||||
Consumer |
| | | 26 | 5 | 31 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 1,749 | $ | 2,969 | $ | 4,718 | $ | 5,344 | $ | 9,671 | $ | 15,015 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
56
The following tables present the loan count by type of modification for those loans modified in a TDR during the quarters and six months ended June 30, 2015 and 2014.
Puerto Rico | ||||||||||||||||||||||||||||||||
For the quarter ended June 30, 2015 | For the six months ended June 30, 2015 | |||||||||||||||||||||||||||||||
Reduction in interest rate |
Extension of maturity date |
Combination of reduction in interest rate and extension of maturity date |
Other | 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 |
3 | 7 | | | 5 | 8 | | | ||||||||||||||||||||||||
Commercial real estate owner occupied |
8 | 6 | | | 10 | 9 | | | ||||||||||||||||||||||||
Commercial and industrial |
6 | 6 | | | 11 | 11 | | | ||||||||||||||||||||||||
Construction |
| | | | 1 | | | | ||||||||||||||||||||||||
Mortgage |
16 | 11 | 83 | 23 | 29 | 30 | 181 | 38 | ||||||||||||||||||||||||
Leasing |
| 1 | 2 | | | 2 | 14 | | ||||||||||||||||||||||||
Consumer: |
||||||||||||||||||||||||||||||||
Credit cards |
194 | | | 164 | 422 | | | 351 | ||||||||||||||||||||||||
Personal |
274 | 4 | | | 502 | 18 | | | ||||||||||||||||||||||||
Auto |
| 3 | 1 | | | 5 | 3 | | ||||||||||||||||||||||||
Other |
11 | | | | 22 | | | | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total |
512 | 38 | 86 | 187 | 1,002 | 85 | 198 | 389 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Mainland | ||||||||||||||||||||||||||||||||
For the quarter ended June 30, 2015 | For the six months ended June 30, 2015 | |||||||||||||||||||||||||||||||
Reduction in interest rate |
Extension of maturity date |
Combination of reduction in interest rate and extension of maturity date |
Other | Reduction in interest rate |
Extension of maturity date |
Combination of reduction in interest rate and extension of maturity date |
Other | |||||||||||||||||||||||||
Mortgage |
| | 2 | | | 1 | 10 | | ||||||||||||||||||||||||
Consumer: |
||||||||||||||||||||||||||||||||
HELOCs |
| 1 | | 1 | | 1 | | 2 | ||||||||||||||||||||||||
Personal |
| 2 | | | | 2 | | | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total |
| 3 | 2 | 1 | | 4 | 10 | 2 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57
Popular, Inc. | ||||||||||||||||||||||||||||||||
For the quarter ended June 30, 2015 | For the six months ended June 30, 2015 | |||||||||||||||||||||||||||||||
Reduction in interest rate |
Extension of maturity date |
Combination of reduction in interest rate and extension of maturity date |
Other | 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 |
3 | 7 | | | 5 | 8 | | | ||||||||||||||||||||||||
Commercial real estate owner occupied |
8 | 6 | | | 10 | 9 | | | ||||||||||||||||||||||||
Commercial and industrial |
6 | 6 | | | 11 | 11 | | | ||||||||||||||||||||||||
Construction |
| | | | 1 | | | | ||||||||||||||||||||||||
Mortgage |
16 | 11 | 85 | 23 | 29 | 31 | 191 | 38 | ||||||||||||||||||||||||
Leasing |
| 1 | 2 | | | 2 | 14 | | ||||||||||||||||||||||||
Consumer: |
||||||||||||||||||||||||||||||||
Credit cards |
194 | | | 164 | 422 | | | 351 | ||||||||||||||||||||||||
HELOCs |
| 1 | | 1 | | 1 | | 2 | ||||||||||||||||||||||||
Personal |
274 | 6 | | | 502 | 20 | | | ||||||||||||||||||||||||
Auto |
| 3 | 1 | | | 5 | 3 | | ||||||||||||||||||||||||
Other |
11 | | | | 22 | | | | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total |
512 | 41 | 88 | 188 | 1,002 | 89 | 208 | 391 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Puerto Rico | ||||||||||||||||||||||||||||||||
For the quarter ended June 30, 2014 | For the six months ended June 30, 2014 | |||||||||||||||||||||||||||||||
Reduction in interest rate |
Extension of maturity date |
Combination of reduction in interest rate and extension of maturity date |
Other | 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 |
| 3 | | | 2 | 4 | | | ||||||||||||||||||||||||
Commercial real estate owner occupied |
6 | 5 | | | 15 | 7 | | | ||||||||||||||||||||||||
Commercial and industrial |
14 | 6 | | | 23 | 6 | | | ||||||||||||||||||||||||
Construction |
| | | | | 3 | | | ||||||||||||||||||||||||
Mortgage |
14 | 12 | 110 | 43 | 27 | 26 | 190 | 67 | ||||||||||||||||||||||||
Leasing |
| 1 | 18 | | | 5 | 24 | | ||||||||||||||||||||||||
Consumer: |
||||||||||||||||||||||||||||||||
Credit cards |
273 | | | 172 | 547 | | | 327 | ||||||||||||||||||||||||
Personal |
247 | 16 | | 2 | 463 | 33 | | 3 | ||||||||||||||||||||||||
Auto |
| 6 | 3 | | | 8 | 3 | | ||||||||||||||||||||||||
Other |
25 | | | 1 | 43 | | | 2 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total |
579 | 49 | 131 | 218 | 1,120 | 92 | 217 | 399 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Mainland | ||||||||||||||||||||||||||||||||
For the quarter ended June 30, 2014 | For the six months ended June 30, 2014 | |||||||||||||||||||||||||||||||
Reduction in interest rate |
Extension of maturity date |
Combination of reduction in interest rate and extension of maturity date |
Other | Reduction in interest rate |
Extension of maturity date |
Combination of reduction in interest rate and extension of maturity date |
Other | |||||||||||||||||||||||||
Mortgage |
| | 5 | | | | 11 | | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total |
| | 5 | | | | 11 | | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58
Popular, Inc. | ||||||||||||||||||||||||||||||||
For the quarter ended June 30, 2014 | For the six months ended June 30, 2014 | |||||||||||||||||||||||||||||||
Reduction in interest rate |
Extension of maturity date |
Combination of reduction in interest rate and extension of maturity date |
Other | 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 |
| 3 | | | 2 | 4 | | | ||||||||||||||||||||||||
Commercial real estate owner occupied |
6 | 5 | | | 15 | 7 | | | ||||||||||||||||||||||||
Commercial and industrial |
14 | 6 | | | 23 | 6 | | | ||||||||||||||||||||||||
Construction |
| | | | | 3 | | | ||||||||||||||||||||||||
Mortgage |
14 | 12 | 115 | 43 | 27 | 26 | 201 | 67 | ||||||||||||||||||||||||
Leasing |
| 1 | 18 | | | 5 | 24 | | ||||||||||||||||||||||||
Consumer: |
||||||||||||||||||||||||||||||||
Credit cards |
273 | | | 172 | 547 | | | 327 | ||||||||||||||||||||||||
Personal |
247 | 16 | | 2 | 463 | 33 | | 3 | ||||||||||||||||||||||||
Auto |
| 6 | 3 | | | 8 | 3 | | ||||||||||||||||||||||||
Other |
25 | | | 1 | 43 | | | 2 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total |
579 | 49 | 136 | 218 | 1,120 | 92 | 228 | 399 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following tables present by class, quantitative information related to loans modified as TDRs during the quarters and six months ended June 30, 2015 and 2014.
Puerto Rico |
||||||||||||||||
For the quarter ended June 30, 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 real estate non-owner occupied |
10 | $ | 48,719 | $ | 48,868 | $ | 10,682 | |||||||||
Commercial real estate owner occupied |
14 | 5,031 | 4,484 | 162 | ||||||||||||
Commercial and industrial |
12 | 6,834 | 6,997 | 439 | ||||||||||||
Mortgage |
133 | 8,284 | 13,146 | 957 | ||||||||||||
Leasing |
3 | 99 | 99 | 23 | ||||||||||||
Consumer: |
||||||||||||||||
Credit cards |
358 | 3,265 | 3,687 | 568 | ||||||||||||
Personal |
278 | 4,751 | 4,749 | 1,009 | ||||||||||||
Auto |
4 | 60 | 62 | 9 | ||||||||||||
Other |
11 | 27 | 38 | 5 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
823 | $ | 77,070 | $ | 82,130 | $ | 13,854 | |||||||||
|
|
|
|
|
|
|
|
U.S. Mainland |
||||||||||||||||
For the quarter ended June 30, 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 |
2 | $ | 187 | $ | 193 | $ | 97 | |||||||||
Consumer: |
||||||||||||||||
HELOCs |
2 | 74 | 75 | 16 | ||||||||||||
Personal |
2 | 30 | 30 | 3 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
6 | $ | 291 | $ | 298 | $ | 116 | |||||||||
|
|
|
|
|
|
|
|
59
Popular, Inc. |
||||||||||||||||
For the quarter ended June 30, 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 real estate non-owner occupied |
10 | $ | 48,719 | 48,868 | $ | 10,682 | ||||||||||
Commercial real estate owner occupied |
14 | 5,031 | 4,484 | 162 | ||||||||||||
Commercial and industrial |
12 | 6,834 | 6,997 | 439 | ||||||||||||
Mortgage |
135 | 8,471 | 13,339 | 1,054 | ||||||||||||
Leasing |
3 | 99 | 99 | 23 | ||||||||||||
Consumer: |
||||||||||||||||
Credit cards |
358 | 3,265 | 3,687 | 568 | ||||||||||||
HELOCs |
2 | 74 | 75 | 16 | ||||||||||||
Personal |
280 | 4,781 | 4,779 | 1,012 | ||||||||||||
Auto |
4 | 60 | 62 | 9 | ||||||||||||
Other |
11 | 27 | 38 | 5 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
829 | $ | 77,361 | $ | 82,428 | $ | 13,970 | |||||||||
|
|
|
|
|
|
|
|
Puerto Rico |
||||||||||||||||
For the quarter ended June 30, 2014 |
||||||||||||||||
(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 |
3 | $ | 1,486 | $ | 1,461 | $ | 141 | |||||||||
Commercial real estate owner occupied |
11 | 31,629 | 31,193 | 1,446 | ||||||||||||
Commercial and industrial |
20 | 41,418 | 41,205 | 60 | ||||||||||||
Mortgage |
179 | 26,651 | 26,411 | 804 | ||||||||||||
Leasing |
19 | 507 | 510 | 103 | ||||||||||||
Consumer: |
||||||||||||||||
Credit cards |
445 | 3,369 | 3,811 | 602 | ||||||||||||
Personal |
265 | 4,374 | 4,391 | 854 | ||||||||||||
Auto |
9 | 144 | 149 | 9 | ||||||||||||
Other |
26 | 66 | 65 | 11 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
977 | $ | 109,644 | $ | 109,196 | $ | 4,030 | |||||||||
|
|
|
|
|
|
|
|
U.S. Mainland |
||||||||||||||||
For the quarter ended June 30, 2014 |
||||||||||||||||
(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 |
5 | $ | 643 | $ | 763 | $ | 245 | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
5 | $ | 643 | $ | 763 | $ | 245 | |||||||||
|
|
|
|
|
|
|
|
Popular, Inc. |
||||||||||||||||
For the quarter ended June 30, 2014 |
||||||||||||||||
(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 |
3 | $ | 1,486 | $ | 1,461 | $ | 141 | |||||||||
Commercial real estate owner occupied |
11 | 31,629 | 31,193 | 1,446 | ||||||||||||
Commercial and industrial |
20 | 41,418 | 41,205 | 60 | ||||||||||||
Mortgage |
184 | 27,294 | 27,174 | 1,049 | ||||||||||||
Leasing |
19 | 507 | 510 | 103 | ||||||||||||
Consumer: |
||||||||||||||||
Credit cards |
445 | 3,369 | 3,811 | 602 | ||||||||||||
Personal |
265 | 4,374 | 4,391 | 854 | ||||||||||||
Auto |
9 | 144 | 149 | 9 | ||||||||||||
Other |
26 | 66 | 65 | 11 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
982 | $ | 110,287 | $ | 109,959 | $ | 4,275 | |||||||||
|
|
|
|
|
|
|
|
60
Puerto Rico |
||||||||||||||||
For the six months ended June 30, 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 |
13 | 66,719 | 66,866 | 13,668 | ||||||||||||
Commercial real estate owner occupied |
19 | 9,790 | 9,036 | 333 | ||||||||||||
Commercial and industrial |
22 | 12,367 | 12,886 | 662 | ||||||||||||
Construction |
1 | 268 | 259 | (166 | ) | |||||||||||
Mortgage |
278 | 24,186 | 29,912 | 2,296 | ||||||||||||
Leasing |
16 | 422 | 424 | 97 | ||||||||||||
Consumer: |
||||||||||||||||
Credit cards |
773 | 6,882 | 7,753 | 1,197 | ||||||||||||
Personal |
520 | 9,253 | 9,249 | 1,976 | ||||||||||||
Auto |
8 | 60 | 113 | 17 | ||||||||||||
Other |
22 | 56 | 67 | 9 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
1,674 | $ | 130,554 | $ | 137,116 | $ | 20,091 | |||||||||
|
|
|
|
|
|
|
|
U.S. mainland |
||||||||||||||||
For the six months ended June 30, 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 |
11 | $ | 655 | $ | 1,657 | $ | 179 | |||||||||
Consumer: |
||||||||||||||||
HELOCs |
3 | 74 | 167 | 25 | ||||||||||||
Personal |
2 | 30 | 30 | 3 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
16 | $ | 759 | $ | 1,854 | $ | 207 | |||||||||
|
|
|
|
|
|
|
|
Popular, Inc. |
||||||||||||||||
For the six months ended June 30, 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 |
13 | 66,719 | 66,866 | 13,668 | ||||||||||||
Commercial real estate owner occupied |
19 | 9,790 | 9,036 | 333 | ||||||||||||
Commercial and industrial |
22 | 12,367 | 12,886 | 662 | ||||||||||||
Construction |
1 | 268 | 259 | (166 | ) | |||||||||||
Mortgage |
289 | 24,841 | 31,569 | 2,475 | ||||||||||||
Leasing |
16 | 422 | 424 | 97 | ||||||||||||
Consumer: |
||||||||||||||||
Credit cards |
773 | 6,882 | 7,753 | 1,197 | ||||||||||||
HELOCs |
3 | 74 | 167 | 25 | ||||||||||||
Personal |
522 | 9,283 | 9,279 | 1,979 | ||||||||||||
Auto |
8 | 60 | 113 | 17 | ||||||||||||
Other |
22 | 56 | 67 | 9 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
1,690 | $ | 131,313 | $ | 138,970 | $ | 20,298 | |||||||||
|
|
|
|
|
|
|
|
61
Puerto Rico |
||||||||||||||||
For the six months ended June 30, 2014 |
||||||||||||||||
(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 |
6 | $ | 2,862 | $ | 2,915 | $ | 78 | |||||||||
Commercial real estate owner occupied |
22 | 33,258 | 32,810 | 1,420 | ||||||||||||
Commercial and industrial |
29 | 42,191 | 41,975 | 69 | ||||||||||||
Construction |
3 | 11,358 | 11,358 | (570 | ) | |||||||||||
Mortgage |
310 | 46,037 | 46,936 | 1,942 | ||||||||||||
Leasing |
29 | 713 | 717 | 166 | ||||||||||||
Consumer: |
||||||||||||||||
Credit cards |
874 | 6,952 | 7,902 | 1,229 | ||||||||||||
Personal |
499 | 8,449 | 8,465 | 1,766 | ||||||||||||
Auto |
11 | 176 | 182 | 10 | ||||||||||||
Other |
45 | 103 | 102 | 17 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
1,828 | $ | 152,099 | $ | 153,362 | $ | 6,127 | |||||||||
|
|
|
|
|
|
|
|
U.S. mainland |
||||||||||||||||
For the six months ended June 30, 2014 |
||||||||||||||||
(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 |
11 | $ | 1,568 | $ | 1,827 | $ | 240 | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
11 | $ | 1,568 | $ | 1,827 | $ | 240 | |||||||||
|
|
|
|
|
|
|
|
Popular, Inc. |
||||||||||||||||
For the six months ended June 30, 2014 |
||||||||||||||||
(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 |
6 | $ | 2,862 | $ | 2,915 | $ | 78 | |||||||||
Commercial real estate owner occupied |
22 | 33,258 | 32,810 | 1,420 | ||||||||||||
Commercial and industrial |
29 | 42,191 | 41,975 | 69 | ||||||||||||
Construction |
3 | 11,358 | 11,358 | (570 | ) | |||||||||||
Mortgage |
321 | 47,605 | 48,763 | 2,182 | ||||||||||||
Leasing |
29 | 713 | 717 | 166 | ||||||||||||
Consumer: |
||||||||||||||||
Credit cards |
874 | 6,952 | 7,902 | 1,229 | ||||||||||||
Personal |
499 | 8,449 | 8,465 | 1,766 | ||||||||||||
Auto |
11 | 176 | 182 | 10 | ||||||||||||
Other |
45 | 103 | 102 | 17 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
1,839 | $ | 153,667 | $ | 155,189 | $ | 6,367 | |||||||||
|
|
|
|
|
|
|
|
During the six months ended June 30, 2015 and 2014, eight loans with an aggregate unpaid principal balance of $3.3 million and one loan of $1.0 million, respectively, were restructured into multiple notes (Note A / B split). The Corporation recorded $747 thousand charge-offs as part of those loan restructurings during the quarter ended June 30, 2015 (June 30, 2014 - $0 million). The restructuring of those loans was made after analyzing the borrowers capacity to repay the debt, collateral and ability to perform under the modified terms. The recorded investment on those commercial TDRs amounted to approximately $2.9 million at June 30, 2015 (June 30, 2014 - $1.1 million) with a related allowance for loan losses amounting to approximately $307 thousand (June 30, 2014 - $0 million).
62
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 June 30, 2015 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 June 30, 2015 |
Defaulted during the six months ended June 30, 2015 |
|||||||||||||||
(Dollars in thousands) |
Loan count | Recorded investment as of first default date |
Loan count | Recorded investment as of first default date |
||||||||||||
Commercial real estate owner occupied |
| $ | | 1 | $ | 291 | ||||||||||
Commercial and industrial |
1 | 64 | 2 | 154 | ||||||||||||
Construction |
| | 2 | 1,192 | ||||||||||||
Mortgage |
48 | 5,941 | 126 | 16,042 | ||||||||||||
Leasing |
4 | 36 | 5 | 43 | ||||||||||||
Consumer: |
||||||||||||||||
Credit cards |
138 | 1,225 | 240 | 2,341 | ||||||||||||
Personal |
31 | 474 | 50 | 692 | ||||||||||||
Auto |
| | 4 | 78 | ||||||||||||
Other |
1 | 1 | 2 | 2 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
223 | $ | 7,741 | 432 | $ | 20,835 | ||||||||||
|
|
|
|
|
|
|
|
For U.S. mainland for the quarter and six months ended June 30, 2015 there were no 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 June 30, 2015 |
Defaulted during the six months ended June 30, 2015 |
|||||||||||||||
(Dollars in thousands) |
Loan count | Recorded investment as of first default date |
Loan count | Recorded investment as of first default date |
||||||||||||
Commercial real estate owner occupied |
| $ | | 1 | $ | 291 | ||||||||||
Commercial and industrial |
1 | 64 | 2 | 154 | ||||||||||||
Construction |
| | 2 | 1,192 | ||||||||||||
Mortgage |
48 | 5,941 | 126 | 16,042 | ||||||||||||
Legacy |
4 | 36 | 5 | 43 | ||||||||||||
Consumer: |
||||||||||||||||
Credit cards |
138 | 1,225 | 240 | 2,341 | ||||||||||||
Personal |
31 | 474 | 50 | 692 | ||||||||||||
Auto |
| | 4 | 78 | ||||||||||||
Other |
1 | 1 | 2 | 2 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
223 | $ | 7,741 | 432 | $ | 20,835 | ||||||||||
|
|
|
|
|
|
|
|
63
Puerto Rico |
||||||||||||||||
Defaulted during the quarter ended June 30, 2014 |
Defaulted during the six months ended June 30, 2014 |
|||||||||||||||
(Dollars in thousands) |
Loan count | Recorded investment as of first default date |
Loan count | Recorded investment as of first default date |
||||||||||||
Commercial real estate non-owner occupied |
| $ | | 1 | $ | 30 | ||||||||||
Commercial real estate owner occupied |
1 | 44 | 3 | 377 | ||||||||||||
Commercial and industrial |
2 | 438 | 5 | 609 | ||||||||||||
Mortgage |
33 | 6,225 | 55 | 10,915 | ||||||||||||
Leasing |
4 | 52 | 7 | 87 | ||||||||||||
Consumer: |
||||||||||||||||
Credit cards |
133 | 1,329 | 256 | 2,408 | ||||||||||||
Personal |
30 | 345 | 55 | 666 | ||||||||||||
Auto |
5 | 84 | 10 | 186 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
208 | $ | 8,517 | 392 | $ | 15,278 | ||||||||||
|
|
|
|
|
|
|
|
For U.S. mainland for the quarter and six months ended June 30, 2014 there were no 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 June 30, 2014 |
Defaulted during the six months ended June 30, 2014 |
|||||||||||||||
(Dollars in thousands) |
Loan count | Recorded investment as of first default date |
Loan count | Recorded investment as of first default date |
||||||||||||
Commercial real estate non-owner occupied |
| $ | | 1 | $ | 30 | ||||||||||
Commercial real estate owner occupied |
1 | 44 | 3 | 377 | ||||||||||||
Commercial and industrial |
2 | 438 | 5 | 609 | ||||||||||||
Mortgage |
33 | 6,225 | 55 | 10,915 | ||||||||||||
Leasing |
4 | 52 | 7 | 87 | ||||||||||||
Consumer: |
||||||||||||||||
Credit cards |
133 | 1,329 | 256 | 2,408 | ||||||||||||
Personal |
30 | 345 | 55 | 666 | ||||||||||||
Auto |
5 | 84 | 10 | 186 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
208 | $ | 8,517 | 392 | $ | 15,278 | ||||||||||
|
|
|
|
|
|
|
|
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.
64
Credit Quality
The following table presents the outstanding balance, net of unearned income, of non-covered loans held-in-portfolio based on the Corporations assignment of obligor risk ratings as defined at June 30, 2015 and December 31, 2014.
June 30, 2015 |
||||||||||||||||||||||||||||||||
(In thousands) |
Watch | Special Mention |
Substandard | Doubtful | Loss | Sub-total | Pass/ Unrated |
Total | ||||||||||||||||||||||||
Puerto Rico[1] |
||||||||||||||||||||||||||||||||
Commercial multi-family |
$ | 1,806 | $ | 1,220 | $ | 8,374 | $ | | $ | | $ | 11,400 | $ | 81,087 | $ | 92,487 | ||||||||||||||||
Commercial real estate non-owner occupied |
387,976 | 203,993 | 539,017 | 307 | 795 | 1,132,088 | 1,611,091 | 2,743,179 | ||||||||||||||||||||||||
Commercial real estate owner occupied |
297,790 | 191,912 | 468,687 | 2,267 | 510 | 961,166 | 995,930 | 1,957,096 | ||||||||||||||||||||||||
Commercial and industrial |
267,796 | 220,499 | 361,142 | 626 | 197 | 850,260 | 1,925,988 | 2,776,248 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total Commercial |
955,368 | 617,624 | 1,377,220 | 3,200 | 1,502 | 2,954,914 | 4,614,096 | 7,569,010 | ||||||||||||||||||||||||
Construction |
1,562 | 8,170 | 39,755 | | | 49,487 | 63,959 | 113,446 | ||||||||||||||||||||||||
Mortgage |
| | 223,718 | | | 223,718 | 6,020,665 | 6,244,383 | ||||||||||||||||||||||||
Leasing |
| | 2,326 | | 2 | 2,328 | 590,488 | 592,816 | ||||||||||||||||||||||||
Consumer: |
||||||||||||||||||||||||||||||||
Credit cards |
| | 19,246 | | | 19,246 | 1,119,194 | 1,138,440 | ||||||||||||||||||||||||
HELOCs |
| | 6,630 | | 65 | 6,695 | 6,001 | 12,696 | ||||||||||||||||||||||||
Personal |
| | 4,388 | | 38 | 4,426 | 1,242,093 | 1,246,519 | ||||||||||||||||||||||||
Auto |
| | 11,125 | | 33 | 11,158 | 788,605 | 799,763 | ||||||||||||||||||||||||
Other |
| | 1,645 | | 755 | 2,400 | 195,207 | 197,607 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total Consumer |
| | 43,034 | | 891 | 43,925 | 3,351,100 | 3,395,025 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total Puerto Rico |
$ | 956,930 | $ | 625,794 | $ | 1,686,053 | $ | 3,200 | $ | 2,395 | $ | 3,274,372 | $ | 14,640,308 | $ | 17,914,680 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
U.S. mainland |
||||||||||||||||||||||||||||||||
Commercial multi-family |
$ | 13,238 | $ | 7,261 | $ | 347 | $ | | $ | | $ | 20,846 | $ | 549,767 | $ | 570,613 | ||||||||||||||||
Commercial real estate non-owner occupied |
35,895 | 3,766 | 24,969 | | | 64,630 | 637,458 | 702,088 | ||||||||||||||||||||||||
Commercial real estate owner occupied |
24,697 | 4,636 | 4,024 | | | 33,357 | 187,151 | 220,508 | ||||||||||||||||||||||||
Commercial and industrial |
11,442 | 2,224 | 70,986 | | | 84,652 | 857,845 | 942,497 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total Commercial |
85,272 | 17,887 | 100,326 | | | 203,485 | 2,232,221 | 2,435,706 | ||||||||||||||||||||||||
Construction |
15,091 | 42,708 | 671 | | | 58,470 | 524,094 | 582,564 | ||||||||||||||||||||||||
Mortgage |
| | 12,050 | | | 12,050 | 969,390 | 981,440 | ||||||||||||||||||||||||
Legacy |
7,184 | 2,208 | 7,864 | | | 17,256 | 55,246 | 72,502 | ||||||||||||||||||||||||
Consumer: |
||||||||||||||||||||||||||||||||
Credit cards |
| | | | | | 13,927 | 13,927 | ||||||||||||||||||||||||
HELOCs |
| | 1,302 | | 2,945 | 4,247 | 323,842 | 328,089 | ||||||||||||||||||||||||
Personal |
| | 306 | | 1,027 | 1,333 | 104,491 | 105,824 | ||||||||||||||||||||||||
Auto |
| | | | | | 80 | 80 | ||||||||||||||||||||||||
Other |
| | 6 | | | 6 | 327 | 333 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total Consumer |
| | 1,614 | | 3,972 | 5,586 | 442,667 | 448,253 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total U.S. mainland |
$ | 107,547 | $ | 62,803 | $ | 122,525 | $ | | $ | 3,972 | $ | 296,847 | $ | 4,223,618 | $ | 4,520,465 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Popular, Inc. |
||||||||||||||||||||||||||||||||
Commercial multi-family |
$ | 15,044 | $ | 8,481 | $ | 8,721 | $ | | $ | | $ | 32,246 | $ | 630,854 | $ | 663,100 | ||||||||||||||||
Commercial real estate non-owner occupied |
423,871 | 207,759 | 563,986 | 307 | 795 | 1,196,718 | 2,248,549 | 3,445,267 | ||||||||||||||||||||||||
Commercial real estate owner occupied |
322,487 | 196,548 | 472,711 | 2,267 | 510 | 994,523 | 1,183,081 | 2,177,604 | ||||||||||||||||||||||||
Commercial and industrial |
279,238 | 222,723 | 432,128 | 626 | 197 | 934,912 | 2,783,833 | 3,718,745 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total Commercial |
1,040,640 | 635,511 | 1,477,546 | 3,200 | 1,502 | 3,158,399 | 6,846,317 | 10,004,716 | ||||||||||||||||||||||||
Construction |
16,653 | 50,878 | 40,426 | | | 107,957 | 588,053 | 696,010 | ||||||||||||||||||||||||
Mortgage |
| | 235,768 | | | 235,768 | 6,990,055 | 7,225,823 | ||||||||||||||||||||||||
Legacy |
7,184 | 2,208 | 7,864 | | | 17,256 | 55,246 | 72,502 | ||||||||||||||||||||||||
Leasing |
| | 2,326 | | 2 | 2,328 | 590,488 | 592,816 | ||||||||||||||||||||||||
Consumer: |
||||||||||||||||||||||||||||||||
Credit cards |
| | 19,246 | | | 19,246 | 1,133,121 | 1,152,367 | ||||||||||||||||||||||||
HELOCs |
| | 7,932 | | 3,010 | 10,942 | 329,843 | 340,785 | ||||||||||||||||||||||||
Personal |
| | 4,694 | | 1,065 | 5,759 | 1,346,584 | 1,352,343 | ||||||||||||||||||||||||
Auto |
| | 11,125 | | 33 | 11,158 | 788,685 | 799,843 | ||||||||||||||||||||||||
Other |
| | 1,651 | | 755 | 2,406 | 195,534 | 197,940 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total Consumer |
| | 44,648 | | 4,863 | 49,511 | 3,793,767 | 3,843,278 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total Popular, Inc. |
$ | 1,064,477 | $ | 688,597 | $ | 1,808,578 | $ | 3,200 | $ | 6,367 | $ | 3,571,219 | $ | 18,863,926 | $ | 22,435,145 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65
The following table presents the weighted average obligor risk rating at June 30, 2015 for those classifications that consider a range of rating scales.
Weighted average obligor risk rating | (Scales 11 and 12) Substandard |
(Scales 1 through 8) Pass |
||||||
Puerto Rico:[1] |
||||||||
Commercial multi-family |
11.13 | 5.73 | ||||||
Commercial real estate non-owner occupied |
11.06 | 6.69 | ||||||
Commercial real estate owner occupied |
11.17 | 7.08 | ||||||
Commercial and industrial |
11.13 | 7.10 | ||||||
|
|
|
|
|||||
Total Commercial |
11.12 | 6.94 | ||||||
|
|
|
|
|||||
Construction |
11.12 | 7.60 | ||||||
|
|
|
|
|||||
Substandard | Pass | |||||||
U.S. mainland: |
||||||||
Commercial multi-family |
11.49 | 7.22 | ||||||
Commercial real estate non-owner occupied |
11.00 | 6.91 | ||||||
Commercial real estate owner occupied |
11.19 | 7.05 | ||||||
Commercial and industrial |
11.13 | 6.25 | ||||||
|
|
|
|
|||||
Total Commercial |
11.10 | 6.75 | ||||||
|
|
|
|
|||||
Construction |
12.00 | 7.84 | ||||||
|
|
|
|
|||||
Legacy |
11.21 | 7.71 | ||||||
|
|
|
|
[1] | Excludes covered loans acquired in the Westernbank FDIC-assisted transaction. |
December 31, 2014 |
||||||||||||||||||||||||||||||||
(In thousands) |
Watch | Special Mention |
Substandard | Doubtful | Loss | Sub-total | Pass/ Unrated |
Total | ||||||||||||||||||||||||
Puerto Rico[1] |
||||||||||||||||||||||||||||||||
Commercial multi-family |
$ | 2,306 | $ | 5,021 | $ | 3,186 | $ | | $ | | $ | 10,513 | $ | 69,564 | $ | 80,077 | ||||||||||||||||
Commercial real estate non-owner occupied |
171,771 | 144,104 | 169,900 | | | 485,775 | 1,527,804 | 2,013,579 | ||||||||||||||||||||||||
Commercial real estate owner occupied |
212,236 | 144,536 | 306,014 | 3,595 | | 666,381 | 806,981 | 1,473,362 | ||||||||||||||||||||||||
Commercial and industrial |
421,332 | 367,834 | 272,880 | 849 | 255 | 1,063,150 | 1,744,635 | 2,807,785 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total Commercial |
807,645 | 661,495 | 751,980 | 4,444 | 255 | 2,225,819 | 4,148,984 | 6,374,803 | ||||||||||||||||||||||||
Construction |
4,612 | 6,204 | 16,908 | | | 27,724 | 131,660 | 159,384 | ||||||||||||||||||||||||
Mortgage |
| | 218,680 | | | 218,680 | 5,231,821 | 5,450,501 | ||||||||||||||||||||||||
Leasing |
| | 3,102 | | | 3,102 | 561,287 | 564,389 | ||||||||||||||||||||||||
Consumer: |
||||||||||||||||||||||||||||||||
Credit cards |
| | 21,070 | | | 21,070 | 1,119,094 | 1,140,164 | ||||||||||||||||||||||||
HELOCs |
| | 8,186 | | 7 | 8,193 | 5,207 | 13,400 | ||||||||||||||||||||||||
Personal |
| | 8,380 | | 77 | 8,457 | 1,254,076 | 1,262,533 | ||||||||||||||||||||||||
Auto |
| | 11,348 | | 40 | 11,388 | 755,908 | 767,296 | ||||||||||||||||||||||||
Other |
| | 2,130 | | 1,735 | 3,865 | 201,779 | 205,644 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total Consumer |
| | 51,114 | | 1,859 | 52,973 | 3,336,064 | 3,389,037 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total Puerto Rico |
$ | 812,257 | $ | 667,699 | $ | 1,041,784 | $ | 4,444 | $ | 2,114 | $ | 2,528,298 | $ | 13,409,816 | $ | 15,938,114 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
U.S. mainland |
||||||||||||||||||||||||||||||||
Commercial multi-family |
$ | 11,283 | $ | 6,818 | $ | 13,653 | $ | | $ | | $ | 31,754 | $ | 375,449 | $ | 407,203 | ||||||||||||||||
Commercial real estate non-owner occupied |
17,424 | 8,745 | 13,446 | | | 39,615 | 472,952 | 512,567 | ||||||||||||||||||||||||
Commercial real estate owner occupied |
24,284 | 4,707 | 4,672 | | | 33,663 | 160,242 | 193,905 | ||||||||||||||||||||||||
Commercial and industrial |
5,357 | 2,548 | 7,988 | | | 15,893 | 629,896 | 645,789 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total Commercial |
58,348 | 22,818 | 39,759 | | | 120,925 | 1,638,539 | 1,759,464 | ||||||||||||||||||||||||
Construction |
| | | | | | 92,436 | 92,436 | ||||||||||||||||||||||||
Mortgage |
| | 23,100 | | | 23,100 | 1,029,285 | 1,052,385 | ||||||||||||||||||||||||
Legacy |
7,902 | 2,491 | 9,204 | | | 19,597 | 61,221 | 80,818 | ||||||||||||||||||||||||
Consumer: |
||||||||||||||||||||||||||||||||
Credit cards |
| | | | | | 15,065 | 15,065 | ||||||||||||||||||||||||
HELOCs |
| | 2,457 | | 1,632 | 4,089 | 348,673 | 352,762 | ||||||||||||||||||||||||
Personal |
| | 571 | | 835 | 1,406 | 111,513 | 112,919 | ||||||||||||||||||||||||
Auto |
| | | | | | 73 | 73 | ||||||||||||||||||||||||
Other |
| | 7 | | | 7 | 408 | 415 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total Consumer |
| | 3,035 | | 2,467 | 5,502 | 475,732 | 481,234 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total U.S. mainland |
$ | 66,250 | $ | 25,309 | $ | 75,098 | $ | | $ | 2,467 | $ | 169,124 | $ | 3,297,213 | $ | 3,466,337 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Popular, Inc. |
||||||||||||||||||||||||||||||||
Commercial multi-family |
$ | 13,589 | $ | 11,839 | $ | 16,839 | $ | | $ | | $ | 42,267 | $ | 445,013 | $ | 487,280 | ||||||||||||||||
Commercial real estate non-owner occupied |
189,195 | 152,849 | 183,346 | | | 525,390 | 2,000,756 | 2,526,146 | ||||||||||||||||||||||||
Commercial real estate owner occupied |
236,520 | 149,243 | 310,686 | 3,595 | | 700,044 | 967,223 | 1,667,267 | ||||||||||||||||||||||||
Commercial and industrial |
426,689 | 370,382 | 280,868 | 849 | 255 | 1,079,043 | 2,374,531 | 3,453,574 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total Commercial |
865,993 | 684,313 | 791,739 | 4,444 | 255 | 2,346,744 | 5,787,523 | 8,134,267 | ||||||||||||||||||||||||
Construction |
4,612 | 6,204 | 16,908 | | | 27,724 | 224,096 | 251,820 | ||||||||||||||||||||||||
Mortgage |
| | 241,780 | | | 241,780 | 6,261,106 | 6,502,886 | ||||||||||||||||||||||||
Legacy |
7,902 | 2,491 | 9,204 | | | 19,597 | 61,221 | 80,818 | ||||||||||||||||||||||||
Leasing |
| | 3,102 | | | 3,102 | 561,287 | 564,389 | ||||||||||||||||||||||||
Consumer: |
||||||||||||||||||||||||||||||||
Credit cards |
| | 21,070 | | | 21,070 | 1,134,159 | 1,155,229 | ||||||||||||||||||||||||
HELOCs |
| | 10,643 | | 1,639 | 12,282 | 353,880 | 366,162 | ||||||||||||||||||||||||
Personal |
| | 8,951 | | 912 | 9,863 | 1,365,589 | 1,375,452 | ||||||||||||||||||||||||
Auto |
| | 11,348 | | 40 | 11,388 | 755,981 | 767,369 | ||||||||||||||||||||||||
Other |
| | 2,137 | | 1,735 | 3,872 | 202,187 | 206,059 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total Consumer |
| | 54,149 | | 4,326 | 58,475 | 3,811,796 | 3,870,271 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total Popular, Inc. |
$ | 878,507 | $ | 693,008 | $ | 1,116,882 | $ | 4,444 | $ | 4,581 | $ | 2,697,422 | $ | 16,707,029 | $ | 19,404,451 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66
The following table presents the weighted average obligor risk rating at December 31, 2014 for those classifications that consider a range of rating scales.
Weighted average obligor risk rating | (Scales 11 and 12) Substandard |
(Scales 1 through 8) Pass |
||||||
Puerto Rico:[1] |
||||||||
Commercial multi-family |
11.69 | 5.63 | ||||||
Commercial real estate non-owner occupied |
11.20 | 6.83 | ||||||
Commercial real estate owner occupied |
11.28 | 6.96 | ||||||
Commercial and industrial |
11.48 | 6.89 | ||||||
|
|
|
|
|||||
Total Commercial |
11.33 | 6.87 | ||||||
|
|
|
|
|||||
Construction |
11.82 | 7.43 | ||||||
|
|
|
|
|||||
Substandard | Pass | |||||||
U.S. mainland: |
||||||||
Commercial multi-family |
11.00 | 7.24 | ||||||
Commercial real estate non-owner occupied |
11.00 | 6.83 | ||||||
Commercial real estate owner occupied |
11.17 | 7.04 | ||||||
Commercial and industrial |
11.09 | 6.29 | ||||||
|
|
|
|
|||||
Total Commercial |
11.04 | 6.74 | ||||||
|
|
|
|
|||||
Construction |
| 7.76 | ||||||
|
|
|
|
|||||
Legacy |
11.11 | 7.70 | ||||||
|
|
|
|
[1] | Excludes covered loans acquired in the Westernbank FDIC-assisted transaction. |
67
Note 13 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 FDICs 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 on June 30, 2015 and provides 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 June 30, | Six months ended June 30, | |||||||||||||||
(In thousands) |
2015 | 2014 | 2015 | 2014 | ||||||||||||
Balance at beginning of period |
$ | 409,844 | $ | 798,460 | $ | 542,454 | $ | 909,414 | ||||||||
Amortization of loss share indemnification asset |
(31,065 | ) | (72,095 | ) | (58,381 | ) | (121,041 | ) | ||||||||
Credit impairment losses to be covered under loss sharing agreements |
7,647 | 10,372 | 15,893 | 25,462 | ||||||||||||
Reimbursable expenses |
42,730 | 11,085 | 64,275 | 23,830 | ||||||||||||
Net payments from FDIC under loss sharing agreements |
(32,158 | ) | (29,291 | ) | (164,423 | ) | (110,618 | ) | ||||||||
Other adjustments attributable to FDIC loss sharing agreements |
(4,051 | ) | (5,662 | ) | (6,871 | ) | (14,178 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance at end of period |
$ | 392,947 | $ | 712,869 | 392,947 | 712,869 | ||||||||||
|
|
|
|
|
|
|
|
During the second quarter of 2014, the Corporation revised its analysis of expected cash flows which resulted in a net decrease in estimated credit losses, which was driven mainly by certain commercial loan pools. Though this had a positive impact on the Corporations interest accretion in future periods, the carrying value of the indemnification asset was amortized to reflect lower levels of expected losses. The amortization of the FDIC loss share asset is recognized over the shorter of the remaining life of the loan pools, or the indemnification asset.
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 of approximately $248.7 million, which were reclassified to non-covered in the accompanying statement of financial condition as of June 30, 2015, are subject to the resolution of several arbitration proceedings currently ongoing with the FDIC related primarily to (i) the FDICs 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 June 30, 2015, losses amounting to $141.3 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 26, Commitments and Contingencies.
The weighted average life of the single family loan portfolio subject to the FDIC loss sharing agreement at June 30, 2015 is 7.63 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
68
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%).
The following table provides the fair value and the undiscounted amount of the true-up payment obligation at June 30, 2015 and December 31, 2014.
(In thousands) |
June 30, 2015 | December 31, 2014 | ||||||
Carrying amount (fair value) |
$ | 121,469 | $ | 129,304 | ||||
Undiscounted amount |
$ | 172,026 | $ | 187,238 |
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 26, Commitment and Contingencies, for additional information on the settlement of the arbitration proceedings with the FDIC regarding the commercial loss share agreement.
69
Note 14 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 Corporations 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 June 30, | Six months ended June 30, | |||||||||||||||
(In thousands) |
2015 | 2014 | 2015 | 2014 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Mortgage servicing fees, net of fair value adjustments: |
||||||||||||||||
Mortgage servicing fees |
$ | 14,689 | $ | 10,558 | $ | 26,937 | $ | 21,306 | ||||||||
Mortgage servicing rights fair value adjustments |
(1,917 | ) | (7,740 | ) | (6,846 | ) | (15,836 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total mortgage servicing fees, net of fair value adjustments |
12,772 | 2,818 | 20,091 | 5,470 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net gain on sale of loans, including valuation on loans held-for-sale |
8,022 | 8,189 | 15,302 | 15,365 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Trading account profit (loss): |
||||||||||||||||
Unrealized gains (losses) on outstanding derivative positions |
42 | 22 | 59 | (738 | ) | |||||||||||
Realized gains (losses) on closed derivative positions |
489 | (7,241 | ) | (1,275 | ) | (12,631 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Total trading account profit (loss) |
531 | (7,219 | ) | (1,216 | ) | (13,369 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Total mortgage banking activities |
$ | 21,325 | $ | 3,788 | $ | 34,177 | $ | 7,466 | ||||||||
|
|
|
|
|
|
|
|
70
Note 15 Transfers of financial assets and mortgage servicing assets
The Corporation typically transfers conforming residential mortgage loans in conjunction with GNMA, FNMA and FHLMC 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, FNMA and FHLMC 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 the past, has sold certain loans with credit recourse to a government-sponsored entity, namely FNMA. Refer to Note 25 to the consolidated financial statements for a description of such arrangements.
During the second quarter of 2015, BPPR completed the acquisition of mortgage servicing rights on three pools of residence mortgage loans serviced for GNMA, FNMA and FHLMC, with an unpaid principal balance of approximately $5.0 billion, from the FDIC as a receiver for Doral Bank, as part of the Doral Bank Transaction. The aggregate purchase price for the mortgage servicing rights and related servicing advances was approximately $56.2 million.
No liabilities were incurred as a result of these securitizations during the quarters and six months ended June 30, 2015 and 2014 because they did not contain any credit recourse arrangements. During the quarter ended June 30, 2015, the Corporation recorded a net gain $7.2 million (June 30, 2014 - $9.2 million) related to the residential mortgage loans securitized. During the six months ended June 30, 2015, the Corporation recorded a net gain $13.7 million (June 30, 2014 - $17.0 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 and six months ended June 30, 2015 and 2014:
Proceeds Obtained During the Quarter Ended June 30, 2015 | ||||||||||||||||
(In thousands) |
Level 1 | Level 2 | Level 3 | Initial Fair Value | ||||||||||||
Assets |
||||||||||||||||
Trading account securities: |
||||||||||||||||
Mortgage-backed securities - GNMA |
$ | | $ | 243,374 | $ | | $ | 243,374 | ||||||||
Mortgage-backed securities - FNMA |
| 70,477 | | 70,477 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total trading account securities |
$ | | $ | 313,851 | $ | | $ | 313,851 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Mortgage servicing rights |
| | 4,207 | 4,207 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | | $ | 313,851 | $ | 4,207 | $ | 318,058 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Proceeds Obtained During the Six Months Ended June 30, 2015 | ||||||||||||||||
(In thousands) |
Level 1 | Level 2 | Level 3 | Initial Fair Value | ||||||||||||
Assets |
||||||||||||||||
Trading account securities: |
||||||||||||||||
Mortgage-backed securities - GNMA |
$ | | $ | 399,830 | $ | | $ | 399,830 | ||||||||
Mortgage-backed securities - FNMA |
| 117,435 | | 117,435 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total trading account securities |
$ | | $ | 517,265 | $ | | $ | 517,265 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Mortgage servicing rights |
| | 6,769 | 6,769 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | | $ | 517,265 | $ | 6,769 | $ | 524,034 | ||||||||
|
|
|
|
|
|
|
|
71
Proceeds Obtained During the Quarter Ended June 30, 2014 | ||||||||||||||||
(In thousands) |
Level 1 | Level 2 | Level 3 | Initial Fair Value | ||||||||||||
Assets |
||||||||||||||||
Trading account securities: |
||||||||||||||||
Mortgage-backed securities - GNMA |
$ | | $ | 184,307 | $ | | $ | 184,307 | ||||||||
Mortgage-backed securities - FNMA |
| 60,069 | | 60,069 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total trading account securities |
$ | | $ | 244,376 | $ | | $ | 244,376 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Mortgage servicing rights |
| | 2,919 | 2,919 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | | $ | 244,376 | $ | 2,919 | $ | 247,295 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Proceeds Obtained During the Six Months Ended June 30, 2014 | ||||||||||||||||
(In thousands) |
Level 1 | Level 2 | Level 3 | Initial Fair Value | ||||||||||||
Assets |
||||||||||||||||
Trading account securities: |
||||||||||||||||
Mortgage-backed securities - GNMA |
$ | | $ | 350,239 | $ | | $ | 350,239 | ||||||||
Mortgage-backed securities - FNMA |
| 122,652 | | 122,652 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total trading account securities |
$ | | $ | 472,891 | $ | | $ | 472,891 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Mortgage servicing rights |
| | 6,117 | 6,117 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | | $ | 472,891 | $ | 6,117 | $ | 479,008 | ||||||||
|
|
|
|
|
|
|
|
During the six months ended June 30, 2015, the Corporation retained servicing rights on whole loan sales involving approximately $41 million in principal balance outstanding (June 30, 2014 - $53 million), with realized gains of approximately $1.7 million (June 30, 2014 - gains of $2.0 million). All loan sales performed during the six months ended June 30, 2015 and 2014 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. These mortgage servicing rights (MSRs) are measured at fair value.
The Corporation uses a discounted cash flow model to estimate the fair value of MSRs. The discounted cash flow model incorporates assumptions that market participants would use in estimating future net servicing income, including estimates of prepayment speeds, discount rate, cost to service, escrow account earnings, contractual servicing fee income, prepayment and late fees, among other considerations. Prepayment speeds are adjusted for the Corporations loan characteristics and portfolio behavior.
72
The following table presents the changes in MSRs measured using the fair value method for the six months ended June 30, 2015 and 2014.
Residential MSRs |
||||||||
(In thousands) |
June 30, 2015 | June 30, 2014 | ||||||
Fair value at beginning of period |
$ | 148,694 | $ | 161,099 | ||||
Purchases[1] |
57,269 | | ||||||
Servicing from securitizations or asset transfers |
7,302 | 6,692 | ||||||
Changes due to payments on loans[2] |
(8,850 | ) | (8,164 | ) | ||||
Reduction due to loan repurchases |
(1,321 | ) | (1,830 | ) | ||||
Changes in fair value due to changes in valuation model inputs or assumptions |
3,325 | (5,842 | ) | |||||
Other disposals |
(62 | ) | (4 | ) | ||||
|
|
|
|
|||||
Fair value at end of period |
$ | 206,357 | $ | 151,951 | ||||
|
|
|
|
[1] | Includes $54.9 million from the acquisition of mortgage servicing rights from the FDIC as a receiver for Doral Bank during the second quarter of 2015. |
[2] | Represents the change due to collection / realization of expected cash flow over time. |
Residential mortgage loans serviced for others were $19.7 billion at June 30, 2015 (December 31, 2014 - $15.6 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 and six months ended June 30, 2015 amounted to $14.7 million and $26.9 million, respectively (June 30, 2014 - $10.6 million and $21.3 million, respectively). The banking subsidiaries receive servicing fees based on a percentage of the outstanding loan balance. At June 30, 2015, those weighted average mortgage servicing fees were 0.29% (June 30, 2014 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 and six months ended June 30, 2015 and 2014 were as follows:
Quarter ended | Six months ended | |||||||||||||||
June 30, 2015 | June 30, 2014 | June 30, 2015 | June 30, 2014 | |||||||||||||
Prepayment speed |
6.9 | % | 6.3 | % | 7.1 | % | 6.2 | % | ||||||||
Weighted average life |
8.7 years | 15.9 years | 8.8 years | 16.0 years | ||||||||||||
Discount rate (annual rate) |
10.8 | % | 10.7 | % | 10.9 | % | 10.7 | % |
73
Key economic assumptions used to estimate the fair value of MSRs derived from sales and securitizations of mortgage loans performed by the banking subsidiaries and the sensitivity to immediate changes in those assumptions were as follows as of the end of the periods reported:
Originated MSRs | ||||||||
(In thousands) |
June 30, 2015 | December 31, 2014 | ||||||
Fair value of servicing rights |
$ | 104,082 | $ | 110,534 | ||||
Weighted average life |
6.9 years | 11.7 years | ||||||
Weighted average prepayment speed (annual rate) |
7.0 | % | 8.6 | % | ||||
Impact on fair value of 10% adverse change |
$ | (676 | ) | $ | (4,089 | ) | ||
Impact on fair value of 20% adverse change |
$ | (3,951 | ) | $ | (7,995 | ) | ||
Weighted average discount rate (annual rate) |
11.5 | % | 11.5 | % | ||||
Impact on fair value of 10% adverse change |
$ | (1,801 | ) | $ | (4,492 | ) | ||
Impact on fair value of 20% adverse change |
$ | (6,021 | ) | $ | (8,701 | ) |
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) |
June 30, 2015 | December 31, 2014 | ||||||
Fair value of servicing rights |
$ | 102,275 | $ | 38,160 | ||||
Weighted average life |
6.5 years | 11.0 years | ||||||
Weighted average prepayment speed (annual rate) |
7.8 | % | 9.1 | % | ||||
Impact on fair value of 10% adverse change |
$ | (1,912 | ) | $ | (1,620 | ) | ||
Impact on fair value of 20% adverse change |
$ | (4,932 | ) | $ | (2,924 | ) | ||
Weighted average discount rate (annual rate) |
10.7 | % | 10.7 | % | ||||
Impact on fair value of 10% adverse change |
$ | (2,904 | ) | $ | (1,603 | ) | ||
Impact on fair value of 20% adverse change |
$ | (6,768 | ) | $ | (2,877 | ) |
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 June 30, 2015, the Corporation serviced $2.0 billion (December 31, 2014 - $2.1 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 GNMAs prior authorization, any loan that is collateral for a GNMA guaranteed mortgage-backed security when certain delinquency criteria are met. At the time that individual loans meet GNMAs specified delinquency criteria and are eligible for repurchase, the Corporation is deemed to have regained effective control over these loans if the Corporation was the pool issuer. At June 30, 2015, the Corporation had recorded $88 million in mortgage loans on its consolidated statements of financial condition related to this buy-back option program (December 31, 2014 - $81 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 six months ended June 30, 2015, the Corporation repurchased approximately $ 60 million (June 30, 2014 - $107 million) of mortgage loans under the GNMA buy-back option program. The determination to repurchase these loans was based on the
74
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.
75
Note 16 Other real estate owned
The following tables present the Other Real Estate Owned Activity, for the quarters and six months ended June 30, 2015 and 2014.
For the quarter ended June 30, 2015 | ||||||||||||||||||||
(In thousands) |
Non-covered OREO Commercial/ Construction |
Non-covered OREO Mortgage |
Covered OREO Commercial/Construction |
Covered OREO Mortgage |
Total | |||||||||||||||
Balance at beginning of period |
$ | 25,608 | $ | 102,562 | $ | 70,573 | $ | 42,984 | $ | 241,727 | ||||||||||
Write-downs in value |
(4,162 | ) | (2,463 | ) | (10,955 | ) | (1,393 | ) | (18,973 | ) | ||||||||||
Additions |
2,793 | 18,532 | 5,623 | 8,879 | 35,827 | |||||||||||||||
Sales |
(4,868 | ) | (14,243 | ) | (50,285 | ) | (13,806 | ) | (83,202 | ) | ||||||||||
Other adjustments |
850 | 50 | (452 | ) | (68 | ) | 380 | |||||||||||||
Transfer to non-covered status[1] |
14,504 | 3,092 | (14,504 | ) | (3,092 | ) | | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ending balance |
$ | 34,725 | $ | 107,530 | $ | | $ | 33,504 | $ | 175,759 | ||||||||||
|
|
|
|
|
|
|
|
|
|
[1] | Represents the reclassification of OREOs to the non-covered category, pursuant to the expiration of the commercial and consumer shared loss arrangement with the FDIC related to loans acquired from Westernbank, on June 30, 2015. |
For the six months ended June 30, 2015 | ||||||||||||||||||||
(In thousands) |
Non-covered OREO Commercial/ Construction |
Non-covered OREO Mortgage |
Covered OREO Commercial/Construction |
Covered OREO Mortgage |
Total | |||||||||||||||
Balance at beginning of period |
$ | 38,983 | $ | 96,517 | $ | 85,394 | $ | 44,872 | $ | 265,766 | ||||||||||
Write-downs in value |
(10,049 | ) | (3,835 | ) | (20,350 | ) | (2,675 | ) | (36,909 | ) | ||||||||||
Additions |
4,828 | 39,607 | 9,661 | 14,260 | 68,356 | |||||||||||||||
Sales |
(14,295 | ) | (27,329 | ) | (59,749 | ) | (19,628 | ) | (121,001 | ) | ||||||||||
Other adjustments |
754 | (522 | ) | (452 | ) | (233 | ) | (453 | ) | |||||||||||
Transfer to non-covered status[1] |
14,504 | 3,092 | (14,504 | ) | (3,092 | ) | | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ending balance |
$ | 34,725 | $ | 107,530 | $ | | $ | 33,504 | $ | 175,759 | ||||||||||
|
|
|
|
|
|
|
|
|
|
[1] | Represents the reclassification of OREOs to the non-covered category, pursuant to the expiration of the commercial and consumer shared loss arrangement with the FDIC related to loans acquired from Westernbank, on June 30, 2015. |
During the second quarter of 2015, the Corporation completed a bulk sale of $37 million of covered OREOs.
For the quarter ended June 30, 2014 | ||||||||||||||||||||
(In thousands) |
Non-covered OREO Commercial/Construction |
Non-covered OREO Mortgage |
Covered OREO Commercial/Construction |
Covered OREO Mortgage |
Total | |||||||||||||||
Balance at beginning of period |
$ | 48,141 | $ | 88,824 | $ | 110,333 | $ | 48,414 | $ | 295,712 | ||||||||||
Write-downs in value |
(571 | ) | (439 | ) | (6,635 | ) | (940 | ) | (8,585 | ) | ||||||||||
Additions |
6,303 | 15,400 | 22,260 | 4,103 | 48,066 | |||||||||||||||
Sales |
(5,372 | ) | (12,203 | ) | (14,792 | ) | (3,777 | ) | (36,144 | ) | ||||||||||
Other adjustments |
1,286 | (1,949 | ) | (3,261 | ) | 100 | (3,824 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ending balance |
$ | 49,787 | $ | 89,633 | $ | 107,905 | $ | 47,900 | $ | 295,225 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
For the six months ended June 30, 2014 | ||||||||||||||||||||
(In thousands) |
Non-covered OREO Commercial/Construction |
Non-covered OREO Mortgage |
Covered OREO Commercial/Construction |
Covered OREO Mortgage |
Total | |||||||||||||||
Balance at beginning of period |
$ | 48,649 | $ | 86,852 | $ | 120,215 | $ | 47,792 | $ | 303,508 | ||||||||||
Write-downs in value |
(785 | ) | (1,108 | ) | (11,198 | ) | (1,147 | ) | (14,238 | ) | ||||||||||
Additions |
10,971 | 30,283 | 35,454 | 8,594 | 85,302 | |||||||||||||||
Sales |
(10,334 | ) | (24,266 | ) | (33,213 | ) | (6,154 | ) | (73,967 | ) | ||||||||||
Other adjustments |
1,286 | (2,128 | ) | (3,353 | ) | (1,185 | ) | (5,380 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ending balance |
$ | 49,787 | $ | 89,633 | $ | 107,905 | $ | 47,900 | $ | 295,225 | ||||||||||
|
|
|
|
|
|
|
|
|
|
76
The caption of other assets in the consolidated statements of financial condition consists of the following major categories:
(In thousands) |
June 30, 2015 | December 31, 2014 | ||||||
Net deferred tax assets (net of valuation allowance) |
$ | 1,286,086 | $ | 812,819 | ||||
Investments under the equity method |
222,218 | 225,625 | ||||||
Prepaid FDIC insurance assessment |
| 360 | ||||||
Prepaid taxes |
201,504 | 198,120 | ||||||
Other prepaid expenses |
80,993 | 83,719 | ||||||
Derivative assets |
21,716 | 25,362 | ||||||
Trades receivable from brokers and counterparties |
111,964 | 66,949 | ||||||
Others |
260,426 | 233,489 | ||||||
|
|
|
|
|||||
Total other assets |
$ | 2,184,907 | $ | 1,646,443 | ||||
|
|
|
|
Prepaid taxes at June 30, 2015 and December 31, 2014 includes a payment of $45 million in income taxes in connection with the Closing Agreement signed with the Puerto Rico Department of Treasury on June 30, 2014.
As discussed in Note 36, the corporation recorded during the quarter ended June 30, 2015 a partial reversal of the valuation allowance on its deferred tax assets from its U.S. operations for approximately $545 million.
77
Note 18 Goodwill and other intangible assets
Goodwill
The changes in the carrying amount of goodwill for the six months ended June 30, 2015 and 2014, allocated by reportable segments, were as follows (refer to Note 38 for the definition of the Corporations reportable segments):
2015 |
||||||||||||||||||||
(In thousands) |
Balance at January 1, 2015 |
Goodwill on acquisition |
Purchase accounting adjustments |
Other | Balance at June 30, 2015 |
|||||||||||||||
Banco Popular de Puerto Rico |
$ | 250,109 | $ | 3,899 | $ | (2,875 | ) | $ | | $ | 251,133 | |||||||||
Banco Popular North America |
215,567 | 38,735 | | | 254,302 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total Popular, Inc. |
$ | 465,676 | $ | 42,634 | $ | (2,875 | ) | $ | | $ | 505,435 | |||||||||
|
|
|
|
|
|
|
|
|
|
2014 |
||||||||||||||||||||||||
(In thousands) |
Balance at January 1, 2014 |
Goodwill on acquisition |
Purchase accounting adjustments |
Goodwill written off related to discontinued operations |
Other | Balance at June 30, 2014 |
||||||||||||||||||
Banco Popular de Puerto Rico |
$ | 245,679 | $ | | $ | | $ | | $ | | $ | 245,679 | ||||||||||||
Banco Popular North America |
402,078 | | | (186,511 | ) | | 215,567 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total Popular, Inc. |
$ | 647,757 | $ | | $ | | $ | (186,511 | ) | $ | | $ | 461,246 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The goodwill acquired during 2015 in the reportable segments of Banco Popular de Puerto Rico and Banco Popular North America of $3.4 million, after considering purchase accounting adjustments, and $38.7 million, respectively, was related to the Doral Bank Transaction. During the second quarter of 2015, the Corporation recorded adjustments to its initial fair value estimates resulting in a net reduction of the goodwill recorded in connection with the Doral Bank Transaction of approximately $0.5 million. Refer to note 5, Business Combination, for additional information. In addition, the Corporation recorded purchase accounting adjustments to reduce the goodwill related to the acquisition of an insurance benefits business during the year ended December 31, 2014, based amount of goodwill by approximately $2.4 million.
The following table presents the gross amount of goodwill and accumulated impairment losses by reportable segments.
June 30, 2015 |
||||||||||||||||||||||||
(In thousands) |
Balance at January 1, 2015 (gross amounts) |
Accumulated impairment losses |
Balance at January 1, 2015 (net amounts) |
Balance at June 30, 2015 (gross amounts) |
Accumulated impairment losses |
Balance at June 30, 2015 (net amounts) |
||||||||||||||||||
Banco Popular de Puerto Rico |
$ | 250,109 | $ | | $ | 250,109 | $ | 251,133 | $ | | $ | 251,133 | ||||||||||||
Banco Popular North America |
379,978 | 164,411 | 215,567 | 418,713 | 164,411 | 254,302 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total Popular, Inc. |
$ | 630,087 | $ | 164,411 | $ | 465,676 | $ | 669,846 | $ | 164,411 | $ | 505,435 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
78
December 31, 2014 |
||||||||||||||||||||||||
(In thousands) |
Balance at January 1, 2014 (gross amounts) |
Accumulated impairment losses |
Balance at January 1, 2014 (net amounts) |
Balance at December 31, 2014 (gross amounts) |
Accumulated impairment losses |
Balance at December 31, 2014 (net amounts) |
||||||||||||||||||
Banco Popular de Puerto Rico |
$ | 245,679 | $ | | $ | 245,679 | $ | 250,109 | $ | | $ | 250,109 | ||||||||||||
Banco Popular North America |
566,489 | 164,411 | 402,078 | 379,978 | 164,411 | 215,567 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total Popular, Inc. |
$ | 812,168 | $ | 164,411 | $ | 647,757 | $ | 630,087 | $ | 164,411 | $ | 465,676 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Other Intangible Assets
At June 30, 2015 and December 31, 2014, the Corporation had $ 6 million of identifiable intangible assets, with indefinite useful lives, mostly associated with E-LOANs trademark.
The following table reflects the components of other intangible assets subject to amortization:
(In thousands) |
Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Value |
|||||||||
June 30, 2015 |
||||||||||||
Core deposits |
$ | 74,252 | $ | 35,400 | $ | 38,852 | ||||||
Other customer relationships |
37,876 | 7,987 | 29,889 | |||||||||
|
|
|
|
|
|
|||||||
Total other intangible assets |
$ | 112,128 | $ | 43,387 | $ | 68,741 | ||||||
|
|
|
|
|
|
|||||||
December 31, 2014 |
||||||||||||
Core deposits |
$ | 50,679 | $ | 32,006 | $ | 18,673 | ||||||
Other customer relationships |
19,452 | 6,644 | 12,808 | |||||||||
|
|
|
|
|
|
|||||||
Total other intangible assets |
$ | 70,131 | $ | 38,650 | $ | 31,481 | ||||||
|
|
|
|
|
|
During the first quarter of 2015, the Corporation also acquired $23.6 million in core deposit intangibles related to the Doral Bank Transaction.
During the quarter ended June 30, 2015, the Corporation recognized $ 2.9 million in amortization expense related to other intangible assets with definite useful lives (June 30, 2014 - $ 2.0 million). During the six months ended June 30, 2015, the Corporation recognized $ 5.0 million in amortization related to other intangible assets with definite useful lives (June 30, 2014 - $ 4.1 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 2015 |
$ | 7,263 | ||
Year 2016 |
13,414 | |||
Year 2017 |
10,665 | |||
Year 2018 |
10,573 | |||
Year 2019 |
9,997 | |||
Year 2020 |
6,131 |
79
Total interest bearing deposits as of the end of the periods presented consisted of:
(In thousands) |
June 30, 2015 | December 31, 2014 | ||||||
Savings accounts |
$ | 6,991,645 | $ | 6,737,370 | ||||
NOW, money market and other interest bearing demand deposits |
5,610,806 | 4,811,972 | ||||||
|
|
|
|
|||||
Total savings, NOW, money market and other interest bearing demand deposits |
12,602,451 | 11,549,342 | ||||||
|
|
|
|
|||||
Certificates of deposit: |
||||||||
Under $100,000 |
4,324,540 | 4,211,180 | ||||||
$100,000 and over |
4,517,717 | 3,263,265 | ||||||
|
|
|
|
|||||
Total certificates of deposit |
8,842,257 | 7,474,445 | ||||||
|
|
|
|
|||||
Total interest bearing deposits |
$ | 21,444,708 | $ | 19,023,787 | ||||
|
|
|
|
A summary of certificates of deposit by maturity at June 30, 2015 follows:
(In thousands) |
||||
2015 |
$ | 3,844,272 | ||
2016 |
2,547,284 | |||
2017 |
841,480 | |||
2018 |
603,939 | |||
2019 |
443,301 | |||
2020 and thereafter |
561,981 | |||
|
|
|||
Total certificates of deposit |
$ | 8,842,257 | ||
|
|
At June 30, 2015, the Corporation had brokered deposits amounting to $ 1.9 billion (December 31, 2014 - $ 1.9 billion).
The aggregate amount of overdrafts in demand deposit accounts that were reclassified to loans was $7 million at June 30, 2015 (December 31, 2014 - $9 million).
80
The following table presents the composition of fed funds purchased and assets sold under agreements to repurchase at June 30, 2015 and December 31, 2014.
(In thousands) |
June 30, 2015 | December 31, 2014 | ||||||
Federal funds purchased |
$ | | $ | 100,000 | ||||
Assets sold under agreements to repurchase |
1,121,244 | 1,171,657 | ||||||
|
|
|
|
|||||
Total federal funds purchased and assets sold under agreements to repurchase |
$ | 1,121,244 | $ | 1,271,657 | ||||
|
|
|
|
The following table presents information related to the Corporations 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 Corporations policy to maintain effective control over assets sold under agreements to repurchase; accordingly, such securities continue to be carried on the consolidated statements of financial condition.
Repurchase agreements accounted for as secured borrowings
June 30, 2015 | December 31, 2014 | |||||||
(In thousands) |
Repurchase liability |
Repurchase liability |
||||||
U.S. Treasury Securities |
||||||||
Within 30 days |
$ | 999 | $ | | ||||
|
|
|
|
|||||
Total U.S. Treasury Securities |
999 | | ||||||
|
|
|
|
|||||
Obligations of U.S. government sponsored entities |
||||||||
Overnight |
275 | | ||||||
Within 30 days |
65,476 | 289,545 | ||||||
After 30 to 90 days |
208,855 | 25,761 | ||||||
After 90 days |
150,521 | 420,176 | ||||||
|
|
|
|
|||||
Total obligations of U.S. government sponsored entities |
425,127 | 735,482 | ||||||
|
|
|
|
|||||
Obligations of Puerto Rico, states and political subdivisions |
||||||||
Overnight |
| 23,397 | ||||||
Within 30 days |
6,836 | 5,199 | ||||||
After 30 to 90 days |
116 | | ||||||
|
|
|
|
|||||
Total Obligations of Puerto Rico, states and political subdivisions |
6,952 | 28,596 | ||||||
|
|
|
|
|||||
Mortgage-backed securities |
||||||||
Overnight |
4,792 | 4,850 | ||||||
Within 30 days |
37,535 | 54,311 | ||||||
After 30 to 90 days |
70,458 | | ||||||
After 90 days |
469,800 | 195,629 | ||||||
|
|
|
|
|||||
Total mortgage-backed securities |
582,585 | 254,790 | ||||||
|
|
|
|
|||||
Collateralized mortgage obligations |
||||||||
Within 30 days |
42,998 | 16,700 | ||||||
After 30 to 90 days |
42,590 | 55,338 | ||||||
After 90 days |
17,945 | 71,281 | ||||||
|
|
|
|
|||||
Total collateralized mortgage obligations |
103,533 | 143,319 | ||||||
|
|
|
|
|||||
Other |
||||||||
Overnight |
1,858 | 1,353 | ||||||
Within 30 days |
| 8,117 | ||||||
After 30 to 90 days |
190 | | ||||||
|
|
|
|
|||||
Total other |
2,048 | 9,470 | ||||||
|
|
|
|
|||||
Total |
$ | 1,121,244 | $ | 1,171,657 | ||||
|
|
|
|
81
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 June 30, 2015 and December 31, 2014.
(In thousands) |
June 30, 2015 | December 31, 2014 | ||||||
Advances with the FHLB paying interest at maturity of 0.34% |
$ | 100,000 | $ | 20,000 | ||||
Others |
1,200 | 1,200 | ||||||
|
|
|
|
|||||
Total other short-term borrowings |
$ | 101,200 | $ | 21,200 | ||||
|
|
|
|
Note: Refer to the Corporations 2014 Annual Report for rates information at December 31, 2014.
The following table presents the composition of notes payable at June 30, 2015 and December 31, 2014.
(In thousands) |
June 30, 2015 | December 31, 2014 | ||||||
Advances with the FHLB with maturities ranging from 2015 through 2029 paying interest at monthly fixed rates ranging from 0.41% to 4.19 % |
$ | 894,800 | $ | 802,198 | ||||
Unsecured senior debt securities maturing on 2019 paying interest semiannually at a fixed rate of 7.00% |
450,000 | 450,000 | ||||||
Junior subordinated deferrable interest debentures (related to trust preferred securities) with maturities ranging from 2027 to 2034 with fixed interest rates ranging from 6.125% to 8.327% (Refer to Note 22) |
439,800 | 439,800 | ||||||
Others |
19,428 | 19,830 | ||||||
|
|
|
|
|||||
Total notes payable |
$ | 1,804,028 | $ | 1,711,828 | ||||
|
|
|
|
Note: Refer to the Corporations 2014 Annual Report for rates information at December 31, 2014.
A breakdown of borrowings by contractual maturities at June 30, 2015 is included in the table below.
(In thousands) |
Assets sold under agreements to repurchase |
Short-term borrowings |
Notes payable | Total | ||||||||||||
Year |
||||||||||||||||
2015 |
$ | 792,506 | $ | 101,200 | $ | 318,516 | $ | 1,212,222 | ||||||||
2016 |
328,738 | | 253,536 | 582,274 | ||||||||||||
2017 |
| | 85,645 | 85,645 | ||||||||||||
2018 |
| | 109,494 | 109,494 | ||||||||||||
2019 |
| | 465,813 | 465,813 | ||||||||||||
Later years |
| | 571,024 | 571,024 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total borrowings |
$ | 1,121,244 | $ | 101,200 | $ | 1,804,028 | $ | 3,026,472 | ||||||||
|
|
|
|
|
|
|
|
82
Note 21 Offsetting of financial assets and liabilities
The following tables present the potential effect of rights of setoff associated with the Corporations recognized financial assets and liabilities at June 30, 2015 and December 31, 2014.
As of June 30, 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 |
$ | 21,716 | $ | | $ | 21,716 | $ | 296 | $ | | $ | | $ | 21,420 | ||||||||||||||
Reverse repurchase agreements |
138,067 | | 138,067 | | 138,067 | | | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
$ | 159,783 | $ | | $ | 159,783 | $ | 296 | $ | 138,067 | $ | | $ | 21,420 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
As of June 30, 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 Pledged |
Net Amount | |||||||||||||||||||||
Derivatives |
$ | 18,430 | $ | | $ | 18,430 | $ | 296 | $ | 6,511 | $ | | $ | 11,623 | ||||||||||||||
Repurchase agreements |
1,121,244 | | 1,121,244 | | 1,121,244 | | | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
$ | 1,139,674 | $ | | $ | 1,139,674 | $ | 296 | $ | 1,127,755 | $ | | $ | 11,623 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
As of December 31, 2014 |
||||||||||||||||||||||||||||
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 |
$ | 25,361 | $ | | $ | 25,361 | $ | 320 | $ | | $ | | $ | 25,041 | ||||||||||||||
Reverse repurchase agreements |
151,134 | | 151,134 | | 151,134 | | | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
$ | 176,495 | $ | | $ | 176,495 | $ | 320 | $ | 151,134 | $ | | $ | 25,041 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83
As of December 31, 2014 |
||||||||||||||||||||||||||||
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 |
$ | 23,032 | $ | | $ | 23,032 | $ | 320 | $ | 8,781 | $ | | $ | 13,931 | ||||||||||||||
Repurchase agreements |
1,171,657 | | 1,171,657 | | 1,171,657 | | | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
$ | 1,194,689 | $ | | $ | 1,194,689 | $ | 320 | $ | 1,180,438 | $ | | $ | 13,931 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Corporations derivatives are subject to agreements which allow a right of set-off with each respective counterparty. In addition, the Corporations 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.
84
Note 22 Trust preferred securities
At June 30, 2015 and December 31, 2014, statutory trusts established by the Corporation (BanPonce Trust I, Popular Capital Trust I, Popular North America Capital Trust I and Popular Capital Trust II) had issued trust preferred securities (also referred to as capital securities) to the public. The proceeds from such issuances, together with the proceeds of the related issuances of common securities of the trusts (the common securities), were used by the trusts to purchase junior subordinated deferrable interest debentures (the junior subordinated debentures) issued by the Corporation.
The sole assets of the trusts consisted of the junior subordinated debentures of the Corporation and the related accrued interest receivable. These trusts are not consolidated by the Corporation pursuant to accounting principles generally accepted in the United States of America.
The junior subordinated debentures are included by the Corporation as notes payable in the consolidated statements of financial condition, while the common securities issued by the issuer trusts are included as other investment securities. The common securities of each trust are wholly-owned, or indirectly wholly-owned, by the Corporation.
The following table presents financial data pertaining to the different trusts at June 30, 2015 and December 31, 2014.
(Dollars in thousands) |
||||||||||||||||
Issuer |
BanPonce Trust I |
Popular Capital Trust I |
Popular North America Capital Trust I |
Popular Capital Trust II |
||||||||||||
Capital securities |
$ | 52,865 | $ | 181,063 | $ | 91,651 | $ | 101,023 | ||||||||
Distribution rate |
8.327 | % | 6.700 | % | 6.564 | % | 6.125 | % | ||||||||
Common securities |
$ | 1,637 | $ | 5,601 | $ | 2,835 | $ | 3,125 | ||||||||
Junior subordinated debentures aggregate liquidation amount |
$ | 54,502 | $ | 186,664 | $ | 94,486 | $ | 104,148 | ||||||||
Stated maturity date |
|
February 2027 |
|
|
November 2033 |
|
|
September 2034 |
|
|
December 2034 |
| ||||
Reference notes |
[1],[3],[6] | [2],[4],[5] | [1],[3],[5] | [2],[4],[5] |
[1] | Statutory business trust that is wholly-owned by Popular North America and indirectly wholly-owned by the Corporation. |
[2] | Statutory business trust that is wholly-owned by the Corporation. |
[3] | The obligations of PNA under the junior subordinated debentures and its guarantees of the capital securities under the trust are fully and unconditionally guaranteed on a subordinated basis by the Corporation to the extent set forth in the applicable guarantee agreement. |
[4] | These capital securities are fully and unconditionally guaranteed on a subordinated basis by the Corporation to the extent set forth in the applicable guarantee agreement. |
[5] | The Corporation has the right, subject to any required prior approval from the Federal Reserve, to redeem after certain dates or upon the occurrence of certain events mentioned below, the junior subordinated debentures at a redemption price equal to 100% of the principal amount, plus accrued and unpaid interest to the date of redemption. The maturity of the junior subordinated debentures may be shortened at the option of the Corporation prior to their stated maturity dates (i) on or after the stated optional redemption dates stipulated in the agreements, in whole at any time or in part from time to time, or (ii) in whole, but not in part, at any time within 90 days following the occurrence and during the continuation of a tax event, an investment company event or a capital treatment event as set forth in the indentures relating to the capital securities, in each case subject to regulatory approval. |
[6] | Same as [5] above, except that the investment company event does not apply for early redemption. |
The Basel III Capital Rules require that capital instruments such as trust preferred securities be phased-out of Tier 1 capital. The Corporations capital components at June 30, 2015 included $ 427 million of trust preferred securities that are subject to the phase-out provisions of the Basel III Capital Rules. The Corporation is allowed to include only 25% of such trust preferred securities in Tier I capital as of January 1, 2015 and would be allowed 0% as of January 1, 2016 and thereafter. The Basel III Capital Rules also permanently grandfathers as Tier 2 capital such trust preferred securities.
85
Note 23 Stockholders equity
BPPR statutory reserve
The Banking Act of the Commonwealth of Puerto Rico requires that a minimum of 10% of BPPRs net income for the year be transferred to a statutory reserve account until such statutory reserve equals the total of paid-in capital on common and preferred stock. Any losses incurred by a bank must first be charged to retained earnings and then to the reserve fund. Amounts credited to the reserve fund may not be used to pay dividends without the prior consent of the Puerto Rico Commissioner of Financial Institutions. The failure to maintain sufficient statutory reserves would preclude BPPR from paying dividends. BPPRs statutory reserve fund amounted to $469 million at June 30, 2015 (December 31, 2014 - $469 million). There were no transfers between the statutory reserve account and the retained earnings account during the quarters and six months ended June 30, 2015 and June 30, 2014.
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Note 24 Other comprehensive loss
The following table presents changes in accumulated other comprehensive loss by component for the quarters and six months ended June 30, 2015 and 2014.
Changes in Accumulated Other Comprehensive Loss by Component [1] |
||||||||||||||||||
Quarters ended June 30, |
Six months ended June 30, |
|||||||||||||||||
(In thousands) |
2015 | 2014 | 2015 | 2014 | ||||||||||||||
Foreign currency translation |
Beginning Balance |
$ | (33,413 | ) | $ | (30,496 | ) | $ | (32,832 | ) | $ | (36,099 | ) | |||||
|
|
|
|
|
|
|
|
|||||||||||
Other comprehensive loss before reclassifications |
(1,092 | ) | (603 | ) | (1,673 | ) | (2,718 | ) | ||||||||||
Amounts reclassified from accumulated other comprehensive loss |
| | | 7,718 | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Net change |
(1,092 | ) | (603 | ) | (1,673 | ) | 5,000 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Ending balance |
$ | (34,505 | ) | $ | (31,099 | ) | $ | (34,505 | ) | $ | (31,099 | ) | ||||||
|
|
|
|
|
|
|
|
|||||||||||
Adjustment of pension and postretirement benefit plans |
Beginning Balance |
$ | (202,701 | ) | $ | (103,584 | ) | $ | (205,187 | ) | $ | (104,302 | ) | |||||
|
|
|
|
|
|
|
|
|||||||||||
Amounts reclassified from accumulated other comprehensive loss for amortization of net losses |
3,065 | 1,297 | 6,130 | 2,594 | ||||||||||||||
Amounts reclassified from accumulated other comprehensive loss for amortization of prior service cost |
(579 | ) | (580 | ) | (1,158 | ) | (1,159 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Net change |
2,486 | 717 | 4,972 | 1,435 | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Ending balance |
$ | (200,215 | ) | $ | (102,867 | ) | $ | (200,215 | ) | $ | (102,867 | ) | ||||||
|
|
|
|
|
|
|
|
|||||||||||
Unrealized net holding gains (losses) on investments |
Beginning Balance |
$ | 42,750 | $ | (22,255 | ) | $ | 8,465 | $ | (48,344 | ) | |||||||
|
|
|
|
|
|
|
|
|||||||||||
Other comprehensive (loss) income before reclassifications |
(39,172 | ) | 26,326 | (4,887 | ) | 52,415 | ||||||||||||
Other-than-temporary impairment amount reclassified from accumulated other comprehensive (loss) income |
11,959 | | 11,959 | | ||||||||||||||
Amounts reclassified from accumulated other comprehensive (loss) income |
(4 | ) | | (4 | ) | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Net change |
(27,217 | ) | 26,326 | 7,068 | 52,415 | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Ending balance |
$ | 15,533 | $ | 4,071 | $ | 15,533 | $ | 4,071 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Unrealized net gains (losses) on cash flow hedges |
Beginning Balance |
$ | (1,036 | ) | $ | 60 | $ | (318 | ) | $ | | |||||||
|
|
|
|
|
|
|
|
|||||||||||
Other comprehensive (loss) income before reclassifications |
612 | (1,554 | ) | (933 | ) | (2,607 | ) | |||||||||||
Amounts reclassified from other accumulated other comprehensive (loss) income |
580 | 1,098 | 1,407 | 2,211 | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Net change |
1,192 | (456 | ) | 474 | (396 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Ending balance |
$ | 156 | $ | (396 | ) | $ | 156 | $ | (396 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | (219,031 | ) | $ | (130,291 | ) | $ | (219,031 | ) | $ | (130,291 | ) | ||||||
|
|
|
|
|
|
|
|
[1] | All amounts presented are net of tax. |
87
The following table presents the amounts reclassified out of each component of accumulated other comprehensive loss during the quarters and six months ended June 30, 2015 and 2014.
Reclassifications Out of Accumulated Other Comprehensive Loss |
||||||||||||||||||
Affected Line Item in the | Quarters ended June 30, |
Six months ended June 30, |
||||||||||||||||
(In thousands) |
Consolidated Statements of Operations |
2015 | 2014 | 2015 | 2014 | |||||||||||||
Foreign Currency Translation |
||||||||||||||||||
Cumulative translation adjustment reclassified into earnings |
Other operating income |
$ | | $ | | $ | | $ | (7,718 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||||
Total before tax |
| | | (7,718 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Total net of tax |
$ | | $ | | $ | | $ | (7,718 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||||
Adjustment of pension and postretirement benefit plans |
||||||||||||||||||
Amortization of net losses |
Personnel costs |
$ | (5,025 | ) | $ | (2,126 | ) | $ | (10,050 | ) | $ | (4,252 | ) | |||||
Amortization of prior service cost |
Personnel costs |
950 | 950 | 1,900 | 1,900 | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Total before tax |
(4,075 | ) | (1,176 | ) | (8,150 | ) | (2,352 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Income tax benefit |
1,589 | 459 | 3,178 | 917 | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Total net of tax |
$ | (2,486 | ) | $ | (717 | ) | $ | (4,972 | ) | $ | (1,435 | ) | ||||||
|
|
|
|
|
|
|
|
|||||||||||
Unrealized holding gains (losses) on investments |
||||||||||||||||||
Realized loss on sale of securities |
Other-than-temporary impairment losses on available-for-sale debt securities |
$ | (14,445 | ) | $ | | $ | (14,445 | ) | $ | | |||||||
Net gain (loss) and valuation adjustments on investment securities |
5 | | 5 | | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Total before tax |
(14,440 | ) | | (14,440 | ) | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Income tax (expense) benefit |
2,485 | | 2,485 | | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Total net of tax |
$ | (11,955 | ) | $ | | $ | (11,955 | ) | $ | | ||||||||
|
|
|
|
|
|
|
|
|||||||||||
Unrealized net gains (losses) on cash flow hedges |
||||||||||||||||||
Forward contracts |
Mortgage banking activities |
$ | (951 | ) | $ | (1,800 | ) | $ | (2,309 | ) | $ | (3,624 | ) | |||||
|
|
|
|
|
|
|
|
|||||||||||
Total before tax |
(951 | ) | (1,800 | ) | (2,309 | ) | (3,624 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Income tax benefit (expense) |
371 | 702 | 902 | 1,413 | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Total net of tax |
$ | (580 | ) | $ | (1,098 | ) | $ | (1,407 | ) | $ | (2,211 | ) | ||||||
|
|
|
|
|
|
|
|
|||||||||||
Total reclassification adjustments, net of tax |
$ | (15,021 | ) | $ | (1,815 | ) | $ | (18,334 | ) | $ | (11,364 | ) | ||||||
|
|
|
|
|
|
|
|
88
At June 30, 2015 the Corporation recorded a liability of $0.7 million (December 31, 2014 - $0.4 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 June 30, 2015 the Corporation serviced $ 2.0 billion (December 31, 2014 - $ 2.1 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 and six months ended June 30, 2015, the Corporation repurchased approximately $ 14 million and $ 30 million, respectively, of unpaid principal balance in mortgage loans subject to the credit recourse provisions (June 30, 2014 - $ 21 million and $ 48 million, respectively). 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 June 30, 2015 the Corporations liability established to cover the estimated credit loss exposure related to loans sold or serviced with credit recourse amounted to $ 58 million (December 31, 2014 - $ 59 million).
The following table shows the changes in the Corporations liability of estimated losses related to loans serviced with credit recourse provisions during the quarters and six month periods ended June 30, 2015 and 2014.
Quarters ended June 30, | Six months ended June 30, | |||||||||||||||
(In thousands) |
2015 | 2014 | 2015 | 2014 | ||||||||||||
Balance as of beginning of period |
$ | 59,385 | $ | 45,809 | $ | 59,438 | $ | 41,463 | ||||||||
Provision for recourse liability |
4,368 | 7,984 | 10,868 | 19,026 | ||||||||||||
Net charge-offs |
(6,164 | ) | (5,901 | ) | (12,717 | ) | (12,597 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance as of end of period |
$ | 57,589 | $ | 47,892 | $ | 57,589 | $ | 47,892 | ||||||||
|
|
|
|
|
|
|
|
The estimated losses to be absorbed under the credit recourse arrangements are recorded as a liability when the loans are sold or credit recourse is assumed as part of acquired servicing rights, and are updated by accruing or reversing expense (categorized in the line item adjustments (expense) to indemnity reserves on loans sold in the consolidated statements of operations) throughout the life of the loan, as necessary, when additional relevant information becomes available. The methodology used to estimate the recourse liability is a function of the recourse arrangements given and considers a variety of factors, which include actual defaults and historical loss experience, foreclosure rate, estimated future defaults and the probability that a loan would be delinquent. Statistical methods are used to estimate the recourse liability. Expected loss rates are applied to different loan segmentations. The expected loss, which represents the amount expected to be lost on a given loan, considers the probability of default and loss severity. The probability of default represents the probability that a loan in good standing would become 90 days delinquent within the following twelve-month period. Regression analysis quantifies the relationship between the default event and loan-specific characteristics, including credit scores, loan-to-value ratios, and loan aging, among others.
When the Corporation sells or securitizes mortgage loans, it generally makes customary representations and warranties regarding the characteristics of the loans sold. The Corporations mortgage operations in Puerto Rico group conforming mortgage loans into pools which are exchanged for FNMA and GNMA mortgage-backed securities, which are generally sold to private investors, or are sold directly to FNMA or other private investors for cash. As required under the government agency programs, quality review procedures are performed by the Corporation to ensure that asset guideline qualifications are met. To the extent the loans do not meet specified characteristics, the Corporation may be required to repurchase such loans or indemnify for losses and bear any subsequent loss related to the loans. Repurchases under BPPRs representation and warranty arrangements for the six months ended June 30, 2015 approximated $175 thousand, in unpaid principal balance, with losses amounting to $24 thousand, and $ 2.2 million and $ 1.6 million, respectively, for the same period of 2014. 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.
89
As discussed on Note 4 Discontinued operations, on November 8, 2014, the Corporation completed the sale of the California regional operations. In connection with this transaction, the Corporation agreed to provide, subject to certain limitations, customary indemnification to the purchaser, including with respect to certain pre-closing liabilities and violations of representations and warranties. The Corporation also agreed to indemnify the purchaser for up to 1.5% of credit losses on transferred loans for a period of two years after the closing. Pursuant to this indemnification provision, the Corporations maximum exposure is approximately $16.0 million. The Corporation recognized a reserve of approximately $2.2 million, representing its best estimate of the loss that would be incurred in connection with this indemnification. This reserve is included within the liabilities from discontinued operations.
During the quarter ended June 30, 2013, the Corporation established a reserve for certain specific representation and warranties made in connection with BPPRs sale of non-performing mortgage loans. The purchasers sole remedy under the indemnity clause is to seek monetary damages from BPPR, for a maximum of $16.3 million. BPPR recognized a reserve of approximately $3.0 million, representing its best estimate of the loss that would be incurred in connection with this indemnification. BPPRs obligations under this clause end one year after the closing except to any claim asserted prior to such termination date. At June 30, 2015, the Corporation has a reserve balance of $2.8 million to cover claims received from the purchaser, which are currently being evaluated.
During the quarter ended March 31, 2013, the Corporation established a reserve for certain specific representations and warranties made in connection with BPPRs sale of commercial and construction loans, and commercial and single family real estate owned. The purchasers sole remedy under the indemnity clause is to seek monetary damages from BPPR, for a maximum of $18.0 million. BPPR is not required to repurchase any of the assets. BPPR recognized a reserve of approximately $10.7 million, representing its best estimate of the loss that would be incurred in connection with this indemnification. During the first and second quarter of 2015, the Corporation released $3.2 million and $1.8 million, respectively, based on an evaluation of claims received under this clause. At June 30, 2015, the Corporation has a reserve balance of $0.1 million to cover claims received from the purchaser.
The following table presents the changes in the Corporations liability for estimated losses associated with indemnifications and representations and warranties related to loans sold by BPPR for the quarters and six months ended June 30, 2015 and 2014.
Quarters ended June 30, | Six months ended June 30, | |||||||||||||||
(In thousands) |
2015 | 2014 | 2015 | 2014 | ||||||||||||
Balance as of beginning of period |
$ | 14,044 | $ | 16,824 | $ | 15,959 | $ | 19,277 | ||||||||
Additions for new sales |
| | | | ||||||||||||
Provision (reversal) for representation and warranties |
(5,707 | ) | (401 | ) | (7,608 | ) | (1,465 | ) | ||||||||
Net charge-offs |
(25 | ) | (504 | ) | (39 | ) | (1,893 | ) | ||||||||
Settlements paid |
(2,250 | ) | | (2,250 | ) | | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance as of end of period |
$ | 6,062 | $ | 15,919 | $ | 6,062 | $ | 15,919 | ||||||||
|
|
|
|
|
|
|
|
In addition, at June 30, 2015, 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 June 30, 2015, the Corporations 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, 2014 - $ 5 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
90
principal, interest, taxes and insurance, if such payments have not been received from the borrowers. At June 30, 2015, the Corporation serviced $ 19.7 billion in mortgage loans for third-parties, including the loans serviced with credit recourse (December 31, 2014 - $ 15.6 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 June 30, 2015, the outstanding balance of funds advanced by the Corporation under such mortgage loan servicing agreements was approximately $35 million (December 31, 2014 - $36 million). To the extent the mortgage loans underlying the Corporations servicing portfolio experience increased delinquencies, the Corporation would be required to dedicate additional cash resources to comply with its obligation to advance funds as well as incur additional administrative costs related to increases in collection efforts.
Popular, Inc. Holding Company (PIHC) fully and unconditionally guarantees certain borrowing obligations issued by certain of its wholly-owned consolidated subsidiaries amounting to $ 0.1 billion at June 30, 2015 (December 31, 2014 - $ 0.2 billion). In addition, at June 30, 2015 and December 31, 2014, 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. Refer to Note 22 to the consolidated financial statements for further information on the trust preferred securities.
91
Note 26 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 Corporations 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) |
June 30, 2015 | December 31, 2014 | ||||||
Commitments to extend credit: |
||||||||
Credit card lines |
$ | 4,473,147 | $ | 4,450,284 | ||||
Commercial and construction lines of credit |
2,370,561 | 2,415,843 | ||||||
Other consumer unused credit commitments |
265,204 | 269,225 | ||||||
Commercial letters of credit |
2,551 | 2,820 | ||||||
Standby letters of credit |
48,564 | 46,362 | ||||||
Commitments to originate or fund mortgage loans |
26,981 | 25,919 |
At June 30, 2015, the Corporation maintained a reserve of approximately $14 million for potential losses associated with unfunded loan commitments related to commercial and consumer lines of credit, as compared to $13 million at December 31, 2014.
Other commitments
At June 30, 2015, the Corporation also maintained other non-credit commitments for approximately $9 million, primarily for the acquisition of other investments, as compared to $9 million at December 31, 2014.
Business concentration
Since the Corporations 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 Corporations 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 38 to the consolidated financial statements.
At June 30, 2015, the Corporations direct exposure to the Puerto Rico government and its instrumentalities and municipalities amounted to $ 729 million, of which approximately $ 673 million is outstanding ($ 1.0 billion and $ 811 million, respectively, at December 31, 2014). Of the amount outstanding, $ 565 million consists of loans and $ 108 million are securities ($ 689 million and $ 122 million at December 31, 2014). Of this amount, $ 185 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 ($ 336 million at December 31, 2014). 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 $ 488 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 ($ 475 million at December 31, 2014). 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. During the quarter, the Corporation agreed to sell a $75 million non-accrual public sector credit at BPPR and accordingly transferred it to held-for-sale. The sale was
92
subject, among other conditions, to the approval of the syndicates agent bank. The sale agreement was terminated on July 29, 2015 pursuant to its terms after the parties were not able to obtain the approval of the agent bank on terms acceptable to the assignee.
In addition, at June 30, 2015, the Corporation had $380 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 ($370 million at December 31, 2014). These included $301 million in residential mortgage loans that are guaranteed by the Puerto Rico Housing Finance Authority (December 31, 2014 - $289 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. Also, the Corporation had $50 million in Puerto Rico pass-through housing bonds backed by FNMA, GNMA or residential loans CMOs, and $29 million of industrial development notes ($49 million and $32 million at December 31, 2014, respectively).
Since February 2014, the three principal rating agencies (Moodys, 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 Commonwealths general obligation ratings are as follows: S&P, CCC-, Moodys, Caa2, and Fitch, CC.
During the second quarter of 2015, the Corporation recognized an other-than-temporary impairment charge of $14.4 million on its portfolio of investment securities available-for-sale classified as obligations from the Puerto Rico government and its political subdivisions. Refer to Note 9, Investment securities available-for-sale, for additional information.
Other contingencies
As indicated in Note 13 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 $ 121 million at June 30, 2015 (December 31, 2014 - $ 129 million).
Legal Proceedings
The nature of Populars 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 managements 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 $32.6 million as of June 30, 2015. 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, managements estimate will change from time-to-time, and actual losses may be more or less than the current estimate.
93
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 Corporations legal proceedings will not have a material adverse effect on the Corporations 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 Corporations consolidated financial position in a particular period.
BPNA 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, existing BPNA customers, allege among other things that BPNA 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 BPNA improperly disclosed its consumer overdraft policies and, additionally, that the overdraft rates and fees assessed by BPNA violate New Yorks usury laws. The complaint seeks unspecified damages, including punitive damages, interest, disbursements, and attorneys fees and costs.
BPNA removed the case to federal court (S.D.N.Y.) 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 BPNAs motion to dismiss. The sole surviving claim relates to BPNAs 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 courts decision and order. BPNA subsequently filed a motion in opposition to plaintiffs 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 BPNAs 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, effectively reducing the scope of potential recovery claims from six to three years.
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 Banco Popular violated FLSA by wilfully 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 Courts order, plaintiffs sent out notices to all purported class members with instructions for opting into the class. Approximately sixty potential classmembers 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.
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 Southern District of New York containing virtually identical allegations with respect to Popular Securities and BPPR. Defendants filed motions to dismiss the amended complaint on June 18, 2015. The briefing on those motions is scheduled to be completed by August 21, 2015.
94
Last, 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 RadioShacks company stock in the portfolio of potential investment options. The complaint further asserts that once RadioShacks 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.
Popular was a directed trustee, and therefore a fiduciary, of the RadioShack Puerto Rico 1165(e) Plan (P.R. Plan). Even though the P.R. Plan directed Popular to retain RadioShack company stock within the portfolio of investment options, the complaint alleges that a trustees 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 Popular 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 P.R. Plan of Company Stock; and (iii) participating in the decisions of another trustee (Wells Fargo) to protect the Plans from inevitable losses.
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 41 arbitration proceedings with aggregate claimed damages of approximately $99 million, including one arbitration with claimed damages of $78 million in which two other Puerto Rico broker-dealers are co-defendants. 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 Governments recent announcements regarding its ability to pay its debt and intention to pursue a comprehensive debt restructuring, together with the market reaction to it, may increase the number of customer complaints (and claimed damages) against Popular Securities concerning Puerto Rico municipal bonds and closed-end investment companies that invest primarily in Puerto Rico municipal bonds. An adverse result in the matters described above or a significant increase in customer complaints could have a material and adverse effect on Popular Securities.
Other Significant Proceedings
As described under Note 13 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 that it acquired in the transaction. Pursuant to the terms of the loss share agreements, the FDICs 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 commercial late stage real-estate-collateral-dependent loans described below provides for loss sharing by the FDIC through the quarter ending June 30, 2015 and for reimbursement to the FDIC 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 BPPRs 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 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 BPPRs 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 FDICs 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.
95
BPPRs 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 the 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. Although the terms of the settlement could delay the timing of reimbursement of certain loss-share claims from the FDIC, the settlement is not expected to have a material adverse impact on BPPRs current estimate of expected reimbursable losses for the covered portfolio through the end of the commercial loss share agreement in the quarter ending June 30, 2015.
The shared-loss arrangement described above expired on June 30, 2015. As of that date BPPR had unreimbursed losses and expenses of $307.9 million under the commercial loss share agreement with the FDIC. On July 22, 2015, BPPR received reimbursement of $78.9 million from the FDIC covering claims filed prior to June 30, 2015. Taking into consideration this payment and claims submitted through that date, the total unreimbursed losses totaled $229.0 million, of which $177.8 million was submitted to the FDIC on July 30, 2015. Other than those reimbursements that are subject to the disputes described below, BPPR continues to work with the FDIC and expects to be reimbursed pursuant to the terms of the commercial loss share agreement.
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 BPPRs 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 FDICs 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 FDICs 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 shared loss 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 is 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.
In addition, in November and December 2014, BPPR proposed separate portfolio sales to the FDIC. The FDIC has 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.
BPPR disagrees with the FDICs characterization of the November and December 2014 portfolio sale proposals and with the FDICs interpretation of the commercial shared loss agreement provision governing portfolio sales (the Proposed Portfolio Sales). Accordingly, on March 13, 2015, 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 the Proposed Portfolio Sales. On June 15, 2015, BPPR amended its statement of claim to include a claim for the FDIC-Rs 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 third proposed sale, but only subject to conditions to which BPPR objects.
96
At June 30, 2015, there are approximately $248.7 million of loans that are subject to the resolution of the arbitration proceedings described above, with losses amounting to $141.3 million reflected in the FDIC indemnification asset as a receivable from the FDIC. 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 (ending on June 30, 2015), with additional recovery sharing for three years thereafter. As of June 30, 2015, the carrying value of covered loans approximated $0.7 billion, 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 reduction 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.
97
Note 27 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, FNMA and FHLMC. These special purpose entities are deemed to be VIEs since they lack equity investments at risk. The Corporations 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 Corporations consolidated statements of financial condition as available-for-sale or trading securities. The Corporation concluded that, essentially, these entities (FNMA, GNMA, and FHLMC) 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 and FHLMC. Moreover, through their guarantee obligations, agencies (FNMA, GNMA, and FHLMC) 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 Corporations financial statements at June 30, 2015.
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 29 to the consolidated financial statements for additional information on the debt securities outstanding at June 30, 2015 and December 31, 2014, which are classified as available-for-sale and trading securities in the Corporations 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 Corporations variable interests in non-consolidated VIEs and the maximum exposure to loss as a result of the Corporations involvement as servicer with non-consolidated VIEs at June 30, 2015 and December 31, 2014.
(In thousands) |
June 30, 2015 | December 31, 2014 | ||||||
Assets |
||||||||
Servicing assets: |
||||||||
Mortgage servicing rights |
$ | 156,059 | $ | 103,828 | ||||
|
|
|
|
|||||
Total servicing assets |
$ | 156,059 | $ | 103,828 | ||||
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|
|
|
|||||
Other assets: |
||||||||
Servicing advances |
$ | 8,243 | $ | 8,974 | ||||
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|
|
|
|||||
Total other assets |
$ | 8,243 | $ | 8,974 | ||||
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|
|
|
|||||
Total assets |
$ | 164,302 | $ | 112,802 | ||||
|
|
|
|
|||||
Maximum exposure to loss |
$ | 164,302 | $ | 112,802 | ||||
|
|
|
|
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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 $12.9 billion at June 30, 2015 (December 31, 2014 - $9 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 Corporations interests and any associated collateral declines to zero, without any consideration of recovery. The Corporation determined that the maximum exposure to loss includes the fair value of the MSRs and the assumption that the servicing advances at June 30, 2015 and December 31, 2014, will not be recovered. The agency debt securities are not included as part of the maximum exposure to loss since they are guaranteed by the related agencies.
In September of 2011, BPPR sold construction and commercial real estate loans with a fair value of $148 million, and most of which were non-performing, to a newly created joint venture, PRLP 2011 Holdings, LLC. The joint venture is majority owned by Caribbean Property Group (CPG), Goldman Sachs & Co. and East Rock Capital LLC. The joint venture was created for the limited purpose of acquiring the loans from BPPR; servicing the loans through a third-party servicer; ultimately working out, resolving and/or foreclosing the loans; and indirectly owning, operating, constructing, developing, leasing and selling any real properties acquired by the joint venture through deed in lieu of foreclosure, foreclosure, or by resolution of any loan.
BPPR provided financing to the joint venture for the acquisition of the loans in an amount equal to the sum of 57 % of the purchase price of the loans, or $84 million, and $2 million of closing costs, for a total acquisition loan of $86 million (the acquisition loan). The acquisition loan has a 5-year maturity and bears a variable interest at 30-day LIBOR plus 300 basis points and is secured by a pledge of all of the acquiring entitys 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. BPPRs equity interest in the joint venture ranks pari-passu with those of other parties involved. As part of the transaction executed in September 2011, BPPR received $ 48 million in cash and a 24.9 % equity interest in the joint venture. The Corporation is not required to provide any other financial support to the joint venture.
BPPR accounted for this transaction as a true sale pursuant to ASC Subtopic 860-10 and thus recognized the cash received, its equity investment in the joint venture, and the acquisition loan provided to the joint venture and derecognized the loans sold.
The Corporation has determined that PRLP 2011 Holdings, LLC is a VIE but the Corporation is not the primary beneficiary. All decisions are made by CPG (or an affiliate thereof) (the Manager), except for certain limited material decisions which would require the unanimous consent of all members. The Manager is authorized to execute and deliver on behalf of the joint venture any and all documents, contracts, certificates, agreements and instruments, and to take any action deemed necessary in the benefit of the joint venture.
The Corporation holds variable interests in this VIE in the form of the 24.9 % equity interest (the Investment in PRLP 2011 Holdings, LLC) and the financing provided to the joint venture. The equity interest is accounted for under the equity method of accounting pursuant to ASC Subtopic 323-10.
The initial fair value of the Corporations 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 arms-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.
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The following table presents the carrying amount and classification of the assets and liabilities related to the Corporations variable interests in the non-consolidated VIE, PRLP 2011 Holdings, LLC, and its maximum exposure to loss at June 30, 2015 and December 31, 2014.
(In thousands) |
June 30, 2015 | December 31, 2014 | ||||||
Assets |
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Loans held-in-portfolio: |
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Advances under the working capital line |
$ | 2,529 | $ | 426 | ||||
Advances under the advance facility |
2,102 | 4,226 | ||||||
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|
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Total loans held-in-portfolio |
$ | 4,631 | $ | 4,652 | ||||
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|
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Accrued interest receivable |
$ | 17 | $ | 22 | ||||
Other assets: |
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Investment in PRLP 2011 Holdings LLC |
$ | 21,820 | $ | 23,650 | ||||
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|
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Total assets |
$ | 26,468 | $ | 28,324 | ||||
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|
|||||
Deposits |
$ | (6,774 | ) | $ | (2,685 | ) | ||
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|
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Total liabilities |
$ | (6,774 | ) | $ | (2,685 | ) | ||
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|
|||||
Total net assets |
$ | 19,694 | $ | 25,639 | ||||
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|
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Maximum exposure to loss |
$ | 19,694 | $ | 25,639 | ||||
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The Corporation determined that the maximum exposure to loss under a worst case scenario at June 30, 2015 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.
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 International, LLC. The joint venture is majority owned by Caribbean Property Group LLC (CPG) and certain affiliates of Perella Weinberg Partners Asset Based Value Strategy. 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 entitys 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. BPPRs 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.
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.
100
The initial fair value of the Corporations 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 arms-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 Corporations variable interests in the non-consolidated VIE, PR Asset Portfolio 2013-1 International, LLC, and its maximum exposure to loss at June 30, 2015 and December 31, 2014.
(In thousands) |
June 30, 2015 | December 31, 2014 | ||||||
Assets |
||||||||
Loans held-in-portfolio: |
||||||||
Acquisition loan |
$ | 65,036 | $ | 97,193 | ||||
Advances under the working capital line |
1,093 | 990 | ||||||
Advances under the advance facility |
17,506 | 12,460 | ||||||
|
|
|
|
|||||
Total loans held-in-portfolio |
$ | 83,635 | $ | 110,643 | ||||
|
|
|
|
|||||
Accrued interest receivable |
$ | 222 | $ | 314 | ||||
Other assets: |
||||||||
Investment in PR Asset Portfolio 2013-1 International, LLC |
$ | 26,906 | $ | 31,374 | ||||
|
|
|
|
|||||
Total assets |
$ | 110,763 | $ | 142,331 | ||||
|
|
|
|
|||||
Deposits |
$ | (12,092 | ) | $ | (12,960 | ) | ||
|
|
|
|
|||||
Total liabilities |
$ | (12,092 | ) | $ | (12,960 | ) | ||
|
|
|
|
|||||
Total net assets |
$ | 98,671 | $ | 129,371 | ||||
|
|
|
|
|||||
Maximum exposure to loss |
$ | 98,671 | $ | 129,371 | ||||
|
|
|
|
The Corporation determined that the maximum exposure to loss under a worst case scenario at June 30, 2015 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.
101
Note 28 Related party transactions with affiliated company / joint venture
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 June 30, 2015, the Corporations stake in EVERTEC was 15.04%. 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. Refer to Note 34 Related party transactions to the consolidated financial statements included in the Corporations 2014 Annual Report for details.
The Corporation received $ 2.3 million in dividend distributions during the quarter ended June 30, 2015 from its investments in EVERTECs holding company (June 30, 2014 - $ 2.3 million). The Corporations 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) |
June 30, 2015 | December 31, 2014 | ||||||
Equity investment in EVERTEC |
$ | 29,411 | $ | 25,146 |
The Corporation had the following financial condition balances outstanding with EVERTEC at June 30, 2015 and December 31, 2014. Items that represent liabilities to the Corporation are presented with parenthesis.
(In thousands) |
June 30, 2015 | December 31, 2014 | ||||||
Accounts receivable (Other assets) |
$ | 5,073 | $ | 5,065 | ||||
Deposits |
(17,824 | ) | (15,481 | ) | ||||
Accounts payable (Other liabilities) |
(18,891 | ) | (15,511 | ) | ||||
|
|
|
|
|||||
Net total |
$ | (31,642 | ) | $ | (25,927 | ) | ||
|
|
|
|
The Corporations proportionate share of income or loss from EVERTEC is included in other operating income in the consolidated statements of operations. The following table presents the Corporations proportionate share of EVERTECs income (loss) and changes in stockholders equity for the quarters and six months ended June 30, 2015 and 2014.
(In thousands) |
Quarter ended June 30, 2015 |
Six months ended June 30, 2015 |
||||||
Share of income from the investment in EVERTEC |
$ | 3,046 | $ | 5,915 | ||||
Share of other changes in EVERTECs stockholders equity |
214 | 565 | ||||||
|
|
|
|
|||||
Share of EVERTECs changes in equity recognized in income |
$ | 3,260 | $ | 6,480 | ||||
|
|
|
|
(In thousands) |
Quarter ended June 30, 2014 |
Six months ended June 30, 2014 |
||||||
Share of income (loss) from the investment in EVERTEC |
$ | 2,553 | $ | 5,332 | ||||
Share of other changes in EVERTECs stockholders equity |
83 | 321 | ||||||
|
|
|
|
|||||
Share of EVERTECs changes in equity recognized in income |
$ | 2,636 | $ | 5,653 | ||||
|
|
|
|
102
The following tables present the transactions and service payments between the Corporation and EVERTEC (as an affiliate) and their impact on the results of operations for the quarters and six months ended June 30, 2015 and 2014. Items that represent expenses to the Corporation are presented with parenthesis.
(In thousands) |
Quarter ended June 30, 2015 |
Six months ended June 30, 2015 |
Category | |||||||||
Interest expense on deposits |
$ | (15 | ) | $ | (26 | ) | Interest expense | |||||
ATH and credit cards interchange income from services to EVERTEC |
7,166 | 13,653 | Other service fees | |||||||||
Rental income charged to EVERTEC |
1,723 | 3,447 | Net occupancy | |||||||||
Processing fees on services provided by EVERTEC |
(41,946 | ) | (81,450 | ) | Professional fees | |||||||
Other services provided to EVERTEC |
384 | 708 | Other operating expenses | |||||||||
|
|
|
|
|||||||||
Total |
$ | (32,688 | ) | $ | (63,668 | ) | ||||||
|
|
|
|
(In thousands) |
Quarter ended June 30, 2014 |
Six months ended June 30, 2014 |
Category | |||||||||
Interest expense on deposits |
$ | (19 | ) | $ | (39 | ) | Interest expense | |||||
ATH and credit cards interchange income from services to EVERTEC |
6,709 | 13,128 | Other service fees | |||||||||
Rental income charged to EVERTEC |
1,750 | 3,427 | Net occupancy | |||||||||
Processing fees on services provided by EVERTEC |
(38,877 | ) | (77,639 | ) | Professional fees | |||||||
Other services provided to EVERTEC |
233 | 454 | Other operating expenses | |||||||||
|
|
|
|
|||||||||
Total |
$ | (30,204 | ) | $ | (60,669 | ) | ||||||
|
|
|
|
EVERTEC has a letter of credit issued by BPPR, for an amount of $ 4.2 million at June 30, 2015 (December 31, 2014 - $ 3.6 million). The Corporation also agreed to maintain outstanding this letter of credit for a 5-year period which expires on September 30, 2015. EVERTEC and the Corporation entered into a Reimbursement Agreement, in which EVERTEC will reimburse the Corporation for any losses incurred by the Corporation in connection with the performance bonds and the letter of credit. Possible losses resulting from these agreements are considered insignificant.
PRLP 2011 Holdings LLC
As indicated in Note 27 to the consolidated financial statements, the Corporation holds a 24.9 % equity interest in PRLP 2011 Holdings LLC and currently provides certain financing to the joint venture as well as holds certain deposits from the entity.
The Corporations 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) |
June 30, 2015 | December 31, 2014 | ||||||
Equity investment in PRLP 2011 Holdings, LLC |
$ | 21,820 | $ | 23,650 |
The Corporation had the following financial condition balances outstanding with PRLP 2011 Holdings, LLC at June 30, 2015 and December 31, 2014.
(In thousands) |
June 30, 2015 | December 31, 2014 | ||||||
Loans |
$ | 4,631 | $ | 4,652 | ||||
Accrued interest receivable |
17 | 22 | ||||||
Deposits (non-interest bearing) |
(6,774 | ) | (2,685 | ) | ||||
|
|
|
|
|||||
Net total |
$ | (2,126 | ) | $ | 1,989 | |||
|
|
|
|
103
The Corporations 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 Corporations proportionate share of income (loss) from PRLP 2011 Holdings, LLC for the quarters and six months ended June 30, 2015 and 2014.
(In thousands) |
Quarter ended June 30, 2015 |
Six months ended June 30, 2015 |
||||||
Share of loss from the equity investment in PRLP 2011 Holdings, LLC |
$ | (2,863 | ) | $ | (1,830 | ) |
(In thousands) |
Quarter ended June 30, 2014 |
Six months ended June 30, 2014 |
||||||
Share of loss from the equity investment in PRLP 2011 Holdings, LLC |
$ | (32 | ) | $ | (1,778 | ) |
The following table presents transactions between the Corporation and PRLP 2011 Holdings, LLC and their impact on the Corporations results of operations for the quarters and six months ended June 30, 2015 and 2014.
(In thousands) |
Quarter ended June 30, 2015 |
Six months ended June 30, 2015 |
Category | |||||||||
Interest income on loan to PRLP 2011 Holdings, LLC |
$ | 51 | $ | 113 | Interest income |
(In thousands) |
Quarter ended June 30, 2014 |
Six months ended June 30, 2014 |
Category | |||||||||
Interest income on loan to PRLP 2011 Holdings, LLC |
$ | 99 | $ | 271 | Interest income |
PR Asset Portfolio 2013-1 International, LLC
As indicated in Note 27 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 Corporations 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) |
June 30, 2015 | December 31, 2014 | ||||||
Equity investment in PR Asset Portfolio 2013-1 International, LLC |
$ | 26,906 | $ | 31,374 |
The Corporation had the following financial condition balances outstanding with PR Asset Portfolio 2013-1 International, LLC, at June 30, 2015 and December 31, 2014.
(In thousands) |
June 30, 2015 | December 31, 2014 | ||||||
Loans |
$ | 83,635 | $ | 110,643 | ||||
Accrued interest receivable |
222 | 314 | ||||||
Deposits |
(12,092 | ) | (12,960 | ) | ||||
|
|
|
|
|||||
Net total |
$ | 71,765 | $ | 97,997 | ||||
|
|
|
|
104
The Corporations 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 Corporations proportionate share of income (loss) from PR Asset Portfolio 2013-1 International, LLC for the quarter and six months ended June 30, 2015 and 2014.
(In thousands) |
Quarter ended June 30, 2015 |
Six months ended June 30, 2015 |
||||||
Share of loss from the equity investment in PR Asset Portfolio 2013-1 International, LLC |
$ | (133 | ) | $ | (4,468 | ) |
(In thousands) |
Quarter ended June 30, 2014 |
Six months ended June 30, 2014 |
||||||
Share of income from the equity investment in PR Asset Portfolio 2013-1 International, LLC |
$ | 161 | $ | 1,450 |
The following table presents transactions between the Corporation and PR Asset Portfolio 2013-1 International, LLC and their impact on the Corporations results of operations for the quarters and six months ended June 30, 2015 and 2014.
(In thousands) |
Quarter ended June 30, 2015 |
Six months ended June 30, 2015 |
Category | |||||||||
Interest income on loan to PR Asset Portfolio 2013-1 International, LLC |
$ | 747 | $ | 1,613 | Interest income | |||||||
Interest expense on deposits |
(1 | ) | (1 | ) | Interest expense | |||||||
|
|
|
|
|||||||||
Total |
$ | 746 | $ | 1,612 | ||||||||
|
|
|
|
(In thousands) |
Quarter ended June 30, 2014 |
Six months ended June 30, 2014 |
Category | |||||||||
Interest income on loan to PR Asset Portfolio 2013-1 International, LLC |
$ | 1,082 | $ | 2,344 | Interest income | |||||||
Servicing fee paid by PR Asset Portfolio 2013-1 International, LLC |
| 70 | Other service fees | |||||||||
|
|
|
|
|||||||||
Total |
$ | 1,082 | $ | 2,414 | ||||||||
|
|
|
|
105
Note 29 Fair value measurement
ASC Subtopic 820-10 Fair Value Measurements and Disclosures establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels in order to increase consistency and comparability in fair value measurements and disclosures. The hierarchy is broken down into three levels based on the reliability of inputs as follows:
| Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities that the Corporation has the ability to access at the measurement date. Valuation on these instruments does not necessitate a significant degree of judgment since valuations are based on quoted prices that are readily available in an active market. |
| Level 2 - Quoted prices other than those included in Level 1 that are observable either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or that can be corroborated by observable market data for substantially the full term of the financial instrument. |
| Level 3 - Inputs are unobservable and significant to the fair value measurement. Unobservable inputs reflect the Corporations own assumptions about assumptions that market participants would use in pricing the asset or liability. |
The Corporation maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the observable inputs be used when available. Fair value is based upon quoted market prices when available. If listed prices or quotes are not available, the Corporation employs internally-developed models that primarily use market-based inputs including yield curves, interest rates, volatilities, and credit curves, among others. Valuation adjustments are limited to those necessary to ensure that the financial instruments fair value is adequately representative of the price that would be received or paid in the marketplace. These adjustments include amounts that reflect counterparty credit quality, the Corporations credit standing, constraints on liquidity and unobservable parameters that are applied consistently. There have been no changes in the Corporations methodologies used to estimate the fair value of assets and liabilities since December 31, 2014. Refer to the Critical Accounting Policies / Estimates in the 2012 Annual Report for additional information on the accounting guidance and the Corporations policies or procedures related to fair value measurements.
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.
Fair Value on a Recurring and Nonrecurring Basis
The following fair value hierarchy tables present information about the Corporations assets and liabilities measured at fair value on a recurring basis at June 30, 2015 and December 31, 2014 and on a nonrecurring basis in periods subsequent to initial recognition for the six months ended June 30, 2015 and 2014:
At June 30, 2015 |
||||||||||||||||
(In thousands) |
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
RECURRING FAIR VALUE MEASUREMENTS |
||||||||||||||||
Assets |
||||||||||||||||
Investment securities available-for-sale: |
||||||||||||||||
U.S. Treasury securities |
$ | | $ | 973,723 | $ | | $ | 973,723 | ||||||||
Obligations of U.S. Government sponsored entities |
| 1,110,372 | | 1,110,372 | ||||||||||||
Obligations of Puerto Rico, States and political subdivisions |
| 52,114 | | 52,114 | ||||||||||||
Collateralized mortgage obligations - federal agencies |
| 1,736,829 | | 1,736,829 | ||||||||||||
Mortgage-backed securities |
| 1,697,399 | 1,445 | 1,698,844 | ||||||||||||
Equity securities |
310 | 2,284 | | 2,594 | ||||||||||||
Other |
| 10,602 | | 10,602 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total investment securities available-for-sale |
$ | 310 | $ | 5,583,323 | $ | 1,445 | $ | 5,585,078 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Trading account securities, excluding derivatives: |
||||||||||||||||
Obligations of Puerto Rico, States and political subdivisions |
$ | | $ | 5,614 | $ | | $ | 5,614 | ||||||||
Collateralized mortgage obligations |
| 235 | 1,192 | 1,427 | ||||||||||||
Mortgage-backed securities - federal agencies |
| 111,139 | 6,046 | 117,185 | ||||||||||||
Other |
| 15,750 | 1,619 | 17,369 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total trading account securities |
$ | | $ | 132,738 | $ | 8,857 | $ | 141,595 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Mortgage servicing rights |
$ | | $ | | $ | 206,357 | $ | 206,357 | ||||||||
Derivatives |
| 21,716 | | 21,716 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total assets measured at fair value on a recurring basis |
$ | 310 | $ | 5,737,777 | $ | 216,659 | $ | 5,954,746 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Liabilities |
||||||||||||||||
Derivatives |
$ | | $ | (18,430 | ) | $ | | $ | (18,430 | ) | ||||||
Contingent consideration |
| | (124,837 | ) | (124,837 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total liabilities measured at fair value on a recurring basis |
$ | | $ | (18,430 | ) | $ | (124,837 | ) | $ | (143,267 | ) | |||||
|
|
|
|
|
|
|
|
106
At December 31, 2014 |
||||||||||||||||
(In thousands) |
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
RECURRING FAIR VALUE MEASUREMENTS |
||||||||||||||||
Assets |
||||||||||||||||
Investment securities available-for-sale: |
||||||||||||||||
U.S. Treasury securities |
$ | | $ | 700,154 | $ | | $ | 700,154 | ||||||||
Obligations of U.S. Government sponsored entities |
| 1,724,973 | | 1,724,973 | ||||||||||||
Obligations of Puerto Rico, States and political subdivisions |
| 61,712 | | 61,712 | ||||||||||||
Collateralized mortgage obligations - federal agencies |
| 1,910,030 | | 1,910,030 | ||||||||||||
Mortgage-backed securities |
| 903,037 | 1,325 | 904,362 | ||||||||||||
Equity securities |
323 | 2,299 | | 2,622 | ||||||||||||
Other |
| 11,306 | | 11,306 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total investment securities available-for-sale |
$ | 323 | $ | 5,313,511 | $ | 1,325 | $ | 5,315,159 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Trading account securities, excluding derivatives: |
||||||||||||||||
Obligations of Puerto Rico, States and political subdivisions |
$ | | $ | 7,954 | $ | | $ | 7,954 | ||||||||
Collateralized mortgage obligations |
| 261 | 1,375 | 1,636 | ||||||||||||
Mortgage-backed securities - federal agencies |
| 104,463 | 6,229 | 110,692 | ||||||||||||
Other |
| 16,682 | 1,563 | 18,245 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total trading account securities |
$ | | $ | 129,360 | $ | 9,167 | $ | 138,527 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Mortgage servicing rights |
$ | | $ | | $ | 148,694 | $ | 148,694 | ||||||||
Derivatives |
| 25,362 | | 25,362 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total assets measured at fair value on a recurring basis |
$ | 323 | $ | 5,468,233 | $ | 159,186 | $ | 5,627,742 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Liabilities |
||||||||||||||||
Derivatives |
$ | | $ | (23,032 | ) | $ | | $ | (23,032 | ) | ||||||
Contingent consideration |
| | (133,634 | ) | (133,634 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total liabilities measured at fair value on a recurring basis |
$ | | $ | (23,032 | ) | $ | (133,634 | ) | $ | (156,666 | ) | |||||
|
|
|
|
|
|
|
|
The fair value information included in the following tables is not as of period end, but as of the date that the fair value measurement was recorded during the six month period ended June 30, 2015, and excludes nonrecurring fair value measurements of assets no longer held by the Corporation.
Six months ended June 30, 2015 |
||||||||||||||||||||
(In thousands) |
Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
NONRECURRING FAIR VALUE MEASUREMENTS |
||||||||||||||||||||
Assets |
Write- downs |
|||||||||||||||||||
Loans[1] |
$ | | $ | | $ | 156,607 | $ | 156,607 | $ | (80,643 | ) | |||||||||
Loans held-for-sale[2] |
| | 214 | 214 | (35 | ) | ||||||||||||||
Other real estate owned[3] |
| 438 | 46,954 | 47,392 | (36,909 | ) | ||||||||||||||
Other foreclosed assets[3] |
| | 73 | 73 | (799 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total assets measured at fair value on a nonrecurring basis |
$ | | $ | 438 | $ | 203,848 | $ | 204,286 | $ | (118,386 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
107
[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. |
Six months ended June 30, 2014 |
||||||||||||||||||||
(In thousands) |
Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
NONRECURRING FAIR VALUE MEASUREMENTS |
||||||||||||||||||||
Assets |
Write-downs | |||||||||||||||||||
Loans[1] |
$ | | $ | | $ | 77,279 | $ | 77,279 | $ | (18,232 | ) | |||||||||
Loans held-for-sale[2] |
| | | | (38 | ) | ||||||||||||||
Other real estate owned[3] |
| 4,200 | 35,959 | 40,159 | (14,276 | ) | ||||||||||||||
Other foreclosed assets[3] |
| | 817 | 817 | (733 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total assets measured at fair value on a nonrecurring basis |
$ | | $ | 4,200 | $ | 114,055 | $ | 118,255 | $ | (33,279 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
[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 and six months ended June 30, 2015 and 2014.
Quarter ended June 30, 2015 |
||||||||||||||||||||||||||||||||
(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 March 31, 2015 |
$ | 1,435 | $ | 1,242 | $ | 6,221 | $ | 1,544 | $ | 149,024 | $ | 159,466 | $ | (129,470 | ) | $ | (129,470 | ) | ||||||||||||||
Gains (losses) included in earnings |
| (2 | ) | (3 | ) | 75 | (1,917 | ) | (1,847 | ) | 3,671 | 3,671 | ||||||||||||||||||||
Gains (losses) included in OCI |
10 | | | | | 10 | | | ||||||||||||||||||||||||
Additions |
| 37 | 128 | | 59,312 | 59,477 | 962 | 962 | ||||||||||||||||||||||||
Settlements |
| (85 | ) | (300 | ) | | (62 | ) | (447 | ) | | | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Balance at June 30, 2015 |
$ | 1,445 | $ | 1,192 | $ | 6,046 | $ | 1,619 | $ | 206,357 | $ | 216,659 | $ | (124,837 | ) | $ | (124,837 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Changes in unrealized gains (losses) included in earnings relating to assets still held at June 30, 2015 |
$ | | $ | | $ | 6 | $ | 119 | $ | 2,570 | $ | 2,695 | $ | 3,671 | $ | 3,671 |
108
Six months ended June 30, 2015 |
||||||||||||||||||||||||||||||||
(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, 2015 |
$ | 1,325 | $ | 1,375 | $ | 6,229 | $ | 1,563 | $ | 148,694 | $ | 159,186 | $ | (133,634 | ) | $ | (133,634 | ) | ||||||||||||||
Gains (losses) included in earnings |
| (4 | ) | 14 | 56 | (6,846 | ) | (6,780 | ) | 7,835 | 7,835 | |||||||||||||||||||||
Gains (losses) included in OCI |
2 | | | | | 2 | | | ||||||||||||||||||||||||
Additions |
118 | 37 | 258 | | 64,571 | 64,984 | 962 | 962 | ||||||||||||||||||||||||
Sales |
| (44 | ) | (80 | ) | | | (124 | ) | | | |||||||||||||||||||||
Settlements |
| (172 | ) | (375 | ) | | (62 | ) | (609 | ) | | | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Balance at June 30, 2015 |
$ | 1,445 | $ | 1,192 | $ | 6,046 | $ | 1,619 | $ | 206,357 | $ | 216,659 | $ | (124,837 | ) | $ | (124,837 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Changes in unrealized gains (losses) included in earnings relating to assets still held at June 30, 2015 |
$ | | $ | (1 | ) | $ | 25 | $ | 142 | $ | 1,886 | $ | 2,052 | $ | 7,835 | $ | 7,835 |
Quarter ended June 30, 2014 |
||||||||||||||||||||||||||||||||
(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 March 31, 2014 |
$ | 6,379 | $ | 1,561 | $ | 8,301 | $ | 1,715 | $ | 156,529 | $ | 174,485 | $ | (126,345 | ) | $ | (126,345 | ) | ||||||||||||||
Gains (losses) included in earnings |
(1 | ) | (1 | ) | (75 | ) | (432 | ) | (7,740 | ) | (8,249 | ) | (1,206 | ) | (1,206 | ) | ||||||||||||||||
Gains (losses) included in OCI |
(39 | ) | | | | | (39 | ) | | | ||||||||||||||||||||||
Additions |
| | 500 | | 3,164 | 3,664 | | | ||||||||||||||||||||||||
Settlements |
(170 | ) | (66 | ) | (924 | ) | | (2 | ) | (1,162 | ) | | | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Balance at June 30, 2014 |
$ | 6,169 | $ | 1,494 | $ | 7,802 | $ | 1,283 | $ | 151,951 | $ | 168,699 | $ | (127,551 | ) | $ | (127,551 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Changes in unrealized gains (losses) included in earnings relating to assets still held at June 30, 2014 |
$ | | $ | (1 | ) | $ | (41 | ) | $ | (394 | ) | $ | (2,818 | ) | $ | (3,254 | ) | $ | (1,206 | ) | $ | (1,206 | ) |
Six months ended June 30, 2014 |
||||||||||||||||||||||||||||||||
(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, 2014 |
$ | 6,523 | $ | 1,423 | $ | 9,799 | $ | 1,929 | $ | 161,099 | $ | 180,773 | $ | (128,299 | ) | $ | (128,299 | ) | ||||||||||||||
Gains (losses) included in earnings |
(3 | ) | (11 | ) | (114 | ) | (646 | ) | (15,836 | ) | (16,610 | ) | (38 | ) | (38 | ) | ||||||||||||||||
Gains (losses) included in OCI |
(81 | ) | | | | | (81 | ) | | | ||||||||||||||||||||||
Additions |
| 263 | 651 | | 6,692 | 7,606 | | | ||||||||||||||||||||||||
Sales |
| | (1,109 | ) | | | (1,109 | ) | | | ||||||||||||||||||||||
Settlements |
(270 | ) | (181 | ) | (1,425 | ) | | (4 | ) | (1,880 | ) | 786 | 786 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Balance at June 30, 2014 |
$ | 6,169 | $ | 1,494 | $ | 7,802 | $ | 1,283 | $ | 151,951 | $ | 168,699 | $ | (127,551 | ) | $ | (127,551 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Changes in unrealized gains (losses) included in earnings relating to assets still held at June 30, 2014 |
$ | | $ | (8 | ) | $ | (65 | ) | $ | (530 | ) | $ | (5,842 | ) | $ | (6,445 | ) | $ | (38 | ) | $ | (38 | ) |
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 and six months ended June 30, 2015 and 2014.
109
Gains and losses (realized and unrealized) included in earnings for the quarter and six months ended June 30, 2015 and 2014 for Level 3 assets and liabilities included in the previous tables are reported in the consolidated statement of operations as follows:
Quarter ended June 30, 2015 | Six months ended June 30, 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 |
||||||||||||
FDIC loss share (expense) income |
$ | 3,671 | $ | 3,671 | $ | 7,835 | $ | 7,835 | ||||||||
Mortgage banking activities |
(1,917 | ) | 2,570 | (6,846 | ) | 1,886 | ||||||||||
Trading account profit (loss) |
70 | 125 | 66 | 166 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 1,824 | $ | 6,366 | $ | 1,055 | $ | 9,887 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Quarter ended June 30, 2014 | Six months ended June 30, 2014 | |||||||||||||||
(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 |
$ | (1 | ) | $ | | $ | (3 | ) | $ | | ||||||
FDIC loss share (expense) income |
(1,206 | ) | (1,206 | ) | (38 | ) | (38 | ) | ||||||||
Mortgage banking activities |
(7,740 | ) | (2,818 | ) | (15,836 | ) | (5,842 | ) | ||||||||
Trading account profit (loss) |
(508 | ) | (436 | ) | (771 | ) | (603 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | (9,455 | ) | $ | (4,460 | ) | $ | (16,648 | ) | $ | (6,483 | ) | ||||
|
|
|
|
|
|
|
|
The following table includes quantitative information about significant unobservable inputs used to derive the fair value of Level 3 instruments, excluding those instruments for which the unobservable inputs were not developed by the Corporation such as prices of prior transactions and/or unadjusted third-party pricing sources.
(In thousands) |
Fair value at June 30, 2015 |
Valuation technique |
Unobservable inputs |
Weighted average (range) | ||||||||
CMOs - trading |
$ | 1,192 | Discounted cash flow model | Weighted average life | 2.3 years (0.5 - 4.9 years) | |||||||
Yield | 4.0% (1.2% - 4.7%) | |||||||||||
Constant prepayment rate | 22.5% (18.0% - 23.9%) | |||||||||||
Other - trading |
$ | 710 | Discounted cash flow model | Weighted average life | 5.5 years | |||||||
Yield | 12.2% | |||||||||||
Constant prepayment rate | 10.8% | |||||||||||
Mortgage servicing rights |
$ | 206,357 | Discounted cash flow model | Prepayment speed | 7.4% (2.8% - 28.4 | |||||||
Weighted average life | 6.6 years (0.1 - 9.2 years) | |||||||||||
Discount rate | 11.1% (9.5% - 15.0%) | |||||||||||
Contingent consideration |
$ | (121,469 | ) | Discounted cash flow model | Credit loss rate on covered loans | 2.9% (0.0% - 100.0%) | ||||||
Risk premium component | ||||||||||||
of discount rate | 5.3% | |||||||||||
Loans held-in-portfolio |
$ | 105,956 | [1] | External appraisal | Haircut applied on external appraisals |
40.5% (25.0% - 45.0%) | ||||||
Other real estate owned |
$ | 42,191 | [2] | External appraisal | Haircut applied on external appraisals |
24.3% (12.0% - 45.0%) | ||||||
Other foreclosed assets |
$ | 73 | [3] | External appraisal | Haircut applied on external appraisals |
1.00% |
[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. |
[3] | Other foreclosed assets 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 Corporations 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 Corporations investment banking and broker-dealer unit utilizing internal
110
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 Corporations Corporate Treasury unit on a quarterly basis. In the case of Level 3 financial instruments which fair value is based on broker quotes, the Corporations 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 Corporations 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 Corporations Corporate Comptrollers 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 Corporations 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 Comptrollers unit. Significant variances in prepayment speeds are investigated by the Corporate Treasury unit. The Corporations 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.
111
Note 30 Fair value of financial instruments
The fair value of financial instruments is the amount at which an asset or obligation could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Fair value estimates are made at a specific point in time based on the type of financial instrument and relevant market information. Many of these estimates involve various assumptions and may vary significantly from amounts that could be realized in actual transactions.
The information about the estimated fair values of financial instruments presented hereunder excludes all nonfinancial instruments and certain other specific items.
For those financial instruments with no quoted market prices available, fair values have been estimated using present value calculations or other valuation techniques, as well as managements best judgment with respect to current economic conditions, including discount rates, estimates of future cash flows, and prepayment assumptions.
The fair values reflected herein have been determined based on the prevailing interest rate environment at June 30, 2015 and December 31, 2014, 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 Corporations fee generating businesses and anticipated future business activities, that is, they do not represent the Corporations value as a going concern. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Corporation.
Following is a description of the Corporations valuation methodologies and inputs used to estimate the fair values for each class of financial assets and liabilities not measured at fair value, but for which the fair value is disclosed. The disclosure requirements exclude certain financial instruments and all non-financial instruments. Accordingly, the aggregate fair value amounts of the financial instruments disclosed do not represent managements estimate of the underlying value of the Corporation. For a description of the valuation methodologies and inputs used to estimate the fair value for each class of financial assets and liabilities measured at fair value, refer to Note 29.
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 and corporate debt. Given that the fair value was based on quoted prices for similar instruments, foreign debt is classified as Level 2. The fair value of corporate debt, which is collateralized by municipal bonds of Puerto Rico, was internally derived from benchmark treasury notes and a credit spread based on comparable Puerto Rico government trades, similar securities, and/or recent issuances. Corporate debt is classified as Level 3. |
112
Other investment securities
| Federal Home Loan Bank capital stock: Federal Home Loan Bank (FHLB) capital stock represents an equity interest in the FHLB of New York. It does not have a readily determinable fair value because its ownership is restricted and it lacks a market. Since the excess stock is repurchased by the FHLB at its par value, the carrying amount of FHLB capital stock approximates fair value. Thus, these stocks are classified as Level 2. |
| Federal Reserve Bank capital stock: Federal Reserve Bank (FRB) capital stock represents an equity interest in the FRB of New York. It does not have a readily determinable fair value because its ownership is restricted and it lacks a market. Since the canceled stock is repurchased by the FRB for the amount of the cash subscription paid, the carrying amount of FRB capital stock approximates fair value. Thus, these stocks are classified as Level 2. |
| Trust preferred securities: 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, except for that of Popular Capital Trust III (Troubled Asset Relief Program) which is classified as Level 3. Refer to Note 22 for additional information on these trust preferred securities. |
| Other investments: Other investments include private equity method investments and Visa Class B common stock held by the Corporation. Since there are no observable market values, private equity method investments are classified as Level 3. The Visa Class B common stock was priced by applying the quoted price of Visa Class A common stock, net of a liquidity adjustment, to the as converted number of Class A common shares since these Class B common shares are restricted and not convertible to Class A common shares until pending litigation is resolved. Thus, these stocks are classified as Level 3. |
Loans held-for-sale
The fair value of certain impaired loans held-for-sale was based on a discounted cash flow model that assumes that no principal payments are received prior to the effective average maturity date, that the outstanding unpaid principal balance is reduced by a monthly net loss rate, and that the remaining unpaid principal balance is received as a lump sum principal payment at the effective average maturity date. The remaining unpaid principal balance expected to be received, which is based on the prior 12-month cash payment experience of these loans and their expected collateral recovery, was discounted using the interest rate currently offered to clients for the origination of comparable loans. These loans were classified as Level 3. As of June 30, 2015, no loans were valued under this methodology. 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.
113
FDIC loss share asset
Fair value of the FDIC loss share asset was estimated using projected net losses related to the loss sharing agreements, which are expected to be reimbursed by the FDIC. The projected net losses were discounted using the U.S. Government agency curve. The loss share asset is classified as Level 3.
Deposits
| Demand deposits: The fair value of demand deposits, which have no stated maturity, was calculated based on the amount payable on demand as of the respective dates. These demand deposits include non-interest bearing demand deposits, savings, NOW, and money market accounts. Thus, these deposits are classified as Level 2. |
| Time deposits: The fair value of time deposits was calculated based on the discounted value of contractual cash flows using interest rates being offered on time deposits with similar maturities. The non-performance risk was determined using internally-developed models that consider, where applicable, the collateral held, amounts insured, the remaining term, and the credit premium of the institution. For certain 5-year certificates of deposit in which customers may withdraw their money anytime with no penalties or charges, the fair value of these certificates of deposit incorporate an early cancellation estimate based on historical experience. Time deposits are classified as Level 2. |
Assets sold under agreements to repurchase
| Securities sold under agreements to repurchase (structured and non-structured): Securities sold under agreements to repurchase with short-term maturities approximate fair value because of the short-term nature of those instruments. Resell and repurchase agreements with long-term maturities were valued using discounted cash flows based on the three-month LIBOR. In determining the non-performance credit risk valuation adjustment, the collateralization levels of these long-term securities sold under agreements to repurchase were considered. In the case of callable structured repurchase agreements, the callable feature is not considered when determining the fair value of those repurchase agreements, since there is a remote possibility, based on forward rates, that the investor will call back these agreements before maturity since it is not expected that the interest rates would rise more than the specified interest rate of these agreements. Securities sold under agreements to repurchase (structured and non-structured) are classified as Level 2. |
Other short-term borrowings
The carrying amount of other short-term borrowings approximate fair value because of the short-term maturity of those instruments or because they carry interest rates which approximate market. Thus, these other short-term borrowings are classified as Level 2.
Notes payable
| FHLB advances: The fair value of FHLB advances was based on the discounted value of contractual cash flows over their contractual term. In determining the non-performance credit risk valuation adjustment, the collateralization levels of these advances were considered. These advances are classified as Level 2. |
| Medium-term notes: The fair value of publicly-traded medium-term notes was determined using recent trades of similar transactions. Publicly-traded medium-term notes are classified as Level 2. The fair value of non-publicly traded debt was based on remaining contractual cash outflows, discounted at a rate commensurate with the non-performance credit risk of the Corporation, which is subjective in nature. Non-publicly traded debt is classified as Level 3. |
| Junior subordinated deferrable interest debentures (related to trust preferred securities): The fair value of junior subordinated interest debentures was determined using recent trades of similar transactions. Thus, these junior subordinated deferrable interest debentures are classified as Level 2. |
| Junior subordinated deferrable interest debentures (Troubled Asset Relief Program): The fair value of junior subordinated deferrable interest debentures was based on the discounted value of contractual cash flows over their contractual term. The discount rate was based on the rate at which a similar security was priced in the open market. Thus, these junior subordinated deferrable interest debentures are classified as Level 3. |
| 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. |
114
Commitments to extend credit and letters of credit
Commitments to extend credit were valued using the fees currently charged to enter into similar agreements. For those commitments where a future stream of fees is charged, the fair value was estimated by discounting the projected cash flows of fees on commitments. Since the fair value of commitments to extend credit varies depending on the undrawn amount of the credit facility, fees are subject to constant change, and cash flows are dependent on the creditworthiness of borrowers, commitments to extend credit are classified as Level 3. The fair value of letters of credit was based on fees currently charged on similar agreements. Given that the fair value of letters of credit constantly vary due to fees being subject to constant change and whether the fees are received depends on the creditworthiness of the account parties, letters of credit are classified as Level 3.
The following tables present the carrying or notional amounts, as applicable, and estimated fair values for financial instruments with their corresponding level in the fair value hierarchy.
June 30, 2015 | ||||||||||||||||||||
(In thousands) |
Carrying amount |
Level 1 | Level 2 | Level 3 | Fair value | |||||||||||||||
Financial Assets: |
||||||||||||||||||||
Cash and due from banks |
$ | 557,248 | $ | 557,248 | $ | | $ | | $ | 557,248 | ||||||||||
Money market investments |
3,254,939 | 3,116,803 | 138,136 | | 3,254,939 | |||||||||||||||
Trading account securities, excluding derivatives[1] |
141,595 | | 132,738 | 8,857 | 141,595 | |||||||||||||||
Investment securities available-for-sale[1] |
5,585,078 | 310 | 5,583,323 | 1,445 | 5,585,078 | |||||||||||||||
Investment securities held-to-maturity: |
||||||||||||||||||||
Obligations of Puerto Rico, States and political subdivisions |
100,270 | | | 82,346 | 82,346 | |||||||||||||||
Collateralized mortgage obligation-federal agency |
91 | | | 96 | 96 | |||||||||||||||
Other |
1,500 | | 1,499 | | 1,499 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total investment securities held-to-maturity |
$ | 101,861 | $ | | $ | 1,499 | $ | 82,442 | $ | 83,941 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Other investment securities: |
||||||||||||||||||||
FHLB stock |
$ | 69,886 | $ | | $ | 69,886 | $ | | $ | 69,886 | ||||||||||
FRB stock |
80,510 | | 80,510 | | 80,510 | |||||||||||||||
Trust preferred securities |
13,197 | | 12,197 | 1,000 | 13,197 | |||||||||||||||
Other investments |
1,912 | | | 4,999 | 4,999 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total other investment securities |
$ | 165,505 | $ | | $ | 162,593 | $ | 5,999 | $ | 168,592 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Loans held-for-sale |
$ | 202,287 | $ | | $ | 1,143 | $ | 204,630 | $ | 205,773 | ||||||||||
Loans not covered under loss sharing agreement with the FDIC |
21,922,406 | | | 21,546,344 | 21,546,344 | |||||||||||||||
Loans covered under loss sharing agreements with the FDIC |
651,576 | | | 548,171 | 548,171 | |||||||||||||||
FDIC loss share asset |
392,947 | | | $ | 392,443 | 392,443 | ||||||||||||||
Mortgage servicing rights |
206,357 | | | 206,357 | 206,357 | |||||||||||||||
Derivatives |
21,716 | | 21,716 | | 21,716 |
115
June 30, 2015 | ||||||||||||||||||||
(In thousands) |
Carrying amount |
Level 1 | Level 2 | Level 3 | Fair value | |||||||||||||||
Financial Liabilities: |
||||||||||||||||||||
Deposits: |
||||||||||||||||||||
Demand deposits |
$ | 18,908,437 | $ | | $ | 18,908,437 | $ | | $ | 18,908,437 | ||||||||||
Time deposits |
8,842,257 | | 8,870,017 | | 8,870,017 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total deposits |
$ | 27,750,694 | $ | | $ | 27,778,454 | $ | | $ | 27,778,454 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Assets sold under agreements to repurchase: |
||||||||||||||||||||
Securities sold under agreements to repurchase |
$ | 1,121,244 | $ | | $ | 1,125,589 | $ | | $ | 1,125,589 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total assets sold under agreements to repurchase |
$ | 1,121,244 | $ | | $ | 1,125,589 | $ | | $ | 1,125,589 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Other short-term borrowings[2] |
$ | 101,200 | $ | | $ | 101,200 | $ | | $ | 101,200 | ||||||||||
Notes payable: |
||||||||||||||||||||
FHLB advances |
894,800 | | 910,480 | | 910,480 | |||||||||||||||
Unsecured senior debt securities |
450,000 | | 455,710 | | 455,710 | |||||||||||||||
Junior subordinated deferrable interest debentures (related to trust preferred securities) |
439,800 | | 369,894 | | 369,894 | |||||||||||||||
Others |
19,428 | | | 19,428 | 19,428 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total notes payable |
$ | 1,804,028 | $ | | $ | 1,736,084 | $ | 19,428 | $ | 1,755,512 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Derivatives |
$ | 18,430 | $ | | $ | 18,430 | $ | | $ | 18,430 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Contingent consideration |
$ | 124,837 | $ | | $ | | $ | 124,837 | $ | 124,837 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
(In thousands) |
Notional amount |
Level 1 | Level 2 | Level 3 | Fair value | |||||||||||||||
Commitments to extend credit |
$ | 7,108,912 | $ | | $ | | $ | 1,112 | $ | 1,112 | ||||||||||
Letters of credit |
51,115 | | | 978 | 978 |
[1] | Refer to Note 29 to the consolidated financial statements for the fair value by class of financial asset and its hierarchy level. |
[2] | Refer to Note 20 to the consolidated financial statements for the composition of short-term borrowings. |
December 31, 2014 | ||||||||||||||||||||
(In thousands) |
Carrying amount |
Level 1 | Level 2 | Level 3 | Fair value | |||||||||||||||
Financial Assets: |
||||||||||||||||||||
Cash and due from banks |
$ | 381,095 | $ | 381,095 | $ | | $ | | $ | 381,095 | ||||||||||
Money market investments |
1,822,386 | 1,671,477 | 150,909 | | 1,822,386 | |||||||||||||||
Trading account securities, excluding derivatives[1] |
138,527 | | 129,360 | 9,167 | 138,527 | |||||||||||||||
Investment securities available-for-sale[1] |
5,315,159 | 323 | 5,313,511 | 1,325 | 5,315,159 | |||||||||||||||
Investment securities held-to-maturity: |
||||||||||||||||||||
Obligations of Puerto Rico, States and political subdivisions |
101,573 | | | 92,597 | 92,597 | |||||||||||||||
Collateralized mortgage obligation-federal agency |
97 | | | 102 | 102 | |||||||||||||||
Other |
1,500 | | 1,500 | | 1,500 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total investment securities held-to-maturity |
$ | 103,170 | $ | | $ | 1,500 | $ | 92,699 | $ | 94,199 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Other investment securities: |
||||||||||||||||||||
FHLB stock |
$ | 66,773 | $ | | $ | 66,773 | $ | | $ | 66,773 | ||||||||||
FRB stock |
80,025 | | 80,025 | | 80,025 | |||||||||||||||
Trust preferred securities |
13,197 | | 12,197 | 1,000 | 13,197 | |||||||||||||||
Other investments |
1,911 | | | 5,028 | 5,028 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total other investment securities |
$ | 161,906 | $ | | $ | 158,995 | $ | 6,028 | $ | 165,023 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Loans held-for-sale |
$ | 106,104 | $ | | $ | 27,074 | $ | 87,862 | $ | 114,936 | ||||||||||
Loans not covered under loss sharing agreement with the FDIC |
18,884,732 | | | 18,079,609 | 18,079,609 | |||||||||||||||
Loans covered under loss sharing agreements with the FDIC |
2,460,589 | | | 2,947,909 | 2,947,909 | |||||||||||||||
FDIC loss share asset |
542,454 | | | 481,420 | 481,420 | |||||||||||||||
Mortgage servicing rights |
148,694 | | | 148,694 | 148,694 | |||||||||||||||
Derivatives |
25,362 | | 25,362 | | 25,362 |
116
December 31, 2014 | ||||||||||||||||||||
(In thousands) |
Carrying amount |
Level 1 | Level 2 | Level 3 | Fair value | |||||||||||||||
Financial Liabilities: |
||||||||||||||||||||
Deposits: |
||||||||||||||||||||
Demand deposits |
$ | 17,333,090 | $ | | $ | 17,333,090 | $ | | $ | 17,333,090 | ||||||||||
Time deposits |
7,474,445 | | 7,512,683 | | 7,512,683 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total deposits |
$ | 24,807,535 | $ | | $ | 24,845,773 | $ | | $ | 24,845,773 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Assets sold under agreements to repurchase: |
||||||||||||||||||||
Securities sold under agreements to repurchase |
$ | 1,271,657 | $ | | $ | 1,269,398 | $ | | $ | 1,269,398 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total assets sold under agreements to repurchase |
$ | 1,271,657 | $ | | $ | 1,269,398 | $ | | $ | 1,269,398 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Other short-term borrowings[2] |
$ | 21,200 | $ | | $ | 20,200 | $ | 1,000 | $ | 21,200 | ||||||||||
Notes payable: |
||||||||||||||||||||
FHLB advances |
802,198 | | 814,877 | | 814,877 | |||||||||||||||
Unsecured senior debt |
450,000 | | 460,530 | | 460,530 | |||||||||||||||
Junior subordinated deferrable interest debentures (related to trust preferred securities) |
439,800 | | 379,400 | | 379,400 | |||||||||||||||
Others |
19,830 | | | 19,830 | 19,830 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total notes payable |
$ | 1,711,828 | $ | | $ | 1,654,807 | $ | 19,830 | $ | 1,674,637 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Derivatives |
$ | 23,032 | $ | | $ | 23,032 | $ | | $ | 23,032 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Contingent consideration |
$ | 133,634 | $ | | $ | | $ | 133,634 | $ | 133,634 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
(In thousands) |
Notional amount |
Level 1 | Level 2 | Level 3 | Fair value | |||||||||||||||
Commitments to extend credit |
$ | 7,135,352 | $ | | $ | | $ | 1,716 | $ | 1,716 | ||||||||||
Letters of credit |
49,182 | | | 486 | 486 |
[1] | Refer to Note 29 to the consolidated financial statements for the fair value by class of financial asset and its hierarchy level. |
[2] | Refer to Note 20 to the consolidated financial statements for the composition of short-term borrowings. |
117
Note 31 Net income per common share
The following table sets forth the computation of net (loss) income per common share (EPS), basic and diluted, for the quarters and six months ended June 30, 2015 and 2014:
Quarter ended June 30, | Six months ended June 30, | |||||||||||||||
(In thousands, except per share information) |
2015 | 2014 | 2015 | 2014 | ||||||||||||
Net income (loss) from continuing operations |
$ | 597,437 | $ | (329,585 | ) | $ | 670,922 | $ | (263,081 | ) | ||||||
Net income (loss) from discontinued operations |
15 | (181,729 | ) | 1,356 | (161,824 | ) | ||||||||||
Preferred stock dividends |
(931 | ) | (931 | ) | (1,861 | ) | (1,862 | ) | ||||||||
Deemed dividend on preferred stock |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) applicable to common stock |
$ | 596,521 | $ | (512,245 | ) | $ | 670,417 | $ | (426,767 | ) | ||||||
|
|
|
|
|
|
|
|
|||||||||
Average common shares outstanding |
102,859,591 | 102,781,438 | 102,899,537 | 102,790,545 | ||||||||||||
Average potential dilutive common shares |
243,127 | | 213,743 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Average common shares outstanding - assuming dilution |
103,102,718 | 102,781,438 | 103,113,280 | 102,790,545 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Basic EPS from continuing operations |
$ | 5.80 | $ | (3.21 | ) | $ | 6.51 | $ | (2.58 | ) | ||||||
|
|
|
|
|
|
|
|
|||||||||
Basic EPS from discontinued operations |
$ | | $ | (1.77 | ) | $ | 0.01 | $ | (1.57 | ) | ||||||
|
|
|
|
|
|
|
|
|||||||||
Total Basic EPS |
$ | 5.80 | $ | (4.98 | ) | $ | 6.52 | $ | (4.15 | ) | ||||||
|
|
|
|
|
|
|
|
|||||||||
Diluted EPS from continuing operations |
$ | 5.79 | $ | (3.21 | ) | $ | 6.49 | $ | (2.58 | ) | ||||||
|
|
|
|
|
|
|
|
|||||||||
Diluted EPS from discontinued operations |
$ | | $ | (1.77 | ) | $ | 0.01 | $ | (1.57 | ) | ||||||
|
|
|
|
|
|
|
|
|||||||||
Total Diluted EPS |
$ | 5.79 | $ | (4.98 | ) | $ | 6.50 | $ | (4.15 | ) | ||||||
|
|
|
|
|
|
|
|
Potential common shares consist of common stock issuable under the assumed exercise of stock options, restricted stock and performance shares awards using the treasury stock method. This method assumes that the potential common shares are issued and the proceeds from exercise, in addition to the amount of compensation cost attributed to future services, are used to purchase common stock at the exercise date. The difference between the number of potential shares issued and the shares purchased is added as incremental shares to the actual number of shares outstanding to compute diluted earnings per share. Warrants, stock options, restricted stock and performance shares awards that result in lower potential shares issued than shares purchased under the treasury stock method are not included in the computation of dilutive earnings per share since their inclusion would have an antidilutive effect in earnings per common share.
For the quarter and six months ended June 30, 2015, there were no stock options outstanding (June 30, 2014 44,797 and 45,621).
118
The caption of other services fees in the consolidated statements of operations consists of the following major categories:
Quarters ended June 30, | Six months ended June 30, | |||||||||||||||
(In thousands) |
2015 | 2014 | 2015 | 2014 | ||||||||||||
Debit card fees |
$ | 11,995 | $ | 11,000 | $ | 23,120 | $ | 21,544 | ||||||||
Insurance fees |
13,606 | 12,406 | 25,647 | 24,125 | ||||||||||||
Credit card fees |
17,611 | 16,985 | 33,760 | 33,068 | ||||||||||||
Sale and administration of investment products |
6,601 | 7,456 | 12,531 | 13,913 | ||||||||||||
Trust fees |
4,914 | 4,566 | 9,516 | 9,029 | ||||||||||||
Other fees |
4,694 | 4,055 | 8,473 | 7,607 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total other services fees |
$ | 59,421 | $ | 56,468 | $ | 113,047 | $ | 109,286 | ||||||||
|
|
|
|
|
|
|
|
119
Note 33 FDIC loss share income (expense)
The caption of FDIC loss share income (expense) in the consolidated statements of operations consists of the following major categories:
Quarters ended June 30, | Six months ended June 30, | |||||||||||||||
(In thousands) |
2015 | 2014 | 2015 | 2014 | ||||||||||||
Amortization of loss share indemnification asset |
$ | (31,065 | ) | $ | (72,095 | ) | $ | (58,381 | ) | $ | (121,041 | ) | ||||
80% mirror accounting on credit impairment losses[1] |
7,647 | 10,372 | 15,893 | 25,462 | ||||||||||||
80% mirror accounting on reimbursable expenses |
42,730 | 11,085 | 64,275 | 23,830 | ||||||||||||
80% mirror accounting on recoveries on covered assets, including rental income on OREOs, subject to reimbursement to the FDIC |
(5,203 | ) | (3,557 | ) | (7,822 | ) | (7,949 | ) | ||||||||
Change in true-up payment obligation |
3,672 | (1,206 | ) | 7,836 | (38 | ) | ||||||||||
Other |
1,294 | 140 | 1,413 | 269 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total FDIC loss share (expense) income |
$ | 19,075 | $ | (55,261 | ) | $ | 23,214 | $ | (79,467 | ) | ||||||
|
|
|
|
|
|
|
|
[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. |
During the second quarter of 2014, the Corporation revised its analysis of expected cash flows which resulted in a net decrease in estimated credit losses, which was driven mainly by certain commercial loan pools. Though this had a positive impact on the Corporations interest accretion in future periods, the carrying value of the indemnification asset was amortized to reflect lower levels of expected losses. The amortization of the FDIC loss share asset is recognized over the shorter of the remaining life of the loan pools, or the indemnification asset.
The negative amortization of the FDICs Indemnification Asset for the quarter ended June 30, 2015 included a $10.9 million expense related to losses incurred by the corporation that were not claimed to the FDIC before the expiration of the loss-share portion of the agreement on June 30, 2015, and that are not subject to the ongoing arbitrations.
120
Note 34 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 Quarters ended June 30, |
Benefit Restoration Plans Quarters ended June 30, |
|||||||||||||||
(In thousands) |
2015 | 2014 | 2015 | 2014 | ||||||||||||
Interest cost |
$ | 7,403 | $ | 7,461 | $ | 407 | $ | 415 | ||||||||
Expected return on plan assets |
(11,056 | ) | (11,630 | ) | (589 | ) | (606 | ) | ||||||||
Amortization of net loss |
4,465 | 2,018 | 311 | 108 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total net periodic pension cost (benefit) |
$ | 812 | $ | (2,151 | ) | $ | 129 | $ | (83 | ) | ||||||
|
|
|
|
|
|
|
|
|||||||||
Pension Plans Six months ended June 30, |
Benefit Restoration Plans Six months ended June 30, |
|||||||||||||||
(In thousands) |
2015 | 2014 | 2015 | 2014 | ||||||||||||
Interest Cost |
$ | 14,806 | $ | 14,922 | $ | 814 | $ | 829 | ||||||||
Expected return on plan assets |
(22,112 | ) | (23,261 | ) | (1,178 | ) | (1,211 | ) | ||||||||
Amortization of net loss |
8,930 | 4,036 | 622 | 216 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total net periodic pension cost (benefit) |
$ | 1,624 | $ | (4,303 | ) | $ | 258 | $ | (166 | ) | ||||||
|
|
|
|
|
|
|
|
During the quarter ended June 30, 2015 the Corporation made a contribution to the benefit restoration plans of $43 thousand. The total contributions expected to be paid during the year 2015 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.
Postretirement Benefit Plan | ||||||||||||||||
Quarters ended June 30, | Six months ended June 30, | |||||||||||||||
(In thousands) |
2015 | 2014 | 2015 | 2014 | ||||||||||||
Service cost |
$ | 368 | $ | 364 | $ | 735 | $ | 729 | ||||||||
Interest cost |
1,589 | 1,712 | 3,178 | 3,423 | ||||||||||||
Amortization of prior service cost |
(950 | ) | (950 | ) | (1,900 | ) | (1,900 | ) | ||||||||
Amortization of net loss |
249 | | 498 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total net periodic postretirement benefit cost |
$ | 1,256 | $ | 1,126 | $ | 2,511 | $ | 2,252 | ||||||||
|
|
|
|
|
|
|
|
Contributions made to the postretirement benefit plan for the quarter ended June 30, 2015 amounted to approximately $1.6 million. The total contributions expected to be paid during the year 2015 for the postretirement benefit plan amount to approximately $5.8 million.
121
Note 35 Stock-based compensation
The Corporation maintained a Stock Option Plan (the Stock Option Plan), which permitted the granting of incentive awards in the form of qualified stock options, incentive stock options, or non-statutory stock options of the Corporation. In April 2004, the Corporations shareholders adopted the Popular, Inc. 2004 Omnibus Incentive Plan (the Incentive Plan), which replaced and superseded the Stock Option Plan. The adoption of the Incentive Plan did not alter the original terms of the grants made under the Stock Option Plan prior to the adoption of the Incentive Plan.
Stock Option Plan
Employees and directors of the Corporation or any of its subsidiaries were eligible to participate in the Stock Option Plan. The Board of Directors or the Compensation Committee of the Board had the absolute discretion to determine the individuals that were eligible to participate in the Stock Option Plan. This plan provided for the issuance of Popular, Inc.s common stock at a price equal to its fair market value at the grant date, subject to certain plan provisions. The shares are to be made available from authorized but unissued shares of common stock or treasury stock. The Corporations policy has been to use authorized but unissued shares of common stock to cover each grant. The maximum option term is ten years from the date of grant. Unless an option agreement provides otherwise, all options granted are 20% exercisable after the first year and an additional 20% is exercisable after each subsequent year, subject to an acceleration clause at termination of employment due to retirement.
There was no intrinsic value of options outstanding and exercisable at June 30, 2015 and 2014. As of June 30, 2015 all options outstanding expired.
The following table summarizes the stock option activity and related information:
(Not in thousands) |
Options Outstanding | Weighted-Average Exercise Price |
||||||
Outstanding at December 31, 2013 |
100,437 | $ | 253.64 | |||||
Granted |
| | ||||||
Exercised |
| | ||||||
Forfeited |
| | ||||||
Expired |
(55,640 | ) | 238.85 | |||||
|
|
|
|
|||||
Outstanding at December 31, 2014 |
44,797 | $ | 272.00 | |||||
Granted |
| | ||||||
Exercised |
| | ||||||
Forfeited |
| | ||||||
Expired |
(44,797 | ) | 272.00 | |||||
|
|
|
|
|||||
Outstanding at June 30, 2015 |
| $ | | |||||
|
|
|
|
There was no stock option expense recognized for the quarters and six months ended June 30, 2015 and 2014.
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
122
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 2014 and thereafter 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 attaining 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.
The following table summarizes the restricted stock and performance shares activity under the Incentive Plan for members of management.
(Not in thousands) |
Incentive Plan Stock | Weighted-Average Grant Date Fair Value |
||||||
Non-vested at December 31, 2013 |
585,247 | $ | 21.16 | |||||
Granted |
365,831 | 29.86 | ||||||
Vested |
(311,078 | ) | 19.02 | |||||
Forfeited |
(11,991 | ) | 29.33 | |||||
|
|
|
|
|||||
Non-vested at December 31, 2014 |
628,009 | $ | 27.13 | |||||
Granted |
323,814 | 33.37 | ||||||
Vested |
(361,350 | ) | 30.40 | |||||
Forfeited |
(24,208 | ) | 28.53 | |||||
|
|
|
|
|||||
Non-vested at June 30, 2015 |
566,265 | $ | 28.56 | |||||
|
|
|
|
During the quarter ended June 30, 2015, 231,830 shares of restricted stock (June 30, 2014 - 129,329) were awarded to management under the Incentive Plan. For the six-month period ended June 30, 2015, 231,830 shares of restricted stock (June 30, 2014 235,112) were awarded to management under the Incentive Plan, from which no shares (June 30, 2014 162,332) were awarded to management consistent with the requirements of the TARP Interim Final Rule.
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 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 and six-month period ended June 30, 2015, 91,984 performance shares have been granted under this plan.
During the quarter ended June 30, 2015, the Corporation recognized $ 5.5 million of restricted stock expense related to management incentive awards, with a tax benefit of $ 0.8 million (June 30, 2014 - $ 1.7 million, with a tax benefit of $ 0.3 million). For the six-month period ended June 30, 2015, the Corporation recognized $ 7.4 million of restricted stock expense related to management incentive awards, with a tax benefit of $ 1.1 million (June 30, 2014 - $ 3.0 million, with a tax benefit of $ 0.5 million). For the six-month period ended June 30, 2015, the fair market value of the restricted stock vested was $5.3 million at grant date and $6.4 million at vesting date. This triggers a windfall, net of shortfalls, of $0.4 million of which $0.2 million was recorded as a windfall pool in additional paid in capital. No windfall pool was recorded for the remaining $0.2 million due to the valuation allowance of the deferred tax asset. During the quarter and six month period ended June 30, 2015, the Corporation recognized $2.0 million of
123
performance shares expense, with a tax benefit of $0.2 million. The total unrecognized compensation cost related to non-vested restricted stock awards and performance shares to members of management at June 30, 2015 was $ 10.9 million and is expected to be recognized over a weighted-average period of 2.1 years.
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, 2013 |
| $ | | |||||
Granted |
23,135 | 30.43 | ||||||
Vested |
(23,135 | ) | 30.43 | |||||
Forfeited |
| | ||||||
|
|
|
|
|||||
Non-vested at December 31, 2014 |
| $ | | |||||
Granted |
18,029 | 32.78 | ||||||
Vested |
(18,029 | ) | 32.78 | |||||
Forfeited |
| | ||||||
|
|
|
|
|||||
Non-vested at June 30, 2015 |
| $ | | |||||
|
|
|
|
During the quarter ended June 30, 2015, the Corporation granted 15,386 shares of restricted stock to members of the Board of Directors of Popular, Inc., which became vested at grant date (June 30, 2014 15,648). During this period, the Corporation recognized $0.1 million of restricted stock expense related to these restricted stock grants, with a tax benefit of $18 thousand (June 30, 2014 - $0.1 million, with a tax benefit of $15 thousand). For the six-month period ended June 30, 2015, the Corporation granted 18,029 shares of restricted stock to members of the Board of Directors of Popular, Inc., which became vested at grant date (June 30, 2014 18,733). During this period, the Corporation recognized $0.3 million of restricted stock expense related to these restricted stock grants, with a tax benefit of $34 thousand (June 30, 2014 - $0.3 million, with a tax benefit of $29 thousand). The fair value at vesting date of the restricted stock vested during the six months ended June 30, 2015 for directors was $ 0.6 million.
124
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 | ||||||||||||||||
June 30, 2015 | June 30, 2014 | |||||||||||||||
(In thousands) |
Amount | % of pre-tax income |
Amount | % of pre-tax income |
||||||||||||
Computed income tax expense at statutory rates |
$ | 24,923 | 39 | % | $ | (130,147 | ) | 39 | % | |||||||
Net benefit of tax exempt interest income |
(13,590 | ) | (21 | ) | (13,558 | ) | 4 | |||||||||
Deferred tax asset valuation allowance |
(542,706 | ) | (849 | ) | (7,211 | ) | 2 | |||||||||
Non-deductible expenses |
| | 169,810 | (50 | ) | |||||||||||
Difference in tax rates due to multiple jurisdictions |
(3,094 | ) | (5 | ) | (4,293 | ) | 1 | |||||||||
Effect of income subject to preferential tax rate[1] |
593 | 1 | (20,833 | ) | 6 | |||||||||||
Others |
341 | 1 | 2,108 | (1 | ) | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income tax (benefit) expense |
$ | (533,533 | ) | (834 | )% | $ | (4,124 | ) | 1 | % | ||||||
|
|
|
|
|
|
|
|
[1] | For 2014, includes the impact of the Closing Agreement with the P.R. Treasury signed in June 2014. |
Six months ended | ||||||||||||||||
June 30, 2015 | June 30, 2014 | |||||||||||||||
(In thousands) |
Amount | % of pre-tax income |
Amount | % of pre-tax income |
||||||||||||
Computed income tax (benefit) expense at statutory rates |
$ | 66,283 | 39 | % | $ | (95,138 | ) | 39 | % | |||||||
Net benefit of tax exempt interest income |
(27,283 | ) | (16 | ) | (24,944 | ) | 10 | |||||||||
Deferred tax asset valuation allowance |
(537,067 | ) | (316 | ) | (14,183 | ) | 6 | |||||||||
Non-deductible expenses |
| | 178,129 | (73 | ) | |||||||||||
Difference in tax rates due to multiple jurisdictions |
(4,703 | ) | (3 | ) | (10,488 | ) | 4 | |||||||||
Effect of income subject to preferential tax rate[1] |
(1,878 | ) | (1 | ) | (18,555 | ) | 8 | |||||||||
Others |
3,684 | 2 | 4,319 | (2 | ) | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income tax (benefit) expense |
$ | (500,964 | ) | (295 | )% | $ | 19,140 | (8 | )% | |||||||
|
|
|
|
|
|
|
|
[1] | For 2014, includes the impact of the Closing Agreement with the P.R. Treasury signed in June 2014. |
Income tax benefit amounted to $533.5 million for the quarter ended June 30, 2015, compared with an income tax benefit of $4.1 million for the same quarter of 2014. During the second quarter of 2015, the Corporation recorded a partial reversal of the valuation allowance on the deferred tax asset from the U.S. operations amounting to $544.9 million. During the second quarter of 2014 the Corporation recorded a tax benefit of $23.4 million as a result of a closing agreement entered into the Corporation and the Puerto Rico Department of the Treasury. The closing agreement among other matters was related to the income tax treatment of certain charge-offs related to the loans acquired from Westernbank as part of the FDIC assisted transaction in the year 2010.
Income tax benefit amounted to $501.0 million for the six months ended June 30, 2015, compared with an income tax expense of $19.1 million for the same quarter of 2014.
125
The following table presents a breakdown of the significant components of the Corporations deferred tax assets and liabilities.
(In thousands) |
June 30, 2015 | December 31, 2014 | ||||||
Deferred tax assets: |
||||||||
Tax credits available for carryforward |
$ | 12,508 | $ | 12,056 | ||||
Net operating loss and other carryforward available |
1,263,589 | 1,261,413 | ||||||
Postretirement and pension benefits |
109,451 | 111,677 | ||||||
Deferred loan origination fees |
7,543 | 7,720 | ||||||
Allowance for loan losses |
694,981 | 710,666 | ||||||
Deferred gains |
6,735 | 7,500 | ||||||
Accelerated depreciation |
7,530 | 7,915 | ||||||
Intercompany deferred gains |
2,892 | 2,988 | ||||||
Other temporary differences |
27,165 | 27,755 | ||||||
|
|
|
|
|||||
Total gross deferred tax assets |
2,132,394 | 2,149,690 | ||||||
|
|
|
|
|||||
Deferred tax liabilities: |
||||||||
Differences between the assigned values and the tax basis of assets and liabilities recognized in purchase business combinations |
42,241 | 37,804 | ||||||
FDIC-assisted transaction |
84,876 | 81,335 | ||||||
Unrealized net gain on trading and available-for-sale securities |
24,754 | 20,817 | ||||||
Other temporary differences |
22,696 | 18,093 | ||||||
|
|
|
|
|||||
Total gross deferred tax liabilities |
174,567 | 158,049 | ||||||
|
|
|
|
|||||
Valuation allowance |
672,391 | 1,212,748 | ||||||
|
|
|
|
|||||
Net deferred tax asset |
$ | 1,285,436 | $ | 778,893 | ||||
|
|
|
|
The net deferred tax asset shown in the table above at June 30, 2015 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, 2014 - $813 million) and $649 thousand in deferred tax liabilities in the Other liabilities caption (December 31, 2014 - $34 million), reflecting the aggregate deferred tax assets or liabilities of individual tax-paying subsidiaries of the Corporation.
A deferred tax asset should be reduced by a valuation allowance if based on the weight of all available evidence, it is more likely than not (a likelihood of more than 50%) that some portion or the entire deferred tax asset will not be realized. The valuation allowance should be sufficient to reduce the deferred tax asset to the amount that is more likely than not to be realized. The determination of whether a deferred tax asset is realizable is based on weighting all available evidence, including both positive and negative evidence. The realization of deferred tax assets, including carryforwards and deductible temporary differences, depends upon the existence of sufficient taxable income of the same character during the carryback or carryforward period. The analysis considers all sources of taxable income available to realize the deferred tax asset, including the future reversal of existing taxable temporary differences, future taxable income exclusive of reversing temporary differences and carryforwards, taxable income in prior carryback years and tax-planning strategies.
During the quarter ended June 30, 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 June 30, 2015 the U.S. operations are not in a three year loss cumulative 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 any changes arises.
126
At June 30, 2015, the Corporations net deferred tax assets related to its Puerto Rico operations amounted to $776 million net of the valuation allowance of $28 million recorded in the Holding Company.
The Corporations Puerto Rico Banking operation is not in a cumulative loss position and has sustained profitability for the three year period ended June 30, 2015, exclusive of the loss generated on the sales of non performing assets that took place in 2013 which is not a continuing condition of the operations. 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 managements 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 position for the three year period ended June 30, 2015. However, after the payment of TARP, the interest expense that is paid on the $450 million subordinated notes which partially funded the repayment of TARP funds in 2014, bearing interest at 7%, is tax deductible contrary to the interest expense payable on the note issued to the U.S. Treasury under TARP. Based on this fact pattern the Holding Company is expecting to have losses for income tax purposes exclusive of reversing temporary differences. Since as required by ASC 740 the historical information should be supplemented by all currently available information about future years, 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.
The reconciliation of unrecognized tax benefits was as follows:
(In millions) |
2015 | 2014 | ||||||
Balance at January 1 |
$ | 8.0 | $ | 9.8 | ||||
Additions for tax positions - January through March |
0.3 | 0.3 | ||||||
Reduction as a result of settlements - January through March |
(0.5 | ) | | |||||
|
|
|
|
|||||
Balance at March 31 |
$ | 7.8 | $ | 10.1 | ||||
Additions for tax positions - April through June |
0.3 | 0.2 | ||||||
|
|
|
|
|||||
Balance at June 30 |
$ | 8.1 | $ | 10.3 | ||||
|
|
|
|
At June 30, 2015, the total amount of interest recognized in the statement of financial condition approximated $2.9 million (December 31, 2014 - $3.1 million). The total interest expense recognized at June 2015 was $325 thousand (December 31, 2014 - $540 thousand). Management determined that at June 30, 2015 and December 31, 2014 there was no need to accrue for the payment of penalties. The Corporations 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.
After consideration of the effect on U.S. federal tax of unrecognized U.S. state tax benefits, the total amount of unrecognized tax benefits, including U.S. and Puerto Rico, that if recognized, would affect the Corporations effective tax rate, was approximately $10.0 million at June 30, 2015 (December 31, 2014 - $9.8 million).
The amount of unrecognized tax benefits may increase or decrease in the future for various reasons including adding amounts for current tax year positions, expiration of open income tax returns due to the statutes of limitation, changes in managements judgment about the level of uncertainty, status of examinations, litigation and legislative activity and the addition or elimination of uncertain tax positions.
The Corporation and its subsidiaries file income tax returns in Puerto Rico, the U.S. federal jurisdiction, various U.S. states and political subdivisions, and foreign jurisdictions. At June 30, 2015, the following years remain subject to examination in the U.S. Federal jurisdiction: 2011 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 $5.8 million.
127
Note 37 Supplemental disclosure on the consolidated statements of cash flows
Additional disclosures on cash flow information and non-cash activities for the six months ended June 30, 2015 and June 30, 2014 are listed in the following table:
(In thousands) |
June 30, 2015 | June 30, 2014 | ||||||
Non-cash activities: |
||||||||
Loans transferred to other real estate |
$ | 67,199 | $ | 82,338 | ||||
Loans transferred to other property |
19,103 | 20,492 | ||||||
|
|
|
|
|||||
Total loans transferred to foreclosed assets |
86,302 | 102,830 | ||||||
Transfers from loans held-in-portfolio to loans held-for-sale |
61,290 | 1,868,420 | ||||||
Transfers from loans held-for-sale to loans held-in-portfolio |
8,523 | 3,245 | ||||||
Transfers from trading securities to available-for-sale securities |
5,523 | | ||||||
Loans securitized into investment securities[1] |
517,265 | 472,891 | ||||||
Trades receivable from brokers and counterparties[2] |
111,964 | 519,495 | ||||||
Trades payable to brokers and counterparties |
73,155 | 45,893 | ||||||
Recognition of mortgage servicing rights on securitizations or asset transfers |
7,302 | 6,692 |
[1] | Includes loans securitized into trading securities and subsequently sold before quarter end. |
[2] | Includes $441 million of trades receivable as of June 30, 2014, related to the issuance of $450 million in Senior Notes, which settled on July 1, 2014, net of debt issuance costs of $9 million. |
As previously disclosed in Note 5, Business Combination, on February 27, 2015, the Corporations Puerto Rico banking subsidiary, BPPR, in an alliance with co-bidders, including the Corporations U.S. mainland banking subsidiary, PCB, 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 net cash proceeds of approximately $ 738 million for consideration of the assets and liabilities acquired.
128
The Corporations 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 in the second quarter of 2014, and the assets and liabilities of these regions were subsequently sold during the third and fourth quarters of 2014.
As indicated in Note 5 to the consolidated financial statements, Business Combination, on February 27, 2015, Banco Popular de Puerto Rico, in an alliance with co-bidders, including BPNA, acquired certain assets and all deposits of Doral Bank from the FDIC as receiver. The financial results for the quarter and six months period ended on June 30, 2015 of both reportable segments include the results from the operations acquired as part of the Doral Bank Transaction.
Management determined the reportable segments based on the internal reporting used to evaluate performance and to assess where to allocate resources. The segments were determined based on the organizational structure, which focuses primarily on the markets the segments serve, as well as on the products and services offered by the segments.
Banco Popular de Puerto Rico:
Given that Banco Popular de Puerto Rico constitutes a significant portion of the Corporations results of operations and total assets at June 30, 2015, additional disclosures are provided for the business areas included in this reportable segment, as described below:
| Commercial banking represents the Corporations banking operations conducted at BPPR, which are targeted mainly to corporate, small and middle size businesses. It includes aspects of the lending and depository businesses, as well as other finance and advisory services. BPPR allocates funds across business areas based on duration matched transfer pricing at market rates. This area also incorporates income related with the investment of excess funds, as well as a proportionate share of the investment function of BPPR. |
| Consumer and retail banking represents the branch banking operations of BPPR which focus on retail clients. It includes the consumer lending business operations of BPPR, as well as the lending operations of Popular Auto and Popular Mortgage. Popular Auto focuses on auto and lease financing, while Popular Mortgage focuses principally 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 Americas reportable segment consists of the banking operations of BPNA, E-LOAN, Popular Equipment Finance, Inc. and Popular Insurance Agency, U.S.A. BPNA operates through a retail branch network in the U.S. mainland under the name of Popular Community Bank, while E-LOAN supports BPNAs deposit gathering through its online platform. All direct lending activities at E-LOAN were ceased during the fourth quarter of 2008. Popular Equipment Finance, Inc. also holds a running-off loan portfolio as this subsidiary ceased originating loans during 2009. Popular Insurance Agency, U.S.A. offers investment and insurance services across the BPNA branch network.
The Corporate group consists primarily of the holding companies: Popular, Inc., Popular North America, Popular International Bank and certain of the Corporations 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.
129
The tables that follow present the results of operations and total assets by reportable segments:
2015
For the quarter ended June 30, 2015 |
||||||||||||
(In thousands) |
Banco Popular de Puerto Rico |
Banco Popular North America |
Intersegment Eliminations |
|||||||||
Net interest income |
$ | 316,085 | $ | 61,932 | $ | | ||||||
Provision (reversal of provision) for loan losses |
76,068 | (61 | ) | | ||||||||
Non-interest income |
125,735 | 5,670 | 125 | |||||||||
Amortization of intangibles |
2,563 | 318 | | |||||||||
Depreciation expense |
10,103 | 1,746 | | |||||||||
Other operating expenses |
279,887 | 48,472 | | |||||||||
Income tax expense (benefit) |
17,312 | (543,833 | ) | | ||||||||
|
|
|
|
|
|
|||||||
Net income |
$ | 55,887 | $ | 560,960 | $ | 125 | ||||||
|
|
|
|
|
|
|||||||
Segment assets |
$ | 29,669,355 | $ | 7,458,709 | $ | (589,902 | ) | |||||
|
|
|
|
|
|
For the quarter ended June 30, 2015 |
||||||||||||||||
(In thousands) |
Reportable Segments |
Corporate | Eliminations | Total Popular, Inc. | ||||||||||||
Net interest income (expense) |
$ | 378,017 | $ | (15,464 | ) | $ | | $ | 362,553 | |||||||
Provision for loan losses |
76,007 | 227 | | 76,234 | ||||||||||||
Non-interest income |
131,530 | 10,483 | (1,254 | ) | 140,759 | |||||||||||
Amortization of intangibles |
2,881 | | | 2,881 | ||||||||||||
Depreciation expense |
11,849 | 181 | | 12,030 | ||||||||||||
Other operating expenses |
328,359 | 20,604 | (700 | ) | 348,263 | |||||||||||
Income tax benefit |
(526,521 | ) | (6,796 | ) | (216 | ) | (533,533 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) |
$ | 616,972 | $ | (19,197 | ) | $ | (338 | ) | $ | 597,437 | ||||||
|
|
|
|
|
|
|
|
|||||||||
Segment assets |
$ | 36,538,162 | $ | 4,909,006 | $ | (4,697,055 | ) | $ | 36,750,113 | |||||||
|
|
|
|
|
|
|
|
For the six months ended June 30, 2015 |
||||||||||||
(In thousands) |
Banco Popular de Puerto Rico |
Banco Popular North America |
Intersegment Eliminations |
|||||||||
Net interest income |
$ | 622,696 | $ | 114,033 | $ | | ||||||
Provision (reversal of provision) for loan losses |
118,305 | (2,263 | ) | | ||||||||
Non-interest income |
229,265 | 11,836 | 125 | |||||||||
Amortization of intangibles |
4,562 | 423 | | |||||||||
Depreciation expense |
20,211 | 3,363 | | |||||||||
Other operating expenses |
507,463 | 102,957 | | |||||||||
Income tax expense (benefit) |
54,761 | (542,896 | ) | | ||||||||
|
|
|
|
|
|
|||||||
Net income |
$ | 146,659 | $ | 564,285 | $ | 125 | ||||||
|
|
|
|
|
|
|||||||
Segment assets |
$ | 29,669,355 | $ | 7,458,709 | $ | (589,902 | ) | |||||
|
|
|
|
|
|
For the six months ended June 30, 2015 |
||||||||||||||||
(In thousands) |
Reportable Segments |
Corporate | Eliminations | Total Popular, Inc. | ||||||||||||
Net interest income (expense) |
$ | 736,729 | $ | (30,981 | ) | $ | | $ | 705,748 | |||||||
Provision for loan losses |
116,042 | 227 | | 116,269 | ||||||||||||
Non-interest income |
241,226 | 16,125 | (1,357 | ) | 255,994 | |||||||||||
Amortization of intangibles |
4,985 | | | 4,985 | ||||||||||||
Depreciation expense |
23,574 | 375 | | 23,949 | ||||||||||||
Other operating expenses |
610,420 | 37,592 | (1,431 | ) | 646,581 | |||||||||||
Income tax benefit |
(488,135 | ) | (12,858 | ) | 29 | (500,964 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) |
$ | 711,069 | $ | (40,192 | ) | $ | 45 | $ | 670,922 | |||||||
|
|
|
|
|
|
|
|
|||||||||
Segment assets |
$ | 36,538,162 | $ | 4,909,006 | (4,697,055 | ) | $ | 36,750,113 | ||||||||
|
|
|
|
|
|
|
|
130
2014
For the quarter ended June 30, 2014 |
||||||||||||
(In thousands) |
Banco Popular de Puerto Rico |
Banco Popular North America |
Intersegment Eliminations |
|||||||||
Net interest income |
$ | 334,079 | $ | 48,688 | $ | | ||||||
Provision (reversal of provision) for loan losses |
86,432 | (24,786 | ) | | ||||||||
Non-interest income |
38,505 | 18,187 | | |||||||||
Amortization of intangibles |
1,822 | 203 | | |||||||||
Depreciation expense |
9,824 | 1,663 | | |||||||||
Other operating expenses |
211,206 | 38,010 | | |||||||||
Income tax (benefit) expense |
(7,958 | ) | 846 | | ||||||||
|
|
|
|
|
|
|||||||
Net income |
$ | 71,258 | $ | 50,939 | $ | | ||||||
|
|
|
|
|
|
For the quarter ended June 30, 2014 |
||||||||||||||||
(In thousands) |
Reportable Segments |
Corporate | Eliminations | Total Popular, Inc. | ||||||||||||
Net interest income (expense) |
$ | 382,767 | $ | (442,148 | ) | $ | | $ | (59,381 | ) | ||||||
Provision for loan losses |
61,646 | 32 | | 61,678 | ||||||||||||
Non-interest income |
56,692 | 7,348 | (1,251 | ) | 62,789 | |||||||||||
Amortization of intangibles |
2,025 | | | 2,025 | ||||||||||||
Depreciation expense |
11,487 | 168 | | 11,655 | ||||||||||||
Other operating expenses |
249,216 | 13,226 | (683 | ) | 261,759 | |||||||||||
Income tax (benefit) expense |
(7,112 | ) | 3,209 | (221 | ) | (4,124 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) |
$ | 122,197 | $ | (451,435 | ) | $ | (347 | ) | $ | (329,585 | ) | |||||
|
|
|
|
|
|
|
|
For the six months ended June 30, 2014 |
||||||||||||
(In thousands) |
Banco Popular de Puerto Rico |
Banco Popular North America |
Intersegment Eliminations |
|||||||||
Net interest income |
$ | 661,949 | $ | 100,119 | $ | | ||||||
Provision (reversal of provision) for loan losses |
166,269 | (24,579 | ) | | ||||||||
Non-interest income |
106,594 | 28,789 | | |||||||||
Amortization of intangibles |
3,646 | 405 | | |||||||||
Depreciation expense |
19,322 | 3,384 | | |||||||||
Other operating expenses |
421,045 | 76,002 | | |||||||||
Income tax expense |
21,985 | 1,692 | | |||||||||
|
|
|
|
|
|
|||||||
Net income |
$ | 136,276 | $ | 72,004 | $ | | ||||||
|
|
|
|
|
|
For the six months ended June 30, 2014 |
||||||||||||||||
(In thousands) |
Reportable Segments |
Corporate | Eliminations | Total Popular, Inc. | ||||||||||||
Net interest income (expense) |
$ | 762,068 | $ | (470,278 | ) | $ | | $ | 291,790 | |||||||
Provision (reversal of provision) for loan losses |
141,690 | (176 | ) | | 141,514 | |||||||||||
Non-interest income |
135,383 | 24,756 | (1,318 | ) | 158,821 | |||||||||||
Amortization of intangibles |
4,051 | | | 4,051 | ||||||||||||
Depreciation expense |
22,706 | 325 | | 23,031 | ||||||||||||
Other operating expenses |
497,047 | 30,302 | (1,393 | ) | 525,956 | |||||||||||
Income tax expense (benefit) |
23,677 | (4,567 | ) | 30 | 19,140 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) |
$ | 208,280 | $ | (471,406 | ) | $ | 45 | $ | (263,081 | ) | ||||||
|
|
|
|
|
|
|
|
131
Additional disclosures with respect to the Banco Popular de Puerto Rico reportable segment are as follows:
2015
For the quarter ended June 30, 2015 |
||||||||||||||||||||
Banco Popular de Puerto Rico |
||||||||||||||||||||
(In thousands) |
Commercial Banking |
Consumer and Retail Banking |
Other Financial Services |
Eliminations | Total Banco Popular de Puerto Rico |
|||||||||||||||
Net interest income |
$ | 119,205 | $ | 194,737 | $ | 2,143 | $ | | $ | 316,085 | ||||||||||
Provision for loan losses |
66,792 | 9,276 | | | 76,068 | |||||||||||||||
Non-interest income |
35,992 | 66,436 | 23,407 | (100 | ) | 125,735 | ||||||||||||||
Amortization of intangibles |
(23 | ) | 1,912 | 674 | | 2,563 | ||||||||||||||
Depreciation expense |
4,703 | 5,104 | 296 | | 10,103 | |||||||||||||||
Other operating expenses |
101,717 | 160,871 | 17,399 | (100 | ) | 279,887 | ||||||||||||||
Income tax (benefit) expense |
(13,395 | ) | 27,530 | 3,177 | | 17,312 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net (loss) income |
$ | (4,597 | ) | $ | 56,480 | $ | 4,004 | $ | | $ | 55,887 | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Segment assets |
$ | 10,038,389 | $ | 19,853,299 | $ | 744,519 | $ | (966,852 | ) | $ | 29,669,355 | |||||||||
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30, 2015 |
||||||||||||||||||||
Banco Popular de Puerto Rico |
||||||||||||||||||||
(In thousands) |
Commercial Banking |
Consumer and Retail Banking |
Other Financial Services |
Eliminations | Total Banco Popular de Puerto Rico |
|||||||||||||||
Net interest income |
$ | 237,680 | $ | 380,989 | $ | 4,023 | $ | 4 | $ | 622,696 | ||||||||||
Provision for loan losses |
63,236 | 55,069 | | | 118,305 | |||||||||||||||
Non-interest income |
63,142 | 122,440 | 43,878 | (195 | ) | 229,265 | ||||||||||||||
Amortization of intangibles |
6 | 3,684 | 872 | | 4,562 | |||||||||||||||
Depreciation expense |
9,023 | 10,616 | 572 | | 20,211 | |||||||||||||||
Other operating expenses |
167,573 | 305,939 | 34,146 | (195 | ) | 507,463 | ||||||||||||||
Income tax expense |
12,658 | 37,308 | 4,795 | | 54,761 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income |
$ | 48,326 | $ | 90,813 | $ | 7,516 | $ | 4 | $ | 146,659 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Segment assets |
$ | 10,038,389 | $ | 19,853,299 | $ | 744,519 | $ | (966,852 | ) | $ | 29,669,355 | |||||||||
|
|
|
|
|
|
|
|
|
|
2014
For the quarter ended June 30, 2014 |
||||||||||||||||||||
Banco Popular de Puerto Rico |
||||||||||||||||||||
(In thousands) |
Commercial Banking |
Consumer and Retail Banking |
Other Financial Services |
Eliminations | Total Banco Popular de Puerto Rico |
|||||||||||||||
Net interest income |
$ | 139,906 | $ | 192,019 | $ | 2,154 | $ | | $ | 334,079 | ||||||||||
Provision for loan losses |
76,879 | 9,553 | | | 86,432 | |||||||||||||||
Non-interest (expense) income |
(14,141 | ) | 28,415 | 24,249 | (18 | ) | 38,505 | |||||||||||||
Amortization of intangibles |
1 | 1,709 | 112 | | 1,822 | |||||||||||||||
Depreciation expense |
4,124 | 5,418 | 282 | | 9,824 | |||||||||||||||
Other operating expenses |
58,326 | 136,619 | 16,279 | (18 | ) | 211,206 | ||||||||||||||
Income tax (benefit) expense |
(16,090 | ) | 4,774 | 3,358 | | (7,958 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income |
$ | 2,525 | $ | 62,361 | $ | 6,372 | $ | | $ | 71,258 | ||||||||||
|
|
|
|
|
|
|
|
|
|
132
For the six months ended June 30, 2014 |
||||||||||||||||||||
Banco Popular de Puerto Rico |
||||||||||||||||||||
(In thousands) |
Commercial Banking |
Consumer and Retail Banking |
Other Financial Services |
Eliminations | Total Banco Popular de Puerto Rico |
|||||||||||||||
Net interest income |
$ | 276,366 | $ | 380,696 | $ | 4,887 | $ | | $ | 661,949 | ||||||||||
Provision for loan losses |
108,068 | 58,201 | | | 166,269 | |||||||||||||||
Non-interest (expense) income |
(6,457 | ) | 66,394 | 46,693 | (36 | ) | 106,594 | |||||||||||||
Amortization of intangibles |
2 | 3,418 | 226 | | 3,646 | |||||||||||||||
Depreciation expense |
8,023 | 10,730 | 569 | | 19,322 | |||||||||||||||
Other operating expenses |
114,765 | 274,220 | 32,096 | (36 | ) | 421,045 | ||||||||||||||
Income tax expense |
1,918 | 13,602 | 6,465 | | 21,985 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income |
$ | 37,133 | $ | 86,919 | $ | 12,224 | $ | | $ | 136,276 | ||||||||||
|
|
|
|
|
|
|
|
|
|
Additional disclosures with respect to the Banco Popular North America reportable segments are as follows:
2015
For the quarter ended June 30, 2015 |
||||||||||||||||
Banco Popular North America |
||||||||||||||||
(In thousands) |
Banco Popular North America |
E-LOAN | Eliminations | Total Banco Popular North America |
||||||||||||
Net interest income |
$ | 61,277 | $ | 655 | $ | | $ | 61,932 | ||||||||
Provision (reversal for provision) for loan losses |
1,156 | (1,217 | ) | | (61 | ) | ||||||||||
Non-interest income (expense) |
5,711 | (41 | ) | | 5,670 | |||||||||||
Amortization of intangibles |
318 | | | 318 | ||||||||||||
Depreciation expense |
1,746 | | | 1,746 | ||||||||||||
Other operating expenses |
47,682 | 790 | | 48,472 | ||||||||||||
Income tax (benefit) |
(341,394 | ) | (202,439 | ) | | (543,833 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income |
$ | 357,480 | $ | 203,480 | $ | | $ | 560,960 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Segment assets |
$ | 7,975,328 | $ | 430,028 | $ | (946,647 | ) | $ | 7,458,709 | |||||||
|
|
|
|
|
|
|
|
|||||||||
For the six months ended June 30, 2015 |
||||||||||||||||
Banco Popular North America |
||||||||||||||||
(In thousands) |
Banco Popular North America |
E-LOAN | Eliminations | Total Banco Popular North America |
||||||||||||
Net interest income |
$ | 112,718 | $ | 1,315 | $ | | $ | 114,033 | ||||||||
Reversal of provision for loan losses |
(499 | ) | (1,764 | ) | | (2,263 | ) | |||||||||
Non-interest income |
11,523 | 313 | | 11,836 | ||||||||||||
Amortization of intangibles |
423 | | | 423 | ||||||||||||
Depreciation expense |
3,363 | | | 3,363 | ||||||||||||
Other operating expenses |
101,595 | 1,362 | | 102,957 | ||||||||||||
Income tax benefit |
(340,457 | ) | (202,439 | ) | | (542,896 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income |
$ | 359,816 | $ | 204,469 | $ | | $ | 564,285 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Segment assets |
$ | 7,975,328 | $ | 430,028 | $ | (946,647 | ) | $ | 7,458,709 | |||||||
|
|
|
|
|
|
|
|
133
2014
For the quarter ended June 30, 2014 |
||||||||||||||||
Banco Popular North America |
||||||||||||||||
(In thousands) |
Banco Popular North America |
E-LOAN | Eliminations | Total Banco Popular North America |
||||||||||||
Net interest income |
$ | 47,966 | $ | 722 | $ | | $ | 48,688 | ||||||||
Reversal of provision for loan losses |
(21,759 | ) | (3,027 | ) | | (24,786 | ) | |||||||||
Non-interest income |
16,772 | 1,415 | | 18,187 | ||||||||||||
Amortization of intangibles |
203 | | | 203 | ||||||||||||
Depreciation expense |
1,663 | | | 1,663 | ||||||||||||
Other operating expenses |
37,339 | 671 | | 38,010 | ||||||||||||
Income tax expense |
846 | | | 846 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income |
$ | 46,446 | $ | 4,493 | $ | | $ | 50,939 | ||||||||
|
|
|
|
|
|
|
|
For the six months ended June 30, 2014 |
||||||||||||||||
Banco Popular North America |
||||||||||||||||
(In thousands) |
Banco Popular North America |
E-LOAN | Eliminations | Total Banco Popular North America |
||||||||||||
Net interest income |
$ | 98,712 | $ | 1,407 | $ | | $ | 100,119 | ||||||||
Reversal of provision for loan losses |
(21,767 | ) | (2,812 | ) | | (24,579 | ) | |||||||||
Non-interest income |
27,265 | 1,524 | | 28,789 | ||||||||||||
Amortization of intangibles |
405 | | | 405 | ||||||||||||
Depreciation expense |
3,384 | | | 3,384 | ||||||||||||
Other operating expenses |
74,797 | 1,205 | | 76,002 | ||||||||||||
Income tax expense |
1,692 | | | 1,692 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income |
$ | 67,466 | $ | 4,538 | $ | | $ | 72,004 | ||||||||
|
|
|
|
|
|
|
|
Geographic Information
Quarter ended | Six months ended | |||||||||||||||
(in thousands) |
June 30, 2015 | June 30, 2014 | June 30, 2015 | June 30, 2014 | ||||||||||||
Revenues: |
||||||||||||||||
Puerto Rico |
$ | 415,972 | $ | (80,277 | ) | $ | 801,026 | $ | 276,760 | |||||||
United States |
67,235 | 64,992 | 123,945 | 127,475 | ||||||||||||
Other |
20,105 | 18,693 | 36,771 | 46,376 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total consolidated revenues |
$ | 503,312 | $ | 3,408 | $ | 961,742 | $ | 450,611 | ||||||||
|
|
|
|
|
|
|
|
[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. |
134
Selected Balance Sheet Information:
(In thousands) |
June 30, 2015 | December 31, 2014 | ||||||
Puerto Rico |
||||||||
Total assets |
$ | 28,299,519 | $ | 26,276,561 | ||||
Loans |
17,931,326 | 17,704,170 | ||||||
Deposits |
21,581,425 | 20,365,445 | ||||||
United States |
||||||||
Total assets |
$ | 7,322,694 | $ | 5,689,604 | ||||
Loans |
4,619,403 | 3,568,564 | ||||||
Deposits |
5,111,236 | 3,442,084 | ||||||
Other |
||||||||
Total assets |
$ | 1,127,900 | $ | 1,130,530 | ||||
Loans |
776,353 | 780,483 | ||||||
Deposits [1] |
1,058,033 | 1,000,006 |
[1] | Represents deposits from BPPR operations located in the U.S. and British Virgin Islands. |
135
Note 39 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 June 30, 2015 and December 31, 2014, and the results of their operations and cash flows for periods ended June 30, 2015 and 2014.
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 BPNAs 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.
A potential source of income for PIHC consists of dividends from BPPR and BPNA. Under existing federal banking regulations any dividend from BPPR or BPNA to the PIHC could be made if the total of all dividends declared by each entity during the calendar year would not exceed the total of its net income for that year, as defined by the Federal Reserve Board, combined with its retained net income for the preceding two years, less any required transfers to surplus or to a fund for the retirement of any preferred stock. At June 30, 2015, BPPR could have declared a dividend of approximately $448 million (December 31, 2014 - $542 million).
136
Condensed Consolidating Statement of Financial Condition (Unaudited)
At June 30, 2015 | ||||||||||||||||||||
(In thousands) |
Popular Inc. Holding Co. |
PNA Holding Co. |
All other subsidiaries and eliminations |
Elimination entries |
Popular, Inc. Consolidated |
|||||||||||||||
Assets: |
||||||||||||||||||||
Cash and due from banks |
$ | 26,593 | $ | 604 | $ | 557,141 | $ | (27,090 | ) | $ | 557,248 | |||||||||
Money market investments |
1,266 | 1,290 | 3,254,673 | (2,290 | ) | 3,254,939 | ||||||||||||||
Trading account securities, at fair value |
1,758 | | 139,837 | | 141,595 | |||||||||||||||
Investment securities available-for-sale, at fair value |
221 | | 5,584,857 | | 5,585,078 | |||||||||||||||
Investment securities held-to-maturity, at amortized cost |
| | 101,861 | | 101,861 | |||||||||||||||
Other investment securities, at lower of cost or realizable value |
9,850 | 4,492 | 151,163 | | 165,505 | |||||||||||||||
Investment in subsidiaries |
5,580,858 | 1,917,859 | | (7,498,717 | ) | | ||||||||||||||
Loans held-for-sale, at lower of cost or fair value |
| | 202,287 | | 202,287 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Loans held-in-portfolio: |
||||||||||||||||||||
Loans not covered under loss sharing agreements with the FDIC |
32,815 | 349 | 22,533,228 | (31,384 | ) | 22,535,008 | ||||||||||||||
Loans covered under loss sharing agreements with the FDIC |
| | 689,650 | | 689,650 | |||||||||||||||
Less - Unearned income |
| | 99,863 | | 99,863 | |||||||||||||||
Allowance for loan losses |
192 | | 550,621 | | 550,813 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total loans held-in-portfolio, net |
32,623 | 349 | 22,572,394 | (31,384 | ) | 22,573,982 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
FDIC loss share asset |
| | 392,947 | | 392,947 | |||||||||||||||
Premises and equipment, net |
2,812 | | 494,266 | | 497,078 | |||||||||||||||
Other real estate not covered under loss sharing agreements with the FDIC |
284 | | 141,971 | | 142,255 | |||||||||||||||
Other real estate covered under loss sharing agreements with the FDIC |
| | 33,504 | | 33,504 | |||||||||||||||
Accrued income receivable |
259 | 113 | 130,118 | (209 | ) | 130,281 | ||||||||||||||
Mortgage servicing assets, at fair value |
| | 206,357 | | 206,357 | |||||||||||||||
Other assets |
72,171 | 26,156 | 2,104,621 | (18,041 | ) | 2,184,907 | ||||||||||||||
Goodwill |
| | 505,436 | (1 | ) | 505,435 | ||||||||||||||
Other intangible assets |
554 | | 74,300 | | 74,854 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total assets |
$ | 5,729,249 | $ | 1,950,863 | $ | 36,647,733 | $ | (7,577,732 | ) | $ | 36,750,113 | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Liabilities and Stockholders Equity |
||||||||||||||||||||
Liabilities: |
||||||||||||||||||||
Deposits: |
||||||||||||||||||||
Non-interest bearing |
$ | | $ | | $ | 6,333,076 | $ | (27,090 | ) | $ | 6,305,986 | |||||||||
Interest bearing |
| | 21,446,998 | (2,290 | ) | 21,444,708 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total deposits |
| | 27,780,074 | (29,380 | ) | 27,750,694 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Federal funds purchased and assets sold under agreements to repurchase |
| | 1,121,244 | | 1,121,244 | |||||||||||||||
Other short-term borrowings |
| 15,384 | 117,200 | (31,384 | ) | 101,200 | ||||||||||||||
Notes payable |
740,812 | 148,988 | 914,228 | | 1,804,028 | |||||||||||||||
Other liabilities |
38,784 | 6,994 | 994,119 | (18,357 | ) | 1,021,540 | ||||||||||||||
Liabilities from discontinued operations |
| | 1,754 | | 1,754 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total liabilities |
779,596 | 171,366 | 30,928,619 | (79,121 | ) | 31,800,460 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Stockholders equity: |
||||||||||||||||||||
Preferred stock |
50,160 | | | | 50,160 | |||||||||||||||
Common stock |
1,037 | 2 | 56,307 | (56,309 | ) | 1,037 | ||||||||||||||
Surplus |
4,190,638 | 4,269,208 | 5,931,332 | (10,192,013 | ) | 4,199,165 | ||||||||||||||
Retained earnings (accumulated deficit) |
932,661 | (2,488,242 | ) | (50,246 | ) | 2,529,961 | 924,134 | |||||||||||||
Treasury stock, at cost |
(5,812 | ) | | | | (5,812 | ) | |||||||||||||
Accumulated other comprehensive loss, net of tax |
(219,031 | ) | (1,471 | ) | (218,279 | ) | 219,750 | (219,031 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total stockholders equity |
4,949,653 | 1,779,497 | 5,719,114 | (7,498,611 | ) | 4,949,653 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total liabilities and stockholders equity |
$ | 5,729,249 | $ | 1,950,863 | $ | 36,647,733 | $ | (7,577,732 | ) | $ | 36,750,113 | |||||||||
|
|
|
|
|
|
|
|
|
|
137
Condensed Consolidating Statement of Financial Condition (Unaudited)
At December 31, 2014 | ||||||||||||||||||||
(In thousands) |
Popular, Inc. Holding Co. |
PNA Holding Co. |
All other subsidiaries and eliminations |
Elimination entries |
Popular, Inc. Consolidated |
|||||||||||||||
Assets: |
||||||||||||||||||||
Cash and due from banks |
$ | 20,448 | $ | 608 | $ | 380,890 | $ | (20,851 | ) | $ | 381,095 | |||||||||
Money market investments |
19,747 | 357 | 1,803,639 | (1,357 | ) | 1,822,386 | ||||||||||||||
Trading account securities, at fair value |
1,640 | | 136,887 | | 138,527 | |||||||||||||||
Investment securities available-for-sale, at fair value |
231 | | 5,314,928 | | 5,315,159 | |||||||||||||||
Investment securities held-to-maturity, at amortized cost |
| | 103,170 | | 103,170 | |||||||||||||||
Other investment securities, at lower of cost or realizable value |
9,850 | 4,492 | 147,564 | | 161,906 | |||||||||||||||
Investment in subsidiaries |
4,878,866 | 1,353,616 | | (6,232,482 | ) | | ||||||||||||||
Loans held-for-sale, at lower of cost or fair value |
| | 106,104 | | 106,104 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Loans held-in-portfolio: |
||||||||||||||||||||
Loans not covered under loss sharing agreements with the FDIC |
55,486 | | 19,496,569 | (53,769 | ) | 19,498,286 | ||||||||||||||
Loans covered under loss sharing agreements with the FDIC |
| | 2,542,662 | | 2,542,662 | |||||||||||||||
Less - Unearned income |
| | 93,835 | | 93,835 | |||||||||||||||
Allowance for loan losses |
41 | | 601,751 | | 601,792 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total loans held-in-portfolio, net |
55,445 | | 21,343,645 | (53,769 | ) | 21,345,321 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
FDIC loss share asset |
| | 542,454 | | 542,454 | |||||||||||||||
Premises and equipment, net |
2,512 | | 492,069 | | 494,581 | |||||||||||||||
Other real estate not covered under loss sharing agreements with the FDIC |
90 | | 135,410 | | 135,500 | |||||||||||||||
Other real estate covered under loss sharing agreements with the FDIC |
| | 130,266 | | 130,266 | |||||||||||||||
Accrued income receivable |
75 | 112 | 121,657 | (26 | ) | 121,818 | ||||||||||||||
Mortgage servicing assets, at fair value |
| | 148,694 | | 148,694 | |||||||||||||||
Other assets |
67,962 | 26,514 | 1,570,094 | (18,127 | ) | 1,646,443 | ||||||||||||||
Goodwill |
| | 465,677 | (1 | ) | 465,676 | ||||||||||||||
Other intangible assets |
555 | | 37,040 | | 37,595 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total assets |
$ | 5,057,421 | $ | 1,385,699 | $ | 32,980,188 | $ | (6,326,613 | ) | $ | 33,096,695 | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Liabilities and Stockholders Equity |
||||||||||||||||||||
Liabilities: |
||||||||||||||||||||
Deposits: |
||||||||||||||||||||
Non-interest bearing |
$ | | $ | | $ | 5,804,599 | $ | (20,851 | ) | $ | 5,783,748 | |||||||||
Interest bearing |
| | 19,025,144 | (1,357 | ) | 19,023,787 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total deposits |
| | 24,829,743 | (22,208 | ) | 24,807,535 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Assets sold under agreements to repurchase |
| | 1,271,657 | | 1,271,657 | |||||||||||||||
Other short-term borrowings |
| 8,169 | 66,800 | (53,769 | ) | 21,200 | ||||||||||||||
Notes payable |
740,812 | 148,988 | 822,028 | | 1,711,828 | |||||||||||||||
Other liabilities |
49,226 | 6,872 | 974,147 | (18,216 | ) | 1,012,029 | ||||||||||||||
Liabilities from discontinued operations |
| | 5,064 | | 5,064 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total liabilities |
790,038 | 164,029 | 27,969,439 | (94,193 | ) | 28,829,313 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Stockholders equity: |
||||||||||||||||||||
Preferred stock |
50,160 | | | | 50,160 | |||||||||||||||
Common stock |
1,036 | 2 | 56,307 | (56,309 | ) | 1,036 | ||||||||||||||
Surplus |
4,187,931 | 4,269,208 | 5,931,161 | (10,191,842 | ) | 4,196,458 | ||||||||||||||
Retained earnings (accumulated deficit) |
262,244 | (3,043,476 | ) | (747,702 | ) | 3,782,651 | 253,717 | |||||||||||||
Treasury stock, at cost |
(4,116 | ) | | (1 | ) | | (4,117 | ) | ||||||||||||
Accumulated other comprehensive loss, net of tax |
(229,872 | ) | (4,064 | ) | (229,016 | ) | 233,080 | (229,872 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total stockholders equity |
4,267,383 | 1,221,670 | 5,010,749 | (6,232,420 | ) | 4,267,382 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total liabilities and stockholders equity |
$ | 5,057,421 | $ | 1,385,699 | $ | 32,980,188 | $ | (6,326,613 | ) | $ | 33,096,695 | |||||||||
|
|
|
|
|
|
|
|
|
|
138
Condensed Consolidating Statement of Operations (Unaudited)
Quarter ended June 30, 2015 | ||||||||||||||||||||
(In thousands) |
Popular, Inc. Holding Co. |
PNA Holding Co. |
All other subsidiaries and eliminations |
Elimination entries |
Popular, Inc. Consolidated |
|||||||||||||||
Interest income: |
||||||||||||||||||||
Dividend income from subsidiaries |
$ | 1,500 | $ | | $ | | $ | (1,500 | ) | $ | | |||||||||
Loans |
169 | 2 | 374,109 | (147 | ) | 374,133 | ||||||||||||||
Money market investments |
2 | 1 | 1,844 | (2 | ) | 1,845 | ||||||||||||||
Investment securities |
190 | 80 | 31,027 | | 31,297 | |||||||||||||||
Trading account securities |
| | 3,026 | | 3,026 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total interest income |
1,861 | 83 | 410,006 | (1,649 | ) | 410,301 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Interest expense: |
||||||||||||||||||||
Deposits |
| | 26,260 | (2 | ) | 26,258 | ||||||||||||||
Short-term borrowings |
| 127 | 1,883 | (147 | ) | 1,863 | ||||||||||||||
Long-term debt |
13,117 | 2,695 | 3,815 | | 19,627 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total interest expense |
13,117 | 2,822 | 31,958 | (149 | ) | 47,748 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net interest (expense) income |
(11,256 | ) | (2,739 | ) | 378,048 | (1,500 | ) | 362,553 | ||||||||||||
Provision for loan losses- non-covered loans |
227 | | 60,241 | | 60,468 | |||||||||||||||
Provision for loan losses- covered loans |
| | 15,766 | | 15,766 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net interest (expense) income after provision for loan losses |
(11,483 | ) | (2,739 | ) | 302,041 | (1,500 | ) | 286,319 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Service charges on deposit accounts |
| | 40,138 | | 40,138 | |||||||||||||||
Other service fees |
| | 60,661 | (1,240 | ) | 59,421 | ||||||||||||||
Mortgage banking activities |
| | 21,325 | | 21,325 | |||||||||||||||
Net gain and valuation adjustments on investment securities |
| | 5 | | 5 | |||||||||||||||
Other-than-temporary impairment losses on investment securities |
| | (14,445 | ) | | (14,445 | ) | |||||||||||||
Trading account loss |
(18 | ) | | (3,090 | ) | | (3,108 | ) | ||||||||||||
Net gain on sale of loans, including valuation adjustments on loans held-for-sale |
| | 681 | | 681 | |||||||||||||||
Adjustments (expense) to indemnity reserves on loans sold |
| | 419 | | 419 | |||||||||||||||
FDIC loss share income |
| | 19,075 | | 19,075 | |||||||||||||||
Other operating income |
3,423 | 524 | 13,315 | (14 | ) | 17,248 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total non-interest income |
3,405 | 524 | 138,084 | (1,254 | ) | 140,759 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Operating expenses: |
||||||||||||||||||||
Personnel costs |
14,470 | | 106,507 | | 120,977 | |||||||||||||||
Net occupancy expenses |
787 | | 22,499 | | 23,286 | |||||||||||||||
Equipment expenses |
472 | | 15,453 | | 15,925 | |||||||||||||||
Other taxes |
652 | | 10,461 | | 11,113 | |||||||||||||||
Professional fees |
2,323 | 32 | 76,154 | (60 | ) | 78,449 | ||||||||||||||
Communications |
108 | | 6,045 | | 6,153 | |||||||||||||||
Business promotion |
408 | | 13,368 | | 13,776 | |||||||||||||||
FDIC deposit insurance |
| | 8,542 | | 8,542 | |||||||||||||||
Other real estate owned (OREO) expenses |
| | 44,816 | | 44,816 | |||||||||||||||
Other operating expenses |
(15,184 | ) | 109 | 46,795 | (638 | ) | 31,082 | |||||||||||||
Amortization of intangibles |
| | 2,881 | | 2,881 | |||||||||||||||
Restructuring cost |
| | 6,174 | | 6,174 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total operating expenses |
4,036 | 141 | 359,695 | (698 | ) | 363,174 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
(Loss) income before income tax and equity in earnings of subsidiaries |
(12,114 | ) | (2,356 | ) | 80,430 | (2,056 | ) | 63,904 | ||||||||||||
Income tax benefit |
(47 | ) | | (533,270 | ) | (216 | ) | (533,533 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
(Loss) income before equity in earnings of subsidiaries |
(12,067 | ) | (2,356 | ) | 613,700 | (1,840 | ) | 597,437 | ||||||||||||
Equity in undistributed earnings of subsidiaries |
609,504 | 559,026 | | (1,168,530 | ) | | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income from continuing operations |
597,437 | 556,670 | 613,700 | (1,170,370 | ) | 597,437 | ||||||||||||||
Income from discontinued operations, net of tax |
| | 15 | | 15 | |||||||||||||||
Equity in undistributed income of discontinued operations |
15 | 15 | | (30 | ) | | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net Income |
$ | 597,452 | $ | 556,685 | $ | 613,715 | $ | (1,170,400 | ) | $ | 597,452 | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Comprehensive income, net of tax |
$ | 572,821 | $ | 545,987 | $ | 589,116 | $ | (1,135,103 | ) | $ | 572,821 | |||||||||
|
|
|
|
|
|
|
|
|
|
139
Condensed Consolidating Statement of Operations
Six months ended June 30, 2015 | ||||||||||||||||||||
(In thousands) |
Popular, Inc. Holding Co. |
PNA Holding Co. |
All other subsidiaries and eliminations |
Elimination entries |
Popular, Inc. Consolidated |
|||||||||||||||
Interest and dividend income: |
||||||||||||||||||||
Dividend income from subsidiaries |
$ | 3,000 | $ | | $ | | $ | (3,000 | ) | $ | | |||||||||
Loans |
309 | 2 | 729,722 | (269 | ) | 729,764 | ||||||||||||||
Money market investments |
4 | 3 | 3,288 | (4 | ) | 3,291 | ||||||||||||||
Investment securities |
333 | 161 | 61,104 | | 61,598 | |||||||||||||||
Trading account securities |
| | 5,722 | | 5,722 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total interest and dividend income |
3,646 | 166 | 799,836 | (3,273 | ) | 800,375 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Interest expense: |
||||||||||||||||||||
Deposits |
| | 52,126 | (4 | ) | 52,122 | ||||||||||||||
Short-term borrowings |
| 228 | 3,638 | (269 | ) | 3,597 | ||||||||||||||
Long-term debt |
26,235 | 5,390 | 7,283 | | 38,908 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total interest expense |
26,235 | 5,618 | 63,047 | (273 | ) | 94,627 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net interest (expense) income |
(22,589 | ) | (5,452 | ) | 736,789 | (3,000 | ) | 705,748 | ||||||||||||
Provision for loan losses- non-covered loans |
227 | | 89,952 | | 90,179 | |||||||||||||||
Provision for loan losses- covered loans |
| | 26,090 | | 26,090 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net interest (expense) income after provision for loan losses |
(22,816 | ) | (5,452 | ) | 620,747 | (3,000 | ) | 589,479 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Service charges on deposit accounts |
| | 79,155 | | 79,155 | |||||||||||||||
Other service fees |
| | 114,375 | (1,328 | ) | 113,047 | ||||||||||||||
Mortgage banking activities |
| | 34,177 | | 34,177 | |||||||||||||||
Net loss and valuation adjustments on investment securities |
| | 5 | | 5 | |||||||||||||||
Other-than-temporary impairment losses on investment securities |
| | (14,445 | ) | | (14,445 | ) | |||||||||||||
Trading account profit (loss) |
22 | | (2,716 | ) | | (2,694 | ) | |||||||||||||
Net gain on sale of loans, including valuation adjustments on loans held-for-sale |
| | 602 | | 602 | |||||||||||||||
Adjustments (expense) to indemnity reserves on loans sold |
| | (4,107 | ) | | (4,107 | ) | |||||||||||||
FDIC loss share expense |
| | 23,214 | | 23,214 | |||||||||||||||
Other operating income (loss) |
6,391 | (305 | ) | 20,984 | (30 | ) | 27,040 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total non-interest income (loss) |
6,413 | (305 | ) | 251,244 | (1,358 | ) | 255,994 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Operating expenses: |
||||||||||||||||||||
Personnel costs |
26,378 | | 211,057 | | 237,435 | |||||||||||||||
Net occupancy expenses |
1,767 | | 43,228 | | 44,995 | |||||||||||||||
Equipment expenses |
1,017 | | 28,319 | | 29,336 | |||||||||||||||
Other taxes |
(806 | ) | | 20,493 | | 19,687 | ||||||||||||||
Professional fees |
5,097 | 442 | 148,586 | (148 | ) | 153,977 | ||||||||||||||
Communications |
225 | | 12,104 | | 12,329 | |||||||||||||||
Business promotion |
844 | | 23,745 | | 24,589 | |||||||||||||||
FDIC deposit insurance |
| | 14,940 | | 14,940 | |||||||||||||||
Other real estate owned (OREO) expenses |
| | 67,885 | | 67,885 | |||||||||||||||
Other operating expenses |
(32,119 | ) | 218 | 81,614 | (1,283 | ) | 48,430 | |||||||||||||
Amortization of intangibles |
| | 4,985 | | 4,985 | |||||||||||||||
Restructuring costs |
| | 16,927 | | 16,927 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total operating expenses |
2,403 | 660 | 673,883 | (1,431 | ) | 675,515 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
(Loss) income before income tax and equity in earnings of subsidiaries |
(18,806 | ) | (6,417 | ) | 198,108 | (2,927 | ) | 169,958 | ||||||||||||
Income tax (benefit) expense |
| | (500,993 | ) | 29 | (500,964 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
(Loss) income before equity in earnings of subsidiaries |
(18,806 | ) | (6,417 | ) | 699,101 | (2,956 | ) | 670,922 | ||||||||||||
Equity in undistributed earnings of subsidiaries |
689,728 | 560,295 | | (1,250,023 | ) | | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income from continuing operations |
670,922 | 553,878 | 699,101 | (1,252,979 | ) | 670,922 | ||||||||||||||
Income from discontinued operations, net of tax |
| | 1,356 | | 1,356 | |||||||||||||||
Equity in undistributed earnings of discontinued operations |
1,356 | 1,356 | | (2,712 | ) | | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net Income |
$ | 672,278 | $ | 555,234 | $ | 700,457 | $ | (1,255,691 | ) | $ | 672,278 | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Comprehensive income, net of tax |
$ | 683,119 | $ | 557,827 | $ | 711,194 | $ | (1,269,021 | ) | $ | 683,119 | |||||||||
|
|
|
|
|
|
|
|
|
|
140
Condensed Consolidating Statement of Operations (Unaudited)
Quarter ended June 30, 2014 | ||||||||||||||||||||
(In thousands) |
Popular, Inc. Holding Co. |
PNA Holding Co. |
All other subsidiaries and eliminations |
Elimination entries |
Popular, Inc. Consolidated |
|||||||||||||||
Interest income: |
||||||||||||||||||||
Loans |
$ | 498 | $ | | $ | 380,966 | $ | (478 | ) | $ | 380,986 | |||||||||
Money market investments |
5 | 2 | 1,131 | (7 | ) | 1,131 | ||||||||||||||
Investment securities |
165 | 81 | 33,743 | | 33,989 | |||||||||||||||
Trading account securities |
| | 5,344 | | 5,344 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total interest income |
668 | 83 | 421,184 | (485 | ) | 421,450 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Interest expense: |
||||||||||||||||||||
Deposits |
| | 26,226 | (3 | ) | 26,223 | ||||||||||||||
Short-term borrowings |
| 89 | 9,285 | (482 | ) | 8,892 | ||||||||||||||
Long-term debt |
440,133 | 2,706 | 2,877 | | 445,716 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total interest expense |
440,133 | 2,795 | 38,388 | (485 | ) | 480,831 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net interest (expense) income |
(439,465 | ) | (2,712 | ) | 382,796 | | (59,381 | ) | ||||||||||||
Provision for loan losses- non-covered loans |
32 | | 50,042 | | 50,074 | |||||||||||||||
Provision for loan losses- covered loans |
| | 11,604 | | 11,604 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net interest (expense) income after provision for loan losses |
(439,497 | ) | (2,712 | ) | 321,150 | | (121,059 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Service charges on deposit accounts |
| | 39,237 | | 39,237 | |||||||||||||||
Other service fees |
| | 57,719 | (1,251 | ) | 56,468 | ||||||||||||||
Mortgage banking activities |
| | 3,788 | | 3,788 | |||||||||||||||
Trading account profit |
52 | | 1,003 | | 1,055 | |||||||||||||||
Net gain on sale of loans, including valuation adjustments on loans held-for-sale |
| | 9,659 | | 9,659 | |||||||||||||||
Adjustments (expense) to indemnity reserves on loans sold |
| | (7,454 | ) | | (7,454 | ) | |||||||||||||
FDIC loss share expense |
| | (55,261 | ) | | (55,261 | ) | |||||||||||||
Other operating income |
3,108 | (1,348 | ) | 13,537 | | 15,297 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total non-interest income (expense) |
3,160 | (1,348 | ) | 62,228 | (1,251 | ) | 62,789 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Operating expenses: |
||||||||||||||||||||
Personnel costs |
8,201 | | 90,899 | | 99,100 | |||||||||||||||
Net occupancy expenses |
1,013 | | 19,254 | | 20,267 | |||||||||||||||
Equipment expenses |
1,079 | | 10,965 | | 12,044 | |||||||||||||||
Other taxes |
176 | | 13,367 | | 13,543 | |||||||||||||||
Professional fees |
2,266 | (241 | ) | 65,053 | (54 | ) | 67,024 | |||||||||||||
Communications |
122 | | 6,303 | | 6,425 | |||||||||||||||
Business promotion |
439 | | 15,599 | | 16,038 | |||||||||||||||
FDIC deposit insurance |
| | 10,480 | | 10,480 | |||||||||||||||
Other real estate owned (OREO) expenses |
| | 3,410 | | 3,410 | |||||||||||||||
Other operating expenses |
(15,251 | ) | 108 | 36,280 | (628 | ) | 20,509 | |||||||||||||
Amortization of intangibles |
| | 2,025 | | 2,025 | |||||||||||||||
Restructuring cost |
| | 4,574 | | 4,574 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total operating expenses |
(1,955 | ) | (133 | ) | 278,209 | (682 | ) | 275,439 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
(Loss) income before income tax and equity in earnings of subsidiaries |
(434,382 | ) | (3,927 | ) | 105,169 | (569 | ) | (333,709 | ) | |||||||||||
Income tax (benefit) expense |
8,984 | | (12,887 | ) | (221 | ) | (4,124 | ) | ||||||||||||
(Loss) income before equity in earnings of subsidiaries |
(443,366 | ) | (3,927 | ) | 118,056 | (348 | ) | (329,585 | ) | |||||||||||
Equity in undistributed earnings of subsidiaries |
113,781 | 47,599 | | (161,380 | ) | | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
(Loss) Income from continuing operations |
(329,585 | ) | 43,672 | 118,056 | (161,728 | ) | (329,585 | ) | ||||||||||||
Loss from discontinued operations, net of tax |
| | (181,729 | ) | | (181,729 | ) | |||||||||||||
Equity in undistributed earnings of discontinued operations |
(181,729 | ) | (181,729 | ) | | 363,458 | | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net Loss |
$ | (511,314 | ) | $ | (138,057 | ) | $ | (63,673 | ) | $ | 201,730 | $ | (511,314 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Comprehensive loss, net of tax |
$ | (485,330 | ) | $ | (125,882 | ) | $ | (37,918 | ) | $ | 163,800 | $ | (485,330 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
141
Condensed Consolidating Statement of Operations
Six months ended June 30, 2014 | ||||||||||||||||||||
(In thousands) |
Popular, Inc. Holding Co. |
PNA Holding Co. |
All other subsidiaries and eliminations |
Elimination entries |
Popular, Inc. Consolidated |
|||||||||||||||
Interest and dividend income: |
||||||||||||||||||||
Loans |
$ | 1,060 | $ | | $ | 758,547 | $ | (1,019 | ) | $ | 758,588 | |||||||||
Money market investments |
12 | 5 | 2,103 | (16 | ) | 2,104 | ||||||||||||||
Investment securities |
331 | 161 | 68,624 | | 69,116 | |||||||||||||||
Trading account securities |
| | 10,601 | | 10,601 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total interest and dividend income |
1,403 | 166 | 839,875 | (1,035 | ) | 840,409 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Interest expense: |
||||||||||||||||||||
Deposits |
| | 53,086 | (5 | ) | 53,081 | ||||||||||||||
Short-term borrowings |
| 306 | 18,656 | (1,030 | ) | 17,932 | ||||||||||||||
Long-term debt |
466,187 | 5,413 | 6,006 | | 477,606 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total interest expense |
466,187 | 5,719 | 77,748 | (1,035 | ) | 548,619 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net interest (expense) income |
(464,784 | ) | (5,553 | ) | 762,127 | | 291,790 | |||||||||||||
Provision for loan losses- non-covered loans |
(176 | ) | | 104,372 | | 104,196 | ||||||||||||||
Provision for loan losses- covered loans |
| | 37,318 | | 37,318 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net interest (expense) income after provision for loan losses |
(464,608 | ) | (5,553 | ) | 620,437 | | 150,276 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Service charges on deposit accounts |
| | 78,596 | | 78,596 | |||||||||||||||
Other service fees |
| | 110,604 | (1,318 | ) | 109,286 | ||||||||||||||
Mortgage banking activities |
| | 7,466 | | 7,466 | |||||||||||||||
Trading account profit (loss) |
73 | | 2,959 | | 3,032 | |||||||||||||||
Net loss on sale of loans, including valuation adjustments on loans held-for-sale |
| | 14,052 | | 14,052 | |||||||||||||||
Adjustments (expense) to indemnity reserves on loans sold |
| | (17,801 | ) | | (17,801 | ) | |||||||||||||
FDIC loss share expense |
| | (79,467 | ) | | (79,467 | ) | |||||||||||||
Other operating income |
6,509 | (687 | ) | 37,835 | | 43,657 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total non-interest income |
6,582 | (687 | ) | 154,244 | (1,318 | ) | 158,821 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Operating expenses: |
||||||||||||||||||||
Personnel costs |
16,510 | | 186,891 | | 203,401 | |||||||||||||||
Net occupancy expenses |
1,945 | | 39,682 | | 41,627 | |||||||||||||||
Equipment expenses |
2,020 | | 21,436 | | 23,456 | |||||||||||||||
Other taxes |
360 | | 26,846 | | 27,206 | |||||||||||||||
Professional fees |
5,312 | 763 | 128,069 | (121 | ) | 134,023 | ||||||||||||||
Communications |
249 | | 12,861 | | 13,110 | |||||||||||||||
Business promotion |
850 | | 26,574 | | 27,424 | |||||||||||||||
FDIC deposit insurance |
| | 21,458 | | 21,458 | |||||||||||||||
Other real estate owned (OREO) expenses |
| | 9,850 | | 9,850 | |||||||||||||||
Other operating expenses |
(29,019 | ) | 217 | 72,931 | (1,271 | ) | 42,858 | |||||||||||||
Amortization of intangibles |
| | 4,051 | | 4,051 | |||||||||||||||
Restructuring cost |
| | 4,574 | | 4,574 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total operating expenses |
(1,773 | ) | 980 | 555,223 | (1,392 | ) | 553,038 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
(Loss) Income before income tax and equity in earnings of subsidiaries |
(456,253 | ) | (7,220 | ) | 219,458 | 74 | (243,941 | ) | ||||||||||||
Income tax expense (benefit) |
8,150 | | 10,960 | 30 | 19,140 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
(Loss) income before equity in earnings of subsidiaries |
(464,403 | ) | (7,220 | ) | 208,498 | 44 | (263,081 | ) | ||||||||||||
Equity in undistributed earnings of subsidiaries |
201,322 | 65,291 | | (266,613 | ) | | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
(Loss) Income from continuing operations |
(263,081 | ) | 58,071 | 208,498 | (266,569 | ) | (263,081 | ) | ||||||||||||
Loss from discontinued operations, net of tax |
| | (161,824 | ) | | (161,824 | ) | |||||||||||||
Equity in undistributed losses of discontinued operations |
(161,824 | ) | (161,824 | ) | | 323,648 | | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net (Loss) Income |
$ | (424,905 | ) | $ | (103,753 | ) | $ | 46,674 | $ | 57,079 | $ | (424,905 | ) | |||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Comprehensive (loss) income, net of tax |
$ | (366,451 | ) | $ | (80,011 | ) | $ | 106,214 | $ | (26,203 | ) | $ | (366,451 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
142
Condensed Consolidating Statement of Cash Flows (UNAUDITED)
Six months ended June 30, 2015 | ||||||||||||||||||||
(In thousands) |
Popular, Inc. Holding Co. |
PNA Holding Co. |
All other subsidiaries and eliminations |
Elimination entries |
Popular, Inc. Consolidated |
|||||||||||||||
Cash flows from operating activities: |
||||||||||||||||||||
Net income |
$ | 672,278 | $ | 555,234 | $ | 700,457 | $ | (1,255,691 | ) | $ | 672,278 | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: |
||||||||||||||||||||
Equity in undistributed earnings of subsidiaries |
(691,084 | ) | (561,651 | ) | | 1,252,735 | | |||||||||||||
Provision for loan losses |
227 | | 116,042 | | 116,269 | |||||||||||||||
Amortization of intangibles |
| | 4,985 | | 4,985 | |||||||||||||||
Depreciation and amortization of premises and equipment |
374 | | 23,575 | | 23,949 | |||||||||||||||
Net accretion of discounts and amortization of premiums and deferred fees |
| | (42,167 | ) | | (42,167 | ) | |||||||||||||
Other-than-temporary impairment on investment securities |
| | 14,445 | | 14,445 | |||||||||||||||
Fair value adjustments on mortgage servicing rights |
| | 6,846 | | 6,846 | |||||||||||||||
FDIC loss share income |
| | (23,214 | ) | | (23,214 | ) | |||||||||||||
Adjustments (expense) to indemnity reserves on loans sold |
| | 4,107 | | 4,107 | |||||||||||||||
(Earnings) losses from investments under the equity method |
(6,391 | ) | 305 | (3,720 | ) | | (9,806 | ) | ||||||||||||
Deferred income tax benefit |
| | (511,157 | ) | 29 | (511,128 | ) | |||||||||||||
Loss (gain) on: |
||||||||||||||||||||
Disposition of premises and equipment |
(1 | ) | | (1,428 | ) | | (1,429 | ) | ||||||||||||
Sale and valuation adjustments of investment securities |
| | (5 | ) | | (5 | ) | |||||||||||||
Sale of loans, including valuation adjustments on loans held for sale and mortgage banking activities |
| | (15,034 | ) | | (15,034 | ) | |||||||||||||
Sale of foreclosed assets, including write-downs |
| | 54,711 | | 54,711 | |||||||||||||||
Acquisitions of loans held-for-sale |
| | (249,059 | ) | | (249,059 | ) | |||||||||||||
Proceeds from sale of loans held-for-sale |
| | 51,062 | | 51,062 | |||||||||||||||
Net originations on loans held-for-sale |
| | (379,264 | ) | | (379,264 | ) | |||||||||||||
Net (increase) decrease in: |
||||||||||||||||||||
Trading securities |
(117 | ) | | 481,388 | | 481,271 | ||||||||||||||
Accrued income receivable |
(183 | ) | (1 | ) | (655 | ) | 183 | (656 | ) | |||||||||||
Other assets |
2,298 | 55 | 31,314 | (115 | ) | 33,552 | ||||||||||||||
Net increase (decrease) in: |
||||||||||||||||||||
Interest payable |
| 183 | 475 | (183 | ) | 475 | ||||||||||||||
Pension and other postretirement benefits obligations |
| | 1,641 | | 1,641 | |||||||||||||||
Other liabilities |
(10,443 | ) | (61 | ) | (30,976 | ) | 42 | (41,438 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total adjustments |
(705,320 | ) | (561,170 | ) | (466,088 | ) | 1,252,691 | (479,887 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net cash (used in) provided by operating activities |
(33,042 | ) | (5,936 | ) | 234,369 | (3,000 | ) | 192,391 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Cash flows from investing activities: |
||||||||||||||||||||
Net decrease (increase) in money market investments |
18,481 | (933 | ) | (1,451,033 | ) | 933 | (1,432,552 | ) | ||||||||||||
Purchases of investment securities: |
||||||||||||||||||||
Available-for-sale |
| | (985,427 | ) | | (985,427 | ) | |||||||||||||
Held-to-maturity |
| | (250 | ) | | (250 | ) | |||||||||||||
Other |
| | (12,805 | ) | | (12,805 | ) | |||||||||||||
Proceeds from calls, paydowns, maturities and redemptions of investment securities: |
||||||||||||||||||||
Available-for-sale |
| | 867,168 | | 867,168 | |||||||||||||||
Held-to-maturity |
| | 2,389 | | 2,389 | |||||||||||||||
Other |
| | 31,592 | | 31,592 | |||||||||||||||
Proceeds from sale of investment securities: |
||||||||||||||||||||
Available for sale |
| | 70,005 | | 70,005 | |||||||||||||||
Other |
| | 8,399 | | 8,399 | |||||||||||||||
Net repayments on loans |
22,400 | 1 | 374,209 | (22,386 | ) | 374,224 | ||||||||||||||
Proceeds from sale of loans |
| | 27,780 | | 27,780 | |||||||||||||||
Acquisition of loan portfolios |
| (350 | ) | (140,492 | ) | 171 | (140,671 | ) | ||||||||||||
Net payments from FDIC under loss sharing agreements |
| | 164,423 | | 164,423 | |||||||||||||||
Net cash received and acquired from business combination |
| | 738,296 | | 738,296 | |||||||||||||||
Acquisition of servicing assets |
| | (3,897 | ) | | (3,897 | ) | |||||||||||||
Cash paid related to business acquisitions |
| | (17,250 | ) | | (17,250 | ) | |||||||||||||
Mortgage servicing rights purchased |
| | (2,400 | ) | | (2,400 | ) | |||||||||||||
Acquisition of premises and equipment |
(677 | ) | | (30,140 | ) | | (30,817 | ) | ||||||||||||
Proceeds from sale of: |
||||||||||||||||||||
Premises and equipment |
4 | | 7,897 | | 7,901 | |||||||||||||||
Foreclosed assets |
| | 98,287 | | 98,287 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net cash provided by (used in) investing activities |
40,208 | (1,282 | ) | (253,249 | ) | (21,282 | ) | (235,605 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
143
Cash flows from financing activities: |
||||||||||||||||||||
Net increase (decrease) in: |
||||||||||||||||||||
Deposits |
| | 752,959 | (7,172 | ) | 745,787 | ||||||||||||||
Federal funds purchased and assets sold under agreements to repurchase |
| | (150,413 | ) | | (150,413 | ) | |||||||||||||
Other short-term borrowings |
| 7,214 | (77,815 | ) | 22,386 | (48,215 | ) | |||||||||||||
Payments of notes payable |
| | (430,003 | ) | | (430,003 | ) | |||||||||||||
Proceeds from issuance of notes payable |
| | 103,231 | | 103,231 | |||||||||||||||
Proceeds from issuance of common stock |
2,536 | | | | 2,536 | |||||||||||||||
Dividends paid to parent company |
| | (3,000 | ) | 3,000 | | ||||||||||||||
Dividends paid |
(1,861 | ) | | | | (1,861 | ) | |||||||||||||
Net payments for repurchase of common stock |
(1,696 | ) | | 1 | | (1,695 | ) | |||||||||||||
Return of capital to parent company |
| | 171 | (171 | ) | | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net cash (used in) provided by financing activities |
(1,021 | ) | 7,214 | 195,131 | 18,043 | 219,367 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net increase (decrease) in cash and due from banks |
6,145 | (4 | ) | 176,251 | (6,239 | ) | 176,153 | |||||||||||||
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 |
$ | 26,593 | $ | 604 | $ | 557,141 | $ | (27,090 | ) | $ | 557,248 | |||||||||
|
|
|
|
|
|
|
|
|
|
The Condensed Consolidating Statements of Cash Flows include the cash flows from operating, investing and financing activities associated with discontinued operations.
144
Condensed Consolidating Statement of Cash Flows (UNAUDITED)
Six months ended June 30, 2014 | ||||||||||||||||||||
(In thousands) |
Popular, Inc. Holding Co. |
PNA Holding Co. |
All other subsidiaries and eliminations |
Elimination entries |
Popular, Inc. Consolidated |
|||||||||||||||
Cash flows from operating activities: |
||||||||||||||||||||
Net (loss) income |
$ | (424,905 | ) | $ | (103,753 | ) | $ | 46,674 | $ | 57,079 | $ | (424,905 | ) | |||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: |
||||||||||||||||||||
Equity in undistributed (earnings) losses of subsidiaries |
(39,498 | ) | 96,533 | | (57,035 | ) | | |||||||||||||
Provision for loan losses |
(176 | ) | | 134,926 | | 134,750 | ||||||||||||||
Goodwill impairment losses |
| | 186,511 | | 186,511 | |||||||||||||||
Amortization of intangibles |
| | 5,007 | | 5,007 | |||||||||||||||
Depreciation and amortization of premises and equipment |
325 | | 23,507 | | 23,832 | |||||||||||||||
Net accretion of discounts and amortization of premiums and deferred fees |
404,461 | | (79,682 | ) | | 324,779 | ||||||||||||||
Fair value adjustments on mortgage servicing rights |
| | 15,836 | | 15,836 | |||||||||||||||
FDIC loss share expense |
| | 79,467 | | 79,467 | |||||||||||||||
Adjustments (expense) to indemnity reserves on loans sold |
| | 17,801 | | 17,801 | |||||||||||||||
(Earnings) losses from investments under the equity method |
(6,509 | ) | 688 | (18,534 | ) | | (24,355 | ) | ||||||||||||
Deferred income tax expense (benefit) |
8,150 | | (5,491 | ) | 30 | 2,689 | ||||||||||||||
Loss (gain) on: |
||||||||||||||||||||
Disposition of premises and equipment |
(1 | ) | | (2,550 | ) | | (2,551 | ) | ||||||||||||
Sale of loans, including valuation adjustments on loans held for sale and mortgage banking activities |
| | (42,413 | ) | | (42,413 | ) | |||||||||||||
Sale of foreclosed assets, including write-downs |
| | (2,035 | ) | | (2,035 | ) | |||||||||||||
Acquisitions of loans held-for-sale |
| | (159,727 | ) | | (159,727 | ) | |||||||||||||
Proceeds from sale of loans held-for-sale |
| | 72,757 | | 72,757 | |||||||||||||||
Net originations on loans held-for-sale |
| | (338,672 | ) | | (338,672 | ) | |||||||||||||
Net (increase) decrease in: |
||||||||||||||||||||
Trading securities |
(224 | ) | | 460,016 | | 459,792 | ||||||||||||||
Accrued income receivable |
(68 | ) | 2 | 6,725 | 62 | 6,721 | ||||||||||||||
Other assets |
9,592 | (7,095 | ) | (25,477 | ) | (25,475 | ) | (48,455 | ) | |||||||||||
Net increase (decrease) in: |
||||||||||||||||||||
Interest payable |
2,080 | 5 | (1,390 | ) | (62 | ) | 633 | |||||||||||||
Pension and other postretirement benefits obligations |
| | (3,096 | ) | | (3,096 | ) | |||||||||||||
Other liabilities |
(4,312 | ) | (32,031 | ) | 41,202 | 25,401 | 30,260 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total adjustments |
373,820 | 58,102 | 364,688 | (57,079 | ) | 739,531 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net cash (used in) provided by operating activities |
(51,085 | ) | (45,651 | ) | 411,362 | | 314,626 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Cash flows from investing activities: |
||||||||||||||||||||
Net (increase) decrease in money market investments |
(1,014 | ) | 4,204 | (808,477 | ) | (3,204 | ) | (808,491 | ) | |||||||||||
Purchases of investment securities: |
||||||||||||||||||||
Available-for-sale |
| | (1,079,586 | ) | | (1,079,586 | ) | |||||||||||||
Other |
| | (51,097 | ) | | (51,097 | ) | |||||||||||||
Proceeds from calls, paydowns, maturities and redemptions of investment securities: |
||||||||||||||||||||
Available-for-sale |
| | 816,830 | | 816,830 | |||||||||||||||
Held-to-maturity |
| | 27,029 | | 27,029 | |||||||||||||||
Other |
| | 64,724 | | 64,724 | |||||||||||||||
Net (originations) repayments on loans |
(67,240 | ) | | 473,634 | 66,942 | 473,336 | ||||||||||||||
Proceeds from sale of loans |
| | 87,983 | | 87,983 | |||||||||||||||
Acquisition of loan portfolios |
| | (289,292 | ) | | (289,292 | ) | |||||||||||||
Net payments from FDIC under loss sharing agreements |
| | 110,618 | | 110,618 | |||||||||||||||
Capital contribution to subsidiary |
(100,000 | ) | | | 100,000 | | ||||||||||||||
Return of capital from wholly-owned subsidiaries |
210,000 | 250,000 | | (460,000 | ) | | ||||||||||||||
Acquisition of premises and equipment |
(352 | ) | | (19,981 | ) | | (20,333 | ) | ||||||||||||
Proceeds from sale of: |
||||||||||||||||||||
Premises and equipment |
24 | | 8,607 | | 8,631 | |||||||||||||||
Foreclosed assets |
| | 81,010 | | 81,010 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net cash provided by (used in) investing activities |
41,418 | 254,204 | (577,998 | ) | (296,262 | ) | (578,638 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
145
Cash flows from financing activities: |
||||||||||||||||||||
Net increase (decrease) in: |
||||||||||||||||||||
Deposits |
| | 241,260 | 11,455 | 252,715 | |||||||||||||||
Federal funds purchased and assets sold under agreements to repurchase |
| | 418,381 | | 418,381 | |||||||||||||||
Other short-term borrowings |
| 1,443 | (304,500 | ) | (66,943 | ) | (370,000 | ) | ||||||||||||
Payments of notes payable |
| | (111,030 | ) | | (111,030 | ) | |||||||||||||
Proceeds from issuance of notes payable |
| | 31,905 | | 31,905 | |||||||||||||||
Proceeds from issuance of common stock |
3,048 | | | | 3,048 | |||||||||||||||
Dividends paid |
(1,862 | ) | | | | (1,862 | ) | |||||||||||||
Net payments for repurchase of common stock |
(861 | ) | | | | (861 | ) | |||||||||||||
Return of capital to parent company |
| (210,000 | ) | (250,000 | ) | 460,000 | | |||||||||||||
Capital contribution from parent |
| | 100,000 | (100,000 | ) | | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net cash provided by (used in) financing activities |
325 | (208,557 | ) | 126,016 | 304,512 | 222,296 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net decrease in cash and due from banks |
(9,342 | ) | (4 | ) | (40,620 | ) | 8,250 | (41,716 | ) | |||||||||||
Cash and due from banks at beginning of period |
10,595 | 616 | 422,967 | (10,967 | ) | 423,211 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Cash and due from banks at end of period, including discontinued operations |
1,253 | 612 | 382,347 | (2,717 | ) | 381,495 | ||||||||||||||
Less: cash from discontinued operations |
| | 18,923 | | 18,923 | |||||||||||||||
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Cash and due from banks at end of period |
$ | 1,253 | $ | 612 | $ | 363,424 | $ | (2,717 | ) | $ | 362,572 | |||||||||
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The Condensed Consolidating Statements of Cash Flows include the cash flows from operating, investing and financing activities associated with discontinued operations.
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This report includes managements discussion and analysis (MD&A) of the consolidated financial position and financial performance of Popular, Inc. (the Corporation or Popular). All accompanying tables, financial statements and notes included elsewhere in this report should be considered an integral part of this analysis.
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, including residential mortgage loan originations, 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, under the name Popular Community Bank (PCB), operates branches in New York, New Jersey and Southern Florida. E-LOAN markets deposit accounts under its name for the benefit of BPNA. Note 38 to the consolidated financial statements presents information about the Corporations business segments. As of June 30, 2015, the Corporation had a 15.04% interest in the holding company of EVERTEC, which provides transaction processing services throughout the Caribbean and Latin America, including servicing many of the Corporations system infrastructures and transaction processing businesses. During the quarter ended June 30, 2015, the Corporation recorded $3.3 million in earnings from its investment in EVERTEC, which had a carrying amount of $29.4 million as of the end of the quarter. 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 June 30, 2015 the Corporation recorded $6.5 million in earnings from its investment in BHD Leon, which had a carrying amount of $106.9 million, as of the end of the quarter.
OVERVIEW
Recent significant events
| During the quarter ended June 30, 2015, the Corporation recorded a partial reversal of the valuation allowance on its deferred tax assets from its U.S. operations for approximately $545 million. The Corporation has concluded that it is more likely than not that a portion of the total of $1.2 billion on deferred tax assets at the U.S. operations, comprised mainly of net operating losses (NOLs) will be realized. The Corporation based its determination on its estimated earnings for the remaining carryforward period eighteen years beginning with the 2016 fiscal year available to utilize the deferred tax asset to reduce its income tax obligations. |
The increase in the net deferred tax asset did not have a material impact on regulatory capital. However, it increased the tangible book value per common share by $5.26.
| 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 on June 30, 2015. Accordingly, approximately $1.5 billion in loans and $18 million in OREOs have been reclassified as non-covered in the accompanying statement of financial condition as of June 30, 2015, because they are no longer subject to the shared-loss payments by the FDIC. However, included in these balances are approximately $249 million of loans that are subject to the resolution of several arbitration proceedings currently ongoing with the FDIC related primarily to (i) the FDICs 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 June 30, 2015, losses amounting to $141 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 26, Commitments and Contingencies, to the accompanying financial statements. |
| During the second quarter of 2015, BPPR completed the acquisition of mortgage servicing rights on three pools of residential mortgage loans serviced for Ginnie Mae, Fannie Mae and Freddie Mac, with an unpaid principal balance of approximately $5.0 billion, from the FDIC as a receiver for Doral Bank, together with the acquisition of certain assets and all deposits (other than certain brokered deposits) from Doral Bank on February 27, 2015, (the Doral Bank Transaction). The aggregate purchase price for the mortgage servicing rights and related servicing advances was approximately $56 million. |
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As discussed in Note 5 to the consolidated financial statements, during the year 2014 the Company completed the sale of its U.S. regional operations in California, Illinois and Central Florida. Current and prior periods financial information covering income and expense amounts presented in this MD&A has been retrospectively adjusted for the impact of the discontinued operations of the U.S. operations for comparative purposes. The financial information for prior periods included in this MD&A does not reflect the reclassification of certain of PCBs assets and liabilities to discontinued operations.
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), the (reported basis). In addition to analyzing the Corporations results on a reported basis, management monitors the performance of the Corporation on an adjusted basis and excludes the impact of certain unusual 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 Corporations ongoing operations. The adjusted results are a Non-GAAP financial measure. Refer to tables 60 through 65 for a reconciliation of the reported results for the quarter and six months ended June 30, 2015 and 2014.
Non-GAAP financial measures used by the Corporation may not be comparable to similarly named non-GAAP financial measures used by other companies.
Financial highlights for the quarter ended June 30, 2015
| For the quarter ended June 30, 2015, the Corporation recorded net income of $597.5 million, compared to a net loss of $511.3 million for the same quarter of the previous year. The adjusted net income from continuing operations for the second quarter of 2015 was $ 90.1 million, compared to $74.5 million for the same quarter of the previous year, while the net income was $90.1 million and $74.5 million, for 2015 and 2014, respectively. Refer to tables 60 through 62 for adjustments to arrive at the adjusted net income. |
| Taxable equivalent net interest income was $382.7 million compared to $375.0 million in the same quarter of 2014; the latter excludes the accelerated amortization of TARP discount and deferred costs of $414.1 million recorded in that quarter upon repayment of TARP funds on July 2014. Net interest margin, on a taxable equivalent basis, for the second quarter of 2015 was 4.80% compared to 4.94%, on an adjusted basis, in the same quarter of 2014, a decrease of 14 basis points. The acquisition of $1.7 billion in loans and the assumption of $2.2 billion of deposits from the Doral Bank Transaction on February 27, 2015 impacts most of the interest income and expense lines. The Doral Bank Transaction added approximately $27.1 million in net interest income for the second quarter of 2015. Interest income also increased as a result of higher volume of commercial loans in the U.S. These positive factors were offset by a lower income from covered loans due to lower average volumes as well as lower income from investment securities. |
| The provision for loan losses for the non-covered portfolio totaled $60.5 million for the quarter ended June 30, 2015, compared to $50.1 million for the same quarter of the previous year, an increase of $10.4 million due mainly to higher reserve releases at BPNA during the second quarter of 2014. The provision for the covered portfolio amounted to $15.8 million for the second quarter of 2015, compared to $11.6 million for the same quarter of the previous year, an increase of $4.2 million. The provision for loan losses for the second quarter of 2015 reflects the impact of managements annual review of the components of the allowance for loan losses models. |
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Total non-performing assets, including covered loans, were $806 million at June 30, 2015, decreasing by $126 million, or 14% from December 31, 2014, of which $96 million were related to covered OREOs. Non-covered non-performing loans held-in-portfolio were $576 million, decreasing by $55 million, or 9%, from December 31, 2014. The decrease was mainly driven by lower commercial non-performing loans of $70 million. During the quarter, the Corporation transferred to held-for-sale a $75 million non-accrual public sector credit at BPPR after BPPR agreed to sell to an unaffiliated third party its part of the syndicated fuel line credit facility to PREPA. The sale was subject, among other conditions, to the approval of the syndicates agent bank. The sale agreement was terminated on July 29, 2015 pursuant to its terms after the parties were not able to obtain the approval of the agent bank on terms acceptable to the assignee. The aggregate write-down on loans transferred to held-for-sale during the quarter was of approximately $31 million, of which $29.0 million was previously reserved. The Corporations annualized net charge-offs to average non-covered loans held-in-portfolio ratio was 0.89% for the quarter ended June 30, 2015, down from 0.94% for the same period in 2014. The decrease in the net charge-off ratio was mostly driven by the impact of Doral Banks acquired portfolio on the total loan base.
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.
| Non-interest income increased by $78.0 million during the quarter ended June 30, 2015, compared to the same quarter of the previous year. Excluding the impact of the certain transactions detailed in Table 60, Adjusted Results (Non-GAAP), non-interest income increased by $84.8 million. The increase in adjusted non-interest income was principally due to: |
| higher mortgage banking activities due to higher mortgage servicing fees, a favorable variance in the valuation adjustment of mortgage servicing rights and a positive variance in gains(losses) from closed derivatives positions; |
| lower adjustments for indemnity reserves; and |
| a positive variance in the FDIC loss share income (expense), due to lower amortization of the indemnification asset; partially offset by |
| lower gain on sale of loans mainly attributed to workout activity at BPNA during the second quarter of 2014. |
The results for the second quarter of 2015 include an other-than-temporary impairment charge on the portfolio of Puerto Rico government investment securities available-for-sale of $14.4 million. Refer to the Non-Interest Income section of this MD&A for additional information on the main variances that affected the non-interest income categories.
| Operating expenses increased by $87.7 million during the quarter ended June 30, 2015, compared with the same quarter of the previous year. Excluding the impact of the certain transactions detailed in Table 60, Adjusted Results (Non-GAAP) operating expenses increased by $51.4 million mainly due to: |
| higher personnel cost by $18.0 million mostly related to an increase in share based compensation by $6.0 million attributed to the accounting treatment of awards granted during the quarter; |
| higher professional fees by $6.5 million due to higher programming, processing and other technology services and higher professional services; |
| higher OREO expenses by $19.4 million mainly as a result of higher write-downs on commercial, construction and mortgage properties by $10.4 million and higher loss on sales; and |
| higher other general operating expenses mainly due to property tax payments at BPPR, most of which is reimbursable from the FDIC. |
Refer to the Operating Expenses section of this MD&A for additional information.
| For the quarter ended June 30, 2015, the Corporation recorded an income tax benefit of $533.5 million, compared to an income tax expense of $4.1 million for the same quarter of the previous year. During the quarter ended June 30, 2015, the Corporation recorded a partial reversal of the valuation allowance on its deferred tax assets from its U.S. operations for approximately $544.9 million. Excluding the impact of this partial reversal and the tax effect of certain other transactions detailed in Table 60. The income tax expense for the second quarter of 2015 was $21.5 million. During the second quarter of 2014 the Corporation recognized an income tax benefit of approximately $23.4 million due to a reduction in the deferred tax liability associated with the Westernbank loan portfolio as a result of a Closing Agreement entered into with the Puerto Rico Department of the Treasury (PR Treasury) during that quarter, offset by the negative |
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impact of the deferred tax asset valuation allowance of approximately $9.2 million recorded at the Holding Company, due to the difference in the tax treatment of interest expense related to the TARP funds and the $450 million senior notes issued to partially fund the TARP repayment. The increase in income tax expense was primarily due to higher taxable income on the Puerto Rico operations. Refer to the Income Taxes section of this MD&A for additional information. |
| Total assets were $36.8 billion at June 30, 2015 and $33.1 billion at December 31, 2014. Excluding the impact of the Doral Bank Transaction, total assets increased by approximately $0.9 billion due to: |
| An increase of $1.5 billion in money market investments due mostly to increases in liquidity at BPPR of $1.4 billion and BPNA of $87 million. |
| An increase of $269 million on investment securities available-for-sale and held-to-maturity, as detailed in Table 10. |
| An increase in other assets of $540 million, mainly due to the partial reversal of the valuation allowance of the deferred tax asset at the U.S. operations amounting to $545 million. |
These increases were partially offset by:
| A decrease of $65 million in the non-covered portfolio, excluding the above mentioned reclassification of $1.5 billion from the covered category, due mainly to loan repayments and the reclassification of a commercial relationship to held-for-sale of $75 million from the public sector at BPPR, partially offset by an increase in the BPNA commercial loan portfolio. |
| A decrease of $338 million in the covered loans portfolio, excluding the impact of the reclassification of $1.5 billion to the non-covered category as mentioned above, due to the normal run-off and portfolio loan resolutions. |
| A decrease of approximately $150 million in the FDIC loss share asset mainly due to amortization and collections from the FDIC. |
| A decrease of $90 million in OREOs due to sales, including a bulk sale of $37 million in commercial, covered OREOs, and write-downs, offset by additions due to foreclosure activity. |
| Excluding approximately $1.6 billion in liabilities assumed from Doral, total liabilities increased by $1.3 billion from the fourth quarter of 2014, driven by an increase of $1.3 billion in deposits from BPPR by $1.0 billion and BPNA by $295 million. |
| Stockholders equity increased by $682 million from the fourth quarter of 2014, mainly as a result of net income for the six months of $672 million, and a decrease in accumulated other comprehensive loss of $11 million. Capital ratios continued to be strong. The Corporations Common equity Tier 1 Capital ratio stood at 15.93% at June 30, 2015, while the tangible common equity ratio at June 30, 2015 was 11.94%. Refer to Table 20 for capital ratios and Tables 21 for Non-GAAP reconciliations. |
Table 1 provides selected financial data and performance indicators for the quarters ended June 30, 2015 and 2014.
As a financial services company, the Corporations earnings are significantly affected by general business and economic conditions. Lending and deposit activities and fee income generation are influenced by the level of business spending and investment, consumer income, spending and savings, capital market activities, competition, customer preferences, interest rate conditions and prevailing market rates on competing products.
The Corporation continuously monitors general business and economic conditions, industry-related indicators and trends, competition, interest rate volatility, credit quality indicators, loan and deposit demand, operational and systems efficiencies, revenue enhancements and changes in the regulation of financial services companies.
The Corporation operates in a highly regulated environment and may be adversely affected by changes in federal and local laws and regulations. Also, competition with other financial institutions could adversely affect its profitability.
The description of the Corporations business contained in Item 1 of the Corporations 2014 Annual Report, while not all inclusive, discusses additional information about the business of the Corporation and risk factors, many beyond the Corporations control that, in addition to the other information in this Form 10-Q, readers should consider.
The Corporations common stock is traded on the NASDAQ Global Select Market under the symbol BPOP.
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Table 1 - Financial Highlights
Financial Condition Highlights |
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Ending balances at | Average for the six months ended | |||||||||||||||||||||||
(In thousands) |
June 30, 2015 | December 31, 2014 |
Variance | June 30, 2015 | June 30, 2014 | Variance | ||||||||||||||||||
Money market investments |
$ | 3,254,939 | $ | 1,822,386 | $ | 1,432,553 | $ | 2,231,909 | $ | 1,346,593 | $ | 885,316 | ||||||||||||
Investment and trading securities |
5,994,039 | 5,718,762 | 275,277 | 5,941,278 | 6,356,622 | (415,344 | ) | |||||||||||||||||
Loans |
23,327,082 | 22,053,217 | 1,273,865 | 22,949,753 | 22,583,201 | 366,552 | ||||||||||||||||||
Earning assets |
32,576,060 | 29,594,365 | 2,981,695 | 31,122,940 | 30,286,417 | 836,523 | ||||||||||||||||||
Assets from discontinued operations |
| | | | 1,908,616 | (1,908,616 | ) | |||||||||||||||||
Total assets |
36,750,113 | 33,096,695 | 3,653,418 | 34,696,180 | 36,216,256 | (1,520,076 | ) | |||||||||||||||||
Deposits* |
27,750,694 | 24,807,535 | 2,943,159 | 26,459,216 | 24,659,911 | 1,799,305 | ||||||||||||||||||
Borrowings |
3,026,472 | 3,004,685 | 21,787 | 2,866,035 | 3,740,430 | (874,395 | ) | |||||||||||||||||
Stockholders equity |
4,949,653 | 4,267,382 | 682,271 | 4,363,634 | 4,781,976 | (418,342 | ) | |||||||||||||||||
Liabilities from discontinued operations |
1,754 | 5,064 | (3,310 | ) | 2,384 | 2,129,271 | (2,126,887 | ) |
* | Average deposits exclude average derivatives. |
Operating Highlights |
Quarters ended June 30, | Six months ended June 30, | ||||||||||||||||||||||
(In thousands, except per share information) |
2015 | 2014 | Variance | 2015 | 2014 | Variance | ||||||||||||||||||
Net interest income (expense) |
$ | 362,553 | $ | (59,381 | ) | $ | 421,934 | $ | 705,748 | $ | 291,790 | $ | 413,958 | |||||||||||
Provision for loan losses - non-covered loans |
60,468 | 50,074 | 10,394 | 90,179 | 104,196 | (14,017 | ) | |||||||||||||||||
Provision for loan losses - covered loans |
15,766 | 11,604 | 4,162 | 26,090 | 37,318 | (11,228 | ) | |||||||||||||||||
Non-interest income |
140,759 | 62,789 | 77,970 | 255,994 | 158,821 | 97,173 | ||||||||||||||||||
Operating expenses |
363,174 | 275,439 | 87,735 | 675,515 | 553,038 | 122,477 | ||||||||||||||||||
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Income (loss) from continuing operations before income tax |
63,904 | (333,709 | ) | 397,613 | 169,958 | (243,941 | ) | 413,899 | ||||||||||||||||
Income tax (benefit) expense |
(533,533 | ) | (4,124 | ) | (529,409 | ) | (500,964 | ) | 19,140 | (520,104 | ) | |||||||||||||
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Income (loss) from continuing operations |
$ | 597,437 | $ | (329,585 | ) | $ | 927,022 | $ | 670,922 | $ | (263,081 | ) | $ | 934,003 | ||||||||||
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Income (loss) from discontinued operations, net of tax |
15 | (181,729 | ) | 181,744 | 1,356 | (161,824 | ) | 163,180 | ||||||||||||||||
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Net income (loss) |
$ | 597,452 | $ | (511,314 | ) | $ | 1,108,766 | $ | 672,278 | $ | (424,905 | ) | $ | 1,097,183 | ||||||||||
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Net income (loss) applicable to common stock |
$ | 596,521 | $ | (512,245 | ) | $ | 1,108,766 | $ | 670,417 | $ | (426,767 | ) | $ | 1,097,184 | ||||||||||
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Net income (loss) from continuing operations |
$ | 5.80 | $ | (3.21 | ) | $ | 9.01 | $ | 6.51 | $ | (2.58 | ) | $ | 9.09 | ||||||||||
Net income (loss) from discontinued operations |
$ | | $ | (1.77 | ) | $ | 1.77 | $ | 0.01 | $ | (1.57 | ) | $ | 1.58 | ||||||||||
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Net income (loss) per Common Share Basic |
$ | 5.80 | $ | (4.98 | ) | $ | 10.78 | $ | 6.52 | $ | (4.15 | ) | $ | 10.67 | ||||||||||
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Net income (loss) from continuing operations |
$ | 5.79 | $ | (3.21 | ) | $ | 9.00 | $ | 6.49 | $ | (2.58 | ) | $ | 9.07 | ||||||||||
Net income (loss) from discontinued operations |
$ | | $ | (1.77 | ) | $ | 1.77 | $ | 0.01 | $ | (1.57 | ) | $ | 1.58 | ||||||||||
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Net income (loss) per Common Share Diluted |
$ | 5.79 | $ | (4.98 | ) | $ | 10.77 | $ | 6.50 | $ | (4.15 | ) | $ | 10.65 | ||||||||||
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Quarters ended June 30, | Six months ended June 30, | |||||||||||||||
Selected Statistical Information |
2015 | 2014 | 2015 | 2014 | ||||||||||||
Common Stock Data |
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Market price |
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High |
$ | 35.45 | $ | 34.18 | $ | 35.58 | $ | 34.18 | ||||||||
Low |
28.86 | 28.93 | 28.86 | 25.50 | ||||||||||||
End |
28.86 | 34.18 | 28.86 | 34.18 | ||||||||||||
Book value per common share at period end |
47.34 | 40.69 | 47.34 | 40.69 | ||||||||||||
Profitability Ratios |
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Return on assets |
6.74 | % | (5.66 | )% | 3.91 | % | (2.37 | )% | ||||||||
Return on common equity |
54.93 | (43.04 | ) | 31.34 | (18.19 | ) | ||||||||||
Net interest spread (taxable equivalent) - Non-GAAP |
4.60 | 4.65 | 4.62 | 4.65 | ||||||||||||
Net interest margin (taxable equivalent) - Non-GAAP |
4.80 | 4.94 | 4.83 | 4.94 | ||||||||||||
Capitalization Ratios |
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Average equity to average assets |
12.38 | % | 13.31 | % | 12.58 | % | 13.20 | % | ||||||||
Tier I capital |
15.93 | 19.23 | 15.93 | 19.23 | ||||||||||||
Total capital |
18.50 | 20.69 | 18.50 | 20.69 | ||||||||||||
Tier 1 leverage |
11.59 | 13.07 | 11.59 | 13.07 |
CRITICAL ACCOUNTING POLICIES / ESTIMATES
The accounting and reporting policies followed by the Corporation and its subsidiaries conform to generally accepted accounting principles in the United States of America and general practices within the financial services industry. Various elements of the Corporations accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. These estimates are made under facts and circumstances at a point in time and changes in those facts and circumstances could produce actual results that differ from those estimates.
Management has discussed the development and selection of the critical accounting policies and estimates with the Corporations Audit Committee. The Corporation has identified as critical accounting policies those related to: (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 2014 Financial Review and Supplementary Information to Stockholders, incorporated by reference in Popular, Inc.s Annual Report on Form 10-K for the year ended December 31, 2014 (the 2014 Annual Report). Also, refer to Note 2 to the consolidated financial statements included in the 2014 Annual Report for a summary of the Corporations significant accounting policies.
Business Combination
The Corporation determined that the acquisition of certain assets and assumption of certain liabilities in connection with the Doral Bank Transaction constitutes a business combination as defined by the Financial Accounting Standards Board (FASB) Codification (ASC) Topic 805 Business Combinations. The assets and liabilities, both tangible and intangible, were initially recorded at their estimated fair values. Fair values were determined based on the requirements of FASB Codification Topic 820 Fair Value Measurements. These fair value estimates are preliminary and subject to refinement for up to one year after the closing date of the acquisition as additional information regarding the closing date fair value becomes available. Acquisition-related costs are expensed as incurred. Refer to Note 4, Business Combination, for additional information of assets acquired and liabilities assumed in connection with this transaction.
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Loans acquired as part of the Doral Bank Transaction
Loans acquired in a business acquisition are recorded at their fair value at the acquisition date. Credit discounts are included in the determination of fair value; therefore, an allowance for loan losses is not recorded at the acquisition date.
Approximately $162 million in unpaid principal balance of residential mortgage loans acquired as part of the Doral Bank Transaction were considered impaired. Accordingly, the Corporation applied the guidance of ASC Subtopic 310-30. Under this guidance, the loans acquired from the FDIC were aggregated into pools based on similar characteristics, including factors such as loan type, interest rate type, accruing status, and amortization type. Each loan pool is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows. Under ASC Subtopic 310-30, the difference between the undiscounted cash flows expected at acquisition and the fair value in the loans, or the accretable yield, is recognized as interest income using the effective yield method over the estimated life of the loan if the timing and amount of the future cash flows of the pool is reasonably estimable. The non-accretable difference represents the difference between contractually required principal and interest and the cash flows expected to be collected. Subsequent to the acquisition date, increases in cash flows over those expected at the acquisition date are recognized as interest income prospectively. Decreases in expected cash flows after the acquisition date are recognized by recording an allowance for loan losses.
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 Corporations 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 analogy, 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 June 30, 2015, 32% (June 30, 2014 - 28%) of the ALLL for BPPR non-covered 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 and commercial multi-family loan portfolios for 2015, and in the commercial multi-family, commercial and industrial, personal and auto loan portfolios for 2014.
For the period ended June 30, 2015, 19% (June 30, 2014 - 23%) of the ALLL for BPNA 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 2015 and in the commercial multi-family, commercial and industrial and legacy loan portfolios for 2014.
| 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. |
153
During the second quarter of 2015, management completed the annual review of the components of the ALLL models. As part of this review management updated core metrics and revised certain components related to the estimation process for evaluating the adequacy of the general reserve of the allowance for loan losses. These enhancements to the ALLL methodology, which are described in the paragraphs below, were implemented as of June 30, 2015 and resulted in a net decrease to the allowance for loan losses of $ 1.9 million for the non-covered portfolio. The effect of the aforementioned enhancements was immaterial for the covered loans portfolio.
Management made the following principal enhancements to the methodology during the second quarter of 2015:
| Increased the historical look-back period for determining the base loss rates for commercial and construction loans. The Corporation increased the look-back period for assessing historical loss trends applicable to the determination of commercial and construction loan net charge-offs from 36 months to 60 months. Given the current overall commercial and construction credit quality improvements, including lower loss trends, management concluded that a 60-month look-back period for the base loss rates aligns the Corporations allowance for loan losses methodology to maintain adequate loss observations in its main general reserve component. |
The combined effect of the aforementioned enhancements to the base loss rates resulted in an increase to the allowance for loan losses of $19.6 million at June 30, 2015, of which $17.9 million related to the non-covered BPPR segment and $1.7 million related to the BPNA segment.
| Annual review and recalibration of the environmental factors adjustment. The environmental factor adjustments are developed by performing regression analyses on selected credit and economic indicators for each applicable loan segment. During the second quarter of 2015, the environmental factor models used to account for changes in current credit and macroeconomic conditions were reviewed and recalibrated based on the latest applicable trends. |
The combined effect of the aforementioned recalibration and enhancements to the environmental factors adjustment resulted in a decrease to the allowance for loan losses of $21.4 million at June 30, 2015, of which $20.5 million related to the non-covered BPPR segment and $1 million related to the BPNA segment.
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 Tables 2 and 3 for the quarter and six months ended June 30, 2015 as compared to the same periods in 2014, 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 political subdivisions and assets held by the Corporations 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 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. Excluding the discount accretion on covered loans accounted for under Subtopic ASC 310-30, the impact to interest income from these fees and amortizations for the quarter and six months ended June 30, 2015 were of $4.9 million and $6.5 million, respectively, compared with a favorable impact of $1.8 million and $3.5 million in the same periods in 2014.
154
Net interest income from continued operations, on a taxable equivalent basis, for the second quarter of 2015 was $382.7 million compared to $375.0 million in the same quarter of 2014; the latter excludes the accelerated amortization of TARP discount and deferred costs of $414.1 million recorded in that quarter upon the repayment of TARP funds on July 2014. Net interest margin, on a taxable equivalent basis, for the second quarter of 2015 was 4.80% compared to 4.94% in the same quarter of 2014, a decrease of 14 basis points. The acquisition of $1.7 billion in loans and the assumption of $2.2 billion of deposits from Doral in February 27, 2015 impacts most of the interest income and expense lines. The Doral Bank Transaction added approximately $27.1 million in net interest income for the second quarter of 2015. This portfolio contributed an approximate 9 basis points to the Corporations overall margin in the quarter primarily driven by $1.8 billion in average earning assets with a yield of 6.40%.
The most important variances were:
| Increase of $20.7 million in interest income from non-covered loans is mostly due to an increase of $1.3 billion in average volume of loans which accounted for $17.0 million of the increase, mainly attributed to the Doral Bank Transaction. Also contributing to this variance in interest income is $3.7 million related to improved yield in the non-covered loans commercial and mortgage loan portfolios. The increase in income from commercial loans is mainly attributed to growth in the U.S. operations. |
| Decrease of $19.0 million in interest expense mainly related to the repayment of TARP funds, at the beginning of the third quarter of 2014, and the refinancing of $638 million in structured repos during the third quarter of 2014 with a cost of 4.41% as part of the reorganization of the U.S. operations. |
These positive variances were partially offset by:
| A decrease in interest income from the covered portfolio of $27.6 million driven by lower balances due to the normal portfolio run-off and loans resolutions. |
| Lower interest income from investment and trading securities by $2.8 million and $2.4 million, respectively due to lower volume and reinvestments of cash flows in lower yielding assets. |
155
Table 2 - Analysis of Levels & Yields on a Taxable Equivalent Basis for Continuing Operations
Quarters ended June 30,
Variance | ||||||||||||||||||||||||||||||||||||||||||||
Average Volume | Average Yields / Costs | Interest | Attributable to | |||||||||||||||||||||||||||||||||||||||||
2015 | 2014 | Variance | 2015 | 2014 | Variance | 2015 | 2014 | Variance | Rate | Volume | ||||||||||||||||||||||||||||||||||
($ in millions) | (In thousands) | |||||||||||||||||||||||||||||||||||||||||||
$ | 2,530 | $ | 1,378 | $ | 1,152 | 0.29 | % | 0.33 | % | (0.04 | )% | Money market investments |
$ | 1,845 | $ | 1,131 | $ | 714 | $ | 33 | $ | 681 | ||||||||||||||||||||||
5,812 | 6,028 | (216 | ) | 2.66 | 2.75 | (0.09 | ) | Investment securities |
38,591 | 41,376 | (2,785 | ) | (1,703 | ) | (1,082 | ) | ||||||||||||||||||||||||||||
233 | 433 | (200 | ) | 6.25 | 5.59 | 0.66 | Trading securities |
3,635 | 6,024 | (2,389 | ) | 650 | (3,039 | ) | ||||||||||||||||||||||||||||||
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8,575 | 7,839 | 736 | 2.06 | 2.48 | (0.42 | ) | Total money market, investment and trading securities |
44,071 | 48,531 | (4,460 | ) | (1,020 | ) | (3,440 | ) | |||||||||||||||||||||||||||||
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Loans: |
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8,776 | 8,446 | 330 | 5.19 | 5.08 | 0.11 | Commercial |
113,515 | 107,041 | 6,474 | 2,229 | 4,245 | |||||||||||||||||||||||||||||||||
682 | 175 | 507 | 6.02 | 5.55 | 0.47 | Construction |
10,247 | 2,416 | 7,831 | 226 | 7,605 | |||||||||||||||||||||||||||||||||
583 | 546 | 37 | 6.93 | 7.43 | (0.50 | ) | Leasing |
10,100 | 10,151 | (51 | ) | (710 | ) | 659 | ||||||||||||||||||||||||||||||
7,175 | 6,691 | 484 | 5.44 | 5.34 | 0.10 | Mortgage |
97,561 | 89,314 | 8,247 | 1,698 | 6,549 | |||||||||||||||||||||||||||||||||
3,823 | 3,894 | (71 | ) | 10.45 | 10.44 | 0.01 | Consumer |
99,587 | 101,350 | (1,763 | ) | 242 | (2,005 | ) | ||||||||||||||||||||||||||||||
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21,039 | 19,752 | 1,287 | 6.30 | 6.30 | | Sub-total loans |
331,010 | 310,272 | 20,738 | 3,685 | 17,053 | |||||||||||||||||||||||||||||||||
2,350 | 2,811 | (461 | ) | 9.44 | 11.83 | (2.39 | ) | Covered loans |
55,335 | 82,975 | (27,640 | ) | (14,933 | ) | (12,707 | ) | ||||||||||||||||||||||||||||
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23,389 | 22,563 | 826 | 6.62 | 6.99 | (0.37 | ) | Total loans |
386,345 | 393,247 | (6,902 | ) | (11,248 | ) | 4,346 | ||||||||||||||||||||||||||||||
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$ | 31,964 | $ | 30,402 | $ | 1,562 | 5.40 | % | 5.82 | % | (0.42 | )% | Total earning assets |
$ | 430,416 | $ | 441,778 | $ | (11,362 | ) | $ | (12,268 | ) | $ | 906 | ||||||||||||||||||||
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Interest bearing deposits: |
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$ | 5,507 | $ | 4,897 | $ | 610 | 0.36 | % | 0.32 | % | 0.04 | % | NOW and money market [1] |
$ | 4,911 | $ | 3,847 | $ | 1,064 | $ | 566 | $ | 498 | ||||||||||||||||||||||
7,040 | 6,713 | 327 | 0.23 | 0.22 | 0.01 | Savings |
4,102 | 3,628 | 474 | 282 | 192 | |||||||||||||||||||||||||||||||||
8,530 | 7,709 | 821 | 0.81 | 0.98 | (0.17 | ) | Time deposits |
17,245 | 18,748 | (1,503 | ) | (2,925 | ) | 1,422 | ||||||||||||||||||||||||||||||
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21,077 | 19,319 | 1,758 | 0.50 | 0.54 | (0.04 | ) | Total deposits |
26,258 | 26,223 | 35 | (2,077 | ) | 2,112 | |||||||||||||||||||||||||||||||
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1,052 | 2,099 | (1,047 | ) | 0.71 | 1.70 | (0.99 | ) | Short-term borrowings [3] |
1,864 | 8,892 | (7,028 | ) | (3,789 | ) | (3,239 | ) | ||||||||||||||||||||||||||||
| 536 | (536 | ) | | 15.92 | (15.92 | ) | TARP funds [2] |
| 21,342 | (21,342 | ) | | (21,342 | ) | |||||||||||||||||||||||||||||
1,803 | 979 | 824 | 4.36 | 4.21 | 0.15 | Other medium and long-term debt [3] |
19,626 | 10,306 | 9,320 | 7,538 | 1,782 | |||||||||||||||||||||||||||||||||
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23,932 | 22,933 | 999 | 0.80 | 1.17 | (0.37 | ) | Total interest bearing liabilities |
47,748 | 66,763 | (19,015 | ) | 1,672 | (20,687 | ) | ||||||||||||||||||||||||||||||
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6,247 | 5,451 | 796 | Non-interest bearing demand deposits |
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1,785 | 2,018 | (233 | ) | Other sources of funds |
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$ | 31,964 | $ | 30,402 | $ | 1,562 | 0.60 | % | 0.88 | % | (0.28 | )% | Total source of funds |
47,748 | 66,763 | (19,015 | ) | 1,672 | (20,687 | ) | |||||||||||||||||||||||||
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4.80 | % | 4.94 | % | (0.14 | )% | Net interest margin |
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Net interest income on a taxable equivalent basis |
382,668 | 375,015 | 7,653 | $ | (13,940 | ) | $ | 21,593 | ||||||||||||||||||||||||||||||||||||
4.60 | % | 4.65 | % | (0.05 | )% | Net interest spread |
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Accelerated amortization TARP discount and related deffered costs |
| 414,068 | (414,068 | ) | ||||||||||||||||||||||||||||||||||||||||
Taxable equivalent adjustment |
20,115 | 20,328 | (213 | ) | ||||||||||||||||||||||||||||||||||||||||
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Net interest income |
$ | 362,553 | $ | (59,381 | ) | $ | 421,934 | |||||||||||||||||||||||||||||||||||||
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(0.51 | )% | Net interest margin including accelerated amortization of TARP discount and related costs |
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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. |
[2] | Junior subordinated deferrable interest debentures. |
[3] | Cost of borrowings excludes the impact of the accelerated amortization. Total cost of borrowings for the second quarter of 2014 including the accelerated amortization of TARP discount would have been 50.31%. |
Net interest income from continuing operations on a taxable equivalent basis for the six-month period ended June 30, 2015 was $746.9 million compared to $744.3 million net interest income in the same period in 2014, excluding the impact of $414.1 million interest expense that resulted from the accelerated amortization of TARP funds discount and deferred costs as mentioned above. The decrease in interest expense of $39.9 million is the most significant variance in the results and is mainly the result of $39 million lower interest expense from borrowed money mainly related to the repayment of TARP funds and structured repos as mentioned above, partially offset by the issuance in July, 2014, of $450 million in senior notes at 7%, which were used to partially fund the repayment of TARP.
On the negative side the decrease in interest income from loans of $27.2 million is mainly related to lower income from the covered portfolio by $51.3 million due to both a lower volume and a lower yield that resulted from the recasting process, partially offset by the higher volume of non-covered loans that resulted from the Doral Bank Transaction.
156
Table 3 - Analysis of Levels & Yields on a Taxable Equivalent Basis from Continuing Operations (Non-GAAP)
Six months ended June 30,
Variance | ||||||||||||||||||||||||||||||||||||||||||||
Average Volume | Average Yields / Costs | Interest | Attributable to | |||||||||||||||||||||||||||||||||||||||||
2015 | 2014 | Variance | 2015 | 2014 | Variance | 2015 | 2014 | Variance | Rate | Volume | ||||||||||||||||||||||||||||||||||
(In millions) | (In thousands) | |||||||||||||||||||||||||||||||||||||||||||
$ | 2,232 | $ | 1,347 | $ | 885 | 0.30 | % | 0.32 | % | (0.02 | )% | Money market investments |
$ | 3,291 | $ | 2,104 | $ | 1,187 | $ | 158 | $ | 1,029 | ||||||||||||||||||||||
5,724 | 5,933 | (209 | ) | 2.67 | 2.78 | (0.11 | ) | Investment securities |
76,234 | 82,493 | (6,259 | ) | (2,218 | ) | (4,041 | ) | ||||||||||||||||||||||||||||
217 | 423 | (206 | ) | 6.49 | 5.73 | 0.76 | Trading securities |
6,979 | 12,022 | (5,043 | ) | 1,428 | (6,471 | ) | ||||||||||||||||||||||||||||||
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8,173 | 7,703 | 470 | 2.12 | 2.51 | (0.39 | ) | Total money market, investment and trading securities |
86,504 | 96,619 | (10,115 | ) | (632 | ) | (9,483 | ) | |||||||||||||||||||||||||||||
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Loans: |
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8,581 | 8,467 | 114 | 5.18 | 5.05 | 0.13 | Commercial |
220,402 | 212,172 | 8,230 | 5,333 | 2,897 | |||||||||||||||||||||||||||||||||
559 | 180 | 379 | 5.89 | 8.11 | (2.22 | ) | Construction |
16,324 | 7,252 | 9,072 | (2,468 | ) | 11,540 | |||||||||||||||||||||||||||||||
576 | 545 | 31 | 6.97 | 7.50 | (0.53 | ) | Leasing |
20,074 | 20,455 | (381 | ) | (1,504 | ) | 1,123 | ||||||||||||||||||||||||||||||
6,955 | 6,691 | 264 | 5.39 | 5.39 | | Mortgage |
187,602 | 180,497 | 7,105 | (12 | ) | 7,117 | ||||||||||||||||||||||||||||||||
3,834 | 3,828 | 6 | 10.41 | 10.42 | (0.01 | ) | Consumer |
197,837 | 197,783 | 54 | 530 | (476 | ) | |||||||||||||||||||||||||||||||
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20,505 | 19,711 | 794 | 6.30 | 6.31 | (0.01 | ) | Sub-total loans |
642,239 | 618,159 | 24,080 | 1,879 | 22,201 | ||||||||||||||||||||||||||||||||
2,445 | 2,872 | (427 | ) | 9.29 | 11.50 | (2.21 | ) | Covered loans |
112,765 | 164,073 | (51,308 | ) | (29,397 | ) | (21,911 | ) | ||||||||||||||||||||||||||||
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22,950 | 22,583 | 367 | 6.62 | 6.97 | (0.35 | ) | Total loans |
755,004 | 782,232 | (27,228 | ) | (27,518 | ) | 290 | ||||||||||||||||||||||||||||||
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$ | 31,123 | $ | 30,286 | $ | 837 | 5.44 | % | 5.83 | % | (0.39 | )% | Total earning assets |
$ | 841,508 | $ | 878,851 | $ | (37,343 | ) | $ | (28,150 | ) | $ | (9,193 | ) | |||||||||||||||||||
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Interest bearing deposits: |
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$ | 5,246 | $ | 4,817 | $ | 429 | 0.35 | % | 0.32 | % | 0.03 | % | NOW and money market [1] |
$ | 9,130 | $ | 7,625 | $ | 1,505 | $ | 882 | $ | 623 | ||||||||||||||||||||||
6,966 | 6,702 | 264 | 0.23 | 0.22 | 0.01 | Savings |
8,026 | 7,187 | 839 | 554 | 285 | |||||||||||||||||||||||||||||||||
8,141 | 7,624 | 517 | 0.87 | 1.01 | (0.14 | ) | Time deposits |
34,966 | 38,269 | (3,303 | ) | (4,550 | ) | 1,247 | ||||||||||||||||||||||||||||||
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20,353 | 19,143 | 1,210 | 0.52 | 0.56 | (0.04 | ) | Total deposits |
52,122 | 53,081 | (959 | ) | (3,114 | ) | 2,155 | ||||||||||||||||||||||||||||||
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1,083 | 2,201 | (1,118 | ) | 0.67 | 1.64 | (0.97 | ) | Short-term borrowings [3] |
3,597 | 17,932 | (14,335 | ) | (7,757 | ) | (6,578 | ) | ||||||||||||||||||||||||||||
| 534 | (534 | ) | | 15.98 | (15.98 | ) | TARP funds [2] |
| 42,673 | (42,673 | ) | | (42,673 | ) | |||||||||||||||||||||||||||||
1,783 | 1,005 | 778 | 4.37 | 4.16 | 0.21 | Other medium and long-term debt [3] |
38,908 | 20,865 | 18,043 | 14,957 | 3,086 | |||||||||||||||||||||||||||||||||
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23,219 | 22,883 | 336 | 0.82 | 1.18 | (0.36 | ) | Total interest bearing liabilities |
94,627 | 134,551 | (39,924 | ) | 4,086 | (44,010 | ) | ||||||||||||||||||||||||||||||
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6,106 | 5,517 | 589 | Non-interest bearing demand deposits |
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1,798 | 1,886 | (88 | ) | Other sources of funds |
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$ | 31,123 | $ | 30,286 | $ | 837 | 0.61 | % | 0.89 | % | (0.28 | )% | Total source of funds |
94,627 | 134,551 | (39,924 | ) | 4,086 | (44,010 | ) | |||||||||||||||||||||||||
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|
|||||||||||||||||||||||||||||||||
4.83 | % | 4.94 | % | (0.11 | )% | Net interest margin/ income on a taxable equivalent basis |
746,881 | 744,300 | 2,581 | $ | (32,236 | ) | $ | 34,817 | ||||||||||||||||||||||||||||||
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|
|||||||||||||||||||||||||||||
4.62 | % | 4.65 | % | (0.03 | )% | Net interest spread |
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|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||
Accelerated amortization of TARP discount and related deferred costs |
| 414,068 | (414,068 | ) | ||||||||||||||||||||||||||||||||||||||||
Taxable equivalent adjustment |
41,133 | 38,442 | 2,691 | |||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||||||||||||||
Net interest income |
$ | 705,748 | $ | 291,790 | $ | 413,958 | ||||||||||||||||||||||||||||||||||||||
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|
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|
|||||||||||||||||||||||||||||||||||||||
2.20 | % | Net interest margin including accelerated amortization of TARP discount and related costs |
||||||||||||||||||||||||||||||||||||||||||
|
|
157
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. |
[2] | Junior subordinated deferrable interest debentures. |
[3] | Cost of borrowings excludes the impact of the accelerated amortization. Total cost of borrowings for the six months ended June 30, 2014 including the accelerated amortization of TARP discount would have been 26.51%. |
Provision for Loan Losses
The Corporations total provision for loan losses was $76.2 million for the quarter ended June 30, 2015, compared to $61.7 million for the quarter ended June 30, 2014, an increase of $14.5 million.
The provision for loan losses for the non-covered loan portfolio totaled $60.5 million, compared to $50.1 million for the same quarter in 2014, an increase of $10.4 million, mostly reflecting a higher reserve release in the BPNA segment in the second quarter of 2014. In addition, during the second quarter of 2015, management completed the annual review of the components of the ALLL models. These enhancements were implemented as of June 30, 2015 and resulted in a net decrease to the allowance for loan losses of $1.9 million for the non-covered portfolio, compared to a reserve release of $18.7 million during the second quarter of 2014. Net charge-offs, excluding write-downs, remained flat at $46.4 million when compared with the same quarter in 2014. Refer to the Critical Accounting Policies section of this MD&A for further details of these revisions.
The provision for loan losses for the non-covered loan portfolio at the BPPR segment decreased by $14.3 million, as the second quarter of 2014 included the effects of environmental factors to account for the macroeconomic conditions in Puerto Rico and the effect of downgrades in the internal risk ratings of certain large corporate and public sector relationships. These increases were partially offset by a $14.9 million reserve release as part of the annual recalibration and enhancements to the allowance for loan losses methodology during the second quarter of 2014. For the quarter ended June 30, 2015, the review of the ALLL methodology resulted in a net decrease of $2.6 million. The aggregate write-down on loans transferred to held-for-sale during the quarter was of approximately $30.0 million, of which $29.0 million was previously reserved having minimal impact on provision. Refer to the Critical Accounting Policies section of this MD&A for further details of these revisions.
The provision for loan losses for the BPNA segment was a provision release of $61 thousand, compared to a release of $24.7 million for the same quarter in 2014. The annual review of the ALLL methodology resulted in a net increase of approximately $0.7 million, compared to a $3.8 million reserve release in the same quarter in 2014. Refer to the Critical Accounting Policies section of this MD&A for further details of these revisions.
The provision for covered loan portfolio totaled $15.8 million in the second quarter of 2015, compared to $11.6 million for the same quarter in 2014, increasing by $4.2 million. The second quarter of 2014 included a $0.8 million increase as part of the annual recalibration and enhancements of the ALLL models. In the second quarter of 2015, the effect of the aforementioned enhancements was immaterial for the covered loans portfolio. Overall expected loss estimates for pools accounted for under ASC Subtopic 310-30 continue to be lower than originally estimated.
For the six months ended June 30, 2015, the Corporations total provision for loan losses totaled $116.3 million, compared with $141.5 million for the same period in 2014, decreasing by $25.2 million mostly driven by lower provision in the BPPR segment. The results for the six months ended June 30, 2015 include a $1.9 million reserve release as part of the annual recalibration and enhancements of the ALLL models, compared to a reserve release of $17.9 million for the same period of 2014.
For the six months period ended June 30, 2015, the provision for loan losses for the non-covered loan portfolio decreased by $14.0 million when compared to the same period of 2014. The provision for the BPPR segment decreased by $36.3 million, since the second quarter of 2014 included the impact of environmental factors to account for the macroeconomic conditions in Puerto Rico and the effect of downgrades in the internal risk ratings of certain large corporate and public sector relationships, as stated above, combined with lower charge-offs during the same period in 2015 by $7.4 million. The provision for the BPNA segment increased by $22.3 million primarily due to higher reserve releases during the six month period ended June 30, 2014.
The provision for the covered portfolio was $26.1 million for the six month period ended June 30, 2015, compared to $37.3 million for same period of last year. This decrease was mainly due to lower impairment losses on commercial loan pools accounted for under ASC 310-30.
158
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
Refer to Table 4 for a breakdown on non-interest income by major categories for the quarters and six months ended June 30, 2015 and 2014.
Table 4 - Non-Interest Income
Quarters ended June 30, | Six months ended June 30, | |||||||||||||||||||||||
(In thousands) |
2015 | 2014 | Variance | 2015 | 2014 | Variance | ||||||||||||||||||
Service charges on deposit accounts |
$ | 40,138 | $ | 39,237 | $ | 901 | $ | 79,155 | $ | 78,596 | $ | 559 | ||||||||||||
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|
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|
|
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Other service fees: |
||||||||||||||||||||||||
Debit card fees |
11,995 | 11,000 | 995 | 23,120 | 21,544 | 1,576 | ||||||||||||||||||
Insurance fees |
13,606 | 12,406 | 1,200 | 25,647 | 24,125 | 1,522 | ||||||||||||||||||
Credit card fees |
17,611 | 16,985 | 626 | 33,760 | 33,068 | 692 | ||||||||||||||||||
Sale and administration of investment products |
6,601 | 7,456 | (855 | ) | 12,531 | 13,913 | (1,382 | ) | ||||||||||||||||
Trust fees |
4,914 | 4,566 | 348 | 9,516 | 9,029 | 487 | ||||||||||||||||||
Other fees |
4,694 | 4,055 | 639 | 8,473 | 7,607 | 866 | ||||||||||||||||||
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|
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|
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Total other service fees |
59,421 | 56,468 | 2,953 | 113,047 | 109,286 | 3,761 | ||||||||||||||||||
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|
|
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|
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|
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Mortgage banking activities |
21,325 | 3,788 | 17,537 | 34,177 | 7,466 | 26,711 | ||||||||||||||||||
Net gain and valuation adjustments of investment securities |
5 | | 5 | 5 | | 5 | ||||||||||||||||||
Other-than-temporary impairment losses on investment securities |
(14,445 | ) | | (14,445 | ) | (14,445 | ) | | (14,445 | ) | ||||||||||||||
Trading account (loss) profit |
(3,108 | ) | 1,055 | (4,163 | ) | (2,694 | ) | 3,032 | (5,726 | ) | ||||||||||||||
Net gain on sale of loans, including valuation adjustment on loans held-for-sale |
681 | 9,659 | (8,978 | ) | 602 | 14,052 | (13,450 | ) | ||||||||||||||||
Adjustment (expense) to indemnity reserves on loans sold |
419 | (7,454 | ) | 7,873 | (4,107 | ) | (17,801 | ) | 13,694 | |||||||||||||||
FDIC loss share income (expense) |
19,075 | (55,261 | ) | 74,336 | 23,214 | (79,467 | ) | 102,681 | ||||||||||||||||
Other operating income |
17,248 | 15,297 | 1,951 | 27,040 | 43,657 | (16,617 | ) | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total non-interest income |
$ | 140,759 | $ | 62,789 | $ | 77,970 | $ | 255,994 | $ | 158,821 | $ | 97,173 | ||||||||||||
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|
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Table 5 - Mortgage Banking Activities
Quarters ended June 30, | Six months ended June 30, | |||||||||||||||||||||||
(In thousands) |
2015 | 2014 | Variance | 2015 | 2014 | Variance | ||||||||||||||||||
Mortgage servicing fees, net of fair value adjustments: |
||||||||||||||||||||||||
Mortgage servicing fees |
$ | 14,689 | $ | 10,558 | $ | 4,131 | $ | 26,937 | $ | 21,306 | $ | 5,631 | ||||||||||||
Mortgage servicing rights fair value adjustments |
(1,917 | ) | (7,740 | ) | 5,823 | (6,846 | ) | (15,836 | ) | 8,990 | ||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total mortgage servicing fees, net of fair value adjustments |
12,772 | 2,818 | 9,954 | 20,091 | 5,470 | 14,621 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net gain on sale of loans, including valuation on loans held-for-sale |
8,022 | 8,189 | (167 | ) | 15,302 | 15,365 | (63 | ) | ||||||||||||||||
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|
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|
|
|
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|
|
|
|||||||||||||
Trading account profit (loss): |
||||||||||||||||||||||||
Unrealized gains (losses) on outstanding derivative positions |
42 | 22 | 20 | 59 | (738 | ) | 797 | |||||||||||||||||
Realized gains (losses) on closed derivative positions |
489 | (7,241 | ) | 7,730 | (1,275 | ) | (12,631 | ) | 11,356 | |||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total trading account profit (loss) |
531 | (7,219 | ) | 7,750 | (1,216 | ) | (13,369 | ) | 12,153 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total mortgage banking activities |
$ | 21,325 | $ | 3,788 | $ | 17,537 | $ | 34,177 | $ | 7,466 | $ | 26,711 | ||||||||||||
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159
Non-interest income increased by $78.0 million during the quarter ended June 30, 2015, compared with the same quarter of the previous year. Excluding the impact of the significant events detailed in Tables 61 to 63 Adjusted Results (Non-GAAP), non-interest income increased $84.8 million. The increase in adjusted non-interest income was principally due to:
| Positive variance in the FDIC loss share income (expense) of $67.7 million, excluding the impact of $17.6 million in mirror accounting for reimbursable expenses related to the bulk sale of OREO and the $10.9 million adjustment to the FDIC indemnification asset, driven by lower amortization of the indemnification asset and higher mirror accounting on reimbursable expenses. Refer to Table 6 for a breakdown of FDIC loss share income (expenses) by major categories; |
| Positive variance in the adjustments to indemnity reserves by $7.9 million due to lower provision for loans previously sold due to decreased reps and warrants repurchase activity and the overaccrual reversal of $1.8 million reserve established during the quarter ended March 31, 2013 for certain specific representation and warranties made in connection with BPPRs bulk sale of commercial and construction loans, and commercial single and single family real estate owned; and |
| Higher mortgage banking activities revenues by $17.5 million mostly at BPPR segment due to higher mortgage servicing fees of $4.1 million due to a higher servicing portfolio, a favorable variance in the valuation adjustment on mortgage servicing rights of $5.8 million and a positive variance of $7.7 million in realized gains/(losses) on closed derivative positions. Refer to Table 5 for details of mortgage banking activities. |
These favorable variances were partially offset by:
| Unfavorable variance in trading account of $4.2 million due to higher unrealized losses on MBS outstanding; and a |
| Negative variance in net gains (loss) on sale of loans by $9.0 million principally at the BPNA segment due to gains realized from individual commercial loan sales during 2014. |
The results for the second quarter of 2015 include an other-than-temporary impairment charge on the portfolio of Puerto Rico government investment securities available-for-sale of $14.4 million. These securities had an amortized cost of approximately $41.1 million and a market value of $26.6 million. Based on the fiscal and economic situation in Puerto Rico, together with the governments recent announcements regarding its ability to pay its debt and its intention to pursue a comprehensive debt restructuring, the Corporation determined that the unrealized loss, a portion of which had been in an unrealized loss for a period exceeding twelve months, was other-than-temporary.
For the six months ended June 30, 2015, non-interest income increased by $97.2 million, compared with the same period of the previous year. Excluding the impact of the significant events detailed in Tables 64 to 66 Adjusted Results (Non-GAAP), non-interest income increased $102.9 million. The increase in adjusted non-interest income was principally due to:
| Positive variance in the FDIC loss share income (expense) of $96.0 million, excluding the significant events described above, mostly driven by lower amortization of the indemnification asset and higher mirror accounting on reimbursable expenses. Refer to Table 6 for a breakdown of FDIC loss share income (expenses) by major categories; |
| Positive variance in the adjustments to indemnity reserves by $13.7 million mainly due to lower provision for loans previously sold due to decreased reps and warrants repurchase activity, and the overaccrual reversal during the six month period ending June 30, 2015 of $5.0 million related to the reserve established in connection with BPPRs bulk sale, as described above; and |
| Higher mortgage banking activities revenues by $26.7 million mostly at BPPR segment due to higher mortgage servicing fees of $5.6 million due to a higher servicing portfolio, a favorable variance in the valuation adjustment on mortgage servicing rights of $9.0 million and a positive variance of $11.4 million in realized gains/(losses) on closed derivative positions. Refer to Table 5 for details of mortgage banking activities. |
These favorable variances were partially offset by:
| Unfavorable variance in trading account of $5.7 million due to higher unrealized losses on MBS outstanding; |
| Negative variance in net gains (loss) on sale of loans by $13.5 million principally at the BPNA segment due to gains realized from individual commercial loan sales during 2014; and |
| Lower other operating income by $18.7 million principally due to lower aggregated net earnings from investments accounted under the equity method by $14.5 million, including a net gain of $6.5 million recorded during the first quarter of 2014 as a result of the acquisition of another financial institution completed by Centro Financiero BHD, the Corporations equity method investee based in the Dominican Republic. |
160
The following table provides a summary of the revenues and expenses derived from the assets acquired in the FDIC-assisted transaction during the quarters and six months period ended June 30, 2015 and 2014.
Table 6 - Financial Information - Westernbank FDIC-Assisted Transaction
Quarters ended June 30, | Six months ended June 30, | |||||||||||||||||||||||
(In thousands) |
2015 | 2014 | Variance | 2015 | 2014 | Variance | ||||||||||||||||||
Interest income on covered loans |
$ | 55,335 | $ | 82,975 | $ | (27,640 | ) | $ | 112,766 | $ | 164,073 | $ | (51,307 | ) | ||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
FDIC loss share income (expense) : |
||||||||||||||||||||||||
Amortization of loss share indemnification asset |
(31,065 | ) | (72,095 | ) | 41,030 | (58,381 | ) | (121,041 | ) | 62,660 | ||||||||||||||
80% mirror accounting on credit impairment losses[1] |
7,647 | 10,372 | (2,725 | ) | 15,893 | 25,462 | (9,569 | ) | ||||||||||||||||
80% mirror accounting on reimbursable expenses |
42,730 | 11,085 | 31,645 | 64,275 | 23,830 | 40,445 | ||||||||||||||||||
80% mirror accounting on recoveries on covered assets, including rental income on OREOs, subject to reimbursement to the FDIC |
(5,203 | ) | (3,557 | ) | (1,646 | ) | (7,822 | ) | (7,949 | ) | 127 | |||||||||||||
Change in true-up payment obligation |
3,672 | (1,206 | ) | 4,878 | 7,836 | (38 | ) | 7,874 | ||||||||||||||||
Other |
1,294 | 140 | 1,154 | 1,413 | 269 | 1,144 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total FDIC loss share income (expense) |
19,075 | (55,261 | ) | 74,336 | 23,214 | (79,467 | ) | 102,681 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total revenues |
74,410 | 27,714 | 46,696 | 135,980 | 84,606 | 51,374 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Provision for loan losses |
15,766 | 11,604 | 4,162 | 26,090 | 37,318 | (11,228 | ) | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total revenues less provision for loan losses |
$ | 58,644 | $ | 16,110 | $ | 42,534 | $ | 109,890 | $ | 47,288 | $ | 62,602 | ||||||||||||
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|
|
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|
[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 June 30, | Six months ended June 30, | |||||||||||||||||||||||
(In millions) |
2015 | 2014 | Variance | 2015 | 2014 | Variance | ||||||||||||||||||
Covered loans |
$ | 2,350 | $ | 2,811 | $ | (461 | ) | $ | 2,444 | $ | 2,872 | $ | (428 | ) | ||||||||||
FDIC loss share asset |
391 | 792 | (401 | ) | 410 | 846 | (436 | ) |
Operating Expenses
Refer to Table 7 for a breakdown of operating expenses by major categories. Operating expenses increased by $87.7 million during the quarter ended June 30, 2015, compared with the same quarter of the previous year. Excluding the impact of certain transactions, as detailed in Tables 60 through 62, operating expenses increased by $51.4 million due mainly to the following factors:
| Higher OREO expenses by $19.4 million mainly as a result of higher write-downs on commercial, construction and mortgage properties by $10.4 million and higher loss on sales by $7.0 million; |
| Higher personnel cost by $18.0 million mostly related to an increase in share based compensation by $6.0 million attributed to the accounting treatment of awards granted during the quarter, higher incentives, full quarters expense of the employees retained from the Doral Bank Transaction and higher pension cost at BPPR related to adjustments to the mortality table and discount rate used for actuarial assumptions; |
| Higher other general operating expenses by $9.3 million mainly due to property tax payments at BPPR by $6.0 million, most of which was related to loss sharing expense reimbursable by the FDIC. These payments were made under a general amnesty provision provided by the government; |
| Higher professional fees by $6.5 million due to higher programming, processing and other technology services. |
Operating expenses decreased by $122.5 million for the six months ended June 30, 2015, when compared to the same period in 2014. Excluding the impact of certain transactions, as detailed in Tables 63 through 65; operating expenses increased by $65.3 million due mainly to the following factors:
| Higher OREO expenses by $36.1 million due to higher write-down of commercial properties by $20.3 million and higher loss on sales by $13.1 million; |
161
| Higher personnel cost by $27.7 million mostly related to higher salaries and incentive compensation, higher share based compensation and higher pension cost at BPPR related to adjustments to the mortality table and discount rate used for actuarial assumptions; |
| Higher professional fees by $8.1 million mainly due to higher programming, processing and other technology services and higher legal expenses related to the FDIC arbitration proceedings. |
These increases were partially offset by:
| Lower other taxes by $7.5 million due to elimination of the Puerto Rico gross revenue tax and lower municipal license tax. |
Table 7 - Operating Expenses
Quarters ended June 30, | Six months ended June 30, | |||||||||||||||||||||||
(In thousands) |
2015 | 2014 | Variance | 2015 | 2014 | Variance | ||||||||||||||||||
Personnel costs: |
||||||||||||||||||||||||
Salaries |
$ | 76,453 | $ | 69,149 | $ | 7,304 | $ | 148,847 | $ | 138,187 | $ | 10,660 | ||||||||||||
Commissions, incentives and other bonuses |
24,214 | 12,862 | 11,352 | 42,672 | 25,961 | 16,711 | ||||||||||||||||||
Pension, postretirement and medical insurance |
9,075 | 7,532 | 1,543 | 21,088 | 16,233 | 4,855 | ||||||||||||||||||
Other personnel costs, including payroll taxes |
11,235 | 9,557 | 1,678 | 24,828 | 23,020 | 1,808 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total personnel costs |
120,977 | 99,100 | 21,877 | 237,435 | 203,401 | 34,034 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net occupancy expenses |
23,286 | 20,267 | 3,019 | 44,995 | 41,627 | 3,368 | ||||||||||||||||||
Equipment expenses |
15,925 | 12,044 | 3,881 | 29,336 | 23,456 | 5,880 | ||||||||||||||||||
Other taxes |
11,113 | 13,543 | (2,430 | ) | 19,687 | 27,206 | (7,519 | ) | ||||||||||||||||
Professional fees: |
||||||||||||||||||||||||
Collections, appraisals and other credit related fees |
7,688 | 6,652 | 1,036 | 13,611 | 12,972 | 639 | ||||||||||||||||||
Programming, processing and other technology services |
49,405 | 43,533 | 5,872 | 94,566 | 86,218 | 8,348 | ||||||||||||||||||
Other professional fees |
21,356 | 16,839 | 4,517 | 45,800 | 34,833 | 10,967 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total professional fees |
78,449 | 67,024 | 11,425 | 153,977 | 134,023 | 19,954 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Communications |
6,153 | 6,425 | (272 | ) | 12,329 | 13,110 | (781 | ) | ||||||||||||||||
Business promotion |
13,776 | 16,038 | (2,262 | ) | 24,589 | 27,424 | (2,835 | ) | ||||||||||||||||
FDIC deposit insurance |
8,542 | 10,480 | (1,938 | ) | 14,940 | 21,458 | (6,518 | ) | ||||||||||||||||
Other real estate owned (OREO) expenses |
44,816 | 3,410 | 41,406 | 67,885 | 9,850 | 58,035 | ||||||||||||||||||
Other operating expenses: |
||||||||||||||||||||||||
Credit and debit card processing, volume and interchange expenses |
5,762 | 5,640 | 122 | 10,583 | 10,836 | (253 | ) | |||||||||||||||||
Transportation and travel |
1,887 | 1,586 | 301 | 3,626 | 3,176 | 450 | ||||||||||||||||||
Printing and supplies |
1,059 | 955 | 104 | 1,878 | 1,645 | 233 | ||||||||||||||||||
Operational losses |
2,674 | 1,945 | 729 | 5,924 | 7,480 | (1,556 | ) | |||||||||||||||||
All other |
19,700 | 10,383 | 9,317 | 26,419 | 19,721 | 6,698 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total other operating expenses |
31,082 | 20,509 | 10,573 | 48,430 | 42,858 | 5,572 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Amortization of intangibles |
2,881 | 2,025 | 856 | 4,985 | 4,051 | 934 | ||||||||||||||||||
Restructuring costs |
6,174 | 4,574 | 1,600 | 16,927 | 4,574 | 12,353 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total operating expenses |
$ | 363,174 | $ | 275,439 | $ | 87,735 | $ | 675,515 | $ | 553,038 | $ | 122,477 | ||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
INCOME TAXES
Income tax benefit amounted to $533.5 million for the quarter ended June 30, 2015, compared with an income tax benefit of $4.1 million for the same quarter of 2014. The increase in income tax benefit was primarily due to a tax benefit of $544.9 million recorded during the second quarter of 2015 as a result of the partial reversal of the valuation allowance on the Corporations deferred tax asset from the U.S. operations. This positive variance was partially offset by a tax benefit of $23.4 million recorded during the second quarter of 2014 as a result of a closing agreement entered into the Corporation and the PR Treasury. The Agreement among other matters was related to the income tax treatment of certain charge-offs related to the loans acquired from Westernbank as part of the FDIC assisted transaction in the year 2010.
During the quarter ended June 30, 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
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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 June 30, 2015 the U.S. operations are not in a three year loss cumulative position, taking into account taxable income exclusive of reversing temporary differences. All of these factor led 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 any changes arises.
The components of income tax expense for the quarters ended June 30, 2015 and 2014 are included in the following table:
Table 8 Components of Income Tax (Benefit) Expense
Quarters ended | ||||||||||||||||
June 30, 2015 | June 30, 2014 | |||||||||||||||
(In thousands) |
Amount | % of pre-tax income |
Amount | % of pre-tax income |
||||||||||||
Computed income tax expense at statutory rates |
$ | 24,923 | 39 | % | $ | (130,147 | ) | 39 | % | |||||||
Net benefit of tax exempt interest income |
(13,590 | ) | (21 | ) | (13,558 | ) | 4 | |||||||||
Deferred tax asset valuation allowance |
(542,706 | ) | (849 | ) | (7,211 | ) | 2 | |||||||||
Non-deductible expenses |
| | 169,810 | (50 | ) | |||||||||||
Difference in tax rates due to multiple jurisdictions |
(3,094 | ) | (5 | ) | (4,293 | ) | 1 | |||||||||
Effect of income subject to preferential tax rate[1] |
593 | 1 | (20,833 | ) | 6 | |||||||||||
Others |
341 | 1 | 2,108 | (1 | ) | |||||||||||
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|
|
|
|
|
|
|
|||||||||
Income tax (benefit) expense |
$ | (533,533 | ) | (834 | )% | $ | (4,124 | ) | 1 | % | ||||||
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|
|
|
|
|
|
|
[1] | For 2014, includes the impact of the Closing Agreement with the P.R. Treasury signed in June 2014. |
Income tax benefit amounted to $501.0 million for the six months ended June 30, 2015, compared with an income tax expense of $19.1 million for the same quarter of 2014. The increase in income tax benefit was related to the above mentioned partial release of the valuation allowance on the deferred tax asset from the U.S. operations, partially offset by the impact of the Closing Agreement with the P.R. Treasury, signed in June 2014.
Table 9 Components of Income Tax (Benefit) Expense Year-to-Date
Six months ended | ||||||||||||||||
June 30, 2015 | June 30, 2014 | |||||||||||||||
(In thousands) |
Amount | % of pre-tax income |
Amount | % of pre-tax income |
||||||||||||
Computed income tax (benefit) expense at statutory rates |
$ | 66,283 | 39 | % | $ | (95,138 | ) | 39 | % | |||||||
Net benefit of tax exempt interest income |
(27,283 | ) | (16 | ) | (24,944 | ) | 10 | |||||||||
Deferred tax asset valuation allowance |
(537,067 | ) | (316 | ) | (14,183 | ) | 6 | |||||||||
Non-deductible expenses |
| | 178,129 | (73 | ) | |||||||||||
Difference in tax rates due to multiple jurisdictions |
(4,703 | ) | (3 | ) | (10,488 | ) | 4 | |||||||||
Effect of income subject to preferential tax rate[1] |
(1,878 | ) | (1 | ) | (18,555 | ) | 8 | |||||||||
Others |
3,684 | 2 | 4,319 | (2 | ) | |||||||||||
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|
|
|
|
|
|
|
|||||||||
Income tax (benefit) expense |
$ | (500,964 | ) | (295 | )% | $ | 19,140 | (8 | )% | |||||||
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|
|
|
|
|
|
[1] | For 2014, includes the impact of the Closing Agreement with the P.R. Treasury signed in June 2014. |
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Refer to Note 36 to the consolidated financial statements for a breakdown of the Corporations deferred tax assets as of June 30, 2015.
REPORTABLE SEGMENT RESULTS
The Corporations 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 in the second quarter of 2014, and the assets and liabilities of these regions were subsequently sold during the third and fourth quarters of 2014.
As indicated in Note 5 to the consolidated financial statements, Business Combination, on February 27, 2015, Banco Popular de Puerto Rico, in an alliance with co-bidders, including BPNA, acquired certain assets and all deposits of Doral Bank from the FDIC as receiver. The financial results for the first and second quarters of 2015 of both reportable segments include the results from the operations acquired as part of the Doral Bank Transaction.
A Corporate group has been defined to support the reportable segments. For managerial reporting purposes, the costs incurred by the Corporate group are not allocated to the reportable segments.
For a description of the Corporations reportable segments, including additional financial information and the underlying management accounting process, refer to Note 38 to the consolidated financial statements.
The Corporate group reported a net loss of $19.2 million for the quarter ended June 30, 2015, compared with a net loss of $451.4 million for the quarter ended June 30, 2014. The favorable variance was mostly due to the accelerated amortization recorded in the second quarter of 2014 of $414.1 million of the discount and deferred costs associated with the TARP funds, which were repaid in July 2, 2014.
Highlights on the earnings results for the reportable segments are discussed below:
Banco Popular de Puerto Rico
The Banco Popular de Puerto Rico reportable segments net income amounted to $55.9 million for the quarter ended June 30, 2015, compared with a net income of $71.3 million for the same quarter of the previous year. The principal factors that contributed to the variance in the financial results included the following:
| lower net interest income by $18.0 million mostly due to: |
| a decrease of $16.6 million, or 42 basis points in income from loans, mostly from the covered loans portfolio by $27.6 million due to lower yields by 240 basis points and lower average balances by $461 million as part of the normal portfolio run-off and loan resolutions, partially offset by an increase of $11.0 million in income from mortgage loans mostly due to higher average balances by $709 million, mainly from the portfolio acquired as part of the Doral Bank Transaction; |
| a decrease of $2.3 million in income from trading account securities due mainly to lower average balances by $200 million; and |
| an increase of $1.0 million in interest expense from long term debt due mostly to higher average balances by $396 million. |
partially offset by:
| an increase of $1.3 million in income from investment securities mostly due to higher average balances by $351 million, partially offset by lower yields by 6 basis points. |
The net interest margin was 4.92% for the quarter ended June 30, 2015, compared to 5.50% for the same period in 2014.
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| lower provision for loan losses by $10.4 million, driven by a decrease of $14.5 million from the non-covered portfolio as the second quarter of 2014 included the effects of environmental factors to account for the macroeconomic conditions in Puerto Rico and the effect of downgrades in the internal risk ratings of certain large corporate and public sector relationships, while for the quarter ended June 30, 2015, the review of the ALLL methodology resulted in a net decrease of $2.6 million. The decrease from the non-covered portfolio was partially offset by an increase of $4.2 million in the covered loans portfolio due to higher credit impairment losses; |
| higher non-interest income by $87.2 million mainly due to: |
| positive variance in the FDIC loss share income (expense) of $74.3 million driven by lower amortization of the indemnification asset and higher mirror accounting on reimbursable expenses. Refer to Table 6 for a breakdown of FDIC loss share income (expenses) by major categories; |
| higher mortgage banking activities revenues by $17.6 million mainly due to higher mortgage servicing fees of $4.1 million, a favorable variance in the valuation adjustment on mortgage servicing rights of $5.8 million and a positive variance of $7.7 million in realized gains/(losses) on closed derivative positions. Refer to Table 5 for details of mortgage banking activities; and |
| positive variance in the adjustments to indemnity reserves on loans sold by $9.8 million due to lower provision for loans previously sold due to decreased representations and warrants repurchase activity and the reversal of $1.8 million of a reserve established during the quarter ended March 31, 2013 for certain specific representation and warranties made in connection with the bulk sale of commercial and construction loans, and commercial single and single family real estate owned; |
partially offset by:
| an other than temporary impairment charge of $14.4 million recorded on Puerto Rico government investment securities available-for-sale. |
| higher operating expenses by $69.7 million mainly due to: |
| higher OREO expenses by $37.2 million due to due to higher write-downs of commercial properties by $10.7 and higher losses on sales by $22.8 million; |
| higher personnel costs by $14.8 million mostly due to an increase in salaries of $11.4 million, of which $4.1 are related to retained employees from the Doral Bank Transaction, and an increase in pension and other benefits of $3.4 million; |
| higher professional fees by $10.5 million largely due to costs incurred as part of the Doral Bank Transaction; and |
| higher other operating expenses by $7.2 million largely due to property tax payments of $6.0 million, most of which was related to loss sharing expense reimbursable by the FDIC. These payments were made under a general amnesty provision provided by the government. |
| higher income tax expense of $25.3 million due to mainly to the $23.4 million benefit recognized during the second quarter of 2014 in connection with a Closing Agreement with the Puerto Rico Department of Treasury. |
Net income for the six months ended June 30, 2015 amounted to $146.7 million, compared to $136.3 million for the same period of the previous year. The principal factors that contributed to the variance in the financial results included the following:
| lower net interest income by $39.3 million, or 55 basis points, mostly due to: |
| a decrease of $36.0 million in income from loans, mostly from the covered loans portfolio by $51.3 million due to lower yields by 222 basis points and lower average balances by $428 million as part of the normal portfolio run-off and loan resolutions, partially offset by an increase of $12.7 million in income from mortgage loans mostly due to higher average balances by $484 million, mainly from the portfolio acquired as part of the Doral Bank Transaction; |
| a decrease of $4.9 million in income from trading account securities due mainly to lower average balances by $207 million; and |
| an increase in interest expense on long term debt of $1.4 million due higher average balances by $346 million. |
Partially offsetting the unfavorable variances in net interest income was an increase of $1.2 million in interest income from money markets due to higher average balances by $865 million, and lower interest expense from short-term borrowings by $1.1 million due to lower average balances by $1.1 billion. The net interest margin was 4.95% for the six months ended June 30, 2015, compared to 5.50% for the same period in 2014;
165
| lower provision for loan losses by $48.0 million, or 29%, mostly due to the decrease in the provision for loan losses on the non-covered loan portfolio of $36.7 million, since the second quarter of 2014 included the impact of environmental factors to account for the macroeconomic conditions in Puerto Rico and the effect of downgrades in the internal risk ratings of certain large corporate and public sector relationships, as stated above; and |
| higher non-interest income by $122.7 million, or 115%, mainly due to: |
| favorable variance in FDIC loss share income (expense) by $102.7 million mainly driven by lower amortization of the indemnification asset and higher mirror accounting on reimbursable expenses; |
| higher income from mortgage banking activities by $26.9 million mainly due to higher mortgage servicing fees of $5.6 million, a favorable variance in the valuation adjustment on mortgage servicing rights of $9.0 million and a positive variance of $12.2 million in realized gains/(losses) on closed derivative positions; and |
| positive variance in adjustments to indemnity reserves by $15.5 million mainly due to lower provision for loans previously sold due to decreased representations and warrants repurchase activity, and the reversal during the six month period ending June 30, 2015 of $5.0 million of a reserve established in connection with a bulk sale, as described above. |
The positive variances in non-interest income detailed above were partially offset by:
| an other than temporary impairment charge of $14.4 million recorded on Puerto Rico government investment securities available- for- sale; and |
| lower other operating income by $7.1 million due to a decrease of $5.9 million in net earnings from the equity investment in PR Asset Portfolio 2013. |
| Higher operating expenses by $88.2 million, or 20%, mainly due to: |
| higher OREO expenses by $49.9 million due to higher write-downs of commercial properties by $19.1 million and higher loss on sales by $28.1 million; |
| higher personnel costs by $24.6 million due mostly to higher salaries and incentive compensation, higher share based compensation and higher pension costs related to adjustments recorded during the first quarter of 2015 to the mortality table and discount rate used for actuarial assumptions; |
| higher professional fees by $17.0 million due to higher programming, processing and other technology services and higher legal expenses related to the FDIC arbitration proceedings. |
Partially offset by:
| lower FDIC deposit insurance by $6.6 million resulting from improvements in assets quality and earnings trends; and |
| lower other operating taxes by $6.4 million due to elimination of the Puerto Rico gross revenue tax and lower municipal license tax. |
| Higher income tax expense by $32.8 million due mostly to the $23.4 million benefit recognized during the second quarter of 2014 in connection with a Closing Agreement with the Puerto Rico Department of Treasury and higher taxable income in the second quarter of 2015. |
Banco Popular North America
For the quarter ended June 30, 2015, the reportable segment of Banco Popular North America reported net income from continuing operations of $561.0 million, compared with a net income $50.9 million for the same quarter of the previous year mainly due to impact of the partial reversal of the valuation allowance of the deferred tax asset of $544.9 million. Other factors that contributed to the variance in the financial results included the following:
| net interest income improved by $13.2 million, mainly due to higher interest income from loans by $9.8 million, mostly due to income from loans acquired as part of the Doral Bank Transaction, and lower interest expense from repos by $7.1 million as BPNA refinanced during the third quarter of 2014 approximately $638 million in long term structured repos with a yield of 4.41% and replaced them with lower cost short-term repos of a similar amount, partially offset by lower interest income from MBS and CMOs by $4.0 million due to portfolio sales in 2014 following the sale of the regions classified as discontinued operations in 2014. Net interest margin was 4.03% compared to 3.25% for the same quarter of the previous year; |
| higher provision for loan losses by $24.7 million mainly due to higher releases during the second quarter of 2014; |
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| lower non-interest income by $12.5 million, mostly due an unfavorable variance in net gains (losses) on sale of loans of $9.8 million due to lower volume of sales of non-performing commercial loans, and higher provision for indemnity reserves by $2.0 million; and |
| higher operating expenses by $10.7 million, mainly due to higher OREO expenses by $4.3 million due mostly to an unfavorable variance of $4.4 million on losses on sales of OREO, restructuring costs of $1.6 million incurred during the second quarter of 2015, higher personnel costs by $1.5 million mainly due to additional personnel retained as part of the Doral Bank Transaction, and higher net occupancy costs by $1.4 million due in part to the Doral Bank Transaction; |
| favorable variance in income tax expense (benefit) by $544.7 million largely due to partial reversal of the valuation allowance of the deferred tax asset of $544.9 million. |
Net income from continuing operations for the six months ended June 30, 2015 amounted to $564.3 million, compared to $72.0 million for the same period of the previous year, largely due to the previously mentioned partial reversal of the valuation allowance of the deferred tax asset of $544.9 million. Other factors that contributed to the variance in the financial results included the following:
| higher net interest income by $13.9 million, or 61 basis points, mainly impacted by lower interest expense from short-term borrowings by $13.9 million due to lower yields by 392 basis points and lower average balances by $521 million due to the above mentioned refinancing of structured repos, and higher interest income from loans by $7.2 million due mostly to income related to the loans acquired during 2015 as part of the Doral Bank Transaction, partially offset by lower income from investment securities by $8.1 million due to lower average balances by $574 million. The BPNA reportable segments net interest margin was 3.94% for the six months ended June 30, 2015, compared with 3.33% for the same period in 2014; |
| unfavorable variance in the provision for loan losses by $22.3 million, principally as a result of higher reserve releases during the six month period ended June 30, 2014; |
| lower non-interest income by $16.9 million, mostly due to lower gains on sale of loans by $14.2 million related to a lower volume of sales of non-performing commercial loans; and lower adjustments for indemnity reserves of $1.8 million; |
| higher operating expenses by $27.0 million mostly due to a $12.4 million increase in restructuring charges related to the reorganization of BPNA, higher OREO expenses by $8.2 million mostly due to lower gains on sales of OREO by $4.2 million and higher write-downs by $3.6 million, and higher professional fees by $3.6 million mostly associated with the Doral Bank Transaction; and |
| favorable variance in income tax expense (benefit) by $544.6 million largely due to partial reversal of the valuation allowance of the deferred tax asset of $544.9 million. |
FINANCIAL CONDITION ANALYSIS
Assets
The Corporations total assets were $36.8 billion at June 30, 2015 and $33.1 billion at December 31, 2014. Refer to the consolidated financial statements included in this report for the Corporations consolidated statements of financial condition as of such dates.
Money market investments, trading and investment securities
Money market investments totaled $3.2 billion at June 30, 2015, compared to $1.8 billion at December 31, 2014. The increase in liquidity was at BPPR by $1.3 billion and BPNA by $87 million.
Trading account securities amounted to $142 million at June 30, 2015, compared to $139 million at December 31, 2014. 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 $5.7 billion at June 30, 2015, compared with $5.4 billion at December 31, 2014. Excluding the balance as of June 30, 2015 of $137 million in mortgage backed securities acquired as part of the Doral Bank Transaction, investment securities available-for-sale and held-to-maturity increased by $132 million.
Table 10 provides a breakdown of the Corporations portfolio of investment securities available-for-sale (AFS) and held-to-maturity (HTM) on a combined basis. Also, Notes 9 and 10 to the consolidated financial statements provide additional information with respect to the Corporations investment securities AFS and HTM. The portfolio of obligations of the Puerto Rico Government is
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mainly comprised of securities with specific sources of income or revenues identified for repayments. Based on the fiscal and economic situation in Puerto Rico, together with the governments recent announcements regarding its ability to pay its debt, the Corporation determined during the second quarter of 2015 that certain PR Government securities with an amortized cost of approximately $41 million and a market value of $27 million have unrealized losses that are other than temporary, and accordingly recorded in earnings OTTI of $14.4 million for the estimated credit loss.
Table 10 - Breakdown of Investment Securities Available-for-Sale and Held-to-Maturity
(In thousands) |
June 30, 2015 | December 31, 2014 | Variance | |||||||||
U.S. Treasury securities |
$ | 973,723 | $ | 700,154 | $ | 273,569 | ||||||
Obligations of U.S. Government sponsored entities |
1,110,372 | 1,724,973 | (614,601 | ) | ||||||||
Obligations of Puerto Rico, States and political subdivisions |
152,384 | 163,285 | (10,901 | ) | ||||||||
Collateralized mortgage obligations |
1,736,920 | 1,910,127 | (173,207 | ) | ||||||||
Mortgage-backed securities |
1,698,844 | 904,362 | 794,482 | |||||||||
Equity securities |
2,594 | 2,622 | (28 | ) | ||||||||
Others |
12,102 | 12,806 | (704 | ) | ||||||||
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|
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|
|
|||||||
Total investment securities AFS and HTM |
$ | 5,686,939 | $ | 5,418,329 | $ | 268,610 | ||||||
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|
Loans
Refer to Table 11, for a breakdown of the Corporations loan portfolio, the principal category of earning assets. Loans covered under the FDIC loss sharing agreements are presented separately in Table 11. The risks on covered loans are significantly different as a result of the loss protection provided by the FDIC. The loss share portion of the loss share agreement applicable to commercial (including construction) and consumer loans expired on June 30, 2015. Accordingly, approximately $1.5 billion in loans were reclassified from covered to non-covered because they are no longer subject to the shared-loss arrangements with the FDIC. As of June 30, 2015, the Corporations covered loans portfolio amounted to $690 million, comprised mainly of residential mortgage loans. Refer to Note 11 for detailed information about the Corporations loan portfolio composition and loan purchases and sales.
The Corporations total loan portfolio amounted to $23.3 billion at June 30, 2015, compared to $22.1 billion at December 31, 2014. Excluding the balance at June 30, 2015 of $1.6 billion in loans acquired as part of the Doral Bank Transaction, the total loan portfolio decreased by $323 million mainly in the covered loans portfolio which decreased by $338 million excluding the impact of the reclassification of $1.5 billion to non-covered loans, mostly due to the continuation of loan resolutions and the normal portfolio run-off.
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Table 11 - Loans Ending Balances
(In thousands) |
June 30, 2015 | December 31, 2014 | Variance | |||||||||
Loans not covered under FDIC loss sharing agreements: |
||||||||||||
Commercial |
$ | 10,004,716 | $ | 8,134,267 | $ | 1,870,449 | ||||||
Construction |
696,010 | 251,820 | 444,190 | |||||||||
Legacy[1] |
72,502 | 80,818 | (8,316 | ) | ||||||||
Lease financing |
592,816 | 564,389 | 28,427 | |||||||||
Mortgage |
7,225,823 | 6,502,886 | 722,937 | |||||||||
Consumer |
3,843,278 | 3,870,271 | (26,993 | ) | ||||||||
|
|
|
|
|
|
|||||||
Total non-covered loans held-in-portfolio |
22,435,145 | 19,404,451 | 3,030,694 | |||||||||
|
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|
|
|
|
|||||||
Loans covered under FDIC loss sharing agreements: |
||||||||||||
Commercial |
3 | 1,614,781 | (1,614,778 | ) | ||||||||
Construction |
| 70,336 | (70,336 | ) | ||||||||
Mortgage |
671,074 | 822,986 | (151,912 | ) | ||||||||
Consumer |
18,573 | 34,559 | (15,986 | ) | ||||||||
|
|
|
|
|
|
|||||||
Total covered loans held-in-portfolio |
689,650 | 2,542,662 | (1,853,012 | ) | ||||||||
|
|
|
|
|
|
|||||||
Total loans held-in-portfolio |
23,124,795 | 21,947,113 | 1,177,682 | |||||||||
|
|
|
|
|
|
|||||||
Loans held-for-sale: |
||||||||||||
Commercial |
48,969 | 309 | 48,660 | |||||||||
Construction |
1,681 | | 1,681 | |||||||||
Legacy[1] |
| 319 | (319 | ) | ||||||||
Mortgage |
151,637 | 100,166 | 51,471 | |||||||||
Consumer |
| 5,310 | (5,310 | ) | ||||||||
|
|
|
|
|
|
|||||||
Total loans held-for-sale |
202,287 | 106,104 | 96,183 | |||||||||
|
|
|
|
|
|
|||||||
Total loans |
$ | 23,327,082 | $ | 22,053,217 | $ | 1,273,865 | ||||||
|
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|
|
[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 $3.0 billion to $22.4 billion at June 30, 2015. Excluding the balance at June 30, 2015 of $1.6 billion loans acquired as part of the Doral Bank Transaction and the previously mentioned reclassification to non-covered loans of $1.5 billion, non-covered loans held-in-portfolio decreased by $65 million, mainly at BPPR.
The loans held-for-sale portfolio reflected an increase of $96 million from December 31, 2014 to June 30, 2015; the increase is mostly due to the reclassification from the held for investment category of $6 million of commercial and construction loans formerly covered under loss sharing agreements with the FDIC, and a $45 million commercial loan from the BPPR public sector net of the related write-down of $30 million, for which the sale was subject, among other conditions, to the approval of the syndicates agent bank. The sale agreement was terminated on July 29, 2015 pursuant to its terms after the parties were not able to obtain the approval of the agent bank on terms acceptable to the assignee. Also contributing to the increase were originations of mortgage loans held-for-sale by branches acquired as part of the Doral Bank Transaction.
Covered loans
The covered loans portfolio amounted to $690 million at June 30, 2015, compared to $2.5 billion at December 31, 2014. Excluding the previously mentioned reclassification of $1.5 billion in loans from covered to non-covered, covered loans decreased by $338 million due to loan resolutions and the normal portfolio run-off. Refer to Table 11 for a breakdown of the covered loans by major loan type categories.
Tables 12 and 13 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.
Table 12 - Activity in the Carrying Amount of Westernbank Loans Accounted for Under ASC 310-30
Quarter ended June 30, |
Six months ended June 30, |
|||||||||||||||
(In thousands) |
2015 | 2014 | 2015 | 2014 | ||||||||||||
Beginning balance |
$ | 2,367,096 | $ | 2,733,122 | $ | 2,444,172 | $ | 2,827,947 | ||||||||
Accretion |
53,994 | 79,863 | 109,691 | 158,981 | ||||||||||||
Collections / charge-offs |
(284,012 | ) | (202,321 | ) | (416,785 | ) | (376,264 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Ending balance |
$ | 2,137,078 | $ | 2,610,664 | $ | 2,137,078 | $ | 2,610,664 | ||||||||
Allowance for loan losses (ALLL) |
(47,049 | ) | (90,892 | ) | (47,049 | ) | (90,892 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Ending balance, net of ALLL |
$ | 2,090,029 | $ | 2,519,772 | $ | 2,090,029 | $ | 2,519,772 | ||||||||
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|
|
|
|
|
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Table 13 - Activity in the Accretable Yield on Westernbank Loans Accounted for Under ASC 310-30
Quarter ended June 30, | Six months ended June 30, | |||||||||||||||
(In thousands) |
2015 | 2014 | 2015 | 2014 | ||||||||||||
Beginning balance |
$ | 1,258,948 | $ | 1,218,212 | $ | 1,271,337 | $ | 1,309,205 | ||||||||
Accretion [1] |
(53,994 | ) | (79,863 | ) | (109,691 | ) | (158,981 | ) | ||||||||
Change in expected cash flows |
40,970 | 142,409 | 84,278 | 130,534 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Ending balance |
$ | 1,245,924 | $ | 1,280,758 | $ | 1,245,924 | $ | 1,280,758 | ||||||||
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|
|
[1] | Positive to earnings, which is included in interest income. |
FDIC loss share asset
Table 14 sets forth the activity in the FDIC loss share asset for the quarters and six months ended June 30, 2015 and 2014.
Table 14 Activity of Loss Share Asset
Quarters ended June 30, | Six months ended June 30, | |||||||||||||||
(In thousands) |
2015 | 2014 | 2015 | 2014 | ||||||||||||
Balance at beginning of period |
$ | 409,844 | $ | 798,460 | $ | 542,454 | $ | 909,414 | ||||||||
Amortization of loss share indemnification asset |
(31,065 | ) | (72,095 | ) | (58,381 | ) | (121,041 | ) | ||||||||
Credit impairment losses to be covered under loss sharing agreements |
7,647 | 10,372 | 15,893 | 25,462 | ||||||||||||
Reimbursable expenses |
42,730 | 11,085 | 64,275 | 23,830 | ||||||||||||
Net payments from FDIC under loss sharing agreements |
(32,158 | ) | (29,291 | ) | (164,423 | ) | (110,618 | ) | ||||||||
Other adjustments attributable to FDIC loss sharing agreements |
(4,051 | ) | (5,662 | ) | (6,871 | ) | (14,178 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance at end of period |
$ | 392,947 | $ | 712,869 | $ | 392,947 | $ | 712,869 | ||||||||
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|
|
|
|
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 15 presents the activity associated with the outstanding balance of the FDIC loss share asset amortization (or negative discount) for the periods presented.
Table 15 - Activity in the Remaining FDIC Loss Share Asset Discount
Quarters ended June 30, | Six months ended June 30, | |||||||||||||||
(In thousands) |
2015 | 2014 | 2015 | 2014 | ||||||||||||
Balance at beginning of period[1] |
$ | 38,687 | $ | 71,634 | $ | 53,095 | $ | 103,691 | ||||||||
Amortization of negative discount[2] |
(31,065 | ) | (72,095 | ) | (58,381 | ) | (121,041 | ) | ||||||||
Impact of lower projected losses |
20,871 | 106,400 | 33,779 | 123,289 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance at end of period |
$ | 28,493 | $ | 105,939 | $ | 28,493 | $ | 105,939 | ||||||||
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|
|
|
|
|
|
|
[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 (expense) income. |
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 June 30, 2015, OREO decreased to $176 million from $266 million at December 31, 2014 mainly driven by sales, which include a bulk sale of covered commercial properties during the second quarter of 2015 of $37 million. Refer to Table 16 for the activity in other real estate owned. The amounts included as covered other real estate are subject to the FDIC loss sharing agreements.
170
Table 16 - Other Real Estate Owned Activity
For the quarter ended June 30, 2015 | ||||||||||||||||||||
(In thousands) |
Non-covered OREO Commercial/ Construction |
Non-covered OREO Mortgage |
Covered OREO Commercial/ Construction |
Covered OREO Mortgage |
Total | |||||||||||||||
Balance at beginning of period |
$ | 25,608 | $ | 102,562 | $ | 70,573 | $ | 42,984 | $ | 241,727 | ||||||||||
Write-downs in value |
(4,162 | ) | (2,463 | ) | (10,955 | ) | (1,393 | ) | (18,973 | ) | ||||||||||
Additions |
2,793 | 18,532 | 5,623 | 8,879 | 35,827 | |||||||||||||||
Sales |
(4,868 | ) | (14,243 | ) | (50,285 | ) | (13,806 | ) | (83,202 | ) | ||||||||||
Other adjustments |
850 | 50 | (452 | ) | (68 | ) | 380 | |||||||||||||
Transfer to non-covered status |
14,504 | 3,092 | (14,504 | ) | (3,092 | ) | | |||||||||||||
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|
|
|
|
|
|
|
|
|
|||||||||||
Ending balance |
$ | 34,725 | $ | 107,530 | $ | | $ | 33,504 | $ | 175,759 | ||||||||||
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|
|
|
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|
|
|||||||||||
For the six months ended June 30, 2015 | ||||||||||||||||||||
(In thousands) |
Non-covered OREO Commercial/ Construction |
Non-covered OREO Mortgage |
Covered OREO Commercial/ Construction |
Covered OREO Mortgage |
Total | |||||||||||||||
Balance at beginning of period |
$ | 38,983 | $ | 96,517 | $ | 85,394 | $ | 44,872 | $ | 265,766 | ||||||||||
Write-downs in value |
(10,049 | ) | (3,835 | ) | (20,350 | ) | (2,675 | ) | (36,909 | ) | ||||||||||
Additions |
4,828 | 39,607 | 9,661 | 14,260 | 68,356 | |||||||||||||||
Sales |
(14,295 | ) | (27,329 | ) | (59,749 | ) | (19,628 | ) | (121,001 | ) | ||||||||||
Other adjustments |
754 | (522 | ) | (452 | ) | (233 | ) | (453 | ) | |||||||||||
Transfer to non-covered status |
14,504 | 3,092 | (14,504 | ) | (3,092 | ) | | |||||||||||||
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|
|
|
|
|
|
|
|
|||||||||||
Ending balance |
$ | 34,725 | $ | 107,530 | $ | | $ | 33,504 | $ | 175,759 | ||||||||||
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|
|
|
|
|||||||||||
For the quarter ended June 30, 2014 | ||||||||||||||||||||
(In thousands) |
Non-covered OREO Commercial/ Construction |
Non-covered OREO Mortgage |
Covered OREO Commercial/ Construction |
Covered OREO Mortgage |
Total | |||||||||||||||
Balance at beginning of period |
$ | 48,141 | $ | 88,824 | $ | 110,333 | $ | 48,414 | $ | 295,712 | ||||||||||
Write-downs in value |
(571 | ) | (439 | ) | (6,635 | ) | (940 | ) | (8,585 | ) | ||||||||||
Additions |
6,303 | 15,400 | 22,260 | 4,103 | 48,066 | |||||||||||||||
Sales |
(5,372 | ) | (12,203 | ) | (14,792 | ) | (3,777 | ) | (36,144 | ) | ||||||||||
Other adjustments |
1,286 | (1,949 | ) | (3,261 | ) | 100 | (3,824 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ending balance |
$ | 49,787 | $ | 89,633 | $ | 107,905 | $ | 47,900 | $ | 295,225 | ||||||||||
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|
|
|
|
|
|
|
|
|||||||||||
For the six months ended June 30, 2014 | ||||||||||||||||||||
(In thousands) |
Non-covered OREO Commercial/ Construction |
Non-covered OREO Mortgage |
Covered OREO Commercial/ Construction |
Covered OREO Mortgage |
Total | |||||||||||||||
Balance at beginning of period |
$ | 48,649 | $ | 86,852 | $ | 120,215 | $ | 47,792 | $ | 303,508 | ||||||||||
Write-downs in value |
(785 | ) | (1,108 | ) | (11,198 | ) | (1,147 | ) | (14,238 | ) | ||||||||||
Additions |
10,971 | 30,283 | 35,454 | 8,594 | 85,302 | |||||||||||||||
Sales |
(10,334 | ) | (24,266 | ) | (33,213 | ) | (6,154 | ) | (73,967 | ) | ||||||||||
Other adjustments |
1,286 | (2,128 | ) | (3,353 | ) | (1,185 | ) | (5,380 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ending balance |
$ | 49,787 | $ | 89,633 | $ | 107,905 | $ | 47,900 | $ | 295,225 | ||||||||||
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|
|
|
|
|
|
|
|
|
171
Other assets
Table 17 provides a breakdown of the principal categories that comprise the caption of Other assets in the consolidated statements of financial condition at June 30, 2015 and December 31, 2014.
Table 17 - Breakdown of Other Assets
(In thousands) |
June 30, 2015 | December 31, 2014 | Variance | |||||||||
Net deferred tax assets (net of valuation allowance) |
$ | 1,286,086 | $ | 812,819 | $ | 473,267 | ||||||
Investments under the equity method |
222,218 | 225,625 | (3,407 | ) | ||||||||
Prepaid FDIC insurance assessment |
| 360 | (360 | ) | ||||||||
Prepaid taxes |
201,504 | 198,120 | 3,384 | |||||||||
Other prepaid expenses |
80,993 | 83,719 | (2,726 | ) | ||||||||
Derivative assets |
21,716 | 25,362 | (3,646 | ) | ||||||||
Trades receivable from brokers and counterparties |
111,964 | 66,949 | 45,015 | |||||||||
Others |
260,426 | 233,489 | 26,937 | |||||||||
|
|
|
|
|
|
|||||||
Total other assets |
$ | 2,184,907 | $ | 1,646,443 | $ | 538,464 | ||||||
|
|
|
|
|
|
Other assets increased by $540 million from December 31, 2014 to June 30, 2015, due mostly to the partial reversal during the second quarter of 2015 of the valuation allowance on its deferred tax assets from its U.S. operations for approximately $545 million. Refer to Note 36 to the consolidated financial statements for detailed information on the Corporations income taxes.
Goodwill
Goodwill increased by $40 million from December 31, 2014 to June 30, 2015, due to $42 million of goodwill recorded as part of the Doral Bank Transaction, partially offset by a decrease of $2 million at the Corporations insurance subsidiary as they recorded purchase accounting adjustments to reduce the goodwill related to the acquisition of an insurance benefits business during the year ended December 31, 2014.
Liabilities
The Corporations total liabilities were $31.8 billion at June 30, 2015 and $28.8 billion at December 31, 2014. Refer to the consolidated financial statements included in this report for the Corporations consolidated statements of financial condition as of such dates.
172
Deposits and Borrowings
The composition of the Corporations financing sources to total assets at June 30, 2015 and December 31, 2014 is included in Table 18.
Table 18 - Financing to Total Assets
June 30, 2015 |
December 31, 2014 |
% increase (decrease) from 2014 to 2015 |
% of total assets | |||||||||||||||||
(In millions) |
2015 | 2014 | ||||||||||||||||||
Non-interest bearing deposits |
$ | 6,306 | $ | 5,784 | 9.0 | % | 17.2 | % | 17.5 | % | ||||||||||
Interest-bearing core deposits |
15,549 | 14,775 | 5.2 | 42.3 | 44.6 | |||||||||||||||
Other interest-bearing deposits |
5,896 | 4,249 | 38.8 | 16.0 | 12.8 | |||||||||||||||
Fed funds purchased and repurchase agreements |
1,121 | 1,272 | (11.9 | ) | 3.0 | 3.8 | ||||||||||||||
Other short-term borrowings |
101 | 21 | 381.0 | 0.3 | 0.1 | |||||||||||||||
Notes payable |
1,804 | 1,712 | 5.4 | 4.9 | 5.2 | |||||||||||||||
Other liabilities |
1,021 | 1,012 | 0.9 | 2.8 | 3.1 | |||||||||||||||
Liabilities from discontinued operations |
2 | 5 | (60.0 | ) | | | ||||||||||||||
Stockholders equity |
4,950 | 4,267 | 16.0 | 13.5 | 12.9 |
Deposits
The Corporations deposits totaled $27.7 billion at June 30, 2015 compared to $24.8 billion at December 31, 2014. Excluding the balance at June 30, 2015 of $1.6 billion in deposits acquired as part of the Doral Bank Transaction, deposits increased by $1.3 billion due to an increase at BPPR of $1.0 billion and an increase at BPNA of $295 million. Refer to Table 19 for a breakdown of the Corporations deposits at June 30, 2015 and December 31, 2014.
Table 19 - Deposits Ending Balances
(In thousands) |
June 30, 2015 | December 31, 2014 | Variance | |||||||||
Demand deposits [1] |
$ | 7,262,176 | $ | 6,606,060 | $ | 656,116 | ||||||
Savings, NOW and money market deposits (non-brokered) |
11,177,288 | 10,320,782 | 856,506 | |||||||||
Savings, NOW and money market deposits (brokered) |
468,973 | 406,248 | 62,725 | |||||||||
Time deposits (non-brokered) |
7,367,256 | 5,960,401 | 1,406,855 | |||||||||
Time deposits (brokered CDs) |
1,475,001 | 1,514,044 | (39,043 | ) | ||||||||
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|
|
|
|
|
|||||||
Total deposits |
$ | 27,750,694 | $ | 24,807,535 | $ | 2,943,159 | ||||||
|
|
|
|
|
|
[1] | Includes interest and non-interest bearing demand deposits. |
Borrowings
The Corporations borrowings amounted to $3.0 billion at June 30, 2015, compared to $3.0 billion at December 31, 2014. Refer to Note 20 to the consolidated financial statements for detailed information on the Corporations borrowings. Also, refer to the Liquidity section in this MD&A for additional information on the Corporations funding sources.
Other liabilities
Other liabilities increased by $10 million from December 31, 2014 to $1.0 billion at June 30, 2015 largely due to an increase of $71 million in securities trades payable, partially offset by decreases of $33 million in the deferred tax liabilities from the U.S. subsidiaries, $13 million in accrued taxes payable, and $10 million in reserves for representations and warranties.
173
Stockholders Equity
Stockholders equity totaled $4.9 billion at June 30, 2015, compared with $4.3 billion at December 31, 2014. The increase resulted from the Corporations net income of $672 million for the six months ended June 30, 2015 and a decrease in accumulated other comprehensive loss of $11 million. 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, including also revised minimum and well capitalized regulatory capital ratios and compliance with the standardized approach for determining risk-weighted assets. As of June 30, 2015, 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 June 30, 2015, the Corporation had $427 million in trust preferred securities outstanding, of which $320 million no longer qualify for Tier 1 capital treatment, but instead qualify for Tier 2 capital treatment. By January 1, 2016, all $427 million of its outstanding trust preferred securities will lose Tier 1 capital treatment, and will be reclassified to Tier 2 capital.
On January 1, 2015, 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.
Risk-based capital ratios presented in Table 20, which include common equity tier 1, Tier 1 capital, total capital and leverage capital as of June 30, 2015, are calculated based on the Basel III regulatory transitional guidance related to the measurement of capital, risk-weighted assets and average assets. Capital ratios for December 31, 2014 were calculated based on the then applicable Basel I rules. Common equity tier 1 capital was not formally codified in the federal banking regulations in effect as of December 31, 2014; thus, common equity tier 1 capital presented in the table below as of year-end 2014 is considered a management internally-defined measurement. Since common equity tier 1 capital was not defined by GAAP or, unlike Tier 1 capital, codified in the Basel I federal banking regulations, it was considered a non-GAAP financial measure as of December 31, 2014.
Table 20 - Capital Adequacy Data
(Dollars in thousands) |
June 30, 2015 | December 31, 2014 | ||||||
Common equity tier 1 capital: |
||||||||
Common stockholders equity - GAAP basis |
$ | 4,899,493 | $ | 4,217,222 | ||||
AOCI related adjustments due to opt-out election |
184,526 | 197,040 | ||||||
Goodwill, net of associated deferred tax liability (DTL) |
(449,685 | ) | (412,455 | ) | ||||
Intangible assets, net of associated DTLs |
(29,030 | ) | (35,315 | ) | ||||
Deferred tax assets and other deductions |
(618,915 | ) | (593,363 | ) | ||||
|
|
|
|
|||||
Common equity tier 1 capital |
$ | 3,986,389 | $ | 3,373,129 | ||||
|
|
|
|
|||||
Additional tier 1 capital: |
||||||||
Preferred stock |
50,160 | 50,160 | ||||||
Trust preferred securities subject to phase out of additional tier 1 |
106,650 | 426,602 | ||||||
Other additional tier 1 capital deductions |
(156,810 | ) | | |||||
|
|
|
|
|||||
Additional tier 1 capital |
$ | | $ | 476,762 | ||||
|
|
|
|
|||||
Tier 1 capital |
$ | 3,986,389 | $ | 3,849,891 | ||||
|
|
|
|
|||||
Tier 2 capital: |
||||||||
Trust preferred securities subject to phase in as tier 2 |
319,952 | | ||||||
Other inclusions (deductions), net |
323,651 | 272,347 | ||||||
|
|
|
|
|||||
Tier 2 capital |
$ | 643,603 | $ | 272,347 | ||||
|
|
|
|
|||||
Total risk-based capital |
$ | 4,629,992 | $ | 4,122,238 | ||||
|
|
|
|
|||||
Minimum total capital requirement to be well capitalized |
$ | 2,503,022 | $ | 2,123,390 | ||||
|
|
|
|
|||||
Excess total capital over minimum well capitalized |
$ | 2,126,970 | $ | 1,998,848 | ||||
|
|
|
|
|||||
Total risk-weighted assets |
$ | 25,030,218 | $ | 21,233,902 | ||||
|
|
|
|
|||||
Total assets for leverage ratio |
$ | 34,390,561 | $ | 32,250,173 | ||||
|
|
|
|
|||||
Risk-based capital ratios: |
||||||||
Common equity tier 1 capital |
15.93 | % | 15.89 | % | ||||
Tier 1 capital |
15.93 | 18.13 | ||||||
Total capital |
18.50 | 19.41 | ||||||
Tier 1 leverage |
11.59 | 11.94 |
174
Rules adopted by the federal banking agencies, as applicable to the Corporations banking subsidiaries as of of June 30, 2015, provide that a depository institution will be deemed to be well capitalized under prompt corrective action 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 June 30, 2015, BPPR and BPNA were well-capitalized under the regulatory framework for prompt corrective action.
The regulatory capital ratios except for the common equity tier 1 capital ratio declined despite the increase in regulatory capital mostly because of the increase in risk-weighted assets driven by the Doral Bank acquired assets, the expiration of the commercial loans loss sharing agreement which required a higher risk-weight percentage and to particular assets and off-balance sheet items which are assigned a higher-risk-weight percentage under the Basel III rules, including, for example, certain exposures past due 90 days or more, high volatility commercial real estate loans and unused commitments with an original maturity of one year or less. The increase in the common equity tier 1 capital ratio is mainly due to higher common equity tier I capital driven by the six months period earnings and to a favorable impact related to the transitional Basel III capital rules applicable to the deferred tax asset capital deduction as compared to the previous Basel I rules, which generally limited the amount allowed as capital for deferred tax assets that were dependable upon future taxable income.
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 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.
175
Table 21 provides a reconciliation of total stockholders equity to tangible common equity and total assets to tangible assets as of June 30, 2015, and December 31, 2014.
Table 21 - Reconciliation of Tangible Common Equity and Tangible Assets
(In thousands, except share or per share information) |
June 30, 2015 | December 31, 2014 | ||||||
Total stockholders equity |
$ | 4,949,653 | $ | 4,267,382 | ||||
Less: Preferred stock |
(50,160 | ) | (50,160 | ) | ||||
Less: Goodwill |
(505,435 | ) | (465,676 | ) | ||||
Less: Other intangibles |
(74,854 | ) | (37,595 | ) | ||||
|
|
|
|
|||||
Total tangible common equity |
$ | 4,319,204 | $ | 3,713,951 | ||||
|
|
|
|
|||||
Total assets |
$ | 36,750,113 | $ | 33,096,695 | ||||
Less: Goodwill |
(505,435 | ) | (465,676 | ) | ||||
Less: Other intangibles |
(74,854 | ) | (37,595 | ) | ||||
|
|
|
|
|||||
Total tangible assets |
$ | 36,169,824 | $ | 32,593,424 | ||||
|
|
|
|
|||||
Tangible common equity to tangible assets |
11.94 | % | 11.39 | % | ||||
Common shares outstanding at end of period |
103,503,014 | 103,476,847 | ||||||
Tangible book value per common share |
$ | 41.73 | $ | 35.89 |
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 June 30, 2015, 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 $176 million at June 30, 2015 of which approximately 53% mature in 2015, 25% in 2016, 8% in 2017 and 14% thereafter.
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 20 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 Corporations exposure to credit losses in the event of nonperformance by the other party to the financial instrument for commitments to extend credit, standby letters of credit and commercial letters of credit is represented by the contractual notional amount of these instruments. The Corporation uses credit procedures and policies in making those commitments and conditional obligations as it does in extending loans to customers. Since many of the commitments may expire without being drawn upon, the total contractual amounts are not representative of the Corporations actual future credit exposure or liquidity requirements for these commitments.
176
Table 22 presents the contractual amounts related to the Corporations off-balance sheet lending and other activities at June 30, 2015.
Table 22 - Off-Balance Sheet Lending and Other Activities
Amount of commitment - Expiration Period | ||||||||||||||||||||
(In millions) |
Remaining 2015 |
Years 2016 - 2017 |
Years 2018 - 2019 |
Years 2020 - thereafter |
Total | |||||||||||||||
Commitments to extend credit |
$ | 5,413 | $ | 1,445 | $ | 180 | $ | 72 | $ | 7,109 | ||||||||||
Commercial letters of credit |
3 | | | | 3 | |||||||||||||||
Standby letters of credit |
25 | 23 | | | 49 | |||||||||||||||
Commitments to originate or fund mortgage loans |
21 | 6 | | | 27 | |||||||||||||||
Unfunded investment obligations |
| 9 | | | 9 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 5,462 | $ | 1,483 | $ | 180 | $ | 72 | $ | 7,196 | ||||||||||
|
|
|
|
|
|
|
|
|
|
At June 30, 2015 and December 31, 2014, the Corporation maintained a reserve of approximately $14 million and $13 million, respectively, 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 Corporations 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 26 to the consolidated financial statements for additional information on credit commitments and contingencies.
Guarantees associated with loans sold / serviced
At June 30, 2015, the Corporation serviced $2.0 billion in residential mortgage loans subject to lifetime credit recourse provisions, principally loans associated with FNMA and FHLMC residential mortgage loan securitization programs, compared with $2.1 billion at December 31, 2014. The Corporation has not sold any mortgage loan subject to credit recourse since 2010.
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. In the event of nonperformance by the borrower, the Corporation has rights to the underlying collateral securing the mortgage loan. The Corporation suffers losses on these loans when the proceeds from a foreclosure sale of the property underlying a defaulted mortgage loan are less than the outstanding principal balance of the loan plus any uncollected interest advanced and the costs of holding and disposing the related property.
In the case of Puerto Rico, most claims are settled by repurchases of delinquent loans, the majority of which are greater than 90 days past due. The average time period to prepare an initial response to a repurchase request is from 30 to 120 days from the initial written notice depending on the type of repurchase request. Failure by the Corporation to respond to a request for repurchase on a timely basis could result in a deterioration of the seller/servicer relationship and the seller/servicers overall standing. In certain instances, investors could require additional collateral to ensure compliance with the servicers repurchase obligation or cancel the seller/servicer license and exercise their rights to transfer the servicing to an eligible seller/servicer.
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The following table presents the delinquency status of the residential mortgage loans serviced by the Corporation that are subject to lifetime credit recourse provisions.
Table 23 - Delinquency of Residential Mortgage Loans Subject to Lifetime Credit Recourse
(In thousands) |
June 30, 2015 | December 31, 2014 | ||||||
Total portfolio |
$ | 1,997,255 | $ | 2,138,705 | ||||
Days past due: |
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30 days and over |
$ | 262,510 | $ | 302,992 | ||||
90 days and over |
$ | 110,724 | $ | 129,590 | ||||
As a percentage of total portfolio: |
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30 days past due or more |
13.14 | % | 14.17 | % | ||||
90 days past due or more |
5.54 | % | 6.06 | % |
During the quarter and six months period ended June 30, 2015, the Corporation repurchased approximately $14 million and $30 million, respectively, in unpaid principal balance of mortgage loans subject to the credit recourse provisions, compared with $21 million and $48 million, respectively, for the same periods of 2014. There are no particular loan characteristics, such as loan vintages, loan type, loan-to-value ratio, or other criteria that denote any specific trend or concentration of repurchases on any particular segment. Based on historical repurchase experience, the loan delinquency status is the main factor which causes the repurchase request. Once the loans are repurchased, they are put through the Corporations loss mitigation programs.
At June 30, 2015, the Corporations liability established to cover the estimated credit loss exposure related to loans sold or serviced with credit recourse amounted to $58 million, compared with $59 million at December 31, 2014.
The following table presents the changes in the Corporations liability for estimated losses related to loans serviced with credit recourse provisions for the quarters and six months periods ended June 30, 2015 and 2014.
Table 24 Changes in Liability of Estimated Losses from Credit Recourse Agreements
Quarters ended June 30, | Six months ended June 30, | |||||||||||||||
(In thousands) |
2015 | 2014 | 2015 | 2014 | ||||||||||||
Balance as of beginning of period |
$ | 59,385 | $ | 45,809 | $ | 59,438 | $ | 41,463 | ||||||||
Provision for recourse liability |
4,368 | 7,984 | 10,868 | 19,026 | ||||||||||||
Net charge-offs |
(6,164 | ) | (5,901 | ) | (12,717 | ) | (12,597 | ) | ||||||||
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Balance as of end of period |
$ | 57,589 | $ | 47,892 | $ | 57,589 | $ | 47,892 | ||||||||
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The provision for credit recourse liability decreased by $8.2 million during the six months ended June 30, 2015, when compared with the same period in 2014, due to certain enhancements in the estimated losses for credit recourse methodology at BPPR during 2014.
The estimated losses to be absorbed under the credit recourse arrangements are recorded as a liability when the loans are sold or credit recourse is assumed as part of acquired servicing rights and are updated by accruing or reversing expense (categorized in the line item adjustments (expense) to indemnity reserves on loans sold in the consolidated statements of operations) throughout the life of the loan, as necessary, when additional relevant information becomes available. The methodology used to estimate the recourse liability is a function of the recourse arrangements given and considers a variety of factors, which include actual defaults and historical loss experience, foreclosure rate, estimated future defaults and the probability that a loan would be delinquent. Statistical methods are used to estimate the recourse liability. Expected loss rates are applied to different loan segmentations. The expected loss, which represents the amount expected to be lost on a given loan, considers the probability of default and loss severity. The probability of default represents the probability that a loan in good standing would become 90 days delinquent within the following twelve-month period. Regression analysis quantifies the relationship between the default event and loan-specific characteristics, including credit scores, loan-to-value ratios and loan aging, among others.
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 June 30, 2015, the Corporation serviced $19.7 billion in mortgage loans for third-parties, including the loans serviced with credit recourse, compared with $15.6 billion at December 31, 2014. The Corporation generally recovers funds advanced pursuant to these arrangements from
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the mortgage borrower, 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 June 30, 2015, the outstanding balance of funds advanced by the Corporation under such mortgage loan servicing agreements was approximately $35 million, compared with $24 million at June 30, 2014. To the extent the mortgage loans underlying the Corporations servicing portfolio experience increased delinquencies, the Corporation would be required to dedicate additional cash resources to comply with its obligation to advance funds as well as incur additional administrative costs related to increases in collection efforts.
When the Corporation sells or securitizes mortgage loans, it generally makes customary representations and warranties regarding the characteristics of the loans sold. The Corporations mortgage operations in Puerto Rico conform mortgage loans into pools which are exchanged for FNMA and GNMA mortgage-backed securities, which are generally sold to private investors, or are sold directly to FNMA for cash. As required under the government agency programs, quality review procedures are performed by the Corporation to ensure that asset guideline qualifications are met. To the extent the loans do not meet specified characteristics, the Corporation may be required to repurchase such loans or indemnify for losses and bear any subsequent loss related to the loans. During the six months period ended June 30, 2015, the Corporation repurchased $175 thousand 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.
As discussed on Note 4 Discontinued operations, on November 8, 2014, the Corporation completed the sale of the California regional operations. In connection with this transaction, the Corporation agreed to provide, subject to certain limitations, customary indemnification to the purchaser, including with respect to certain pre-closing liabilities and violations of representations and warranties. The Corporation also agreed to indemnify the purchaser for up to 1.5% of credit losses on transferred loans for a period of two years after the closing. Pursuant to this indemnification provision, the Corporations maximum exposure is approximately $16.0 million. The Corporation recognized a reserve of approximately $2.2 million, representing its best estimate of the loss that would be incurred in connection with this indemnification. This reserve is included within the liabilities from discontinued operations.
During the quarter ended June 30, 2013, the Corporation established a reserve for certain specific representation and warranties made in connection with BPPRs sale of non-performing mortgage loans. The purchasers sole remedy under the indemnity clause is to seek monetary damages from BPPR, for a maximum of $16.3 million. BPPR recognized a reserve of approximately $3.0 million, representing its best estimate of the loss that would be incurred in connection with this indemnification. BPPRs obligations under this clause end one year after the closing except with respect to any claim asserted prior to such termination date. At June 30, 2015, the Corporation has a reserve balance of $2.8 million to cover claims received from the purchaser, which are currently being evaluated.
During the quarter ended March 31, 2013, the Corporation established a reserve for certain specific representation and warranties made in connection with BPPRs sale of commercial and construction loans, and commercial and single family real estate owned. The purchasers sole remedy under the indemnity clause is to seek monetary damages from BPPR, for a maximum of $18.0 million. BPPR is not required to repurchase any of the assets. BPPR recognized a reserve of approximately $10.7 million, representing its best estimate of the loss that would be incurred in connection with this indemnification. During the quarter ended March 31, 2015, the Corporation released $3.2 million. In addition, during the quarter ended June 30, 2015, the Corporation and the purchaser agreed to amend the Portfolio Purchase Agreement and a settlement amount of $2.3 million was paid, and $1.8 million of the reserve was released. At June 30, 2015, the Corporation has a reserve balance of $0.1 million to cover pending claims received from the purchaser.
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The following table presents the changes in the Corporations liability for estimated losses associated with indemnifications and customary representations and warranties related to loans sold by BPPR during the quarters and six month periods ended June 30, 2015 and 2014.
Table 25 Changes in Liability of Estimated Losses from Indemnifications and Customary Representations and Warranties Agreements
Quarters ended June 30, | Six months ended June 30, | |||||||||||||||
(In thousands) |
2015 | 2014 | 2015 | 2014 | ||||||||||||
Balance as of beginning of period |
$ | 14,044 | $ | 16,824 | $ | 15,959 | $ | 19,277 | ||||||||
Additions for new sales |
| | | | ||||||||||||
Provision (reversal) for representation and warranties |
(5,707 | ) | (401 | ) | (7,608 | ) | (1,465 | ) | ||||||||
Net charge-offs |
(25 | ) | (504 | ) | (39 | ) | (1,893 | ) | ||||||||
Settlements paid |
(2,250 | ) | | (2,250 | ) | | ||||||||||
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Balance as of end of period |
$ | 6,062 | $ | 15,919 | $ | 6,062 | $ | 15,919 | ||||||||
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In addition, at June 30, 2015, the Corporation has reserves for customary representations and warranties related to loans sold by its U.S. subsidiary E-LOAN prior to 2009. Loans were sold to investors on a servicing released basis subject to certain representations and warranties. Although the risk of loss or default was generally assumed by the investors, the Corporation made certain 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 June 30, 2015 and December 31, 2014, the Corporations reserve for estimated losses from such representation and warranty arrangements amounted to $4 million and $5 million, respectively. 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.
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.
The Asset Liability Management Committee (ALCO) and the Corporate Finance Group are responsible for planning and executing the Corporations market, interest rate risk, funding activities and strategy, and for implementing the policies and procedures approved by the Corporations Risk Management Committee. In addition, 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 Corporations 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 Corporations liquidity positions, projected sources and uses of funds, interest rate risk positions and economic conditions.
Interest rate risk (IRR), a component of market risk, is considered by management as a predominant market risk in terms of its potential impact on profitability or market value. 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 Corporations 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.
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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, + 200 and + 400 basis points parallel ramps and + 200 basis points parallel shocks. Management also performs analyses to isolate and measure basis and prepayment risk exposures.
The asset and liability management group 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 Corporations 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 managements 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 gradually by the same amount. The rising rate scenarios considered in these market risk simulations reflect gradual changes of 200 and 400 basis points during the twelve-month period ending June 30, 2016. Under a 200 basis points rising rate scenario, projected net interest income increases by $60 million, while under a 400 basis points rising rate scenario, projected net interest income increases by $106 million. These scenarios were compared against the Corporations 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 Corporations assets minus the estimated present value of the liabilities. This sensitivity analysis is a useful tool to measure long-term IRR because it captures the impact of up or down rate changes in expected cash flows, including principal and interest, from all future periods.
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.
The Corporation maintains an overall interest rate risk management strategy that incorporates the use of derivative instruments to minimize significant unplanned fluctuations in net interest income or market value that are caused by interest rate volatility. The market value of these derivatives is subject to interest rate fluctuations and counterparty credit risk adjustments which could have a positive or negative effect in the Corporations earnings.
The Corporations 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. BPPRs 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 June 30, 2015, the Corporation held trading securities with a fair value of $142 million, representing approximately 0.4% of the Corporations total assets, compared with $139 million and 0.4% at December 31, 2014. As shown in Table 26, the trading portfolio consists principally of mortgage-backed securities relating to BPPRs mortgage activities described above, which at June 30, 2015
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were investment grade securities. As of June 30, 2015, the trading portfolio also included $7.1 million in Puerto Rico government obligations and shares of Closed-end funds that invest primarily in Puerto Rico government obligations (December 31, 2014 - $9.9 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 $3.1 million for the quarter ended June 30, 2015 and a trading account gain of $1.1 million for the quarter ended June 30, 2014. Table 26 provides the composition of the trading portfolio at June 30, 2015 and December 31, 2014.
Table 26 - Trading Portfolio
June 30, 2015 | December 31, 2014 | |||||||||||||||
(Dollars in thousands) |
Amount | Weighted Average Yield [1] |
Amount | Weighted Average Yield [1] |
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Mortgage-backed securities |
$ | 117,185 | 5.82 | % | $ | 110,692 | 6.19 | % | ||||||||
Collateralized mortgage obligations |
1,427 | 5.00 | 1,636 | 5.01 | ||||||||||||
Puerto Rico government obligations |
5,614 | 5.42 | 7,954 | 5.23 | ||||||||||||
Interest-only strips |
710 | 12.24 | 769 | 12.11 | ||||||||||||
Other |
16,659 | 2.17 | 17,476 | 3.26 | ||||||||||||
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Total |
$ | 141,595 | 5.40 | % | $ | 138,527 | 5.78 | % | ||||||||
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[1] | Not on a taxable equivalent basis. |
The Corporations 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 Corporations trading portfolio had a 5-day VAR of approximately $1.1 million for the last week in June 2015. There are numerous assumptions and estimates associated with VAR modeling, and actual results could differ from these assumptions and estimates. Backtesting is performed to compare actual results against maximum estimated losses, in order to evaluate model and assumptions accuracy.
In the opinion of management, the size and composition of the trading portfolio does not represent a significant source of market risk for the Corporation.
FAIR VALUE MEASUREMENT OF FINANCIAL INSTRUMENTS
The Corporation currently measures at fair value on a recurring basis its trading assets, available-for-sale securities, derivatives, mortgage servicing rights and contingent consideration. Occasionally, the Corporation may be required to record at fair value other assets on a nonrecurring basis, such as loans held-for-sale, impaired loans held-in-portfolio that are collateral dependent and certain other assets. These nonrecurring fair value adjustments typically result from the application of lower of cost or fair value accounting or write-downs of individual assets.
The Corporation categorizes its assets and liabilities measured at fair value under the three-level hierarchy. The level within the hierarchy is based on whether the inputs to the valuation methodology used for fair value measurement are observable.
Refer to Note 29 to the consolidated financial statements for information on the Corporations fair value measurement disclosures required by the applicable accounting standard. At June 30, 2015, approximately $ 5.7 billion, or 96%, of the assets measured at fair value on a recurring basis used market-based or market-derived valuation inputs in their valuation methodology and, therefore, were classified as Level 1 or Level 2. The majority of instruments measured at fair value were classified as Level 2, including U.S. Treasury securities, obligations of U.S. Government sponsored entities, obligations of Puerto Rico, States and political subdivisions, most mortgage-backed securities (MBS) and collateralized mortgage obligations (CMOs), and derivative instruments.
At June 30, 2015, the remaining 4% of assets measured at fair value on a recurring basis were classified as Level 3 since their valuation methodology considered significant unobservable inputs. The financial assets measured as Level 3 included mostly tax-exempt
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GNMA mortgage-backed securities and mortgage servicing rights (MSRs). Additionally, the Corporation reported $157 million of financial assets that were measured at fair value on a nonrecurring basis at June 30, 2015, all of which were classified as Level 3 in the hierarchy.
Broker quotes used for fair value measurements inherently reflect any lack of liquidity in the market since they represent an exit price from the perspective of the market participants. Financial assets that were fair valued using broker quotes amounted to $ 20 million at June 30, 2015, of which $ 7 million were Level 3 assets and $ 13 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.
During the quarter and six months ended June 30, 2015, there were no transfers in and/or out of Level 1, Level 2 and Level 3 for financial instruments measured at fair value on a recurring basis. Refer to the Critical Accounting Policies / Estimates in the 2014 Annual Report for additional information on the accounting guidance and the Corporations policies or procedures related to fair value measurements.
Trading Account Securities and Investment Securities Available-for-Sale
The majority of the values for trading account securities and investment securities available-for-sale are obtained from third-party pricing services and are validated with alternate pricing sources when available. Securities not priced by a secondary pricing source are documented and validated internally according to their significance to the Corporations financial statements. Management has established materiality thresholds according to the investment class to monitor and investigate material deviations in prices obtained from the primary pricing service provider and the secondary pricing source used as support for the valuation results. During the quarter and six months ended June 30, 2015, the Corporation did not adjust any prices obtained from pricing service providers or broker dealers.
Inputs are evaluated to ascertain that they consider current market conditions, including the relative liquidity of the market. When a market quote for a specific security is not available, the pricing service provider generally uses observable data to derive an exit price for the instrument, such as benchmark yield curves and trade data for similar products. To the extent trading data is not available, the pricing service provider relies on specific information including dialogue with brokers, buy side clients, credit ratings, spreads to established benchmarks and transactions on similar securities, to draw correlations based on the characteristics of the evaluated instrument. If for any reason the pricing service provider cannot observe data required to feed its model, it discontinues pricing the instrument. During the quarter and six months ended June 30, 2015, none of the Corporations investment securities were subject to pricing discontinuance by the pricing service providers. The pricing methodology and approach of our primary pricing service providers is concluded to be consistent with the fair value measurement guidance.
Furthermore, management assesses the fair value of its portfolio of investment securities at least on a quarterly basis, which includes analyzing changes in fair value that have resulted in losses that may be considered other-than-temporary. Factors considered include, for example, the nature of the investment, severity and duration of possible impairments, industry reports, sector credit ratings, economic environment, creditworthiness of the issuers and any guarantees.
Securities are classified in the fair value hierarchy according to product type, characteristics and market liquidity. At the end of each period, management assesses the valuation hierarchy for each asset or liability measured. The fair value measurement analysis performed by the Corporation includes validation procedures and review of market changes, pricing methodology, assumption and level hierarchy changes, and evaluation of distressed transactions.
At June 30, 2015, the Corporations portfolio of trading and investment securities available-for-sale amounted to $ 5.7 billion and represented 96% of the Corporations assets measured at fair value on a recurring basis. At June 30, 2015, net unrealized gains on the trading portfolios approximated $3 million and net unrealized losses on available-for-sale investments securities approximated $16 million. Fair values for most of the Corporations trading and investment securities available-for-sale were classified as Level 2. Trading and investment securities available-for-sale classified as Level 3, which were the securities that involved the highest degree of judgment, represented less than 1% of the Corporations total portfolio of trading and investment securities available-for-sale.
Mortgage Servicing Rights
Mortgage servicing rights (MSRs), which amounted to $ 206 million at June 30, 2015, do not trade in an active, open market with readily observable prices. Fair value is estimated based upon discounted net cash flows calculated from a combination of loan level
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data and market assumptions. The valuation model combines loans with common characteristics that impact servicing cash flows (e.g. investor, remittance cycle, interest rate, product type, etc.) in order to project net cash flows. Market valuation assumptions include prepayment speeds, discount rate, cost to service, escrow account earnings, and contractual servicing fee income, among other considerations. Prepayment speeds are derived from market data that is more relevant to the U.S. mainland loan portfolios and, thus, are adjusted for the Corporations loan characteristics and portfolio behavior since prepayment rates in Puerto Rico have been historically lower. Other assumptions are, in the most part, directly obtained from third-party providers. Disclosure of two of the key economic assumptions used to measure MSRs, which are prepayment speed and discount rate, and a sensitivity analysis to adverse changes to these assumptions, is included in Note 15 to the consolidated financial statements.
Derivatives
Derivatives, such as interest rate swaps and indexed options, are traded in over-the-counter active markets. These derivatives are indexed to an observable interest rate benchmark, such as LIBOR or equity indexes, and are priced using an income approach based on present value and option pricing models using observable inputs. Other derivatives are liquid and have quoted prices, such as forward contracts or to be announced securities (TBAs). All of these derivatives held by the Corporation were classified as Level 2. Valuations of derivative assets and liabilities reflect the values associated with counterparty risk and nonperformance risk, respectively. The non-performance risk, which measures the Corporations own credit risk, is determined using internally-developed models that consider the net realizable value of the collateral posted, remaining term, and the creditworthiness or credit standing of the Corporation. The counterparty risk is also determined using internally-developed models which incorporate the creditworthiness of the entity that bears the risk, net realizable value of the collateral received, and available public data or internally-developed data to determine their probability of default. To manage the level of credit risk, the Corporation employs procedures for credit approvals and credit limits, monitors the counterparties credit condition, enters into master netting agreements whenever possible and, when appropriate, requests additional collateral. During the quarter ended June 30, 2015, inclusion of credit risk in the fair value of the derivatives resulted in a net loss of $44.5 thousands recorded in the other operating income and interest expense captions of the consolidated statement of operations, which consisted of a gain of $27 thousands from the assessment of the counterparties credit risk and a loss of $71.1 thousands resulting from the Corporations own credit standing adjustment. During the six months ended June 30, 2015, inclusion of credit risk in the fair value of the derivatives resulted in a net loss of $148.7 thousands recorded in the other operating income and interest expense captions of the consolidated statement of operations, which consisted of a gain of $57.3 thousands resulting from assessment of the counterparties credit risk and a loss of $205.9 thousands resulting from the Corporations own credit standing adjustment.
Loans held-in-portfolio considered impaired under ASC Section 310-10-35 that are collateral dependent
The impairment is based on the fair value of the collateral, which is derived from appraisals that take into consideration prices in observed transactions involving similar assets in similar locations, size and supply and demand. Deterioration of the housing markets and the economy in general have adversely impacted and continue to affect the market activity related to real estate properties. These collateral dependent impaired loans are classified as Level 3 and are reported as a nonrecurring fair value measurement.
LIQUIDITY
The objective of effective liquidity management is to ensure that the Corporation has sufficient liquidity to meet all of its financial obligations, finance expected future growth and maintain a reasonable safety margin for cash commitments under both normal and stressed market conditions. The Board is responsible for establishing the Corporations 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 Corporations Corporate Treasurer is responsible for implementing the policies and procedures approved by the Board and for monitoring the Corporations 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 institutions liquidity may be pressured if, for example, its credit rating is downgraded, it experiences a sudden and unexpected substantial cash outflow, or some other event causes counterparties to avoid exposure to the institution. 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.
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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 Corporations 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.
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 $ 1.7 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 Corporations total assets at June 30, 2015, compared with 75% at December 31, 2014. The ratio of total ending loans to deposits was 84% at June 30, 2015, compared to 89% at December 31, 2014. In addition to traditional deposits, the Corporation maintains borrowing arrangements. At June 30, 2015, these borrowings consisted primarily of $ 1.1 billion in assets sold under agreement to repurchase, $995 million in advances with the FHLB, $440 million in junior subordinated deferrable interest debentures related to trust preferred securities and $450 million in term notes issued to partially fund the repayment of TARP funds. A detailed description of the Corporations borrowings, including their terms, is included in Note 20 to the consolidated financial statements. Also, the consolidated statements of cash flows in the accompanying consolidated financial statements provide information on the Corporations cash inflows and outflows.
The following sections provide further information on the Corporations major funding activities and needs, as well as the risks involved in these activities. A detailed description of the Corporations borrowings and available lines of credit, including its terms, is included in Note 20 to the consolidated financial statements. Also, the consolidated statements of cash flows in the accompanying consolidated financial statements provide information on the Corporations cash inflows and outflows.
Banking Subsidiaries
Primary sources of funding for the Corporations banking subsidiaries (BPPR 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.
Note 39 to the consolidated financial statements provides a consolidating statement of cash flows which includes the Corporations 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 Corporations ability to compete successfully in the marketplace for deposits, excluding brokered deposits, depends on various factors, including pricing, service, convenience and financial stability as reflected by operating results, credit ratings (by nationally recognized credit rating agencies), and importantly, FDIC deposit insurance. Although a downgrade in the credit ratings of the Corporations 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 Corporations 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.
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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 19 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 $21.9 billion, or 79% of total deposits, at June 30, 2015, compared with $20.6 billion, or 83% of total deposits, at December 31, 2014. Core deposits financed 67% of the Corporations earning assets at June 30, 2015, compared with 69% at December 31, 2014.
Certificates of deposit with denominations of $100,000 and over at June 30, 2015 totaled $4.5 billion, or 16% of total deposits (December 31, 2014 - $3.3 billion, or 13% of total deposits). Their distribution by maturity at June 30, 2015 is presented in the table that follows:
Table 27 - Distribution by Maturity of Certificate of Deposits of $100,000 and Over
(In thousands) |
||||
3 months or less |
$ | 2,024,576 | ||
3 to 6 months |
431,130 | |||
6 to 12 months |
884,654 | |||
Over 12 months |
1,177,357 | |||
|
|
|||
Total |
$ | 4,517,717 | ||
|
|
At June 30, 2015 approximately 5 % of the Corporations assets were financed by brokered deposits, as compared to 6% at December 31, 2014. The Corporation had $ 1.9 billion in brokered deposits at June 30, 2015 and December 31, 2014. In the event that any of the Corporations banking subsidiaries regulatory capital ratios fall below those required by a well-capitalized institution or are subject to capital restrictions by the regulators, that banking subsidiary faces the risk of not being able to raise or maintain brokered deposits and faces limitations on the rate paid on deposits, which may hinder the Corporations 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 Corporations banking subsidiaries have the ability to borrow funds from the FHLB. At June 30, 2015 and December 31, 2014, the banking subsidiaries had credit facilities authorized with the FHLB aggregating to $3.7 billion, based on assets pledged with the FHLB at those dates. Outstanding borrowings under these credit facilities totaled $995 million at June 30, 2015 and $822 million at December 31, 2014. Such advances are collateralized by loans held-in-portfolio, do not have restrictive covenants and do not have any callable features. At June 30, 2015 and December 31, 2014 the credit facilities authorized with the FHLB were collateralized by $ 4.5 billion in loans held-in-portfolio. Refer to Note 20 to the consolidated financial statements for additional information on the terms of FHLB advances outstanding.
At June 30, 2015 and December 31, 2014, the Corporations borrowing capacity at the Feds Discount Window amounted to approximately $1.3 billion and $2.1 billion, respectively, 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 June 30, 2015 and December 31, 2014, this credit facility with the Fed was collateralized by $ 3.9 billion and $4.1 billion, respectively, in loans held-in-portfolio.
At June 30, 2015, 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 Corporations financial condition or general market conditions were to deteriorate. The Corporations financial flexibility will be severely constrained if its banking subsidiaries are unable to maintain access to funding or if adequate
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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 Corporations normal practices.
BPPRs 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 26 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.
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 the six months ended June 30, 2015, PIHC received $ 2.3 million in dividends from EVERTECs parent company. PIHC also received $9.3 million in dividends from its investment in BHD and $3.1 million in dividends from its non-banking subsidiaries.
Another use of liquidity at the parent holding company is the payment of dividends on preferred stock. At the end of 2010, the Corporation resumed paying dividends on its Series A and B preferred stock. The preferred stock dividends amounted to $1.9 million for the six months ended June 30, 2015. The preferred stock dividends paid were financed by issuing new shares of common stock to the participants of the Corporations qualified employee savings plans. The Corporation anticipates that any future preferred stock dividend payments would continue to be financed with the issuance of new common stock in connection with its qualified employee savings plans. The Corporation is not paying dividends to holders of its common stock.
The BHCs have in the past borrowed in the money markets and in the corporate debt market primarily to finance their non-banking subsidiaries, however, the cash needs of the Corporations 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 Corporations credit ratings. The Corporations principal credit ratings are below investment grade which affects the Corporations 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 39 to the consolidated financial statements provides a statement of condition, of operations and of cash flows for the two BHCs. The loans held-in-portfolio in such financial statements is principally associated with intercompany transactions.
The outstanding balance of notes payable at the BHCs amounted to $890 million at June 30, 2015 and December 31, 2014. The repayment of the BHCs 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 BHCs notes payable at June 30, 2015 are presented in Table 28.
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Table 28 - Distribution of BHCs Notes Payable by Contractual Maturity
Year |
(In thousands) | |||
2015 |
$ | | ||
2016 |
| |||
2017 |
| |||
2018 |
| |||
2019 |
450,000 | |||
Later years |
439,800 | |||
|
|
|||
Total |
$ | 889,800 | ||
|
|
As indicated previously, the BHC did not issue new registered debt in the capital markets during the quarter ended June 30, 2015.
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 Corporations 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 and risk appetite of the various counterparties. The Corporations unpledged investment and trading securities, excluding other investment securities, amounted to $ 2.4 billion at June 30, 2015 and $2.7 billion at December 31, 2014. 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 Populars debt obligations are a relevant factor for liquidity because they impact the Corporations 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 Corporations ability to access a broad array of wholesale funding sources, among other factors.
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The Corporations 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 Corporations 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 Corporations banking subsidiaries currently do not use borrowings that are rated by the major rating agencies, as these banking subsidiaries are funded primarily with deposits and secured borrowings. The banking subsidiaries had $20 million in deposits at June 30, 2015 that are subject to rating triggers.
Some of the Corporations derivative instruments include financial covenants tied to the banks 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 $7 million at June 30, 2015, with the Corporation providing collateral totaling $15 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 the Guarantees section of this MD&A, the Corporation services residential mortgage loans subject to credit recourse provisions. Certain contractual agreements require the Corporation to post collateral to secure such recourse obligations if the institutions required credit ratings are not maintained. Collateral pledged by the Corporation to secure recourse obligations amounted to approximately $81 million at June 30, 2015. The Corporation could be required to post additional collateral under the agreements. Management expects that it would be able to meet additional collateral requirements if and when needed. The requirements to post collateral under certain agreements or the loss of escrow deposits could reduce the Corporations liquidity resources and impact its operating results.
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 29.
The Corporations non-accruing and charge-off policies by major categories of loan portfolios are as follows:
| Commercial and construction loans - recognition of interest income on commercial and construction loans is discontinued when the loans are 90 days or more in arrears on payments of principal or interest or when other factors indicate that the collection of principal and interest is doubtful. The impaired portions of secured loans past due as to principal and interest is charged-off not later than 365 days past due. However, in the case of collateral dependent loans individually evaluated for impairment, the excess of the recorded investment over the fair value of the collateral (portion deemed uncollectible) is generally promptly charged-off, but in any event, not later than the quarter following the quarter in which such excess was first recognized. Commercial unsecured loans are charged-off no later than 180 days past due. Overdrafts are generally charged-off no later than 60 days past their due date. |
| Lease financing - recognition of interest income for lease financing is ceased when loans are 90 days or more in arrears. Leases are charged-off when they are 120 days in arrears. |
| Mortgage loans - recognition of interest income on mortgage loans is generally discontinued when loans are 90 days or more in arrears on payments of principal or interest. The impaired portion of a mortgage loan is charged-off when the loan is 180 days past due. The Corporation discontinues the recognition of interest income on residential mortgage loans insured by the Federal Housing Administration (FHA) or guaranteed by the U.S. Department of Veterans Affairs (VA) when 18 months delinquent as to principal or interest. The principal repayment on these loans is insured. |
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| Consumer loans - recognition of interest income on closed-end consumer loans and home-equity lines of credit is discontinued when the loans are 90 days or more in arrears on payments of principal or interest. Income is generally recognized on open-end consumer loans, except for home equity lines of credit, until the loans are charged-off. Closed-end consumer loans are charged-off when they are 120 days in arrears. Open-end consumer loans are charged-off when they are 180 days in arrears. Overdrafts in excess of 60 days are generally charged-off no later than 60 days past their due date. |
| Troubled debt restructurings (TDRs) - loans classified as TDRs are typically in non-accrual status at the time of the modification. The TDR loan continues in non-accrual status until the borrower has demonstrated a willingness and ability to make the restructured loan payments (generally at least six months of sustained performance after the modification (or one year for loans providing for quarterly or semi-annual payments)) and management has concluded that it is probable that the borrower would not be in payment default in the foreseeable future. |
| Loans 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. |
| Loans acquired in the Westernbank FDIC-assisted transaction, except for revolving lines of credit, are accounted for by the Corporation in accordance with ASC Subtopic 310-30. Under ASC Subtopic 310-30, the acquired loans were aggregated into pools based on similar characteristics. Each loan pool is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows. The loans, which are accounted for under ASC Subtopic 310-30 by the Corporation, are not considered non-performing and will continue to have an accretable yield as long as there is a reasonable expectation about the timing and amount of cash flows expected to be collected. Also, loans charged-off against the non-accretable difference established in purchase accounting are not reported as charge-offs. Charge-offs will be recorded only to the extent that losses exceed the purchase accounting estimates. |
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. Accordingly, approximately $1.5 billion in loans and $18 million in OREOs have been reclassified as non-covered in the accompanying statement of financial condition as of June 30, 2015, because they are no longer subject to the shared-loss payments by the FDIC. However, included in these balances are approximately $248.7 million of loans that are subject to the resolution of several arbitration proceedings currently ongoing with the FDIC. Loans and OREOs 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 June 30, 2015.
Because of the application of ASC Subtopic 310-30 to the Westernbank acquired loans and the loss protection provided by the FDIC which limits the risks on the covered loans, the Corporation has determined to provide certain quality metrics in this MD&A that exclude such covered loans to facilitate the comparison between loan portfolios and across periods. Given the amount of covered loans that are past due but still accruing due to the accounting under ASC Subtopic 310-30, the Corporation believes the inclusion of these loans in certain asset quality ratios in the numerator or denominator (or both) would result in a 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 that 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.
The reclassification to non-covered of the non-single family loans and foreclosed assets that were previously covered under the shared-loss arrangement with the FDIC, a bulk sale of covered OREOs, and the impact of the classification to held-for-sale of certain non-performing loans as detailed below, impacted credit metrics for the second quarter of 2015. Excluding the effect of these events, the underlying credit quality of the loan portfolios remained generally stable, in spite of the challenging economic conditions that persist in Puerto Rico. The Corporation continued to pursue strategic opportunities intended to reduce non-performing assets and continue improving the overall risk profile of its loan portfolios. The US region continued to exhibit strong asset quality, with low levels of delinquencies and charge-offs.
Total non-performing assets, including covered, were $806 million at June 30, 2015, decreasing by $126 million, or 14% from December 31, 2014, of which $96 million were related to covered OREOs. Total non-performing non-covered assets were $769 million at June 30, 2015, decreasing by $16 million, or 2% from December 31, 2014. Non-covered non-performing loans held-in-portfolio were $576 million, decreasing by $55 million, or 9%, from December 31, 2014. The decrease was mainly driven by lower
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commercial non-performing loans of $70 million. During the quarter, the Corporation agreed to sell a $75 million non-accrual public sector credit at BPPR and accordingly transferred it to held-for-sale. The sale was subject, among other conditions, to the approval of the syndicates agent bank. The sale agreement was terminated on July 29, 2015 pursuant to its terms after the parties were not able to obtain the approval of the agent bank on terms acceptable to the assignee. The aggregate write-down on loans transferred to held-for-sale during the quarter was of approximately $30.5 million, of which $29.0 million was previously reserved. Included in the second quarter of 2015 were $8 million of non-performing loans no longer covered by FDIC loss share agreement. The ratio of non-performing loans to loans held-in-portfolio, excluding covered loans, decreased to 2.57% at June 30, 2015 from 3.25% at December 31, 2014.
At June 30, 2015, non-performing loans secured by real estate held-in-portfolio, excluding covered loans, amounted to $498 million in the Puerto Rico operations and $23 million in the U.S. mainland operations. These figures compare to $482 million in the Puerto Rico operations and $35 million in the U.S. mainland operations at December 31, 2014. In addition to the non-performing loans included in Table 29, at June 30, 2015, there were $209 million of non-covered performing loans, mostly commercial loans, which in managements opinion, are currently subject to potential future classification as non-performing and are considered impaired, compared with $146 million at December 31, 2014.
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Table 29 - Non-Performing Assets
(Dollars in thousands) |
June 30, 2015 |
As a % of loans HIP by category [4] |
December 31, 2014 |
As a % of loans HIP by category [4] |
||||||||||||
Commercial |
$ | 190,294 | 1.9 | % | $ | 260,225 | 3.2 | % | ||||||||
Construction |
5,427 | 0.8 | 13,812 | 5.5 | ||||||||||||
Legacy[1] |
4,686 | 6.5 | 1,545 | 1.9 | ||||||||||||
Leasing |
2,328 | 0.4 | 3,102 | 0.5 | ||||||||||||
Mortgage |
330,821 | 4.6 | 304,913 | 4.7 | ||||||||||||
Consumer |
42,441 | 1.1 | 46,886 | 1.2 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total non-performing loans held-in-portfolio, excluding covered loans |
575,997 | 2.6 | % | 630,483 | 3.3 | % | ||||||||||
Non-performing loans held-for-sale [2] |
50,875 | 18,899 | ||||||||||||||
Other real estate owned (OREO), excluding covered OREO |
142,255 | 135,500 | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total non-performing assets, excluding covered assets |
$ | 769,127 | $ | 784,882 | ||||||||||||
Covered loans and OREO [3] |
37,367 | 148,099 | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total non-performing assets |
$ | 806,494 | $ | 932,981 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Accruing loans past due 90 days or more[5] [6] |
$ | 435,775 | $ | 447,990 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Ratios excluding covered loans:[7] |
||||||||||||||||
Non-performing loans held-in-portfolio to loans held-in-portfolio |
2.57 | % | 3.25 | % | ||||||||||||
Allowance for loan losses to loans held-in-portfolio |
2.29 | 2.68 | ||||||||||||||
Allowance for loan losses to non-performing loans, excluding held-for-sale |
89.02 | 82.43 | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Ratios including covered loans: |
||||||||||||||||
Non-performing assets to total assets |
2.19 | % | 2.82 | % | ||||||||||||
Non-performing loans held-in-portfolio to loans held-in-portfolio |
2.51 | 2.95 | ||||||||||||||
Allowance for loan losses to loans held-in-portfolio |
2.38 | 2.74 | ||||||||||||||
Allowance for loan losses to non-performing loans, excluding held-for-sale |
94.99 | 92.82 | ||||||||||||||
|
|
|
|
|
|
|
|
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 $49 million in commercial loans, $2 million in construction loans and $225 thousand in mortgage loans as of June 30, 2015 (December 31, 2014 - $14.0 million in mortgage loans, $309 thousand in commercial loans and $4.5 million in consumer loans). |
[3] | The amount consists of $4 million in non-performing covered loans accounted for under ASC Subtopic 310-20 and $34 million in covered OREO as of June 30, 2015 (December 31, 2014 - $18 million and $130 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 $690 million in covered loans at June 30, 2015 (December 31, 2014 - 2.5 billion). |
[5] | The carrying value of loans accounted for under ASC Sub-topic 310-30 that are contractually 90 days or more past due was $0.4 billion at June 30, 2015 (December 31, 2014 - $0.5 billion). 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 Corporations 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 $133 million of residential mortgage loans insured by FHA or guaranteed by the VA that are no longer accruing interest as of June 30, 2015 (December 31, 2014 - $125 million). Furthermore, the Corporation has approximately $72 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 Corporations policy to exclude these balances from non-performing assets (December 31, 2014 - $66 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. |
192
Table 30 - Activity in Non-Performing Loans Held-in-Portfolio (Excluding Consumer and Covered Loans)
For the quarter ended June 30, 2015 | For the six months ended June 30, 2015 | |||||||||||||||
(Dollars in thousands) |
BPPR | BPNA | BPPR | BPNA | ||||||||||||
Beginning balance |
$ | 597,999 | $ | 20,556 | $ | 567,351 | $ | 13,144 | ||||||||
Plus: |
||||||||||||||||
New non-performing loans |
102,647 | 16,991 | 237,914 | 32,253 | ||||||||||||
Advances on existing non-performing loans |
| 397 | | 430 | ||||||||||||
Reclass from covered loans |
8,075 | | 8,075 | | ||||||||||||
Less: |
||||||||||||||||
Non-performing loans transferred to OREO |
(11,865 | ) | (314 | ) | (17,779 | ) | (314 | ) | ||||||||
Non-performing loans charged-off |
(59,802 | ) | (1,151 | ) | (76,335 | ) | (1,841 | ) | ||||||||
Loans returned to accrual status / loan collections |
(89,130 | ) | (8,179 | ) | (171,302 | ) | (17,410 | ) | ||||||||
Loans transferred to held-for-sale |
(44,996 | ) | | (44,996 | ) | 2,038 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Ending balance NPLs |
$ | 502,928 | $ | 28,300 | $ | 502,928 | $ | 28,300 | ||||||||
|
|
|
|
|
|
|
|
193
Table 31 - Activity in Non-Performing Loans Held-in-Portfolio (Excluding Consumer and Covered Loans)
For the quarter ended June 30, 2014 | For the six months ended June 30, 2014 | |||||||||||||||
(Dollars in thousands) |
BPPR | BPNA | BPPR | BPNA | ||||||||||||
Beginning balance |
$ | 498,196 | $ | 94,826 | $ | 410,594 | $ | 139,961 | ||||||||
Plus: |
||||||||||||||||
New non-performing loans |
136,133 | 14,604 | 319,280 | 37,418 | ||||||||||||
Advances on existing non-performing loans |
| 1,000 | | 1,011 | ||||||||||||
Less: |
||||||||||||||||
Non-performing loans transferred to OREO |
(6,948 | ) | (661 | ) | (12,399 | ) | (1,856 | ) | ||||||||
Non-performing loans charged-off |
(22,685 | ) | (6,935 | ) | (40,072 | ) | (14,462 | ) | ||||||||
Loans returned to accrual status / loan collections |
(67,332 | ) | (19,325 | ) | (140,039 | ) | (48,469 | ) | ||||||||
Loans transferred to held-for-sale |
| (17,402 | ) | | (47,496 | ) | ||||||||||
Non-performing loans from discontinued operations |
| (9,239 | ) | | (9,239 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Ending balance NPLs |
$ | 537,364 | $ | 56,868 | $ | 537,364 | $ | 56,868 | ||||||||
|
|
|
|
|
|
|
|
For the quarter ended June 30, 2015, total non-performing loan inflows, excluding consumer loans, amounted to $120 million, a decrease of $32 million, or 21%, when compared to the inflows for the same quarter in 2014. Inflows of non-performing loans held-in-portfolio at the BPPR segment amounted to $103 million, a decrease of $33 million, or 25%, compared to the inflows for the second quarter of 2014. Inflows of non-performing loans held-in-portfolio at the BPNA segment amounted to $17 million, an increase of $2 million, or 11%, compared to the inflows for the second quarter of 2014. BPPR NPL activity was mostly related to lower mortgage and commercial inflows of $20 million and $13 million, respectively. Refer to Table 32 for a summary of the activity in the allowance for loan losses and selected loan losses statistics for the quarters ended June 30, 2015 and 2014.
Table 32 - Allowance for Loan Losses and Selected Loan Losses Statistics - Quarterly Activity
Quarters ended June 30, | ||||||||||||||||||||||||
2015 | 2015 | 2015 | 2014 | 2014 | 2014 | |||||||||||||||||||
(Dollars in thousands) |
Non-covered loans |
Covered loans |
Total | Non-covered loans |
Covered loans |
Total | ||||||||||||||||||
Balance at beginning of period |
$ | 516,224 | $ | 72,473 | $ | 588,697 | $ | 542,575 | $ | 97,773 | $ | 640,348 | ||||||||||||
Provision for loan losses - Continuing operations |
60,468 | 15,766 | 76,234 | 50,074 | 11,604 | 61,678 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
576,692 | 88,239 | 664,931 | 592,649 | 109,377 | 702,026 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Charged-offs: |
||||||||||||||||||||||||
Commercial |
23,755 | 23,697 | 47,452 | 21,890 | 5,993 | 27,883 | ||||||||||||||||||
Construction |
2,194 | 16,040 | 18,234 | 42 | 6,427 | 6,469 | ||||||||||||||||||
Leases |
1,693 | | 1,693 | 1,754 | 2 | 1,756 | ||||||||||||||||||
Legacy[1] |
480 | | 480 | 1,347 | | 1,347 | ||||||||||||||||||
Mortgage |
11,701 | 520 | 12,221 | 10,997 | 2,262 | 13,259 | ||||||||||||||||||
Consumer |
27,157 | 767 | 27,924 | 33,938 | (677 | ) | 33,261 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
66,980 | 41,024 | 108,004 | 69,968 | 14,007 | 83,975 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Recoveries: |
||||||||||||||||||||||||
Commercial |
7,575 | 3,864 | 11,439 | 11,671 | 555 | 12,226 | ||||||||||||||||||
Construction |
473 | 1,425 | 1,898 | 657 | 2,727 | 3,384 | ||||||||||||||||||
Leases |
720 | | 720 | 610 | 1 | 611 | ||||||||||||||||||
Legacy[1] |
450 | | 450 | 2,552 | | 2,552 | ||||||||||||||||||
Mortgage |
786 | 342 | 1,128 | 678 | 11 | 689 | ||||||||||||||||||
Consumer |
10,534 | 88 | 10,622 | 7,599 | 1 | 7,600 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
20,538 | 5,719 | 26,257 | 23,767 | 3,295 | 27,062 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net loans charged-offs (recovered): |
||||||||||||||||||||||||
Commercial |
16,180 | 19,833 | 36,013 | 10,219 | 5,438 | 15,657 | ||||||||||||||||||
Construction |
1,721 | 14,615 | 16,336 | (615 | ) | 3,700 | 3,085 | |||||||||||||||||
Leases |
973 | | 973 | 1,144 | 1 | 1,145 | ||||||||||||||||||
Legacy[1] |
30 | | 30 | (1,205 | ) | | (1,205 | ) | ||||||||||||||||
Mortgage |
10,915 | 178 | 11,093 | 10,319 | 2,251 | 12,570 | ||||||||||||||||||
Consumer |
16,623 | 679 | 17,302 | 26,339 | (678 | ) | 25,661 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
46,442 | 35,305 | 81,747 | 46,201 | 10,712 | 56,913 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Allowance transferred from covered to non-covered loans [4] |
13,037 | (13,037 | ) | | | | | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net write-downs[3] |
(30,548 | ) | (1,823 | ) | (32,371 | ) | | | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net write-downs related to loans transferred to discontinued operations |
| | | (20,202 | ) | | (20,202 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Balance at end of period |
$ | 512,739 | $ | 38,074 | $ | 550,813 | $ | 526,246 | $ | 98,665 | $ | 624,911 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Ratios: |
||||||||||||||||||||||||
Annualized net charge-offs to average loans held-in-portfolio[2] |
0.89 | % | 1.41 | % | 0.94 | % | 1.01 | % | ||||||||||||||||
Provision for loan losses to net charge-offs[2] |
1.28 | x | 0.92 | x | 1.08 | x | 1.08 | x | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
194
[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 recoveries (write-down) related to loans sold or reclassified to held-for-sale. |
[3] | Net write-downs are related to loans sold or reclassified to held-for-sale. |
[4] | Represents the allowance transfer of covered to non-covered loans at June 30, 2015. |
Refer to Table 33 for a summary of the activity in the allowance for loan losses and selected loan losses statistics for the six months ended June 30, 2015 and 2014.
195
Table 33 - Allowance for Loan Losses and Selected Loan Losses Statistics - Year-to-date Activity
Six months ended June 30, | ||||||||||||||||||||||||
2015 | 2015 | 2015 | 2014 | 2014 | 2014 | |||||||||||||||||||
(Dollars in thousands) |
Non-covered loans |
Covered loans |
Total | Non-covered loans |
Covered loans |
Total | ||||||||||||||||||
Balance at beginning of period |
$ | 519,719 | $ | 82,073 | $ | 601,792 | $ | 538,463 | $ | 102,092 | $ | 640,555 | ||||||||||||
Provision for loan losses - Continuing operations |
90,179 | 26,090 | 116,269 | 104,196 | 37,318 | 141,514 | ||||||||||||||||||
Provision for loan losses - Discontinued operations |
| | | (6,764 | ) | | (6,764 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
609,898 | 108,163 | 718,061 | 635,895 | 139,410 | 775,305 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Charged-offs: |
||||||||||||||||||||||||
Commercial |
33,777 | 37,936 | 71,713 | 48,998 | 13,961 | 62,959 | ||||||||||||||||||
Construction |
2,194 | 25,086 | 27,280 | 458 | 29,408 | 29,866 | ||||||||||||||||||
Leases |
2,930 | | 2,930 | 2,721 | 2 | 2,723 | ||||||||||||||||||
Legacy[1] |
954 | | 954 | 4,331 | | 4,331 | ||||||||||||||||||
Mortgage |
22,895 | 3,905 | 26,800 | 21,261 | 3,918 | 25,179 | ||||||||||||||||||
Consumer |
59,374 | 767 | 60,141 | 68,210 | (972 | ) | 67,238 | |||||||||||||||||
Discontinued operations |
| | | 4,452 | | 4,452 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
122,124 | 67,694 | 189,818 | 150,431 | 46,317 | 196,748 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Recoveries: |
||||||||||||||||||||||||
Commercial |
13,274 | 6,504 | 19,778 | 21,619 | 875 | 22,494 | ||||||||||||||||||
Construction |
3,398 | 4,700 | 8,098 | 2,627 | 4,616 | 7,243 | ||||||||||||||||||
Leases |
1,188 | | 1,188 | 921 | 1 | 922 | ||||||||||||||||||
Legacy[1] |
2,752 | | 2,752 | 9,745 | | 9,745 | ||||||||||||||||||
Mortgage |
1,353 | 446 | 1,799 | 1,556 | 11 | 1,567 | ||||||||||||||||||
Consumer |
17,831 | 815 | 18,646 | 14,519 | 69 | 14,588 | ||||||||||||||||||
Discontinued operations |
| | | 9,997 | | 9,997 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
39,796 | 12,465 | 52,261 | 60,984 | 5,572 | 66,556 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net loans charged-off (recovered): |
||||||||||||||||||||||||
Commercial |
20,503 | 31,432 | 51,935 | 27,379 | 13,086 | 40,465 | ||||||||||||||||||
Construction |
(1,204 | ) | 20,386 | 19,182 | (2,169 | ) | 24,792 | 22,623 | ||||||||||||||||
Leases |
1,742 | | 1,742 | 1,800 | 1 | 1,801 | ||||||||||||||||||
Legacy[1] |
(1,798 | ) | | (1,798 | ) | (5,414 | ) | | (5,414 | ) | ||||||||||||||
Mortgage |
21,542 | 3,459 | 25,001 | 19,705 | 3,907 | 23,612 | ||||||||||||||||||
Consumer |
41,543 | (48 | ) | 41,495 | 53,691 | (1,041 | ) | 52,650 | ||||||||||||||||
Discontinued operations |
| | | (5,545 | ) | | (5,545 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
82,328 | 55,229 | 137,557 | 89,447 | 40,745 | 130,192 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Allowance transferred from covered to non-covered loans [4] |
13,037 | (13,037 | ) | | | | | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net write-downs [3] |
(27,868 | ) | (1,823 | ) | (29,691 | ) | | | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net write-downs related to loans transferred to discontinued operations |
| | | (20,202 | ) | | (20,202 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Balance at end of period |
$ | 512,739 | $ | 38,074 | $ | 550,813 | $ | 526,246 | $ | 98,665 | $ | 624,911 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Ratios: |
||||||||||||||||||||||||
Annualized net charge-offs to average loans held-in-portfolio[2] |
0.81 | % | 1.20 | % | 0.87 | % | 1.11 | % | ||||||||||||||||
Provision for loan losses to net charge-offs[2] |
1.08 | x | 0.84 | x | 1.16 | x | 1.09 | x | ||||||||||||||||
|
|
|
|
|
|
|
|
[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 recoveries (write-down) related to loans sold or reclassified to held-for-sale. |
[3] | Net write-downs are related to loans sold or reclassified to held-for-sale. |
[4] | Represents the allowance transfer of covered to non-covered loans at June 30, 2015. |
196
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 and six months ended June 30, 2015 and 2014.
Table 34 - Annualized Net Charge-offs (Recoveries) to Average Loans Held-in-Portfolio (Non-covered loans)
Quarters ended June 30, | Six months ended June 30, | |||||||||||||||
2015 | 2014[1] | 2015 | 2014 | |||||||||||||
Commercial |
0.74 | % | 0.49 | % | 0.48 | % | 0.47 | % | ||||||||
Construction |
1.03 | (1.55 | ) | (0.44 | ) | (2.61 | ) | |||||||||
Leases |
0.67 | 0.84 | 0.61 | 0.66 | ||||||||||||
Legacy |
0.16 | (7.66 | ) | (4.78 | ) | (9.09 | ) | |||||||||
Mortgage |
0.62 | 0.62 | 0.63 | 0.59 | ||||||||||||
Consumer |
1.74 | 2.71 | 2.17 | 2.79 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total annualized net charge-offs to average loans held-in-portfolio |
0.89 | % | 0.94 | % | 0.81 | % | 0.87 | % | ||||||||
|
|
|
|
|
|
|
|
[1] | Excluding net charge-offs from discontinued operations |
Average loans held-in-portfolio excludes covered loans acquired in the Westernbank FDIC-assisted transaction which were recorded at fair value on date of acquisition, and thus, considered a credit discount component.
Excluding the $30.5 million write-down related to the loans transferred to held-for-sale, net charge-offs, excluding covered loans, for the quarter ended June 30, 2015, were flat at $46.4 million, reflective of lower consumer net charge-offs in the BPPR segment, offset by higher commercial and legacy losses as the second quarter of 2014 included the effect of higher recoveries. The Corporations annualized net charge-offs to average non-covered loans held-in-portfolio ratio was 0.89% for the quarter ended June 30, 2015, down from 0.94% for the same period in 2014. The decrease in the net charge-off ratio was mostly driven by the impact of Doral Banks acquired portfolio on the total loan base.
The discussions in the sections that follow assess credit quality performance for the second quarter of 2015 for each of the Corporations non-covered loan portfolios, including $1.5 billion in loans transferred from covered to non-covered status upon the expiration of the shared-loss arrangement under the commercial loss share agreement with the FDIC.
Commercial loans
Non-covered non-performing commercial loans held-in-portfolio were $190 million at June 30, 2015, compared with $260 million at December 31, 2014. The decrease of $70 million, or 27%, from December 31, 2014 was mostly driven by the abovementioned $75 million public sector credit transferred to held-for-sale. The aggregate write-down on loans transferred to held-for-sale during the quarter was of approximately $30.5 million, of which $29.0 million was previously reserved. The percentage of non-performing commercial loans held-in-portfolio to commercial loans held-in-portfolio decreased to 1.90% at June 30, 2015 from 3.20% at December 31, 2014.
Commercial non-covered non-performing loans held-in-portfolio at the BPPR segment decreased by $79 million from December 31, 2014, driven by the transfer to loans-held-for sale of the public sector credit, as mentioned above. Included in the second quarter of 2015 were $7 million of commercial non-performing loans no longer covered by FDIC loss share agreement. Commercial non-performing loans held-in-portfolio at the BPNA segment increased by $9 million from December 31, 2014 driven by $9 million of acquired commercial loans placed in NPL status following the acquisition.
Tables 35 and 36 present the changes in the non-performing commercial loans held-in-portfolio for the quarters and six months ended June 30, 2015 and 2014 for the BPPR (excluding covered loans) and BPNA segments.
197
Table 35 - Activity in Non-Performing Commercial Loans Held-in-Portfolio (Excluding Covered Loans)
For the quarter ended June 30, 2015 | For the six months ended June 30, 2015 | |||||||||||||||
(Dollars in thousands) |
BPPR | BPNA | BPPR | BPNA | ||||||||||||
Beginning balance |
$ | 264,631 | $ | 9,807 | $ | 257,910 | $ | 2,315 | ||||||||
Plus: |
||||||||||||||||
New non-performing loans |
17,092 | 1,386 | 44,518 | 9,416 | ||||||||||||
Advances on existing non-performing loans |
| 383 | | 383 | ||||||||||||
Reclass from covered loans |
7,395 | | 7,395 | | ||||||||||||
Less: |
||||||||||||||||
Non-performing loans transferred to OREO |
(3,568 | ) | | (4,637 | ) | | ||||||||||
Non-performing loans charged-off |
(51,804 | ) | (399 | ) | (60,179 | ) | (825 | ) | ||||||||
Loans returned to accrual status / loan collections |
(9,351 | ) | (282 | ) | (20,612 | ) | (394 | ) | ||||||||
Loans transferred to held-for-sale |
(44,996 | ) | | (44,996 | ) | | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Ending balance NPLs |
$ | 179,399 | $ | 10,895 | $ | 179,399 | $ | 10,895 | ||||||||
|
|
|
|
|
|
|
|
Table 36 - Activity in Non-Performing Commercial Loans Held-in-Portfolio (Excluding Covered Loans)
For the quarter ended June 30, 2014 | For the six months ended June 30, 2014 | |||||||||||||||
(Dollars in thousands) |
BPPR | BPNA | BPPR | BPNA | ||||||||||||
Beginning balance |
$ | 245,931 | $ | 60,998 | $ | 186,097 | $ | 92,956 | ||||||||
Plus: |
||||||||||||||||
New non-performing loans |
30,068 | 7,726 | 116,113 | 24,882 | ||||||||||||
Advances on existing non-performing loans |
| 951 | | 957 | ||||||||||||
Less: |
||||||||||||||||
Non-performing loans transferred to OREO |
(4,103 | ) | | (7,803 | ) | | ||||||||||
Non-performing loans charged-off |
(14,377 | ) | (5,470 | ) | (24,655 | ) | (9,562 | ) | ||||||||
Loans returned to accrual status / loan collections |
(3,967 | ) | (15,475 | ) | (16,200 | ) | (30,409 | ) | ||||||||
Loans transferred to held-for-sale |
| (16,130 | ) | | (46,224 | ) | ||||||||||
Non-performing loans transferred to discontinued operations |
| (8,019 | ) | | (8,019 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Ending balance NPLs |
$ | 253,552 | $ | 24,581 | $ | 253,552 | $ | 24,581 | ||||||||
|
|
|
|
|
|
|
|
Table 37 - Non-Performing Commercial Loans and Net Charge-offs (Excluding Covered Loans)
BPPR | BPNA | Popular, Inc. | ||||||||||||||||||||||
(Dollars in thousands) |
June 30, 2015 |
December 31, 2014 |
June 30, 2015 |
December 31, 2014 |
June 30, 2015 |
December 31, 2014 |
||||||||||||||||||
Non-performing commercial loans |
$ | 179,399 | $ | 257,910 | $ | 10,895 | $ | 2,315 | $ | 190,294 | $ | 260,225 | ||||||||||||
Non-performing commercial loans to commercial loans HIP |
2.37 | % | 4.05 | % | 0.45 | % | 0.13 | % | 1.90 | % | 3.20 | % |
BPPR | BPNA | Popular, Inc. | ||||||||||||||||||||||
For the quarters ended | For the quarters ended | For the quarters ended | ||||||||||||||||||||||
(Dollars in thousands) |
June 30, 2015 |
June 30, 2014 |
June 30, 2015 |
June 30, 2014 |
June 30, 2015 |
June 30, 2014 |
||||||||||||||||||
Commercial loan net charge-offs (recoveries) |
$ | 17,059 | $ | 9,309 | $ | (879 | ) | $ | 910 | $ | 16,180 | $ | 10,219 | |||||||||||
Commercial loan net charge-offs (recoveries) (annualized) to average commercial loans HIP |
1.07 | % | 0.58 | % | (0.15 | )% | 0.18 | % | 0.74 | % | 0.49 | % |
198
BPPR | BPNA | Popular, Inc. | ||||||||||||||||||||||
For the six months ended | For the six months ended | For the six months ended | ||||||||||||||||||||||
(Dollars in thousands) |
June 30, 2015 |
June 30, 2014 |
June 30, 2015 |
June 30, 2014 |
June 30, 2015 |
June 30, 2014 |
||||||||||||||||||
Commercial loan net charge-offs (recoveries) |
$ | 21,861 | $ | 24,482 | (1,358 | ) | $ | (2,781 | ) | $ | 20,503 | $ | 21,701 | |||||||||||
Commercial loan net charge-offs (recoveries) (annualized) to average commercial loans HIP |
0.69 | % | 0.76 | % | (0.13 | )% | (0.20 | )% | 0.48 | % | 0.47 | % |
For the quarter ended June 30, 2015, inflows of commercial non-performing loans held-in-portfolio at the BPPR segment amounted to $17 million, a decrease of $13 million, or 43%, when compared to inflows for the same period in 2014. Inflows of commercial non-performing loans held-in-portfolio at the BPNA segment amounted to $2 million, a decrease of $7 million, or 80%, compared to inflows for the same quarter in 2014. The reduction was driven by improvements in the underlying quality of the loan portfolio.
Table 37 provides information on commercial non-performing loans and net charge-offs for the BPPR (excluding the Westernbank covered loan portfolio) and BPNA segments.
There are no commercial loan relationships greater than $10 million in non-accrual status at June 30, 2015, compared with two commercial loan relationships with an outstanding aggregate balance of $88 million at December 31, 2014.
Commercial loan net charge-offs, excluding net charge-offs for covered loans, amounted to $16.2 million for the quarter ended June 30, 2015, compared to $10.2 million for the same period in 2014 an increase of $6.0 million, or 58%. Commercial loans annualized net charge-offs to average non-covered loans held-in-portfolio increased to 0.74% for the quarter ended June 30, 2015 from 0.49% for the quarter ended June 30, 2014.
Commercial loan net charge-offs in the BPPR segment amounted to $17.1 million for the quarter ended June 30, 2015, compared to $9.3 million for the quarter ended June 30, 2014. The increase of $7.8 million for the for the quarter ended June 30, 2015, when compared with the same period in 2014 primarily stems from lower loss trend during the first quarter of 2015 and the effect of higher recoveries in the second quarter of 2014. Commercial loans annualized net charge-offs to average non-covered loans held-in-portfolio increased to 1.07% for the quarter ended June 30, 2015 from 0.58% for the quarter ended June 30, 2014. For the quarter ended June 30, 2015, the charge-offs associated with collateral dependent impaired commercial loans amounted to approximately $10.0 million at the BPPR segment.
Commercial loan net charge-offs (recoveries) in the BPNA segment amounted to recoveries of ($879 thousand) for quarter ended June 30, 2015, compared to $910 thousand for the quarter ended June 30, 2014. Commercial loans annualized net charge-offs to average non-covered loans held-in-portfolio was (0.15%) for the quarter ended June 30, 2015, and 0.18% for the quarter ended June 30, 2014. Low levels of net charge-offs reflect improvements in credit quality. For the quarter ended June 30, 2015, there were no charge-offs associated with collateral dependent impaired commercial loans from continuing operations at the BPNA segment.
The Corporations commercial loan portfolio secured by real estate (CRE), excluding covered loans, amounted to $6.3 billion at June 30, 2015, of which $2.2 billion was secured with owner occupied properties, compared with $4.7 billion and $1.7 billion, respectively, at December 31, 2014. CRE non-performing loans, excluding covered loans, amounted to $130 million at June 30, 2015, compared with $129 million at December 31, 2014. The CRE non-performing loans ratios for the BPPR and BPNA segments were 2.70% and 0.06%, respectively, at June 30, 2015, compared with 3.60% and 0.07%, respectively, at December 31, 2014. The decrease in the ratio was primarily due to the impact of approximately $1.3 billion in CRE loans transferred from covered category, of which $7 million are in NPL status.
Construction loans
Non-covered non-performing construction loans held-in-portfolio amounted to $5 million at June 30, 2015, compared to $14 million at December 31, 2014, mostly concentrated in the BPPR segment. This decrease was mostly related to loan resolutions. Stable credit trends in the construction portfolio were 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, decreased to 0.78% at June 30, 2015 from 5.48% at December 31, 2014. The decrease in the ratio was in part due to the impact of $429 million of the Doral acquired construction portfolio on the total loan base.
199
Tables 38 and 39 present changes in non-performing construction loans held-in-portfolio for the quarters and six months ended June 30, 2015 and 2014 for the BPPR (excluding covered loans) and BPNA segments.
Table 38 - Activity in Non-Performing Construction Loans Held-in-Portfolio (Excluding Covered Loans)
For the quarter ended June 30, 2015 | For the six months ended June 30, 2015 | |||||||||||||||
(Dollars in thousands) |
BPPR | BPNA | BPPR | BPNA | ||||||||||||
Beginning balance |
$ | 13,214 | $ | | $ | 13,812 | $ | | ||||||||
Plus: |
||||||||||||||||
New non-performing loans |
| 671 | 456 | 671 | ||||||||||||
Reclass from covered loans |
112 | | 112 | | ||||||||||||
Less: |
||||||||||||||||
Non-performing loans transferred to OREO |
(2,194 | ) | | (2,194 | ) | | ||||||||||
Loans returned to accrual status / loan collections |
(6,376 | ) | | (7,430 | ) | | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Ending balance NPLs |
$ | 4,756 | $ | 671 | $ | 4,756 | $ | 671 | ||||||||
|
|
|
|
|
|
|
|
Table 39 - Activity in Non-Performing Construction Loans Held-in-Portfolio (Excluding Covered Loans)
For the quarter ended June 30, 2014 | For the six months ended June 30, 2014 | |||||||||||||||
(Dollars in thousands) |
BPPR | BPNA | BPPR | BPNA | ||||||||||||
Beginning balance |
$ | 22,464 | $ | | $ | 18,108 | $ | 5,663 | ||||||||
Plus: |
||||||||||||||||
New non-performing loans |
952 | | 8,912 | | ||||||||||||
Less: |
||||||||||||||||
Non-performing loans charged-off |
(42 | ) | | (458 | ) | | ||||||||||
Loans returned to accrual status / loan collections |
(1,918 | ) | | (5,106 | ) | (5,663 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Ending balance NPLs |
$ | 21,456 | $ | | $ | 21,456 | $ | | ||||||||
|
|
|
|
|
|
|
|
For the quarter ended June 30, 2015, there were no inflows of construction non-performing loans held-in-portfolio at the BPPR segment, decreasing by $1 million when compared to additions for the same quarter in 2014, while the BPNA segment showed additions of $671 thousand for the quarter.
There are no construction loan relationships greater than $10 million in non-performing status at June 30, 2015 and December 31, 2014.
Construction loan net charge-offs (recoveries), excluding net charge-offs for covered loans, amounted $1.7 million for the quarter ended June 30, 2015, compared to recoveries of $615 thousand for the quarter ended June 30, 2014. Construction loans annualized net charge-offs (recoveries) to average non-covered loans held-in-portfolio resulted in 1.03% for the quarter ended June 30, 2015, compared to (1.55%) for the quarter ended June 30, 2014. For quarter ended June 30, 2015, charge-offs associated with collateral dependent impaired construction loans were $4.4 million in the BPPR and none in the BPNA segment.
Table 40 provides information on construction non-performing loans and net charge-offs for the BPPR and BPNA (excluding the covered loan portfolio) segments.
200
Table 40 - Non-Performing Construction Loans and Net Charge-offs (Excluding Covered Loans)
BPPR | BPNA | Popular, Inc. | ||||||||||||||||||||||
(Dollars in thousands) |
June 30, 2015 | December 31, 2014 | June 30, 2015 | December 31, 2014 | June 30, 2015 | December 31, 2014 | ||||||||||||||||||
Non-performing construction loans |
$ | 4,756 | $ | 13,812 | $ | 671 | $ | | $ | 5,427 | $ | 13,812 | ||||||||||||
Non-performing construction loans to construction loans HIP |
4.19 | % | 8.67 | % | 0.12 | % | | % | 0.78 | % | 5.48 | % | ||||||||||||
BPPR | BPNA | Popular, Inc. | ||||||||||||||||||||||
For the quarters ended | For the quarters ended | For the quarters ended | ||||||||||||||||||||||
(Dollars in thousands) |
June 30, 2015 | June 30, 2014 | June 30, 2015 | June 30, 2014 | June 30, 2015 | June 30, 2014 | ||||||||||||||||||
Construction loan net charge-offs (recoveries) |
$ | 1,721 | $ | (615 | ) | $ | | $ | | $ | 1,721 | $ | (615 | ) | ||||||||||
Construction loan net charge-offs (recoveries) (annualized) to average construction loans HIP |
8.02 | % | (1.86 | )% | | % | | % | 1.03 | % | (1.55 | )% | ||||||||||||
BPPR | BPNA | Popular, Inc. | ||||||||||||||||||||||
For the six months ended | For the six months ended | For the six months ended | ||||||||||||||||||||||
(Dollars in thousands) |
June 30, 2015 | June 30, 2014 | June 30, 2015 | June 30, 2014 | June 30, 2015 | June 30, 2014 | ||||||||||||||||||
Construction loan net charge-offs (recoveries) |
$ | (1,204 | ) | $ | (1,993 | ) | $ | | $ | (176 | ) | $ | (1,204 | ) | $ | (2,169 | ) | |||||||
Construction loan net charge-offs (recoveries) (annualized) to average construction loans HIP |
(2.04 | )% | (2.86 | )% | | % | (1.31 | )% | (0.44 | )% | (2.61 | )% |
Legacy loans
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.
Legacy non-performing loans held-in-portfolio amounted to $5 million at June 30, 2015, compared to $2 million at December 31, 2014. The percentage of non-performing legacy loans held-in-portfolio to legacy loans held-in-portfolio increased to 6.46% at June 30, 2015 from 1.91% at December 31, 2014. This increase in the ratio was mostly related to the continued run-off of the legacy portfolio and the impact on the total loan base.
For the quarter ended June 30, 2015, additions to legacy loans in non-performing status amounted to $3 million, compared to addition of $2 million recorded for the same period in 2014.
Tables 41 and 42 present the changes in non-performing legacy loans held in-portfolio.
Table 41 - Activity in Non-Performing Legacy Loans Held-in-Portfolio
For the quarter ended June 30, 2015 |
For the six months ended June 30, 2015 |
|||||||
(In thousands) |
BPNA | BPNA | ||||||
Beginning balance |
$ | 2,288 | $ | 1,545 | ||||
Plus: |
||||||||
New non-performing loans |
3,077 | 4,077 | ||||||
Advances on existing non-performing loans |
14 | 47 | ||||||
Less: |
||||||||
Non-performing loans charged-off |
(433 | ) | (574 | ) | ||||
Loans returned to accrual status / loan collections |
(260 | ) | (409 | ) | ||||
|
|
|
|
|||||
Ending balance NPLs |
$ | 4,686 | $ | 4,686 | ||||
|
|
|
|
201
Table 42 - Activity in Non-Performing Legacy Loans Held-in-Portfolio
For the quarter ended June 30, 2014 |
For the six months ended June 30, 2014 |
|||||||
(Dollars in thousands) |
BPNA | BPNA | ||||||
Beginning balance |
$ | 11,608 | $ | 15,050 | ||||
Plus: |
||||||||
New non-performing loans |
2,201 | 3,939 | ||||||
Advances on existing non-performing loans |
49 | 54 | ||||||
Less: |
||||||||
Non-performing loans charged-off |
(816 | ) | (3,384 | ) | ||||
Loans returned to accrual status / loan collections |
(2,227 | ) | (4,844 | ) | ||||
Loans transferred to held-for-sale |
(1,272 | ) | (1,272 | ) | ||||
Non-performing loans transferred to discontinued operations |
(1,220 | ) | (1,220 | ) | ||||
|
|
|
|
|||||
Ending balance NPLs |
$ | 8,323 | $ | 8,323 | ||||
|
|
|
|
In the loans held-in-portfolio, there were no legacy loan relationships greater than $10 million in non-accrual status at June 30, 2015 and December 31, 2014.
Legacy loan net charge-offs (recoveries) amounted to $30 thousand for the quarter ended June 30, 2015, compared to recoveries of ($1.2 million) for the quarter ended June 30, 2014. Legacy loan net charge-offs (recoveries) to average non-covered loans held-in-portfolio was 0.16% for the quarter ended June 30, 2015, compared to (7.66%) for the quarter ended June 30, 2014. For the quarter ended June 30, 2015, there were no charge-offs associated with collateral dependent legacy loans.
Low level of delinquencies and charge-offs was mainly driven by lower level of problem loans and the continued run-off of the portfolio.
Table 43 provides information on legacy non-performing loans and net charge-offs.
Table 43 - Non-Performing Legacy Loans and Net Charge-Offs
BPNA | ||||||||
(Dollars in thousands) |
June 30, 2015 | December 31, 2014 | ||||||
Non-performing legacy loans |
$ | 4,686 | $ | 1,545 | ||||
Non-performing legacy loans to legacy loans HIP |
6.46 | % | 1.91 | % | ||||
BPNA | ||||||||
For the quarters ended | ||||||||
(Dollars in thousands) |
June 30, 2015 | June 30, 2014 | ||||||
Legacy loan net charge-offs (recoveries) |
$ | 30 | $ | (1,205 | ) | |||
Legacy loan net charge-offs (recoveries) (annualized) to average legacy loans HIP |
0.16 | % | (7.66 | )% | ||||
BPNA | ||||||||
For the six months ended | ||||||||
(Dollars in thousands) |
June 30, 2015 | June 30, 2014 | ||||||
Legacy loan net charge-offs (recoveries) |
$ | (1,798 | ) | $ | (6,087 | ) | ||
Legacy loan net charge-offs (recoveries) (annualized) to average legacy loans HIP |
(4.78 | )% | (9.09 | )% |
202
Mortgage loans
Non-covered non-performing mortgage loans held-in-portfolio were $331 million at June 30, 2015, compared to $305 million at December 31, 2014. The increase of $26 million was mainly driven by an increase of $23 million in the BPPR segment, which included the addition in the first quarter of 2015 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. The percentage of non-performing mortgage loans held-in-portfolio to mortgage loans held-in-portfolio decreased to 4.58% at June 30, 2015 from 4.69% at December 31, 2014. The decrease was due mainly to the impact of the Doral portfolio on the total loan base.
Tables 44 and 45 present changes in non-performing mortgage loans held-in-portfolio for the BPPR (excluding covered loans) and BPNA segments.
Table 44 - Activity in Non-Performing Mortgage Loans Held-in-Portfolio (Excluding Covered Loans)
For the quarter ended June 30, 2015 | For the six months ended June 30, 2015 | |||||||||||||||
(Dollars in thousands) |
BPPR | BPNA | BPPR | BPNA | ||||||||||||
Beginning balance |
$ | 320,154 | $ | 8,461 | $ | 295,629 | $ | 9,284 | ||||||||
Plus: |
||||||||||||||||
New non-performing loans |
85,555 | 11,857 | 192,940 | 18,089 | ||||||||||||
Reclass from covered loans |
568 | | 568 | | ||||||||||||
Less: |
||||||||||||||||
Non-performing loans transferred to OREO |
(6,103 | ) | (314 | ) | (10,948 | ) | (314 | ) | ||||||||
Non-performing loans charged-off |
(7,998 | ) | (319 | ) | (16,156 | ) | (442 | ) | ||||||||
Loans returned to accrual status / loan collections |
(73,403 | ) | (7,637 | ) | (143,260 | ) | (16,607 | ) | ||||||||
Loans transferred to held-for-sale |
| | | 2,038 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Ending balance NPLs |
$ | 318,773 | $ | 12,048 | $ | 318,773 | $ | 12,048 | ||||||||
|
|
|
|
|
|
|
|
Table 45 - Activity in Non-Performing Mortgage loans Held-in-Portfolio (Excluding Covered Loans)
For the quarter ended June 30, 2014 | For the six months ended June 30, 2014 | |||||||||||||||
(Dollars in thousands) |
BPPR | BPNA | BPPR | BPNA | ||||||||||||
Beginning balance |
$ | 229,801 | $ | 22,220 | $ | 206,389 | $ | 26,292 | ||||||||
Plus: |
||||||||||||||||
New non-performing loans |
105,113 | 4,677 | 194,255 | 8,597 | ||||||||||||
Less: |
||||||||||||||||
Non-performing loans transferred to OREO |
(2,845 | ) | (661 | ) | (4,596 | ) | (1,856 | ) | ||||||||
Non-performing loans charged-off |
(8,266 | ) | (649 | ) | (14,959 | ) | (1,516 | ) | ||||||||
Loans returned to accrual status / loan collections |
(61,447 | ) | (1,623 | ) | (118,733 | ) | (7,553 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Ending balance NPLs |
$ | 262,356 | $ | 23,964 | $ | 262,356 | $ | 23,964 | ||||||||
|
|
|
|
|
|
|
|
For the quarter ended June 30, 2015, inflows of mortgage non-performing loans held-in-portfolio at the BPPR segment amounted to $86 million, an improvement of $20 million, or 19%, when compared to inflows for the same period in 2014. Inflows of mortgage non-performing loans held-in-portfolio at the BPNA segment amounted to $12 million, an increase of $7 million, when compared to inflows for the same period in 2014.
Mortgage loan net charge-offs, excluding net charge-offs for covered loans, remained stable at $10.9 million for the quarter ended June 30, 2015, compared to $10.3 million for the quarter ended June 30, 2014. Mortgage loan net charge-offs to average mortgage non-covered loans held-in-portfolio was 0.62% in the quarter ended June 30, 2015, compared to 0.62% for the quarter ended June 30,
203
2014. Net charge-off activity derived mainly from loans in the BPPR segment. Mortgage loan net charge-offs at the BPNA segment amounted to $0.2 million, or 0.07% of average mortgage loans held-in-portfolio on an annualized basis for the quarter ended June 30, 2015, reflective of the improved risk profile of the portfolio, further strengthened by the sale of certain non-performing and classified assets. For the quarter ended June 30, 2015, charge-offs associated with mortgage loans individually evaluated for impairment amounted to $2.5 million in the BPPR segment.
Table 46 provides information on non-performing mortgage loans and net charge-offs for the BPPR, excluding the covered loan portfolio, and the BPNA segments.
Table 46 - Non-Performing Mortgage Loans and Net Charge-Offs (Excluding Covered Loans)
BPPR | BPNA | Popular, Inc. | ||||||||||||||||||||||
(Dollars in thousands) |
June 30, 2015 | December 31, 2014 | June 30, 2015 | December 31, 2014 | June 30, 2015 | December 31, 2014 | ||||||||||||||||||
Non-performing mortgage loans |
$ | 318,773 | $ | 295,629 | $ | 12,048 | $ | 9,284 | $ | 330,821 | $ | 304,913 | ||||||||||||
Non-performing mortgage loans to mortgage loans HIP |
5.10 | % | 5.42 | % | 1.23 | % | 0.88 | % | 4.58 | % | 4.69 | % | ||||||||||||
BPPR | BPNA | Popular, Inc. | ||||||||||||||||||||||
For the quarters ended | For the quarters ended | For the quarters ended | ||||||||||||||||||||||
(Dollars in thousands) |
June 30, 2015 | June 30, 2014 | June 30, 2015 | June 30, 2014 | June 30, 2015 | June 30, 2014 | ||||||||||||||||||
Mortgage loan net charge-offs |
$ | 10,739 | $ | 9,926 | $ | 176 | $ | 393 | $ | 10,915 | $ | 10,319 | ||||||||||||
Mortgage loan net charge-offs (annualized) to average mortgage loans HIP |
0.71 | % | 0.73 | % | 0.07 | % | 0.13 | % | 0.62 | % | 0.62 | % | ||||||||||||
BPPR | BPNA | Popular, Inc. | ||||||||||||||||||||||
For the six months ended | For the six months ended | For the six months ended | ||||||||||||||||||||||
(Dollars in thousands) |
June 30, 2015 | June 30, 2014 | June 30, 2015 | June 30, 2014 | June 30, 2015 | June 30, 2014 | ||||||||||||||||||
Mortgage loan net charge-offs |
$ | 21,212 | $ | 18,442 | 330 | $ | 1,263 | $ | 21,542 | $ | 19,705 | |||||||||||||
Mortgage loan net charge-offs (annualized) to average mortgage loans HIP |
0.73 | % | 0.68 | % | 0.06 | % | 0.20 | % | 0.63 | % | 0.59 | % |
Consumer loans
Non-covered non-performing consumer loans held-in-portfolio were $43 million at June 30, 2015, compared to $47 million at December 31, 2014. Consumer non-covered non-performing loans held-in-portfolio decreased by $4 million when compared to December 31, 2014, primarily as a result of a decrease of $4 million in the BPPR segment, mainly related to personal loans.
For the quarter ended June 30, 2015, the BPPR segment inflows of consumer non-performing loans held-in-portfolio, decreased by $4.9 million, or 20%, when compared to inflows for the same period of 2014, mostly related to auto loans. Inflows of consumer non-performing loans held-in-portfolio at the BPNA segment amounted to $3 million, a decrease of $3 million, or 48% compared to inflows for 2014.
The Corporations consumer loan net charge-offs, excluding covered loans, amounted to $16.6 million for the quarter ended June 30, 2015, compared to $26.3 million in the quarter ended June 30, 2014. The decrease of $9.7 million in consumer net charge-offs for the second quarter of 2015, when compared with the same period in 2014, was driven by a $5.0 million recovery associated with a sale of a portfolio of previously charged-off credit cards and auto loans in the BPPR segment during the second quarter of 2015. Consumer loan net charge-offs to average consumer non-covered loans held-in-portfolio was 1.74% for the quarter ended June 30, 2015, compared with 2.71% for the same period in 2014. For the quarter ended June 30, 2015, charge-offs associated with consumer loans individually evaluated for impairment amounted to $4.3 million in the BPPR segment.
204
Table 47 provides information on consumer non-performing loans and net charge-offs by segments.
Table 47 - Non-Performing Consumer Loans and Net Charge-Offs (Excluding Covered Loans)
BPPR | BPNA | Popular, Inc. | ||||||||||||||||||||||
(Dollars in thousands) |
June 30, 2015 | December 31, 2014 | June 30, 2015 | December 31, 2014 | June 30, 2015 | December 31, 2014 | ||||||||||||||||||
Non-performing consumer loans |
$ | 36,511 | $ | 40,930 | $ | 5,930 | $ | 5,956 | $ | 42,441 | $ | 46,886 | ||||||||||||
Non-performing consumer loans to consumer loans HIP |
1.08 | % | 1.21 | % | 1.32 | % | 1.24 | % | 1.10 | % | 1.21 | % | ||||||||||||
BPPR | BPNA | Popular, Inc. | ||||||||||||||||||||||
For the quarters ended | For the quarters ended | For the quarters ended | ||||||||||||||||||||||
(Dollars in thousands) |
June 30, 2015 | June 30, 2014 | June 30, 2015 | June 30, 2014 | June 30, 2015 | June 30, 2014 | ||||||||||||||||||
Consumer loan net charge-offs |
$ | 14,654 | $ | 23,571 | $ | 1,969 | $ | 2,768 | $ | 16,623 | $ | 26,339 | ||||||||||||
Consumer loan net charge-offs (annualized) to average consumer loans HIP |
1.74 | % | 2.76 | % | 1.72 | % | 2.30 | % | 1.74 | % | 2.71 | % | ||||||||||||
BPPR | BPNA | Popular, Inc. | ||||||||||||||||||||||
For the six months ended | For the six months ended | For the six months ended | ||||||||||||||||||||||
(Dollars in thousands) |
June 30, 2015 | June 30, 2014 | June 30, 2015 | June 30, 2014 | June 30, 2015 | June 30, 2014 | ||||||||||||||||||
Consumer loan net charge-offs |
$ | 38,307 | $ | 46,554 | $ | 3,236 | $ | 7,943 | $ | 41,543 | $ | 54,497 | ||||||||||||
Consumer loan net charge-offs (annualized) to average consumer loans HIP |
2.27 | % | 2.77 | % | 1.39 | % | 2.92 | % | 2.17 | % | 2.79 | % |
Combined net charge-offs for E-LOANs home equity lines of credit and closed-end second mortgages amounted to approximately $485 thousand, or 0.46% of those particular average loan portfolios, at June 30, 2015, compared with $397 thousand, or 0.65%, at June 30, 2014. With the downsizing of E-LOAN, this subsidiary ceased originating these types of loans in 2008. Home equity lending includes both home equity loans and lines of credit. This type of lending, which is secured by a first or second mortgage on the borrowers residence, allows customers to borrow against the equity in their home. Real estate market values at the time the loan or line is granted directly affect the amount of credit extended and, in addition, changes in these values impact the severity of losses. E-LOANs portfolio of home equity lines of credit and closed-end second mortgages outstanding at June 30, 2015 totaled $199 million with a related allowance for loan losses of $5 million, representing 2.34% of that particular portfolio. E-LOANs portfolio of home equity lines of credit and closed-end second mortgages outstanding at December 31, 2014 totaled $220 million with a related allowance for loan losses of $6 million, representing 2.53% of that particular portfolio. At June 30, 2015, home equity lines of credit and closed-end second mortgages in which E-LOAN holds both the first and second lien amounted to $47 thousand and $231 thousand, respectively, representing 0.01% and 0.05%, respectively, of the consumer loan portfolio of the BPNA segment. At June 30, 2015, 47% were paying the minimum amount due on the home equity lines of credit. At June 30, 2015, the majority of the closed-end second mortgages in which E-LOAN holds the first lien mortgage were in performing status.
Other real estate
Other real estate represents real estate property acquired through foreclosure, part of the Corporations continuous efforts to aggressively resolve non-performing loans. Other real estate not covered under loss sharing agreements with the FDIC amounted to $142 million at June 30, 2015, compared to $136 million at December 31, 2014. The increase of $6 million was mainly related to the reclassification of OREOs to the non-covered category, pursuant to the expiration of the commercial and consumer shared loss arrangement with the FDIC related to loans acquired from Westerbank, on June 30, 2015 by $18 million, offset by a $12 million reduction in the BPNA segment as a result of OREO sales.
Other real estate covered under loss sharing agreements with the FDIC, comprised principally of repossessed commercial real estate properties, amounted to $34 million at June 30, 2015, compared with $130 million at December 31, 2014. The decrease of $96 million was mainly the result of a bulk sale during the second quarter of 2015. Generally, 80% of the write-downs taken on these properties based on appraisals or losses on the sale are covered under the loss sharing agreements.
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During the second quarter of 2015, the Corporation transferred $36 million of loans to other real estate, sold $83 million of foreclosed properties and recorded write-downs and other adjustments of approximately $19 million.
Updated appraisals or third-party opinions of value (BPOs) are obtained to adjust the values of the other real estate assets. Commencing in 2011, the appraisal for a commercial or construction other real estate property with a book value greater than $1 million is updated annually and if lower than $1 million it is updated at least every two years. For residential other real estate property, the Corporation requests third-party BPOs or appraisals generally on an annual basis. Appraisals may be adjusted due to age, collateral inspections and property profiles or due to general marked conditions. The adjustments applied are based upon internal information like other appraisals for the type of properties and loss severity information that can provide historical trends in the real estate market, and may change from time to time based on market conditions.
For commercial and construction other real estate properties at the BPPR segment, depending on the type of property and/or the age of the appraisal, downward adjustments currently may range between 35% to 50%, including estimated cost to sell. For commercial and construction properties at the BPNA segment, the most typically applied collateral discount rate currently ranges from 10% to 40%, including cost to sell. This discount was determined based on an analysis of other real estate owned and loan sale transactions during a twelve month period, comparing net proceeds received by the lender relative to the most recent appraised value of the properties. However, additional haircuts can be applied depending upon the age of appraisal, the region and the condition of the property or project.
Currently, in the case of the BPPR segment, appraisals of residential properties were subject to downward adjustments of up to approximately 20%, including cost to sell of 5%. In the case of the U.S. mainland residential properties, appraisals are adjusted for the estimated cost to sell of 10%.
Troubled debt restructurings
The following tables present the loans classified as TDRs according to their accruing status at June 30, 2015 and December 31, 2014.
The Corporations TDR loans, excluding covered loans, totaled $1.2 billion at June 30, 2015, an increase of $49 million, or 4%, from December 31, 2014. TDRs in accruing status increased by $107 million from December 31, 2014, due to sustained borrower performance, while non-accruing TDRs decreased by $58 million.
Table 48 - TDRs Non-Covered Loans
June 30, 2015 | ||||||||||||
(In thousands) |
Accruing | Non-Accruing | Total | |||||||||
Commercial |
$ | 214,907 | $ | 85,388 | $ | 300,295 | ||||||
Construction |
275 | 5,023 | 5,298 | |||||||||
Mortgage |
603,105 | 126,052 | 729,157 | |||||||||
Leases |
2,229 | 325 | 2,554 | |||||||||
Consumer |
105,237 | 14,019 | 119,256 | |||||||||
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|
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Total |
$ | 925,753 | $ | 230,807 | $ | 1,156,560 | ||||||
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Table 49 - TDRs Non-Covered Loans
December 31, 2014 | ||||||||||||
(In thousands) |
Accruing | Non-Accruing | Total | |||||||||
Commercial |
$ | 153,380 | $ | 150,069 | $ | 303,449 | ||||||
Construction |
453 | 5,488 | 5,941 | |||||||||
Mortgage |
556,346 | 116,465 | 672,811 | |||||||||
Leases |
775 | 2,248 | 3,023 | |||||||||
Consumer |
107,530 | 14,848 | 122,378 | |||||||||
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Total |
$ | 818,484 | $ | 289,118 | $ | 1,107,602 | ||||||
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Table 50 - TDRs Covered Loans
June 30, 2015 | ||||||||||||
(In thousands) |
Accruing | Non-Accruing | Total | |||||||||
Mortgage |
$ | 1,749 | $ | 2,969 | $ | 4,718 | ||||||
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Total |
$ | 1,749 | $ | 2,969 | $ | 4,718 | ||||||
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Table 51 - TDRs Covered Loans
December 31, 2014 | ||||||||||||
(In thousands) |
Accruing | Non-Accruing | Total | |||||||||
Commercial |
$ | 1,689 | $ | 3,257 | $ | 4,946 | ||||||
Construction |
| 2,419 | 2,419 | |||||||||
Leases |
3,629 | 3,990 | 7,619 | |||||||||
Consumer |
26 | 5 | 31 | |||||||||
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Total |
$ | 5,344 | $ | 9,671 | $ | 15,015 | ||||||
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At June 30, 2015, the Corporations commercial loan TDRs, excluding covered loans, for the BPPR amounted to $300 million of which $85 million were in non-performing status. BPPR segment includes $5 million in TDRs transferred from covered category upon the expiration of the non-single family loss share agreement, of which $2 million were non-performing. The BPNA segment had no commercial TDRs as of June 30, 2015. This compares with $303 million and $250 thousand, respectively, of which $150 million and none were in non-performing status at December 31, 2014. The outstanding commitments for these commercial loan TDRs amounted to $2 million in the BPPR segment at June 30, 2015. Commercial loans that have been modified as part of loss mitigation efforts were evaluated individually for impairment, resulting in a specific reserve of $50 million for the BPPR segment at June 30, 2015, compared with $65 million at December 31, 2014.
At June 30, 2015, the Corporations construction loan TDRs, excluding covered loans, for the BPPR segment amounted to $5 million, of which $5 million were in non-performing status, including $2 million in non-performing status transferred from covered loans. This compares with $6 million, of which $5 million were in non-performing status at December 31, 2014. The BPNA segment had no construction TDRs as of June 30, 2015. The outstanding commitments for these construction loan TDRs amounted to $1 million in the BPPR segment at June 30, 2015. These construction loan TDRs were individually evaluated for impairment resulting in a specific reserve of $725 thousand in the BPPR segment at June 30, 2015, compared with $363 thousand at December 31, 2014.
The Corporations had no legacy loans modifications at June 30, 2015 and December 31, 2014.
At June 30, 2015, the mortgage loan TDRs for the BPPR and BPNA segments amounted to $724 million (including $335 million guaranteed by U.S. sponsored entities) and $5 million, respectively, of which $125 million and $1 million, respectively, were in non-performing status. This compares with $669 million (including $290 million guaranteed by U.S. sponsored entities) and $4 million, respectively, of which $115 million and $987 thousand were in non-performing status at December 31, 2014. These mortgage loan TDRs were evaluated for impairment resulting in a specific allowance for loan losses of $44 million and $413 thousand for the BPPR and BPNA segments, respectively, at June 30, 2015, compared to $46 million and $273 thousand, respectively, at December 31, 2014.
At June 30, 2015, the consumer loan TDRs for the BPPR and BPNA segments amounted to $117 million and $2 million, respectively, of which $14 million and $113 thousand, respectively, were in non-performing status, compared with $120 million and $2 million, respectively, of which $15 million and $35 thousand, respectively, were in non-performing status at December 31, 2014. These consumer loan TDRs were evaluated for impairment resulting in a specific allowance for loan losses of $25 million and $412 thousand for the BPPR and BPNA segments, respectively, at June 30, 2015, compared with $28 million and $365 thousand, respectively, at December 31, 2014.
Refer to Note 12 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.
207
Allowance for Loan Losses
Non-Covered Loan Portfolio
The allowance for loan losses, which represents managements estimate of credit losses inherent in the loan portfolio, is maintained at a sufficient level to provide for estimated credit losses on individually evaluated loans as well as estimated credit losses inherent in the remainder of the loan portfolio. The Corporations 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 managements estimates are the years of historical data when estimating losses, changes in underwriting standards, financial accounting standards and loan impairment measurements, among others. Changes in the financial condition of individual borrowers, in economic conditions, in historical loss experience and in the condition of the various markets in which collateral may be sold may all affect the required level of the allowance for loan losses. Consequently, the business financial condition, liquidity, capital and results of operations could also be affected.
The Corporations assessment of the allowance for loan losses is determined in accordance with accounting guidance, specifically guidance of loss contingencies in ASC Subtopic 450-20 (general reserve for inherent losses) and loan impairment guidance in ASC Section 310-10-35 (loans individually assessed for impairment). 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 Corporations 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. Refer to the Critical Accounting Policies / Estimates section of this MD&A for a description of the Corporations allowance for loan losses methodology.
The following tables set forth information concerning the composition of the Corporations allowance for loan losses (ALLL) at June 30, 2015 and December 31, 2014 by loan category and by whether the allowance and related provisions were calculated individually pursuant to the requirements for specific impairment or through a general valuation allowance.
Table 52 - Composition of ALLL
June 30, 2015 |
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(Dollars in thousands) |
Commercial | Construction | Legacy [3] | Leasing | Mortgage | Consumer | Total[2] | |||||||||||||||||||||
Specific ALLL |
$ | 68,456 | $ | 725 | $ | 34 | $ | 607 | $ | 44,162 | $ | 25,027 | $ | 139,011 | ||||||||||||||
Impaired loans [1] |
$ | 337,577 | $ | 3,627 | $ | 1,357 | $ | 2,554 | $ | 455,834 | $ | 114,877 | $ | 915,826 | ||||||||||||||
Specific ALLL to impaired loans [1] |
20.28 | % | 19.99 | % | 2.51 | % | 23.77 | % | 9.69 | % | 21.79 | % | 15.18 | % | ||||||||||||||
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General ALLL |
$ | 147,264 | $ | 8,262 | $ | 3,281 | $ | 8,553 | $ | 85,785 | $ | 120,583 | $ | 373,728 | ||||||||||||||
Loans held-in-portfolio, excluding impaired loans [1] |
$ | 9,667,139 | $ | 692,383 | $ | 71,145 | $ | 590,262 | $ | 6,769,989 | $ | 3,728,401 | $ | 21,519,319 | ||||||||||||||
General ALLL to loans held-in-portfolio, excluding impaired loans [1] |
1.52 | % | 1.19 | % | 4.61 | % | 1.45 | % | 1.27 | % | 3.23 | % | 1.74 | % | ||||||||||||||
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Total ALLL |
$ | 215,720 | $ | 8,987 | $ | 3,315 | $ | 9,160 | $ | 129,947 | $ | 145,610 | $ | 512,739 | ||||||||||||||
Total non-covered loans held-in-portfolio [1] |
$ | 10,004,716 | $ | 696,010 | $ | 72,502 | $ | 592,816 | $ | 7,225,823 | $ | 3,843,278 | $ | 22,435,145 | ||||||||||||||
ALLL to loans held-in-portfolio [1] |
2.16 | % | 1.29 | % | 4.57 | % | 1.55 | % | 1.80 | % | 3.79 | % | 2.29 | % | ||||||||||||||
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[1] | Excludes covered loans acquired on the Westernbank FDIC-assisted transaction. |
[2] | Excludes covered loans acquired on the Westernbank FDIC-assisted transaction. At June 30, 2015, the general allowance on the covered loans amounted to $38.1 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. |
208
Table 53 - Composition of ALLL
December 31, 2014 |
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(Dollars in thousands) |
Commercial | Construction | Legacy[3] | Leasing | Mortgage | Consumer | Total[2] | |||||||||||||||||||||
Specific ALLL |
$ | 64,736 | $ | 363 | $ | | $ | 770 | $ | 46,111 | $ | 28,161 | $ | 140,141 | ||||||||||||||
Impaired loans [1] |
$ | 357,161 | $ | 13,268 | $ | | $ | 3,023 | $ | 435,824 | $ | 117,732 | $ | 927,008 | ||||||||||||||
Specific ALLL to impaired loans [1] |
18.13 | % | 2.74 | % | | % | 25.47 | % | 10.58 | % | 23.92 | % | 15.12 | % | ||||||||||||||
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|||||||||||||||
General ALLL |
$ | 146,501 | $ | 6,307 | $ | 2,944 | $ | 6,361 | $ | 77,211 | $ | 140,254 | $ | 379,578 | ||||||||||||||
Loans held-in-portfolio, excluding impaired loans [1] |
$ | 7,777,106 | $ | 238,552 | $ | 80,818 | $ | 561,366 | $ | 6,067,062 | $ | 3,752,539 | $ | 18,477,443 | ||||||||||||||
General ALLL to loans held-in-portfolio, excluding impaired loans [1] |
1.88 | % | 2.64 | % | 3.64 | % | 1.13 | % | 1.27 | % | 3.74 | % | 2.05 | % | ||||||||||||||
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Total ALLL |
$ | 211,237 | $ | 6,670 | $ | 2,944 | $ | 7,131 | $ | 123,322 | $ | 168,415 | $ | 519,719 | ||||||||||||||
Total non-covered loans held-in-portfolio [1] |
$ | 8,134,267 | $ | 251,820 | $ | 80,818 | $ | 564,389 | $ | 6,502,886 | $ | 3,870,271 | $ | 19,404,451 | ||||||||||||||
ALLL to loans held-in-portfolio [1] |
2.60 | % | 2.65 | % | 3.64 | % | 1.26 | % | 1.90 | % | 4.35 | % | 2.68 | % | ||||||||||||||
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[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, 2014, the general allowance on the covered loans amounted to $82.1 million while the specific reserve amounted to $5 thousand. |
[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. |
During the second quarter of 2015, management completed the annual review of the components of the ALLL models. As part of this review management updated core metrics and revised certain components related to the estimation process for evaluating the adequacy of the general reserve of the allowance for loan losses. These enhancements to the ALLL methodology, which are described in the Critical Accounting Policies / Estimates section of this MD&A were implemented as of June 30, 2015 and resulted in a net decrease to the allowance for loan losses of $2 million for the non-covered portfolio.
At June 30, 2015, the allowance for loan losses, excluding covered loans, amounted to $513 million, decreasing by $7 million when compared with December 31, 2014, mainly driven by reductions in the BPPR segment. The allowance for loan losses for the second quarter includes $13 million transferred from covered to non-covered loans and a $29.0 million write-down from loans transferred to held-for-sale. Excluding these effects, the allowance for loan losses increased by $9 million from December 31, 2014. The general and specific reserves related to the non-covered loans totaled $374 million and $139 million, respectively, compared with $380 million and $140 million, respectively, as of December 31, 2014. The ratio of the allowance for loan losses to loans held-in-portfolio decreased to 2.29% of non-covered loans held-in-portfolio at June 30, 2015, compared with 2.68% at December 31, 2014, in part due to the impact of the Doral Bank portfolio and the loans reclassified from the covered portfolio on the total loan base. Excluding these loans and related ALLL at June 30, 2015, the allowance to loans ratio was 2.59%. The ratio of the allowance to non-performing loans held-in-portfolio was 89.02% at June 30, 2015, compared with 82.43% at December 31, 2014.
At June 30, 2015, the allowance for loan losses for non-covered loans at the BPPR segment totaled $483 million, or 2.69% of non-covered loans held-in-portfolio, compared with $489 million, or 3.07% of non-covered loans held-in-portfolio, at December 31, 2014, inclusive of $13 million allowance transferred from covered loans, as mentioned above. The decrease in the allowance was driven by a $29 million charge-off in connection with the loans transferred to held-for-sale specifically reserved in prior quarters, coupled with a slight reduction in the general reserve component, offset in part by higher ASC 310-10 reserves for commercial loans. The ratio of the allowance to non-performing loans held-in-portfolio was 89.10% at June 30, 2015, compared with 80.00% at December 31, 2014. The annual review of the ALLL methodology resulted in a net decrease of $3 million.
The allowance for loan losses at the BPNA segment decreased slightly to $30 million, or 0.66% of loans held-in-portfolio, compared with $31 million, or 0.88% of loans held-in-portfolio, at December 31, 2014, driven by strong credit quality. The ratio of the allowance
209
to non-performing loans held-in-portfolio was 87.76% at June 30, 2015, compared with 160.13% at December 31, 2014. The decrease in allowance coverage ratios was mainly related to the impact of the Doral portfolio. Excluding Doral Banks impact, the previously referred ratios stood at 0.81% and 117.90%, respectively. The annual review of the ALLL methodology resulted in a net increase of approximately $1 million.
The allowance for loan losses for commercial loans held-in-portfolio, excluding covered loans, amounted to $216 million, or 2.16% of that portfolio, at June 30, 2015, compared with $211 million, or 2.60%, at December 31, 2014. The allowance for loan losses for the commercial loan portfolio in the BPPR segment, excluding the allowance for covered loans, totaled $207 million, or 2.74% of non-covered commercial loans held-in-portfolio, at June 30, 2015, including $8 million corresponding to loans transferred from covered loans compared with $202 million, or 3.16%, at December 31, 2014. The decrease in the allowance to loans ratio was due to the impact of the reclassified covered loans. At the BPNA segment, the allowance for loan losses of the commercial loan portfolio amounted to $9 million at June 30, 2015, decreasing slightly by $1 million when compared to December 31, 2014. The allowance for loan losses for commercial loans held-in-portfolio at the BPNA segment was 0.35% of commercial loans held-in-portfolio, at June 30, 2015, compared with 0.55%, at December 31, 2014. The Corporations ratio of allowance to non-performing loans held-in-portfolio in the commercial loan category was 113.36% at June 30, 2015, compared with 81.18% at December 31, 2014.
The allowance for loan losses for construction loans held-in-portfolio, excluding covered loans, amounted to $9 million, or 1.29% of that portfolio, at June 30, 2015, compared with $7 million, or 2.65%, at December 31, 2014. The allowance for loan losses corresponding to the construction loan portfolio for the BPPR segment, excluding the allowance for covered loans, totaled $7 million, or 5.78% of non-covered construction loans held-in-portfolio, at June 30, 2015, compared with $5 million, or 3.44%, at December 31, 2014. At the BPNA segment, the allowance for loan losses of the construction loan portfolio totaled $2 million, or 0.42% of construction loans held-in-portfolio, at June 30, 2015, compared with $1 million, or 1.28%, at December 31, 2014. The Corporations ratio of allowance to non-performing loans held-in portfolio in the construction loan category was 165.60% at June 30, 2015, compared with 48.29% at December 31, 2014. 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 the legacy loans held-in-portfolio amounted to $3 million, or 4.57% of that portfolio, at June 30, 2015, compared with $3 million, or 3.64%, at December 31, 2014. The ratio of allowance to non-performing loans held-in portfolio in the legacy loan category was 70.74% at June 30, 2015, compared with 190.55% at December 31, 2014.
The allowance for loan losses for mortgage loans held-in-portfolio, excluding covered loans, amounted to $130 million, or 1.80% of that portfolio, at June 30, 2015, compared with $123 million, or 1.90%, at December 31, 2014. The decrease in the ratio was due to the impact of Doral Bank acquired mortgage loans in the loan base. The allowance for loan losses corresponding to the mortgage loan portfolio at the BPPR segment totaled $126 million, or 2.02% of mortgage loans held-in-portfolio, excluding covered loans, at June 30, 2015, compared with $121 million, or 2.22%, respectively, at December 31, 2014. The increase was consistent with current credit quality trends, including higher non-performing loans. At the BPNA segment, the allowance for loan losses corresponding to the mortgage loan portfolio increased to $4 million, or 0.38% of mortgage loans held-in-portfolio, at June 30, 2015, compared with $2 million, or 0.23%, at December 31, 2014. Low allowance levels corresponds the sale of certain classified loans, including mortgage TDRs and non-performing loans during 2014. The allowance for loan losses for BPNAs non-conventional mortgage loan portfolio amounted to $2 million, or 0.48% of that particular loan portfolio, compared with $2 million, or 0.61%, at December 31, 2014. The Corporation is no longer originating non-conventional mortgage loans at BPNA.
The allowance for loan losses for the consumer portfolio, excluding covered loans, decreased to $146 million, or 3.79% of that portfolio, at June 30, 2015, compared to $168 million, or 4.35%, at December 31, 2014. The allowance for loan losses of the non-covered consumer loan portfolio in the BPPR segment at $134 million, or 3.94% of that portfolio, at June 30, 2015, compared with $154 million, or 4.55%, at December 31, 2014. At the BPNA segment, the allowance for loan losses of the consumer loan portfolio totaled $12 million, or 2.65% of consumer loans, at June 30, 2015, compared with $14 million, or 2.98%, at December 31, 2014.
210
The following table presents the Corporations recorded investment in non-covered loans that were considered impaired and the related valuation allowance at June 30, 2015 and December 31, 2014.
Table 54 - Impaired Loans (Non-Covered Loans) and the Related Valuation Allowance
June 30, 2015 | December 31, 2014 | |||||||||||||||
(In millions) |
Recorded Investment |
Valuation Allowance |
Recorded Investment |
Valuation Allowance |
||||||||||||
Impaired loans: |
||||||||||||||||
Valuation allowance |
$ | 823.2 | $ | 139.0 | $ | 831.5 | $ | 140.1 | ||||||||
No valuation allowance required |
92.6 | | 95.5 | | ||||||||||||
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Total impaired loans |
$ | 915.8 | $ | 139.0 | $ | 927.0 | $ | 140.1 | ||||||||
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With respect to the $93 million portfolio of the non-covered impaired loans for which no allowance for loan losses was required at June 30, 2015, management followed the guidance for specific impairment of a loan. When a loan is impaired, the measurement of the impairment may be based on: (1) the present value of the expected future cash flows of the impaired loan discounted at the loans original effective interest rate; (2) the observable market price of the impaired loan; or (3) the fair value of the collateral, if the loan is collateral dependent. A loan is collateral dependent if the repayment of the loan is expected to be provided solely by the underlying collateral. Impaired loans with no valuation allowance were mostly collateral dependent loans for which management charged-off specific reserves based on the fair value of the collateral less estimated costs to sell.
Average non-covered impaired loans for the quarters ended June 30, 2015 and June 30, 2014 were $956.5 million and $939.4 million, respectively. The Corporation recognized interest income on non-covered impaired loans of $9.0 million and $8.8 million for the quarters ended June 30, 2015 and 2014, respectively.
The following tables set forth the activity in the specific reserves for non-covered impaired loans for the quarters ended June 30, 2015 and 2014.
Table 55 - Activity in Specific ALLL for the Quarter Ended June 30, 2015
(In thousands) |
Commercial | Construction | Mortgage | Legacy | Consumer | Leasing | Total | |||||||||||||||||||||
Beginning balance |
$ | 69,946 | $ | 158 | $ | 42,570 | $ | | $ | 25,604 | $ | 687 | $ | 138,965 | ||||||||||||||
Provision for impaired loans |
38,492 | 4,949 | 4,080 | 34 | 3,761 | (39 | ) | 51,277 | ||||||||||||||||||||
Less: Net charge-offs |
(9,985 | ) | (4,382 | ) | (2,488 | ) | | (4,338 | ) | (41 | ) | (21,234 | ) | |||||||||||||||
Net write-downs |
(29,997 | ) | | | | | | (29,997 | ) | |||||||||||||||||||
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Specific allowance for loan losses at June 30, 2015 |
$ | 68,456 | $ | 725 | $ | 44,162 | $ | 34 | $ | 25,027 | $ | 607 | $ | 139,011 | ||||||||||||||
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Table 56 - Activity in Specific ALLL for the Quarter Ended June 30, 2014
(In thousands) |
Commercial | Construction | Mortgage | Legacy | Consumer | Leasing | Total | |||||||||||||||||||||
Beginning balance |
$ | 30,892 | $ | 243 | $ | 53,916 | $ | | $ | 29,413 | $ | 672 | $ | 115,136 | ||||||||||||||
Provision for impaired loans |
13,576 | 537 | 2,371 | | 4,316 | 16 | 20,816 | |||||||||||||||||||||
Less: Net charge-offs |
(7,871 | ) | 103 | (2,472 | ) | | (4,686 | ) | | (14,926 | ) | |||||||||||||||||
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Specific allowance for loan losses at June 30, 2014 |
$ | 36,597 | $ | 883 | $ | 53,815 | $ | | $ | 29,043 | $ | 688 | $ | 121,026 | ||||||||||||||
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For the quarter ended June 30, 2015, total net charge-offs for individually evaluated impaired loans amounted to approximately $21.2 million related to the BPPR segment.
The Corporation requests updated appraisal reports from pre-approved appraisers for loans that are considered impaired, and individually analyzes them following the Corporations reappraisal policy. This policy requires updated appraisals for loans secured by real estate (including construction loans) either annually or every two years depending on the total exposure of the borrower. As a general procedure, the Corporation internally reviews appraisals as part of the underwriting and approval process and also for credits considered impaired. Generally, the specialized appraisal review unit of the Corporations Credit Risk Management Division internally reviews appraisals following certain materiality benchmarks. In addition to evaluating the reasonability of the appraisal reports, these reviews monitor that appraisals are performed following the Uniform Standards of Professional Appraisal Practice (USPAP).
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Appraisals may be adjusted due to age or general market conditions. The adjustments applied are based upon internal information, like other appraisals and/or loss severity information that can provide historical trends in the real estate market. Specifically, in commercial and construction impaired loans for the BPPR segment, and depending on the type of property and/or the age of the appraisal, downward adjustments currently range from 35% to 50% (including costs to sell). At June 30, 2015, the weighted average discount rate for the BPPR segment was 38%.
For commercial and construction loans at the BPNA segment, downward adjustments to the collateral value currently range from 10% to 40% (including costs to sell) depending on the age of the appraisals and the type, location and condition of the property. This discount used was determined based on a study of other real estate owned and loan sale transactions during the past two years, comparing net proceeds received by the bank relative to the most recent appraised value of the properties. However, additional haircuts can be applied depending upon the age of appraisal, the region and the condition of the project. Factors are based on appraisal changes and/or trends in loss severities. Discount rates discussed above include costs to sell and may change from time to time based on market conditions.
For mortgage loans secured by residential real estate properties, a current assessment of value is made not later than 180 days past the contractual due date. Any outstanding balance in excess of the estimated value of the collateral property, less estimated costs to sell, is charged-off. For this purpose, the Corporation requests third-party Broker Price Opinion of Value BPOs of the subject collateral property at least annually. In the case of the mortgage loan portfolio for the BPPR segment, BPOs of the subject collateral properties are currently subject to downward adjustment of up to approximately 30%, including cost to sell of 5%. In the case of the U.S. mortgage loan portfolio, a 10% haircut is taken, which includes costs to sell.
Discount rates discussed above, including costs to sell, are validated twice a year and may change from time to time based on market conditions.
The table that follows presents the approximate amount and percentage of non-covered impaired loans for which the Corporation relied on appraisals dated more than one year old for purposes of impairment requirements at June 30, 2015.
Table 57 - Non-Covered Impaired Loans with Appraisals Dated 1 year or Older
June 30, 2015 |
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Total Impaired Loans Held-in-portfolio (HIP) | ||||||||||||
(In thousands) |
Loan Count | Outstanding Principal Balance |
Impaired Loans with Appraisals Over One- Year Old [1] |
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Commercial |
128 | $ | 281,311 | 38 | % | |||||||
Legacy |
1 | 1,357 | 100 |
[1] | Based on outstanding balance of total impaired loans. |
December 31, 2014 |
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Total Impaired Loans Held-in-portfolio (HIP) | ||||||||||||
(In thousands) |
Loan Count | Outstanding Principal Balance |
Impaired Loans with Appraisals Over One- Year Old [1] |
|||||||||
Commercial |
140 | $ | 303,128 | 12 | % | |||||||
Construction |
6 | 10,693 | 79 |
[1] | Based on outstanding balance of total impaired loans. |
At June 30, 2015, the Corporation accounted for $953 thousand impaired construction loans under the as developed value. This approach is used since the current plan is that the project will be completed and it reflects the best strategy to reduce potential losses based on the prospects of the project. The costs to complete the project and the related increase in debt are considered an integral part of the individual reserve determination.
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Costs to complete are deducted from the subject as developed collateral value on impaired construction loans. Impairment determinations are calculated following the collateral dependent method, comparing the outstanding principal balance of the respective impaired construction loan against the expected realizable value of the subject collateral. Realizable values of subject collaterals have been defined as the as developed appraised value less costs to complete, costs to sell and discount factors. Costs to complete represent an estimate of the amount of money to be disbursed to complete a particular phase of a construction project. Costs to sell have been determined as a percentage of the subject collateral value, to cover related collateral disposition costs (e.g. legal and commission fees). As discussed previously, discount factors may be applied to the appraised amounts due to age or general market conditions.
The percentage of the Corporations impaired construction loans that were relied upon as developed and as is for the periods ended June 30, 2015 and December 31, 2014 are presented in Table 58.
Table 58 - Impaired Construction Loans Relied Upon As is or As Developed
June 30, 2015 |
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As is | As developed | |||||||||||||||||||||||||||
(In thousands) |
Loan Count |
Outstanding Principal Balance |
As a % Of Total Construction Impaired Loans HIP |
Loan Count |
Outstanding Principal Balance |
As a % Of Total Construction Impaired Loans HIP |
Average % Of Completion |
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Loans held-in-portfolio |
6 | $ | 2,673 | 74 | % | 1 | $ | 953 | 26 | % | 95 | % | ||||||||||||||||
December 31, 2014 |
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As is | As developed | |||||||||||||||||||||||||||
(In thousands) |
Loan Count |
Outstanding Principal Balance |
As a % Of Total Construction Impaired Loans HIP |
Loan Count |
Outstanding Principal Balance |
As a % Of Total Construction Impaired Loans HIP |
Average % Of Completion |
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Loans held-in-portfolio |
7 | $ | 7,653 | 58 | % | 2 | $ | 5,616 | 42 | % | 87 | % |
Allowance for loan losses Covered loan portfolio
The Corporations allowance for loan losses for the covered loan portfolio acquired in the Westernbank FDIC-assisted transaction amounted to $38 million at June 30, 2015, compared to $82 million at December 31, 2014. As of June 30, 2015, an allowance of $13 million was transferred from covered to non-covered category. This allowance covers the estimated credit loss exposure related to: (i) acquired loans accounted for under ASC Subtopic 310-30, which required an allowance for loan losses of $34 million at June 30, 2015, compared with $79 million at December 31, 2014; and (ii) acquired loans accounted for under ASC Subtopic 310-20, which required an allowance for loan losses of $4 million at June 30, 2015 and $3 million at December 31, 2014.
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 Corporations 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.
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Geographic and government risk
The Corporation is exposed to geographic and government risk. The Corporations assets and revenue composition by geographical area and by business segment reporting are presented in Note 38 to the consolidated financial statements. A significant portion of our financial activities and credit exposure is concentrated in Puerto Rico, which entered into a recession in the second quarter of 2006. Puerto Ricos gross national product contracted in real terms in every year between fiscal year 2007 and fiscal year 2011 (inclusive), grew by 0.9% in fiscal year 2012 and decreased by 0.2% and 0.9% in fiscal years 2013 and 2014. Although the forecast for fiscal years 2015 and 2016 has not been made public, gross national product for fiscal year 2015 is expected to decrease, based on available monthly economic indicators. The latest Government Development Bank for Puerto Rico (GDB) Economic Activity Index, which is a coincident indicator of ongoing economic activity, reflected a 0.4% year-over-year reduction for June 2015, and a 1.6% reduction in the average for fiscal year 2015 (July 2014 to June 2015), compared to the prior fiscal year.
The Commonwealth of Puerto Rico (the Commonwealth) has experienced and continues to experience significant budget deficits, which have been historically covered with bond financings, loans from GDB and extraordinary one-time revenue measures. As a result of the downgrades of the Commonwealth and its instrumentalities obligations to below investment grade ratings (as described below) and recent liquidity constraints at the Commonwealth central government level and GDB, the Commonwealths ability to finance future budget deficits is expected to be very limited.
The Governments most recent estimate of the budget deficit for fiscal year 2015 is approximately $703 million. For fiscal year 2016, the Government recently 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.
The Commonwealths public corporations and instrumentalities are also facing fiscal 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.
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 courts decision. The Commonwealth has announced that it intends to file a petition for certiorari in the United States Supreme Court.
On February 11, 2015, the Puerto Rico Resident Commissioner introduced a bill in the U.S. House of Representatives to permit the Government of Puerto Rico to authorize Puerto Rico municipalities and public corporations to restructure their debt obligations under Chapter 9 of the United States Bankruptcy Code. On July 15, 2015, Senator Richard Blumenthal filed a companion bill in the United States Senate. The Commonwealth and GDB have expressed their support for this amendment to the United States Bankruptcy Code. On February 26, 2015, public hearings were held to consider the bill. At this time it is unclear if the bill will be approved and, if it is approved, whether its effects will be retroactive or not.
On July 28, 2015, in a letter addressed to the Chairman of the Senate Committee on Finance, the United States Secretary of the Treasury endorsed the enactment of federal legislation granting the Commonwealth access to an orderly bankruptcy regime to resolve its financial obligations under the supervision of a United States bankruptcy court.
In response to the continued economic challenges, the Government of Puerto Rico engaged a group of former IMF economists to analyze the Commonwealths economic and financial stability and growth prospects. The groups 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, fiscal solvency and debt sustainability, and institutional credibility. Some of the reports 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 Ricos public debt cannot be made sustainable without growth, nor can growth occur in the face of structural obstacles and doubts about debt sustainability.
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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 falling due during fiscal years 2016-2024. 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 will be responsible for developing and recommending to the Governor of Puerto Rico a Puerto Rico Fiscal and Economic Adjustment Plan no later than August 30, 2015 and the legislative measures necessary to implement the Plan will be filed in the Legislative Assembly no later than October 1, 2015.
On July 13, 2015, GDB held an investors meeting to present the Krueger Report and the steps the Commonwealth proposes to take to prepare the Fiscal and Economic Adjustment Plan targeted at structurally reforming the Commonwealths economy, reducing the financing gap identified in the Krueger Report and implementing the necessary institutional reforms to execute such plan. The GDB President indicated in her presentation that the Fiscal and Economic Adjustment Plan will be comprehensive, will include structural and institutional reforms, revenue and expense measures and, as suggested by the Krueger Report, temporary adjustments to the terms of the Commonwealths accumulated debt load.
On August 1, 2015, the Puerto Rico Public Finance Corporation (PFC), a subsidiary of GDB, missed substantially all of the debt service payment of $57.9 million due on such date on approximately $1.1 billion of bonds payable solely from Commonwealth legislative appropriations. The Puerto Rico Legislative Assembly had not included in the approved budget for fiscal year 2016 the funds necessary to pay principal and interest on these bonds. The Commonwealth has indicated that the non-appropriation of funds reflects serious liquidity concerns.
The Commonwealth has indicated that it is evaluating the implementation of various measures to deal with the liquidity challenges it expects to face during the first quarter of fiscal year 2016. Some of these measures include: (i) advances to the Treasury Department from the two largest government retirement systems for the payment by the Treasury Department of retirement benefits to participants; (ii) requiring certain Commonwealth instrumentalities to purchase at least $400 million aggregate principal amount of TRANs for fiscal year 2016; (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) delay in the payment of third-party payables or amounts due to public corporations; and (v) delay in the payment of income tax refunds.
On May 29, 2015, the Commonwealth enacted Act No. 72 (Act 72-2015), which, inter alia, increased the sales and use tax (SUT) rate and provided for a transition to a value added tax (VAT) to substitute the central governments portion of the SUT, subject to certain conditions. Commencing on July 1, 2015, transactions currently subject to the 7% SUT will be subject to an 11.5% SUT (10.5% collected by the Treasury Department, of which 0.5% goes to a special fund for the municipalities, and 1% collected by the municipalities). The SUT will be in effect until March 31, 2016, unless the Secretary of Treasury extends the effectiveness of the SUT for an additional 60 day period.
Commencing on October 1, 2015 and until March 31, 2016: (i) business-to-business transactions that are currently taxable will be subject to an 11.5% SUT, (ii) business-to-business services and designated professional services that were previously exempt from SUT will be subject to a Commonwealth SUT of 4% but no municipal SUT will apply to these services, and (iii) specific services will be exempt from SUT. After March 31, 2016 (or the extended sunset date provided for the SUT at the discretion of the Secretary of Treasury), all transactions subject to the SUT will be subject to a new VAT of 10.5% plus a 1% municipal SUT.
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 is unable to access the capital markets, manage its fiscal problems in an orderly manner and honor its obligations as they come due, 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 revenues.
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At June 30, 2015, the Corporations direct exposure to the Puerto Rico government and its instrumentalities and municipalities amounted to $ 729 million, of which approximately $ 673 million is outstanding ($ 1.0 billion and $ 811 million, respectively, at December 31, 2014). Of the amount outstanding, $ 565 million consists of loans and $ 108 million are securities ($ 689 million and $ 122 million, respectively, at December 31, 2014). Of this amount, $ 185 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 ($ 336 million at December 31, 2014). 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 $ 488 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 ($ 475 million at December 31, 2014). 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. The Corporation performs periodic credit quality reviews on these issuers. Table 59 has a summary of the Corporations direct exposure to the Puerto Rico government and its instrumentalities and municipalities.
Table 59 - Direct Exposure to the Puerto Rico Government
(In thousands) |
Investment Portfolio | Loans | Total Outstanding | Total Exposure | ||||||||||||
Central Government |
$ | 43,804 | $ | | $ | 43,804 | $ | 43,804 | ||||||||
Government Development Bank (GDB) |
5,272 | | 5,272 | 5,272 | ||||||||||||
Public Corporations: |
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Puerto Rico Aqueduct and Sewer Authority |
418 | 90,000 | 90,418 | 121,108 | ||||||||||||
Puerto Rico Electric Power Authority |
19 | 44,996 | 45,015 | 45,015 | ||||||||||||
Puerto Rico Highways and Transportation Authority |
4 | | 4 | 4 | ||||||||||||
Other |
| | | 1,000 | ||||||||||||
Municipalities |
58,660 | 429,694 | 488,354 | 512,744 | ||||||||||||
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Total Direct Government Exposure |
$ | 108,177 | $ | 564,690 | $ | 672,867 | $ | 728,947 | ||||||||
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In addition, at June 30, 2015, the Corporation had $380 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 ($370 million at December 31, 2014). These included $301 million in residential mortgage loans that are guaranteed by the Puerto Rico Housing Finance Authority (December 31, 2014 - $289 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. Also, the Corporation had $50 million in Puerto Rico pass-through housing bonds backed by FNMA, GNMA or residential loans CMOs, and $29 million of industrial development notes ($49 million and $32 million, respectively, at December 31, 2014).
On October 10, 2014, GDB entered into a note purchase, revolving credit and term loan agreement with a syndicate of banks and other financial institutions providing for the issuance of up to $900 million of GDB short-term senior notes, guaranteed by the Commonwealth, the proceeds of which will be used to fund the purchase of an equal amount of TRANs of the Commonwealth. The TRANs, which also serve as collateral for the GDB notes, provide intra-year financing to the central Government to address timing differences between expected disbursements and receipts of taxes and revenues for fiscal year 2015. The GDB notes and the related Commonwealths tax and revenue anticipation notes matured on June 30, 2015 and were paid in full. BPPR participated in this credit facility with an aggregate commitment of $100 million in the term loan and revolving credit facilities.
During the quarter ended June 30, 2015, BPPR agreed to sell to an unaffiliated third party its $75 million loan part of a syndicated fuel line credit facility to PREPA. The sale was subject, among other conditions, to the approval of the syndicates agent bank. The sale agreement was terminated on July 29, 2015 pursuant to its terms after the parties were not able to obtain the approval of the agent bank on terms acceptable to the assignee.
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As further detailed in Notes 9 and 10 to the consolidated financial statements, a substantial portion of the Corporations investment securities represented exposure to the U.S. Government in the form of U.S. Government sponsored entities, as well as agency mortgage-backed and U.S. Treasury securities. In addition, $929 million of residential mortgages and $111 million in commercial loans were insured or guaranteed by the U.S. Government or its agencies at June 30, 2015. The Corporation does not have any exposure to European sovereign debt.
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.
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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), the (reported basis). In addition to analyzing the Corporations 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 Corporations present 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 Corporations 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 and six months ended June 30, 2015 and 2014.
Table 60 - Adjusted Consolidated Statement of Operations for the Quarter Ended June 30, 2015 (Non-GAAP)
(Unaudited) |
Quarter ended June 30, 2015 | |||||||||||||||||||||||||||||||
(In thousands) |
Actual Results (US GAAP) |
BPNA Reorganization [2] |
Doral Acquisition [3] |
OTTI [4] |
Reversal DTA - PNA [5] |
Loss on Bulk Sale of Covered OREOs [6] |
Adjustment to FDIC Indemnification Asset [7] |
Adjusted Results (Non-GAAP) |
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Net interest income |
$ | 362,553 | $ | | $ | | $ | | $ | | $ | | $ | | $ | 362,553 | ||||||||||||||||
Provision for loan losses non-covered loans |
60,468 | | | | | | | 60,468 | ||||||||||||||||||||||||
Provision for loan losses covered loans [1] |
15,766 | | | | | | | 15,766 | ||||||||||||||||||||||||
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Net interest income after provision for loan losses |
286,319 | | | | | | | 286,319 | ||||||||||||||||||||||||
Other-than -temporary impairment losses on investment securities |
(14,445 | ) | | | (14,445 | ) | | | | | ||||||||||||||||||||||
FDIC loss share income |
19,075 | | | | | 17,566 | (10,887 | ) | 12,396 | |||||||||||||||||||||||
Other non-interest income |
136,129 | | 961 | | | | | 135,168 | ||||||||||||||||||||||||
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Total non-interest income |
140,759 | | 961 | (14,445 | ) | | 17,566 | (10,887 | ) | 147,564 | ||||||||||||||||||||||
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Personnel costs |
120,977 | | 3,865 | | | | | 117,112 | ||||||||||||||||||||||||
Net occupancy expenses |
23,286 | | 2,309 | | | | | 20,977 | ||||||||||||||||||||||||
Equipment expenses |
15,925 | | 725 | | | | | 15,200 | ||||||||||||||||||||||||
Professional fees |
78,449 | | 4,885 | | | | | 73,564 | ||||||||||||||||||||||||
Communications |
6,153 | | 70 | | | | | 6,083 | ||||||||||||||||||||||||
Business promotion |
13,776 | | 401 | | | | | 13,375 | ||||||||||||||||||||||||
Other real estate owned (OREO) expenses |
44,816 | | | | | 21,957 | | 22,859 | ||||||||||||||||||||||||
Restructuring costs |
6,174 | 6,174 | | | | | | | ||||||||||||||||||||||||
Other operating expenses |
53,618 | | 509 | | | | | 53,109 | ||||||||||||||||||||||||
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Total operating expenses |
363,174 | 6,174 | 12,764 | | | 21,957 | | 322,279 | ||||||||||||||||||||||||
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Income from continuing operations before income tax |
63,904 | (6,174 | ) | (11,803 | ) | (14,445 | ) | | (4,391 | ) | (10,887 | ) | 111,604 | |||||||||||||||||||
Income tax (benefit) expense |
(533,533 | ) | | (3,744 | ) | (2,486 | ) | (544,927 | ) | (1,712 | ) | (2,177 | ) | 21,513 | ||||||||||||||||||
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Income from continuing operations |
$ | 597,437 | $ | (6,174 | ) | $ | (8,059 | ) | $ | (11,959 | ) | $ | 544,927 | $ | (2,679 | ) | $ | (8,710 | ) | $ | 90,091 | |||||||||||
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Income from discontinued operations, net of tax |
$ | 15 | $ | 15 | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||||||||||
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Net income |
$ | 597,452 | $ | (6,159 | ) | $ | (8,059 | ) | $ | (11,959 | ) | $ | 544,927 | $ | (2,679 | ) | $ | (8,710 | ) | $ | 90,091 | |||||||||||
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[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 approximately $1.0 million of fees charged for services provided to the alliance co-bidders, including loan servicing and other interim services, personnel costs related to former Doral Bank employees retained on a temporary basis and incentive compensation for an aggregate of $3.9 million, building rent expense of Doral Banks administrative offices for $2.3 million, professional fees and business promotion expenses directly associated with the Doral Bank Transaction and systems conversion for $5.3 million and other expenses, including equipment, business promotions and communications, of $1.3 million. |
[4] | Represents an other than temporary impairment (OTTI) recorded on Puerto Rico government investment securities available- for- sale. These securities had an amortized cost of approximately $41.1 million and a market value of $26.6 million. Based on the fiscal and economic situation in Puerto Rico, together with the governments recent announcements regarding its ability to pay its debt, the Corporation determined that the unrealized loss, a portion of which had been in an unrealized loss for a period exceeding twelve months, was other than temporary. |
[5] | Represents the partial reversal of the valuation allowance of a portion of the deferred tax asset amounting to approximately $1.2 billion, at the U.S. operations. |
[6] | Represents the loss on a bulk sale of covered OREOs completed in the second quarter and the related mirror accounting of the 80% reimbursable from the FDIC. |
[7] | The quarters negative amortization of the FDICs Indemnification Asset included a $10.9 million expense related to losses incurred by the corporation that were not claimed to the FDIC before the expiration of the loss-share portion of the agreement on June 30, 2015, and that are not subject to the ongoing arbitrations. |
Table 61 - Adjusted Consolidated Statement of Operations for the Quarter Ended June 30, 2014 (Non-GAAP)
(Unaudited) |
Quarter ended June 30, 2014 | |||||||||||||||
(In thousands) |
Actual Results (US GAAP) |
TARP repayment discount amortization and Income Tax adjustments [2] |
Goodwill impairment and Restructuring charges [3] |
Adjusted Results (Non-GAAP) |
||||||||||||
Net interest income (expense) |
$ | (59,381 | ) | $ | (414,068 | ) | $ | | $ | 354,687 | ||||||
Provision for loan losses non-covered loans |
50,074 | | | 50,074 | ||||||||||||
Provision for loan losses covered loans [1] |
11,604 | | | 11,604 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net interest income after provision for loan losses |
(121,059 | ) | (414,068 | ) | | 293,009 | ||||||||||
FDIC loss share income |
(55,261 | ) | | | (55,261 | ) | ||||||||||
Other non-interest income |
118,050 | | | 118,050 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total non-interest income |
62,789 | | | 62,789 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Personnel costs |
99,100 | | | 99,100 | ||||||||||||
Net occupancy expenses |
20,267 | | | 20,267 | ||||||||||||
Equipment expenses |
12,044 | | | 12,044 | ||||||||||||
Professional fees |
67,024 | | | 67,024 | ||||||||||||
Communications |
6,425 | | | 6,425 | ||||||||||||
Business promotion |
16,038 | | | 16,038 | ||||||||||||
Other real estate owned (OREO) expenses |
3,410 | | | 3,410 | ||||||||||||
Restructuring costs |
4,574 | | 4,574 | | ||||||||||||
Other operating expenses |
46,557 | | | 46,557 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total operating expenses |
275,439 | | 4,574 | 270,865 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
(Loss) income from continuing operations before income tax |
(333,709 | ) | (414,068 | ) | (4,574 | ) | 84,933 | |||||||||
Income tax (benefit) expense |
(4,124 | ) | (14,524 | ) | | 10,400 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
(Loss) income from continuing operations |
$ | (329,585 | ) | $ | (399,544 | ) | $ | (4,574 | ) | $ | 74,533 | |||||
|
|
|
|
|
|
|
|
|||||||||
(Loss) income from discontinued operations, net of tax |
$ | (181,729 | ) | $ | | $ | (181,729 | ) | $ | | ||||||
|
|
|
|
|
|
|
|
|||||||||
Net (loss) income |
$ | (511,314 | ) | $ | (399,544 | ) | $ | (186,303 | ) | $ | 74,533 | |||||
|
|
|
|
|
|
|
|
219
[1] | Covered loans represent loans acquired in the Westernbank FDIC-assisted transaction that are covered under an FDIC loss sharing agreement. |
[2] | Income tax adjustments include a benefit of approximately $23.4 million related to a Closing Agreement with the PR Department of Treasury, completed during the second quarter of 2014 and the negative impact of the deferred tax asset valuation allowance of approximately $8.9 million recorded at the Holding Company, due to the difference in the tax treatment of the interest expense related to the TARP funds and the newly issued $450 million senior notes. |
[3] | Adjustments included within Loss from discontinued operations include approximately $186.5 million of goodwill impairment charge and $6.9 million in transaction costs, which include severance payment expenses, legal and other professional services, incurred in connection with the agreements to sell the U.S. regional operations. Adjustments within operating expenses are related to restructuring charges incurred in connection with the reorganization of PCB. |
Table 62 - Adjusted Consolidated Statement of Operations (Non-GAAP) - Comparative Quarters
(Unaudited) |
Adjusted Results (Non-GAAP) for the quarters ended |
|||||||||||
(In thousands) |
June 30, 2015 | June 30, 2014 | Variance | |||||||||
Net interest income |
$ | 362,553 | $ | 354,687 | $ | (7,866 | ) | |||||
Provision for loan losses non-covered loans |
60,468 | 50,074 | (10,394 | ) | ||||||||
Provision for loan losses covered loans [1] |
15,766 | 11,604 | (4,162 | ) | ||||||||
|
|
|
|
|
|
|||||||
Net interest income after provision for loan losses |
286,319 | 293,009 | 6,690 | |||||||||
FDIC loss share income |
12,396 | (55,261 | ) | (67,657 | ) | |||||||
Other non-interest income |
135,168 | 118,050 | (17,118 | ) | ||||||||
|
|
|
|
|
|
|||||||
Total non-interest income |
147,564 | 62,789 | (84,775 | ) | ||||||||
|
|
|
|
|
|
|||||||
Personnel costs |
117,112 | 99,100 | (18,012 | ) | ||||||||
Net occupancy expenses |
20,977 | 20,267 | (710 | ) | ||||||||
Equipment expenses |
15,200 | 12,044 | (3,156 | ) | ||||||||
Professional fees |
73,564 | 67,024 | (6,540 | ) | ||||||||
Communications |
6,083 | 6,425 | 342 | |||||||||
Business promotion |
13,375 | 16,038 | 2,663 | |||||||||
Other real estate owned (OREO) expenses |
22,859 | 3,410 | (19,449 | ) | ||||||||
Other operating expenses |
53,109 | 46,557 | (6,552 | ) | ||||||||
|
|
|
|
|
|
|||||||
Total operating expenses |
322,279 | 270,865 | (51,414 | ) | ||||||||
|
|
|
|
|
|
|||||||
Income from continuing operations before income tax |
111,604 | 84,933 | (26,671 | ) | ||||||||
Income tax expense (benefit) |
21,513 | 10,400 | (11,113 | ) | ||||||||
|
|
|
|
|
|
|||||||
Income from continuing operations |
$ | 90,091 | $ | 74,533 | $ | (15,558 | ) | |||||
|
|
|
|
|
|
|||||||
Net income |
$ | 90,091 | $ | 74,533 | $ | (15,558 | ) | |||||
|
|
|
|
|
|
[1] | Covered loans represent loans acquired in the Westernbank FDIC-assisted transaction that are covered under an FDIC loss sharing agreement. |
220
Table 63 - Adjusted Consolidated Statement of Operations for the Six Months Ended June 30, 2015 (Non-GAAP)
For the six months ended June 30, 2015 |
||||||||||||||||||||||||||||||||||||||||
(Unaudited) | Q1 2015 | Q2 2015 | ||||||||||||||||||||||||||||||||||||||
(In thousands) |
Actual Results (US GAAP) |
BPNA Reorganization [2] |
Doral Acquisition [3] |
BPNA Reorganization [2] |
Doral Acquisition [3] |
OTTI [4] |
Reversal DTA - PNA [5] |
Loss on Bulk Sale of Covered OREOs [6] |
Adjustment to FDIC Indemnification Asset [7] |
Adjusted Results (Non- GAAP) |
||||||||||||||||||||||||||||||
Net interest income |
$ | 705,748 | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | 705,748 | ||||||||||||||||||||
Provision for loan losses non-covered loans |
90,179 | | | | | | | | | 90,179 | ||||||||||||||||||||||||||||||
Provision for loan losses covered loans [1] |
26,090 | | | | | | | | | 26,090 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Net interest income after provision for loan losses |
589,479 | | | | | | | | | 589,479 | ||||||||||||||||||||||||||||||
Other-than-temporary impairment losses on investment securities |
(14,445 | ) | | | | | (14,445 | ) | | | | | ||||||||||||||||||||||||||||
FDIC loss share income |
23,214 | | | | | | | 17,566 | (10,887 | ) | 16,535 | |||||||||||||||||||||||||||||
Other non-interest income |
247,225 | | 1,121 | | 961 | | | | | 245,143 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Total non-interest income |
255,994 | | 1,121 | | 961 | (14,445 | ) | | 17,566 | (10,887 | ) | 261,678 | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Personnel costs |
237,435 | | 2,432 | | 3,865 | | | | | 231,138 | ||||||||||||||||||||||||||||||
Net occupancy expenses |
44,995 | | 643 | | 2,309 | | | | | 42,043 | ||||||||||||||||||||||||||||||
Equipment expenses |
29,336 | | | | 725 | | | | | 28,611 | ||||||||||||||||||||||||||||||
Professional fees |
153,977 | | 6,997 | | 4,885 | | | | | 142,095 | ||||||||||||||||||||||||||||||
Communications |
12,329 | | | | 70 | | | | | 12,259 | ||||||||||||||||||||||||||||||
Business promotion |
24,589 | | | | 401 | | | | | 24,188 | ||||||||||||||||||||||||||||||
Other real estate owned (OREO) expenses |
67,885 | | | | | | | 21,957 | | 45,928 | ||||||||||||||||||||||||||||||
Restructuring costs |
16,927 | 10,753 | | 6,174 | | | | | | | ||||||||||||||||||||||||||||||
Other operating expenses |
88,042 | | | | 509 | | | | | 87,533 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Total operating expenses |
675,515 | 10,753 | 10,072 | 6,174 | 12,764 | | | 21,957 | | 613,795 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Income from continuing operations before income tax |
169,958 | (10,753 | ) | (8,951 | ) | (6,174 | ) | (11,803 | ) | (14,445 | ) | | (4,391 | ) | (10,887 | ) | 237,362 | |||||||||||||||||||||||
Income tax (benefit) expense |
(500,964 | ) | | (2,896 | ) | | (3,744 | ) | (2,486 | ) | (544,927 | ) | (1,712 | ) | (2,177 | ) | 56,978 | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Income from continuing operations |
$ | 670,922 | $ | (10,753 | ) | $ | (6,055 | ) | $ | (6,174 | ) | $ | (8,059 | ) | $ | (11,959 | ) | $ | 544,927 | $ | (2,679 | ) | $ | (8,710 | ) | $ | 180,384 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Income from discontinued operations, net of tax |
$ | 1,356 | $ | 1,341 | $ | | $ | 15 | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Net income |
$ | 672,278 | $ | (9,412 | ) | $ | (6,055 | ) | $ | (6,159 | ) | $ | (8,059 | ) | $ | (11,959 | ) | $ | 544,927 | $ | (2,679 | ) | $ | (8,710 | ) | $ | 180,384 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[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 approximately $2.1 million of fees charged for services provided to the alliance co-bidders, including loan servicing and other interim services, personnel costs related to former Doral Bank employees retained on a temporary basis and incentive compensation for an aggregate of $6.3 million, building rent expense of Doral Banks administrative offices for $3.0 million, professional fees and business promotion expenses directly associated with the Doral Bank Transaction and systems conversion for $12.3 million and other expenses, including equipment, business promotions and communications, of $1.3 million. |
[4] | Represents an other than temporary impairment (OTTI) recorded on Puerto Rico government investment securities available- for- sale. These securities had an amortized cost of approximately $41.1 million and a market value of $26.6 million. Based on the fiscal and economic situation in Puerto Rico, together with the governments recent announcements regarding its ability to pay its debt, the Corporation determined that the unrealized loss, a portion of which had been in an unrealized loss for a period exceeding twelve months, was other than temporary. |
[5] | Represents the partial reversal of the valuation allowance of a portion of the deferred tax asset amounting to approximately $1.2 billion, at the U.S. operations. |
[6] | Represents the loss on a bulk sale of covered OREOs completed in the second quarter and the related mirror accounting of the 80% reimbursable from the FDIC. |
[7] | The quarters negative amortization of the FDICs Indemnification Asset included a $10.9 million expense related to losses incurred by the corporation that were not claimed to the FDIC before the expiration of the loss-share portion of the agreement on June 30, 2015, and that are not subject to the ongoing arbitrations. |
221
Table 64 - Adjusted Consolidated Statement of Operations for the Six Months Ended June 30, 2014 (Non-GAAP)
(Unaudited) |
For the six months ended June 30, 2014 | |||||||||||||||
Q2 2014 | ||||||||||||||||
(In thousands) |
Actual Results (US GAAP) |
TARP repayment discount amortization and Income Tax adjustments [2] |
Goodwill impairment and Restructuring charges [3] |
Adjusted Results (Non-GAAP) |
||||||||||||
Net interest income |
$ | 291,790 | $ | (414,068 | ) | $ | | $ | 705,858 | |||||||
Provision for loan losses non-covered loans |
104,196 | | | 104,196 | ||||||||||||
Provision for loan losses covered loans [1] |
37,318 | | | 37,318 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net interest income after provision for loan losses |
150,276 | (414,068 | ) | | 564,344 | |||||||||||
FDIC loss share income (expense) |
(79,467 | ) | | | (79,467 | ) | ||||||||||
Other non-interest income |
238,288 | | | 238,288 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total non-interest income |
158,821 | | | 158,821 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Personnel costs |
203,401 | | | 203,401 | ||||||||||||
Net occupancy expenses |
41,627 | | | 41,627 | ||||||||||||
Equipment expenses |
23,456 | | | 23,456 | ||||||||||||
Professional fees |
134,023 | | | 134,023 | ||||||||||||
Communications |
13,110 | | | 13,110 | ||||||||||||
Business promotion |
27,424 | | | 27,424 | ||||||||||||
Other real estate owned (OREO) expenses |
9,850 | | | 9,850 | ||||||||||||
Restructuring costs |
4,574 | | 4,574 | | ||||||||||||
Other operating expenses |
95,573 | | | 95,573 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total operating expenses |
553,038 | | 4,574 | 548,464 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
(Loss) income from continuing operations before income tax |
(243,941 | ) | (414,068 | ) | (4,574 | ) | 174,701 | |||||||||
Income tax expense |
19,140 | (15,393 | ) | | 34,533 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
(Loss) income from continuing operations |
$ | (263,081 | ) | $ | (398,675 | ) | $ | (4,574 | ) | $ | 140,168 | |||||
|
|
|
|
|
|
|
|
|||||||||
Income from discontinued operations, net of tax |
$ | (161,824 | ) | $ | | $ | (161,824 | ) | $ | | ||||||
|
|
|
|
|
|
|
|
|||||||||
Net (loss) \income |
$ | (424,905 | ) | $ | (398,675 | ) | $ | (166,398 | ) | $ | 140,168 | |||||
|
|
|
|
|
|
|
|
[1] | Covered loans represent loans acquired in the Westernbank FDIC-assisted transaction that are covered under an FDIC loss sharing agreement. |
[2] | Income tax adjustments include a benefit of approximately $23.4 million related to a Closing Agreement with the PR Department of Treasury, completed during the second quarter of 2014 and the negative impact of the deferred tax asset valuation allowance of approximately $8.0 million recorded at the Holding Company, due to the difference in the tax treatment of the interest expense related to the TARP funds and the newly issued $450 million senior notes. |
[3] | Adjustments included within Loss from discontinued operations include approximately $186.5 million of goodwill impairment charge and $6.9 million in transaction costs, which include severance payment expenses, legal and other professional services, incurred in connection with the agreements to sell the U.S. regional operations. Adjustments within operating expenses are related to restructuring charges incurred in connection with the reorganization of PCB. |
222
Table 65 - Adjusted Consolidated Statement of Operations (Non-GAAP) - Comparative Six Months Ended
(Unaudited) |
Adjusted Results (Non-GAAP) for the six months ended |
|||||||||||
(In thousands) |
June 30, 2015 | June 30, 2014 | Variance | |||||||||
Net interest income |
$ | 705,748 | $ | 705,858 | $ | 110 | ||||||
Provision for loan losses non-covered loans |
90,179 | 104,196 | 14,017 | |||||||||
Provision for loan losses covered loans [1] |
26,090 | 37,318 | 11,228 | |||||||||
|
|
|
|
|
|
|||||||
Net interest income after provision for loan losses |
589,479 | 564,344 | (25,135 | ) | ||||||||
FDIC loss share income |
16,535 | (79,467 | ) | (96,002 | ) | |||||||
Other non-interest income |
245,143 | 238,288 | (6,855 | ) | ||||||||
|
|
|
|
|
|
|||||||
Total non-interest income |
261,678 | 158,821 | (102,857 | ) | ||||||||
|
|
|
|
|
|
|||||||
Personnel costs |
231,138 | 203,401 | (27,737 | ) | ||||||||
Net occupancy expenses |
42,043 | 41,627 | (416 | ) | ||||||||
Equipment expenses |
28,611 | 23,456 | (5,155 | ) | ||||||||
Professional fees |
142,095 | 134,023 | (8,072 | ) | ||||||||
Communications |
12,259 | 13,110 | 851 | |||||||||
Business promotion |
24,188 | 27,424 | 3,236 | |||||||||
Other real estate owned (OREO) expenses |
45,928 | 9,850 | (36,078 | ) | ||||||||
Other operating expenses |
87,533 | 95,573 | 8,040 | |||||||||
|
|
|
|
|
|
|||||||
Total operating expenses |
613,795 | 548,464 | (65,331 | ) | ||||||||
|
|
|
|
|
|
|||||||
Income from continuing operations before income tax |
237,362 | 174,701 | (62,661 | ) | ||||||||
Income tax expense (benefit) |
56,978 | 34,533 | (22,445 | ) | ||||||||
|
|
|
|
|
|
|||||||
Income from continuing operations |
$ | 180,384 | $ | 140,168 | $ | (40,216 | ) | |||||
|
|
|
|
|
|
|||||||
Net income |
$ | 180,384 | $ | 140,168 | $ | (40,216 | ) | |||||
|
|
|
|
|
|
[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 Corporations 2014 Annual Report.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
The Corporations management, with the participation of the Corporations Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Corporations disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on such evaluation, the Corporations Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Corporations disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Corporation in the reports that it files or submits under the Exchange Act and such information is accumulated and communicated to management, as appropriate, to allow timely decisions regarding required disclosures.
Internal Control Over Financial Reporting
There have been no changes in the Corporations internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended June 30, 2015 that have materially affected, or are reasonably likely to materially affect, the Corporations internal control over financial reporting.
For a discussion of Legal Proceedings, see Note 26, Commitments and Contingencies, to the Consolidated Financial Statements.
223
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 2014 Annual Report. These factors could materially adversely affect our business, financial condition, liquidity, results of operations and capital position, and could cause our actual results to differ materially from our historical results or the results contemplated by the forward-looking statements contained in this report. Also refer to the discussion in Part I - Item 2 - Managements 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 2014 Annual Report.
There have been no material changes to the risk factors previously disclosed under Item 1A of the Corporations 2014 Annual Report, except for the risks described below.
The risks described in our 2014 Annual Report and in this report are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or results of operations.
RISKS RELATING TO THE BUSINESS ENVIRONMENT AND OUR INDUSTRY
Weakness in the Puerto Rico economy and real estate market, together with the Puerto Rico governments ongoing fiscal crisis, has adversely impacted and may continue to adversely impact us.
Popular is exposed to geographical and government risk. A significant portion of our financial activities and credit exposure is concentrated in Puerto Rico, which entered into a recession in the second quarter of 2006. Puerto Ricos gross national product contracted in real terms in every year between fiscal year 2007 and fiscal year 2011 (inclusive), grew by 0.9% in fiscal year 2012 and decreased by 0.2% and 0.9% in fiscal years 2013 and 2014. Although the forecast for fiscal years 2015 and 2016 has not been made public, gross national product for fiscal year 2015 is expected to decrease, based on available monthly economic indicators. The latest Government Development Bank for Puerto Rico (GDB) Economic Activity Index, which is a coincident indicator of ongoing economic activity, reflected a 0.4% year-over-year reduction for June 2015, and a 1.6% reduction in the average for fiscal year 2015 (July 2014 to June 2015), compared to the prior fiscal year.
This persistent contraction or minimal growth has had an adverse effect on employment. A reduction in total employment began in the fourth quarter of fiscal year 2007 (ending June 30, 2007) and has continued consistently through fiscal year 2014 (ending June 30, 2014) due to the current recession and contractionary fiscal adjustment measures. According to the Household Survey (conducted by the Puerto Rico Department of Labor and Human Resources), during the first nine months of fiscal year 2015, total employment fell by 0.8% as compared to the same period for the prior fiscal year, and the unemployment rate averaged 13.1% compared to 14.7% for the same period of the prior fiscal year.
The Commonwealth of Puerto Rico (the Commonwealth) has experienced and continues to experience significant budget deficits, which have been historically covered with bond financings, loans from GDB and extraordinary one-time revenue measures. As a result of the downgrades of the Commonwealth and its instrumentalities obligations to below investment grade ratings (as described below) and recent liquidity constraints at the Commonwealth central government and GDB, the Commonwealths ability to finance future budget deficits is expected to be very limited. The Governments most recent estimate of the budget deficit for fiscal year 2015 is approximately $703 million. For fiscal year 2016, the Government recently 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 addition, the Commonwealths and GDBs liquidity is significantly strained. GDB has stated that its internal liquidity projection shows that, absent a capital market transaction or the implementation of other potential liquidity enhancing or conservation measures, GDB would not have insufficient liquidity to meet its legal reserve requirement by late in the first quarter of fiscal year 2016 and may be unable to support the operations and liquidity needs of the Commonwealth, its public corporations and instrumentalities and municipalities. In that scenario, the Commonwealth may also be unable to obtain intra-year short-term
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financing for fiscal year 2016 through the issuance of Tax Revenue Anticipation Notes (TRANs). The Commonwealth currently projects that absent TRANs financing, the Commonwealth would deplete its cash resources in full during the first quarter of fiscal year 2016, even after considering the implementation of extraordinary short-term administrative measures to conserve cash. The Government has stated that the Commonwealth and GDB may be unable to honor all of their obligations as they come due and that the Commonwealth may also be unable to fund all necessary governmental programs and services if it does not have sufficient access to the capital markets or alternative sources of financing to satisfy its liquidity needs, or as a result of its fiscal challenges. The Commonwealth has also indicated that it may need to implement administrative and emergency measures in fiscal year 2016 and thereafter, which may include a moratorium on the payment of debt service, a debt adjustment, or other actions affecting creditors rights.
In response to the continued economic challenges, the Government of Puerto Rico engaged a group of former IMF economists to analyze the Commonwealths economic and financial stability and growth prospects. The groups 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, fiscal solvency and debt sustainability, and institutional credibility. Some of the reports 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 Ricos 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.
Following the publication of the Krueger Report, the Governor of Puerto Rico created a Puerto Rico Fiscal and Economic Recovery Working Group (the Working Group) to consider the measures necessary to address the fiscal crisis of the Commonwealth and to develop a Puerto Rico Fiscal and Economic Adjustment Plan. The GDB has indicated that the Fiscal and Economic Adjustment Plan will be comprehensive, will include structural and institutional reforms, revenue and expense measures and, as suggested by the Krueger Report, temporary adjustments to the terms of the Commonwealths accumulated debt load.
As part of the Governments efforts to address the fiscal challenges described above, on May 29, 2015, the Commonwealth enacted an increase in the sales and use tax (SUT) rate and provided for a transition to a value added tax (VAT) to substitute the central governments portion of the SUT, subject to certain conditions. Under this legislation, certain business-to-business services and designated professional services that were previously exempt from SUT will now be subject to a Commonwealth SUT.
The Commonwealths public corporations and instrumentalities are also facing fiscal 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. The Recovery Act was challenged in the United States District Court for the District of Puerto Rico, which declared the Recovery Act unconstitutional and 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 courts decision. The Commonwealth has announced that it intends to file a petition for certiorari in the United States Supreme Court.
The Puerto Rico Resident Commissioner has introduced a bill in the U.S. House of Representatives to permit the Government of Puerto Rico to authorize Puerto Rico municipalities and public corporations to restructure their debt obligations under Chapter 9 of the United States Bankruptcy Code. On July 15, 2015, Senator Richard Blumenthal filed a companion bill in the United States Senate. The Commonwealth and GDB have expressed their support for this amendment to the United States Bankruptcy Code. At this time it is unclear if and when the bill will be approved and, if it is approved, whether its effects will be retroactive or not. Separately, the Unites States Secretary of the Treasury, in a letter addressed to the Chairman of the Senate Committee on Finance, has endorsed the enactment of federal legislation granting the Commonwealth access to an orderly bankruptcy regime to resolve its financial obligations under the supervision of a United States bankruptcy court.
Since February 2014, the three principal rating agencies (Moodys, 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
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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 Commonwealths general obligation bonds ratings are as follows: S&P, CCC-, Moodys, Caa2, and Fitch, CC.
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 is unable to access the capital markets, manage its fiscal problems in an orderly manner and honor its obligations as they come due, those adverse effects could continue or worsen in ways that we are not able to predict. Furthermore, the Governments response to the fiscal crisis will likely include additional revenue and expense reduction measures that may increase our expenses and have an adverse effect on our clients and the Puerto Rico economy in general, all of which could adversely impact our results of operations and financial condition. Any reduction in consumer spending or deterioration in creditworthiness of borrowers or their collateral as a result of these issues may also adversely impact our results of operations and financial condition.
For additional information regarding the Puerto Rico economy, refer to Geographical and government risk in the Managements Discussion and Analysis of Financial Condition and Results of Operations section of this Quarterly Report.
RISKS RELATED TO THE FDIC-ASSISTED TRANSACTION
Our ability to obtain reimbursement under the loss sharing agreements on covered assets depends on our compliance with the terms of the loss sharing agreements.
The loss share agreements contain specific terms and conditions regarding the management of the covered assets that BPPR must follow 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 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; and |
| file monthly and quarterly certificates with the FDIC specifying the amount of losses, charge-offs and recoveries. |
Under the loss share agreements, BPPR is also required to maintain books and records sufficient to ensure and document compliance with the terms of the loss share agreements.
Under the terms of the loss share agreements, BPPR is also required to deliver certain certificates regarding compliance with the terms of each of the loss share agreements and the computations required there under. The required terms of the agreements are extensive and failure to comply with any of the guidelines could result in a specific asset or group of assets permanently losing their
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loss sharing coverage. BPPR believes that it has complied with the terms and conditions regarding the management of the covered assets. No assurances can be given that we will manage the covered assets in such a way as to always maintain loss share coverage on all such assets and fully recover the value of our loss share asset.
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 BPPRs 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 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 BPPRs 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 FDICs 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.
BPPRs 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 the 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. Although the terms of the settlement could delay the timing of reimbursement of certain loss-share claims from the FDIC, the settlement did not have a material adverse impact on BPPRs current estimate of expected reimbursable losses for the covered portfolio through the end of the shared-loss arrangement under the commercial loss share agreement in the quarter ending June 30, 2015.
The shared-loss arrangement described above expired on June 30, 2015. As of that date BPPR had unreimbursed losses and expenses of $307.9 million under the commercial loss share agreement with the FDIC. On July 22, 2015, BPPR received reimbursement of $78.9 million from the FDIC covering claims filed prior to June 30, 2015. Taking into consideration this payment and claims submitted through that date, the total unreimbursed losses totaled $229.0 million, of which $177.8 million was submitted to the FDIC on July 30, 2015. Other than those reimbursements that are subject to the disputes described below, BPPR continues to work with the FDIC and expects to be reimbursed pursuant to the terms of the commercial loss share agreement.
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 BPPRs 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 FDICs 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 FDICs 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 shared loss 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-R notified BPPR that it is clawing back approximately $1.7 million in reimbursable expenses relating to the Disputed Asset that the FDIC-R 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.
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In addition, in November and December 2014, BPPR proposed separate portfolio sales 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 and May 2015, BPPR proposed two additional separate portfolio sales to the FDIC.
BPPR disagrees with the FDICs characterization of the November and December 2014 portfolio sale proposals and with the FDICs interpretation of the commercial shared loss agreement provision governing portfolio sales (the Proposed 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 the Proposed Portfolio Sales. On June 15, 2015, BPPR amended its statement of claim to include a claim for the FDIC-Rs 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 third proposed sale, but only subject to conditions to which BPPR objects.
At June 30, 2015, there are approximately $248.7 million of loans that are subject to the resolution of the arbitration proceedings described above, with losses amounting to $141.3 million reflected in the FDIC indemnification asset as a receivable from the FDIC. 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 (ending on June 30, 2015), with additional recovery sharing for three years thereafter. As of June 30, 2015, the carrying value of covered loans approximated $0.7 billion, 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 reduction 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.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Issuer Purchases of Equity Securities
In April 2004, the Corporations shareholders adopted the Popular, Inc. 2004 Omnibus Incentive Plan. The Corporation has to date used shares purchased in the market to make grants under the Plan. As of June 30, 2015 the maximum number of shares of common stock that may have been granted under this plan was 3,500,000.
In connection with the Corporations 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 June 30, 2015 under the 2004 Omnibus Incentive Plan.
Issuer Purchases of Equity Securities | ||||||||||||||||
Not in thousands |
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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 |
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April 1 - April 30 |
| | | | ||||||||||||
May 1 - May 30 |
2,356 | $ | 32.25 | | | |||||||||||
June 1 - June 30 |
13,030 | 33.0 | | | ||||||||||||
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Total June 30, 2015 |
15,386 | $ | 32.89 | | | |||||||||||
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Item 3. | Defaults Upon Senior Securities |
None.
Item 4. | Mine Safety Disclosures |
Not applicable.
Item 5. | Other Information |
None.
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Exhibit No. |
Exhibit Description | |
3.1 | Restated Certificate of Incorporation of Popular, Inc. (1) | |
3.2 | Restated By-laws of Popular, Inc. (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 |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
POPULAR, INC. | ||||||
(Registrant) | ||||||
Date: August 10, 2015 | By: | /s/ Carlos J. Vázquez | ||||
Carlos J. Vázquez | ||||||
Executive Vice President & Chief Financial Officer | ||||||
Date: August 10, 2015 | By: | /s/ Jorge J. García | ||||
Jorge J. García | ||||||
Senior Vice President & Corporate Comptroller |
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