UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OF THE SECURITIES
EXCHANGE ACT OF 1934
For Fiscal Year ended December 31, 2008
Commission File: 001-15849
SANTANDER BANCORP
(Exact name of Corporation as specified in its charter)
Incorporated in the Commonwealth of Puerto Rico
I.R.S. Employer Identification No. 66-0573723
207 Ponce de León Avenue
Hato Rey, Puerto Rico 00917
Telephone Number: (787) 777-4100
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
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Name of each exchange on
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Title of each class
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which registered
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Common Stock, $2.50 par value
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Securities Exchange Act of 1934:
NONE
Indicate by check mark if the registrant is a well-known seasoned issuer (as defined in Rule 405 of
the Securities Act). Yes
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No
o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act). Yes
o
No
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Indicate by check mark whether the Corporation (1) has filed all reports required to be filed by
Section 13 of the Securities Exchange Act of 1934 during the preceding 12 months (for such shorter
period that the Corporation was required to file such reports) and has been subject to such filing
requirement for the past 90 days. Yes
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No
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Indicate by check mark if disclosure of delinquent files pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of the registrant’s knowledge, in
definite proxy or information statement incorporated by reference in Part III of this Form 10-K or
any amendments to this Form 10-K.
þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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(Do not check if a smaller reporting company)
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Smaller reporting company
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes
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No
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As of December 31, 2008 the Corporation had 46,639,104 shares of common stock outstanding. The
aggregate market value of the common stock held by non-affiliates of the Corporation was
$54,789,708 based upon the reported closing price of $12.49 on the New York Stock Exchange on that
date.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Corporation’s Proxy Statement relating to the 2009 Annual Meeting of Stockholders
of the Corporation to be held on or about April 30, 2009, are incorporated herein by reference to
Item 10 through 14 of Part III.
SANTANDER BANCORP
CONTENTS
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Santander BanCorp
PART I
ITEM 1. BUSINESS
General
Santander BanCorp (the “Corporation”) is a publicly owned financial holding company, registered
under the Bank Holding Company Act of 1956, (“BHC Act”) as amended and, accordingly, subject to
the supervision and regulation by the Federal Reserve Board. The Corporation was incorporated
under the laws of the Commonwealth of Puerto Rico (“Puerto Rico” or the “Island”) to serve as the
financial holding company for Banco Santander Puerto Rico (“Banco Santander” or the “Bank”).
Banco Santander, S.A., (SAN.MC, STD.N), (‘Santander Group”) headquartered in Madrid, engages
primarily in commercial banking with complementary activities in global wholesale banking, cards,
asset management and insurance. Santander Group had over
€
1.168 trillion in funds under management
at the close of 2008, from more than 80 million customers served through more than 14,000 offices
— more branches than any other international bank. Founded in 1857, Santander Group is the largest
financial group in Spain and Latin America and has a significant presence in Western Europe and in
the United Kingdom. In 2008, Santander Group registered
€
8,876 million in attributable net profit,
an increase of 9% from 2007, excluding capital gains.
In Latin America, Santander Group manages over US$200 billion in business volumes (loans, deposits,
mutual funds, pension funds and managed funds) through 6,089 branches. In 2008, Santander reported
€
2,945 million in net attributable income in Latin America, up 10% from the previous year.
The Corporation offers a full range of financial services through its subsidiaries Banco Santander
Puerto Rico, including mortgage banking, Santander Securities Corporation, Santander Insurance
Agency, Inc., Santander International Bank of Puerto Rico, Inc., Santander Asset Management
Corporation, Santander Financial Services, Island Insurance Corporation and Santander PR Capital
Trust I. As of December 31, 2008, the Corporation had, on a consolidated basis, total assets of
$7.9 billion, total net loans of $6.0 billion, total deposits of $5.0 billion and stockholder’s
equity of $551.6 million. The Corporation also had $13.4 billion of customer financial assets under
management.
Banco Santander Puerto Rico
The Corporation’s main subsidiary, Banco Santander Puerto Rico, is one of the Island’s largest
financial institutions (based on number of branches and customer deposits as reported with the
Federal Deposit Insurance Corporation (“FDIC”) and the Office of the Commissioner of Financial
Institutions of Puerto Rico) with a network of 57 branches and 169 ATMs, representing one of the
largest branch franchises in Puerto Rico. As of December 31, 2008, the Bank had total assets of
approximately $7.4 billion, total deposits of $5.1 billion and stockholders’ equity of $616.6
million.
The Bank provides a wide range of financial products and services to a diverse customer base that
includes small and medium-size businesses, large corporations and individuals, including mortgage
banking services. The Bank also provides specialized products and services to foreign customers
through its wholly owned subsidiary, Santander International Bank of Puerto Rico, Inc. (“Santander
International Bank”), an international banking entity organized under the International Banking
Center Regulatory Act of Puerto Rico (“IBC Act”).
Santander International Bank of Puerto Rico, Inc.
Santander International Bank of Puerto Rico, Inc. is a wholly owned subsidiary of
Banco Santander Puerto Rico, organized during 2001 to operate as an international
banking entity under the International Banking Center Regulatory Act of Puerto
Rico. Santander International Bank was created for the purpose of providing
specialized products and services to foreign customers.
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Santander Securities Corporation
Santander Securities Corporation (“Santander Securities”) is the second largest securities
broker-dealer (based on broker-dealer customer assets and mutual funds managed as reported with the
SEC and the Office of the Commissioner of Financial Institutions of Puerto Rico) in Puerto Rico
with approximately $9.3 billion in assets under management, composed of over $5.4 billion in
customer assets at the retail broker-dealer and $3.9 billion in managed gross assets and
institutional accounts at its wholly owned subsidiary, Santander Asset Management. Santander
Securities has three offices islandwide and an office in Miami, Fl.
Santander Asset Management Corporation
Santander Asset Management Corporation (“Santander Asset Management” or “SAM”) is a
wholly owned subsidiary of Santander Securities created for the purpose of managing
assets for Puerto Rico investment companies (mutual funds) and institutional
accounts. The funds managed by Santander Asset Management invest primarily in
fixed-income securities, including Puerto Rico and U.S. Government securities,
mortgage-backed and asset-backed securities and municipal obligations. Santander
Asset Management also services its institutional accounts, which consist primarily
of university endowments, insurance companies, governmental agencies, pension funds
and individual investors.
Santander Insurance Agency, Inc.
The Corporation’s subsidiary, Santander Insurance Agency, Inc. (“Santander Insurance”) was
established in October 2000 as the first financial holding company insurance operation to receive
approval from the Commissioner of Insurance of Puerto Rico (“Insurance Commissioner”). This was a
result of the Gramm-Leach-Bliley Act of 1999 (“Gramm-Leach-Bliley Act”) that authorized financial
holding companies to enter into the insurance business. Santander Insurance Agency offers a growing
base of products, including life, disability, unemployment and title insurance as a corporate
agent, and also operates as a general agent offering bid, payment and performance bonds, and
insurance to cover equipment and auto leases.
Santander Financial Services, Inc.
Santander Financial Services, Inc. (“Santander Financial Services” or “Island Finance”) is the
second largest consumer finance company in Puerto Rico (as reported with the Office of the
Commissioner of Financial Institutions). Island Finance is a well established consumer finance
business in Puerto Rico. The brand has operated in Puerto Rico for over 40 years, is one of the
most recognized brand names in consumer finance and commands a 20% market share as of September 30,
2008 (as reported with the Office of the Commissioner of Financial Institutions). The acquisition
of Island Finance in 2006 boosted the Corporation’s business footprint by adding 64 consumer retail
branches and close to 110,000 clients. Santander Financial Services, Inc. through, Island Finance
provides mainly consumer loans and real estate-secured loans to customers.
Island Insurance Corporation
In July 2006, the Corporation acquired Island Insurance Corporation, a Puerto Rico life insurance
company, duly licensed by the Puerto Rico Commissioner of Insurance. This corporation is currently
inactive.
Santander PR Capital Trust I
A statutory trust organized under the Statutory Trust Act of the state of Delaware. It was formed
for the purpose of issuing trust redeemable preferred securities issued pursuant to the acquisition
of Island Finance in 2006.
Operations
The Corporation operates a client-oriented, full-service bank, offering products and services in
the areas of commercial, mortgage and consumer banking. Insurance, securities and asset management
services are also offered through the Corporation’s various subsidiaries. The Corporation organizes
its operations in five reportable segments: Commercial Banking, Mortgage Banking, Consumer Finance,
Treasury and Investments, and Wealth Management.
While the Bank offers a wide variety of financial services to its customers, its primary products
and services are grouped into the following categories:
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Commercial Banking
. The Corporation’s integrated business model is built upon the strength of its
commercial banking franchise and its distribution capabilities. This segment’s goal is to be an
agile client-service organization with the primary focus on satisfying the total financial needs of
its customers through specialized retail and wholesale banking services. These two units of the
commercial banking segment are closely interrelated and are differentiated mostly by the
composition of their respective client-bases.
Retail Banking
. The Retail Banking unit serves individual clients and
small-and medium-sized businesses providing them with a full range of financial
products and services through branches across Puerto Rico. Each branch represents an
important vehicle for distributing the retail banking solutions. Branch personnel
promote cross selling of financial products and coordinate service delivery.
Wholesale Banking
. The Wholesale Banking unit serves major corporate and
institutional clients including the public sector, not-for-profit organizations and
specialized industries such as universities, healthcare and financial institutions.
This unit also houses certain specialized services such as construction lending,
international commerce and cash management. Wholesale banking also calls into play
the substantial resources of our worldwide operations, when such involvement is deemed
appropriate or necessary to achieve the client’s financial objectives. Wholesale
banking clients are offered a full array of commercial banking products and services,
including cash management, bank card products, letters of credit and a variety of
other foreign trade-related services. This unit works closely with retail banking
branch personnel when its specialized services are required.
Mortgage Banking.
Through Santander Mortgage Corporation up to December 31,
2007 and as a Bank’s division thereafter, this business segment, the fourth largest
mortgage loan originator (based on information on mortgage production obtained from
the Office of the Commissioner of Financial Institutions of Puerto Rico) and servicer
in Puerto Rico, originates, sells, and services a variety of residential mortgage
loans. Total mortgage loan originations amounted to $345.7 million in 2008, the
mortgage loan portfolio reached $2.6 billion by year-end and the mortgage servicing
portfolio consisted of $1.3 billion serviced for other institutions.
Consumer Finance.
The Island Finance operation provides consumer loans and real estate-secured
loans through its 64 consumer retail branches in Puerto Rico.
Island Finance provides lending to near
prime or “Band C ” borrowers (Individuals with
Fair Isaac Corporation (“Fico Scores”) of 620 or less among
other factors,) which represent approximately of 30.3% of total loan
portfolio.
Treasury and Investments
. The Corporation’s Treasury Department handles its investment portfolio
and liquidity position. It also focuses on offering another level of financial service to our
clients in the form of derivative instruments that can protect the owner of small and medium-sized
business from the impact of interest rate fluctuations.
Wealth Management
. The Corporation’s Wealth Management segment includes the operations of its
subsidiary Santander Securities. Santander Securities offers a complete range of products and
services as part of an overall wealth management program that includes asset management and other
trust services. The combination of Santander Asset Management products and Santander Securities’
distribution capabilities has allowed Santander Group to provide a diverse range of high quality
investment alternatives in the Puerto Rico market.
The principal offices of the Corporation are located at 207 Ponce de León Avenue, San Juan, Puerto
Rico, and the main telephone number is (787) 777-4100. The Corporation’s Internet web site is
http://www.santandernet.com
.
Forward Looking Statements
When used in this Form 10-K or future filings by Santander BanCorp with the Securities and Exchange
Commission, in the Corporation’s press releases or other public or shareholder communications, or
in oral statements made with the approval of an authorized executive officer, the word of phrases
“would be”, “will allow”, “intends to”, “will likely result”, “are expected to”, “is anticipated”,
“estimate”, “project”, “believe” , or similar expressions are intended to identify “forward looking
statements” within the meaning of the Private Securities Litigation Reform Act of 1995
.
5
The future results of the Corporation could be affected by subsequent events and could differ
materially from those expressed in forward-looking statements. If future events and actual
performance differ from the Corporation’s assumptions, the actual results could vary significantly
from the performance projected in the forward-looking statements.
The Corporation wishes to caution readers not to place undue reliance on any such forward-looking
statements, which speak only as of the date made, and to advise readers that various factors,
including regional and national conditions, substantial changes in levels of market interest rates,
credit and other risks of lending and investment activities, competitive and regulatory factors and
legislative changes, could affect the Corporation’s financial performance and could cause the
Corporation’s actual results for future periods to differ materially from those anticipated or
projected. The Corporation does not undertake, and specifically disclaims any obligation, to update
any forward-looking statements to reflect occurrences or unanticipated events or circumstances
after the date of such statements.
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REGULATION AND SUPERVISION
Overview
The Corporation and its banking subsidiary are subject to extensive federal and Puerto Rico banking
regulations that impose restrictions on and provide for general regulatory oversight of the
Corporation and its operations. Set forth below is a summary description of material laws and
regulations that relate to the operations of the Corporation and its subsidiaries, including the
Bank. This summary description does not purport to be complete and is qualified in its entirety by
reference to the full text of the particular statutes and regulations described. Supervision,
regulation and examination of banks by regulatory agencies are intended primarily for the
protection of depositors, the deposit insurance fund of the FDIC, other clients of the institution
and the banking system as a whole, and not for the benefit of the Corporation’s shareholders.
Future changes in laws, regulations or policies that impact the Corporation and its subsidiaries,
including the Bank, cannot be predicted and may have a material effect on our business and
earnings. Legislation relating to banking and other financial services has been introduced from
time to time in Congress and is likely to be introduced in the future. If enacted, such
legislation could significantly change the competitive environment in which the Corporation and its
subsidiaries operate. The Corporation cannot predict whether these or any other proposals will be
enacted or the ultimate impact of any such legislation on our competitive situation, financial
condition or results of operations.
Holding Company Operations — Federal Regulation
General
The BHC Act and the Gramm-Leach-Bliley Act (“GLB Act”).
The Corporation is a bank holding company
registered under the BHC Act and subject to regulation, supervision and examination by the Board of
Governors of the Federal Reserve System (the “Federal Reserve”). As a bank holding company, the
Corporation is required to file periodic and annual reports with the Federal Reserve and other
information concerning its own business operations and those of its subsidiaries. The BHC Act
subjects bank holding companies to particular restrictions on the types of activities in which they
may engage, and to a range of supervisory requirements and activities, including regulatory
enforcement actions for violations of laws and regulations. The BHC Act requires that a bank
holding company obtain prior Federal Reserve Board approval before: (i) acquiring direct or
indirect ownership or control of more than 5% of any class of the voting shares of any bank; (ii)
acquiring all or substantially all of the assets of any bank; or (iii) merging or consolidating
with another bank holding company. The Federal Reserve Board also has authority to issue cease and
desist orders against holding companies and their non-bank subsidiaries.
The BHC Act prohibits a bank holding company, with limited exceptions, from engaging in any
business other than the business of banking, or of managing or controlling banks, and to any other
activity that the Federal Reserve deems to be so closely related to banking as to be a proper
incident thereto.
Enacted in 1999, the GLB Act revised and expanded the existing provisions of the BHC Act by
permitting a bank holding company to elect to become a “financial holding company” to engage in a
full range of financial activities. The law eliminated the legal barriers to affiliations among
banks and securities firms, insurance companies and other financial services companies. The law
reserved the role of the Federal Reserve as the supervisor for bank holding companies. At the same
time, it also provided a system of functional regulation which is designed to utilize the various
existing federal and state regulatory bodies. The qualification requirements provide that in order
for a bank holding company to elect to be treated as a financial holding company (and to maintain
such treatment), all the subsidiary banks controlled by the bank holding company at the time of
election to become a financial holding company must be and remain at all times “well capitalized”
and “well managed.” Under the law, financial holding companies and banks that desire to engage in
new financial activities are required to have a “satisfactory” or better Community Reinvestment Act
(“CRA”) rating when they commence the new activity. On May 15, 2000, the Corporation elected to
become a financial holding company under the provisions of the GLB Act.
Financial holding companies may engage, directly or indirectly, in any activity that is determined
to be (i) financial in nature, (ii) incidental to such financial activity, or (iii) complementary
to a financial activity and does not pose a substantial risk to the safety and soundness of
depository institutions or to the financial system generally. The GLB Act, specifically provides
that the following activities have been determined to be “financial in nature”: (a) lending, trust
and other banking activities; (b) insurance activities; (c) financial or economic advice or
services; (d) pooled investments; (e) securities underwriting and dealing; (f) existing bank
holding company domestic activities; (g) existing bank holding company foreign activities; and (h)
merchant banking activities. Santander Insurance Agency, which is a wholly-owned subsidiary of the
Corporation, offers
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insurance agency services. Santander Securities, which is also a wholly-owned subsidiary of the
Corporation, offers securities brokerage, dealing and underwriting services.
In addition, the GLB Act specifically gives the Federal Reserve the authority, by regulation or
order, to expand the list of “financial” or “incidental” activities, but requires consultation with
the U.S. Treasury, and gives the Federal Reserve authority to allow a financial holding company to
engage in any activity that is “complementary” to a financial activity and does not “pose a
substantial risk to the safety and soundness of depository institutions or the financial system
generally.”
Under the GLB Act, if the Corporation fails to continue to meet any of the requirements for
financial holding company status, the Corporation must enter into an agreement with the Federal
Reserve to comply with all applicable requirements. If the Corporation is unable to cure such
deficiencies within certain prescribed periods of time, the Federal Reserve could require the
Corporation to divest control of its depository institution subsidiaries or alternatively cease
conducting financial activities that are not permissible for bank holding companies that are not
financial holding companies.
Under Federal Reserve policy, a bank holding company such as the Corporation is expected to act as
a source of financial strength for its banking subsidiary and is required to commit resources to
support the Bank. Moreover, an obligation to support the Bank may be required at times when, absent
such policy, the Corporation might not be inclined to provide it. In addition, any capital loans by
a bank holding company to any of its subsidiary banks must be subordinated in right of payment to
deposits and to certain other indebtedness of such subsidiary bank. In the event of a bank holding
company’s bankruptcy, any commitment by the bank holding company to the federal bank regulatory
agency to maintain capital of a subsidiary bank will be assumed by the bankruptcy trustee and be
entitled to a priority of payment. The Bank is currently the only subsidiary depository
institution of the Corporation.
The GLB Act also modified other laws, including laws related to financial privacy and community
reinvestment. These financial privacy provisions generally prohibit financial institutions,
including the Corporation’s bank subsidiary, from disclosing nonpublic personal financial
information to third parties unless customers have the opportunity to “opt out” of the disclosure.
USA Patriot Act
The USA Patriot Act of 2001 (the “USA Patriot Act”) was enacted in response to the terrorist
attacks that occurred on September 11, 2001. The statute amended the Bank Secrecy Act and broadened
the application of anti-money laundering regulations to apply to additional types of financial
institutions, such as broker-dealers, and strengthened the ability of the U.S. government to
prosecute international money laundering and the financing of terrorism. Under the statute, all
financial institutions, including the Corporation and the Bank, are required in general to verify
the identity of clients, adopt formal and comprehensive anti-money laundering programs, scrutinize
or prohibit altogether certain transactions of special concern, and be prepared to respond to
inquiries from U.S. law enforcement agencies concerning their customers and their transactions.
Additional information-sharing among financial institutions, regulators, and law enforcement
authorities is encouraged by the presence of an exemption from the privacy provisions of the GLB
Act for financial institutions that comply with this provision and the authorization of the
Secretary of the Treasury to adopt rules to further encourage cooperation and information-sharing.
The U.S. Treasury Department (“U.S. Treasury”) has issued a number of regulations implementing the
USA Patriot Act that apply certain of its requirements to financial institutions. The regulations
impose new obligations on financial institutions to maintain appropriate policies, procedures and
controls to detect, prevent and report money laundering and financing of terrorists.
Failure of a financial institution to comply with the USA Patriot Act’s requirements could have
serious legal and reputational consequences for the institution. The Corporation and its
subsidiaries have adopted policies, procedures and controls designed to comply with the USA Patriot
Act and regulations adopted thereunder by the U.S. Treasury.
Privacy Policies
The GLB Act requires financial institutions to adopt and implement policies and procedures
regarding the disclosure of non-public personal information about consumers to non-affiliated third
parties and the protection of customer data from unauthorized access. In general, the statute
requires explanations to consumers on policies and procedures regarding the disclosure of such
non-public personal information, and, except as otherwise required by law, prohibits disclosing
such information except as provided in the institution’s policies and procedures. The Corporation
and its subsidiaries have adopted
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policies and procedures in order to comply with the privacy provisions of the GLB Act, pursuant to
which all its existing and new customers are notified of the privacy policies.
Dividend Restrictions
The Corporation is a legal entity separate and distinct from the Bank and our other subsidiaries
and affiliated entities. The principal sources of our cash flow, including cash flow to pay
dividends to our shareholders, are dividends that the Bank and our other subsidiaries pay us as
their sole shareholder. Various statutory and regulatory limitations limit the amount of dividends
that the Bank can pay the Corporation, as well as to the dividends that the Corporation can pay to
its shareholders. The policy of the Federal Reserve that a bank holding company should serve as the
source of strength to its subsidiary banks also results in the position of the Federal Reserve that
a bank holding company should not maintain a level of cash dividends to its shareholders that
places undue pressure on the capital of its bank subsidiaries or that can be funded through
additional borrowings or other arrangements that may undermine the bank holding company’s ability
to serve as such a source of strength.
The Federal Reserve Board and the FDIC have also issued policy statements that provide that bank
holding companies and their insured banks should generally pay dividends only out of current
operating earnings. The Federal Reserve has indicated that in the current financial and economic
environment bank holding companies should carefully review their dividend policy and has
discouraged dividend pay-out ratios that are at the 100% or higher level unless the asset quality
and the capital of the institution are very strong.
The Corporation’s ability to pay dividends is also subject to the provisions of Puerto Rico
corporations’ law which requires that dividends be paid out only from the Corporation’s net assets
in excess of capital or in the absence of such excess, from the Corporation’s net earnings for such
fiscal year and/or the preceding fiscal year.
The ability of the Bank to declare and pay dividends on its common stock is restricted by the
Puerto Rico Banking Law. In general terms, the Puerto Rico Banking Law provides that when the
expenditures of a bank are greater than receipts, the excess of expenditures over receipts shall be
charged against undistributed profits of the bank and the balance, if any, shall be charged against
the required reserve fund of the bank. If there is an insufficient reserve fund to cover such
balance in whole or in part, the outstanding amount shall be charged against the bank’s capital
account. The Bank may not declare any dividends under the statute until its capital has been
restored to its original amount and the reserve fund to 20% of the original capital.
In light of the continuing challenging general economic conditions in Puerto Rico and the global
capital markets, in August 2008 the Board of Directors of the Corporation voted to discontinue the
payment of the quarterly cash dividend on the Corporation’s common stock to strengthen the
institution’s core capital position. The Corporation may use a portion of the funds previously paid
as dividends to reduce its outstanding debt. The Corporation’s decision is part of the significant
actions it has proactively taken in order to face the on-going challenges presented by the Puerto
Rico economy, which among others, include: maintaining an on-going strict control on operating expenses; an efficiency plan driven to
lower its current efficiency ratio; and merging its mortgage banking and commercial banking
subsidiaries.
The payment of dividends by the Corporation, or by the Bank, may also be affected by other factors,
such as the requirement to maintain adequate capital above regulatory guidelines. The FDIC has
indicated that paying dividends that deplete a depository institution’s capital base to an
inadequate level would be an unsafe and unsound banking practice. Moreover, under the FDIA, a
depository institution may not pay any dividend if payment would cause the depository institution
to become undercapitalized or if it already is undercapitalized.
Federal Home Loan Bank System
The Bank is a member of the Federal Home Loan Bank (“FHLB”) system. The FHLB system consists of
twelve regional FHLBs governed and regulated by the Federal Housing Finance Board. Among other
benefits, each FHLB serves as reserve or central bank for its member institutions within its
assigned region. Each FHLB is funded primarily from proceeds derived from the sale of consolidated
obligations of the FHLB system. Each make available loans or advances to its members in accordance
with policies and procedures established by the FHLB system and the boards of directors of each
regional FHLB.
The Bank is a member of the FHLB of New York. As such, the Bank is required to own capital stock in
that FHLB in an amount equal to the greater of: (i) 1.0% of the aggregate outstanding principal
amount of its residential mortgage loans, home purchase contracts and similar obligations at the
beginning of each calendar year, or (ii) 5.0% of its FHLB outstanding
9
advances or borrowings. At December 31, 2008, the Bank met the required investment in FHLB stock,
holding $61.6 million in capital stock of the FHLB of New York. All loans, advances and other
extensions of credit made by the FHLB of New York to the Bank are secured by a portion of the
Bank’s mortgage loan portfolio, certain other investments and the FHLB capital stock owned by the
Bank.
Limitations on Transactions with Affiliates
Transactions between depository institutions and any affiliate are governed by Sections 23A and 23B
of the Federal Reserve Act and Regulation W adopted by the Federal Reserve, which codifies prior
regulations under Sections 23A and 23B and provides interpretative guidance with respect to
affiliate transactions. An affiliate of a depository institution is any company or entity, which
controls, is controlled by or is under common control with the depository institution. In a holding
company context, the parent bank holding company and any companies which are controlled by such
parent holding company (or by the ultimate parent company of such bank holding company) are
affiliates of the depository institution. In general, subject to certain specified exemptions,
under Section 23A, depository institutions and their subsidiaries are limited in their ability to
engage in “covered transactions” with any one affiliate to an amount equal to 10% of the depository
institution’s capital stock and surplus, and contain an aggregate limit on all such transactions
with all affiliates to an amount equal to 20% of such institution’s capital stock and surplus.
Affiliate transactions are also subject to Section 23B which generally requires that all such
transactions be on terms substantially the same, or at least as favorable, to the depository
institution or subsidiary as those prevailing at the time for comparable transactions with
non-affiliated persons. The term “covered transaction” includes the making of loans, purchase of
assets, issuance of a guarantee and other similar transactions. In addition, loans or other
extensions of credit by the depository institution to the affiliate are required to be
collateralized in accordance with the requirements set forth in Section 23A of the Federal Reserve
Act.
Loans to Insiders
Sections 22(h) and (g) of the Federal Reserve Act and its implementing regulation, Regulation O,
restrict loans by a bank to executive officers, directors and principal stockholders. Under Section
22(h), loans to a director, an executive officer and to a greater-than-10% stockholder of a bank
and certain of their related interests, or insiders, and insiders of affiliates, may not exceed,
together with all other outstanding loans to such person and related interests, the bank’s
loans-to-one-borrower limit, generally equal to 15% of the institution’s unimpaired capital and
surplus. Section 22(h) also requires that loans to insiders and to insiders of affiliates be made
on terms substantially the same as offered in comparable transactions to other persons, unless the
loans are made pursuant to a benefit or compensation program that (i) is widely available to
employees of the bank and (ii) does not give preference to insiders over other employees of the
bank. Section 22(h) also requires prior board of directors approval for certain loans. In
addition, the aggregate amount of extensions of credit by a depository institution to all insiders
cannot exceed the institution’s unimpaired capital and surplus. Furthermore, Section 22(g) places
additional restrictions on loans to executive officers.
Capital Requirements
The Federal Reserve has adopted capital risked-based guidelines to evaluate the capital adequacy of
bank holding companies. Under these guidelines, specific categories of assets are assigned
different risk weights based generally on the perceived credit risk of the asset, with the
categories ranging from 0% (requiring no additional capital) for assets such as cash to 100% for
the bulk of assets which are typically held by a bank holding company, including multi-family
residential and commercial real estate loans, commercial business loans and commercial loans.
These risks weights are multiplied by corresponding asset balances to determine a “risk-weighted”
asset base. The Federal Reserve capital adequacy guidelines generally require bank holding
companies to maintain total capital equal to 8.0% of total risk-adjusted assets, with at least 4.0%
consisting of Tier I or core capital and the rest consisting of Tier II or supplementary capital.
Tier I capital for bank holding companies generally consists of the sum of common stockholders’
equity and perpetual preferred stock, subject to limitations on the kind and amount of such
perpetual preferred stock which may be included as Tier I capital, less goodwill and, with certain
exceptions, intangibles. Tier II capital generally consists of hybrid capital instruments,
perpetual preferred stock which is not eligible to be included as Tier I capital, term subordinated
debt and intermediate-term preferred stock, and, subject to limitations, generally allowances for
loan losses. Total capital is the sum of Tier I and Tier II capital. As of December 31, 2008, the
Corporation’s Tier I risk-based capital ratio was 8.41% and our total risk-based capital ratio was
12.83%.
In addition to the risk-based capital guidelines, the Federal Reserve requires bank holding
companies to maintain a minimum leverage capital ratio of Tier I capital to total consolidated
assets of 3.0%. Total consolidated assets for purposes of this calculation do not include goodwill
and any other intangible assets and investments that the Federal Reserve determines should
10
be deducted from Tier I capital. Certain top-rated bank holding companies without supervisory,
financial or operational weaknesses or deficiencies or those which are not experiencing or
anticipating significant growth may maintain a minimum leverage capital ratio of 3.0%. Other bank
holding companies are required to maintain a leverage capital ratio of at least 4.0%. As of
December 31, 2008, the Corporation’s leverage capital ratio was 6.10%.
The federal banking agencies’ risk-based and leverage ratios are minimum supervisory ratios
generally applicable to banking organizations that meet certain specified criteria. The federal
bank regulatory agencies may set capital requirements for a particular banking organization that
are higher than the minimum ratios when circumstances warrant. Federal Reserve guidelines also
provide that banking organizations experiencing internal growth or making acquisitions will be
expected to maintain strong capital positions, substantially above the minimum supervisory levels,
without significant reliance on intangible assets.
The Basel Committee on Banking Supervision proposed new risk-based international capital standards
(“Basel II”) in June 2004, and the new framework is currently being evaluated and implemented by
bank supervisory authorities worldwide. Basel II is an effort to update the original international
bank capital accord (“Basel I”), which has been in effect since 1988. Basel II is intended to
improve the consistency of capital regulations internationally, make regulatory capital more risk
sensate, and promote enhanced risk-management practices. A definitive final rule for implementing
the advanced approaches of Basel II in the United States, which applies only to certain large or
internationally active or “core” banking organizations (defined as those with consolidated total
assets of $250 billion or more or consolidated on-balance sheet foreign exposures of $10 billion or
more) became effective on April 1, 2008. Other U.S. banking organizations may elect to adopt the
requirements of this rule (if they meet applicable qualification requirements), but are not
required to comply. The rule also allows a banking organization’s primary federal supervisor to
determine that application of the rule would not be appropriate in light of the bank’s asset size,
level of complexity, risk profile or scope of operations.
To correct differences between core and non-core banking organizations, Basel IA was proposed in
late 2006 presenting modifications to the general risk-based capital rules for non-core banking
organizations that do not adopt the advanced approaches. After considering the comments on both the
Basel IA and the advanced approaches, in July 2008, the agencies proposed a new rule that would
provide all non-core banking organizations with an option to adopt the standardized approach under
Basel II. This alternative provides a more risk sensitive capital framework to institutions not
adopting the advanced approaches without unduly increasing regulatory burden. Comments on the
proposed rule were due to the agencies by October 27, 2008, but a definitive final rule has not
been issued. The proposed rule, if adopted, will replace the Basel IA approach.
In light of the weaknesses revealed by the financial market crisis, in January 2009, the Basel
Committee on Banking Supervision issued a consultative package proposing enhancements to strengthen
the regulation and supervision of internationally active banks. The proposed enhancements will help
ensure that the risks inherent in banks’ portfolios related to trading activities, securitizations
and exposures to off-balance sheet vehicles are better reflected in minimum capital requirements,
risk management practices and accompanying disclosures to the public.
The Corporation does not meet the criteria in the new U.S. rules which would make adoption of the
new Basel II rules mandatory.
Sarbanes-Oxley Act
The Sarbanes-Oxley Act of 2002 (“SOA”) was enacted to address corporate and accounting
improprieties. SOA contains reforms of various business practices and numerous aspects of
corporate governance. The SOA generally applies to all companies, both U.S. and non-U.S., that
file or are required to file periodic reports with the Securities and Exchange Commission (the
“SEC”) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The SOA
includes additional public disclosure requirements and new corporate governance rules.
SOA addresses, among other matters: (i) expansion of the authority and responsibilities of audit
committees, (ii) certification of financial statements by the chief executive officer and the chief
financial officer, (iii) the forfeiture of bonuses or other incentive base compensation and profits
from the sale of an issuer’s securities by directors and senior officers in the twelve-month period
following initial publication of any financial statements that later require restatement, (iv) a
prohibition on insider trading during pension plan black-out periods, (v) disclosure of off-balance
sheet transactions, (vi) a prohibition on personal loans to directors and officers, (vii) expedited
filing requirements for Form 4’s, (viii) disclosure of a code of ethics and filing of a Form 8-K
for a change or waiver of such code and protection for whistleblowers and informants, (ix) “real
time” filing of periodic reports, (x) the formation of an independent accounting oversight board
(“PCAOB”) to oversee the audit of public companies and auditors who perform such audits, (xi)
auditor independence provisions which restrict the non-audit services
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that independent accountants may provide to their audit clients, and (xii) various increased
criminal penalties for fraud and other violations of securities laws.
Change of Control
Federal law restricts the amount of voting stock of a bank holding company and a state bank that a
person may acquire without the prior approval of banking regulators. The overall effect of such
laws is to make it more difficult to acquire a bank holding company and a bank by tender offer or
similar means than it might be to acquire control of another type of corporation. Regulations
pursuant to the BHC Act and the Change in Bank Control Act generally require prior FDIC and Federal
Reserve approval for an acquisition of control of an insured institution or its holding company,
respectively, by any person or persons acting in concert. Control is deemed to exist if, among
other things, a person (or persons acting in concert) acquires more than 25% of any class of voting
stock of an insured institution or its holding company. Control is presumed to exist subject to
rebuttal, if a person (or persons acting in concert) acquires more than 10% of any class of voting
stock and either (i) the company has securities registered under Section 12 of the Exchange Act, or
(ii) no person will own, control or hold the power to vote a greater percentage of that class of
voting securities immediately after the transaction. The concept of acting in concert is very
broad and also is subject to certain rebuttable presumptions, including among others, that
relatives, business partners, management officials, affiliates and others are presumed to be acting
in concert with each other and their businesses. The FDIC’s regulations implementing the Change in
Bank Control Act are generally similar to those described above.
The Banking Law requires the approval of the Commissioner for changes in control of a Puerto Rico
bank. See “Banking Operations-Puerto Rico Regulation.”
Banking Operations
General
The Bank is a Puerto Rico corporation chartered as a commercial bank under the Banking Law of
Puerto Rico. The Bank is a “state bank” and an “insured depository institution” under the Federal
Deposit Insurance Act (“FDIA”), and a “foreign bank” within the meaning of the International
Banking Act of 1978. The Bank is not a member of the Federal Reserve System, making it primarily
subject to regulation and supervision by the Commissioner and the FDIC. The federal and Puerto
Rico laws and regulations that apply to banks regulate, among other things, the scope of their
business, their investments, their reserves against deposits, the types and amounts of loans that
may be granted and the interest that they may charge, the timing of the availability of deposited
funds, the nature and amount of and collateral for certain loans and the types of services they may
offer. As a creditor and financial institution, the Bank is subject to consumer laws and
regulations promulgated by the Federal Reserve, which also affect its operations. In addition to
the impact of regulation, commercial banks are affected significantly by the actions of the Federal
Reserve as it attempts to control the money supply and credit availability in order to influence
the economy.
The Bank is subject to periodic examinations by the Commissioner and the FDIC. The regulatory
structure also gives the regulatory authorities extensive discretion in connection with their
supervisory and enforcement activities and examination policies, including policies with respect to
the classification of assets and the establishment of adequate loan loss reserves for regulatory
purposes. This enforcement authority includes, among other things, the ability to assess civil
money penalties, to issue cease-and-desist or removal orders and to initiate injunctive actions
against banks and their affiliates. In general, these enforcement actions may be initiated for
violations of laws and regulations and unsafe or unsound banking practices. In addition, certain
actions are required by statute and implementing regulations. Other actions or inaction may
provide the basis for enforcement action, including misleading or untimely reports filed by a bank
with regulatory authorities.
FDIC Capital Requirements
The FDIC has promulgated regulations and adopted a statement of policy regarding the capital
adequacy of state-chartered banks, like the Bank, that are not members of the Federal Reserve
System. For purposes of the FDIA, Puerto Rico is treated as a state and the Bank as such is a
state-chartered non-member bank. These requirements are substantially similar to those adopted by
the Federal Reserve regarding bank holding companies, as described above. The FDIA, among other
things, requires federal banking agencies to take “prompt corrective action” in respect of
depository institutions that do not meet minimum capital requirements. Under this system, the
federal banking regulators have established five capital categories (well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized) in
which all institutions are placed. The relevant capital measures are the total risk-based capital
ratio, the Tier I risk-based capital ratio and the leverage ratio. Federal banking regulators are
required to take various mandatory supervisory actions and are authorized to
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take other discretionary actions with respect to institutions in the three undercapitalized
categories. The severity of the action depends upon the capital category in which the institution
is placed. The federal banking agencies have specified by regulation the relevant capital for each
category. A well capitalized depository institution, for example, must maintain a leverage ratio
of at least 5.0%, a Tier I risk-based capital ratio of at least 6.0% and a total risk-based capital
ration of at least 10.0% and not be subject to any written agreement or directive to meet and
maintain a specific capital level.
An institution that is categorized as undercapitalized, significantly undercapitalized or
critically undercapitalized is required to submit an acceptable capital restoration plan to its
appropriate federal banking regulator. An undercapitalized institution is also generally
prohibited from increasing its average total assets, making acquisitions, establishing any branches
or engaging in any new line of business, except under an accepted capital restoration plan or with
FDIC approval. The regulations also establish procedures for downgrading an institution to a lower
capital category based on supervisory factors other than capital.
Failure to meet capital guidelines could subject an insured bank like the Bank to a variety of
prompt corrective actions and enforcement remedies under the FDIA, including, with respect to an
insured bank, the termination of deposit insurance by the FDIC, and to certain restrictions on its
business. In general terms, undercapitalized depository institutions are prohibited from making any
capital distributions (including dividends), are subject to restrictions on borrowing from the
Federal Reserve System, and are subject to growth limitations and are required to submit capital
restoration plans.
At December 31, 2008, the Bank met the capital requirements of a well capitalized institution.
An institution’s capital category, as determined by applying the prompt corrective action
provisions of law, may not constitute an accurate representation of the overall financial condition
or prospects of the institution. The capital condition of the Bank should be considered in
conjunction with other available information regarding the Corporation’s financial condition and
results of operations.
FDIC Deposit Insurance Assessments
Banco Santander is subject to FDIC deposit insurance assessments. On February 8, 2006, the Federal
Deposit Insurance Reform Act of 2005 (the “Reform Act”) was signed by the President. The Reform
Act provided for the merger of the Bank Insurance Fund (“BIF”) and Savings Association Insurance
Fund (“SAIF”) into a single Deposit Insurance Fund (“DIF”), increase in the maximum amount of FDIC
insurance coverage for certain retirement accounts, and possible “inflation adjustments” in the
maximum amount of coverage available with respect to other insured accounts. In addition, it
granted a one-time initial assessment credit to recognize institutions’ past contributions to the
fund.
The deposits of Banco Santander are insured up to the applicable limits by the DIF of the FDIC and
are subject to the deposit insurance assessments to maintain the DIF. Banco Santander Puerto Rico
paid $4.2 million of insurance premium to the FDIC during 2008.
Under the Reform Act, the FDIC made significant changes to its risk-based assessment system so that
effective January 1, 2007, the FDIC imposes insurance premium based upon a matrix that is designed
to more closely tie what banks pay for deposit insurance to the risk they pose. The new FDIC
risk-based assessment system imposes premium based upon factors that vary depending upon the size
of the bank. These factors are: for banks with less than $10 billion in assets—capital level,
supervisory rating, weighted average CAMELS component rating, and certain financial ratios; and for
banks with $10 billion up to $30 billion in assets—capital level, supervisory rating, weighted
average CAMELS component rating, certain financial ratios and (if at least one is available)
long-term debt issuer ratings, and additional risk information; and for banks with over $30 billion
in assets- capital level, supervisory rating, weighted average CAMELS component rating, debt issuer
ratings (unless none are available in which case certain financial ratios are used), and additional
risk information. The FDIC subsequently adopted a new base schedule of rates that the FDIC can
adjust up or down, depending on the revenue needs of the DIF, and set initial premiums that range
from 5 cents per $100 of domestic deposits for the banks in the lowest risk category to 43 cent per
$100 of domestic deposits for banks in the highest risk category. This assessment system resulted
in a 2008 annual assessment rate on the deposits of Banco Santander of 7 cents per $100 of
deposits.
On October 3, 2008, President George W. Bush signed into law the Emergency Economic Stabilization
Act of 2008 (“EESA”), which temporarily raised the basic limit on federal deposit insurance
coverage from $100,000 to $250,000 per depositor. The temporary increase in deposit insurance
coverage became effective upon the President’s signature. The legislation provides that the basic
deposit insurance limit will return to $100,000 after December 31, 2009. The legislation did not
increase coverage for retirement accounts; which continues to be $250,000.
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On November 21, 2008, the Board of Directors of the FDIC approved the Temporary Liquidity Guarantee
Program (“TLGP”) to strengthen confidence and encourage liquidity in the banking system. The TLGP
is comprised of the Debt Guarantee Program (“DGP”) and the Transaction Account Guarantee Program
(“TAGP”). The DGP guarantees all newly issued senior unsecured debt (e.g., promissory notes,
unsubordinated unsecured notes and commercial paper) up to prescribed limits issued by
participating entities, including bank holding companies, beginning on October 14, 2008 and
continuing through October 31, 2009. For eligible debt issued by that date, the FDIC will provide
the guarantee coverage until the earlier of the maturity date of the debt or June 30, 2012. The
TAGP offers a full guarantee for non interest-bearing transaction deposit accounts held at
FDIC-insured depository institutions. The unlimited deposit coverage is voluntary for eligible
institutions and is in addition to the $250,000 FDIC deposit insurance per depositor that was
included as part of the EESA. The TAGP coverage became effective on October 14, 2008 and will
continue for participating institutions until December 31, 2009. Participants in the DGP program
have a fee structure based on a sliding scale, depending on length of maturity. Shorter-term debt
has a lower fee structure and longer-term debt have a higher fee. The range is 50 basis points on
debt of 180 days or less, and a maximum of 100 basis points for debt with maturities of one year or
longer, on an annualized basis. Any eligible entity that has not chosen to opt out of the TAGP is
assessed, on a quarterly basis, an annualized 10 cents per $100 fee on balances in non interest
bearing transaction accounts that exceed the existing deposit insurance limit of $250,000. The
Corporation is only participating on the “TAGP” program.
On December 16, 2008, the Board of Directors of the FDIC voted to adopt a final rule increasing
risk-based assessment rates uniformly by seven basis points, on an annual basis, for the first
quarter of 2009. As provided above, previously banks paid between 5 and 43 cents per $100 of their
domestic deposits for FDIC insurance. Under this final rule, risk-based rates will range between 12
and 50 cents per $100 of domestic deposits (annualized) for the first quarter 2009 assessment. Most
institutions will be charged between 12 and 14 cents per $100 of deposits. On February 27, 2009,
the Board of Directors of the FDIC voted to adopt a final rule to alter the way in which the FDIC’s
risk-based assessment system differentiates for risk, change deposit insurance assessment rates,
and make technical and other changes to the rules governing the risk-based assessment system. Under
this final rule, risk-based rates will range between 12 and 45 cents per $100 of domestic deposits
(annualized) and between 7 and 77.5 cents per $100 of domestic deposits after adjustments,
effective April 1, 2009. Most institutions will be charged between 7 and 24 cents per $100 of
deposits.
On February 27, 2009, the Board of Directors of the FDIC voted to adopt an interim final rule to
impose an emergency special assessment of 20 cents per $100 of deposits on June 30, 2009, and to
allow the FDIC to impose emergency special assessments after June 30, 2009 of 10 cents per $100 of
deposits if the reserve ratio of the DIF is estimated to fall to a level that the FDIC believes
would adversely affect public confidence or to a level that is close to zero or negative at the end
of a calendar quarter was 1.10 cents per $100 of deposits. On March 5, 2009, the FDIC
Chairman announced that the FDIC intends to lower the special assessment from 20 cents to 10 cents
per $100 of deposits. The approval of the cutback is contingent on whether Congress clears
legislation that would expand the FDIC’s line of credit with the U.S. Treasury to $100 billion.
Legislation to increase the FDIC’s borrowing authority on a permanent basis is also expected to
advance to Congress, which would aid in reducing the burden on the industry. The assessment rates,
including the special assessment, are subject to change at the discretion of the Board of Directors
of the FDIC.
The Deposit Insurance Funds Act of 1996 separated the Financing Corporation (“FICO”) assessment to
service the interest on its bond obligations from the DIF assessment. The amount assessed on
individual institutions by the FICO is in addition to the amount, if any, paid for deposit
insurance according to the FDIC’s risk-related assessment rate schedules. The FICO assessment rate
for the fourth quarter of 2008 was $1.14 per $100 of DIF-assessable deposits. As of December 31,
2008, the Bank had a DIF deposit assessment base of approximately $5.9 billion.
The FDIC may terminate its insurance of deposits if it finds after a hearing that the depository
institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound
condition to continue operations, or has violated any applicable law, regulation, rule, order or
condition imposed by an agreement with the FDIC. It also may suspend deposit insurance temporarily
during the hearing process for the permanent termination of insurance.
Community Reinvestment Act
The Bank has a responsibility under the CRA and related regulations, to help meet the credit needs
of its entire community, including low-and moderate-income neighborhoods consistent with safe and
sound banking practice. The CRA does not establish specific lending requirements or programs for
such banks nor does it limit an institution’s discretion to develop the types of products and
services that it believes are best suited to its particular community, consistent with the CRA.
The CRA
14
requires each federal banking agency, in connection with its examination of an insured depository
institution, to assess and assign one of four ratings to the institution’s record of meeting the
credit needs of its community. An institution’s failure to comply with the provisions of the CRA
could lead to potential penalties, including regulatory denials of applications to expand branches,
relocate, add subsidiaries and affiliates, expand into new financial activities and merge with or
purchase other financial institutions. The CRA also requires that all institutions make public
disclosure of their CRA ratings. The Bank received a rating of “outstanding” from the FDIC on its
last CRA examination report dated August 2008.
Office of Foreign Assets Control Regulation
The United States has imposed economic sanctions that affect transactions with designated foreign
countries, nationals and others. These are generally known as the “OFAC” rules as they are
administered by the U.S. Treasury Department Office of Foreign Assets Control (“OFAC”). The
OFAC-administered sanctions targeting countries take many different forms. Generally, however, they
may contain one or more of the following elements: (i) restrictions on trade with or investment in
a sanctioned country, including prohibitions against direct or indirect imports from and exports to
a sanctioned country and prohibitions on “U.S. persons” engaging in financial transactions relating
to making investments in, or providing investment-related advice or assistance to a sanctioned
country; and (ii) a blocking of assets in which the government or specially designated nationals of
the sanctioned country have an interest, by prohibiting transfers of property subject to U.S.
jurisdiction (including property in the possession or control of U.S. persons). Blocked assets
(e.g., property and bank deposits) cannot be paid out, withdrawn, set off or transferred in any
manner without a license from OFAC. Failure to comply with these sanctions could have serious legal
and reputational consequences.
Brokered Deposits
FDIC regulations adopted under the FDIA govern the receipt of brokered deposits by banks. Well
capitalized institutions such as the Bank are not subject to limitations on brokered deposits,
while adequately capitalized institutions are able to accept, renew or rollover brokered deposits
only with a waiver from the FDIC and subject to certain restrictions on the yield paid on such
deposits. Undercapitalized institutions are not permitted to accept brokered deposits. The Bank
does not believe the brokered deposits regulation has had or will have a material effect on the
funding or liquidity of the Bank.
Federal Limitations on Activities and Investments
The activities and equity investments of FDIC-insured, state-chartered banks (which under the FDIA
include banking institutions incorporated under the laws of Puerto Rico) are generally limited to
those permitted under applicable state laws and are permissible for national banks. Under
regulations dealing with equity investments, an insured state bank generally may not directly or
indirectly acquire or retain any equity investment of a type, or in an amount, that is not
permissible for a national bank. However, an insured state bank is not prohibited from, among
other things, (i) acquiring or retaining a majority interest in a subsidiary, [(ii) investing as a
limited partner in a partnership the sole purpose of which is direct or indirect investment in the
acquisition, rehabilitation or new construction of a qualified housing project, provided that such
limited partnership investments may not exceed 2% of the bank’s total assets, (iii) acquiring up to
10% of the voting stock of a company that solely provides or reinsures director’, trustees’ and
officers’ liability insurance coverage or bankers’ blanket bond group insurance coverage for
insured depository institutions, and][confirm source] (iv) acquiring or retaining the voting shares
of a depository institution if certain requirements are met. In addition, an insured
state-chartered bank may not, directly or indirectly through a subsidiary, engage as “principal” in
any activity that is not permissible for a national bank unless the FDIC has determined that such
activities would pose no risk to the insurance fund of which it is a member and the bank is in
compliance with applicable regulatory capital requirements. Any insured state-chartered bank that
is directly or indirectly engaged in any activity that is not permitted for a national bank must
cease such impermissible activity.
Interstate Branching
Effective June 1, 1997, the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the “Riegle-Neal Act”) amended the FDIA and certain other statutes to permit state and national
banks with different home states to merge across state lines, with approval of the appropriate
federal banking agency, unless the home state of a participating bank had passed legislation prior
to May 31, 1997 expressly prohibiting interstate mergers. States are also allowed to permit de
novo interstate branching. Under the Riegle-Neal Act amendments, once a state or national bank has
established branches in a state through an interstate merger transaction, the bank may establish
and acquire additional branches at any location in the state where any bank involved in the
interstate merger transaction could have established or acquired branches under applicable federal
or state law. A bank that has established a branch in a state through de novo branching (if
permitted under state laws) may establish and acquire additional branches in such state in the same
manner and to the same extent as a bank having a branch in such state
15
as a result of an interstate merger. If a state opted out of interstate branching within the
specified time period, no bank in any other state may establish a branch in the state which has
opted out, whether through an acquisition or
de novo.
For purposes of the Riegle-Neal Act’s amendments to the FDIA, the Bank is treated as a state bank
and is subject to the same restriction on interstate branching as other state banks. However, for
purposes of the IBA, the Bank is considered to be a foreign bank and may branch interstate by
merger or
de novo
to the same extent as a domestic bank in the Bank’s home state.
Banking Operations-Puerto Rico Regulation
General
As a commercial bank organized under the laws of Puerto Rico, the Bank is subject to the
supervision, examination and regulation of the Commissioner, pursuant to the Puerto Rico Banking
Act of 1933, as amended (the “Banking Law”). The Banking Law contains provisions governing the
incorporation and organization, rights and responsibilities of directors, officers and stockholders
as well as the corporate powers, lending limitations, capital requirements, investment requirements
and other aspects of the Bank and its affairs. In addition, the Commissioner is given extensive
rule making power and administrative discretion under the Banking Law.
Section 12 of the Banking Law requires the prior approval of the Commissioner with respect to a
transfer of capital stock of a bank that results in a change of control of the bank. Under Section
12, a change of control is presumed to occur if a person or a group of persons acting in concert,
directly or indirectly, acquire more than 5% of the outstanding voting capital stock of the bank.
The Commissioner has interpreted the restrictions of Section 12 as applying to acquisitions of
voting securities of entities controlling a bank, such as a bank holding company. Under the
Banking Law, the determination of the Commissioner whether to approve a change of control filing is
final and non-appealable.
Section 16 of the Banking Law requires every bank to maintain a legal reserve which, except as
otherwise provided by the Commissioner, may not be less than 20% of its demand liabilities,
excluding government deposits (federal, state and municipal) which are secured by actual
collateral. The reserve is required to be composed of any of the following securities or a
combination thereof: (1) legal tender of the United States; (2) checks on banks or trust companies
located in Puerto Rico, to be presented for collection on the day after the day they are received;
(3) money deposited in other banks or depository institutions, subject to immediate collection; (4)
federal funds sold to any Federal Reserve Bank and securities purchased under agreement to resell
executed by the bank to the extent such funds are subject to be repaid to the bank on or before the
close of the next business day; and (5) any other asset that the Commissioner determines from time
to time.
Section 17 of the Banking Law permits Puerto Rico commercial banks to make loans to any one person,
firm, partnership or corporation, up to an aggregate amount of 15% the sum of: (i) paid-in
capital; (ii) reserve fund of the commercial bank; and (iii) any other components that the
Commissioner may determine from time to time. As of December 31, 2008, the legal lending limit for
the Bank under this provision was approximately $65.7 million. If such loans are secured by
collateral worth at least 25% more than the amount of the loan, the aggregate maximum amount may
reach one third of the sum of the Bank’s paid-in capital, reserve fund, retained earnings and any
such other components approved by the Commissioner. If the bank is well capitalized and had been
rated 1 in the last examination performed by the Commissioner or any regulatory agency, its legal
lending limit shall also include 15% of 50% of its undivided profits and for loans secured by
collateral worth at least 25% more than the amount of the loan, the capital of the bank shall also
include 33 1/3% of 50% of its undivided profits. Institutions rated 2 in their last regulatory
examination may include this additional component in their legal lending limit only with the prior
authorization of the Commissioner. There are no restrictions under Section 17 of the Banking Law on
the amount of loans which are wholly secured by bonds, securities and other evidences of
indebtedness of the Governments of the United States or of the Commonwealth of Puerto Rico, or by
bonds, not in default, of authorities, instrumentalities or dependencies of the Commonwealth of
Puerto Rico or its municipalities.
Section 17 of the Banking Law also prohibits banks from making loans secured by their own stock,
and from purchasing their own stock in connection therewith, unless such purchase is necessary to
prevent losses because of a debt previously contracted in good faith. The stock so purchased by a
bank must be sold by it in a public or private sale within one year from the date of purchase.
Section 27 of the Banking Law requires that at least 10% of the yearly net income of the Bank be
credited annually to a reserve fund until the amount deposited to the credit of the reserve fund is
equal to the total paid-in capital on common and preferred stock of the Bank. A transfer to
Reserve Fund was not required in 2008 because the Bank has a net loss in the period.
16
Section 27 of the Banking Law also provides that when the expenditures of a bank are greater than
receipts, the excess of the expenditures over receipts must be charged against the undistributed
profits of the bank, and the balance, if any, shall be charged against the reserve fund, as a
reduction thereof. If the reserve fund is not sufficient to cover such balance in whole or in
part, the outstanding amount must be charged against the capital account and no dividends may be
declared until capital has been restored to its original amount and the reserve fund to 20% of the
original capital of the bank.
Section 14 of the Banking Law authorizes the Bank to conduct certain financial and related
activities directly or through subsidiaries, including finance leasing of personal property,
operating small loans companies and mortgage loans activities. The Bank currently has one
wholly-owned subsidiary, Santander International Bank, an international banking entity operating
under the International Banking Center Regulatory Act of Puerto Rico (the “IBC Act”).
The Finance Board, which is composed of the Commissioner, the Secretary of the Treasury, the
Secretary of Economic and Commercial Development, the Secretary of Consumer Affairs, the President
of the Economic Development Bank, the President of the Planning Board, the President of the
Government Development Bank for Puerto Rico, the Executive President of the Public Corporation for
the Supervision and Insurance of Cooperatives and the Insurance Commissioner, has the authority to
regulate the maximum interest rates and finance charges that may be charged on loans to individuals
and unincorporated businesses in Puerto Rico. The current regulations of the Finance Board provide
that the applicable interest rate on loans to individuals and unincorporated businesses, including
real estate development loans but excluding certain other personal and commercial loans secured by
mortgages on real estate properties and finance charges on retail installment sales and for credit
card purchases, is to be determined by free competition. Regulations adopted by the Finance Board
deregulated the maximum finance charges on retail installment sales contracts, and for credit card
purchases. These regulations do not set a maximum rate for charges on retail installment sales
contracts and for credit card purchases and set aside previous regulations which regulated these
maximum finance charges. Furthermore, there is no maximum rate set for installment sales contracts
involving motor vehicles, commercial, agricultural and industrial equipment, commercial electric
appliances and insurance premiums.
IBC Act
Santander International Bank, an international banking entity (“IBE”), is subject to supervision
and regulation by the Commissioner under the IBC Act. Under the IBC Act, no sale, encumbrance,
assignment, merger, exchange or transfer of shares, interest or participation in the capital of an
IBE may be initiated without the prior approval of the Commissioner, if by such transaction a
person or persons acting in concert would acquire, directly or indirectly, control of 10% or more
of any class of stock, interest or participation in the capital of the IBE. Such authorization
must be requested at least 30 days prior to the transaction. The IBC Act and the regulations issued
thereunder by the Commissioner limit the business activities that may be carried out by an IBE. The
activities of Santander International Bank are limited to dealing with persons and assets located
outside Puerto Rico. The IBC Act further provides that every IBE must have not less than $300,000
of unencumbered assets or acceptable financial securities in Puerto Rico.
Under the IBC Act, without the prior approval of the Office of the Commissioner, Santander
International Bank may not amend its articles of incorporation or issue additional shares of
capital stock or other securities convertible into additional shares of capital stock unless such
shares are issued directly to the shareholders of Santander International Bank previously
identified in the application to organize the IBE, in which case notification to the Commissioner
must be given within ten (10) business days following the date of the issue.
Pursuant to the IBC Act, Santander International Bank must maintain its original accounting books
and records in its principal place of business in Puerto Rico. Santander International Bank is also
required to submit to the Commissioner quarterly and annual reports of its financial condition and
results of operations, including annual audited financial statements.
The IBC Act empowers the Commissioner to revoke or suspend, after notice and hearing, a license
issued to an international banking entity if, among other things, the IBE fails to comply with the
IBC Act, the regulations issued thereunder, or the terms of its license, or if the Commissioner
finds that the business of the IBE is conducted in a manner not consistent with the public
interest.
Mortgage Banking Operations
The mortgage banking business conducted by the Bank is subject to the rules and regulations of FHA,
VA, FNMA, FHLMC, HUD and GNMA with respect to originating, processing, selling and servicing
mortgage loans and the issuance and sale of mortgage-backed securities. Those rules and
regulations, among other things, prohibit discrimination and establish
17
underwriting guidelines which include provisions for inspections and appraisals, required credit
reports on prospective borrowers and fix maximum loan amounts and, with respect to VA loans, fix
maximum interest rates. Moreover, mortgages lenders are required annually to submit to FHA, VA,
FNMA, FHLMC, GNMA and HUD, audited financial statements, and each regulatory entity has its own
financial requirements. Our mortgage banking business is also subject to supervision and
examination by FHA, VA, FNMA, FHLMC, GNMA and HUD at all times to assure compliance with the
applicable regulations, policies and procedures. Mortgage origination activities are subject to,
among others, the Equal Credit Opportunity Act, Federal Truth-in-Lending Act, the Real Estate
Settlement Procedures Act and the regulations promulgated thereunder.
Mortgage loan production activities are subject to the Federal Truth-in-Lending Act and Regulation
Z promulgated thereunder. This Act contains disclosure requirements designed to provide consumers
with uniform, understandable information with respect to the terms and conditions of loans and
credit transactions in order to give them the ability to compare credit terms. The
Truth-in-Lending Act provides consumers with a three-day right to cancel certain credit
transactions, including the refinancing of any mortgage or junior mortgage on a consumer’s primary
residence.
The Bank is required to comply with the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit lenders from discriminating against applicants on the basis of race,
color, sex, age or marital status, and restrict creditors from obtaining certain types of
information from loan applicants. These requirements mandate certain disclosures by lenders
regarding consumer rights and require lenders to advice applicants of the reasons for any credit
denial. In instances where the applicant is denied credit or the rate or charge for the loan
increases as a result of information obtained from a consumer credit agency, another statute, The
Fair Credit Reporting Act of 1970, as amended, requires that the lenders supply the applicant with
the name and address of the reporting agency. The Real Estate Settlement Procedures Act imposes,
among other things, limits on the amount of funds a borrower can be required to deposit in any
escrow account for the payment of taxes, insurance premiums and other taxes.
The mortgage banking operation is licensed by the Commissioner under the Puerto Rico Mortgage
Banking Law (the “Mortgage Banking Law”), and as such is subject to regulation by the Commissioner,
with respect to, among other things, licensing requirements, maximum origination fees on certain
types of mortgage loans products, and the recordkeeping, examination and reporting requirements
under that statute. The authorization to act as a mortgage banking institution under the Mortgage
Banking Law must be renewed each year. Although the Bank believes that it is in compliance in all
material respects with applicable Federal and Puerto Rico laws, rules and regulations related to
its mortgage banking business, there can be no assurance that more restrictive laws or rules will
not be adopted in the future, which could make compliance more difficult or expensive, restricting
the Bank’s ability to originate or sell mortgage loans or sell mortgage-backed securities, further
limit or restrict the amount of interest and other fees earned from the origination of mortgage
loans, or otherwise adversely affect the business or prospects of the Bank.
The Mortgage Banking Law requires the prior approval of the Commissioner for the acquisition of
control of any mortgage banking institution licensed under such law. For purposes of the Mortgage
Banking Law, the term “control” means the power to direct or influence decisively, directly or
indirectly, the management or policies of a mortgage banking institution. The Mortgage Banking Law
provides that a transaction that results in the holding of less than 10% of the outstanding voting
securities of a mortgage banking institution shall not be considered a change in control.
Broker-Dealer Operations
Santander Securities is registered as a broker-dealer with the SEC and the Commissioner, and is
also a member of the Financial Industry Regulatory Authority (“FINRA”). As a registered
broker-dealer, it is subject to regulation, examination and supervision by the SEC, the
Commissioner and FINRA which can affect its manner of operation and profitability. Such
regulations cover a broad range of subject matters. Rules and regulations for registered
broker-dealers cover such issues as: net capital requirements; sales and trading practices; use of
client funds and securities; the conduct of directors, officers and employees; record-keeping and
recording; supervisory procedures to prevent improper trading on material non-public information;
qualification and licensing of sales personnel; and limitations on the extension of credit in
securities transactions.
Santander Securities is subject to the net capital rule of the Exchange Act, which specify minimum
net capital requirements for registered broker-dealers. The net capital requirements are designed
to ensure that broker-dealers maintain regulatory capital in relation to their liabilities and the
size of their customer business. If Santander Securities fails to maintain its minimum required net
capital, it would be required to cease executing customer transactions until it came back into
compliance. This could result in Santander Securities losing its FINRA membership, its
registration with the SEC, or require a complete liquidation. As of December 31, 2008, Santander
Securities was in compliance with the required net capital under the rule.
18
The SEC’s risk assessment rules also apply to Santander Securities as a registered broker-dealer.
These rules require broker-dealers to maintain and preserve records and certain information,
describe risk management policies and procedures, and report on the financial condition of
affiliates whose financial and securities activities are reasonably likely to have a material
impact on the financial and operational condition of the broker-dealer.
Insurance Operations
Santander Insurance Agency is licensed as a corporate agent and general agency by the Office of the
Commissioner of Insurance of Puerto Rico (the “Insurance Commissioner”). As such, Santander
Insurance Agency is subject to regulation, examination and supervision by the Insurance
Commissioner. The applicable regulations relate to, among other things, licensing of employees,
sales practices, charging of commissions and obligations to customers.
Island Insurance Corporation is licensed as an insurance company with the Insurance Commissioner.
Island Insurance Corporation is subject to regulation, examination and supervision by the Insurance
Commissioner. As of December 31, 2008, this corporation was inactive.
Recent Puerto Rico Legislation
On March 9, 2009, the Governor of Puerto Rico signed Law 7 (“Law 7”) which seeks to increase the
tax revenues of the Puerto Rico Government with certain permanent and temporary measures. Law 7
includes the following amendments: (i) for taxable years commenced after December 31, 2008 and
before January 1, 2012, taxable corporations (such as the Corporation and the Bank) would be
subject to a separate tax of 5% based on their total tax liability; (ii) for taxable years
commenced after December 31, 2008 and before January 1, 2012, international banking entities that
do not operate as bank units would be subject to a 5% income tax on their entire net income
computed in accordance with the Puerto Rico Internal Revenue Code of 1994, as amended (the “PR
Code”); (iii) certain income tax credits granted to financial institutions in relation to
financing provided for the acquisition of new or existing homes may no longer generate a tax refund
for any taxable year commenced on or before December 31, 2010 and after such date, this refundable
tax credit will not generate interest for the period elapsed between the claim of refund and its
payment by the Puerto Rico Treasury Department (as further discussed below); (iv) certain income
tax credits granted to developers of projects in designated urban areas which serve as source of
repayment for construction loans will not be available during the taxable years commenced after
December 31, 2008 and before January 1, 2012; and (v) net income subject to alternative minimum tax
in the case of individuals (“AMT”) now includes various categories of exempt income and income
subject to preferential tax rates under the PR Code (as further discussed below).
Shareholders of the Corporation will now have to take into consideration for purposes of computing
their AMT income subject to preferential tax rates such as: (i) long-term capital gains on the sale
of their Corporation stock which enjoys a preferential tax rate of 10% under PR Code Section 1014;
(ii) dividends from the Corporation that are taxable at the rate of 10% under PR Code Section 1012;
(iii) interest on bank deposits and individual retirement accounts subject to the special 10% and
17% preferential income tax rates, respectively; and (iv) interest from notes or bonds eligible for
the special 10% tax rate provided by Section 1013A of the PR Code. These changes may affect this
income by subjecting it to AMT. The AMT top rate of 20% starts on alternative minimum taxable
income in excess of $175,000. Also, the vast majority of tax-exempt income covered by Section 1022
of the PR Code and other special laws is subject to AMT pursuant to the provisions of Law 7. A
notable exception is the interest income derived from U.S. and Puerto Rico Government obligations
which continues to be exempt for AMT purposes even after the enactment of Law 7.
On December 2007, the Governor of Puerto Rico signed Law 197 (“Law 197”) which provided certain
credits when individuals purchase certain new or existing homes. The maximum amount of credits
under Law 197 amounted to $220,000,000 and such amount was reached before its December 31, 2008
sunset. The incentives under Law 197 were as follows: (a) for a new constructed home constituting
the individuals principal residence, a credit equal to 20% of the sales price or $25,000, whichever
is lower; (b) for new constructed homes that will not constitute the individuals principal
residence, a credit of 10% of the sales price or $15,000, whichever is lower; and (c) for existing
homes a credit of 10% of the sales price or $10,000, whichever is lower.
The income tax credit provided under Law 197 may be used against income taxes, including estimated
taxes, for years commencing after December 31, 2007 in three installments, subject to certain
limitations, between January 1, 2008 and June 30, 2011; the credit may be ceded, sold or otherwise
transferred to any other person. Any tax credit not used in a given tax year, as certified by the
Secretary of Treasury, may be claimed as a refund but only for taxable years commenced after
December 31, 2010 and after such date, this refundable tax credit will not generate interest for
the period elapsed between the claim of refund and its payment by the Puerto Rico Treasury
Department.
Employees
As of
December 31, 2008, the Corporation and its subsidiaries have
approximately 1,768 employees.
None of its employees are represented by a collective bargaining group. The Corporation considers
its employee relations to be good.
Availability at our website
We make available free of charge, through our investor relations section at our internet website,
www.santandernet.com
, our Form 10-K, Form 10-Q and Form 8-K reports and all amendments to those
reports as soon as reasonably practicable after such material is electronically filed with or
furnished to the SEC.
19
ITEM 1A. RISK FACTORS
The Corporation is subject to risk in several areas. Discussed below, and elsewhere in this report,
are the various risk factors that could cause the Corporation’s financial condition and results of
operations to vary significantly from period to period. Please refer to the “Regulation and
Supervision” section of this report for more information about legislative and regulatory risks.
Also refer to the MD&A section, Quantitative and Qualitative Disclosures about Market Risk, and the
Financial Statements and Supplementary Data sections in this report for additional information
about credit, interest rate and market risks. Any factor described below or elsewhere in this
report or in our 2008 Annual Report to Stockholders could, by itself or together with one or more
other factors, have a material adverse effect on the Corporation’s financial condition and results
of operations.
General business, economic and political conditions.
The Corporation’s businesses and earnings are
affected by general economic and political conditions in Puerto Rico and the United States of
America. General business and economic conditions that could affect the Corporation include
short-term and long-term interest rates, inflation, monetary supply, fluctuations in both debt and
equity capital markets, and the strength of the United States and Puerto Rico economies. A period
of reduced economic growth or a recession has historically resulted in a reduction in lending
activity and an increase in the rate of defaults on loans. A recession may have an adverse impact
on net interest income and fee income. The Corporation may also experience significant losses on
the loan portfolio due to defaults as customers become unable to meet their obligations, which
would result in an adverse effect on earnings as higher reserves for loan losses would be required.
Geopolitical conditions can also affect the Corporation’s earnings. Acts or threats of terrorism,
actions taken by the United States or other governments in response to acts or threats of terrorism
and/or military conflicts, could affect the general business and economic conditions in Puerto
Rico, United States and abroad.
The Corporation’s financial activities and credit exposure are concentrated in Puerto Rico. As a
result, the Corporation’s financial condition and results of operations are highly dependent on
economic conditions in Puerto Rico. An extended economic slowdown, adverse political or economic
developments or natural disasters such as hurricanes, affecting Puerto Rico could result in a
reduction in lending activities and an increase in the level of non-performing assets and charge
offs, all of which would adversely affect the Corporation’s profitability.
Competition.
The Corporation operates in a highly competitive environment in Puerto Rico composed
of other local and international banks as well as mortgage banking companies, insurance companies
and brokers-dealers. Increased competition could require that the Corporation lower rates charged
on loans or increase rates offered on deposits, which could adversely affect profitability.
The Corporation’s business model is based on a diversified mix of businesses that provide a broad
range of financial products and services, delivered through multiple distribution channels. The
Corporation’s success depends, in part, on its ability to adapt its products and services to
evolving industry standards. There is increasing pressure to provide products and services at
lower prices. This can reduce the Corporation’s net interest margin and income from fee-based
products and services. In addition, the widespread adoption of new technologies, including
internet services, could require the Corporation to incur in substantial expenditures to modify or
adapt its existing products and services in order to remain competitive. The Corporation is at
risk of not being successful or timely in introducing new products and services, responding or
adapting to changes in consumer spending and saving habits, achieving market acceptance of its
products and services, or developing and maintaining loyal customers.
Interest rate risk.
Net interest income is the interest earned on loans, securities and other
assets minus the interest paid on deposits, long-term and short-term debt and other liabilities.
Net interest income is the difference between the yield on assets and the rate paid on deposits and
other sources of funding. These rates are highly sensitive to many factors beyond the
Corporation’s control, including general economic conditions and the policies of various
governmental and regulatory agencies. Changes in monetary policy, including changes in interest
rates, will influence the origination of loans, the prepayment speed of loans, the purchase of
investments, the generation of deposits and the rates received on loans and investment securities
and paid on deposits or other sources of funding. The impact of these changes may be magnified if
the Corporation does not effectively manage the relative sensitivity of its assets and liabilities
to changes in market interest rates.
Changes in interest rates could adversely affect net interest margin. Although the yield earned on
assets and funding costs tend to move in the same direction in response to changes in interest
rates, one can rise or fall faster than the other, causing the Corporation’s net interest margin to
expand or contract. The Corporation’s liabilities tend to be shorter in duration than its assets,
so they may adjust faster in response to changes in interest rates.
20
Changes in the slope of the “yield curve” — or the spread between short-term and long-term
interest rates — could also reduce the Corporation’s net interest margin. Normally, the yield
curve is upward sloping, meaning short-term rates are lower than long-term rates. However, since
the Corporation’s liabilities tend to be shorter in duration than its assets, they may adjust
faster in response to changes in interest rates. As a result, when interest rates rise, the
Corporation’s funding costs may rise faster than the yield earned on its assets causing net
interest margin to contract until the yield catches up.
The Corporation assesses its interest rate risk by estimating the effect on earnings under various
scenarios that differ based on assumptions about the direction, magnitude and speed of interest
rate changes and the slope of the yield curve. Some interest rate risk is hedged with derivatives.
However, not all interest rate risk is hedged. There is always the risk that changes in interest
rates could reduce net interest income and earnings in material amounts, especially if actual
conditions turn out to be materially different than what the Corporation expected. For example, if
interest rates rise or fall faster than the Corporation assumed, or the slope of the yield curve
changes, the Corporation may incur significant losses on debt securities held as investments. To
reduce interest rate risk, the Corporation may rebalance its investment and loan portfolios,
refinance its debt and take other strategic actions. Certain losses or expenses may be incurred
when such strategic actions are taken. Refer to the “Risk Management — Asset Liability Management”
section of the MD&A.
Credit Risk.
When the Corporation lends money or commits to lend money or enters into a contract
with a counterparty, it incurs credit risk, or the risk of losses if borrowers do not repay their
loans or counterparties fail to perform according to the term of their contract. The Corporation
allows for and reserves against credit risks based on its assessment of credit losses inherent in
its loan portfolio (including unfunded credit commitments). The process for determining the amount
of the allowance for loan losses is critical to the Corporation’s financial condition and results
of operations. It requires difficult, subjective and complex judgments, including forecasts of
economic conditions and how these economic predictions might impair the ability of borrowers to
repay their loans. As is the case with any such assessments, there is always the chance that the
Corporation will fail to identify the proper factors or that it will fail to accurately estimate
the impacts of factors that are identified.
For further discussion of credit risk and the Corporation’s credit risk management policies and
procedures, refer to “Credit Risk Management and Loan Quality” in the MD&A.
Changes in market prices of managed assets.
The Corporation earns fee income from managing assets
for others and providing brokerage services. Since investment management fees are often based on
the value of assets under management, a fall in the market prices of those assets could reduce the
Corporation’s fee income. Changes in stock market prices could affect the trading activity of
investors, reducing commissions and other fees earned from the brokerage business.
Changes in accounting standards.
The Corporation’s accounting policies are fundamental to
understanding its financial condition and results of operations. Some of these policies require
the use of estimates and assumptions that may affect the value of assets or liabilities and
financial results. Several of our accounting policies are critical because they require management
to make difficult, subjective and complex judgments about matters that are inherently uncertain and
because it is likely that materially different amounts would be reported under different conditions
or using different assumptions. For a description of the Corporation’s critical accounting
policies, refer to “Critical Accounting Policies” in the MD&A.
From time to time the Financial Accounting Standards Board (FASB), the SEC and other regulatory
bodies, change the financial accounting and reporting standards that govern the preparation of
external financial statements. These changes are beyond the Corporation’s control, can be
difficult to predict and could materially impact how it reports financial condition and results of
operations. In some cases, the Corporation could be required to apply a new or revised standard
retroactively, resulting in the restatement of prior period financial statements.
Federal and state regulations.
The Corporation, the banking and non banking subsidiaries are
subject to extensive state and federal regulation, supervision and legislation that govern almost
all aspects of its operations. These regulations protect depositors, federal deposit insurance
funds, consumers and the banking system as a whole, not stockholders. The Corporation and its non
banking subsidiaries are also heavily regulated by securities regulators. This regulation is
designed to protect investors in securities we sell or underwrite. Congress and state legislatures
and foreign, federal and state regulatory agencies continually review laws, regulations and
policies for possible changes. Changes to statutes, regulations or regulatory policies, including
interpretation or implementation of statutes, regulations or policies, could affect the Corporation
in substantial and unpredictable ways including limiting the types of financial services and
products it may offer and increasing the ability of non banks to offer competing financial services
and products. Implementation of regulatory changes could also be costly to the Corporation.
21
Governmental fiscal and monetary policy.
The Corporation’s earnings are affected by domestic and
international monetary policy. For example, the Board of Governors of the Federal Reserve System
regulates the supply of money and credit in the United States. These policies, to a large extent,
determine the Corporation’s cost of funds for lending and investing and the returns earned on those
loans and investments, both of which affect net interest margin. These policies can also affect the
value of financial instruments, such as debt securities and mortgage servicing rights as well as
affecting as borrowers by potentially increasing the risk that they may fail to repay their loans.
The Corporations earnings are also affected by the fiscal policies that are adopted by various
governmental authorities of Puerto Rico and the United States. Changes in tax laws can have a
potentially adverse impact on the Corporation’s earnings.
Changes in domestic and international monetary and fiscal policies are beyond the Corporation’s
control and are difficult to predict.
Liquidity risk.
Liquidity is essential to business and could be impaired by an inability to access
the capital markets or unforeseen outflows of cash. This situation may arise due to circumstances
that the Corporation may be unable to control, such as a general market disruption. The
Corporation’s credit ratings are important to its liquidity. A reduction in credit ratings could
adversely affect its liquidity and competitive position, increase borrowing costs, limit access to
the capital markets. For a further discussion of the Corporation’s liquidity, refer to “Liquidity
Risk” in the MD&A.
Operational risk.
The Corporation is exposed to operational risk. In its daily operations, the
Corporation relies on the continued efficacy of its technical and telecommunication systems,
operational infrastructure, relationships with third parties and the vast array of associates and
key executives in its day to day and ongoing operations. Failure by any or all of these resources
subjects the Corporation to risks that may vary in size, scale and scope. This includes but is not
limited to operational or technical failures, ineffectiveness or exposure due to interruption in
third party support as expected, the risk of fraud or theft by employees or outsiders, unauthorized
transactions by employees or operational errors (including clerical or recordkeeping errors), as
well as, the loss of key individuals or failure on the part of the key individuals to perform
properly.
Reputational risk.
The Corporation is subject to reputational risk, or the risk to earnings and
capital from negative public opinion. The Corporation’s ability to attract and retain customers and
employees could be adversely affected to the extent its reputation is damaged. The Corporation’s
failure to address, or to appear to fail to address various issues that could give rise to
reputational risk could cause harm to the Corporation and its business prospects and could lead to
litigation and regulatory action. These issues include, but are not limited to, appropriately
addressing potential conflicts of interest; legal and regulatory requirements; ethical issues;
money laundering ; privacy; properly maintaining customer and associated personal information;
record keeping; sales and trading practices; and the proper identification of the legal,
reputational, credit, liquidity, and market risks inherent in its products.
Merger risk.
There are significant risks associated with mergers. Future business acquisitions
could be material to the Corporation and could require the issuance of additional capital or
incurring of debt. In that event, the Corporation could become more susceptible to economic
downturns and competitive pressures. Merger risk includes the possibility that projected growth
opportunities and cost savings fail to be realized, and that the integration process results in the
loss of key employees, or that the disruption of ongoing business from the merger could adversely
affect the Corporation’s ability to maintain relationships with customers.
Litigation risk.
The volume of claims and the amount of damages and penalties claimed in
litigation and regulatory proceedings against financial institutions remains high. Substantial
legal liability or significant regulatory action against the Corporation could have material
adverse financial effects or cause significant reputational harm to the Corporation, which could
result in serious financial consequences.
Current Economic Condition of the Commonwealth of Puerto Rico.
Puerto Rico’s economic recession
not only prolonged but also deepened in 2008. The labor market continued deteriorating in the
fourth quarter of 2008 with nonfarm employment declining 3.1% and the unemployment rate increasing
1.6 percentage points to 12.7% when compared to the fourth quarter of 2007. Total investment in
construction also remained in negative territory as the development of new residential projects
remained halted due to an oversupply of housing units in the residential market and to stagnation
in public investment due to the financial constraints facing the public sector to finance new
infrastructure projects. Construction data as of October 2008 shows that the value of construction
permits and cement sales declined 3.4% and 12.2% respectively when compared to accumulated figures
for the same period in 2007. On the other hand, sustained inflationary pressure and continuous
employment layoffs have seriously eroded consumer purchasing power and confidence level, leading to
continue deterioration in the commercial activity. As a result, retail sales adjusted for inflation
weakened with total sales declining 6.0% as of
22
September 2008 when compared with accumulated figures for 2007. As these events unveil, the
financial conditions of consumers and businesses deteriorated rapidly, leading to a 17% growth in
total bankruptcies between 2007 and 2008 and to a rapid deterioration in asset quality in Puerto
Rico’s financial system.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
ITEM 2. PROPERTIES
As of December 31, 2008, the Corporation owned nineteen facilities, which consisted of eleven
branches and eight parking lots. The Corporation occupies one hundred twenty-two leased branch
premises, while warehouse space is rented in one location. In addition, office spaces are rented at
Torre Santander building in Hato Rey Puerto Rico, at the Santander Tower in Galeria San Patricio
building, in Guaynabo, Puerto Rico, at Professional Office Park IV building, in Río Piedras, Puerto
Rico and at the Operational Center in Hato Rey, Puerto Rico. The Corporation’s management believes
that each of its facilities is well maintained and suitable for its purpose.
ITEM 3. LEGAL PROCEEDINGS
The Corporation is involved as plaintiff or defendant in a variety of routine litigation incidental
to the normal course of business. Management believes, based on the opinion of legal counsel, that
it has adequate defense with respect to such litigation and that any losses therefrom would not
have a material adverse effect on the consolidated results of operations or consolidated financial
condition of the Corporation.
Management believes that there are no material pending legal proceedings, other than ordinary
routine litigation incidental to the business, to which the Corporation or its subsidiary is a
party or of which any of their property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
Santander BanCorp’s Common Stock, $2.50 par value (the “Common Stock”), is traded on the New York
Stock Exchange (the “NYSE”) under the symbol “SBP”, and on the Madrid Stock Exchange (LATIBEX)
under the symbol “XSBP”, respectively. The table below sets forth, for the calendar quarters
indicated, the high and low sales prices on the NYSE during such periods.
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Cash
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Book
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Dividends
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Value
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Period
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High
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Low
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per Share
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per Sha
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2008
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1st Quarter
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$
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14.56
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$
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7.06
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$
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0.10
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$
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12.15
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2nd Quarter
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15.00
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9.23
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0.10
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12.03
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3rd Quarter
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15.50
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9.63
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—
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11.91
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4th Quarter
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14.50
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6.63
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—
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11.83
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2007
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1st Quarter
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$
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19.79
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$
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17.49
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$
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0.16
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$
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12.56
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2nd Quarter
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18.87
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|
|
|
14.45
|
|
|
|
0.16
|
|
|
|
12.26
|
|
|
3rd Quarter
|
|
|
15.14
|
|
|
|
10.30
|
|
|
|
0.16
|
|
|
|
11.36
|
|
|
4th Quarter
|
|
|
8.76
|
|
|
|
7.90
|
|
|
|
0.16
|
|
|
|
11.50
|
|
23
As of December 31, 2008 the approximate number of record holders of the Corporation’s Common Stock
was 132, which does not include beneficial owners whose shares are held in record names of brokers
and nominees. The last sales price for the Common Stock as quoted on the NYSE on such date was
$12.49 per share representing a market capitalization of $582.5 million as of December 31, 2008.
Dividend Policy and Dividends Paid
The payment of dividends by the Corporation will depend on the earnings, cash position and capital
needs of the Bank, its subsidiaries, general business conditions and other factors deemed relevant
by the Corporation’s Board of Directors. The ability of the Corporation to pay dividends may be
restricted also by various regulatory requirements and policies of regulatory agencies having
jurisdiction over the Corporation and the Bank.
Dividends on the Corporation’s common stock are payable when, as and if declared by the Board of
Directors of the Corporation, out of funds legally available therefore. The Corporation declared a
cash dividend of $0.20 and $0.64 per common share to all stockholders for a total payment of $9.3
million and $29.8 million during the years ended December 31, 2008 and 2007, respectively. The
annualized dividend yield for the year ended December 31, 2008 and 2007 was 1.6% and 7.4%,
respectively. In light of the continuing challenging general economic conditions in Puerto Rico and
the global capital markets, the Board of Directors of the Corporation voted during August 2008 to
discontinue the payment of the quarterly cash dividend on the Corporation’s common stock to
strengthen the institution’s core capital position. The Corporation may use a portion of the funds
previously paid as dividends to reduce its outstanding debt. The Corporation’s decision is part of
the significant actions it has proactively taken in order to face the on-going challenges presented
by the Puerto Rico economy, which among others, include: selling the merchant business to an
unrelated third party; maintaining an on-going strict control on operating expenses; an efficiency
plan driven to lower its current efficiency ratio; and merging its mortgage banking and commercial
banking subsidiaries. While each of the Corporation and its banking subsidiary remain above well
capitalized ratios, this prudent measure will preserve and continue to reinforce the Corporation’s
capital position.
24
Stock Performance Graph
The graph below shows the cumulative stockholder return of the Common Stock of the Corporation
during the measurement period. The graph compares the return of the Common Stock of the Corporation
(identified by its official symbol as “SBP”) to the cumulative return of the Puerto Rico Stock
Index (PRSI) and the S&P Small Cap Commercial Bank Index (S6CBNK). The performance of the Common
Stock and the mentioned indexes are valued using a base value of 100. The Common Stock value as of
December 31, 2008 was $12.49. The Board of Directors of the Corporation acknowledges that the
market price of the Common Stock is influenced by numerous factors. The stock price shown in the
graph is not necessarily indicative of future performance. This stock performance graph should not
be deemed to be soliciting material under the proxy rules or incorporated by reference into any
filing under the Securities Act or the Exchange Act, unless the Corporation specifically
states otherwise.
Source: Bloomberg
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected consolidated and other financial and operating information
for the Corporation and subsidiaries and certain statistical information as of the dates and for
the periods indicated. This information should be read in conjunction with the Corporation’s
consolidated financial statements and the sections titled “Management’s Discussion and Analysis of
Financial Condition and Results of Operations “ and “Selected Statistical Information” appearing
elsewhere in this Annual Report. The selected Balance Sheet and Statement of Income data as of and
for the year ended December 31, 2008, 2007, 2006, 2005 and 2004 have been derived from the
Corporation’s consolidated audited financial statements.
25
Santander BanCorp and Subsidiaries
Selected Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
(Dollars in thousands, except per data share)
|
|
|
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
600,771
|
|
|
$
|
674,210
|
|
|
$
|
618,320
|
|
|
$
|
439,605
|
|
|
$
|
363,822
|
|
|
Interest expense
|
|
|
244,449
|
|
|
|
362,531
|
|
|
|
327,714
|
|
|
|
212,583
|
|
|
|
140,762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
356,322
|
|
|
|
311,679
|
|
|
|
290,606
|
|
|
|
227,022
|
|
|
|
223,060
|
|
|
Security gains
|
|
|
5,154
|
|
|
|
1,265
|
|
|
|
—
|
|
|
|
17,842
|
|
|
|
11,475
|
|
|
Loss on extinghuishment of debt
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(5,959
|
)
|
|
|
—
|
|
|
Broker-dealer, asset management and insurance fees
|
|
|
74,808
|
|
|
|
68,265
|
|
|
|
56,973
|
|
|
|
53,016
|
|
|
|
51,113
|
|
|
Other income
|
|
|
67,873
|
|
|
|
78,590
|
|
|
|
61,496
|
|
|
|
60,459
|
|
|
|
54,651
|
|
|
Operating expenses
|
|
|
324,627
|
|
|
|
344,016
|
|
|
|
277,783
|
|
|
|
221,386
|
|
|
|
217,377
|
|
|
Provision for loan losses
|
|
|
175,523
|
|
|
|
147,824
|
|
|
|
65,583
|
|
|
|
20,400
|
|
|
|
26,270
|
|
|
Income tax (benefit) provision
|
|
|
(6,524
|
)
|
|
|
4,204
|
|
|
|
22,540
|
|
|
|
30,788
|
|
|
|
9,724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
10,531
|
|
|
$
|
(36,245
|
)
|
|
$
|
43,169
|
|
|
$
|
79,806
|
|
|
$
|
86,928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PER COMMON SHARE DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
0.23
|
|
|
$
|
(0.78
|
)
|
|
$
|
0.93
|
|
|
$
|
1.71
|
|
|
$
|
1.86
|
|
|
Book value
|
|
$
|
11.83
|
|
|
$
|
11.50
|
|
|
$
|
12.42
|
|
|
$
|
12.19
|
|
|
$
|
11.86
|
|
|
Outstanding shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
46,639,104
|
|
|
|
46,639,104
|
|
|
|
46,639,104
|
|
|
|
46,639,104
|
|
|
|
46,639,104
|
|
|
End of period
|
|
|
46,639,104
|
|
|
|
46,639,104
|
|
|
|
46,639,104
|
|
|
|
46,639,104
|
|
|
|
46,639,104
|
|
|
Cash Dividend per Share
|
|
$
|
0.20
|
|
|
$
|
0.64
|
|
|
$
|
0.64
|
|
|
$
|
0.64
|
|
|
$
|
0.49
|
|
|
AVERAGE BALANCES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held
for sale and loans, net of allowance for loan losses
|
|
$
|
6,584,842
|
|
|
$
|
6,900,764
|
|
|
$
|
6,439,205
|
|
|
$
|
5,871,433
|
|
|
$
|
4,723,538
|
|
|
Allowance for loan losses
|
|
|
175,100
|
|
|
|
125,897
|
|
|
|
87,465
|
|
|
|
67,956
|
|
|
|
73,518
|
|
|
Earning assets
|
|
|
8,014,368
|
|
|
|
8,530,213
|
|
|
|
8,262,748
|
|
|
|
7,882,180
|
|
|
|
7,300,735
|
|
|
Total assets
|
|
|
8,740,670
|
|
|
|
9,195,712
|
|
|
|
8,820,630
|
|
|
|
8,285,992
|
|
|
|
7,634,471
|
|
|
Deposits
|
|
|
5,558,667
|
|
|
|
5,221,999
|
|
|
|
5,054,687
|
|
|
|
5,082,520
|
|
|
|
4,153,245
|
|
|
Borrowings
|
|
|
2,314,535
|
|
|
|
3,089,947
|
|
|
|
2,876,720
|
|
|
|
2,415,172
|
|
|
|
2,811,152
|
|
|
Common equity
|
|
|
564,238
|
|
|
|
573,536
|
|
|
|
563,593
|
|
|
|
576,226
|
|
|
|
495,963
|
|
|
PERIOD END BALANCES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held
for sale and loans, net of allowance for loan losses
|
|
$
|
5,967,958
|
|
|
$
|
6,911,380
|
|
|
$
|
6,836,693
|
|
|
$
|
5,954,890
|
|
|
$
|
5,490,120
|
|
|
Allowance for loan losses
|
|
|
191,889
|
|
|
|
166,952
|
|
|
|
106,863
|
|
|
|
66,842
|
|
|
|
69,177
|
|
|
Earning assets
|
|
|
7,186,973
|
|
|
|
8,519,773
|
|
|
|
8,598,703
|
|
|
|
7,933,139
|
|
|
|
8,069,346
|
|
|
Total assets
|
|
|
7,897,576
|
|
|
|
9,160,213
|
|
|
|
9,188,168
|
|
|
|
8,271,948
|
|
|
|
8,323,647
|
|
|
Deposits
|
|
|
5,014,902
|
|
|
|
5,160,703
|
|
|
|
5,313,974
|
|
|
|
5,224,650
|
|
|
|
4,748,139
|
|
|
Borrowings
|
|
|
1,939,384
|
|
|
|
3,138,730
|
|
|
|
2,954,515
|
|
|
|
2,212,245
|
|
|
|
2,863,367
|
|
|
Common equity
|
|
|
551,636
|
|
|
|
536,536
|
|
|
|
579,220
|
|
|
|
568,527
|
|
|
|
553,346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continued on the following page
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
Continued from the previous page
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
(Dollars in thousands)
|
|
|
SELECTED RATIOS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin (1)
|
|
|
4.50
|
%
|
|
|
3.74
|
%
|
|
|
3.63
|
%
|
|
|
3.02
|
%
|
|
|
3.33
|
%
|
|
Efficiency ratio (2)
|
|
|
60.39
|
%
|
|
|
66.32
|
%
|
|
|
66.82
|
%
|
|
|
62.97
|
%
|
|
|
62.78
|
%
|
|
Return on average total assets
|
|
|
0.12
|
%
|
|
|
(0.39
|
)%
|
|
|
0.49
|
%
|
|
|
0.96
|
%
|
|
|
1.14
|
%
|
|
Return on average common equity
|
|
|
1.87
|
%
|
|
|
(6.32
|
)%
|
|
|
7.66
|
%
|
|
|
13.85
|
%
|
|
|
17.53
|
%
|
|
Dividend payout
|
|
|
86.96
|
%
|
|
|
(82.05
|
)%
|
|
|
68.82
|
%
|
|
|
37.43
|
%
|
|
|
26.34
|
%
|
|
Average net loans/average total deposits
|
|
|
118.46
|
%
|
|
|
132.15
|
%
|
|
|
127.39
|
%
|
|
|
115.52
|
%
|
|
|
113.73
|
%
|
|
Average earning assets/average total assets
|
|
|
91.69
|
%
|
|
|
92.76
|
%
|
|
|
93.68
|
%
|
|
|
95.13
|
%
|
|
|
95.63
|
%
|
|
Average stockholders’ equity/average assets
|
|
|
6.46
|
%
|
|
|
6.24
|
%
|
|
|
6.39
|
%
|
|
|
6.95
|
%
|
|
|
6.50
|
%
|
|
Fee income to average assets
|
|
|
1.37
|
%
|
|
|
1.26
|
%
|
|
|
1.20
|
%
|
|
|
1.15
|
%
|
|
|
1.18
|
%
|
|
Capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I capital to risk-adjusted assets
|
|
|
8.41
|
%
|
|
|
7.42
|
%
|
|
|
7.87
|
%
|
|
|
9.09
|
%
|
|
|
8.63
|
%
|
|
Total capital to risk-adjusted assets
|
|
|
12.83
|
%
|
|
|
10.55
|
%
|
|
|
10.93
|
%
|
|
|
12.30
|
%
|
|
|
11.05
|
%
|
|
Leverage Ratio
|
|
|
6.10
|
%
|
|
|
5.38
|
%
|
|
|
5.81
|
%
|
|
|
6.50
|
%
|
|
|
6.43
|
%
|
|
Asset quality:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing loans to total loans
|
|
|
3.45
|
%
|
|
|
4.16
|
%
|
|
|
1.54
|
%
|
|
|
1.22
|
%
|
|
|
1.57
|
%
|
|
Annualized net charge-offs to average loans
|
|
|
2.23
|
%
|
|
|
1.25
|
%
|
|
|
0.93
|
%
|
|
|
0.38
|
%
|
|
|
0.56
|
%
|
|
Allowance for loan losses to period-end loans
|
|
|
3.12
|
%
|
|
|
2.36
|
%
|
|
|
1.54
|
%
|
|
|
1.11
|
%
|
|
|
1.24
|
%
|
|
Allowance for loan losses to non-performing
loans
|
|
|
90.21
|
%
|
|
|
56.70
|
%
|
|
|
100.01
|
%
|
|
|
90.72
|
%
|
|
|
79.05
|
%
|
|
Allowance for loan losses to non-performing loans plus
accruing loans past-due 90 days or more
|
|
|
84.84
|
%
|
|
|
55.36
|
%
|
|
|
83.62
|
%
|
|
|
87.17
|
%
|
|
|
76.11
|
%
|
|
Non-performing assets to total assets
|
|
|
2.97
|
%
|
|
|
3.39
|
%
|
|
|
1.23
|
%
|
|
|
0.92
|
%
|
|
|
1.10
|
%
|
|
Recoveries to charge-offs
|
|
|
2.52
|
%
|
|
|
3.97
|
%
|
|
|
9.30
|
%
|
|
|
18.28
|
%
|
|
|
32.83
|
%
|
|
EARNINGS TO FIXED CHARGES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excluding interest on deposits
|
|
|
1.04
|
x
|
|
|
0.82
|
x
|
|
|
1.42
|
x
|
|
|
2.19
|
x
|
|
|
2.17
|
x
|
|
Including interest on deposits
|
|
|
1.02
|
x
|
|
|
0.91
|
x
|
|
|
1.20
|
x
|
|
|
1.51
|
x
|
|
|
1.68
|
x
|
|
EARNINGS TO FIXED CHARGES AND PREFERRED
STOCK DIVIDENDS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excluding interest on deposits
|
|
|
1.04
|
x
|
|
|
0.82
|
x
|
|
|
1.42
|
x
|
|
|
2.19
|
x
|
|
|
2.17
|
x
|
|
Including interest on deposits
|
|
|
1.02
|
x
|
|
|
0.91
|
x
|
|
|
1.20
|
x
|
|
|
1.51
|
x
|
|
|
1.68
|
x
|
|
OTHER DATA AT END OF PERIOD
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer financial assets under management
|
|
$
|
13,413,000
|
|
|
$
|
13,263,000
|
|
|
$
|
14,154,000
|
|
|
$
|
12,960,000
|
|
|
$
|
12,827,700
|
|
|
Full services branches
|
|
|
57
|
|
|
|
61
|
|
|
|
61
|
|
|
|
64
|
|
|
|
65
|
|
|
Consumer retail branches
|
|
|
64
|
|
|
|
68
|
|
|
|
70
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total branches
|
|
|
121
|
|
|
|
129
|
|
|
|
131
|
|
|
|
64
|
|
|
|
65
|
|
|
ATMs
|
|
|
169
|
|
|
|
140
|
|
|
|
144
|
|
|
|
149
|
|
|
|
150
|
|
|
|
|
|
|
(1)
|
|
On a tax equivalent basis.
|
|
|
|
(2)
|
|
Operating expenses less provision for claim receivable in 2008 and intangibles impairment charges in 2007 divided by net interest income on a tax
equivalent basis, plus other income excluding securities gains and losses, gain on equity securities, gain on sale of POS and Trust division in 2007,
gain on sale of FDIC assessment credits and gain on tax credit purchased in 2006, loss on extinguisment of debt in 2005 and gain
on sale of building in 2004.
|
27
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Description of the Business
Santander BanCorp and subsidiaries is a diversified financial holding company headquartered in San
Juan, Puerto Rico, offering a full range of financial products and services to consumers and
commercial customers through its subsidiaries. The Corporation’s subsidiaries are engaged in the
following businesses:
|
•
|
|
Commercial Banking — Banco Santander Puerto Rico
|
|
•
|
|
Mortgage Banking — Banco Santander Puerto Rico (Santander Mortgage Corporation during 2007
and prior, which was merged into the Bank at January 1, 2008)
|
|
•
|
|
Securities Brokerage and Investment Banking — Santander Securities Corporation
|
|
•
|
|
Asset Management — Santander Asset Management Corporation
|
|
•
|
|
Consumer Finance — Santander Financial Services, Inc.
|
|
•
|
|
Insurance — Santander Insurance Agency, Inc. and Island Insurance Corporation
|
|
•
|
|
International Banking — Santander International Bank of Puerto Rico, Inc.
|
Basis of Presentation
The Corporation’s financial statements are prepared in conformity with accounting principles
generally accepted in the United States of America and with general practices within the financial
services industry, which are described in the notes to the consolidated financial statements. In
preparing the consolidated financial statements in conformity with generally accepted accounting
principles, management is required to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date
of the consolidated financial statements, and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. Accounting policies that
are critical to the overall financial statements are fully described in the “Critical Accounting
Policies” section below.
Forward-Looking Statements
This discussion of financial results contains forward-looking statements about the Corporation.
Forward-looking statements can be identified by the fact that they do not relate strictly to
historical or current facts. They often include words or phrases like “would be”, “will allow”,
“intends to”, “will likely result”, “are expected to”, “will continue”, “is anticipated”,
“estimate”, “project”, “believe”, or similar expressions and are intended to identify “forward
looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.
The future results of the Corporation could be affected by subsequent events and could differ
materially from those expressed in forward-looking statements. If future events and actual
performance differ from the Corporation’s assumptions, the actual results could vary significantly
from the performance projected in the forward-looking statements. The Corporation wishes to caution
readers not to place undue reliance on any such forward-looking statements, which speak only as of
the date made, and to advise readers that various factors, including regional and national
conditions, substantial changes in levels of market interest rates, credit and other risks of
lending and investment activities, competitive and regulatory factors and legislative changes,
could affect the Corporation’s financial performance and could cause the Corporation’s actual
results for future periods to differ materially from those anticipated or projected. The
Corporation does not undertake, and specifically disclaims any obligation, to update any
forward-looking statements to reflect occurrences or unanticipated events or circumstances after
the date of such statements.
28
Overview of Management’s Discussion and Analysis of Financial Condition and Results of Operations
This overview of management’s discussion and analysis highlights selected information in this
document and may not contain all of the information that is important to the reader. For a more
complete understanding of trends, events, commitments, uncertainties, liquidity, capital resources
and critical accounting estimates, you should carefully read this entire document. All
accompanying tables, financial statements and notes included elsewhere in this report should be
considered an integral part of this analysis.
The Corporation, similarly to other financial institutions, is subject to certain risks, many of
which are beyond management’s control, though efforts and initiatives are undertaken to manage
those risks in conjunction with return optimization. Among the risks being managed are: (1) market
risk, which is the risk that changes in market rates and prices will adversely affect the
Corporation’s financial condition or results of operations, (2) liquidity risk, which is the risk
that the Corporation will have insufficient cash or access to cash to meet operating needs and
financial obligations, (3) credit risk, which is the risk that loan customers or other
counterparties will be unable to perform their contractual obligations, and (4) operational risk,
which is the risk of loss resulting from inadequate or failed internal processes, people and
systems, or from external events. In addition, the Corporation is subject to legal, compliance and
reputational risks, among others.
The Corporation had counterparty exposure to Lehman Brothers, Inc. (“LBI”) in connection with the
sale of securities sold under agreements to repurchase amounting to $200.2 million at September 19,
2008 under a Master Repurchase Agreement. LBI was placed in a Securities Investor Protection
Corporation (“SIPC”) liquidation proceeding on September 19, 2008. The filing of the SIPC
liquidation proceeding was an event of default under the terms of the Master Repurchase Agreement,
which resulted in the acceleration of repurchase dates under the Master Repurchase Agreement to
September 19, 2008. This action resulted in a reduction in the Corporation’s total assets of
$225.3 million and a reduction in its total liabilities of $200.2 million. As soon as claims
procedures have been established in the LBI liquidation proceeding, the Corporation intends to file
a claim for the amount of $25.1 million, which is the amount it is owed by LBI, as a result of the
acceleration of the repurchase date and the exercise by the Corporation of its rights under the
Master Repurchase Agreement, plus incidental expenses and damages. The Corporation has recognized
a claim receivable from LBI for $25.1 million and has established a valuation allowance for the
same amount since management, in consultation with legal counsel, believes that based on current
information and events, it is probable that the Corporation will be unable to collect the full
amount. The tax effect related to the recognition of this valuation allowance was a deferred
benefit of $9.8 million.
The Corporation had a $100 million floating-for-fixed interest rate swap designated as a cash flow
hedge with LBI affiliate Lehman Brothers Special Financing Inc. (“LBSF”). The derivative liability
of this swap was $371,736 as of September 19, 2008 and was paid on December 5, 2008. As a result of
the bankruptcy filing of Lehman Brothers Holding, Inc. (“LBHI”) and default on its contractual
payments as of September 19, 2008, the Corporation terminated the swap and the cash flow hedge
designation on this swap. The net loss of $371,000 was reclassified into earnings in the last
quarter of 2008. In addition, the Corporation terminated $23.8 million of fixed for floating
interest rate swaps. The derivative liability of the swap with LBSF was $681,535 as of September
19, 2008 and was paid on December 5, 2008. The Corporation also terminated $13.8 million of
interest rate swaps with LBSF. The derivative liability of this swap was $166,333 as of September
19, 2008 and was paid on December 5, 2008.
As a provider of financial services, the Corporation’s earnings are significantly affected by
general economic and business conditions. Credit, funding, including deposit origination and fee
income generation activities 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 constantly monitors general business and economic conditions, industry-related trends
and indicators, competition from traditional and non-traditional financial services providers,
interest rate volatility, indicators of credit quality, demand for loans and deposits, operational
efficiencies, including systems, revenue and profitability improvement and regulatory changes in
the financial services industry, among others. 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 services providers could adversely affect the Corporation’s
profitability.
The Corporation reported a net income of $10.5 million for the year ended December 31, 2008, or
$0.23 per common share, a significant increase of $46.8 million or 129.1% over the net loss of
$36.2 million or $0.78 per share reported for the year ended December 31, 2007. The increase in net
income was principally due to increases in net interest income of $44.6 million, a decrease in
operating expenses of $19.4 million and a decrease in provision for income tax of $10.7 million,
partially offset by an increase of $27.7 million in the provision for loan losses.
29
Return on average assets (ROA) reflected an improvement of 51 basis points to 0.12% for the year
ended December 31, 2008 compared (0.39)% reported for the year ended December 31, 2007. Return on
average common equity (ROE) was 1.87% and (6.32)%, respectively, for the years ended December 31,
2008 and 2007, reflecting an improvement 819 basis points. The efficiency ratio (on a
tax-equivalent basis) also reflected an improvement of 593 basis points to reach 60.39% for the
year ended December 31, 2008 from 66.32% for 2007.
The Corporation’s financial results for the year ended December 31, 2008 were impacted by the
following:
|
|
•
|
|
The Corporation recognized a provision for claim receivable of $25.1 million which
represents the excess of the value of the securities held by LBI above the amounts owed by
the Corporation under the securities sold under agreements to repurchase. The related tax
benefit of this valuation allowance amounts to $9.8 million.
|
|
|
|
|
•
|
|
The Corporation experienced an improvement of 76 basis points in net interest margin, on
a tax equivalent basis, to 4.50% for the year ended December 31, 2008 versus 3.74% for
2007;
|
|
|
|
|
•
|
|
The provision for loan losses increased $27.7 million or 18.7% for the year ended
December 31, 2008 compared to 2007. The increase in the provision for loan losses reflects
the current recessionary cycle in Puerto Rico affecting the loan portfolio, including
commercial and construction loans. The provision for loan losses represented 116.56% of the
net charge-offs for the year ended December 31, 2008;
|
|
|
|
|
•
|
|
The allowance for loan losses of $191.9 million as of December 31, 2008 represented
3.12% of total loans, 90.21% of non-performing loans and 225.06% of non-performing loans
excluding loans secured by real estate. As of December 31, 2007, the allowance for loan
losses was $167.0 million, represented 2.36% of total loans, 56.70% of non-performing loans
and 82.32% of non-performing loans excluding loans secured by real estate;
|
|
|
|
|
•
|
|
Non-interest income remained basically flat when comparing the years ended December 31,
2008 and 2007. Non-interest income was impacted during 2008 principally by: (i) an increase
in broker-dealer, asset management and insurance fees of $6.5 million; (ii) a gain of $8.6
million on the sale of a portion of the Corporation’s investment in Visa, Inc. in
connection with its initial public offering during the first quarter of 2008; (iii) an
increase in gain on derivatives of $3.0 million; (iv) an increase in gain on sale of
securities of $3.9 million; (v) an unfavorable valuation adjustment of $7.4 million on
loans held for sale; (vi) a decrease in other gain of $12.8
million due mainly due to a $12.3
million in gain of sale of merchant business to an unrelated party during 2007; (vii) a
$3.4 million decrease in gain on sale of loans; (viii) a $1.2 million increase in technical
assistance collected from affiliates;
|
|
|
|
|
•
|
|
Operating expenses reflected a decrease of $19.4 million or 5.6% when compared to 2007.
This decrease was affected principally by: (i) $43.3 million
related to goodwill and other intangible assets impairment charges
recognized during 2007; (ii) $16.0 million decrease in stock incentive
compensation expense sponsored by Santander Group; (iii) a provision for claim receivable of $25.1 million recognized during 2008;
(iv) $7.8 million increase in professional fees; (v) $6.9 million increase in salaries and
other personnel expenses; (vi) $3.9 million increase in occupancy cost (vii) $3.8 million
increase in FDIC assessment; (viii) offset by a decrease of $9.0 million
in business promotion and a decrease of $1.8 million in repossessed
asset provision and expenses.
|
|
|
|
|
•
|
|
During the year ended December 31, 2008, the Corporation
sold loans, including some classified as impaired, to
an affiliate for $300.1 million in cash. These loans had a net
book value of $300.1 million
comprised of an outstanding principal balance of $334.6 million and a specific valuation
allowance of $34.5 million. The type of loans by net book value
was $212.3 million in
construction loans and $87.8 million in commercial loans. No gain or loss was recognized on
these transactions.
|
|
|
|
|
•
|
|
The common stock dividend for the year ended December 31, 2008 was $0.20 per share
resulting in a current annualized dividend yield of 1.60%. On August 2008, the Board of
Directors of the Corporation determined to discontinue the payment of the quarterly cash
dividend on the Corporation’s common stock to strengthen the institution’s core capital
position. The Corporation may use a portion of the funds previously used to pay as
dividends to reduce its outstanding debt.
|
30
The Corporation’s principal source of revenues is net interest income, which is the difference
between the interest earned on loans and investments and the interest paid on customer deposits and
other interest-bearing liabilities. Net interest income represents
approximately 70.7% and 67.8% of
the Corporation’s total net revenues (defined as net interest income plus other income) for 2008 and 2007,
respectively. Net interest income is affected by the relative amounts of interest-earning assets
and interest-bearing liabilities, and the interest rates earned or paid on these balances.
Lending activities are one of the most important aspects of the Corporation’s operations. The
economic environment and uncertainties in Puerto Rico caused reduced lending activity and impacted
the quality of the Corporation’s loan portfolio increasing the delinquency rates and charge offs.
The net loan portfolio, including loans held for sale, decreased $0.9 billion, or 13.7% reaching
$6.0 billion at December 31, 2008, compared to the figures reported at December 31, 2007. As of
December 31, 2008, the allowance for loan losses reached $191.9 million, reflecting an increase of
$24.9 million or 14.9%, which includes $122.8 million related to the Bank portfolio and $69.1
million related to the Island Finance portfolio. The ratio of allowance for loan losses to total
loans increased to 3.12% at December 31, 2008 from 2.36% at December 31, 2007.
Although the Corporation has diversified its sources of revenue, interest income from the loan
portfolio continues to account for the majority of total revenues, representing 73.2% and 72.9% of
total gross revenues for 2008 and 2007, respectively. As a result, the primary influence on the
Corporation’s operating results is the demand for loans in Puerto Rico, which is significantly
affected by economic conditions, competition, the demand and supply of housing, the fiscal policies
of the federal and Puerto Rico governments and interest rate levels. Changes in interest rates, the
Corporation’s principal market risk, can significantly impact its results of operations by
affecting net interest income and the gains or losses realized on the sale of loans and securities.
As described under “Risk Management”, the Corporation uses derivative instruments to hedge, to a
limited extent, its interest rate risk in order to protect its net interest income under different
interest rate scenarios.
Broker-dealer, asset management and insurance fees accounted for 50.6% and 46.1% of the
Corporation’s other income and 10.0% and 8.3% of its total revenues for 2008 and 2007,
respectively. The Corporation also earns revenues from other sources that are not as dependent on
interest levels, such as bank service fees on deposit accounts and credit card fees. Other income,
including broker-dealer, asset management and insurance fees, accounted for 19.8% and 18.0% of
total revenues for 2008 and 2007, respectively.
Deposits at December 31, 2008 were $5.0 billion, reflecting a decrease of $145.8 million or 2.8%
compared to deposits of $5.2 billion as of December 31, 2007.
Total borrowings at December 31, 2008 (comprised of federal funds purchased and other borrowings,
securities sold under agreements to repurchase, commercial paper issued, term and capital notes)
reflected a decrease of $1.2 billion or 38.3% to $1.9 billion at December 31, 2008 compared with
$3.1 billion at December 31, 2007.
As of December 31, 2008, the Corporation had $13.4 billion in customer financial assets under
management, reflecting an increase of 1.1% compared with the prior year. This is a significant part
of the financial assets of Puerto Rico households and reflects the Corporation’s strong positioning
in its primary market. Customer financial assets under management include bank deposits (excluding
brokered deposits), broker-dealer customer accounts, mutual fund assets managed, and trust,
institutional and private accounts under management.
SBP common stock price per share was $12.49 as of December 31, 2008 resulting in a market
capitalization of $0.6 billion (including affiliated holdings).
During 2008, Santander BanCorp declared and paid a cash dividend of 20 cents per common share to
its shareholders of record, resulting in a current annual dividend yield of 1.6%.
Critical Accounting Policies
The consolidated financial statements of Santander BanCorp are prepared in accordance with
accounting principles generally accepted in the United States of America and with general practices
within the financial services industry. In preparing the consolidated financial statements,
management is required to make judgments, involving significant estimates and assumptions, in the
application of its accounting policies about matters that are inherently uncertain. Management
arrives at these estimates and assumptions, which may materially affect the reported amounts of
certain assets, liabilities, revenues and expenses, considering the facts and circumstances at a
specific point in time. Changes in those facts and circumstances could produce actual results that
differ from those estimates. Detailed below is a discussion of the Corporation’s critical
accounting
31
policies. These policies are critical because they are highly dependent upon subjective
or complex judgments, assumptions and estimates. For a complete discussion of the Corporation’s
significant and critical accounting policies refer to the notes to the
consolidated financial statements and the discussion throughout this document which should be read
in conjunction with this section.
Current Accounting Developments
Effective January 1, 2008, the Corporation adopted Financial Accounting Standards Board (FASB)
Statement of Financial Accounting Standards (SFAS) 157,
Fair Value Measurements
, for all financial
instruments accounted for at fair value on a recurring basis. In February 2008, the FASB issued a
final staff position (FSP FAS 157-2) that partially delayed the effective date of SFAS 157 for one
year for certain nonfinancial assets and nonfinancial liabilities, except for items that are
recognized or disclosed at fair value in the financial statements on a recurring basis. As such,
the Corporation did not adopt SFAS 157 for those nonfinancial assets and liabilities eligible for
deferral under FSP FAS 157-2 and is evaluating the impact that this adoption may have on its
consolidated financial statements and disclosures. Adoption of SFAS 157 did not have a material
effect on the Corporation’s financial position and results of operations. Illiquidity in the credit
markets contributed to the amount of our reported Level 3 instruments, primarily in our trading and
loan portfolios. At December 31, 2008, the aggregate amount of instruments requiring fair value
measurement on a recurring basis included in Level 3 represented approximately 2.8% and 0.16% of
the aggregate amount of consolidated assets and liabilities recorded at fair value, respectively.
The amount we report in Level 3 in future periods will be affected by market conditions. See Notes
1 and 24 to the accompanying consolidated financial statements for further information related to
the adoption of SFAS 157.
In conjunction with the adoption of SFAS 157, effective January 1, 2008, the Corporation adopted
Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) 159,
The Fair Value Option for Financial Assets and Financial Liabilities.
SFAS 159 provides an option
for most financial assets and liabilities to be reported at fair value on an
instrument-by-instrument basis with changes in fair value reported in earnings. The election is
made at the initial adoption, at the acquisition of a financial asset, financial liability or a
firm commitment and it may not be revoked. Under the SFAS 159 transition provisions, the
Corporation has elected to report certain callable brokered certificates of deposits and
subordinated notes at fair value with future changes in value reported in earnings. SFAS 159
provides an opportunity to mitigate volatility in reported earnings as well as reducing the burden
associated with complex hedge accounting requirements. As a result of this adoption and the
election under the fair value option, the Corporation reported an after-tax increase in opening
retained earnings of $3.2 million. See Notes 1 and 24 to the accompanying consolidated financial
statements for further information related to the adoption of SFAS 159.
Fair Value Measurement.
The Corporation’s estimates of fair value for financial instruments are
based on the framework established in SFAS 157. The fair value of a financial instrument is the
estimated amount at which the instrument could be exchanged in an orderly transaction between
knowledgeable, unrelated willing parties, i.e., not in a forced transaction. The disclosure of
fair value estimates in the SFAS 157 hierarchy is based on whether the significant inputs into the
valuation are observable. In determining such estimates and the level of the hierarchy in which
the estimate is disclosed, the highest priority is given to unadjusted quoted prices in active
markets, the lowest priority to unobservable inputs that reflect the Corporation’s market
assumptions. SFAS 157 requires the use of observable inputs when available. Additionally, the
level at which a financial instrument is reported is based on the lowest level of any significant
input into the estimation of fair value. The three levels of the hierarchy are as follows:
|
|
•
|
|
Level 1
—
Unadjusted quoted market prices for identical assets or liabilities in active
markets that the Corporation has the ability to access.
|
|
|
|
|
•
|
|
Level 2
—
Quoted prices for similar assets or liabilities in active markets; quoted
prices for identical or similar assets or liabilities in inactive markets; or valuations
based on models where the significant inputs are observable (e.g., interest rates, yield
curves, prepayment speeds, default rates, loss severities, etc.) or can be corroborated by
observable market data.
|
|
|
|
|
•
|
|
Level 3
—
Valuations based on models where significant inputs are not observable. The
unobservable inputs reflect the Corporation’s own assumptions about the assumptions that
market participants would use.
|
The Corporation uses quoted market prices, when available, to determine estimates of fair value and
includes these prices in the amounts disclosed in Level 1 of the hierarchy. When quoted market
prices are unavailable, the Corporation obtains fair value estimates from a nationally recognized
pricing service that determines fair value estimates based on objectively verifiable
32
information:
relevant market information, relevant credit information, perceived market movements and sector
news. The market inputs utilized in the pricing evaluation, listed in the approximate order of
priority, include: benchmark yields, reported trades, broker/dealer quotes, issuer spreads,
two-sided markets, benchmark securities, bids, offers, reference data, and industry
and economic events. Depending on the security, the priority of the use of inputs may change or
some market inputs may not be relevant. For some securities additional inputs may be necessary.
The Corporation reviews the estimates of fair value provided by the pricing service and compares
the estimates to the Corporation’s knowledge of the market to determine if the estimates obtained
are representative of the prices in the market. The Corporation will challenge any prices deemed
not to be representative of fair value. The fair value estimates provided from this pricing service
are included in the amount disclosed in Level 2 of the hierarchy.
If quoted market prices and an estimate from a pricing service are unavailable, the Corporation
produces an estimate of fair value based on internally developed valuation techniques, which,
depending on the level of observable market inputs, will render the fair value estimate as Level 2
or Level 3. See Note 24 to the accompanying consolidated financial statements for further
information related to valuation methods used by the Corporation for each type of financial
instruments that are carried at fair value.
The Corporation employs control processes to validate the fair value of its financial instruments.
These control processes are designed to assure that the values used for financial reporting are
based on observable inputs wherever possible. In the event that observable inputs are not
available, the control processes are designed to assure that the valuation approach utilized is
appropriate and consistently applied, and the assumptions are reasonable. These control processes
include validation and corroboration procedures over the quotes and prices obtained from brokers
and counterparties, as well as reviews of the pricing models’ appropriateness by the personnel with
relevant expertise, which are independent from the trading desks on a quarterly basis. In addition,
the Corporation is considering recently executed comparable transaction and other observable market
data for purposes of validating assumptions used in the models.
The Corporation understands that any increases and/or decreases in the aggregate fair value of its
assets and liabilities will not materially affect its liquidity and capital resources.
Allowance for Loan Losses
. The Corporation assesses the overall risks in its loan portfolio and
establishes and maintains a reserve for probable losses thereon. The allowance for loan losses is
maintained at a level sufficient to provide for estimated loan losses based on the evaluation of
known and inherent risks in the Corporation’s loan portfolio. The Corporation’s management
evaluates the adequacy of the allowance for loan losses on a monthly basis.
The determination of the allowance for loan losses is one of the most complex and critical
accounting estimates the Corporation’s management makes. The allowance for loan losses is composed
of three different components. An asset-specific reserve based on the provisions of Statements of
Financial Accounting Standards (“SFAS”) No. 114 “Accounting by Creditors for Impairment of a Loan”
(as amended), an expected loss estimate based on the provisions of SFAS No. 5 “Accounting for
Contingencies”, and an unallocated reserve based on the effect of probable economic deterioration
above and beyond what is reflected in the asset-specific component of the allowance.
Commercial, construction loans and certain mortgage loans exceeding a predetermined monetary
threshold are identified for evaluation of impairment on an individual basis pursuant to SFAS No.
114. The Corporation considers a loan impaired when interest and/or principal is past due 90 days
or more, or, when based on current information and events it is probable that the Corporation will
be unable to collect all amounts due according to the contractual terms of the loan agreement. The
asset-specific reserve on each individual loan identified as impaired is measured based on the
present value of expected future cash flows discounted at the loan’s effective interest rate,
except as a practical expedient, the Corporation may measure impairment based on the loan’s
observable market price, or the fair value of the collateral, net of estimated disposal costs, if
the loan is collateral dependent. Most of the asset-specific reserves of the Corporation’s impaired
loans are measured on the basis of the fair value of the collateral. The fair value of the
collateral is determined by external valuation specialists and since these values cannot be
observed or corroborated with market data, they are classified as Level 3 and presented as part of
non-recurring measurement disclosures.
A reserve for expected losses is determined under the provisions of SFAS No. 5 for all loans not
evaluated individually for impairment, based on historical loss experience by loan type, management
judgment of the quantitative factors (historical net charge-offs, statistical loss estimates,
etc.), as well as qualitative factors (current economic conditions, portfolio composition,
delinquency trends, industry concentrations, etc.). The Corporation groups small homogeneous loans
by type of loan (consumer, credit card, mortgage, etc.) and applies a loss factor, which is
determined using an average history of actual net losses and other statistical loss estimates.
Historical loss rates are reviewed at least quarterly and adjusted based on changing borrower
and/or collateral conditions and actual collections and charge-off experience. Historical loss
rates for the different
33
portfolios may be adjusted for significant factors that in management’s
judgment reflect the impact of any current conditions on loss recognition. Factors that management
considers in the analysis include the effect of the trends in the nature and volume of loans
(delinquency, charge-offs, non accrual), changes in the mix or type of collateral, asset quality
trends, changes in the internal lending policies and credit standards, collection practices and
examination results from internal and external agencies.
An additional, or unallocated, reserve is maintained to cover the effect of probable economic
deterioration above and beyond what is reflected in the asset-specific component of the allowance.
This component represents management’s view that given the complexities of the lending portfolio
and the assessment process, including the inherent imprecision in the financial models used in the
loss forecasting process, there are estimable losses that have been incurred but not yet
specifically identified, and as a result not fully provided for in the asset-specific component of
the allowance. The level of the unallocated reserve may change periodically after evaluating
factors impacting assumptions used in the calculation of the asset specific component of the
reserve.
The underlying assumptions, estimates and assessments used by management to determine the
components of the allowance for loan losses are periodically evaluated and updated to reflect
management’s current view of overall economic conditions and other relevant factors impacting
credit quality and inherent losses. Changes in such estimates could significantly impact the
allowance and provision for loan losses. The Corporation could experience loan losses that are
different from the current estimates made by management. Based on current and expected economic
conditions, the expected level of net loan losses and the methodology established to evaluate the
adequacy of the allowance for loan losses, management considers that the Corporation has
established an adequate position in its allowance for loan losses. Refer to the Non-performing
Assets and Past Due Loans section for further information.
Transfers of Financial Assets
. The Corporation occasionally engages in transfers of financial
assets and accounts for them in accordance with the provisions of SFAS No. 140, “Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities — a replacement of
FASB Statement No. 125” (SFAS No. 140). Paragraph 9 of SFAS No. 140 provides that a transfer of
financial assets in which the transferor surrenders control over those financial assets shall be
accounted for as a sale to the extent that consideration other than beneficial interests in the
transferred assets is received in exchange. A transferor has surrendered control if all of the
following conditions are met: (a) the transferred assets have been isolated from the
transferor—put presumptively beyond the reach of creditors, even in bankruptcy; (b) each
transferee has the right to pledge or exchange the assets it received and no condition constrains
the transferee from taking advantage of its right to pledge or exchange; and (c) the transferor
does not maintain effective control over the transferred assets through either (i) an agreement
that both entitles and obligates the transferor to repurchase or redeem them before their maturity
or (ii) the ability to unilaterally cause the holder to return specified assets, other than through
a cleanup call. In accordance with SFAS No. 140, a gain or loss on the sale is recognized based on
the carrying amount of the financial assets involved in the transfer, allocated between the assets
transferred and the retained interests based on their relative fair value at the date of transfer.
When the Corporation transfers financial assets and the transfer fails any one of the SFAS No. 140
sales criteria, the Corporation is not permitted to derecognize the transferred financial assets
and the transaction is accounted for as a secured borrowing.
Income taxes
. In preparing the consolidated financial statements, the Corporation is required to
estimate income taxes. This involves an estimation of current income tax expense together with an
assessment of temporary differences resulting from differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for income tax
purposes. The determination of current income tax expense involves estimates and assumptions that
require the Corporation to assume certain positions based on its interpretation of current tax
regulations. The Corporation accounts for uncertain tax positions in accordance with FASB
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). Accordingly, the
Corporation reports a liability for unrecognized tax benefits resulting from uncertain tax
positions taken or expected to be taken in a tax return. The Corporation recognizes interest and
penalties, if any, related to unrecognized tax benefits in income tax expense. Changes in
assumptions affecting estimates may be required in the future and estimated tax liabilities may
need to be increased or decreased accordingly. The accrual for uncertain tax positions is adjusted
in light of changing facts and circumstances, such as the progress of tax audits, case law and
emerging legislation. The Corporation’s effective tax rate includes the impact of tax contingency
accruals and changes to such accruals, including related interest and penalties, as considered
appropriate by management. When particular matters arise, a number of years may elapse before such
matters are audited by the taxing authorities and finally resolved. Favorable resolution of such
matters or the expiration of the statute of limitations may result in the release of uncertain tax
positions, which are recognized as a reduction to the Corporation’s effective rate in the year of
resolution. Unfavorable settlement of any particular issue could increase the effective rate and
may require the use of cash in the year of resolution.
The determination of deferred tax expense or benefit is based on changes in the carrying amounts of
assets and liabilities that generate temporary differences. The carrying value of the Corporation’s
net deferred tax assets assumes that the Corporation will be able to generate sufficient future
taxable income based on estimates and assumptions. If these estimates and related assumptions
change, the Corporation may be required to record valuation allowances against its deferred tax
assets resulting in
34
additional income tax expense in the consolidated statements of operations.
Management evaluates its deferred tax assets on a quarterly basis and assesses the need for a
valuation allowance. A valuation allowance is established when management believes that it is more
likely than not that some portion of its deferred tax assets will not be realized. Changes in
valuation allowance from period to period are included in the Corporation’s tax provision in the
period of change. Based upon the level of historical taxable income and projections for future
taxable income, management believes it is more likely than not, the Corporation will not realize
the benefits of the deferred tax assets related to Santander Financial Services, Inc and Santander
Bancorp (parent company only) amounting to $20.6 million and $0.1 million, respectively, at
December 31, 2008. Accordingly, deferred tax asset valuation allowances of $20.6 million and $0.1
million for Santander Financial Services, Inc and Santander Bancorp (parent company only),
respectively, were recorded at December 31, 2008.
The Corporation accounts for uncertain tax positions in accordance with FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes” (“FIN 48”). Accordingly, the Corporation reports a
liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to
be taken in a tax return. The Corporation recognizes interest and penalties, if any, related to
unrecognized tax benefits in income tax expense.
Goodwill and other intangible assets
. The Corporation accounts for goodwill in accordance with
SFAS No. 142, “Goodwill and Other Intangible Assets.” The reporting units are tested at least
annually to determine whether their carrying value exceeds their fair market value. Should this be
the case, the value of goodwill or indefinite-lived intangibles may be impaired and written down.
Goodwill and other indefinite lived intangible assets are also tested for impairment on an interim
basis if an event occurs or circumstances change between annual tests that would more likely than
not reduce the fair value of the reporting unit below its carrying amount. If there is a
determination that the fair value of the goodwill or other identifiable intangible asset is less
than the carrying value, an impairment loss is recognized in an amount equal to the difference.
Impairment losses, if any, are reflected in other operating expenses in the consolidated statement
of operations.
Tangible and intangible assets with finite useful lives are amortized over their estimated useful
lives. Useful lives are based on management’s estimates of the period that the assets will generate
revenue. If circumstances and conditions indicate deterioration in the value of tangible assets and
intangible assets with finite useful lives, the book value would be adjusted and a loss would be
recognized in current operations.
The Corporation uses judgment in assessing goodwill and intangible assets for impairment.
Estimates of fair value are based on projections of revenues, operating costs and cash flows of
each reporting unit considering historical and anticipated future results, general economic and
market conditions as well as the impact of planned business or operational strategies. The
valuations employ a combination of present value techniques to measure fair value and consider
market factors. Generally, the Corporation engages third party specialists to assist with its
valuations. Additionally, judgment is used in determining the useful lives of finite-lived
intangible assets. Changes in judgments and projections could result in a significantly different
estimate of the fair value of the reporting units and could result in an impairment of goodwill.
As a result of the purchase price allocations from prior acquisitions and the Corporation’s
decentralized structure, goodwill is included in multiple reporting units. Due to certain factors
such as the highly competitive environment, cyclical nature of the business in some of the
reporting units, general economic and market conditions as well as planned business or operational
strategies, among others, the profitability of the Corporation’s individual reporting units may
periodically suffer from downturns in these factors. These factors may have a relatively more
pronounced impact on the individual reporting units as compared to the Corporation as a whole and
might adversely affect the fair value of the reporting units. If material adverse conditions occur
that impact the Corporation’s reporting units, the Corporation’s reporting units, and the related
goodwill would need to be written down to an amount considered recoverable.
The Corporation’s goodwill consists of $10.5 million that resulted from the acquisition by the Bank
of Banco Central Hispano Puerto Rico, $24.3 million that resulted from the acquisition by Santander
Securities of Merrill Lynch’s retail brokerage business in Puerto Rico and $86.7 million that
resulted from the acquisition of Island Finance.
The value of the goodwill is supported ultimately by revenue from the commercial banking segment,
the wealth management segment and the consumer finance segment. A decline in earnings as a result
of a lack of growth, or our inability to deliver cost effective services over sustained periods,
could lead to a perceived impairment of goodwill, which would be evaluated and, if necessary be
recorded as a write-down in the consolidated statement of operations.
On an annual basis, or more frequently if circumstances dictate, management reviews goodwill and
evaluates events or other developments that may indicate impairment in the carrying amount. The
evaluation for potential impairment is inherently complex, and involves significant judgment in the
use of estimates and assumptions.
35
To determine the fair value of the reporting units being evaluated for goodwill impairment, the
Corporation uses the assistance of an independent consultant. The determination of the fair value
of the reporting units (acquired segments) involves the use of estimates and assumptions including
expected results of operations, an assumed discount rate and an assumed growth rate for the
reporting units. Specifically, the independent valuation specialist prepared analyses regarding the
fair value of equity of the Corporation’s reporting units, Commercial Banking, Wealth Management
and Consumer Finance. The consultant may use up to three separate valuation approaches:
Market Multiple Approach
: provides indications of value based upon comparisons of
the reporting unit to market values and pricing evidence of public companies in the
same or similar lines of businesses. Market ratios (pricing multiples) and
performance fundamentals relating the public companies’ stock prices (equity) or
enterprise values to certain underlying fundamental data are applied to the
reporting unit to determine indications of its fair value.
Comparable Transaction Approach
: includes an examination of recent transactions in
which companies involved in the same or similar lines of business to the reporting
unit were acquired. Acquisition values and pricing evidence are used in much the
same manner as the Market Multiple Approach for indication of the reporting unit’s
fair value.
Discounted Cash Flow Approach
: calculates the present value of the projected future
cash flows to be generated by the reporting unit using appropriate discount rates.
The discount rates are intended to reflect all associated risks of realizing the
projected future cash flows. Terminal values are computed as of the end of the last
period for which cash flows are projected to determine an estimate of the values of
the reporting unit as of that future point in time. Discounting the terminal values
back to the present and adding the present values of the future cash flows yields
indications of the reporting unit’s fair value.
Events that may indicate goodwill impairment include significant or adverse changes in the
business, economic or political climate; unanticipated competition; adverse action or assessment by
a regulator; plans for disposition of a segment; among others.
As a result of the unfavorable economic environment in Puerto Rico, Island Finance’s short-term
financial performance and profitability declined significantly during 2007, caused by reduced
lending activity and increases in non-performing assets and charge-offs. The Corporation, with the
assistance of an independent valuation firm, performed an interim impairment test of the goodwill
and other intangibles of Island Finance as of July 1, 2007. SFAS No. 142 provides a two-step
impairment test. The first step of the impairment test compares the fair value of a reporting unit
with its carrying amount, including goodwill. If the carrying amount of a reporting unit exceeds
its fair value, the second step of the goodwill impairment test is performed to measure the amount
of the impairment loss, if any. The Corporation completed the first step of the impairment test and
determined that the carrying amount of the goodwill and other intangible assets of Island Finance
exceeded their fair value, thereby requiring performance of the second step of the impairment test
to calculate the amount of the impairment. Based upon the completed impairment test, the
Corporation determined that the actual non-cash impairment charges as of July 1, 2007 were $43.3
million, which included $26.8 of goodwill and $16.5 million of other intangibles assets (comprised
of $9.2 million of customer relationships, $5.4 million of trade name and $1.9 million of
non-compete agreement). These impairment charges did not result in cash expenditures and will not
result in future cash expenditures. The Corporation performed its annual impairment assessments as
of October 1, 2007 with the assistance of the independent valuation specialist. The Corporation
determined that no impairment charge was necessary as of October 1, 2007. Based on management’s
assessment of the value of the Corporation’s goodwill at October 1, 2008, which includes an
independent valuation, among others, management determined that the Corporation’s goodwill and
other intangibles were not impaired.
In assessing the recoverability of goodwill and other intangibles, the Corporation must make
assumptions regarding estimated future cash flows and other factors to determine the fair value of
the respective assets. If these estimates or their related assumptions change in the future, the
Corporation may be required to record impairment charges for these assets not previously recorded.
The key assumptions used by management to determine the fair value of the reporting units include
company specific risk elements that are consistent with the risks inherent in its current business
models for each reporting unit. Changes in judgment and estimates could result in a significantly
different estimate of the fair value of the reporting units and could result in an impairment of
goodwill and other intangibles.
Pension and Other Postemployment Benefits
. The determination of the Corporation’s obligation and
expense for pension and other postretirement benefits is dependent on the selection of certain
assumptions used by actuaries in calculating such amounts. Those assumptions are described in Note
19 to the consolidated financial statements and include, among others, the discount rate, expected
long-term rate of return on plan assets and rates of increase in healthcare costs. Management
participates in the determination of these factors, which normally undergo evaluation against
industry assumptions, among
36
other factors. In accordance with accounting principles generally
accepted in the United States of America, actual results that differ from the Corporation’s assumptions are accumulated and amortized over future periods and
therefore, generally affect recognized expense and recorded obligation in such future periods. The
Corporation uses an independent actuarial firm for the determination of the pension and
post-retirement benefit costs and obligations.
In September 2006, the FASB issued SFAS No. 158 which requires recognition of a plan’s over-funded
or under-funded status as an asset or liability with an offsetting adjustment to accumulated other
comprehensive income (AOCI). Actuarial gains or losses, prior service costs and transition assets
or obligations will be subsequently recognized as components of net periodic benefit costs.
Additional minimum pension liabilities (AMPL) and related intangible assets are derecognized upon
adoption of the standard.
In developing the expected return on plan assets, the Corporation considers the asset allocation,
historical returns on the types of assets held in the pension trust, the current economic
environment, as well as input from the actuaries, financial analysts and the Corporation’s
long-term inflation assumptions and interest rate scenarios. The expected rate of return for plan
assets was set at 7.5% for the year ended December 31, 2008 and 8.5% for the years ended December
31, 2007 and 2006. In selecting a discount rate, the Corporation considers the Moody’s long-term
AA Corporate Bond yield as a guide. At December 31, 2008, 2007 and 2006, the discount rate was
6.00%, 6.50% and 5.75%, respectively, for the Corporation’s Plan and 6.0%, 5.75% and 5.75%,
respectively, for the BCH’s Plan.
Management believes that the assumptions made are appropriate; however, significant differences in
actual experience or significant changes in assumptions may materially affect pension obligations
and future expense.
Results of Operations
The following financial discussion is based upon and should be read in conjunction with the
Corporation’s consolidated financial statements for the years ended December 31, 2008, 2007, and
2006.
The following table sets forth the principal components of the Corporation’s net income (loss) for
the years ended December 31, 2008, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(Dollars in thousands)
|
|
|
Components of net income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
356,322
|
|
|
$
|
311,679
|
|
|
$
|
290,606
|
|
|
Provision for loan losses
|
|
|
(175,523
|
)
|
|
|
(147,824
|
)
|
|
|
(65,583
|
)
|
|
Other income
|
|
|
147,835
|
|
|
|
148,120
|
|
|
|
118,469
|
|
|
Other operating expenses
|
|
|
(324,627
|
)
|
|
|
(344,016
|
)
|
|
|
(277,783
|
)
|
|
(Benefit) provision for income tax
|
|
|
(6,524
|
)
|
|
|
4,204
|
|
|
|
22,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
10,531
|
|
|
$
|
(36,245
|
)
|
|
$
|
43,169
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 compared to 2007.
The Corporation’s net income increased $46.8 million or 129.1% for the year
ended December 31, 2008 compared to figures reported in 2007. This increase was mainly due to an
increase of $44.6 million or 14.3% in other net interest income, a decrease in other operating
expenses of $19.4 million or 5.6% and a decrease in provision for income tax of $10.7 million or
255.2%. These increases were offset by an increase the provision for loan losses of $27.7 million
or 18.7%. The increase in net interest income was due to an improvement of 76 basis points in net
interest margin, on a tax equivalent basis. The decrease in operating expenses was principally due
to a $43.3 million related to goodwill and other intangible
assets impairment charges recognized during 2007, a
$16.0 million decrease in stock incentive compensation expense sponsored by Santander Group, a provision for claim receivable of $25.1 million recognized
during 2008, a $7.8 million increase in professional fees, a $6.9 million increase in salaries and
other personnel expenses, a $3.9 million increase in occupancy cost, a $3.8 million increase in
FDIC assessment offset by a decrease of $9.0 million in
business promotion and a decrease of $1.8 million in repossesed asset
provision and expenses.
37
2007 compared to 2006.
The Corporation’s net income decreased $79.5 million or 184.0% for the year
ended December 31, 2007 compared to figures reported in 2006. This decrease was principally due to
an increase in the provision for loan losses of $82.2 million and operating expenses of $66.2
million, partially offset by an increase in net interest income of $21.1 million and in
non-interest income of $29.7 million and a decrease in the provision for income tax of $18.3
million. The increase in operating expenses was mainly due to $43.3 million of goodwill and other
intangibles impairment charges on the consumer finance segment and $14.8 million in compensation
expense related to stock incentive plans sponsored by Santander Spain. The increase in other income
was mainly due to a gain of $12.3 million recognized during the fourth quarter of 2007 due to the
sale of the Corporation’s merchant business to an unrelated third party during the first quarter of
2007 and higher fees in broker-dealer, asset management and insurance fees of $11.3 million.
Net Interest Income
The Corporation reported net interest income of $356.3 million, $311.7 million and $290.6 million
for the years ended December 31, 2008, 2007, and 2006, respectively.
To facilitate the comparison of assets with different tax attributes, the interest income on
tax-exempt assets under this heading and under the heading “Change in Interest Income and Interest
Expense—Volume and Rate Analysis,” has been adjusted by an amount equal to the income taxes which
would have been paid had the interest income been fully taxable. This tax equivalent adjustment is
derived using the applicable statutory tax rate and resulted in an adjustment of $4.7 million in
2008, $7.5 million in 2007 and $9.0 million in 2006.
The following table sets forth the principal components of the Corporation’s net interest income
for the years ended December 31, 2008, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income — tax equivalent basis
|
|
$
|
605,445
|
|
|
$
|
681,755
|
|
|
$
|
627,306
|
|
|
Interest expense
|
|
|
(244,449
|
)
|
|
|
(362,531
|
)
|
|
|
(327,714
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income — tax equivalent basis
|
|
$
|
360,996
|
|
|
$
|
319,224
|
|
|
$
|
299,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin — tax equivalent basis (1)
|
|
|
4.50
|
%
|
|
|
3.74
|
%
|
|
|
3.63
|
%
|
|
|
|
|
|
(1)
|
|
Net interest margin for any period equals tax-equivalent net interest income divided by average interest-earning
assets for such period.
|
2008 compared to 2007.
For the year ended December 31, 2008, net interest margin, on a tax
equivalent basis, was 4.50% compared with 3.74% for the same period in 2007. The increase of 76
basis points in net interest margin
was mainly due to a decrease of 133 basis points in
the cost of interest-bearing liabilities together with a decrease of $489.2 million in average
interest-bearing liabilities. The Corporation also experienced a decrease in the yield of
interest-earning assets of 44 basis points and $515.8 million decrease in average interest-earnings
assets. Net Interest income, on a tax equivalent basis, reflected an increase of $41.8 million or
13.1% resulting from a decrease of $118.1 million or 32.6% in interest expense due to a $77.9
million decrease in interest expense in average borrowings (including average term notes and
average subordinated notes) offset by a decrease of $76.3 million or 11.2% in interest income, on a
tax equivalent basis mainly due to a $53.0 million decrease in interest income on average loans.
The 44 basis points reduction in the yield on the average
interest-earnings assets was due to changes in the mix in the interest-earning assets and the repricing of the interest rate during 2008. There was a reduction of
$53.0 million or 8.8% in interest income on average net loans accompanied by a $21.9
million or 30.7% decrease in interest income on average investment securities.
Average interest-earning assets decreased $515.8 million or 6.1% to $8.0 billion at December 31,
2008 compared with December 31, 2007. The decrease in average interest-earning assets was driven by
decreases in average investment securities of $330.7 million and average net loans of $315.9
million partially offset by a $130.8 million increase in average interest- bearing deposits. The
decrease of $330.7 million in average investment securities was due to a $346.7 million sale of
investment securities available for sale during the year ended December 31, 2008, which includes
$221.4 million of investment securities pledged as collateral to securities sold under agreements
to repurchase with LBI. The decrease of $315.9 million in average net loans was driven by a $74.3
million decrease in average commercial loans and $101.3 million decrease in average
38
construction loans principally due to the sale of certain loans, including some classified as impaired, to an affiliate
during the period. There were decreases of $36.1 million in average leasing portfolio since the
Corporation has strategically reduced this line of lending, of $29.7 million in average mortgage
loans and $25.3 million in average consumer loans which comprised a $48.0 million decrease in
average personal loans and a $12.2 million decrease in average consumer finance offset by a $34.9
million increase in average credit cards.
There was a reduction of 133 basis points in the average cost of interest-bearing liabilities. The
Corporation’s interest expense on average interest-bearing liabilities reflected a decreased of
32.6% to $244.5 million for year ended December 31, 2008 from $362.5 million for the same period in
2007. This reduction was due to a decrease in interest expense on average borrowings (including
average term notes and average subordinated notes) of $77.9 million or 45.8% for the year ended
December 31, 2008 compared to December 31, 2007 and a decrease in interest expense on total average
interest-bearing deposits of $40.2 million or 20.9%. There were decreases in interest expense on
average time deposits and average savings and NOW accounts of $23.4 million and $16.8 million,
respectively, in 2008 compared to the same period in 2007.
Average interest-bearing liabilities reached $7.1 billion as of December 31, 2008, reflecting a
decrease of $489.2 million or 6.4% when compared to figures reported in 2007. The reduction in
average interest-bearing liabilities was mainly due to a decrease in average borrowings (including
term and subordinated notes) of 779.4 million or 25.2% to $2.3 billion in 2008 from $3.1 billion in
2007. The reduction in average borrowings (including term and subordinated notes) was mainly to the
payment of the $700 million outstanding indebtedness incurred under the bridge facility agreement
among the Corporation, SFS and National Australia Bank Limited during the first quarter of 2008 and
the cancellation on September 19, 2008 of $200 million of securities sold under agreements to
repurchase with LBI as result of bankruptcy of its parent LBHI. Also, there were decreases in
average commercial paper and average term notes of $169.9 million or 44.8% and $18.5 million or
48.5%, respectively, when compared with the same period in prior year. These decreases were
partially offset by an increase in average Federal Home Loan Bank Advances of $177.8 million or
18.8%. Average interest-bearing deposits increased $290.2 million or 6.4% to reach $4.8 billion as
of December 31, 2008 and include an increase in average other time deposits of $330.8 million or
23.3% offset by decreases of $24.5 million and $16.0 million in average savings and Now accounts
and average brokered deposits, respectively, when compared with the figures reported in the prior
year. The increase in average interest bearing deposits is mainly due to a certificate of deposit
in the amount of $630 million held by Banco Santander, S.A. in Banco Santander Puerto Rico during
the first quarter of 2008.
2007 compared to 2006
. For the year ended December 31, 2007, net interest margin, on a tax
equivalent basis, was 3.74% compared to net interest margin, on a tax equivalent basis, of 3.63%
for the same period in 2006. This increase of 11 basis points in net interest margin, on a tax
equivalent basis, was mainly due to an increase of 40 basis points in the yield on average interest
earning assets together with an increase in average interest earning assets of $267.5 million.
These increases were partially offset by an increase in the cost of interest bearing liabilities of
31 basis points and an increase in average interest bearing liabilities of $242.8 million.
Interest income, on a tax equivalent basis, increased $54.5 million or 8.7% for the year ended
December 31, 2007 compared to 2006, while interest expense increased $34.8 million or 10.6% over
the same period. The increase of $54.5 million in interest income, on a tax equivalent basis, was
due principally to a $65.1 million increase in interest income on average net loans offset by $8.5
million decrease in interest income on average investment securities.
For the year ended December 31, 2007 average interest earning assets increased $267.5 million or
3.2% and average interest bearing liabilities increased $242.8 million or 3.3% compared to the same
period in 2006. The increment in average interest earning assets compared to the previous year was
driven by an increase in average net loans of $461.6 million, which was partially offset by
decreases in average investment securities and average interest bearing deposits of $161.9 million
and $32.2 million, respectively. The increase in average net loans was due to an increase of $266.8
million or 11.0% in average mortgage loans. There was also an increase of $165.2 million or 15.0%
in the average consumer loan and consumer finance portfolios as a result of an increase in the
average consumer finance portfolio of $84.8 million as well as increases in average credit cards
and personal installment loans of $44.7 million and $35.9 million, respectively. The commercial
loan and construction loan portfolios experienced an increase of $67.9 million or 2.3% due
primarily to increases in average construction loans of $178.8 million and average retail
commercial banking loans of $61.7 million. These increases were partially offset by decrease in
average corporate loans of $150.3 million due to the settlement with an unrelated financial
institution of $232.5 million of commercial loans secured by mortgages during the second quarter of
2006. Excluding the loans settled with an unrelated financial institution in 2006, the average
commercial loan portfolio grew $300.5 million or 10.9%.
Interest expense on average interest-bearing liabilities increased by $34.8 million, or 10.6%, to
reach $362.5 million at December 31, 2007 when compared to $327.7 million for the same period in
2006. This increase was due to increases in interest expense on average interest bearing deposits
and average borrowings of $18.0 million and $15.5 million, respectively.
39
The increase in average interest bearing liabilities of $242.8 million for the year ended December
31, 2007, was driven by an increase in average borrowings of $193.8 million compared to the same
period in 2006. This increase was due to increments in average FHLB Advances of $279.3 million and
average federal funds purchased and other borrowings of $72.7 million to finance the operations of
Island Finance and the refinancing of other existing debt of the Corporation. There was also an
increase in average commercial paper of $5.5 million. These increases were offset by a reduction in
average repurchase agreements of $163.8 million. The average interest bearing deposits reflected an
increment of $29.6 million which comprised increase in brokered deposits and other time deposits of
$118.6 million and $56.5 million, respectively, offset by a decrease in savings and NOW accounts of
$145.5 million.
The following table shows average balances and, where applicable, interest amounts earned on a
tax-equivalent basis and average rates for the Corporation’s assets and liabilities and
stockholders’ equity for the years ended December 31, 2008, 2007and 2006.
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
|
|
(Dollars in thousands)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits
|
|
$
|
81,851
|
|
|
$
|
1,063
|
|
|
|
1.30
|
%
|
|
$
|
85,278
|
|
|
$
|
3,343
|
|
|
|
3.92
|
%
|
|
$
|
94,890
|
|
|
$
|
4,439
|
|
|
|
4.68
|
%
|
|
Federal funds sold and securities
purchased under agreements to resell
|
|
|
202,658
|
|
|
|
4,333
|
|
|
|
2.14
|
%
|
|
|
68,477
|
|
|
|
3,456
|
|
|
|
5.05
|
%
|
|
|
91,049
|
|
|
|
4,531
|
|
|
|
4.98
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits
|
|
|
284,509
|
|
|
|
5,396
|
|
|
|
1.90
|
%
|
|
|
153,755
|
|
|
|
6,799
|
|
|
|
4.42
|
%
|
|
|
185,939
|
|
|
|
8,970
|
|
|
|
4.82
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.Treasury securities
|
|
|
42,604
|
|
|
|
1,028
|
|
|
|
2.41
|
%
|
|
|
91,384
|
|
|
|
4,090
|
|
|
|
4.48
|
%
|
|
|
58,137
|
|
|
|
2,759
|
|
|
|
4.75
|
%
|
|
Obligations of other U.S. government
agencies and corporations
|
|
|
417,457
|
|
|
|
14,122
|
|
|
|
3.38
|
%
|
|
|
635,219
|
|
|
|
29,561
|
|
|
|
4.65
|
%
|
|
|
744,923
|
|
|
|
36,417
|
|
|
|
4.89
|
%
|
|
Obligations of the government of Puerto Rico
and political subdivisions
|
|
|
100,610
|
|
|
|
5,633
|
|
|
|
5.60
|
%
|
|
|
95,781
|
|
|
|
5,113
|
|
|
|
5.34
|
%
|
|
|
90,478
|
|
|
|
4,982
|
|
|
|
5.51
|
%
|
|
Collateralized mortgage obligations and
mortgage backed securities
|
|
|
519,311
|
|
|
|
24,752
|
|
|
|
4.77
|
%
|
|
|
588,719
|
|
|
|
28,422
|
|
|
|
4.83
|
%
|
|
|
692,986
|
|
|
|
32,965
|
|
|
|
4.76
|
%
|
|
Other
|
|
|
65,035
|
|
|
|
3,820
|
|
|
|
5.87
|
%
|
|
|
64,591
|
|
|
|
4,076
|
|
|
|
6.31
|
%
|
|
|
51,080
|
|
|
|
2,595
|
|
|
|
5.08
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
|
1,145,017
|
|
|
|
49,355
|
|
|
|
4.31
|
%
|
|
|
1,475,694
|
|
|
|
71,262
|
|
|
|
4.83
|
%
|
|
|
1,637,604
|
|
|
|
79,718
|
|
|
|
4.87
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
2,431,527
|
|
|
|
137,263
|
|
|
|
5.65
|
%
|
|
|
2,505,825
|
|
|
|
172,671
|
|
|
|
6.89
|
%
|
|
|
2,587,001
|
|
|
|
175,214
|
|
|
|
6.77
|
%
|
|
Construction
|
|
|
379,857
|
|
|
|
16,363
|
|
|
|
4.31
|
%
|
|
|
481,174
|
|
|
|
38,479
|
|
|
|
8.00
|
%
|
|
|
302,370
|
|
|
|
26,242
|
|
|
|
8.68
|
%
|
|
Consumer
|
|
|
613,499
|
|
|
|
86,960
|
|
|
|
14.17
|
%
|
|
|
626,580
|
|
|
|
79,531
|
|
|
|
12.69
|
%
|
|
|
553,472
|
|
|
|
63,542
|
|
|
|
11.48
|
%
|
|
Consumer Finance
|
|
|
596,129
|
|
|
|
141,701
|
|
|
|
23.77
|
%
|
|
|
608,366
|
|
|
|
139,075
|
|
|
|
22.86
|
%
|
|
|
523,610
|
|
|
|
118,077
|
|
|
|
22.55
|
%
|
|
Mortgage
|
|
|
2,662,726
|
|
|
|
163,360
|
|
|
|
6.14
|
%
|
|
|
2,692,448
|
|
|
|
166,192
|
|
|
|
6.17
|
%
|
|
|
2,425,611
|
|
|
|
146,558
|
|
|
|
6.04
|
%
|
|
Lease financing
|
|
|
76,204
|
|
|
|
5,047
|
|
|
|
6.62
|
%
|
|
|
112,268
|
|
|
|
7,746
|
|
|
|
6.90
|
%
|
|
|
134,606
|
|
|
|
8,985
|
|
|
|
6.68
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loans
|
|
|
6,759,942
|
|
|
|
550,694
|
|
|
|
8.15
|
%
|
|
|
7,026,661
|
|
|
|
603,694
|
|
|
|
8.59
|
%
|
|
|
6,526,670
|
|
|
|
538,618
|
|
|
|
8.25
|
%
|
|
Allowance for loan losses
|
|
|
(175,100
|
)
|
|
|
|
|
|
|
|
|
|
|
(125,897
|
)
|
|
|
|
|
|
|
|
|
|
|
(87,465
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net
|
|
|
6,584,842
|
|
|
|
550,694
|
|
|
|
8.36
|
%
|
|
|
6,900,764
|
|
|
|
603,694
|
|
|
|
8.75
|
%
|
|
|
6,439,205
|
|
|
|
538,618
|
|
|
|
8.36
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets/ interest
income (tax-equivalent basis)
|
|
|
8,014,368
|
|
|
|
605,445
|
|
|
|
7.55
|
%
|
|
|
8,530,213
|
|
|
|
681,755
|
|
|
|
7.99
|
%
|
|
|
8,262,748
|
|
|
|
627,306
|
|
|
|
7.59
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest-earning assets
|
|
|
726,302
|
|
|
|
|
|
|
|
|
|
|
|
669,499
|
|
|
|
|
|
|
|
|
|
|
|
561,237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
8,740,670
|
|
|
|
|
|
|
|
|
|
|
$
|
9,199,712
|
|
|
|
|
|
|
|
|
|
|
$
|
8,823,985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders’ equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings and NOW accounts
|
|
$
|
1,691,094
|
|
|
$
|
34,944
|
|
|
|
2.07
|
%
|
|
$
|
1,715,631
|
|
|
$
|
51,785
|
|
|
|
3.02
|
%
|
|
$
|
1,861,167
|
|
|
$
|
49,470
|
|
|
|
2.66
|
%
|
|
Other time deposits
|
|
|
1,749,942
|
|
|
|
56,905
|
|
|
|
3.25
|
%
|
|
|
1,419,185
|
|
|
|
65,810
|
|
|
|
4.64
|
%
|
|
|
1,362,653
|
|
|
|
57,648
|
|
|
|
4.23
|
%
|
|
Brokered deposits
|
|
|
1,385,318
|
|
|
|
60,603
|
|
|
|
4.37
|
%
|
|
|
1,401,310
|
|
|
|
73,820
|
|
|
|
5.27
|
%
|
|
|
1,282,704
|
|
|
|
66,262
|
|
|
|
5.17
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest-bearing deposits
|
|
|
4,826,354
|
|
|
|
152,452
|
|
|
|
3.16
|
%
|
|
|
4,536,126
|
|
|
|
191,415
|
|
|
|
4.22
|
%
|
|
|
4,506,524
|
|
|
|
173,380
|
|
|
|
3.85
|
%
|
|
Borrowings
|
|
|
2,047,442
|
|
|
|
78,049
|
|
|
|
3.81
|
%
|
|
|
2,805,003
|
|
|
|
153,951
|
|
|
|
5.49
|
%
|
|
|
2,611,231
|
|
|
|
138,500
|
|
|
|
5.30
|
%
|
|
Term Notes
|
|
|
19,674
|
|
|
|
631
|
|
|
|
3.21
|
%
|
|
|
38,223
|
|
|
|
1,278
|
|
|
|
3.34
|
%
|
|
|
40,883
|
|
|
|
1,460
|
|
|
|
3.57
|
%
|
|
Subordinated Notes
|
|
|
247,419
|
|
|
|
13,317
|
|
|
|
5.38
|
%
|
|
|
250,721
|
|
|
|
15,887
|
|
|
|
6.34
|
%
|
|
|
227,961
|
|
|
|
14,374
|
|
|
|
6.31
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
interest expense
|
|
|
7,140,889
|
|
|
|
244,449
|
|
|
|
3.42
|
%
|
|
|
7,630,073
|
|
|
|
362,531
|
|
|
|
4.75
|
%
|
|
|
7,386,599
|
|
|
|
327,714
|
|
|
|
4.44
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non interest-bearing liabilities
|
|
|
1,035,543
|
|
|
|
|
|
|
|
|
|
|
|
996,103
|
|
|
|
|
|
|
|
|
|
|
|
873,793
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
8,176,432
|
|
|
|
|
|
|
|
|
|
|
|
8,626,176
|
|
|
|
|
|
|
|
|
|
|
|
8,260,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity
|
|
|
564,238
|
|
|
|
|
|
|
|
|
|
|
|
573,536
|
|
|
|
|
|
|
|
|
|
|
|
563,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
8,740,670
|
|
|
|
|
|
|
|
|
|
|
$
|
9,199,712
|
|
|
|
|
|
|
|
|
|
|
$
|
8,823,985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
360,996
|
|
|
|
|
|
|
|
|
|
|
$
|
319,224
|
|
|
|
|
|
|
|
|
|
|
$
|
299,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread
|
|
|
|
|
|
|
|
|
|
|
4.13
|
%
|
|
|
|
|
|
|
|
|
|
|
3.24
|
%
|
|
|
|
|
|
|
|
|
|
|
3.16
|
%
|
|
Cost of funding earning assets
|
|
|
|
|
|
|
|
|
|
|
3.05
|
%
|
|
|
|
|
|
|
|
|
|
|
4.25
|
%
|
|
|
|
|
|
|
|
|
|
|
3.97
|
%
|
|
Net interest margin (tax equivalent basis)
|
|
|
|
|
|
|
|
|
|
|
4.50
|
%
|
|
|
|
|
|
|
|
|
|
|
3.74
|
%
|
|
|
|
|
|
|
|
|
|
|
3.63
|
%
|
41
Changes in Interest Income and Interest Expense-Volume and Rate Analysis
The following table allocates changes in the Corporation’s tax equivalent interest income and
interest expense between changes in the average volume of interest-earning assets and
interest-bearing liabilities and changes in their respective interest rates for the years 2008
compared to 2007 and 2007 compared to 2006 Volume and rate variances have been calculated based on
activities in average balances over the period and changes in interest rates on average
interest-earning assets and average interest-bearing liabilities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 vs. 2007
|
|
|
2007 vs. 2006
|
|
|
|
|
Increase (decrease) due to change in:
|
|
|
Increase (decrease) due to change in:
|
|
|
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
|
|
|
(Dollars in thousands)
|
|
|
Interest Income — tax equivalent basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold and securities
purchased under agreements to resell
|
|
$
|
3,756
|
|
|
$
|
(2,879
|
)
|
|
$
|
877
|
|
|
$
|
(1,138
|
)
|
|
$
|
63
|
|
|
$
|
(1,075
|
)
|
|
Time deposits with other banks
|
|
|
(129
|
)
|
|
|
(2,151
|
)
|
|
|
(2,280
|
)
|
|
|
(422
|
)
|
|
|
(674
|
)
|
|
|
(1,096
|
)
|
|
Investment securities
|
|
|
(14,810
|
)
|
|
|
(7,097
|
)
|
|
|
(21,907
|
)
|
|
|
(7,823
|
)
|
|
|
(633
|
)
|
|
|
(8,456
|
)
|
|
Loans, net
|
|
|
(27,016
|
)
|
|
|
(25,984
|
)
|
|
|
(53,000
|
)
|
|
|
39,688
|
|
|
|
25,388
|
|
|
|
65,076
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
(38,199
|
)
|
|
|
(38,111
|
)
|
|
|
(76,310
|
)
|
|
|
30,305
|
|
|
|
24,144
|
|
|
|
54,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings and NOW accounts
|
|
|
(730
|
)
|
|
|
(16,111
|
)
|
|
|
(16,841
|
)
|
|
|
(4,060
|
)
|
|
|
6,375
|
|
|
|
2,315
|
|
|
Other time deposits
|
|
|
14,509
|
|
|
|
(37,876
|
)
|
|
|
(23,367
|
)
|
|
|
8,455
|
|
|
|
7,265
|
|
|
|
15,720
|
|
|
Borrowings
|
|
|
(35,377
|
)
|
|
|
(39,251
|
)
|
|
|
(74,628
|
)
|
|
|
10,521
|
|
|
|
4,930
|
|
|
|
15,451
|
|
|
Long-term borrowings
|
|
|
(1,239
|
)
|
|
|
(2,007
|
)
|
|
|
(3,246
|
)
|
|
|
1,171
|
|
|
|
160
|
|
|
|
1,331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
(22,837
|
)
|
|
|
(95,245
|
)
|
|
|
(118,082
|
)
|
|
|
16,087
|
|
|
|
18,730
|
|
|
|
34,817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (expense) — tax
equivalent basis
|
|
$
|
(15,362
|
)
|
|
$
|
57,134
|
|
|
$
|
41,772
|
|
|
$
|
14,218
|
|
|
$
|
5,414
|
|
|
$
|
19,632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2008, the increase in net interest income on a tax equivalent basis was driven primarily by
decreases in volume and rate on interest bearing-liabilities of 133 basis points accompanied by a
decrease in volume and yield earned on interest-earning assets of 44 basis points. The increase in
net interest income was attributed to a significant cost of funds reduction and the refinancing of
existing debts.
During 2007, the increase in net interest income on a tax equivalent basis was driven primarily by
increases in volume and yield earned on interest earning-assets of 40 basis points which is higher
than the increase in volume and interest rates paid on interest-bearing liabilities of 31 basis
points. The increase in interest income is attributed principally to increase in yield earned on
average net loans of 39 basis points.
Provision for Loan Losses
2008 compared to 2007.
The provision for loan losses increased $27.7 million or 18.7% from $147.8
million for the year ended December 31, 2007 to $175.5 million for the year ended December 31,
2008. The increase in the provision for loan losses was due primarily to increases in
non-performing loans due to the deterioration in economic conditions in Puerto Rico, requiring the
Corporation to increase the level of its allowance for loan losses.
2007 compared to 2006.
The provision for loan losses increased $82.2 million or 125.4% from $65.6
million for the year ended December 31, 2006 to $147.8 million for the year ended December 31,
2007. The increase in the provision for loan losses was due primarily to increases in
non-performing loans due to the deterioration in economic conditions in Puerto Rico.
42
Refer to the discussions under “Allowance for Loan Losses” and “Risk Management” for further
analysis of the allowance for loan losses, the allocation of the allowance by loan category and
non-performing assets and related ratios.
Other Income
Other income consists of service charges on deposit accounts, other service fees, including
mortgage servicing fees and fees on credit cards, broker-dealer, asset management and insurance
fees, gains and losses on sales of securities, gain on sale of mortgage servicing rights, certain
other gains and losses and certain other income.
The following table sets forth the components of our other income for the years ended December 31,
2008, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(Dollars In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank service fees on deposit accounts
|
|
$
|
12,975
|
|
|
$
|
13,603
|
|
|
$
|
13,349
|
|
|
Other service fees:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit card fees
|
|
|
8,788
|
|
|
|
10,872
|
|
|
|
17,870
|
|
|
Mortgage-servicing fees
|
|
|
3,555
|
|
|
|
3,010
|
|
|
|
2,554
|
|
|
Trust fees
|
|
|
1,561
|
|
|
|
1,914
|
|
|
|
3,004
|
|
|
Confirming advances
|
|
|
6,200
|
|
|
|
4,169
|
|
|
|
2,812
|
|
|
Other fees
|
|
|
11,606
|
|
|
|
13,633
|
|
|
|
9,489
|
|
|
Broker-dealer, asset management and insurance fees
|
|
|
74,808
|
|
|
|
68,265
|
|
|
|
56,973
|
|
|
Gain on sale of securities, net
|
|
|
5,154
|
|
|
|
1,265
|
|
|
|
—
|
|
|
Gain on sale of loans
|
|
|
3,253
|
|
|
|
6,658
|
|
|
|
1,994
|
|
|
Trading gains
|
|
|
2,608
|
|
|
|
2,831
|
|
|
|
1,243
|
|
|
Gain (loss) on derivatives
|
|
|
3,284
|
|
|
|
249
|
|
|
|
(478
|
)
|
|
Other gains, net
|
|
|
5,739
|
|
|
|
18,644
|
|
|
|
4,428
|
|
|
Other
|
|
|
8,304
|
|
|
|
3,007
|
|
|
|
5,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
147,835
|
|
|
$
|
148,120
|
|
|
$
|
118,469
|
|
|
|
|
|
|
|
|
|
|
|
|
The table below details the breakdown of commissions from broker-dealer, asset management and insurance operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Broker-dealer
|
|
$
|
40,480
|
|
|
$
|
32,147
|
|
|
$
|
25,269
|
|
|
Asset management
|
|
|
26,833
|
|
|
|
24,362
|
|
|
|
19,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Santander Securities and subsidiary
|
|
|
67,313
|
|
|
|
56,509
|
|
|
|
45,238
|
|
|
Insurance
|
|
|
7,495
|
|
|
|
11,756
|
|
|
|
11,735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
74,808
|
|
|
$
|
68,265
|
|
|
$
|
56,973
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 compared to 2007.
For the year ended December 31, 2008, other income remained basically flat
as compared with figures reported in the prior year. Broker-dealer, asset management and insurance
fees reflected an increase of $6.5 million or 9.6% due to increases in broker-dealer and asset
management fees of $10.8 million partially offset by a decrease of $4.3 million in insurance fees
due to a reduction of $3.1 million and $1.1 million in credit life commissions generated from the
Bank and Island Finance operations, respectively. The broker-dealer asset management and insurance
operations contributed 50.6% of commissions to the Corporation’s other income for the year ended
December 31, 2008.
There was a gain of $8.6 million on the sale of a portion of the Corporation’s investment in Visa,
Inc. in connection with its initial public offering during the first quarter of 2008. A gain on
sale of securities of $5.2 million or a $3.9 million increase was recognized for the year ended
December 31, 2008. This increase was driven by a sale of investment securities of $346.7 million
during 2008, including $221.4 million related to investment securities available for sale held as
collateral by LBI under securities sold under agreements to repurchase. The Corporation recognized
a $2.3 million gain in connection with the settlement of the securities pledged as collateral to
securities sold under agreements to repurchase. Also, the Corporation reported an increase in gain
on derivative instruments of $3.0 million for the year ended December 31, 2008 compared with the
43
prior year mainly due to the net effect of incorporating the Corporation’s credit risk in the
derivative fair value calculation methodology pursuant the adoption of SFAS 157, a $1.0 million
increase in swap income, $1.2 million increase in technical assistance collected from affiliates
and an additional fees received of
$1.0 million as part of the agreement for the sale of the Corporation’s merchant business during 2007.
These increases were partially offset by an unfavorable valuation adjustment of $7.4 million for
loans held for sale, a decrease in other gain of $12.9 due mainly to a $12.2 million in gain of
sale of merchant business to an unrelated party during 2007. Also, there was a $3.4 million
decrease in gain on sale of loans. The Corporation reported $105.8 million in mortgage loans sold,
a reduction of $145.7 million or 57.9%, for the year ended December 31, 2008 compared with $251.4
million mortgage loans sold during 2007.
Bank service charges, fees and other decreased $2.6 million, or 5.3% for the year ended December
31, 2008. These reductions were principally due to a $2.1 million decrease in credit card fees due
to the sale of the Corporation’s merchant business to an unrelated third party during the first
quarter of 2007.
2007 compared to 2006.
For the year ended December 31, 2007, other income reached $148.1 million, a
$29.7 million or 25.0% increase when compared to $118.5 million for the same period in 2006. This
increase was mainly due to a $12.3 million gain on the sale of the Corporation’s merchant business
to an unrelated third party. During 2007, the Corporation transferred its merchant business to a
subsidiary, MBPR Services, Inc. (“MBPR”) and subsequently sold the stock of MBPR to an unrelated
third party. During 2007, the Corporation provided certain processing and other services to the
third party acquirer. As part of the transaction, the Corporation entered into a long-term
marketing alliance agreement with the third party and will serve as its sponsor with the card
associations and network organizations. The Corporation expects to offer better products and
services to its merchant client base and to obtain certain cost efficiencies as a result of this
transaction.
Gain on sales of loans increased due to sales of $251.4 million for the year ended December 31,
2007 compared with sales of $174.5 million for the year ended December 31, 2006 resulting in an
increase in gain on sale of loans of $1.0 million. There was also an increase of $3.7 million in
gain on sales of loans previously charged-off during 2007 when compared with the same period in
2006. There were increases in trading gains of $1.7 million, gain on sale of securities of $1.3
million, derivatives gains of $0.8 million, mortgage servicing rights recognized of $1.1 million
and a favorable change in the valuation of mortgage loans held for sale of $1.2 million for the
year ended December 31, 2007 compared with the same period in 2006. These increases were partially
offset by a gain on sale of an FDIC assessment credit of $1.9 million and a tax credit purchased of
$0.5 million during 2006, a reduction in swap income of $0.9 million and a decrease in rental
income in point-of-sale (POS) terminals of $0.7 million due to the sale of merchant business during
2007.
Bank service charges, fees and other decreased $1.9 million or 3.8% for the year ended December 31,
2007. These reductions were principally due to $7.0 million decrease in credit card fees due to a
reduction in merchant fees at POS terminals for the
sale of the Corporation’s merchant business to an unrelated third party during the first quarter of
2007, partially offset by an increase of $3.4 million in other fees related to the early
cancellation of certain client structured certificates of deposit.
Broker-dealer, asset management and insurance fees increased by $11.3 million or 19.8% to $68.3
million in 2007 basically due to improvements in broker-dealer fees of $6.7 million or 27.2% and
asset management fees of $4.4 million or 22.0% earned by Santander Securities and Santander Assets
Management, respectively. Santander Securities’ business includes securities underwriting and
distribution, sales, trading, financial planning and securities brokerage services. In addition,
Santander Securities provides investment advisory services portfolio management through its wholly
owned subsidiary, Santander Asset Management. The broker-dealer asset management and insurance
operations represented 46.1% of commissions to the Corporation’s other income for the year ended
December 31, 2007.
44
Operating Expenses
The following table sets forth information as to the Corporation’s other operating expenses for the
years ended December 31, 2008, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
|
|
$
|
76,012
|
|
|
$
|
72,927
|
|
|
$
|
78,945
|
|
|
Pension and other benefits
|
|
|
57,200
|
|
|
|
72,815
|
|
|
|
55,428
|
|
|
Expenses deferred as loan origination costs
|
|
|
(8,076
|
)
|
|
|
(11,484
|
)
|
|
|
(12,662
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total personnel costs
|
|
|
125,136
|
|
|
|
134,258
|
|
|
|
121,711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Occupancy costs
|
|
|
27,665
|
|
|
|
23,767
|
|
|
|
22,476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment expenses
|
|
|
4,358
|
|
|
|
4,427
|
|
|
|
4,797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EDP servicing expense, amortization and technical services
|
|
|
41,860
|
|
|
|
39,255
|
|
|
|
40,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Communications
|
|
|
10,062
|
|
|
|
10,923
|
|
|
|
11,358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business promotion
|
|
|
6,628
|
|
|
|
15,621
|
|
|
|
11,613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill and other intangibles impairment charges
|
|
|
—
|
|
|
|
43,349
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other taxes
|
|
|
13,101
|
|
|
|
12,334
|
|
|
|
11,514
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional fees
|
|
|
22,094
|
|
|
|
14,330
|
|
|
|
12,589
|
|
|
Amortization of intangibles
|
|
|
3,067
|
|
|
|
3,828
|
|
|
|
4,081
|
|
|
Printing and supplies
|
|
|
1,926
|
|
|
|
2,137
|
|
|
|
1,939
|
|
|
Credit card expenses
|
|
|
5,041
|
|
|
|
6,198
|
|
|
|
10,741
|
|
|
Insurance
|
|
|
3,371
|
|
|
|
4,029
|
|
|
|
2,810
|
|
|
Examinations & FDIC assessment
|
|
|
5,952
|
|
|
|
2,194
|
|
|
|
1,914
|
|
|
Transportation and travel
|
|
|
2,539
|
|
|
|
2,981
|
|
|
|
2,802
|
|
|
Repossessed assets provision and expenses
|
|
|
5,717
|
|
|
|
7,482
|
|
|
|
1,879
|
|
|
Collections and related legal costs
|
|
|
1,462
|
|
|
|
1,239
|
|
|
|
1,542
|
|
|
Provision for claim receivable
|
|
|
25,120
|
|
|
|
—
|
|
|
|
—
|
|
|
All other
|
|
|
19,528
|
|
|
|
15,664
|
|
|
|
13,933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other
|
|
|
95,817
|
|
|
|
60,082
|
|
|
|
54,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non personnel expenses
|
|
|
199,491
|
|
|
|
209,758
|
|
|
|
156,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Operating Expenses
|
|
$
|
324,627
|
|
|
$
|
344,016
|
|
|
$
|
277,783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Efficiency ratio-on a tax equivalent basis
|
|
|
60.39
|
%
|
|
|
66.32
|
%
|
|
|
66.82
|
%
|
|
Personnel cost to average assets
|
|
|
1.43
|
%
|
|
|
1.46
|
%
|
|
|
1.38
|
%
|
|
Other operating expenses to average assets
|
|
|
2.28
|
%
|
|
|
2.28
|
%
|
|
|
1.77
|
%
|
|
Assets per employee
|
|
$
|
4,467
|
|
|
$
|
3,494
|
|
|
$
|
3,929
|
|
2008 compared to 2007.
For the year ended December 31, 2008, the Efficiency Ratio, on a tax
equivalent basis, was 60.39% reflecting an improvement of 593 basis points compared to 66.32% for
the year ended December 31, 2007. This improvement was mainly the result of higher net interest
income and a reduction in operating expenses. The effect of the $43.3 million for goodwill and other intangible assets impairment charges recognized during 2007 and $25.1 million for claim receivable recognized during 2008 were
excluded from operating expenses to determine the Efficiency Ratio, on a tax
equivalent basis.
For the year ended December 31, 2008, operating expenses amounted $324.6 million, a decrease of $19.4 million or 5.6% compared to
$344.0 million for the year ended December 31, 2007.
The decrease in operating expenses was principally due to a $43.3 million related to goodwill and
other intangible assets impairment charges recognized during 2007, a
$16.0 million decrease in stock incentive
compensation expense sponsored by Santander Group, a provision for claim receivable of $25.1 million recognized during 2008, a $7.8 million increase
in professional fees due to an increment in consulting fees related to the adoption of new
accounting pronouncements and the review of other operational procedures, a $6.9 million increase
in salaries and other personnel expenses, mainly due to severance payments related to personal reductions, a $3.9 million increase in occupancy cost due to the sale
and leaseback of the Corporation’s two principal properties in December 2007, a $3.8 million
increase in FDIC assessment due to the 2007 assessment systems implemented under
the Federal Deposit Insurance Reform Act of 2005 that imposed insurance premiums based on factors
such as capital level, supervisory rating, certain financial ratios and
45
risk information offset by
a decrease of $9.0 million in business promotion and a decrease
of $1.8 million in repossessed asset provision
and expenses.
2007 compared to 2006.
For the year ended December 31, 2007, the Efficiency Ratio, on a tax
equivalent basis, was 66.32% reflecting an improvement of 50 basis points compared to 66.82% for
the year ended December 31, 2006. This improvement was mainly the result of higher net interest and
non-interest income. For the year ended December 31, 2007, compared to the same period in 2006,
operating expenses increased $66.2 million or 23.8%. As a previously discussed, during 2007, the
Corporation recorded a non-cash impairment charges of $43.3 million which comprised $26.8 of
goodwill and $16.5 million of other intangibles assets. During 2007, the Corporation recognized
$14.8 million of stock compensation expenses related to various stock compensation plans sponsored
by Santander Spain. Excluding the effect of these incentives plans, the Efficiency Ratio, on a tax
equivalent basis, would have been 63.06%, a 376 basis point improvement over the same period in
2006.
Operating expenses reflected increases of $4.2 million attributed to SFS, $7.2 million in salaries
and other employee benefits, $5.4 million in repossessed assets provision and expenses, $4.6
million in business promotion and $0.6 million in professional fees. These increases were partially
offset by a decrease in credit card expenses of $4.3 million due to the sale of the Corporation’s
merchant business to an unrelated third party during the first quarter of 2007. Excluding stock
incentive plans expense and impairment charges recognized during 2007 and stock incentive plans
expense for 2006, operating expenses for the year ended December 31, 2007 reflected an increase of
$8.9 million or 3.2% compared to the same period in 2006.
Income Taxes
Under the Puerto Rico Internal Revenue Code, as amended (the “PR Code”), the Corporation and each
of its subsidiaries are treated as separate taxable entities and are not entitled to file
consolidated tax returns in Puerto Rico. The maximum statutory marginal corporate income tax rate
is 39%. Furthermore, there is an alternative minimum tax of 22%. The difference between the
statutory marginal tax rate and the effective tax rate is primarily due to the interest income
earned on certain investments and loans, which is exempt from income tax (net of the disallowance
of expenses attributable to the exempt income) and to the disallowance of certain expenses and
other items. The PR Code provides dividends received deduction of 100% on dividends received from
controlled subsidiaries subject to taxation in Puerto Rico. The Corporation is also subject to
municipal license tax at various rates that do not exceed 1.5% of the Corporation’s taxable gross
income. .
Puerto Rico international banking entities, or IBEs, such as Santander International Bank (SIB),
are currently exempt from taxation under Puerto Rico law. During 2004, the Legislature of Puerto
Rico and the Governor of Puerto Rico approved a law amending the IBE Act. This law imposes income
taxes at normal statutory rates on each IBE that operates as a unit of a bank, if the IBE’s net
income generated was 20% of the bank’s net income in the taxable year commencing on July 1, 2005,
and thereafter. It does not impose income taxation on an IBE that operates as a subsidiary of a
bank as is the case of SIB.
During June 2006, the FASB issued Interpretation No.48 (“FIN 48”), “
Accounting for Uncertainty in
Income Tax — an interpretation of FASB Statement No 109”.
FIN 48 clarifies the accounting for
uncertainty of income tax recognized in a enterprise’s financial statements in accordance with SFAS
No 109, “
Accounting for Income Tax”.
This interpretation prescribes a recognition threshold and
measurement attribute for the financial statements recognition and measurement of a tax position
taken or expected to be taken in a tax return. This interpretation also provides guidance on
derecognition, classification, interest and penalties, accounting in interim periods, disclosure
and transition.
The Corporation adopted the provisions of FIN No. 48 on January 1, 2007. As a result of the
implementation of FIN 48, the Corporation recognized a decrease of $0.5 million in the January 1,
2007 balance of retained earnings and an increase in the liability for unrecognized tax benefits.
In assessing the realization of deferred tax assets, management considers whether it is more likely
than not that some portion or all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future taxable income during
the periods in which the temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning
strategies in making this assessment. Based upon the level of historical taxable income and
projections for future taxable income, management believes it is more likely than not, the
Corporation will not realize the benefits of the deferred tax assets related to Santander Financial
Services, Inc. and Santander Bancorp (parent company only) amounting to $20.6 million and $0.1
million, respectively, at December 31, 2008. Accordingly, deferred tax asset valuation allowances
of $20.6 million and $0.1 million for Santander Financial Services, Inc and Santander Bancorp
(parent company only), respectively, were recorded at December 31, 2008.
46
2008 compared to 2007.
The income tax benefit was $6.5 million a decrease of $10.7 million or
255.2% for the year ended December 31, 2008 compared to provision for income tax $4.2 million for
the same period in 2007. The decrease in the provision for income tax during 2008 was due in
primarily to lower taxable income in 2008 compared to 2007. Refer to Note 17 of the consolidated
financial statements for additional information.
2007 compared to 2006.
The 2007 provision for income tax was $4.2 million, which reflects a
decrease of $18.3 million or 81.4% over 2006. The decrease in the provision for income tax during
2007 was due primarily to lower taxable income in 2007 compared to 2006 and the elimination of the
temporary surtaxes imposed by the Commonwealth of Puerto Rico for fiscal years 2005 and 2006. Refer
to Note 17 of the consolidated financial statements for additional information.
For the year ended December 31, 2007 the Corporation recorded a non-cash charge of $23.1 million
related to establishing a valuation allowance against its deferred tax assets from its consumer
finance segment, primarily related to the goodwill and trade name impairment charges. In accordance
with SFAS No. 109 “Accounting for Income Taxes” (SFAS No. 109), management evaluates its deferred
income taxes on a quarterly basis to determine if valuation allowances are required. SFAS No. 109
prescribes that an entity conduct an assessment to determine whether valuation allowances should
established based on the consideration of all available evidence using a “more likely than not”
criteria. In reaching such determination, significant weighting is given to data and evidence that
can be objectively verified. The Corporation currently has substantial net operating loss
carryforwards from its consumer finance segment. The Corporation recorded a 100% valuation
allowance against the deferred tax assets from its consumer finance segment due to the uncertainty
of their ultimate realization.
Financial Condition
Assets
The Corporation’s total assets as of December 31, 2008 reached $7.9 billion, a $1.3 billion
decrease when compared to $9.2 billion as of December 31, 2007. The Corporation reflected a
decrease of $0.9 billion, or 13.7%, in net loans, including a decrease of $103.4 million in loans
held for sale, compared to December 31, 2007 balances. Also, the investment securities portfolio
decreased $466.1 million, or 36.8%, from $1.3 billion as of December 31, 2007 to $0.8 billion as of
December 31, 2007.
There was an increase in other assets of $102.7 million, which consisted mainly of $117.1 million
in derivative assets, $19.6 million in income tax credits and $19.3 million in deferred tax assets.
This increase in other assets was partially offset by a decrease in confirming advances of $56.8
million.
Short Term Investments and Interest-bearing Deposits in Other Financial Institutions
The Corporation sells federal funds, purchases securities under agreements to resell and deposits
funds in interest-bearing accounts in other financial institutions to help meet liquidity
requirements and provide temporary holdings until the funds can be otherwise invested or utilized.
As of December 31, 2008, 2007 and 2006, the Corporation had interest-bearing deposits, federal
funds sold and securities purchased under agreements to resell as detailed below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(Dollars in thousands)
|
|
|
Interest-bearing deposits
|
|
$
|
8,370
|
|
|
$
|
6,606
|
|
|
$
|
52,235
|
|
|
Federal funds sold
|
|
|
64,871
|
|
|
|
82,434
|
|
|
|
35,412
|
|
|
Securities purchased under agreements to resell
|
|
|
—
|
|
|
|
—
|
|
|
|
37,995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
73,241
|
|
|
$
|
89,040
|
|
|
$
|
125,642
|
|
|
|
|
|
|
|
|
|
|
|
|
47
Investment Portfolio
The following tables set forth the Corporation’s investments in government securities and certain
other financial investments at December 31, 2008 and 2007, by contractual maturity, giving
comparative carrying and fair values and average yield for each of the categories. The Corporation
has evaluated the conditions under which it might sell its investment securities. As a result,
most of its investment securities have been classified as available for sale. The Corporation may
decide to sell some of the securities classified as available for sale either as part of its
efforts to manage its interest rate risk, or in response to changes in interest rates, prepayment
risk or similar economic factors. Investment securities available for sale are carried at fair
value and unrealized gains and losses net of taxes on these investments are included in accumulated
other comprehensive income or loss, which is a separate component of stockholders’ equity.
Gains or losses on sales of investment securities available for sale are recognized when realized
and are computed on the basis of specific identification. At December 31, 2008, 2007 and 2006
investment securities available for sale were $0.8 billion, $1.3 billion and $1.4 billion,
respectively. The Corporation experienced a reduction of $466.1 million in investment securities
available for sale for the year ended December 31, 2008 compared with the same period in prior year
which was driven by a sale of investment securities available for sale of $346.7 million during
2008, including $221.4 million related to investment securities available for sale pledged as
collateral to under securities sold under agreements to repurchase with LBI. The Corporation
recognized a $2.3 million gain in connection with the settlement of these securities.
The Corporation had counterparty exposure to Lehman Brothers, Inc. (“LBI”) in connection with the
sale of securities sold under agreements to repurchase amounting to $200.2 million at September 19,
2008 under a Master Repurchase Agreement. LBI was placed in a Securities Investor Protection
Corporation (“SIPC”) liquidation proceeding on September 19, 2008. The filing of the SIPC
liquidation proceeding was an event of default under the terms of the Master Repurchase Agreement,
which resulted in the acceleration of repurchase dates under the Master Repurchase Agreement to
September 19, 2008. This action resulted in a reduction in the Corporation’s investment securities
available for sale of $221.0 million pledged as collateral on the securities sold under agreements
to repurchase with LBI.
Other investment securities include debt, equity or other securities that do not have readily
determinable fair values and are stated at amortized cost. The Corporation includes in this
category stock owned to comply with regulatory requirements, such as Federal Home Loan Bank (FHLB)
stock.
The Corporation acquires certain securities for trading purposes and carries its trading account at
fair value. Financial instruments including, to a limited extent, derivatives, such as option
contracts, are used in dealing and other trading activities and are carried at fair value. The
Corporation classifies as trading those securities that are acquired and held principally for the
purpose of selling them in the near term. Realized and unrealized changes in fair value are
recorded separately in the trading profit or loss account as part of the results of operations in
the period in which the changes occur. At December 31, 2008, 2007 and 2006, the Corporation had
$64.7 million, $68.5 million and $50.8 million of securities held for trading, respectively.
The following table presents the carrying value and fair value of the Corporation’s investment
securities available for sale by major category as of the December 31, 2008, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
Available for Sale
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
|
|
(Dollars in thousands)
|
|
|
U.S. Treasury
|
|
$
|
30,000
|
|
|
$
|
30,000
|
|
|
$
|
64,455
|
|
|
$
|
64,455
|
|
|
$
|
63,995
|
|
|
$
|
63,995
|
|
|
U.S. Agency Notes
|
|
|
141,916
|
|
|
|
141,916
|
|
|
|
609,223
|
|
|
|
609,223
|
|
|
|
658,340
|
|
|
|
658,340
|
|
|
P.R. Government
Obligations
|
|
|
148,616
|
|
|
|
148,616
|
|
|
|
49,288
|
|
|
|
49,288
|
|
|
|
55,942
|
|
|
|
55,942
|
|
|
Mortgage-backed
Securities
|
|
|
481,530
|
|
|
|
481,530
|
|
|
|
545,182
|
|
|
|
545,182
|
|
|
|
631,437
|
|
|
|
631,437
|
|
|
Foreign Securities
|
|
|
50
|
|
|
|
50
|
|
|
|
50
|
|
|
|
50
|
|
|
|
75
|
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
802,112
|
|
|
$
|
802,112
|
|
|
$
|
1,268,198
|
|
|
$
|
1,268,198
|
|
|
$
|
1,409,789
|
|
|
$
|
1,409,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The tables below summarize the contractual maturity of the Corporation’s available for sale and
other investment securities at December 31, 2008, 2007 and 2006:
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
After One
|
|
|
After Five Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within
|
|
|
Year to
|
|
|
to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One Year
|
|
|
Five Years
|
|
|
Ten Years
|
|
|
Over Ten Years
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Avg
|
|
|
Carrying
|
|
|
Avg
|
|
|
Carrying
|
|
|
Avg
|
|
|
Carrying
|
|
|
Avg
|
|
|
Carrying
|
|
|
Fair
|
|
|
Avg
|
|
|
|
|
Value
|
|
|
Yield
|
|
|
Value
|
|
|
Yield
|
|
|
Value
|
|
|
Yield
|
|
|
Value
|
|
|
Yield
|
|
|
Value
|
|
|
Value
|
|
|
Yield
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
U.S. Treasury
|
|
$
|
30,000
|
|
|
|
0.05
|
%
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
30,000
|
|
|
$
|
30,000
|
|
|
|
0.05
|
%
|
|
U.S. Agency Notes
|
|
|
136,007
|
|
|
|
2.80
|
%
|
|
|
5,909
|
|
|
|
3.99
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
141,916
|
|
|
|
141,916
|
|
|
|
2.85
|
%
|
|
P.R. Government
Obligations
|
|
|
1,454
|
|
|
|
4.23
|
%
|
|
|
133,148
|
|
|
|
5.23
|
%
|
|
|
9,479
|
|
|
|
5.18
|
%
|
|
|
4,535
|
|
|
|
5.55
|
%
|
|
|
148,616
|
|
|
|
148,616
|
|
|
|
5.22
|
%
|
|
Mortgage-backed
Securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
195,815
|
|
|
|
4.39
|
%
|
|
|
285,715
|
|
|
|
5.41
|
%
|
|
|
481,530
|
|
|
|
481,530
|
|
|
|
4.99
|
%
|
|
Foreign Securities
|
|
|
—
|
|
|
|
—
|
|
|
|
50
|
|
|
|
4.65
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
50
|
|
|
|
50
|
|
|
|
4.65
|
%
|
|
Other Securities
|
|
|
50,382
|
|
|
|
3.50
|
%
|
|
|
11,250
|
|
|
|
3.50
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
61,632
|
|
|
|
61,632
|
|
|
|
3.50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Securities
|
|
$
|
217,843
|
|
|
|
2.59
|
%
|
|
$
|
150,357
|
|
|
|
5.05
|
%
|
|
$
|
205,294
|
|
|
|
4.43
|
%
|
|
$
|
290,250
|
|
|
|
5.41
|
%
|
|
$
|
863,744
|
|
|
$
|
863,744
|
|
|
|
4.40
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
After One
|
|
|
After Five Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within
|
|
|
Year to
|
|
|
to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One Year
|
|
|
Five Years
|
|
|
Ten Years
|
|
|
Over Ten Years
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Avg
|
|
|
Carrying
|
|
|
Avg
|
|
|
Carrying
|
|
|
Avg
|
|
|
Carrying
|
|
|
Avg
|
|
|
Carrying
|
|
|
Fair
|
|
|
Avg
|
|
|
|
|
Value
|
|
|
Yield
|
|
|
Value
|
|
|
Yield
|
|
|
Value
|
|
|
Yield
|
|
|
Value
|
|
|
Yield
|
|
|
Value
|
|
|
Value
|
|
|
Yield
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
U.S. Treasury
|
|
$
|
64,455
|
|
|
|
3.92
|
%
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
64,455
|
|
|
$
|
64,455
|
|
|
|
3.92
|
%
|
|
U.S. Agency Notes
|
|
|
253,423
|
|
|
|
2.84
|
%
|
|
|
355,800
|
|
|
|
3.91
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
609,223
|
|
|
|
609,223
|
|
|
|
3.40
|
%
|
|
P.R. Government
Obligations
|
|
|
1,367
|
|
|
|
3.99
|
%
|
|
|
19,775
|
|
|
|
4.44
|
%
|
|
|
15,111
|
|
|
|
5.21
|
%
|
|
|
13,035
|
|
|
|
5.73
|
%
|
|
|
49,288
|
|
|
|
49,288
|
|
|
|
5.00
|
%
|
|
Mortgage-backed
Securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
225,124
|
|
|
|
4.40
|
%
|
|
|
320,058
|
|
|
|
5.41
|
%
|
|
|
545,182
|
|
|
|
545,182
|
|
|
|
4.99
|
%
|
|
Foreign Securities
|
|
|
—
|
|
|
|
—
|
|
|
|
50
|
|
|
|
4.65
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
50
|
|
|
|
50
|
|
|
|
4.65
|
%
|
|
Other Securities
|
|
|
64,559
|
|
|
|
5.50
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
64,559
|
|
|
|
64,559
|
|
|
|
5.50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Securities
|
|
$
|
383,804
|
|
|
|
3.47
|
%
|
|
$
|
375,625
|
|
|
|
3.94
|
%
|
|
$
|
240,235
|
|
|
|
4.45
|
%
|
|
$
|
333,093
|
|
|
|
5.42
|
%
|
|
$
|
1,332,757
|
|
|
$
|
1,332,757
|
|
|
|
4.24
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
After One
|
|
|
After Five Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within
|
|
|
Year to
|
|
|
to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One Year
|
|
|
Five Years
|
|
|
Ten Years
|
|
|
Over Ten Years
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Avg
|
|
|
Carrying
|
|
|
Avg
|
|
|
Carrying
|
|
|
Avg
|
|
|
Carrying
|
|
|
Avg
|
|
|
Carrying
|
|
|
Fair
|
|
|
Avg
|
|
|
|
|
Value
|
|
|
Yield
|
|
|
Value
|
|
|
Yield
|
|
|
Value
|
|
|
Yield
|
|
|
Value
|
|
|
Yield
|
|
|
Value
|
|
|
Value
|
|
|
Yield
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
U.S. Treasury
|
|
$
|
63,995
|
|
|
|
5.14
|
%
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
63,995
|
|
|
$
|
63,995
|
|
|
|
5.14
|
%
|
|
U.S. Agency Notes
|
|
|
188,503
|
|
|
|
4.82
|
%
|
|
|
469,837
|
|
|
|
3.89
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
658,340
|
|
|
|
658,340
|
|
|
|
4.15
|
%
|
|
P.R. Government
Obligations
|
|
|
948
|
|
|
|
3.85
|
%
|
|
|
15,482
|
|
|
|
4.26
|
%
|
|
|
24,565
|
|
|
|
5.28
|
%
|
|
|
14,947
|
|
|
|
5.79
|
%
|
|
|
55,942
|
|
|
|
55,942
|
|
|
|
5.10
|
%
|
|
Mortgage-backed
Securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
631,437
|
|
|
|
4.99
|
%
|
|
|
631,437
|
|
|
|
631,437
|
|
|
|
4.99
|
%
|
|
Foreign Securities
|
|
|
25
|
|
|
|
7.50
|
%
|
|
|
50
|
|
|
|
4.65
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
75
|
|
|
|
75
|
|
|
|
5.60
|
%
|
|
Other Securities
|
|
|
50,710
|
|
|
|
5.50
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
50,710
|
|
|
|
50,710
|
|
|
|
5.50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Securities
|
|
$
|
304,181
|
|
|
|
5.00
|
%
|
|
$
|
485,369
|
|
|
|
3.90
|
%
|
|
$
|
24,565
|
|
|
|
5.28
|
%
|
|
$
|
646,384
|
|
|
|
5.01
|
%
|
|
$
|
1,460,499
|
|
|
$
|
1,460,499
|
|
|
|
4.64
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49
Loan Portfolio
The following table analyzes the Corporation’s loans by type of loan, including loans held for
sale, as of December 31, 2008, 2007, 2006, 2005 and 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Total
|
|
|
|
|
Amount
|
|
|
Loans
|
|
|
Amount
|
|
|
Loans
|
|
|
Amount
|
|
|
Loans
|
|
|
Amount
|
|
|
Loans
|
|
|
Amount
|
|
|
Loans
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, industrial and agricultural:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail commercial banking:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Middle-market
|
|
$
|
1,363,742
|
|
|
|
22.1
|
%
|
|
$
|
1,646,046
|
|
|
|
23.3
|
%
|
|
$
|
1,692,058
|
|
|
|
24.4
|
%
|
|
$
|
1,593,359
|
|
|
|
26.5
|
%
|
|
$
|
1,445,206
|
|
|
|
26.0
|
%
|
|
Agricultural
|
|
|
46,032
|
|
|
|
0.7
|
%
|
|
|
63,204
|
|
|
|
0.9
|
%
|
|
|
59,315
|
|
|
|
0.9
|
%
|
|
|
61,531
|
|
|
|
1.0
|
%
|
|
|
62,198
|
|
|
|
1.1
|
%
|
|
SBA
|
|
|
51,871
|
|
|
|
0.8
|
%
|
|
|
63,825
|
|
|
|
0.9
|
%
|
|
|
66,734
|
|
|
|
1.0
|
%
|
|
|
69,763
|
|
|
|
1.2
|
%
|
|
|
72,963
|
|
|
|
1.3
|
%
|
|
Factor liens
|
|
|
10,268
|
|
|
|
0.2
|
%
|
|
|
18,252
|
|
|
|
0.3
|
%
|
|
|
20,553
|
|
|
|
0.3
|
%
|
|
|
16,696
|
|
|
|
0.3
|
%
|
|
|
16,818
|
|
|
|
0.3
|
%
|
|
Other
|
|
|
897
|
|
|
|
0.0
|
%
|
|
|
4,688
|
|
|
|
0.1
|
%
|
|
|
6,965
|
|
|
|
0.1
|
%
|
|
|
40,072
|
|
|
|
0.7
|
%
|
|
|
11,978
|
|
|
|
0.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail commercial banking
|
|
|
1,472,810
|
|
|
|
24.0
|
%
|
|
|
1,796,015
|
|
|
|
25.5
|
%
|
|
|
1,845,625
|
|
|
|
26.6
|
%
|
|
|
1,781,421
|
|
|
|
29.6
|
%
|
|
|
1,609,163
|
|
|
|
28.9
|
%
|
|
Corporate banking
|
|
|
691,976
|
|
|
|
11.2
|
%
|
|
|
765,310
|
|
|
|
10.8
|
%
|
|
|
673,566
|
|
|
|
9.7
|
%
|
|
|
1,205,664
|
|
|
|
20.0
|
%
|
|
|
1,598,443
|
|
|
|
28.8
|
%
|
|
Construction
|
|
|
194,026
|
|
|
|
3.1
|
%
|
|
|
484,237
|
|
|
|
6.8
|
%
|
|
|
435,182
|
|
|
|
6.3
|
%
|
|
|
213,705
|
|
|
|
3.5
|
%
|
|
|
199,799
|
|
|
|
3.6
|
%
|
|
Lease Financing
|
|
|
60,615
|
|
|
|
1.0
|
%
|
|
|
92,641
|
|
|
|
1.3
|
%
|
|
|
132,655
|
|
|
|
1.9
|
%
|
|
|
125,168
|
|
|
|
2.1
|
%
|
|
|
112,152
|
|
|
|
2.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Commercial
|
|
|
2,419,427
|
|
|
|
39.3
|
%
|
|
|
3,138,203
|
|
|
|
44.3
|
%
|
|
|
3,087,028
|
|
|
|
44.6
|
%
|
|
|
3,325,958
|
|
|
|
55.2
|
%
|
|
|
3,519,557
|
|
|
|
63.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal (installment and other
loans)
|
|
|
305,058
|
|
|
|
5.0
|
%
|
|
|
402,195
|
|
|
|
5.7
|
%
|
|
|
383,460
|
|
|
|
5.5
|
%
|
|
|
378,269
|
|
|
|
6.3
|
%
|
|
|
313,607
|
|
|
|
5.6
|
%
|
|
Automobile
|
|
|
—
|
|
|
|
0.0
|
%
|
|
|
—
|
|
|
|
0.0
|
%
|
|
|
2
|
|
|
|
0.0
|
%
|
|
|
610
|
|
|
|
0.0
|
%
|
|
|
6,434
|
|
|
|
0.1
|
%
|
|
Credit Cards
|
|
|
261,531
|
|
|
|
4.2
|
%
|
|
|
240,858
|
|
|
|
3.4
|
%
|
|
|
193,260
|
|
|
|
2.8
|
%
|
|
|
169,416
|
|
|
|
2.8
|
%
|
|
|
128,622
|
|
|
|
2.3
|
%
|
|
Consumer Finance
|
|
|
578,243
|
|
|
|
9.4
|
%
|
|
|
611,114
|
|
|
|
8.6
|
%
|
|
|
625,266
|
|
|
|
9.0
|
%
|
|
|
—
|
|
|
|
0.0
|
%
|
|
|
—
|
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consumer
|
|
|
1,144,832
|
|
|
|
18.5
|
%
|
|
|
1,254,167
|
|
|
|
17.6
|
%
|
|
|
1,201,988
|
|
|
|
17.3
|
%
|
|
|
548,295
|
|
|
|
9.1
|
%
|
|
|
448,663
|
|
|
|
8.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
2,591,930
|
|
|
|
42.1
|
%
|
|
|
2,682,362
|
|
|
|
37.9
|
%
|
|
|
2,649,128
|
|
|
|
38.1
|
%
|
|
|
2,141,358
|
|
|
|
35.6
|
%
|
|
|
1,583,418
|
|
|
|
28.5
|
%
|
|
Commercial
|
|
|
3,658
|
|
|
|
0.1
|
%
|
|
|
3,600
|
|
|
|
0.1
|
%
|
|
|
5,412
|
|
|
|
0.1
|
%
|
|
|
6,121
|
|
|
|
0.1
|
%
|
|
|
7,659
|
|
|
|
0.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Mortgage
|
|
|
2,595,588
|
|
|
|
42.2
|
%
|
|
|
2,685,962
|
|
|
|
38.0
|
%
|
|
|
2,654,540
|
|
|
|
38.2
|
%
|
|
|
2,147,479
|
|
|
|
35.7
|
%
|
|
|
1,591,077
|
|
|
|
28.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans, net of unearned interest
and deferred fees
|
|
$
|
6,159,847
|
|
|
|
100.0
|
%
|
|
$
|
7,078,332
|
|
|
|
100.0
|
%
|
|
$
|
6,943,556
|
|
|
|
100.0
|
%
|
|
$
|
6,021,732
|
|
|
|
100.0
|
%
|
|
$
|
5,559,297
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The gross loan portfolio, including loans held for sale, reflected a decrease of 13.0% or $918.5
million, reaching $6.2 billion at December 31, 2008, compared to the figures reported as of
December 31, 2007.
The Corporation experienced a $718.8 million or 22.9% decrease in commercial and construction loans
over last year to reach $2.4 million as of December 31, 2008. This decrease was mainly due to the
sale of $334.3 million of commercial and construction loans
sold, including some classified as impaired, to an affiliate
and $384.5 million of repayments, net of originations for the year ended December 31, 2008. The
loans sold to an affiliate had a net book value of $300.1 million comprised of an outstanding
principal balance of $334.6 million and a specific valuation allowance of $34.5 million. The type
of loans sold by net book value was $212.3 million in construction loans and $87.8 million in
commercial loans. No gain or loss was recognized on this transaction. There was a decrease in
mortgage portfolio of $90.4 million or 3.4% during 2008 when compared with the same period in the
prior year. For the year ended December 31, 2008 residential mortgage loans origination was $345.7
million or 37.9% less than the $556.8 million originated during the same period in 2007. For the
year ended December 31, 2008, mortgage loans sold and securitized were $213.4 million versus $298.5
million during the prior year, $85.1 million or 28.5% less. Also, there was a decrease in consumer
loans portfolio (credit cards and personal installment loans and consumer finance)
50
of $109.3 million or 8.7% which comprised decreases of $97.1 million and $32.9 million in personal
and consumer finance offset by an increase of $20.7 million in credit card when compared with the
same figures in 2007.
Allowance for Loan Losses
The Corporation systematically assesses the overall risks in its loan portfolio and establishes and
maintains an allowance for probable losses thereon. The allowance for loan losses is maintained at
a level sufficient to provide for estimated loan losses based on the evaluation of known and
inherent risks in its loan portfolio. Management evaluates the adequacy of the allowance for loan
losses on a monthly basis. This evaluation involves the exercise of judgment and the use of
assumptions and estimates that are subject to revision, as more information becomes available. In
determining the allowance, management considers the portfolio risk characteristics, prior loss
experience, prevailing and projected economic conditions, loan impairment measurements and the
results of its internal audit and regulatory agencies’ loan reviews. Based on current and expected
economic conditions, the expected level of net loan losses and the methodology established to
evaluate the adequacy of the allowance for loan losses, management considers that the allowance for
loan losses is adequate to absorb probable losses in the Corporation’s loan portfolio.
Commercial, construction loans and certain mortgage loan over a predetermined amount are
individually evaluated for impairment, on at least quarterly basis, following the provisions of
SFAS No. 114, “Accounting by Creditors of a Loan.” A loan is impaired when based on current
information and events; it is probable that the Corporation will be unable to collect all amounts
due according to the contractual terms of the loan agreement. The impairment loss, if any, on each
individual loan identified as impaired is measured based on the present value of expected cash
flows discounted at the loan’s effective interest rate, except as a practical expedient, impairment
may be measured based on the loan’s observable market price, or the fair value of the collateral,
if the loan is collateral dependent. Substantially all of the Corporation’s impaired loans are
measured on the basis of the fair value of the collateral, net of estimated disposition costs. The
fair value of the collateral is determined by external valuation specialists and since these values
cannot be observed or corroborated with market data, they are classified as Level 3 and presented
as part of non-recurring measurement disclosures. The Corporation maintains a detailed analysis of
all loans identified as impaired with their corresponding allowances and the specific component of
the allowance is computed at least on a quarterly basis. Additions, deletions or adjustments to the
analysis are tracked and formal justification is documented detailing the rationale for such
adjustments.
For small, homogeneous type of loans, a general allowance is computed based on average historical
loss experience or ratios for each corresponding type of loans (consumer, credit cards, residential
mortgages, auto, etc.). The methodology of accounting for all probable losses is made in
accordance with the guidance provided by SFAS No. 5, “Accounting for Contingencies.” In
determining the general allowance, the Corporation applies a loss factor for each type of loan
based on the average historical net charge off for the previous twelve months for each portfolio
adjusted for other statistical loss estimates, as deemed appropriate. Historical loss rates are
reviewed at least quarterly and adjusted based on changes in actual collections and charge off
experience as well as significant factors that in management’s judgment reflect the impact of any
current conditions on loss recognition. Factors that management considers in the analysis of the
general reserve include the effect of the trends in the nature and volume of loans (delinquency,
charge-offs and non-accrual loans), changes in the mix or type of collateral, asset quality trends,
changes in the internal lending policies and credit standards, collection practices and examination
results from bank regulatory agencies.
The determination of the allowance for loan losses under SFAS No. 5 is based on historical loss
experience by loan type, management judgment of the quantitative factors (historical net
charge-offs, statistical loss estimates, etc.), as well as qualitative factors (current economic
conditions, portfolio composition, delinquency trends, industry concentrations, etc.), which result
in the final determination of the provision for loan losses to maintain a level of allowance for
loan losses deemed to be adequate.
The Corporation’s methodology for allocating the allowance among the different parts of the
portfolio or different elements of the allowance is based on the historical loss percentages for
each type or pool of loan (consumer, commercial, construction, mortgage and other), after assigning
the specific allowances for impaired loans on an individual review process. The sum of specific
allowances for impaired loans plus the general allowances for each type of loan not specifically
examined constitutes the total allowance for loan losses at the end of any reporting period.
An additional or unallocated reserve is maintained to cover the effect of probable economic
deterioration above and beyond what is reflected in the asset-specific component of the allowance.
This component represents management’s view that given the complexities of the lending portfolio
and the assessment process, including the inherent imprecision in the financial models used in the
loss forecasting process, there are estimable losses that have been incurred but not yet
specifically identified, and as a result not fully provided for in the asset-specific and general
valuation components of the allowance. The level of the
51
unallocated reserve may change periodically after evaluating factors impacting assumptions used in
the calculation of the asset specific component of the reserve.
On a quarterly basis, management reviews its determination of the allowance for loan losses which
includes the specific allowance computed according to the provisions of SFAS No. 114 and the
general allowance for small, homogenous type of loans, which is based on historical loss
percentages for each type or pool of loan. This analysis also considers loans classified by the
internal loan review department, the internal auditors, the in-house Watch System Unit, and banking
regulators.
The Corporation has not changed any aspects of its overall approach in the determination of the
allowance for loan losses, and there have been no material changes in assumptions or estimation
techniques, as compared to prior periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
$
|
166,952
|
|
|
$
|
106,863
|
|
|
$
|
66,842
|
|
|
$
|
69,177
|
|
|
$
|
69,693
|
|
|
Allowance acquired (Island Finance)
|
|
|
—
|
|
|
|
—
|
|
|
|
35,104
|
|
|
|
—
|
|
|
|
—
|
|
|
Provision for loan losses
|
|
|
175,523
|
|
|
|
147,824
|
|
|
|
65,583
|
|
|
|
20,400
|
|
|
|
26,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
342,475
|
|
|
|
254,687
|
|
|
|
167,529
|
|
|
|
89,577
|
|
|
|
95,963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses charged to the allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
17,782
|
|
|
|
10,375
|
|
|
|
9,792
|
|
|
|
8,044
|
|
|
|
19,250
|
|
|
Construction
|
|
|
32,257
|
|
|
|
2,710
|
|
|
|
—
|
|
|
|
1,438
|
|
|
|
—
|
|
|
Mortage
|
|
|
1,257
|
|
|
|
1,768
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Consumer
|
|
|
44,682
|
|
|
|
29,281
|
|
|
|
16,679
|
|
|
|
17,351
|
|
|
|
18,969
|
|
|
Consumer Finance
|
|
|
56,444
|
|
|
|
44,484
|
|
|
|
38,345
|
|
|
|
—
|
|
|
|
—
|
|
|
Leasing
|
|
|
2,064
|
|
|
|
2,742
|
|
|
|
2,071
|
|
|
|
986
|
|
|
|
1,658
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
154,486
|
|
|
|
91,360
|
|
|
|
66,887
|
|
|
|
27,819
|
|
|
|
39,877
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
626
|
|
|
|
1,192
|
|
|
|
2,463
|
|
|
|
1,686
|
|
|
|
5,271
|
|
|
Construction
|
|
|
20
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Consumer
|
|
|
1,256
|
|
|
|
904
|
|
|
|
1,677
|
|
|
|
2,646
|
|
|
|
7,341
|
|
|
Consumer Finance
|
|
|
1,517
|
|
|
|
1,088
|
|
|
|
1,314
|
|
|
|
—
|
|
|
|
—
|
|
|
Leasing
|
|
|
481
|
|
|
|
441
|
|
|
|
767
|
|
|
|
752
|
|
|
|
479
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,900
|
|
|
|
3,625
|
|
|
|
6,221
|
|
|
|
5,084
|
|
|
|
13,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans charged-off
|
|
|
150,586
|
|
|
|
87,735
|
|
|
|
60,666
|
|
|
|
22,735
|
|
|
|
26,786
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
191,889
|
|
|
$
|
166,952
|
|
|
$
|
106,863
|
|
|
$
|
66,842
|
|
|
$
|
69,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses to year-end loans
|
|
|
3.12
|
%
|
|
|
2.36
|
%
|
|
|
1.54
|
%
|
|
|
1.11
|
%
|
|
|
1.24
|
%
|
|
Recoveries to charge-offs
|
|
|
2.52
|
%
|
|
|
3.97
|
%
|
|
|
9.30
|
%
|
|
|
18.28
|
%
|
|
|
32.83
|
%
|
|
Net charge-offs to average loans
|
|
|
2.23
|
%
|
|
|
1.25
|
%
|
|
|
0.93
|
%
|
|
|
0.38
|
%
|
|
|
0.56
|
%
|
|
Allowance for loan losses to net charge-offs
|
|
|
127.43
|
%
|
|
|
190.29
|
%
|
|
|
176.15
|
%
|
|
|
294.00
|
%
|
|
|
258.26
|
%
|
|
Allowance for loan losses to non-performing
loans
|
|
|
90.21
|
%
|
|
|
56.70
|
%
|
|
|
100.01
|
%
|
|
|
90.72
|
%
|
|
|
79.05
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
116.56
|
%
|
|
|
168.49
|
%
|
|
|
108.11
|
%
|
|
|
89.73
|
%
|
|
|
98.07
|
%
|
|
Average loans
|
|
|
2.60
|
%
|
|
|
2.10
|
%
|
|
|
1.00
|
%
|
|
|
0.34
|
%
|
|
|
0.55
|
%
|
During the third quarter of 2004, the Corporation reclassified its reserves related to unfunded
lending commitments and standby letters of credit from the allowance for the loan losses to other
liabilities. Changes in the reserve for unfunded commitments and standby letters of credit were as
follows:
52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
$
|
1,835
|
|
|
$
|
1,864
|
|
|
$
|
1,666
|
|
|
$
|
1,269
|
|
|
$
|
879
|
|
|
Provision (credit) for unfunded lending
commitments and stand by letters of
credit
|
|
|
(273
|
)
|
|
|
(29
|
)
|
|
|
198
|
|
|
|
397
|
|
|
|
390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
1,562
|
|
|
$
|
1,835
|
|
|
$
|
1,864
|
|
|
$
|
1,666
|
|
|
$
|
1,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 compared to 2007
. The allowance for loan losses reached $191.9 million as of December 31,
2008, a $24.9 million increase when compared with prior year. The Corporation’s allowance for loan
losses represented 3.12% of period-end loans at December 31, 2008, a 76 basis points increase over
2.36% reported as of December 31, 2007. At December 31, 2008, the composition of the allowance for
loan losses was of $122.8 million related to the Bank with a provision for loan losses of $119.8
million and $69.1 million related to Island Finance, with a provision for loan losses of $55.7
million.
The ratio of allowance for loan losses to non-performing loans was 90.21% reflecting an increase of
3,351 percentage points from to 56.70% during the year ended 2007. Excluding non-performing
mortgage loans, this ratio is 225.06% and 82.32% as of December 31, 2008 and 2007, respectively.
The annualized ratio of net charge-off to average loans for the year ended December 31, 2008 was
2.23%, an increase of 98 basis points from 1.25% for the year ended December 31, 2007. Losses
charged to the allowance amounted to $154.5 million in 2008, an increase of $63.1 million when
compared $91.4 million of losses charged to the allowance in 2007 mainly due to an increment in
charge-offs on certain loans sold to an affiliate amounting $34.5 million.
2007 compared to 2006.
The allowance for loan losses increased $60.1 million to $167.0 million
from $106.9 million as of December 31, 2006. The prolonged economic recession and uncertainties in
Puerto Rico caused reduced lending activity and impacted the quality of the Corporation’s loan
portfolio, increasing delinquency rates and charge offs.
The Corporation’s allowance for loan losses was $167.0 million or 2.36% of period-end loans at
December 31, 2007, 82 basis points higher than the level 1.54% reported as of December 31, 2006.
The increase in this ratio was partially due to an increment in non-performing loans during the
year. Non-performing loans increased $187.6 million or 175.6% to $294.4 million as of December 31,
2007 from $106.9 million as of December 31, 2006. The non-performing loans of Island Finance
reached $37.4 million, a $12.7 million or 51.3% increase as of December 31, 2007 when compared the
prior year. The $294.4 million of non-performing loans was comprised of $257.0 million of
commercial, residential and consumer loans in the Bank portfolio and $37.4 million in the consumer
finance portfolio.
The ratio of allowance for loan losses to non-performing loans was 56.70% and 100.01% for the years
ended December 31, 2007 and 2006, respectively, decreasing 43.31 percentage points due to higher
level of non-performing figures reported. Excluding non-performing mortgage loans, this ratio was
82.32% as of December 31, 2007, reflecting a decrease of 153.51 percentage points when compared
with 235.83% as of December 31, 2006.
The annualized ratio of net charge-offs to average loans for the year ended December 31, 2007 was
1.25%, increasing 32 basis points from 0.93% for the year ended December 31, 2006. This change was
due to an increment in net charge-offs of $27.1 million or 44.6% when compared with figures
reported in 2006. This increase was mainly due to an increase in consumer loan charge-offs of $18.7
million in 2007.
53
Broken down by major loan categories, the allowance for loan losses for each of the five years in
the period ended December 31, 2008 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of loans
|
|
|
|
|
|
|
% of loans
|
|
|
|
|
|
|
% of loans
|
|
|
|
|
|
|
% of loans
|
|
|
|
|
|
|
% of loans
|
|
|
|
|
|
|
|
|
in each
|
|
|
|
|
|
|
in each
|
|
|
|
|
|
|
in each
|
|
|
|
|
|
|
in each
|
|
|
|
|
|
|
in each
|
|
|
|
|
|
|
|
|
category to
|
|
|
|
|
|
|
category to
|
|
|
|
|
|
|
category to
|
|
|
|
|
|
|
category to
|
|
|
|
|
|
|
category to
|
|
|
|
|
Amount
|
|
|
Total Loans
|
|
|
Amount
|
|
|
Total Loans
|
|
|
Amount
|
|
|
Total Loans
|
|
|
Amount
|
|
|
Total Loans
|
|
|
Amount
|
|
|
Total Loans
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
36,926
|
|
|
|
35.2
|
%
|
|
$
|
29,883
|
|
|
|
35.8
|
%
|
|
$
|
29,846
|
|
|
|
49.3
|
%
|
|
$
|
27,765
|
|
|
|
49.3
|
%
|
|
$
|
29,469
|
|
|
|
57.6
|
%
|
|
Construction
|
|
|
15,496
|
|
|
|
3.1
|
%
|
|
|
23,735
|
|
|
|
6.8
|
%
|
|
|
3,128
|
|
|
|
3.5
|
%
|
|
|
1,456
|
|
|
|
3.5
|
%
|
|
|
1,208
|
|
|
|
3.6
|
%
|
|
Consumer
|
|
|
46,135
|
|
|
|
9.2
|
%
|
|
|
33,641
|
|
|
|
9.5
|
%
|
|
|
20,099
|
|
|
|
9.4
|
%
|
|
|
30,664
|
|
|
|
9.4
|
%
|
|
|
30,832
|
|
|
|
8.2
|
%
|
|
Consumer Finance
|
|
|
69,128
|
|
|
|
9.4
|
%
|
|
|
68,359
|
|
|
|
8.6
|
%
|
|
|
41,281
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Mortgage
|
|
|
22,876
|
|
|
|
42.1
|
%
|
|
|
7,379
|
|
|
|
38.0
|
%
|
|
|
9,249
|
|
|
|
35.7
|
%
|
|
|
2,415
|
|
|
|
35.7
|
%
|
|
|
4,250
|
|
|
|
28.6
|
%
|
|
Lease financing
|
|
|
373
|
|
|
|
1.0
|
%
|
|
|
1,292
|
|
|
|
1.3
|
%
|
|
|
555
|
|
|
|
2.1
|
%
|
|
|
2,128
|
|
|
|
2.1
|
%
|
|
|
2,068
|
|
|
|
2.0
|
%
|
|
Unallocated
|
|
|
955
|
|
|
|
—
|
|
|
|
2,663
|
|
|
|
—
|
|
|
|
2,705
|
|
|
|
—
|
|
|
|
2,414
|
|
|
|
—
|
|
|
|
1,350
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
191,889
|
|
|
|
100.0
|
%
|
|
$
|
166,952
|
|
|
|
100.0
|
%
|
|
$
|
106,863
|
|
|
|
100.0
|
%
|
|
$
|
66,842
|
|
|
|
100.0
|
%
|
|
$
|
69,177
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under the caption “Unallocated” the Corporation maintains an unallocated reserve for loan losses of
$1.0 million as of December 31, 2008. The unallocated reserve is maintained to cover the effect of
probable economic deterioration above and beyond what is reflected in the asset-specific component
of the allowance. This component represents management’s view that given the complexities of the
lending portfolio and the assessment process, including the inherent imprecision in the financial
models used in the loss forecasting process, there are estimable losses that have been incurred but
not yet specifically identified, and as a result not fully provided for in the asset-specific
component of the allowance. The level of the unallocated reserve may change periodically after
evaluating factors impacting assumptions used in the calculation of the asset specific component of
the reserve.
At December 31, 2008, 2007 and 2006, the portion of the allowance for loan losses related to
impaired loans was $18.4 million, $25.6 million and $4.4 million, respectively. Please refer to
Notes 1 and 5 to the consolidated financial statements for further information.
Liabilities
The principal sources of funding for the Corporation are its equity capital, core deposits from
retail and commercial clients, and wholesale deposits and borrowings raised in the interbank and
commercial markets.
As of December 31, 2008, total liabilities amounted $7.3 billion, $1.3 billion or 14.9% less when
compared to figures reported as of December 31, 2007. The reduction in total liabilities was driven
by a decrease in federal funds and other borrowings of $705.1 million due to the settlement of a
$700.0 million bridge facility agreement among the Corporation, SFS and National Australia Bank
Limited during the first quarter of 2008. The Corporation reported a $260.6 million decrease in
securities sold under agreements to repurchase mainly due to the cancellation on September 19, 2008
of $200.0 million by LBI as result of bankruptcy of its parent LBHI. Also, there were decreases in
commercial paper and Federal Home Loan Bank advances of $233.5 million and $60.0 million,
respectively.
Deposits of $5.0 billion at December 31, 2008 reflect a decrease of $145.8 million or 2.8%,
compared to deposits of $5.2 billion as of December 31, 2007, which comprised an increase in
customer deposits of $336.2 million or 9.1% offset by a decrease in brokered deposits of $482.0
million or 33.1%. The increase in interest bearing deposits is mainly due to a certificate of
deposit in the amount of $630 million held by Banco Santander, S.A. with Banco Santander Puerto
Rico during the first quarter of 2008.
On December 10, 2008, the Corporation undertook a Subordinated Note Purchase Agreement with Crefisa, Inc,
(“Crefisa”), an affiliate, for $60 million due on December 10, 2028 and to pay interest thereon
from December 10, 2008 or from the most recent interest payment date to which interest has been
paid or duly provided for, semiannually on the tenth (10
th
) day of June and the tenth
(10
th
) of December of each year, commencing on June 10, 2009, at the rate of 7.5% per
annum, until the principal hereof is paid or made available for payment. The interest so payable,
and punctually paid or duly provided for, on any interest payment date will, as provided in such
Note Purchase Agreement, be paid to Crefisa at the close of business on the regular record date for
such interest, which shall be the tenth (10
th
) day of the month next preceding the
relevant interest payment date.
54
On September 24, 2008, Santander BanCorp and Santander Financial Services, Inc., entered into a
collateralized loan agreement (the “Loan Agreement”) with Banco Santander Puerto Rico. Under the
Loan Agreement, the Bank advanced $200 million and $430 million (the “Loans”) to the Corporation
and Santander Financial, respectively. The proceeds of the Loans were used to refinance the
outstanding indebtedness incurred under the loan agreement dated
March 25, 2008 among the
Corporation, Santander Financial and the Bank, and for general corporate purposes. The Loans are
collateralized by a certificate of deposit in the amount of $630 million held by Banco Santander,
S.A., the parent of the Corporation, with the Bank and provided as security for the Loans pursuant
to the terms of a Security Agreement, Pledge and Assignment between the Bank and Banco Santander,
S.A. The Corporation and Santander Financial have agreed to pay an annual fee of 0.10% net of
taxes, deductions and withholdings to Banco Santander, S.A. in connection with its agreement to
collateralize the Loans with the deposit.
On March 25, 2008, the Corporation and SFS entered into a fully-collateralized Loan Agreement (the
“Loan”) with the Bank. The proceeds of the Loan were used to refinance the outstanding indebtedness
incurred under the previously announced bridge facility agreement among the Corporation, SFS and
National Australia Bank Limited, and for general corporate purposes. Under the Loan, the
Corporation and SFS had available $186 million and $454 million, respectively, all of which was
paid on March 25, 2008. The Loan was fully-collateralized by a certificate of deposit in the amount
of $640 million opened by Banco Santander, S.A., the parent of the Corporation, and provided as
security for the Loan pursuant to the terms of a Security Agreement, Pledge and Assignment between
the Bank and Banco Santander, S.A. The Corporation and SFS have paid a fee of 0.10% net of taxes,
deduction and withholdings, on an annualized basis, to Banco Santander, S.A. in connection with its
agreement to collateralize the loan with the deposit.
During October 2006, the Corporation also completed the private placement of $125 million Trust
Preferred Securities (“Preferred Securities”) and issued Junior Subordinated Debentures in the
aggregate principal amount of $129 million in connection with the issuance of the Preferred
Securities. The Preferred Securities are fully and unconditionally guaranteed (to the extent
described in the guarantee agreement between the Corporation and the guarantee trustee, for the
benefit of the holders from time to time of the Preferred Securities) by the Corporation. The Trust
Preferred Securities were acquired by an affiliate of the Corporation. In connection with the
issuance of the Preferred Securities, the Corporation issued an aggregate principal amount of
$129,000,000 of its 7.00% Junior Subordinated Debentures, Series A, due July 1, 2037.
The following table sets forth the Corporation’s average daily balance of liabilities for the years
ended December 31, 2008, 2007 and 2006 by source, together with the average interest rates paid
thereon.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
Average
|
|
|
Total
|
|
|
Average
|
|
|
Average
|
|
|
Total
|
|
|
Average
|
|
|
Average
|
|
|
Total
|
|
|
Average
|
|
|
|
|
Balance
|
|
|
Liabilities
|
|
|
Cost
|
|
|
Balance
|
|
|
Liabilities
|
|
|
Cost
|
|
|
Balance
|
|
|
Liabilities
|
|
|
Cost
|
|
|
|
|
(Dollars in thousands)
|
|
|
Savings deposits
|
|
$
|
1,691,094
|
|
|
|
20.7
|
%
|
|
|
2.07
|
%
|
|
$
|
1,715,631
|
|
|
|
19.9
|
%
|
|
|
3.02
|
%
|
|
$
|
1,861,167
|
|
|
|
22.5
|
%
|
|
|
2.66
|
%
|
|
Time deposits
|
|
|
3,135,260
|
|
|
|
38.3
|
%
|
|
|
3.75
|
%
|
|
|
2,820,495
|
|
|
|
32.7
|
%
|
|
|
4.95
|
%
|
|
|
2,645,357
|
|
|
|
32.0
|
%
|
|
|
4.68
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits
|
|
|
4,826,354
|
|
|
|
59.0
|
%
|
|
|
3.16
|
%
|
|
|
4,536,126
|
|
|
|
52.6
|
%
|
|
|
4.22
|
%
|
|
|
4,506,524
|
|
|
|
54.6
|
%
|
|
|
3.85
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds, repos, and
commercial paper and other
borrowings
|
|
|
2,047,442
|
|
|
|
25.0
|
%
|
|
|
3.81
|
%
|
|
|
2,805,003
|
|
|
|
32.5
|
%
|
|
|
5.49
|
%
|
|
|
2,611,231
|
|
|
|
31.6
|
%
|
|
|
5.30
|
%
|
|
Term and subordinated notes
|
|
|
267,093
|
|
|
|
3.3
|
%
|
|
|
5.22
|
%
|
|
|
284,944
|
|
|
|
3.3
|
%
|
|
|
6.02
|
%
|
|
|
265,489
|
|
|
|
3.2
|
%
|
|
|
5.96
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total borrowings
|
|
|
2,314,535
|
|
|
|
28.3
|
%
|
|
|
3.97
|
%
|
|
|
3,089,947
|
|
|
|
35.8
|
%
|
|
|
5.54
|
%
|
|
|
2,876,720
|
|
|
|
34.8
|
%
|
|
|
5.36
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
7,140,889
|
|
|
|
87.3
|
%
|
|
|
3.42
|
%
|
|
|
7,626,073
|
|
|
|
88.4
|
%
|
|
|
4.75
|
%
|
|
|
7,383,244
|
|
|
|
89.4
|
%
|
|
|
4.44
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing deposits
|
|
|
732,314
|
|
|
|
9.0
|
%
|
|
|
0.00
|
%
|
|
|
685,875
|
|
|
|
8.0
|
%
|
|
|
0.00
|
%
|
|
|
548,163
|
|
|
|
6.6
|
%
|
|
|
0.00
|
%
|
|
Other liabilities
|
|
|
303,229
|
|
|
|
3.7
|
%
|
|
|
0.00
|
%
|
|
|
310,228
|
|
|
|
3.6
|
%
|
|
|
0.00
|
%
|
|
|
325,620
|
|
|
|
3.9
|
%
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest-bearing liabilities
|
|
|
1,035,543
|
|
|
|
12.7
|
%
|
|
|
0.00
|
%
|
|
|
996,103
|
|
|
|
11.6
|
%
|
|
|
0.00
|
%
|
|
|
873,783
|
|
|
|
10.6
|
%
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
$
|
8,176,432
|
|
|
|
100.0
|
%
|
|
|
2.99
|
%
|
|
$
|
8,622,176
|
|
|
|
100.0
|
%
|
|
|
4.20
|
%
|
|
$
|
8,257,027
|
|
|
|
100.0
|
%
|
|
|
3.97
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55
The following tables set forth additional details on the Corporation’s average deposit base for the
years ended December 31, 2008, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
Average Total Deposits
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Demand
|
|
$
|
731,645
|
|
|
$
|
684,923
|
|
|
$
|
547,416
|
|
|
Public Demand
|
|
|
669
|
|
|
|
953
|
|
|
|
747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing
|
|
|
732,314
|
|
|
|
685,876
|
|
|
|
548,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings Accounts
|
|
|
641,970
|
|
|
|
657,044
|
|
|
|
792,791
|
|
|
NOW and Super NOW accounts
|
|
|
417,654
|
|
|
|
401,104
|
|
|
|
412,696
|
|
|
Government NOW accounts
|
|
|
631,470
|
|
|
|
657,483
|
|
|
|
655,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Savings Accounts
|
|
|
1,691,094
|
|
|
|
1,715,631
|
|
|
|
1,861,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under $100,000
|
|
|
273,409
|
|
|
|
262,561
|
|
|
|
259,255
|
|
|
$100,000 and over
|
|
|
2,861,851
|
|
|
|
2,557,934
|
|
|
|
2,386,102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Time Deposits
|
|
|
3,135,260
|
|
|
|
2,820,495
|
|
|
|
2,645,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest Bearing Deposits
|
|
|
4,826,354
|
|
|
|
4,536,126
|
|
|
|
4,506,524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Deposits
|
|
$
|
5,558,668
|
|
|
$
|
5,222,002
|
|
|
$
|
5,054,687
|
|
|
|
|
|
|
|
|
|
|
|
|
The Corporation’s most important source of funding is its customer deposits. Total average deposits
reached $5.6 billion for the year ended December 31, 2008, an increase of 6.5% compared with
figures reported in 2007. Average interest-bearing deposits increased $290.2 million or 6.4% and
reached $4.8 billion as of December 31, 2008, which includes an increase in average other time
deposits of $314.8 million or 11.2% offset by a decrease of $24.5 million in average savings and
Now accounts when compared with the figures reported in prior year. The increase in average
interest bearing deposits is mainly due to a certificate of deposit for the amount of $630 million
held by Banco Santander, S.A. with Banco Santander Puerto Rico during the first quarter of 2008.
Average non-interest bearing deposits are the least expensive sources of funding used by
Corporation and represent 9.0%, 8.0% and 6.6% of the Corporation average total liabilities for the
years ended December 31, 2008, 2007 and 2006, respectively Total average deposits represented
68.0%, 60.6% and 61.2% of the total average liabilities of the Corporation as of December 31, 2008,
2007 and 2006, respectively.
For the year ended December 31, 2008, the Corporation’s customer deposits (average balance)
consisted of $732.3 million in non interest-bearing-checking accounts and $4.8 billion of
interest-bearing deposits. The increase in average interest-bearing deposits was primarily in time
deposits greater than $100,000, which reflected an increment of 11.9% or $303.9 million.
The following table sets forth the maturities of time deposits of $100,000 or more as of December
31, 2008, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(Dollars in thousands)
|
|
|
Three months or less
|
|
$
|
702,292
|
|
|
$
|
1,105,405
|
|
|
$
|
896,638
|
|
|
Over three months through six months
|
|
|
397,697
|
|
|
|
365,957
|
|
|
|
302,716
|
|
|
Over six months through twelve months
|
|
|
1,000,911
|
|
|
|
79,576
|
|
|
|
377,998
|
|
|
Over twelve months
|
|
|
261,580
|
|
|
|
948,841
|
|
|
|
963,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,362,480
|
|
|
$
|
2,499,779
|
|
|
$
|
2,541,011
|
|
|
|
|
|
|
|
|
|
|
|
|
The Corporation’s current funding strategy is to continue to use various alternative funding
sources taking into account their relative cost, their availability and the general asset and
liability management strategy of the Corporation, placing a stronger emphasis on obtaining client
deposits and reducing reliance on borrowings maintaining adequate levels of liquidity and to meet
funding requirements.
56
For further information regarding the Corporation’s borrowings, see Notes 11 and 12 to the
consolidated financial statements.
Capital and Dividends
The Corporation does not expect favorable or unfavorable trends that would materially affect our
capital resources.
As an investment-grade rated entity by several nationally recognized rating agencies, the
Corporation has access to a variety of capital issuance alternatives in the United States and
Puerto Rico capital markets. The Corporation continuously monitors its capital raising
alternatives. The Corporation may issue additional capital in the future, as needed, to maintain
its “well-capitalized” status.
Stockholders’ equity was $551.6 million or 6.9% of total assets at December 31, 2008, compared to
$536.5 million or 5.8% of total assets at December 31, 2007. The $15.1 million change in
stockholders’ equity was composed by net income of $10.5 million, stock incentive plan expense
recognized as capital contribution of $8.8 million for the period, an increase in accumulated other
comprehensive gain of $1.9 million and the cumulative effect of adoption of SFAS 159 of $3.2
million. These increases were offset by dividends declared of $9.3 million.
The Corporation declared a cash dividend of $0.20 and $0.64 per common share during the years ended
December 31, 2008 and 2007, respectively. The current annualized dividend yield is 1.6% and 7.4%
for the years ended December 31, 2008 and 2007, respectively. In light of the continuing
challenging general economic conditions in Puerto Rico and the global capital markets, the Board of
Directors of the Corporation voted during August 2008 to discontinue the payment of the quarterly
cash dividend on the Corporation’s common stock to strengthen the institution’s core capital
position. The Corporation may use a portion of the funds previously paid as dividends to reduce its
outstanding debt. The Corporation’s decision is part of the significant actions it has proactively
taken in order to face the on-going challenges presented by the Puerto Rico economy, which among
others, include: selling the merchant business to an unrelated third party; maintaining an
on-going strict control on operating expenses; an efficiency plan driven to lower its current
efficiency ratio; and merging its mortgage banking and commercial banking subsidiaries. While each
of the Corporation and its banking subsidiary remain above well capitalized ratios, this prudent
measures will preserve and continue to reinforce the Corporation’s capital position.
The Corporation adopted and implemented various Stock Repurchase Programs in May 2000, December
2000 and June 2002. Under these programs the Corporation acquired 3% of the then outstanding
common shares. During November 2002, the Corporation started a fourth Stock Repurchase program
under which it may acquire 3% of its outstanding common shares. In November 2002, the Board of
Directors authorized the Corporation to repurchase up to 928,204 shares, or approximately 3%, of
its shares of outstanding common stock. The Board felt that the Corporation’s shares of common
stock represented an attractive investment at prevailing market prices at the time of the adoption
of the common stock repurchase program and that, given the relatively small amount of the program,
the stock repurchases would not have a significant impact on liquidity and capital positions. The
program has no time limitation and management is authorized to effect repurchases at its
discretion. The authorization permits the Corporation to repurchase shares from time to time in the
open market or in privately negotiated transactions. The timing and amount of any repurchases will
depend on many factors, including the Corporation’s capital structure, the market price of the
common stock and overall market conditions. All of the repurchased shares will be held by the
Corporation as treasury stock and reserved for future issuance for general corporate purposes.
During the years ended December 31, 2008, 2007 and 2006, the Corporation did not repurchase any
shares of common stock. As of December 31, 2008, the Corporation had repurchased 4,011,260 shares
of its common stock under these programs at a cost of $67.6 million. Management believes that the
repurchase program has not had a significant effect on the Corporation’s liquidity and capital
positions.
The Corporation has a Dividend Reinvestment Plan and a Cash Purchase Plan wherein holders of common
stock have the opportunity to automatically invest cash dividends to purchase more shares of the
Corporation’s common stock. Shareholders may also make, as frequently as once a month, optional
cash payments for investment in additional shares of the Corporation’s common stock.
At December 31, 2008, the Corporation’s common stock price per share was $12.49 representing an
aggregate shareholder value of $582.5 million (including affiliated holdings).
The Corporation is subject to various regulatory capital requirements administered by federal
banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Corporation’s consolidated financial statements. The regulations require
the Corporation to meet specific capital guidelines that involve quantitative measures of assets,
liabilities, and certain off-
57
balance sheet items as calculated under regulatory accounting
practices. The Corporation’s capital classification is also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors.
The Corporation’s common stock is listed on the New York Stock Exchange (“NYSE”) and on the Madrid
Stock Exchange (LATIBEX). The symbol on the NYSE and on the LATIBEX for the common stock is “SBP”
and “XSBP,” respectively. There were approximately 132 holders of record of the Corporation’s
common stock as of December 31, 2008, not including beneficial owners whose shares are held in
names of brokers or other nominees.
As of December 31, 2008, the Bank was classified as a “well capitalized” institution under the
regulatory framework for prompt corrective action. At December 31, 2008, the Corporation continued
to exceed the regulatory risk-based capital requirements. Tier I capital to risk-adjusted assets
and total capital ratios of the Corporation at December 31, 2008 were 8.41% and 12.83%,
respectively, and the leverage ratio was 6.10%. Refer to notes 1 and 26 in the consolidated
financial statements for additional information.
Capital Adequacy Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To be Well Capitalized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For Minimum Capital
|
|
Under Prompt Corrective
|
|
|
|
|
|
|
|
Actual
|
|
Adequacy
|
|
Action Provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
|
|
|
|
|
|
Amount
|
|
Ratio
|
|
Must be
|
|
Must be
|
|
Must be
|
|
Must be
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to Risk Weighted
Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Santander BanCorp
|
|
$
|
726,863
|
|
|
|
12.83
|
%
|
≥
|
$
|
453,114
|
|
≥
|
|
8.00
|
%
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
Banco Santander Puerto Rico
|
|
|
662,161
|
|
|
|
12.87
|
%
|
≥
|
|
411,725
|
|
≥
|
|
8.00
|
%
|
≥
|
$
|
514,656
|
|
≥
|
|
10.00
|
%
|
|
|
|
|
|
Tier I (to Risk Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Santander BanCorp
|
|
|
476,268
|
|
|
|
8.41
|
%
|
≥
|
|
226,557
|
|
≥
|
|
4.00
|
%
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
Banco Santander Puerto Rico
|
|
|
537,395
|
|
|
|
10.44
|
%
|
≥
|
|
205,863
|
|
≥
|
|
4.00
|
%
|
≥
|
|
308,795
|
|
≥
|
|
6.00
|
%
|
|
|
|
|
|
Leverage (to average assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Santander BanCorp
|
|
|
476,268
|
|
|
|
6.10
|
%
|
≥
|
|
234,278
|
|
≥
|
|
3.00
|
%
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
Banco Santander Puerto Rico
|
|
|
537,395
|
|
|
|
6.88
|
%
|
≥
|
|
234,488
|
|
≥
|
|
3.00
|
%
|
≥
|
|
390,813
|
|
>
|
|
5.00
|
%
|
|
|
|
|
|
December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to Risk Weighted
Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Santander BanCorp
|
|
$
|
697,009
|
|
|
|
10.55
|
%
|
≥
|
$
|
528,134
|
|
≥
|
|
8.00
|
%
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
Banco Santander Puerto Rico
|
|
|
647,482
|
|
|
|
10.91
|
%
|
≥
|
|
474,647
|
|
≥
|
|
8.00
|
%
|
≥
|
$
|
593,309
|
|
≥
|
|
10.00
|
%
|
|
|
|
|
|
Tier I (to Risk Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Santander BanCorp
|
|
|
490,259
|
|
|
|
7.42
|
%
|
≥
|
|
264,067
|
|
≥
|
|
4.00
|
%
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
Banco Santander Puerto Rico
|
|
|
573,022
|
|
|
|
9.66
|
%
|
≥
|
|
237,324
|
|
≥
|
|
4.00
|
%
|
≥
|
|
355,986
|
|
≥
|
|
6.00
|
%
|
|
|
|
|
|
Leverage (to average assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Santander BanCorp
|
|
|
490,259
|
|
|
|
5.38
|
%
|
≥
|
|
273,297
|
|
≥
|
|
3.00
|
%
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
Banco Santander Puerto Rico
|
|
|
573,022
|
|
|
|
6.84
|
%
|
≥
|
|
251,493
|
|
≥
|
|
3.00
|
%
|
≥
|
|
419,155
|
|
>
|
|
5.00
|
%
|
|
|
|
|
|
December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to Risk Weighted
Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Santander BanCorp
|
|
$
|
723,269
|
|
|
|
10.93
|
%
|
≥
|
$
|
529,191
|
|
≥
|
|
8.00
|
%
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
Banco Santander Puerto Rico
|
|
|
651,350
|
|
|
|
11.10
|
%
|
≥
|
|
469,346
|
|
≥
|
|
8.00
|
%
|
≥
|
$
|
586,683
|
|
≥
|
|
10.00
|
%
|
|
|
|
|
|
Tier I (to Risk Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Santander BanCorp
|
|
|
520,794
|
|
|
|
7.87
|
%
|
≥
|
|
264,596
|
|
≥
|
|
4.00
|
%
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
Banco Santander Puerto Rico
|
|
|
583,941
|
|
|
|
9.95
|
%
|
≥
|
|
234,673
|
|
≥
|
|
4.00
|
%
|
≥
|
|
352,010
|
|
≥
|
|
6.00
|
%
|
|
|
|
|
|
Leverage (to average assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Santander BanCorp
|
|
|
520,794
|
|
|
|
5.81
|
%
|
≥
|
|
269,000
|
|
≥
|
|
3.00
|
%
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
Banco Santander Puerto Rico
|
|
|
583,941
|
|
|
|
7.15
|
%
|
≥
|
|
244,857
|
|
≥
|
|
3.00
|
%
|
≥
|
|
408,095
|
|
>
|
|
5.00
|
%
|
|
|
|
|
58
Goodwill and Intangible Assets
Total goodwill and intangibles at December 31, 2008, 2007 and 2006 consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Servicing Rights
|
|
$
|
10.2
|
|
|
$
|
9.6
|
|
|
$
|
8.4
|
|
|
Advisory Servicing Rights
|
|
|
1.3
|
|
|
|
1.6
|
|
|
|
1.8
|
|
|
Trade Name
|
|
|
18.3
|
|
|
|
18.3
|
|
|
|
23.7
|
|
|
Customer Relationships
|
|
|
—
|
|
|
|
—
|
|
|
|
9.7
|
|
|
Non-compete Agreement
|
|
|
0.1
|
|
|
|
0.7
|
|
|
|
3.8
|
|
|
Goodwill:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail Banking
|
|
|
10.5
|
|
|
|
10.5
|
|
|
|
10.5
|
|
|
Wealth Management
|
|
|
24.3
|
|
|
|
24.3
|
|
|
|
24.3
|
|
|
Consumer Finance
|
|
|
86.7
|
|
|
|
86.7
|
|
|
|
113.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
151.4
|
|
|
$
|
151.7
|
|
|
$
|
195.7
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill and intangible assets were $121.5 million and $29.9 million at December 31, 2008, compared
with $121.5 million and $30.24 million at December 31, 2007.
Goodwill assigned to the Commercial Banking segment is related to the acquisition of Banco Central
Hispano Puerto Rico in 1996, the goodwill assigned to the Wealth Management segment is related to
the acquisition of Merrill Lynch’s retail brokerage business in Puerto Rico by Santander Securities
Corporation in 2000 and goodwill assigned to the Consumer Finance segment is related to the
acquisition of Island Finance in 2006.
As a result of the unfavorable economic environment in Puerto Rico, Island Finance’s short-term
financial performance and profitability declined significantly during 2007, caused by reduced
lending activity and increases in non-performing assets and charge-offs. The Corporation, with the
assistance of an independent valuation firm, performed an interim impairment test of the goodwill
and other intangibles of Island Finance as of July 1, 2007. SFAS No. 142 provides a two-step
impairment test. The first step of the impairment test compares the fair value of a reporting unit
with its carrying amount, including goodwill. If the carrying amount of a reporting unit exceeds
its fair value, the second step of the goodwill impairment test is performed to measure the amount
of the impairment loss, if any. The Corporation completed the first step of the impairment test and
determined that the carrying amount of the goodwill and other intangible assets of Island Finance
exceeded their fair value, thereby requiring performance of the second step of the impairment test
to calculate the amount of the impairment. Based upon the completed impairment test, the
Corporation determined that the actual non-cash impairment charges as of July 1, 2007 were $43.3
million, which included $26.8 of goodwill and $16.5 million of other intangibles assets (comprised
of $9.2 million of customer relationships, $5.4 million of trade name and $1.9 million of
non-compete agreement). These impairment charges did not result in cash expenditures and will not
result in future cash expenditures. The Corporation performed its annual impairment assessments as
of October 1, 2007 with the assistance of the independent valuation specialist. The Corporation
determined that no impairment charge was necessary as of October 1, 2007. Based on management’s
assessment of the value of the Corporation’s goodwill at October 1, 2008, which includes an
independent valuation, among others, management determined that the Corporation’s goodwill and
other intangibles were not impaired.
59
Contractual Obligations and Commercial Commitments
As disclosed in the notes to the consolidated financial statements, 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 agreements 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 a
fixed minimum or variable price over a specified period of time, are defined as purchases
obligations. At December 31, 2008, the aggregate contractual cash obligations, including purchases
obligations and borrowings maturities, were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by Period
|
|
|
|
|
as of December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
More
|
|
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
|
|
than
|
|
|
|
|
Total
|
|
|
1 year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
5 years
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
Contractual Obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds purchased and
other borrowings
|
|
$
|
2,040
|
|
|
$
|
2,040
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Securities sold under
agreements to repurchase
|
|
|
375,000
|
|
|
|
75,000
|
|
|
|
300,000
|
|
|
|
—
|
|
|
|
—
|
|
|
Commercial paper
|
|
|
50,985
|
|
|
|
50,985
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Federal Home Loan Bank Advances
|
|
|
1,185,000
|
|
|
|
360,000
|
|
|
|
825,000
|
|
|
|
—
|
|
|
|
—
|
|
|
Subordinated notes
|
|
|
306,392
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
306,392
|
|
|
Term notes
|
|
|
19,967
|
|
|
|
—
|
|
|
|
11,154
|
|
|
|
8,813
|
|
|
|
—
|
|
|
Operating lease obligations
|
|
|
128,453
|
|
|
|
32,077
|
|
|
|
21,949
|
|
|
|
18,284
|
|
|
|
56,143
|
|
|
Pension plan contribution
|
|
|
1,106
|
|
|
|
1,106
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,068,943
|
|
|
$
|
521,208
|
|
|
$
|
1,158,103
|
|
|
$
|
27,097
|
|
|
$
|
362,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Commitment and expiration period
|
|
|
|
|
as of December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
More
|
|
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
|
|
than
|
|
|
|
|
Total
|
|
|
1 year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
5 years
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
Other Commercial Commitments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lines of credit and
financial guarantees written
|
|
|
95,660
|
|
|
|
43,585
|
|
|
|
51,001
|
|
|
|
1,074
|
|
|
|
—
|
|
|
Commitments to extend credit
|
|
|
1,193,875
|
|
|
|
1,193,875
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,289,535
|
|
|
$
|
1,237,460
|
|
|
$
|
51,001
|
|
|
$
|
1,074
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
Recent Accounting Pronouncements
Refer to Note 1 to the consolidated financial statements for a description of each of the
pronouncements and management’s assessment as to the impact of the adoptions.
ITEM 7A. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Risk Management
The Corporation has specific policies and procedures which structure and delineate the management
of risks, particularly those related to credit, interest rate exposure and liquidity risk. Risks
are identified, measured and monitored through various committees including the Asset and
Liability, Credit and Investment Committees, among others.
Credit Risk Management and Loan Quality
The lending activity of the Corporation represents its core function, and as such, the quality and
effectiveness of the loan origination and credit risk areas are imperative to management for the
growth and success of the Corporation. The importance of the Corporation’s lending activity has
been considered when establishing functional responsibilities, organizational reporting, lending
policies and procedures, and various monitoring processes and controls.
Critical risk management responsibilities include establishing sound lending standards, monitoring
the quality of the loan portfolio, establishing loan rating systems, assessing reserves and loan
concentrations, supervising document control and accounting, providing necessary training and
resources to credit officers, implementing lending policies and loan documentation procedures,
identifying problem loans as early as possible, and instituting procedures to ensure appropriate
actions to comply with laws and regulations. Due to the challenging environment, the Corporation
implemented during the second semester of 2006 more stringent underwriting and lending criteria.
Credit risk management for our portfolio begins with initial underwriting and continues throughout
the borrower’s credit cycle. Experiential judgment in conjunction with statistical techniques are
used in all aspects of portfolio management including underwriting, product pricing, risk appetite,
setting credit limits, operating processes and metrics to quantify balance risks and returns. In
addition to judgmental decisions, statistical models are used for credit decisions. Tolerance
levels are set to decrease the percentage of approvals as the risk profile increases. Statistical
models are based on detailed behavioral information from external sources such as credit bureaus
and/or internal historical experience. These models are an integral part of our credit management
process and are used in the assessment of both new and existing credit decisions, portfolio
management, strategies including authorizations and line management, collection practices and
strategies and determination of the allowance for credit losses.
The Corporation has also established an internal risk rating system and internal classifications
which serve as timely identification of potential deterioration in loan quality attributes in the
loan portfolio.
Credit extensions for commercial loans are approved by credit committees including the Small Loan
Credit Committee, the Regional Credit Committee, the Credit Administration Committee, the
Management Credit Committee, and the Board of Directors Credit Committee. A centralized department
of the Consumer Lending Division approves all consumer loans.
The Corporation’s collateral requirements for loans depend on the financial strength and liquidity
of the prospective borrower and the principal amount and term of the proposed financing.
Acceptable collateral includes cash, marketable securities, mortgages on real and personal
property, accounts receivable, and inventory.
In addition, the Corporation has an independent Loan Review Department and an independent Internal
Audit Division, each of which conducts monitoring and evaluation of loan portfolio quality, loan
administration, and other related activities, carried on as part of the Corporation’s lending
activity. Both departments provide periodic reports to the Board of Directors, continuously assess
the validity of information reported to the Board of Directors and maintain compliance with
established lending policies.
61
The following table provides the composition of the Corporation’s loan portfolio as of December 31,
2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
2,165,613
|
|
|
$
|
2,562,101
|
|
|
|
|
|
|
|
|
|
|
Consumer — banking operations
|
|
|
565,833
|
|
|
|
641,593
|
|
|
|
|
|
|
|
|
|
|
Consumer Finance:
|
|
|
|
|
|
|
|
|
|
Consumer Installment Loans
|
|
|
686,277
|
|
|
|
667,327
|
|
|
Mortgage Loans
|
|
|
310,642
|
|
|
|
278,882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
996,919
|
|
|
|
946,209
|
|
|
|
|
|
|
|
|
|
|
Leasing
|
|
|
64,065
|
|
|
|
98,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
194,596
|
|
|
|
486,284
|
|
|
|
|
|
|
|
|
|
|
Mortgage Loans
|
|
|
2,553,328
|
|
|
|
2,539,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
|
6,540,354
|
|
|
|
7,274,985
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned income and deferred fees/cost:
|
|
|
|
|
|
|
|
|
|
Banking operations
|
|
|
(290
|
)
|
|
|
(3,459
|
)
|
|
Consumer finance
|
|
|
(418,676
|
)
|
|
|
(335,096
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loans losses:
|
|
|
|
|
|
|
|
|
|
Banking operations
|
|
|
(122,761
|
)
|
|
|
(98,593
|
)
|
|
Consumer finance
|
|
|
(69,128
|
)
|
|
|
(68,359
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,929,499
|
|
|
$
|
6,769,478
|
|
|
|
|
|
|
|
|
|
The Corporation’s gross loan portfolio as of December 31, 2008 and 2007 amounted to $6.5 billion
and $7.3 billion respectively, which represented 90.9% and 84.9%, respectively, of the
Corporation’s total earning assets. The loan portfolio is distributed among various types of
credit, including commercial business loans, commercial real estate loans, construction loans,
small business loans, consumer lending and residential mortgage loans. The credit risk exposure
provides for diversification among specific industries, specific types of business, and related
individuals. As of December 31, 2008 and 2007, there was no obligor group that represented more
than 2.5% of the Corporation’s total loan portfolio. Obligors’ resident or having a principal place
of business in Puerto Rico comprised approximately 99% of the Corporation’s loan portfolio.
As of December 31, 2008 and 2007, the Corporation had over 379,000 consumer loan customers each and
over 7,000 and 8,000 commercial loan customers, respectively, As of such dates, the Corporation
had 50 and 52 clients with commercial loans outstanding over $10 million, respectively. Although
the Corporation has generally avoided cross-border loans, the Corporation had approximately $31.3
million and $33.6 million in cross-border loans as of December 31, 2008 and 2007, respectively,
which are collateralized with real estate in the United States of America, cash and marketable
securities.
The Corporation uses an underwriting system for the origination of residential mortgage loans.
These loans are fully underwritten by experienced underwriters. The methodology used in
underwriting the extension of credit for each residential mortgage loan employs objective
mathematical principles which relate the mortgagor’s income, assets, and liabilities to the
proposed payment and such underwriting methodology confirmed that at the time of origination
(application/approval) the borrower had a reasonable ability to make timely payments on the
residential mortgage loan. Also the character of the borrower or willingness to pay is evaluated by
analyzing the credit report. We apply the basic principles of the borrower’s willingness and
ability to pay.
The risk involved with a loan decision is kept in perspective and must be considered in the
analysis of a loan. Certain characteristics of the transaction are indicators of risk such as
occupancy, loan amount, purpose, product type, property type, loan amount size in relation to
borrower’s previous credit depth and loan to value, cash out of the transaction, time of occupancy,
etc. Risk will be mitigated, in part, by requiring a higher equity, risk pricing, additional
documentation and obtaining and documenting compensating factors.
The purpose of mortgage credit analysis is to determine the borrower’s ability and willingness to
repay the mortgage debt, and thus, limit the probability of default or collection difficulties.
There are four major elements which, typically, are evaluated in
62
assessing a borrower’s ability and willingness to repay the mortgage debt and the property to determine it complies with the agency
and investor’s requirement, has marketability, and is a sound collateral for the loan. The elements
above mentioned comprised (1) stability documentation, (2) continuity and adequacy of income, (3)
credit and assets and (4) collateral.
The Corporation follows the established guidelines and requirements for all government insured or
guaranteed loans such as FHA, VA, RURAL, PR government products, as well as conforming loans sold
to FHLMC and FNMA. In addition to conforming loans and government insured or guaranteed loans, we
also provide loans designed to offer an alternative to individuals who do not qualify for an Agency
conforming mortgage loan. These non-conforming loans typically have: (1) LTV higher than 80% with
mortgage insurance or additional collateral; (2) the mortgage amount may exceed the FNMA/FHLMC
limits and (3) may have different documentation requirements.
Commencing in late 2006, the Corporation adjusted the underwriting policies to take into
consideration the worsening macroeconomic conditions in PR. The implementation of more tight
underwriting standards to reduce the exposure of risks, has contributed to a significant reduction
of mortgage loans originations, and to improve the credit quality of our portfolio. These
underwriting criteria reflect the Corporation’s effort to minimize the impact of the local
recession on its overall loan portfolio, including its mortgage business and protect the value of
its franchise from the higher risk levels caused by declining assets quality.
Residential real estate mortgages are one of the Corporation’s core products and pursuant to our
credit management strategy the Corporation offers a broad range of alternatives of this product to
borrowers that are considered mostly prime or near prime or “Band C” (borrowers with Fair Isaac
Corporation (“Fico Scores”) of 620 or less among other factors including income and its source,
nature and location of collateral, loan-to-value and other guarantees, if any). Near prime or “Band
C” lending policies and procedures do not differ from our general residential mortgages and
consumer lending policies and procedures to other customers. The concentration of residential
mortgages loans of the Bank are presented in the followings tables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
|
First
|
|
|
Second
|
|
|
Consumer
|
|
|
Other
|
|
|
Total
|
|
|
Vintage
|
|
|
Non-performing
|
|
|
% of
|
|
|
|
|
mortgage
|
|
|
mortgage
|
|
|
mortgage
|
|
|
mortgage
|
|
|
Mortgage
|
|
|
% of total
|
|
|
loans
|
|
|
total loans
|
|
|
|
|
(Dollars in thousands)
|
|
|
Vintage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
$
|
106,836
|
|
|
$
|
2,359
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
108,553
|
|
|
|
4
|
%
|
|
$
|
638
|
|
|
|
0.59
|
%
|
|
2007*
|
|
|
269,220
|
|
|
|
2,546
|
|
|
|
|
|
|
|
—
|
|
|
|
272,408
|
|
|
|
11
|
%
|
|
|
5,701
|
|
|
|
2.09
|
%
|
|
2006
|
|
|
578,086
|
|
|
|
4,319
|
|
|
|
31
|
|
|
|
157
|
|
|
|
582,593
|
|
|
|
23
|
%
|
|
|
32,198
|
|
|
|
5.53
|
%
|
|
2005
|
|
|
604,142
|
|
|
|
636
|
|
|
|
—
|
|
|
|
—
|
|
|
|
604,778
|
|
|
|
24
|
%
|
|
|
24,251
|
|
|
|
4.01
|
%
|
|
2004
|
|
|
439,674
|
|
|
|
487
|
|
|
|
|
|
|
|
—
|
|
|
|
440,161
|
|
|
|
17
|
%
|
|
|
16,256
|
|
|
|
3.69
|
%
|
|
2003 and earlier
|
|
|
543,044
|
|
|
|
1,578
|
|
|
|
55
|
|
|
|
158
|
|
|
|
544,835
|
|
|
|
21
|
%
|
|
|
22,953
|
|
|
|
4.21
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub- Total
|
|
$
|
2,541,002
|
|
|
$
|
11,925
|
|
|
$
|
86
|
|
|
$
|
315
|
|
|
|
2,553,328
|
|
|
|
100
|
%
|
|
$
|
101,997
|
|
|
|
3.99
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
The increase in this caption, compared with prior year, was
mainly due to the first mortgage loans held for sale reclassification to loans held to maturity
portfolio
at fair value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
First
|
|
|
Second
|
|
|
Consumer
|
|
|
Other
|
|
|
Total
|
|
|
Vintage
|
|
|
Non-performing
|
|
|
% of
|
|
|
|
|
mortgage
|
|
|
mortgage
|
|
|
mortgage
|
|
|
mortgage
|
|
|
Mortgage
|
|
|
% of total
|
|
|
loans
|
|
|
total loans
|
|
|
|
|
(Dollars in thousands)
|
|
|
Vintage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
$
|
225,340
|
|
|
$
|
2,931
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
228,271
|
|
|
|
9
|
%
|
|
$
|
—
|
|
|
|
0.00
|
%
|
|
2006
|
|
|
588,575
|
|
|
|
5,258
|
|
|
|
52
|
|
|
|
—
|
|
|
|
593,885
|
|
|
|
23
|
%
|
|
|
8,696
|
|
|
|
1.46
|
%
|
|
2005
|
|
|
633,798
|
|
|
|
869
|
|
|
|
—
|
|
|
|
—
|
|
|
|
634,667
|
|
|
|
25
|
%
|
|
|
15,918
|
|
|
|
2.51
|
%
|
|
2004
|
|
|
473,550
|
|
|
|
532
|
|
|
|
|
|
|
|
21
|
|
|
|
474,103
|
|
|
|
19
|
%
|
|
|
11,751
|
|
|
|
2.48
|
%
|
|
2003 and earlier
|
|
|
605,350
|
|
|
|
1,758
|
|
|
|
131
|
|
|
|
1,646
|
|
|
|
608,885
|
|
|
|
24
|
%
|
|
|
15,644
|
|
|
|
2.57
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,526,613
|
|
|
$
|
11,348
|
|
|
$
|
183
|
|
|
$
|
1,667
|
|
|
|
2,539,811
|
|
|
|
100
|
%
|
|
$
|
52,009
|
|
|
|
2.05
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63
The Corporation originates mortgage loans through three main channels: retail sales force, licensed
real estate brokers and purchases from third parties. The production originated through the retail
sales force represent 44% and 48% of the total mortgage originations for the year ended December
31, 2008 and 2007, respectively. The Corporation performed strict quality control reviews of third
party originated loans, which represented 55% for the year ended December 31, 2008 and 52% of the
total originated mortgage portfolio for the year ended December 31, 2007. The Corporation offered
fixed rate first and second mortgages which are almost entirely secured by a primary residence for
the purpose of purchase money, refinance, debt consolidation, or home equity loans. Residential
real estate mortgages of banking operations represent approximately 39% and 35% of total gross
loans at December 31, 2008 and 2007, respectively. As of December 31, 2008 and 2007, the first
mortgage portfolio totaled approximately $2.5 billion while the second mortgage portfolio was
approximately $11.9 million for both periods from banking operations.
The Corporation has not originated option adjustable-rate mortgage products (option ARMs) or
variable-rate mortgage products with fixed payment amounts, commonly referred to within the
financial services industry as negative amortizing mortgage loans, as the Corporation believes
these products rarely provide a benefit to our customers. The interest rates impact the amount and
timing of origination and servicing fees because consumer demand for new mortgages and the level of
refinancing activity are sensitive to changes in mortgage interest rates. The ARMs currently
outstanding in the residential mortgage portfolio came from previous acquisitions made by the
Corporation. The Corporation also mitigated its credit risk in its residential mortgage loan
portfolio through sales and securitizations transactions.
The mortgage real estate loans in the Corporation’s consumer finance subsidiary Santander Financial
Services, Inc. (“Island Finance”) are presented in the followings tables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
First
|
|
|
Second
|
|
|
ARM
|
|
|
Total
|
|
|
Vintage
|
|
|
Non-performing
|
|
|
% of
|
|
|
|
|
mortgage
|
|
|
mortgage
|
|
|
mortgage
|
|
|
Mortgage*
|
|
|
% of total
|
|
|
loans
|
|
|
total loans
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Vintage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
$
|
31,441
|
|
|
$
|
696
|
|
|
$
|
—
|
|
|
$
|
32,137
|
|
|
|
20
|
%
|
|
$
|
262
|
|
|
|
0.82
|
%
|
|
2007
|
|
|
28,323
|
|
|
|
1,498
|
|
|
|
1,246
|
|
|
|
31,067
|
|
|
|
19
|
%
|
|
|
572
|
|
|
|
1.84
|
%
|
|
2006
|
|
|
13,409
|
|
|
|
1,281
|
|
|
|
22,355
|
|
|
|
37,045
|
|
|
|
22
|
%
|
|
|
3,196
|
|
|
|
8.63
|
%
|
|
2005
|
|
|
12,208
|
|
|
|
1,219
|
|
|
|
19,953
|
|
|
|
33,380
|
|
|
|
20
|
%
|
|
|
3,014
|
|
|
|
9.03
|
%
|
|
2004
|
|
|
11,524
|
|
|
|
3,108
|
|
|
|
—
|
|
|
|
14,632
|
|
|
|
9
|
%
|
|
|
1,776
|
|
|
|
12.14
|
%
|
|
2003 and earlier
|
|
|
13,129
|
|
|
|
6,185
|
|
|
|
—
|
|
|
|
19,314
|
|
|
|
12
|
%
|
|
|
2,160
|
|
|
|
11.18
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
110,034
|
|
|
$
|
13,987
|
|
|
$
|
43,554
|
|
|
$
|
167,575
|
|
|
|
100
|
%
|
|
$
|
10,980
|
|
|
|
6.55
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Net of unearned finance charges and deferred income/cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
First
|
|
|
Second
|
|
|
ARM
|
|
|
Total
|
|
|
Vintage
|
|
|
Non-performing
|
|
|
% of
|
|
|
|
|
mortgage
|
|
|
mortgage
|
|
|
mortgage
|
|
|
Mortgage*
|
|
|
% of total
|
|
|
loans
|
|
|
total loans
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Vintage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
$
|
32,007
|
|
|
$
|
1,859
|
|
|
$
|
1,354
|
|
|
$
|
35,220
|
|
|
|
22
|
%
|
|
$
|
24
|
|
|
|
0.07
|
%
|
|
2006
|
|
|
15,965
|
|
|
|
1,424
|
|
|
|
25,771
|
|
|
|
43,160
|
|
|
|
27
|
%
|
|
|
1,634
|
|
|
|
3.79
|
%
|
|
2005
|
|
|
14,434
|
|
|
|
1,556
|
|
|
|
23,445
|
|
|
|
39,435
|
|
|
|
24
|
%
|
|
|
3,405
|
|
|
|
8.63
|
%
|
|
2004
|
|
|
13,898
|
|
|
|
3,960
|
|
|
|
—
|
|
|
|
17,858
|
|
|
|
11
|
%
|
|
|
2,319
|
|
|
|
12.99
|
%
|
|
2003 and earlier
|
|
|
17,530
|
|
|
|
7,982
|
|
|
|
—
|
|
|
|
25,512
|
|
|
|
16
|
%
|
|
|
3,449
|
|
|
|
13.52
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
93,834
|
|
|
$
|
16,781
|
|
|
$
|
50,570
|
|
|
$
|
161,185
|
|
|
|
100
|
%
|
|
$
|
10,831
|
|
|
|
6.72
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Net of unearned finance charges and deferred income/cost
|
The Corporation originates loans to near prime or “Band C” borrowers (customers with Fair Isaac
Corporation (“FICO”) scores of 620 or less among other factors, including level of income and its
source, loan-to-value (LTV), other guarantees and banking relationships and nature and location of
collateral, if any,) mainly through Island Finance and to a lesser extent at the Bank. The
following table provides information on the Corporation’s residential mortgage and consumer
installments loans exposure
64
from banking operations and consumer finance business, including near prime or “Band C” loans at December 31, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
|
“BAND A”
|
|
|
Avg.
|
|
|
“BAND B”
|
|
|
Avg.
|
|
|
“BAND C”
|
|
|
Avg.
|
|
|
Total
|
|
|
Avg.
|
|
|
|
|
FICO>=660
|
|
|
LTV
|
|
|
FICO>620 and <660
|
|
|
LTV
|
|
|
FICO<=620
|
|
|
LTV
|
|
|
Loans
|
|
|
LTV
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Loan Portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banking Operations
|
|
$
|
1,984,652
|
|
|
|
80
|
%
|
|
$
|
308,690
|
|
|
|
81
|
%
|
|
$
|
259,986
|
|
|
|
76
|
%
|
|
$
|
2,553,328
|
|
|
|
80
|
%
|
|
Consumer Finance
|
|
|
65,516
|
|
|
|
61
|
%
|
|
|
41,652
|
|
|
|
62
|
%
|
|
|
60,407
|
|
|
|
61
|
%
|
|
|
167,575
|
|
|
|
61
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,050,168
|
|
|
|
|
|
|
$
|
350,342
|
|
|
|
|
|
|
$
|
320,393
|
|
|
|
|
|
|
$
|
2,720,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Installment
Loans*:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banking Operations
|
|
$
|
427,056
|
|
|
|
n/a
|
|
|
$
|
59,070
|
|
|
|
n/a
|
|
|
$
|
79,707
|
|
|
|
n/a
|
|
|
$
|
565,833
|
|
|
|
n/a
|
|
|
Consumer Finance
|
|
|
176,334
|
|
|
|
n/a
|
|
|
|
119,492
|
|
|
|
n/a
|
|
|
|
114,842
|
|
|
|
n/a
|
|
|
|
410,668
|
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
603,390
|
|
|
|
|
|
|
$
|
178,562
|
|
|
|
|
|
|
$
|
194,549
|
|
|
|
|
|
|
$
|
976,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Net of unearned finance charges and deferred income/cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
“BAND A”
|
|
|
Avg.
|
|
|
“BAND B”
|
|
|
Avg.
|
|
|
“BAND C”
|
|
|
Avg.
|
|
|
Total
|
|
|
Avg.
|
|
|
|
|
FICO>=660
|
|
|
LTV
|
|
|
FICO>620 and <660
|
|
|
LTV
|
|
|
FICO<=620
|
|
|
LTV
|
|
|
Loans
|
|
|
LTV
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Loan portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banking Operations
|
|
$
|
1,901,868
|
|
|
|
81
|
%
|
|
$
|
309,770
|
|
|
|
82
|
%
|
|
$
|
328,173
|
|
|
|
80
|
%
|
|
$
|
2,539,811
|
|
|
|
81
|
%
|
|
Consumer Finance
|
|
|
56,535
|
|
|
|
58
|
%
|
|
|
40,389
|
|
|
|
60
|
%
|
|
|
64,261
|
|
|
|
57
|
%
|
|
|
161,185
|
|
|
|
58
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,958,403
|
|
|
|
|
|
|
$
|
350,159
|
|
|
|
|
|
|
$
|
392,434
|
|
|
|
|
|
|
$
|
2,700,996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Installment
Loans*:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banking Operations
|
|
$
|
510,844
|
|
|
|
n/a
|
|
|
$
|
54,943
|
|
|
|
n/a
|
|
|
$
|
75,806
|
|
|
|
n/a
|
|
|
$
|
641,593
|
|
|
|
n/a
|
|
|
Consumer Finance
|
|
|
178,745
|
|
|
|
n/a
|
|
|
|
130,202
|
|
|
|
n/a
|
|
|
|
140,981
|
|
|
|
n/a
|
|
|
|
449,928
|
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
689,589
|
|
|
|
|
|
|
$
|
185,145
|
|
|
|
|
|
|
$
|
216,787
|
|
|
|
|
|
|
$
|
1,091,521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Net of unearned finance charges and deferred income/cost
|
At December 31, 2008, residential mortgage portfolio categorized as near prime or “Band C” loans
was approximately $260 million and $60 million for banking operations and consumer finance
business, respectively, a 10% and 36% of its total residential mortgage portfolio, respectively.
The mortgage loans amounts reported in “Band C” as of December 31, 2008 includes $5.3 million or
1.5% of originated loans during the year for banking operations and $7.9 million or 13% for
consumer finance portfolio. At December 31, 2007, residential mortgage portfolio categorized as
near prime or “Band C” loans was approximately $328 million and $64 million for banking operations
and consumer finance portfolios, respectively, a 13% and 40% of its total residential mortgage
portfolio, respectively. The amounts reported in “Band C” as of December 31, 2007 includes $17.2
million or 5.3% of originated loans during the year for banking operations and $8.0 million or
12.4% for consumer finance portfolio. The Corporation’s risk management considers a “FICO” credit
score, an indicator of credit rating and credit profile, and loan-to value ratios, the proportional
lending exposure relative to property value, as a key determinant of credit performance. The
average FICO score for the residential mortgage portfolio of banking operations, as of December 31,
2008 and 2007 was 706 and 697, respectively and an average LTV of 80% as compared to 81% in 2007.
For its consumer finance business residential mortgages, average FICO score, as of December 31,
2008 and 2007 was 648 and 641, respectively and an average LTV of 61% in 2008 as compared to 58% in
2007. The actual rates of delinquencies, foreclosures and losses on these loans could be higher
than anticipated during economic slowdowns.
65
Residential mortgage loan origination for banking operations was $345.7 million for the year ended
December 31, 2008 and $556.8 million for the year ended December 31, 2007. The Corporation sold and
securitized $213.4 million and $298.6 million for the year ended December 31, 2008 and 2007,
respectively to unaffiliated third parties. Within the sales and securitizations numbers mentioned
above, the Corporation sold and securitized $18.8 million and $12.9 million of near prime or “Band
C” loans for the year ended December 31, 2008 and 2007, respectively.
The Corporation added strength to the control over its credit activities and does not pursue near
prime or “Band C” residential mortgage and consumer installment as a core product of its lending
activities. Under the Corporation’s Loss Mitigation Policy (“LMP”), we evaluate, several
alternatives for identifying near prime or “Band C” residential mortgage loan borrowers who are at
risk of default in order to design and offer loan mitigation strategies, including repayment plans
and loan modifications to such borrowers. The objective of the Loss Mitigation Policy is to
document the approach to loss mitigation manage and reduce the risk of loss for the consumer and
mortgage portfolios and takes into consideration the current stress that consumer and mortgage
borrowers are facing in Puerto Rico. The Corporation’s strategy is to maximize the recovery from
delinquent and past due consumer and mortgage loans by actively working with borrowers to develop
repayment plans that avoid foreclosure or other legal remedies.
The policy applies to the Corporation’s consumer lending business, including personal loans, credit
cards and credit lines and mortgage business including conforming, guaranteed & insured mortgages
and non-conforming mortgages. Loss mitigation, where applicable, is intended to benefit both the
Corporation and the borrower. The Corporation avoids a costly and time consuming foreclosure
process while the borrower maintains ownership of his/her home. The Loss Mitigation Policy
describes the Corporation’s approach to identifying borrowers with higher risk of default, assessing their
ability to pay taking into account various factors, including debt to income ratios; assessing the
likelihood of default; explore loss mitigation techniques that might avoid foreclose or other legal
remedies and ensuring compliance with the appropriate regulations and policies of each regulatory
or investment agency.
Industry Risk
Commercial loans, including commercial real estate and construction loans, amounted to $2.4 billion
as of December 31, 2008. The Corporation accepts various types of collateral to guarantee specific
loan obligations. As of December 31, 2008, the use of real estate as loan collateral has resulted
in a portfolio of approximately $1.4 billion, or 57.2% of the commercial loan portfolio. In
addition, as of such date, loans secured by cash collateral and marketable securities amounted to
$234.4 million, or 10.0% of the commercial loan portfolio. Commercial loans guaranteed by federal
or local government amounted to $97.1 million as of December 31, 2008, which represents 4.0% of the
commercial loan portfolio. The remaining commercial loan portfolio had $218.8 million partially
secured by other types of collateral including, among others, equipment, accounts receivable, and
inventory. As of December 31, 2008, unsecured commercial loans represented $484.5 million or 20.0%
of commercial loans receivable; however, the majority of these loans were backed by personal
guarantees.
In addition to the commercial loan portfolio indicated above, as of December 31, 2008, the
Corporation had $1.2 billion in unused commitments under commercial lines of credit. These credit
facilities are typically structured to mature within one year. As of December 31, 2008, stand-by
letters of credit amounted to $95.7 million.
The commercial loan portfolio is distributed among the different economic sectors and there are no
concentrations of credit consisting of direct, indirect, or contingent obligations in any specific
borrower, an affiliated group of borrowers, or borrowers engaged in or dependent on one industry.
The Corporation provides for periodic reviews of industry trends and the credits’ susceptibility to
external factors.
Government Risk
As of December 31, 2008, $171.9 million of the Corporation’s investment securities represented
exposure to the U.S. government in the form of U.S. Treasury securities and federal agency
obligations. In addition, as of such date, $42.7 million of residential mortgages and $55.8
million in commercial loans were insured or guaranteed by the U.S. Government or its agencies
through the Small Business Administration (SBA) and Rural Development Programs. Furthermore, as of
December 31, 2008, there were $148.6 million of investment securities representing obligations of
the Commonwealth of Puerto Rico, its agencies, instrumentalities and political subdivisions as well
as $8.0 million of mortgage loans and $165.3 million in commercial loans issued to or guaranteed by
Puerto Rico government agencies, instrumentalities, political subdivisions and municipalities. As
of December 31, 2008, the Corporation’s credit exposure to the Commonwealth of Puerto Rico and its
political subdivisions and municipalities was $321.9 million
composed of $133.8 million in municipalities loans, $39.5
million in other government credit
facilities and $148.6 million in outstanding bonds and other obligations. The Corporation believes
that the credit exposure to the Commonwealth of Puerto Rico and its political subdivisions and
municipalities is manageable. The Commonwealth of Puerto Rico has a long-standing record of
supporting all of its debt obligations. It has never defaulted in the payment of principal or
interest on any public
66
debt. The Corporation’s level of exposure is manageable given the fact that its outstanding loans and investment securities have either one or more of the following
characteristics: (i) investment grade rated counterparties, (ii) identifiable source of repayment,
(iii) high ranking in repayment priority or (iv) tangible collateral. The Corporation has $133.8
million on loans or obligations to various Municipalities for which payments are secured by the
full faith, credit and unlimited taxing power of the Municipalities. The Corporation anticipates
recovery of the amortized cost of these securities at maturity. Since the Corporation has the
ability and intent to hold these investments until a recovery of fair value, which may be maturity,
and the contractual term of these investments do not permit the issuer to settle the securities at
a price less than the amortized cost, the Corporation does not consider these investments to be
other-than-temporarily impaired at December 31, 2008.
67
Non-performing Assets and Past Due Loans
The following table sets forth non-performing assets as of December 31, 2008, 2007, 2006, 2005 and
2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
(Dollars in thousands)
|
|
|
Commercial, Industrial and Agricultural
|
|
$
|
30,564
|
|
|
$
|
21,236
|
|
|
$
|
15,549
|
|
|
$
|
14,326
|
|
|
$
|
27,975
|
|
|
Construction
|
|
|
13,856
|
|
|
|
141,140
|
|
|
|
3,966
|
|
|
|
3,414
|
|
|
|
11,200
|
|
|
Mortgage
|
|
|
116,473
|
|
|
|
80,805
|
|
|
|
51,341
|
|
|
|
45,292
|
|
|
|
36,252
|
|
|
Consumer
|
|
|
13,479
|
|
|
|
10,818
|
|
|
|
7,590
|
|
|
|
4,747
|
|
|
|
6,808
|
|
|
Consumer Finance
|
|
|
35,508
|
|
|
|
37,412
|
|
|
|
24,731
|
|
|
|
—
|
|
|
|
—
|
|
|
Lease Financing
|
|
|
2,493
|
|
|
|
2,334
|
|
|
|
2,783
|
|
|
|
3,340
|
|
|
|
2,715
|
|
|
Restructured Loans
|
|
|
341
|
|
|
|
693
|
|
|
|
892
|
|
|
|
2,560
|
|
|
|
2,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing loans
|
|
|
212,714
|
|
|
|
294,438
|
|
|
|
106,852
|
|
|
|
73,679
|
|
|
|
87,510
|
|
|
Total repossessed assets
|
|
|
21,592
|
|
|
|
16,447
|
|
|
|
6,173
|
|
|
|
2,706
|
|
|
|
3,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing assets
|
|
$
|
234,306
|
|
|
$
|
310,885
|
|
|
$
|
113,025
|
|
|
$
|
76,385
|
|
|
$
|
91,447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruing loans past-due 90 days or more
|
|
$
|
13,462
|
|
|
$
|
7,162
|
|
|
$
|
20,938
|
|
|
$
|
2,999
|
|
|
$
|
3,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing loans to total loans
|
|
|
3.45
|
%
|
|
|
4.16
|
%
|
|
|
1.54
|
%
|
|
|
1.22
|
%
|
|
|
1.57
|
%
|
|
Non-performing loans plus accruing loans
past due 90 days or more to total loans
|
|
|
3.67
|
%
|
|
|
4.26
|
%
|
|
|
1.84
|
%
|
|
|
1.27
|
%
|
|
|
1.63
|
%
|
|
Non-performing assets to total assets
|
|
|
2.97
|
%
|
|
|
3.39
|
%
|
|
|
1.23
|
%
|
|
|
0.92
|
%
|
|
|
1.10
|
%
|
|
Interest lost
|
|
$
|
9,268
|
|
|
$
|
7,708
|
|
|
$
|
3,112
|
|
|
$
|
2,111
|
|
|
$
|
2,351
|
|
Non-performing assets consist of past-due commercial loans, construction loans, lease financing and
closed-end consumer loans with principal or interest payments over 90 days on which no interest
income is being accrued, and mortgage loans with principal or interest payments over 120 days past
due on which no interest income is being accrued, renegotiated loans and other real estate owned.
Once a loan is placed on non-accrual status, interest is recorded as income only to the extent of
the Corporation’s management expectations regarding the full collectibility of principal and
interest on such loans. The interest income that would have been realized had these loans been
performing in accordance with their original terms amounted to $9.3 million, $7.7 million and $3.1
million in 2008, 2007 and 2006, respectively.
Non-performing loans to total loans as of December 31, 2008 were 3.45%, a 71 basis point decrease
compared to the 4.16% reported as of December 31, 2007. Non-performing loans at December 31, 2008
amounted to $212.7 million. The Corporation’s non-performing loans reflected a decrease of $81.7
million or 27.8% compared to non-performing loans as of December 31, 2007. This change was driven
by a decrease in non-performing construction loans of $127.3 million or 90.2% due to the sale to an
affiliate of certain loans, including some classified as impaired, during the year. The reduction
in non-performing construction loans was partially offset by increases in non-performing
residential mortgage and commercial loans of $35.7 million or 44.1% and $9.3 million or 43.9%,
respectively, when compared with the same in prior year.
Repossessed assets increased $5.1 million or 31.3% to $21.6 million at December 31, 2008, from
$16.4 million at December 31, 2007.
As of December 31, 2008, the coverage ratio (allowance for loan losses to total non-performing
loans) increased to 90.21% in 2008 from 56.70% in 2007. Excluding non-performing mortgage loans
(for which the Corporation has historically had a minimal loss experience) this ratio is 225.06% at
December 31, 2008 compared to 82.32% as of December 31, 2007.
The accrual of interest on commercial loans, construction loans, lease financing and closed-end
consumer loans is discontinued when, in management’s opinion, the borrower may be unable to meet
payments as they become due, but in no event is it recognized after 90 days in arrears on payments
of principal or interest. Interest on mortgage loans is not recognized after four months in arrears
on payments of principal or interest. Income is generally recognized on open-end (revolving credit)
consumer
68
loans until the loans are charged off. When interest accrual is discontinued, unpaid
interest is reversed on all closed-end portfolios. Interest income is subsequently recognized only
to the extent that it is received. The non accrual status is discontinued when loans are made
current by the borrower.
Potential Problem Loans
As a general rule, the Corporation closely monitors certain loans not disclosed under
“Non-performing Assets and Past Due Loans” but that represent a greater than normal credit risk.
These loans are not included under the non-performing category, but management provides close
supervision of their performance. The identification process is implemented through various risk
management procedures, such as periodic review of customer relationships, a risk grading system, an
internal watch system and a loan review process. This classification system enables management to
respond to changing circumstances and to address the risk that may arise from changing business
conditions or any other factors that bear significantly on the overall condition of these loans.
The principal amounts of loans under this category as of December 31, 2008 and 2007 were
approximately $297.8 million and $194.9 million, respectively.
Asset and Liability Management
The Corporation’s policy with respect to asset liability management is to maximize its net interest
income, return on assets and return on equity while remaining within the established parameters of
interest rate and liquidity risks provided by the Board of Directors and the relevant regulatory
authorities. Subject to these constraints, the Corporation takes mismatched interest rate
positions. The Corporation’s asset and liability management policies are developed and implemented
by its Asset and Liability Committee (“ALCO”), which is composed of senior members of the
Corporation including the President, Chief Accounting Officer, Treasurer and other executive
officers of the Corporation. The ALCO reports on a monthly basis to the members of the Bank’s Board
of Directors.
Market Risk and Interest Rate Sensitivity
A key component of the Corporation’s asset and liability policy is the management of interest rate
sensitivity. Interest rate sensitivity is the relationship between market interest rates and net
interest income due to the maturity or repricing characteristics of interest-earning assets and
interest-bearing liabilities. For any given period, the pricing structure is matched when an equal
amount of such assets and liabilities mature or reprice in that period. Any mismatch of
interest-earning assets and interest-bearing liabilities is known as a gap position. A positive
gap denotes asset sensitivity, which means that an increase in interest rates would have a positive
effect on net interest income, while a decrease in interest rates would have a negative effect on
net interest income. A negative gap denotes liability sensitivity, which means that a decrease in
interest rates would have a positive effect on net interest income, while an increase in interest
rates would have a negative effect on net interest income. Because different types of assets and
liabilities with the same or similar maturities may react differently to changes in overall market
rates or conditions, changes in interest rates may affect net interest income positively or
negatively even if an institution were perfectly matched in each maturity category.
The Corporation’s one-year cumulative GAP position at December 31, 2008, was negative $1.2 billion
or -16.0% of total earning assets. This is a one-day position that is continually changing and is
not indicative of the Corporation’s position at any other time. This denotes liability
sensitivity, which means that an increase in interest rates would have a negative effect on net
interest income while a decrease in interest rates would have a positive effect on net interest
income. While the GAP position is a useful tool in measuring interest rate risk and contributes
toward effective asset and liability management, shortcomings are inherent in GAP analysis since
certain assets and liabilities may not move proportionally as interest rates change.
The Corporation’s interest rate sensitivity strategy takes into account not only rates of return
and the underlying degree of risk, but also liquidity requirements, capital costs and additional
demand for funds. The Corporation’s maturity mismatches and positions are monitored by the ALCO
and managed within limits established by the Board of Directors.
The following table sets forth the repricing of the Corporation’s interest earning assets and
interest bearing liabilities at December 31, 2008 and may not be representative of interest rate
gap positions at other times. In addition, variations in interest rate sensitivity may exist
within the repricing period presented due to the differing repricing dates within the period. In
preparing the interest rate gap report, the following assumptions was considered, all assets and
liabilities are reported according to their repricing characteristics. For example, a commercial
loan maturing in five years with monthly variable interest rate payments is stated in the column of
“up to 90 days”. The investment portfolio is reported considering the effective duration of the
securities. Expected prepayments and remaining terms are considered for the residential mortgage
portfolio. Core deposits are reported in accordance with their effective duration. Effective duration of core deposits is
based on price and volume elasticity to market rates. The Corporation reviews on a monthly basis
the effective duration of core deposits. Assets and liabilities with embedded options are stated
based on full valuation of the asset/liability and the option to ascertain their effective
duration.
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Sensitivity
|
|
|
|
|
As of December 31, 2008
|
|
|
|
|
0 to 3
|
|
|
3 months
|
|
|
1 to 3
|
|
|
3 to 5
|
|
|
5 to 10
|
|
|
More than
|
|
|
No Interest
|
|
|
|
|
|
|
|
Months
|
|
|
to a Year
|
|
|
Years
|
|
|
Years
|
|
|
Years
|
|
|
10 Years
|
|
|
Rate Risk
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Portfolio
|
|
$
|
107,130
|
|
|
$
|
60,513
|
|
|
$
|
537,477
|
|
|
$
|
84,919
|
|
|
$
|
9,918
|
|
|
$
|
—
|
|
|
$
|
128,506
|
|
|
$
|
928,463
|
|
|
Deposits with Other Banks
|
|
|
73,458
|
|
|
|
8,260
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
208,834
|
|
|
|
290,552
|
|
|
Loan Portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
1,249,183
|
|
|
|
244,060
|
|
|
|
290,845
|
|
|
|
139,452
|
|
|
|
140,916
|
|
|
|
82,198
|
|
|
|
78,747
|
|
|
|
2,225,401
|
|
|
Construction
|
|
|
139,310
|
|
|
|
25,396
|
|
|
|
16,597
|
|
|
|
3,172
|
|
|
|
6,356
|
|
|
|
3,195
|
|
|
|
—
|
|
|
|
194,026
|
|
|
Consumer
|
|
|
357,194
|
|
|
|
185,653
|
|
|
|
366,028
|
|
|
|
195,697
|
|
|
|
41,645
|
|
|
|
14
|
|
|
|
(1,399
|
)
|
|
|
1,144,832
|
|
|
Mortgage
|
|
|
100,398
|
|
|
|
277,901
|
|
|
|
605,902
|
|
|
|
508,935
|
|
|
|
951,576
|
|
|
|
148,836
|
|
|
|
2,040
|
|
|
|
2,595,588
|
|
|
Fixed and Other Assets
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
518,714
|
|
|
|
518,714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
|
2,026,673
|
|
|
|
801,783
|
|
|
|
1,816,849
|
|
|
|
932,175
|
|
|
|
1,150,411
|
|
|
|
234,243
|
|
|
|
935,442
|
|
|
|
7,897,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External Funds Purchased:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Paper
|
|
|
50,985
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
50,985
|
|
|
Repurchase Agreements
|
|
|
75,000
|
|
|
|
300,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
375,000
|
|
|
Federal Funds and other
borrowings
|
|
|
310,000
|
|
|
|
52,040
|
|
|
|
825,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,187,040
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of Deposit
|
|
|
804,168
|
|
|
|
1,521,195
|
|
|
|
194,288
|
|
|
|
61,859
|
|
|
|
19,226
|
|
|
|
28,472
|
|
|
|
(12,360
|
)
|
|
|
2,616,848
|
|
|
Demand Deposits and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings Accounts
|
|
|
121,051
|
|
|
|
—
|
|
|
|
149,983
|
|
|
|
421,928
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
692,962
|
|
|
Transactional Accounts
|
|
|
242,450
|
|
|
|
353,154
|
|
|
|
—
|
|
|
|
1,109,488
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,705,092
|
|
|
Senior and Subordinated Debt
|
|
|
55,000
|
|
|
|
—
|
|
|
|
11,298
|
|
|
|
195,930
|
|
|
|
—
|
|
|
|
60,000
|
|
|
|
4,131
|
|
|
|
326,359
|
|
|
Other Liabilities and Capital
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
943,290
|
|
|
|
943,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Capital
|
|
|
1,658,654
|
|
|
|
2,226,389
|
|
|
|
1,180,569
|
|
|
|
1,789,205
|
|
|
|
19,226
|
|
|
|
88,472
|
|
|
|
935,061
|
|
|
|
7,897,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-Balance Sheet
Financial Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps (Assets)
|
|
|
1,544,685
|
|
|
|
14,159
|
|
|
|
1,683
|
|
|
|
138,961
|
|
|
|
1,466,418
|
|
|
|
26,987
|
|
|
|
—
|
|
|
|
3,192,893
|
|
|
Interest Rate Swaps (Liabilities)
|
|
|
(1,669,685
|
)
|
|
|
(14,159
|
)
|
|
|
(1,683
|
)
|
|
|
(13,961
|
)
|
|
|
(1,466,418
|
)
|
|
|
(26,987
|
)
|
|
|
—
|
|
|
|
(3,192,893
|
)
|
|
Caps
|
|
|
1,166
|
|
|
|
—
|
|
|
|
411
|
|
|
|
755
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,332
|
|
|
Caps Final Maturity
|
|
|
(1,166
|
)
|
|
|
—
|
|
|
|
(411
|
)
|
|
|
(755
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,332
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAP
|
|
|
243,019
|
|
|
|
(1,424,606
|
)
|
|
|
636,280
|
|
|
|
(732,030
|
)
|
|
|
1,131,185
|
|
|
|
145,771
|
|
|
|
381
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative GAP
|
|
$
|
243,019
|
|
|
$
|
(1,181,587
|
)
|
|
$
|
(545,307
|
)
|
|
$
|
(1,277,337
|
)
|
|
$
|
(146,152
|
)
|
|
$
|
(381
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative GAP to earning assets
|
|
|
3.29
|
%
|
|
|
-16.01
|
%
|
|
|
-7.39
|
%
|
|
|
-17.31
|
%
|
|
|
-1.98
|
%
|
|
|
-0.01
|
%
|
|
|
|
|
|
|
|
|
Interest rate risk is the primary market risk to which the Corporation is exposed. Nearly all of
the Corporation’s interest rate risk arises from instruments, positions and transactions entered
into for purposes other than trading. They include loans, investment securities, deposits,
short-term borrowings, senior and subordinated debt and derivative financial instruments used for
asset and liability management.
As part of its interest rate risk management process, the Corporation analyzes on an ongoing basis
the profitability of the balance sheet structure, and how this structure will react under different
market scenarios. In order to carry out this task, management prepares three standardized reports
with detailed information on the sources of interest income and expense: the “Financial
Profitability Report”, the “Net Interest Income Shock Report” and the “Market Value Shock Report”.
The former report deals with historical data while the latter two deal with expected future
earnings.
The Financial Profitability Report identifies individual components of the Corporation’s
non-trading portfolio independently with their corresponding interest income or expense. It uses
the historical information at the end of each month to track the yield of such components and to
calculate net interest income for such time period.
70
The Net Interest Income Shock Report uses a simulation analysis to measure the amount of net
interest income the Corporation would have from its operations throughout the next twelve months
and the sensitivity of these earnings to assumed shifts in market interest rates throughout the
same period. The important assumptions of this analysis are: ( i ) rate shifts are parallel and
immediate throughout the yield curve; (ii) rate changes affect all assets and liabilities equally;
(iii) interest-bearing demand accounts and savings passbooks will run off in a period of one year;
and (iv) demand deposit accounts will run off in a period of one to three years. Cash flows from
assets and liabilities are assumed to be reinvested at market rates in similar instruments. The
object is to simulate a dynamic gap analysis enabling a more accurate interest rate risk
assessment.
The ALCO monitors interest rate gaps in combination with net interest margin (NIM) sensitivity and
duration of market value equity (MVE).
NIM sensitivity analysis captures the maximum acceptable net interest margin loss for a one percent
parallel change of all interest rates across the curve. Duration of market value equity analysis
entails a valuation of all interest bearing assets and liabilities under parallel movements in
interest rates. The ALCO has established limits of $35 million of NIM sensitivity for a 1% parallel
shock and $140 million of MVE sensitivity for a 1% parallel shock.
As of December 31, 2008, it was determined for purposes of the Net Interest Income Shock Report
that the Corporation had a potential loss in net interest income of approximately $5.2 million if
market rates were to increase 100 basis points immediately parallel across the yield curve, less
than the $35.0 million limit. For purposes of the Market Value Shock Report it was determined that
the Corporation had a potential loss of approximately $63.5 million if market rates were to
increase 100 basis points immediately parallel across the yield curve, less than the $140.0 million
limit. The tables below present a summary of the Corporation’s net interest margin and market value
shock reports, considering several scenarios as of December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INTEREST MARGIN SHOCK REPORT
|
|
|
|
December 31, 2008
|
|
(In millions)
|
|
-200 BP’s
|
|
-100 BP’s
|
|
-50 BP’s
|
|
Base Case
|
|
+50 BP’s
|
|
+100 BP’s
|
|
+200 BP’s
|
|
Gross Interest Margin
|
|
$
|
401.1
|
|
|
$
|
397.8
|
|
|
$
|
389.5
|
|
|
$
|
392.2
|
|
|
$
|
389.4
|
|
|
$
|
387.0
|
|
|
$
|
378.8
|
|
|
Sensitivity
|
|
$
|
8.9
|
|
|
$
|
5.6
|
|
|
$
|
(2.7
|
)
|
|
|
|
|
|
$
|
(2.8
|
)
|
|
$
|
(5.2
|
)
|
|
$
|
(13.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MARKET VALUE SHOCK REPORT
|
|
|
|
December 31, 2008
|
|
(In millions)
|
|
-200 BP’s
|
|
-100 BP’s
|
|
-50 BP’s
|
|
Base Case
|
|
+50 BP’s
|
|
+100 BP’s
|
|
+200 BP’s
|
|
Market Value of Equity
|
|
$
|
697.8
|
|
|
$
|
711.8
|
|
|
$
|
645.2
|
|
|
$
|
684.6
|
|
|
$
|
652.4
|
|
|
$
|
621.1
|
|
|
$
|
556.3
|
|
|
Sensitivity
|
|
$
|
13.2
|
|
|
$
|
27.2
|
|
|
$
|
(39.4
|
)
|
|
|
|
|
|
$
|
(32.2
|
)
|
|
$
|
(63.5
|
)
|
|
$
|
(128.3
|
)
|
As of December 31, 2008 the Corporation had a liability sensitive profile as explained by the
negative gap, the NIM shock report and the MVE shock report. Any decision to reposition the balance
sheet is taken by the ALCO committee, and is subject to compliance with the established risk
limits. Some factors that could lead to shifts in policy could be, but are not
limited to, changes in views on interest rate markets, monetary policy, and macroeconomic
factors as well as legal, fiscal and other factors which could lead to shifts in the asset
liability mix.
71
Derivatives
The Corporation uses derivative financial instruments mostly as hedges of interest rate risk,
changes in fair value of assets and liabilities and to secure future cash flows. Refer to Notes 1
and 22 to the consolidated financial statements for details of the Corporation’s derivative
transactions as of December 31, 2008 and 2007.
In the normal course of business, the Corporation utilizes derivative instruments to manage
exposure to fluctuations in interest rates, currencies and other markets, to meet the needs of
customers and for proprietary trading activities. The Corporation uses the same credit risk
management procedures to assess and approve potential credit exposures when entering into
derivative transactions as those used for traditional lending.
Hedging Activities:
The following table summarizes the derivative contracts designated as hedges as of December 31,
2008, 2007 and 2006, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
|
|
|
|
|
Notional
|
|
|
|
|
|
|
Gain
|
|
|
Income
|
|
|
(Dollars in thousands)
|
|
Amounts *
|
|
|
Fair Value
|
|
|
(Loss)
|
|
|
(Loss)**
|
|
|
Cash Flow Hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,237
|
|
|
Economic Undesignated Hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps
|
|
|
125,000
|
|
|
|
5,210
|
|
|
|
4,311
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
125,000
|
|
|
$
|
5,210
|
|
|
$
|
4,311
|
|
|
$
|
1,237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
|
|
|
|
|
Notional
|
|
|
|
|
|
|
Gain
|
|
|
Income
|
|
|
(Dollars in thousands)
|
|
Amounts *
|
|
|
Fair Value
|
|
|
(Loss)
|
|
|
(Loss)**
|
|
|
Cash Flow Hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps
|
|
|
650,000
|
|
|
|
(2,027
|
)
|
|
|
—
|
|
|
|
(1,023
|
)
|
|
Fair Value Hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps
|
|
|
937,863
|
|
|
|
(4,425
|
)
|
|
|
(465
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
1,587,863
|
|
|
$
|
(6,452
|
)
|
|
$
|
(465
|
)
|
|
$
|
(1,023
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
|
|
|
|
|
Notional
|
|
|
|
|
|
|
Gain
|
|
|
Income
|
|
|
(Dollars in thousands)
|
|
Amounts *
|
|
|
Fair Value
|
|
|
(Loss)
|
|
|
(Loss)**
|
|
|
Cash Flow Hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
36
|
|
|
Interest Rate Swaps
|
|
|
825,000
|
|
|
|
(351
|
)
|
|
|
—
|
|
|
|
(214
|
)
|
|
Fair Value Hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps
|
|
|
1,189,740
|
|
|
|
(22,065
|
)
|
|
|
64
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
2,014,740
|
|
|
$
|
(22,416
|
)
|
|
$
|
64
|
|
|
$
|
(178
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
The notional amount
represents the gross sum of
long and short
|
|
|
|
**
|
|
Net of tax
|
72
Cash Flow Hedges:
The Corporation designates hedges as Cash Flow Hedges when its main purpose is to reduce the
exposure associated with the variability of future cash flows related to fluctuations in short term
financing rates (such as LIBOR). At the inception of each hedge, management documents the hedging
relationship, including its objective and probable effectiveness. To assess ongoing effectiveness
of the hedges, the Corporation compares the hedged item’s periodic variable rate with the hedging
item’s benchmark rate (LIBOR) at every reporting period to determine the effectiveness of the
hedge. Any hedge ineffectiveness is recorded currently as a derivative gain or loss in consolidated
statements of income.
The Corporation had a $100 million floating-for-fixed interest rate swap designated as cash flow
hedges with LBSF. The derivative liability of this swap was $371,736 as of September 19, 2008 and
was paid on December 5, 2008. As a result of the bankruptcy filing of LBHI and the default on its
contractual payments as of September 19, 2008, the Corporation terminated the swap and the cash
flow hedge designation on these swaps. The net loss of $371,000 was reclassified into earnings in
the last quarter of 2008. As of December 31, 2007, the total amount, net of tax, included in
accumulated other comprehensive income pertaining to the cash flow hedges was an unrealized loss of
$1.2 million.
Economic Undesignated Hedges:
The Corporation adopted SFAS 159 effective January 1, 2008 which permit the measurement of selected
financial instruments at fair value. The Corporation elected to account at fair value certain of
its brokered deposits and subordinated capital notes that were previously designated for fair value
hedge accounting in accordance with SFAS 133. The selected financial instruments are reported at
fair value with changes in fair value reported in consolidated statements of income.
As of December 31, 2008 the economic undesignated hedges have maturities through the year 2032. The
weighted average rate paid and received on these contracts is 3.24% and 6.22% as of December 31,
2008.
The Corporation had issued fixed rate debt swapped to create a floating rate source of funds. In
this case, the Corporation matches all of the relevant economics variables (notional, coupon,
payments date and exchanges, etc) of the fixed rate sources of funds to the fixed rate portion of
the interest rate swaps, (which it received from counterparty), and pays the floating rate portion
of the interest swaps. The effectiveness of these transactions is very high since all of the
relevant economic variables are matched. The Corporation had $23.8 million fixed-for-floating
interest rate swaps with LBSF. The derivative liability of these swaps was $681,535 as of September
19, 2008 and was paid on December 5, 2008. As a result of the bankruptcy filing of LBHI and the
default on its contractual payments as of September 19, 2008, the Corporation terminated these
swaps. As of December 31, 2008, the Corporation has $5.2 million in fair value of these economic
undesignated hedges.
Fair Value Hedges:
The Corporation designates hedges as Fair Value Hedges when its main purpose is to hedge the
changes in market value of an associated asset or liability. The Corporation only designates these
types of hedges if at inception it is believed that the
relationship in the changes in the market value of the hedged item and hedging item will offset
each other in a highly effective manner. At the inception of each hedge, management documents the
hedging relationship, including its objective and probable effectiveness. To assess ongoing
effectiveness of the hedges, the Corporation marks to market both the hedging item and the hedged
item at every reporting period to determine the effectiveness of the hedge. Any hedge
ineffectiveness is recorded currently as a derivative gain or loss in consolidated statements of
income.
The fair value hedges have maturities through the year 2032 as of December 31, 2007. The
weighted-average rate paid and received on these contracts as of December 31, 2007 is 5.10% and
5.39%, respectively.
The $937.9 million fair value hedges are associated to the swapping of fixed rate debt as December
31, 2007. The Corporation regularly issues term fixed rate debt, which it in turn swaps to floating
rate debt via interest rate swaps. In these cases the Corporation matches all of the relevant
economic variables (notional, coupon, payment dates and conventions etc.) of the fixed rate debt it
issues to the fixed rate leg of the interest rate swap ( which it receives from the counterparty)
and pays the floating rate leg of the interest rate swap. The effectiveness of these transactions
is very high since all of the relevant economic variables are matched.
73
Derivative instruments not designated as hedging instruments:
Any derivative not associated to hedging activity is booked as a freestanding derivative. In the
normal course of business the Corporation may enter into derivative contracts as either a market
maker or proprietary position taker. The Corporation’s mission as a market maker is to meet the
clients’ needs by providing them with a wide array of financial products, which include derivative
contracts. The Corporation’s major role in this aspect is to serve as a derivative counterparty to
these clients. Positions taken with these clients are hedged (although not designated as hedges) in
the OTC market with interbank participants or in the organized futures markets. To a lesser extent,
the Corporation enters into freestanding derivative contracts as a proprietary position taker,
based on market expectations or to benefit from price differentials between financial instruments
and markets. The Corporation had $13.8 million of interest rate swaps with LBSF. The derivative
liability of these swaps was $166,333 as of September 19, 2008 and was paid on December 5, 2008. As
a result of the bankruptcy filing of LBHI and the default on its contractual payments as of
September 19, 2008, the Corporation terminated these swaps.
These derivatives are not linked to specific assets and liabilities on the balance sheet or to
forecasted transactions in an accounting hedge relationship and, therefore, do not qualify for
hedge accounting. These derivatives are carried at fair value and changes in fair value are
recorded in earnings. The market and credit risk associated with these activities is measured,
monitored and controlled by the Corporation’s Market Risk Group, a unit independent from the
treasury department. Among other things, this group is responsible for: policy, analysis,
methodology and reporting of anything related to market risk and credit risk. The following table
summarizes the aggregate notional amounts and the reported derivative assets or liabilities (i.e.
the fair value of the derivative contracts) as of December 31, 2008, 2007 and 2006, respectively:
74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
|
Notional
|
|
|
|
|
|
|
Gain
|
|
|
(Dollars in thousands)
|
|
Amounts *
|
|
|
Fair Value
|
|
|
(Loss)
|
|
|
Interest Rate Contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps
|
|
$
|
3,548,418
|
|
|
$
|
(53
|
)
|
|
$
|
(392
|
)
|
|
Interest Rate Caps
|
|
|
1,166
|
|
|
|
—
|
|
|
|
—
|
|
|
Other
|
|
|
3,862
|
|
|
|
93
|
|
|
|
48
|
|
|
Equity Derivatives
|
|
|
236,428
|
|
|
|
—
|
|
|
|
(21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
3,789,874
|
|
|
$
|
40
|
|
|
$
|
(365
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
Notional
|
|
|
|
|
|
|
Gain
|
|
|
(Dollars in thousands)
|
|
Amounts *
|
|
|
Fair Value
|
|
|
(Loss)
|
|
|
Interest Rate Contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps
|
|
$
|
3,237,179
|
|
|
$
|
257
|
|
|
$
|
679
|
|
|
Interest Rate Caps
|
|
|
14,762
|
|
|
|
—
|
|
|
|
—
|
|
|
Other
|
|
|
1,451
|
|
|
|
45
|
|
|
|
35
|
|
|
Equity Derivatives
|
|
|
267,124
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
3,520,516
|
|
|
$
|
302
|
|
|
$
|
714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
|
Notional
|
|
|
|
|
|
|
Gain
|
|
|
(Dollars in thousands)
|
|
Amounts *
|
|
|
Fair Value
|
|
|
(Loss)
|
|
|
Interest Rate Contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps
|
|
$
|
3,628,108
|
|
|
$
|
(421
|
)
|
|
$
|
(592
|
)
|
|
Interest Rate Caps
|
|
|
70,984
|
|
|
|
3
|
|
|
|
2
|
|
|
Other
|
|
|
1,988
|
|
|
|
9
|
|
|
|
49
|
|
|
Equity Derivatives
|
|
|
307,056
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
4,008,136
|
|
|
$
|
(409
|
)
|
|
$
|
(541
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
The notional amount represents the gross sum of long and short
|
Liquidity Risk
Liquidity risk is the risk that not enough cash will be generated from either assets or liabilities
to meet deposit withdrawals or contractual loan funding. The Corporation’s general policy is to
maintain liquidity adequate to ensure our ability to honor withdrawals of deposits, make repayments
at maturity of other liabilities, extend loans and meet working capital needs. The Corporation’s
principal sources of liquidity are capital, core deposits from retail and commercial clients, and
wholesale deposits raised in the inter-bank and commercial markets. The Corporation manages
liquidity risk by maintaining diversified short-term and long-term sources through the Federal
funds market, commercial paper program, repurchase agreements and retail certificate of deposit
programs. As of December 31, 2008 the Corporation had $1.4 billion in unsecured lines of credit
($0.6 billion available) and $3.7 billion in collateralized lines of credit with banks and
financial entities ($2.1 billion available). All securities in portfolio are highly rated and very
liquid, enabling us to treat them as a secondary source of liquidity.
The Corporation does not have significant usage or limitations on its ability to upstream or
downstream funds as a method of liquidity. However, there are certain tax constraints when
borrowing funds (excluding the placement of deposits) from Santander Spain or affiliates because
Puerto Rico’s tax code requires local corporations to withhold 29% of the interest income paid to
non-resident affiliates. The Corporation does not face significant limitations to its ability to
downstream funds to its affiliates. The current intra-group credit line for the Corporation is
$1.4 billion.
75
Liquidity is derived from capital, reserves and the securities portfolio. The Corporation has
established lines of credit with foreign and domestic banks, has access to U.S. markets through its
commercial paper program and also has broadened its relations in the federal funds and repurchase
agreement markets to increase the availability of other sources of funds and to augment liquidity
as necessary.
On December 10, 2008, the Corporation undertook a Subordinated Note Purchase Agreement
with Crefisa, Inc, (“Crefisa”), an affiliate, for $60 million due to December 10, 2028 and to pay
interest thereon from December 10, 2008 or from the most recent interest payment date to which
interest has been paid or duly provided for, semiannually on the tenth (10
th
) day of
June and the tenth (10
th
) of December of each year, commencing June 10, 2009, at the
rate of 7.5% per annum, until the principal hereof is paid or made available for payment. The
interest so payable, and punctually paid or duly provided for, on any interest payment date will,
as provided in such Note Purchase Agreement, be paid to Crefisa at the close of business on the
regular record date for such interest, which shall be the tenth (10
th
) day of the month
next preceding the relevant interest payment date.
On September 24, 2008, Santander BanCorp (the “Corporation”) and Santander Financial Services,
Inc., a wholly owned subsidiary of the Corporation (“Santander Financial”), entered into a
collateralized loan agreement (the “Loan Agreement”) with Banco Santander Puerto Rico (the “Bank”).
Under the Loan Agreement, the Bank advanced $200 million and $430 million (the “Loans”) to the
Corporation and Santander Financial, respectively. The proceeds of the Loans were used to refinance
the outstanding indebtedness incurred under the loan agreement,
dated March 25, 2008, among the
Corporation, Santander Financial and the Bank, and for general corporate purposes. The Loans are
collateralized by a certificate of deposit in the amount of $630 million opened by Banco Santander,
S.A., the parent of the Corporation, at the Bank and provided as security for the Loans pursuant to
the terms of a Security Agreement, Pledge and Assignment between the Bank and Banco Santander, S.A.
The Corporation and Santander Financial have agreed to pay an annual fee of 0.10% net of taxes,
deductions and withholdings to Banco Santander, S.A. in connection with its agreement to
collateralize the Loans with the deposit.
On March 25, 2008, the Corporation and SFS entered into a fully-collateralized Loan Agreement (the
“Loan”) with the Bank. The proceeds of the Loan were used to refinance the outstanding indebtedness
incurred under the previously announced bridge facility agreement among the Corporation, SFS and
National Australia Bank Limited, and for general corporate purposes. Under the Loan, the
Corporation and SFS had available $186 million and $454 million, respectively, all of which was
paid on March 25, 2008. The Loan was fully-collateralized by a certificate of deposit in the amount
of $640 million opened by Banco Santander, S.A., the parent of the Corporation, and provided as
security for the Loan pursuant to the terms of a Security Agreement, Pledge and Assignment between
the Bank and Banco Santander, S.A. The Corporation and SFS have paid a fee of 0.10% net of taxes,
deduction and withholdings, on an annualized basis, to Banco Santander, S.A. in connection with its
agreement to collateralize the loan with the deposit.
During October 2006, the Corporation also completed the private placement of $125 million Trust
Preferred Securities (“Preferred Securities”) and issued Junior Subordinated Debentures in the
aggregate principal amount of $129 million in connection with the issuance of the Preferred
Securities. The Preferred Securities are fully and unconditionally guaranteed (to the extent
described in the guarantee agreement between the Corporation and the guarantee trustee, for the
benefit of the holders from time to time of the Preferred Securities) by the Corporation. The Trust
Preferred Securities were acquired by an affiliate of the Corporation. In connection with the
issuance of the Preferred Securities, the Corporation issued an aggregate principal amount of
$129,000,000 of its 7.00% Junior Subordinated Debentures, Series A, due July 1, 2037.
The Corporation has a high credit rating, which permits the Corporation to utilize various
alternative funding sources. The Corporation’s current ratings are as follows:
76
|
|
|
|
|
|
|
|
|
|
|
Standard
|
|
Fitch
|
|
|
|
& Poor's
|
|
IBCA
|
|
|
|
|
|
|
|
|
|
Short-term funding
|
|
A-1
|
|
|
F1+
|
|
|
Long-term funding
|
|
A
|
|
AA-
|
Management monitors liquidity levels each month. The focus is on the liquidity ratio, which
compares net liquid assets (all liquid assets not subject to collateral or repurchase agreements)
against total liabilities plus contingent liabilities. As of December 31, 2007, the Corporation
had a liquidity ratio of 7.8%. At December 31, 2008, the Corporation had total available liquid
assets of $0.6 billion. The Corporation believes that it has sufficient liquidity to meet current
obligations.
The Corporation does not contemplate material uncertainties in the rolling over of deposits, both
retail and wholesale, and is not engaged in capital expenditures that would materially affect the
capital and liquidity positions. Should any deficiency arise for seasonal or more critical reasons,
the Bank would make recourse to alternative sources of funding such as the commercial paper
program, its lines of credit with domestic and national banks, unused collateralized lines with
Federal Home Loan Banks and others.
Maturity and Interest Rate Sensitivity of Interest-Earning Assets as of December 31, 2008
The following table sets forth an analysis by type and time remaining to maturity of the
Corporation’s loans and securities portfolio as of December 31, 2008. Loans are stated before
deduction of the allowance for loan losses and include loans held for sale.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturities and/or Next Repricing Date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After One Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Through Five Years
|
|
|
After Five Years
|
|
|
|
|
|
|
|
One Year
|
|
|
Fixed
|
|
|
Variable
|
|
|
Fixed
|
|
|
Variable
|
|
|
|
|
|
|
|
or Less
|
|
|
Interest Rates
|
|
|
Interest Rates
|
|
|
Interest Rates
|
|
|
Interest Rates
|
|
|
Total
|
|
|
|
|
(Dollars in thousands)
|
|
Cash and Cash Equivalents and
other Interest-bearing deposits
|
|
$
|
290,552
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
290,552
|
|
|
Investment Portfolio
|
|
|
167,642
|
|
|
|
622,396
|
|
|
|
—
|
|
|
|
138,425
|
|
|
|
—
|
|
|
|
928,463
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
1,065,310
|
|
|
|
399,279
|
|
|
|
192,162
|
|
|
|
255,955
|
|
|
|
252,080
|
|
|
|
2,164,786
|
|
|
Construction
|
|
|
118,405
|
|
|
|
11,806
|
|
|
|
37,369
|
|
|
|
—
|
|
|
|
26,446
|
|
|
|
194,026
|
|
|
Consumer
|
|
|
209,473
|
|
|
|
203,051
|
|
|
|
—
|
|
|
|
154,065
|
|
|
|
—
|
|
|
|
566,589
|
|
|
Consumer Finance
|
|
|
171,345
|
|
|
|
357,840
|
|
|
|
15,972
|
|
|
|
20,872
|
|
|
|
12,214
|
|
|
|
578,243
|
|
|
Mortgage
|
|
|
378,299
|
|
|
|
1,114,836
|
|
|
|
—
|
|
|
|
1,102,453
|
|
|
|
—
|
|
|
|
2,595,588
|
|
|
Leasing
|
|
|
34,198
|
|
|
|
21,944
|
|
|
|
1,978
|
|
|
|
2,484
|
|
|
|
11
|
|
|
|
60,615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,435,224
|
|
|
$
|
2,731,152
|
|
|
$
|
247,481
|
|
|
$
|
1,674,254
|
|
|
$
|
290,751
|
|
|
$
|
7,378,862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77
Capital Expenditures
The following table reflects capital expenditures for the years ended December 31, 2008, 2007 and
2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Headquarters/branches
|
|
$
|
412
|
|
|
$
|
1,770
|
|
|
$
|
1,217
|
|
|
Data processing equipment
|
|
|
1,829
|
|
|
|
1,438
|
|
|
|
2,907
|
|
|
Software
|
|
|
4,419
|
|
|
|
1,981
|
|
|
|
5,818
|
|
|
Office furniture and equipment
|
|
|
2,766
|
|
|
|
1,257
|
|
|
|
2,161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,426
|
|
|
$
|
6,446
|
|
|
$
|
12,103
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2008, the Corporation’s capital expenditures reflected an increase in software due to
standard upgrade and improvement procedures.
Environmental Matters
Under various environmental laws and regulations, a lender may be liable as an “owner” or
“operator” for the costs of investigation or remediation of hazardous substances at any mortgaged
property or other property of a borrower or at its owned or leased property regardless of whether
the lender knew of, or was responsible for, the hazardous substances. In addition, certain cities
in which some of the Corporation’s assets are located impose a statutory lien, which may be prior
to the lien of the mortgage, for costs incurred in connection with a cleanup of hazardous
substances.
Some of the Corporation’s mortgaged properties and owned and leased properties may contain
hazardous substances or are located in the vicinity of properties that are contaminated. As a
result, the value of such properties may decrease, the borrower’s ability to repay the loan may be
affected, the Corporation’s ability to foreclose on certain properties may be affected or the
Corporation may be exposed to potential environmental liabilities. The Corporation, however, is not
aware of any such environmental costs or liabilities that would have a material adverse effect on
the Corporation’s results of operations or financial condition.
Puerto Rico Income Taxes
The Corporation is subject to Puerto Rico income tax. The maximum statutory regular corporate tax
rate that the Corporation is subject to under the P.R. Code is 39%. In computing its net income
subject to the regular income tax, the Corporation is entitled to exclude from its gross income,
interest derived on obligations of the Commonwealth of Puerto Rico and its agencies,
instrumentalities and political subdivisions, obligations of the United States Government and its
agencies and instrumentalities, certain FHA and VA loans and certain GNMA securities. In computing
its net income subject to the regular income tax the Corporation is entitled to claim a deduction
for ordinary and necessary expenses, worthless debts, interest and depreciation, among others. The Corporation’s deduction for interest is reduced in the same proportion that the
average adjusted basis of its exempt obligations bears to the average adjusted basis of its total
assets.
The Corporation is also subject to an alternative minimum tax of 22% imposed on its alternative
minimum tax net income. In general, the Corporation’s alternative minimum net income is an amount
equal to its net income determined for regular income tax purposes, as adjusted for certain items
of tax preference. To the extent that the Corporation’s alternative minimum tax for a taxable year
exceeds its regular tax, such excess is required to be paid by the Corporation as an alternative
minimum tax. An alternative minimum tax paid by the Corporation in any taxable year may be claimed
by the Corporation as a credit in future taxable years against the excess of its regular tax over
the alternative minimum tax in such years, and such credits do not expire.
Under the P.R. Code, corporations are not permitted to file consolidated tax returns with their
subsidiaries and affiliates. However, the Corporation is entitled to a 100% dividend received
deduction with respect to dividends received from Banco Santander Puerto Rico, Santander Securities
Corporation, Santander Insurance Agency, or any other Puerto Rico corporation subject to tax under
the P.R. Code and in which the Corporation owns at least 80% of the value of its stock or voting
power.
78
Interest paid by the Corporation to non-resident foreign corporations is not subject to Puerto Rico
income tax, provided such foreign corporation is not related to the Corporation. Dividends paid by
the Corporation to non-resident foreign corporations and individuals (whether resident or not) are
subject to a Puerto Rico income tax of 10%.
Puerto Rico international banking entities, or IBE’s, are currently exempt from taxation under
Puerto Rico law. During 2004, the Legislature of Puerto Rico and the Governor of Puerto Rico
approved a law amending the IBE Act. This law imposes income taxes at normal statutory rates on
each IBE that operates as a unit of a bank, if the IBE’s net income generated after December 31,
2003 exceeds 40 percent of the bank’s net income in the taxable year commenced on July 1, 2003, 30
percent of the bank’s net income in the taxable year commencing on July 1, 2004, and 20 percent of
the bank’s net income in the taxable year commencing on July 1, 2005, and thereafter. It does not
impose income taxation on an IBE that operates as a subsidiary of a bank.
The Corporation adopted the provisions of FIN No .48 on January 1, 2007. As a result of the
implementation of FIN 48, the Corporation recognized a decrease of $0.5 million to the January 1,
2007 balance of retained earnings and an increase in the liability for unrecognized tax benefits.
As of the date of adoption and after the impact of recognizing the increase in the liability noted
above, the Corporation’s liability for unrecognized tax benefits totaled $12.7 million, which
included $1.8 million of interest and penalties.
The Corporation recognizes interest and penalties related to uncertain tax positions in income tax
expense. For the year ended December 31, 2008 and 2007, the Corporation recognized $1.3 million and
$1.4 million, respectively, of interest and penalties, respectively, for uncertain tax positions. At December 31,
2008 and 2007, the Corporation had $10.3 million and
$10.4 million, respectively, of unrecognized tax benefits
which, if recognized, would decrease the effective income tax rate in future periods. The
Corporation recognized a tax benefit of $1.1 million and
$1.6 million for the year ended December 31, 2008 and 2007, respectively, as a result of the expiration
of the statute of limitations related to the uncertain tax positions.
United States Income Taxes
The Corporation, the Bank, Santander Securities and Santander Insurance Agency are corporations
organized under the laws of Puerto Rico. Accordingly, the Corporation, the Bank, Santander
Securities and Santander Insurance Agency are subject to United States income tax under the
Internal Revenue Code of 1986, as amended to the date hereof (the “Code”) only on certain income
from sources within the United States or effectively connected with a United States trade or
business.
79
CERTIFICATION PURSUANT TO SECTION 303A.12(a) OF THE
NEW YORK STOCK EXCHANGE LISTED COMPANY MANUAL
Santander BanCorp’s Chief Executive Officer, Chief Operating Officer and Chief Accounting Officer
have filed with the Securities and Exchange Commission the certifications required by Section 302
of the Sarbanes-Oxley Act of 2002 as Exhibits 31.1 and 31.2 and to Santander BanCorp’s 2008 Form
10-K. In addition, on April 25, 2008, Santander BanCorp’s CEO certified to the New York Stock
Exchange that he was not aware of any violation by the Corporation of the NYSE corporate governance
listing standards. The foregoing certification was unqualified.
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
/s/ Juan Moreno Blanco
|
|
|
|
|
President and Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
/s/ Roberto Jara
|
|
|
|
|
Executive Vice President and
|
|
|
|
|
Chief Accounting Officer
|
|
80
INTERNAL CONTROL OPINION
Deloitte & Touche LLP
Torre Chardón
350 Chardón Ave. Suite 700
San Juan, PR 00918-2140
USA
Tel: +1 787 759 7171
Fax: +1 787 756 6340
www.deloitte.com
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Santander BanCorp
San Juan, Puerto Rico
We have audited the accompanying consolidated balance sheets of Santander BanCorp and subsidiaries
(the “Corporation”, a subsidiary of Santander Central Hispano, S.A.) as of December 31, 2008 and
2007, and the related consolidated statements of operations, changes in stockholders’ equity,
comprehensive income, and cash flows for each of the three years in the period ended December 31,
2008. We also have audited the Corporation’s internal control over financial reporting as of
December 31, 2008 based on criteria established in
Internal Control — Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission. The Corporation’s
management is responsible for these financial statements, for maintaining effective internal
control over financial reporting, and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying
Management’s Report on Internal Control over
Financial Reporting.
Our responsibility is to express an opinion on these financial statements and
an opinion on the Corporation’s internal control over financial reporting based on our audits. We
conducted our audits in accordance with the standards of the Public Corporation Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement and whether effective internal control over financial reporting was maintained in all
material respects. Our audits of the financial statements included examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. Our audit of internal control over financial reporting included
obtaining an understanding of internal control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We believe that our audits provide a
reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed by, or under the
supervision of, the company’s principal executive and principal financial officers, or persons
performing similar functions, and effected by the company’s board of directors, management, and
other personnel to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial statements.
Member of
Deloitte & Touche Tohmatsu
81
FINANCIAL STATEMENTS OPINION
Because of the inherent limitations of internal control over financial reporting, including the
possibility of collusion or improper management override of controls, material misstatements due to
error or fraud may not be prevented or detected on a timely basis. Also, projections of any
evaluation of the effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Santander BanCorp and subsidiaries as of December 31,
2008 and 2007, and the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2008, in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, the Corporation maintained, in all material
respects, effective internal control over financial reporting as of December 31, 2008, based on the
criteria established in
Internal Control — Integrated Framework
issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
March 12, 2009
Stamp No. 2385137
affixed to original.
82
Santander BanCorp and Subsidiaries
Consolidated Balance Sheets-December 31, 2008 and 2007
(Dollars in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents:
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
217,311
|
|
|
$
|
118,096
|
|
|
Interest-bearing deposits
|
|
|
976
|
|
|
|
1,167
|
|
|
Federal funds sold and securities purchased under agreements to resell
|
|
|
64,871
|
|
|
|
82,434
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents
|
|
|
283,158
|
|
|
|
201,697
|
|
|
|
|
|
|
|
|
|
|
Interest-Bearing Deposits
|
|
|
7,394
|
|
|
|
5,439
|
|
|
Trading Securities, at fair value:
|
|
|
|
|
|
|
|
|
|
Securities pledged that can be repledged
|
|
|
—
|
|
|
|
15,965
|
|
|
Other trading securities
|
|
|
64,719
|
|
|
|
52,535
|
|
|
|
|
|
|
|
|
|
|
Total trading securities
|
|
|
64,719
|
|
|
|
68,500
|
|
|
|
|
|
|
|
|
|
|
Investment Securities Available for Sale,
at fair value:
|
|
|
|
|
|
|
|
|
|
Securities pledged that can be repledged
|
|
|
408,650
|
|
|
|
667,361
|
|
|
Other investment securities available for sale
|
|
|
393,462
|
|
|
|
600,837
|
|
|
|
|
|
|
|
|
|
|
Total investment securities available for sale
|
|
|
802,112
|
|
|
|
1,268,198
|
|
|
|
|
|
|
|
|
|
|
Other Investment Securities,
at amortized cost
|
|
|
61,632
|
|
|
|
64,559
|
|
|
Loans Held for Sale,
net
|
|
|
38,459
|
|
|
|
141,902
|
|
|
Loans,
net
|
|
|
5,929,499
|
|
|
|
6,769,478
|
|
|
Accrued Interest Receivable
|
|
|
45,953
|
|
|
|
80,029
|
|
|
Premises and Equipment,
net
|
|
|
19,368
|
|
|
|
29,523
|
|
|
Real Estate Held for Sale
|
|
|
8,075
|
|
|
|
—
|
|
|
Goodwill
|
|
|
121,482
|
|
|
|
121,482
|
|
|
Intangible Assets
|
|
|
29,842
|
|
|
|
30,203
|
|
|
Other Assets
|
|
|
485,883
|
|
|
|
383,203
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,897,576
|
|
|
$
|
9,164,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
Non interest-bearing
|
|
$
|
692,963
|
|
|
$
|
755,457
|
|
|
Interest-bearing, including $101.4 million at fair value in 2008
|
|
|
4,321,939
|
|
|
|
4,405,246
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
|
5,014,902
|
|
|
|
5,160,703
|
|
|
|
|
|
|
|
|
|
|
Federal Funds Purchased and Other Borrowings
|
|
|
2,040
|
|
|
|
707,110
|
|
|
Securities Sold Under Agreements to Repurchase
|
|
|
375,000
|
|
|
|
635,597
|
|
|
Commercial Paper Issued
|
|
|
50,985
|
|
|
|
284,482
|
|
|
Federal Home Loan Bank Advances
|
|
|
1,185,000
|
|
|
|
1,245,000
|
|
|
Term Notes
|
|
|
19,967
|
|
|
|
19,371
|
|
|
Subordinated Capital Notes,
including $118.3 million at fair value in 2008
|
|
|
306,392
|
|
|
|
251,170
|
|
|
Accrued Interest Payable
|
|
|
45,419
|
|
|
|
77,356
|
|
|
Other Liabilities
|
|
|
346,235
|
|
|
|
246,888
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
7,345,940
|
|
|
|
8,627,677
|
|
|
|
|
|
|
|
|
|
|
Contingencies and Commitments (Notes 13, 14, 18, 19, 22 and 23)
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY:
|
|
|
|
|
|
|
|
|
|
Series A Preferred stock, $25 par value; 10,000,000 shares authorized,
none issued and outstanding
|
|
|
—
|
|
|
|
—
|
|
|
Common stock, $2.50 par value; 200,000,000 shares authorized, 50,650,364
shares issued;
46,639,104 shares outstanding
|
|
|
126,626
|
|
|
|
126,626
|
|
|
Capital paid in excess of par value
|
|
|
317,141
|
|
|
|
308,373
|
|
|
Treasury stock at cost, 4,011,260 shares
|
|
|
(67,552
|
)
|
|
|
(67,552
|
)
|
|
Accumulated other comprehensive loss, net of taxes
|
|
|
(22,563
|
)
|
|
|
(24,478
|
)
|
|
Retained earnings:
|
|
|
|
|
|
|
|
|
|
Reserve fund
|
|
|
139,250
|
|
|
|
139,250
|
|
|
Undivided profits
|
|
|
58,734
|
|
|
|
54,317
|
|
|
|
|
|
|
|
|
|
|
Total stockholders’ equity
|
|
|
551,636
|
|
|
|
536,536
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,897,576
|
|
|
$
|
9,164,213
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
83
Santander BanCorp and Subsidiaries
Consolidated Statements of Operations
Years Ended December 31, 2008, 2007 and 2006
(Dollars in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Interest Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
547,973
|
|
|
$
|
599,581
|
|
|
$
|
535,327
|
|
|
Investment securities
|
|
|
47,402
|
|
|
|
67,830
|
|
|
|
74,023
|
|
|
Interest-bearing deposits
|
|
|
1,063
|
|
|
|
3,344
|
|
|
|
4,439
|
|
|
Federal funds sold and securities purchased under
agreements to resell
|
|
|
4,333
|
|
|
|
3,455
|
|
|
|
4,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
600,771
|
|
|
|
674,210
|
|
|
|
618,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
152,452
|
|
|
|
192,660
|
|
|
|
173,644
|
|
|
Securities sold under agreements to repurchase and other
borrowings
|
|
|
78,680
|
|
|
|
153,955
|
|
|
|
138,499
|
|
|
Subordinated capital notes
|
|
|
13,317
|
|
|
|
15,916
|
|
|
|
15,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
244,449
|
|
|
|
362,531
|
|
|
|
327,714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
356,322
|
|
|
|
311,679
|
|
|
|
290,606
|
|
|
Provision for Loan Losses
|
|
|
175,523
|
|
|
|
147,824
|
|
|
|
65,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses
|
|
|
180,799
|
|
|
|
163,855
|
|
|
|
225,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank service charges, fees and other
|
|
|
44,685
|
|
|
|
47,201
|
|
|
|
49,078
|
|
|
Broker-dealer, asset management and insurance fees
|
|
|
74,808
|
|
|
|
68,265
|
|
|
|
56,973
|
|
|
Gain on sale of securities available for sale
|
|
|
5,154
|
|
|
|
1,265
|
|
|
|
—
|
|
|
Gain on sale of loans
|
|
|
3,253
|
|
|
|
6,658
|
|
|
|
1,994
|
|
|
Other income
|
|
|
19,935
|
|
|
|
24,731
|
|
|
|
10,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
147,835
|
|
|
|
148,120
|
|
|
|
118,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
125,137
|
|
|
|
134,258
|
|
|
|
121,711
|
|
|
Occupancy costs
|
|
|
27,665
|
|
|
|
23,767
|
|
|
|
22,476
|
|
|
Equipment expenses
|
|
|
4,358
|
|
|
|
4,427
|
|
|
|
4,797
|
|
|
EDP servicing, amortization and technical assistance
|
|
|
41,860
|
|
|
|
39,255
|
|
|
|
40,084
|
|
|
Communication expenses
|
|
|
10,062
|
|
|
|
10,923
|
|
|
|
11,358
|
|
|
Business promotion
|
|
|
6,628
|
|
|
|
15,621
|
|
|
|
11,613
|
|
|
Goodwill and other intangibles impairment charges
|
|
|
—
|
|
|
|
43,349
|
|
|
|
—
|
|
|
Provision for claim receivable
|
|
|
25,120
|
|
|
|
—
|
|
|
|
—
|
|
|
Other taxes
|
|
|
13,101
|
|
|
|
12,334
|
|
|
|
11,514
|
|
|
Other operating expenses
|
|
|
70,696
|
|
|
|
60,082
|
|
|
|
54,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other operating expenses
|
|
|
324,627
|
|
|
|
344,016
|
|
|
|
277,783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before (benefit) provision for income tax
|
|
|
4,007
|
|
|
|
(32,041
|
)
|
|
|
65,709
|
|
|
(Benefit) Provision for Income Tax
|
|
|
(6,524
|
)
|
|
|
4,204
|
|
|
|
22,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) Available to Common Shareholders
|
|
$
|
10,531
|
|
|
$
|
(36,245
|
)
|
|
$
|
43,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted Earnings (Loss) per Common Share
|
|
$
|
0.23
|
|
|
$
|
(0.78
|
)
|
|
$
|
0.93
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
84
Santander BanCorp and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
Years Ended December 31, 2008, 2007 and 2006
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Common Stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
$
|
126,626
|
|
|
$
|
126,626
|
|
|
$
|
126,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
|
126,626
|
|
|
|
126,626
|
|
|
|
126,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Paid in Excess of Par Value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
308,373
|
|
|
|
304,171
|
|
|
|
304,171
|
|
|
Capital contribution
|
|
|
9,710
|
|
|
|
4,202
|
|
|
|
|
|
|
Payments to ultimate parent for long-term incentive plan
|
|
|
(942
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
|
317,141
|
|
|
|
308,373
|
|
|
|
304,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury Stock at cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
(67,552
|
)
|
|
|
(67,552
|
)
|
|
|
(67,552
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
|
(67,552
|
)
|
|
|
(67,552
|
)
|
|
|
(67,552
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Loss, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
(24,478
|
)
|
|
|
(44,213
|
)
|
|
|
(41,591
|
)
|
|
Unrealized net gain (loss) on investment securities
available
for sale, net of tax
|
|
|
13,449
|
|
|
|
18,227
|
|
|
|
(587
|
)
|
|
Unrealized net gain (loss) on cash flow hedges, net of tax
|
|
|
1,237
|
|
|
|
(1,023
|
)
|
|
|
(178
|
)
|
|
Minimum pension (liability) benefit, net of tax
|
|
|
(12,771
|
)
|
|
|
2,531
|
|
|
|
(1,750
|
)
|
|
Adoption of SFAS No. 158, net of tax
|
|
|
—
|
|
|
|
—
|
|
|
|
(107
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
|
(22,563
|
)
|
|
|
(24,478
|
)
|
|
|
(44,213
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve Fund:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
139,250
|
|
|
|
137,511
|
|
|
|
133,759
|
|
|
Transfer from undivided profits
|
|
|
—
|
|
|
|
1,739
|
|
|
|
3,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
|
139,250
|
|
|
|
139,250
|
|
|
|
137,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Undivided Profits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
54,317
|
|
|
|
122,677
|
|
|
|
113,114
|
|
|
Net income (loss)
|
|
|
10,531
|
|
|
|
(36,245
|
)
|
|
|
43,169
|
|
|
Transfer to reseve fund
|
|
|
—
|
|
|
|
(1,739
|
)
|
|
|
(3,752
|
)
|
|
Deferred tax benefit amortization
|
|
|
(4
|
)
|
|
|
(3
|
)
|
|
|
(5
|
)
|
|
Common stock cash dividends
|
|
|
(9,329
|
)
|
|
|
(29,849
|
)
|
|
|
(29,849
|
)
|
|
Cummulative effect of adoption of SFAS 159
|
|
|
3,219
|
|
|
|
—
|
|
|
|
—
|
|
|
Cummulative effect of adoption of FIN 48
|
|
|
—
|
|
|
|
(524
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
|
58,734
|
|
|
|
54,317
|
|
|
|
122,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders’ equity
|
|
$
|
551,636
|
|
|
$
|
536,536
|
|
|
$
|
579,220
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
85
Santander BanCorp and Subsidiaries
Consolidated Statements of Comprehensive Income
Years Ended December 31, 2008, 2007 and 2006
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (loss) income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
10,531
|
|
|
$
|
(36,245
|
)
|
|
$
|
43,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains (losses) on investment securities available for sale, net of tax
|
|
|
14,142
|
|
|
|
18,170
|
|
|
|
(926
|
)
|
|
Reclassification adjustment for (losses) gains included in net income (loss), net of tax
|
|
|
(693
|
)
|
|
|
57
|
|
|
|
339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) on investment securities available for sale, net of tax
|
|
|
13,449
|
|
|
|
18,227
|
|
|
|
(587
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on cash flow hedges, net of tax
|
|
|
1,237
|
|
|
|
(1,023
|
)
|
|
|
(178
|
)
|
|
Minimum pension (liability) benefit, net of tax
|
|
|
(12,771
|
)
|
|
|
2,531
|
|
|
|
(1,750
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss), net of tax
|
|
|
1,915
|
|
|
|
19,735
|
|
|
|
(2,515
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
12,446
|
|
|
$
|
(16,510
|
)
|
|
$
|
40,654
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
86
Santander BanCorp and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 2008, 2007 and 2006
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
10,531
|
|
|
$
|
(36,245
|
)
|
|
$
|
43,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
15,096
|
|
|
|
16,276
|
|
|
|
17,595
|
|
|
Deferred tax benefit
|
|
|
(18,083
|
)
|
|
|
(23,833
|
)
|
|
|
(2,123
|
)
|
|
Provision for loan losses
|
|
|
175,523
|
|
|
|
147,824
|
|
|
|
65,583
|
|
|
Goodwill and other intangibles impairment charges
|
|
|
—
|
|
|
|
43,349
|
|
|
|
—
|
|
|
Gain on sale of securities available for sale
|
|
|
(5,154
|
)
|
|
|
(1,265
|
)
|
|
|
—
|
|
|
Gain on sale of loans
|
|
|
(3,253
|
)
|
|
|
(6,658
|
)
|
|
|
(1,994
|
)
|
|
Gain on sale of mortgage-servicing rights
|
|
|
—
|
|
|
|
(132
|
)
|
|
|
(170
|
)
|
|
(Gain) loss on derivatives
|
|
|
(3,946
|
)
|
|
|
(249
|
)
|
|
|
477
|
|
|
Gain on trading securities
|
|
|
(2,607
|
)
|
|
|
(2,831
|
)
|
|
|
(1,243
|
)
|
|
Valuation loss on loans held for sale
|
|
|
7,357
|
|
|
|
—
|
|
|
|
—
|
|
|
Net discount accretion on securities
|
|
|
(2,877
|
)
|
|
|
(6,782
|
)
|
|
|
(3,421
|
)
|
|
Net (discount accretion) premium amortization on loans
|
|
|
433
|
|
|
|
(1,793
|
)
|
|
|
(3,994
|
)
|
|
Accretion of debt discount
|
|
|
628
|
|
|
|
—
|
|
|
|
—
|
|
|
Share based compensation (benefit) sponsored by the ultimate parent
|
|
|
(1,210
|
)
|
|
|
14,656
|
|
|
|
810
|
|
|
Provision for claim receivable
|
|
|
25,120
|
|
|
|
—
|
|
|
|
—
|
|
|
Purchases and originations of loans held for sale
|
|
|
(345,706
|
)
|
|
|
(556,838
|
)
|
|
|
(908,272
|
)
|
|
Proceeds from sales of loans
|
|
|
437,177
|
|
|
|
305,183
|
|
|
|
180,463
|
|
|
Repayments of loans held for sale
|
|
|
17,109
|
|
|
|
22,511
|
|
|
|
6,579
|
|
|
Proceeds from sales of trading securities
|
|
|
2,215,946
|
|
|
|
2,553,127
|
|
|
|
9,750,934
|
|
|
Purchases of trading securities
|
|
|
(2,101,645
|
)
|
|
|
(2,576,040
|
)
|
|
|
(9,755,086
|
)
|
|
Net change in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in accrued interest receivable
|
|
|
32,382
|
|
|
|
22,215
|
|
|
|
(24,280
|
)
|
|
Decrease (increase) in other assets
|
|
|
20,559
|
|
|
|
(116,664
|
)
|
|
|
(70,230
|
)
|
|
(Decrease) increase in accrued interest payable
|
|
|
(31,709
|
)
|
|
|
(13,889
|
)
|
|
|
26,085
|
|
|
(Decrease) increase in other liabilities
|
|
|
(3,469
|
)
|
|
|
(48,111
|
)
|
|
|
31,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustments
|
|
|
427,671
|
|
|
|
(229,944
|
)
|
|
|
(691,198
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
438,202
|
|
|
|
(266,189
|
)
|
|
|
(648,029
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in interest-bearing deposits
|
|
|
(1,955
|
)
|
|
|
46,016
|
|
|
|
49,578
|
|
|
Proceeds from sales of investment securities available for sale
|
|
|
129,451
|
|
|
|
149,413
|
|
|
|
—
|
|
|
Proceeds from maturities of investment securities available for sale
|
|
|
8,858,239
|
|
|
|
36,258,629
|
|
|
|
29,621,084
|
|
|
Purchases of investment securities available for sale
|
|
|
(8,808,967
|
)
|
|
|
(36,323,477
|
)
|
|
|
(29,591,661
|
)
|
|
Proceeds from maturities of other investment securities
|
|
|
40,727
|
|
|
|
16,526
|
|
|
|
—
|
|
|
Purchases of other investments
|
|
|
(37,800
|
)
|
|
|
(30,375
|
)
|
|
|
(8,848
|
)
|
|
Repayment of securities and securities called
|
|
|
89,302
|
|
|
|
100,631
|
|
|
|
125,448
|
|
|
Payments on derivative transactions
|
|
|
(1,497
|
)
|
|
|
(434
|
)
|
|
|
(392
|
)
|
|
Net decrease in loans
|
|
|
547,090
|
|
|
|
15,083
|
|
|
|
359,889
|
|
|
Proceeds from sales of mortgage-servicing rights
|
|
|
—
|
|
|
|
132
|
|
|
|
170
|
|
|
Proceeds from sale of buildings
|
|
|
—
|
|
|
|
56,750
|
|
|
|
—
|
|
|
Payment for the acquisition of net assets of consumer finance
company, net
of cash and cash equivalents acquired
|
|
|
—
|
|
|
|
—
|
|
|
|
(740,761
|
)
|
|
Payment for the acquisition of net assets of insurance company, net
of cash
and cash equivalents acquired
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,074
|
)
|
|
Purchases of premises and equipment
|
|
|
(5,137
|
)
|
|
|
(3,694
|
)
|
|
|
(5,611
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
809,453
|
|
|
|
285,200
|
|
|
|
(193,178
|
)
|
|
|
|
|
|
|
|
|
|
|
|
(Continued)
The accompanying notes are an integral part of these financial statements.
87
Santander BanCorp and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 2008, 2007 and 2006
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in deposits
|
|
|
(149,298
|
)
|
|
|
(168,296
|
)
|
|
|
89,349
|
|
|
Net (decrease) increase in federal funds purchased and other
borrowings
|
|
|
(765,070
|
)
|
|
|
323,710
|
|
|
|
859,554
|
|
|
Net decrease in securities sold under agreements to repurchase
|
|
|
(60,597
|
)
|
|
|
(194,972
|
)
|
|
|
(117,198
|
)
|
|
Net (decrease) increase in commercial paper issued
|
|
|
(233,497
|
)
|
|
|
74,933
|
|
|
|
(124,770
|
)
|
|
Net decrease in term notes
|
|
|
—
|
|
|
|
(22,158
|
)
|
|
|
1,314
|
|
|
Issuance of subordinated capital notes
|
|
|
60,000
|
|
|
|
54
|
|
|
|
124,078
|
|
|
Share based compensation (benefit) sponsored by the ultimate
parent
|
|
|
(942
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Dividends paid
|
|
|
(16,790
|
)
|
|
|
(29,849
|
)
|
|
|
(29,849
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(1,166,194
|
)
|
|
|
(16,578
|
)
|
|
|
802,478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CHANGE IN CASH AND CASH EQUIVALENTS
|
|
|
81,461
|
|
|
|
2,433
|
|
|
|
(38,729
|
)
|
|
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
|
|
|
201,697
|
|
|
|
199,264
|
|
|
|
237,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF YEAR
|
|
$
|
283,158
|
|
|
$
|
201,697
|
|
|
$
|
199,264
|
|
|
|
|
|
|
|
|
|
|
|
|
(Concluded)
Supplemental Disclosures of Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(Dollars in thousands)
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
274,186
|
|
|
$
|
375,045
|
|
|
$
|
301,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
10,756
|
|
|
$
|
23,648
|
|
|
$
|
34,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised options recognized as capital contribution
|
|
$
|
6,661
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum pension benefit (liability)
|
|
$
|
12,771
|
|
|
$
|
2,531
|
|
|
$
|
(1,750
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial adoption of SFAS No. 158
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(107
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan securitization
|
|
$
|
107,691
|
|
|
$
|
47,093
|
|
|
$
|
11,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of premises to real estate held for sale
|
|
$
|
8,075
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlement by counterparty in bankruptcy of securities
sold under agreement to repurchase
|
|
$
|
200,228
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlement by counterparty in bankruptcy of investment
securities
available for sale pledged under agreement to repurchase
|
|
$
|
225,348
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
88
Santander BanCorp and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 2008, 2007 and 2006
1. Summary of Significant Accounting Policies and Other Matters:
The accounting and reporting policies of Santander BanCorp (the “Corporation”), a 91% owned
subsidiary of Banco Santander, S.A. (Santander Group), conform with accounting principles generally
accepted in the United States of America (hereinafter referred to as “generally accepted accounting
principles” or “GAAP”) and with general practices within the financial services industry.
Following is a summary of the Corporation’s most significant accounting policies:
Nature of Operations and Use of Estimates
Santander BanCorp is a financial holding company offering a full range of financial services
(including mortgage banking) through its wholly owned banking subsidiary Banco Santander Puerto
Rico and subsidiary (the “Bank”). The Corporation also engages in broker-dealer, asset management,
consumer finance, international banking, insurance agency services and insurance products through
its subsidiaries, Santander Securities Corporation, Santander Asset Management Corporation,
Santander Financial Services, Inc. (“Island Finance”), Santander International Bank, Santander
Insurance Agency and Island Insurance Corporation (currently inactive), respectively.
Santander BanCorp is subject to the Federal Bank Holding Company Act and to the regulations,
supervision, and examination of the Federal Reserve Board.
In preparing the consolidated financial statements in conformity with generally accepted accounting
principles, management is required to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date
of the consolidated financial statements, and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. Material estimates that
are particularly susceptible to significant change in the near term relate to the determination of
the allowance for loan losses, impairment of goodwill and other intangibles, income taxes, and the
valuation of foreclosed real estate, deferred tax assets and financial instruments.
Principles of Consolidation
The consolidated financial statements include the accounts of the Corporation, the Bank and the
Bank’s wholly owned subsidiary, Santander International Bank; Santander Securities Corporation and
its wholly owned subsidiary, Santander Asset Management Corporation; Santander Financial Services,
Inc., Santander Insurance Agency and Island Insurance Corporation. All significant intercompany
balances and transactions have been eliminated in consolidation. Effective January 1, 2008,
Santander Mortgage Corporation (a formerly wholly owned subsidiary of the Bank) was merged into the
Bank and ceased to operate as a separate legal entity.
Cash Equivalents
All highly liquid instruments with a maturity of three months or less, when acquired or generated,
are considered cash equivalents.
Securities Purchased/Sold under Agreements to Resell/Repurchase
Repurchase and resell agreements are treated as collateralized financing transactions and are
carried at the amounts at which the assets will be reacquired or resold at the contractual
maturity. The settlement of these agreements prior to maturity may be subject to early termination
penalties.
The counterparties to securities purchased under resell agreements maintain effective control over
such securities and accordingly, those securities are not reflected in the Corporation’s
consolidated balance sheets. The Corporation monitors the market value of the underlying
securities as compared to the related receivable, including accrued interest, and requests
additional collateral where deemed appropriate.
89
The Corporation maintains effective control over assets sold under agreements to repurchase;
accordingly, such securities continue to be carried on the consolidated balance sheets.
Investment Securitie
s
Investment securities are classified in four categories and accounted for as follows:
|
|
•
|
|
Debt securities that the Corporation has the intent and ability to hold to maturity are
classified as securities held to maturity and reported at cost adjusted for premium
amortization and discount accretion. The Corporation may not sell or transfer
held-to-maturity securities without calling into question its intent to hold securities to
maturity, unless a nonrecurring or unusual event that could not have been reasonably
anticipated has occurred.
|
|
|
|
|
•
|
|
Debt and equity securities that are bought and held principally for the purpose of
selling them in the near term are classified as trading securities and reported at fair
value with unrealized gains and losses included in the consolidated statements of
operations as part of other income. Financial instruments including, to a limited extent,
derivatives, such as option contracts, are used by the Corporation in dealing and other
trading activities and are carried at fair value. Interest revenue and expense arising from
trading instruments are included in the consolidated statements of operations as part of
net interest income.
|
|
|
|
|
•
|
|
Debt and equity securities not classified as either securities held to maturity or
trading securities, and which have a readily available fair value, are classified as
securities available for sale and reported at fair value, with unrealized gains and losses
reported, net of tax, in accumulated other comprehensive income (loss). The specific
identification method is used to determine realized gains and losses on sales of securities
available for sale, which are included in gain (loss) on sale of investment securities in
the consolidated statements of income.
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Investments in debt, equity or other securities, that do not have readily determinable
fair values, are classified as other investment securities in the consolidated balance
sheets. These securities are stated at cost. Stock that is owned by the Corporation to
comply with regulatory requirements, such as Federal Home Loan Bank (FHLB) stock, is
included in this category.
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The amortization of premiums is deducted and the accretion of discounts is added to net interest
income based on a method which approximates the interest method, over the outstanding life of the
related securities. The cost of securities sold is determined by specific identification. For
securities available for sale, held to maturity and other investment securities, the Corporation
reports separately in the consolidated statements of operations, net realized gains or losses on
sales of investment securities and unrealized loss valuation adjustments considered other than
temporary, if any.
Derivative Financial Instruments
The Corporation uses derivative financial instruments mostly as hedges of interest rate risk,
changes in fair value of assets and liabilities and to secure future cash flows.
All of the Corporation’s derivative instruments are recognized as assets or liabilities at fair
value. If certain conditions are met, the derivative may qualify for hedge accounting treatment and
be designated as one of the following types of hedges: (a) hedge of the exposure to changes in the
fair value of a recognized asset or liability or an unrecognized firm commitment (“fair value
hedge”); (b) a hedge of the exposure to variability of cash flows of a recognized asset, liability
or forecasted transaction (“cash flow hedge”) or (c) a hedge of foreign currency exposure (“foreign
currency hedge”).
Prior to the adoption of Statement of Financial Accounting Standard (“SFAS” ) No. 159,
“Fair Value
Option for Financial Assets and Financial Liabilities- including an amendment of FASB Statements
No. 115"
, in the case of a qualifying fair value hedge, changes in the value of the derivative
instruments that have been highly effective were recognized in current period consolidated
statements of operations along with the change in value of the designated hedged item attributable
to the risk being hedged. If the hedge relationship was terminated, hedge accounting was
discontinued and any balance related to the derivative was recognized in current operations, and
the fair value adjustment to the hedged item continued to be reported as part of the basis of the
item and was amortized to earnings as a yield adjustment. The Corporation hedges certain callable
brokered certificates of deposits and subordinated capital notes by using interest rate swaps.
Prior to the adoption of SFAS 159 as of January 1, 2008, these swaps were designated for the hedge
accounting treatment under SFAS 133, “
Accounting for Derivatives Instruments and Hedging
Activities”
as amended and interpreted (“SFAS 133”). These financial instruments were accounted for
as fair value hedges, with changes in the fair value of both the derivative and the hedged item
included in other income and
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the interest included in net interest income in the consolidated statements of operations. In
connection with the adoption of SFAS 159 the Corporation carries certain callable brokered
certificates of deposits and subordinated capital notes at fair value with changes in fair value
included in other income in the consolidated statements of operations. The cost of funding of the
Corporation’s borrowings, as well as derivatives, continues to be included in interest expense and
income, as applicable, in the consolidated statements of operations. See Note 22 to the
consolidated financial statements for more information.
In the case of a qualifying cash flow hedge, changes in the value of the derivative instruments
that have been highly effective are recognized in other comprehensive income, until such time as
those earnings are affected by the variability of the cash flows of the underlying hedged item. If
the hedge relationship is terminated, the net derivative gain or loss related to the discontinued
cash flow hedge should continue to be reported in accumulated other comprehensive income (loss) and
would be reclassified into earnings when the cash flows that were hedged occur, or when the
forecasted transaction affects earnings or is no longer expected to occur. In either a fair value
hedge or a cash flow hedge, net earnings may be impacted to the extent the changes in the value of
the derivative instruments do not perfectly offset changes in the value of the hedged items. If the
derivative is not designated as a hedging instrument, the changes in fair value of the derivative
are recorded in consolidated statements of income.
Certain contracts contain embedded derivatives. When the embedded derivative possesses economic
characteristics that are not clearly and closely related to the economic characteristics of the
host contract, it is bifurcated, carried at fair value, and designated as a trading or non-hedging
derivative instrument.
Loans Held for Sale
Loans held for sale are recorded at the lower of cost or market computed on the aggregate portfolio
basis. The amount, by which cost exceeds market value, if any, is accounted for as a valuation
allowance with changes included in the determination of results of operations for the period in
which the change occurs. The amount of loan origination cost and fees are deferred at origination
of the loans and recognized as part of the gain and loss on sale of the loans in the consolidated
statement of operations as part of other income.
Loans
Loans that management has the intent and ability to hold for the foreseeable future or until
maturity or pay-off are reported at their outstanding unpaid principal balances adjusted for the
allowance for loan losses, unearned finance charges and any deferred fees or costs on originated
loans.
Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain
direct origination costs, are deferred and amortized using methods that approximate the interest
method over the term of the loans as an adjustment to interest yield. Discounts and premiums on
purchased loans are amortized to results of operations over the expected lives of the loans using a
method that approximates the interest method.
The accrual of interest on commercial loans, construction loans, lease financing and closed-end
consumer loans is discontinued when, in management’s opinion, the borrower may be unable to meet
payments as they become due, but in no event is it recognized after 90 days in arrears on payments
of principal or interest. Interest on mortgage loans is not recognized after four months in arrears
on payments of principal or interest. Income is generally recognized on open-end (revolving credit)
consumer loans until the loans are charged off. When interest accrual is discontinued, unpaid
interest is reversed on all closed-end portfolios. Interest income is subsequently recognized only
to the extent that it is collected. The non accrual status is discontinued when loans are made
current by the borrower.
The Corporation leases vehicles and equipment to individual and corporate customers. The finance
method of accounting is used to recognize revenue on lease contracts that meet the criteria
specified in (“SFAS”) No. 13, “
Accounting for Leases
,” as amended. Aggregate rentals due over the
term of the leases less unearned income are included in lease receivable, which is part of “Loans,
net” in the consolidated balance sheets. Unearned income is amortized to results of operations over
the lease term so as to yield a constant rate of return on the principal amounts outstanding.
Lease origination fees and costs are deferred and amortized over the average life of the portfolio
as an adjustment to yield.
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Off-Balance Sheet Instruments
In the ordinary course of business, the Corporation enters into off-balance sheet instruments
consisting of commitments to extend credit, stand by letters of credit and financial guarantees.
Such financial instruments are recorded in the consolidated financial statements when they are
funded or when related fees are incurred or received. The Corporation periodically evaluates the
credit risks inherent in these commitments, and establishes loss allowances for such risks if and
when these are deemed necessary.
The Corporation recognized as liabilities the fair value of the obligations undertaken in issuing
the guarantees under the standby letters of credit issued or modified after December 31, 2002, net
of the related amortization at inception. The fair value approximates the unamortized fees received
from the customers for issuing the standby letters of credit. The fees are deferred and recognized
on a straight-line basis over the commitment period. Standby letters of credit outstanding at
December 31, 2008 had terms ranging from one month to five years.
Fees received for providing loan commitments and letters of credit that result in loans are
typically deferred and amortized to interest income over the life of the related loan, beginning
with the initial borrowing. Fees on commitments and letters of credit are amortized to other
income as banking fees and commissions over the commitment period when funding is not expected.
Allowance for Loan Losses
The allowance for loan losses is a current estimate of the losses inherent in the present portfolio
based on management’s ongoing quarterly evaluations of the loan portfolio. Estimates of losses
inherent in the loan portfolio involve the exercise of judgment and the use of assumptions. This
evaluation is inherently subjective as it requires estimates that are susceptible to significant
revision as more information becomes available. The allowance is increased by a provision for loan
losses, which is charged to expense and reduced by charge-offs, net of recoveries. Changes in the
allowance relating to impaired loans are charged or credited to the provision for loan losses.
Because of uncertainties inherent in the estimation process, management’s estimate of credit losses
in the loan portfolio and the related allowance may change in the near term.
The Corporation follows a systematic methodology to establish and evaluate the adequacy of the
allowance for loan losses. This methodology consists of several key elements.
Larger commercial, construction loans and certain mortgage loans that exhibit potential or observed
credit weaknesses are subject to individual review. Where appropriate, allowances are allocated to
individual loans based on management’s estimate of the borrower’s ability to repay the loan given
the availability of collateral, other sources of cash flow and legal options available to the
Corporation.
Included in the review of individual loans are those that are impaired as defined by GAAP. Any
allowances for loans deemed impaired are measured based on the present value of expected future
cash flows discounted at the loans’ effective interest rate or on the fair value of the underlying
collateral if the loan is collateral dependent. Commercial business, commercial real estate,
construction and mortgage loans exceeding a predetermined monetary threshold are individually
evaluated for impairment. Other loans are evaluated in homogeneous groups and collectively
evaluated for impairment. Loans that are recorded at fair value or at the lower of cost or fair
value are not evaluated for impairment. Impaired loans for which the discounted cash flows,
collateral value or fair value exceeds its carrying value do not require an allowance. The
Corporation evaluates the collectivity of both principal and interest when assessing the need for
loss accrual.
Historical loss rates are applied to other commercial loans not subject to individual review. The
loss rates are derived from historical loss trends.
Homogeneous loans, such as consumer installment, credit card, residential mortgage and consumer
finance are not individually risk graded. Allowances are established for each pool of loans based
on the expected net charge-offs for one year. Loss rates are based on the average net charge-off
history by loan category, market loss trends and other relevant economic factors.
An unallocated allowance is maintained to recognize the imprecision in estimating and measuring
losses when estimating the allowance for individual loans or pools of loans.
Historical loss rates for commercial and consumer loans may also be adjusted for significant
factors that, in management’s judgment, reflect the impact of any current condition on loss
recognition. Factors which management considers in the analysis include the effect of the national
and local economies, trends in the nature and volume of loans (delinquencies, charge-offs,
non-accrual and problem loans), changes in the internal lending policies and credit standards,
collection practices, and examination results from bank regulatory agencies and the Corporation’s
internal credit examiners.
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Allowances on individual loans and historical loss rates are reviewed quarterly and adjusted as
necessary based on changing borrower and/or collateral conditions and actual collection and
charge-off experience.
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities
Transfers of financial assets are accounted for as sales, when control over the transferred assets
is deemed to be surrendered: (1) the assets have been isolated from the Corporation, (2) the
transferee obtains the right (free of conditions that constrain it from taking advantage of that
right) to pledge or exchange the transferred assets, and (3) the Corporation does not maintain
effective control over the transferred assets through an agreement to repurchase them before their
maturity. The Corporation recognizes the financial assets and servicing assets it controls and the
liabilities it has incurred. At the same time, it ceases to recognize financial assets when control
has been surrendered and liabilities when they are extinguished.
In April 2007, the Bank transferred its merchant business to a subsidiary, MBPR Services, Inc.
(“MBPR”). The Bank subsequently sold the stock of MBPR to an unrelated third party. For an interim
period that ended October 30, 2007, the Bank provided certain processing and other services to the
third party acquirer. The gain on the transaction of $12.3 million was recognized in the fourth
quarter of 2007. As part of the transaction, the Bank entered into a long-term marketing alliance
agreement with the third party and will serve as its sponsor with the card associations and network
organizations.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation and amortization which is
computed utilizing the straight-line method over the estimated useful lives of the assets that
range between three and fifty years. Leasehold improvements are stated at cost and are amortized
using the straight-line method over the estimated useful lives of the assets or the term of the
lease, whichever is lower. Gains or losses on dispositions are reflected in current operations.
Costs of maintenance and repairs that do not improve or extend the lives of the respective assets
are charged to expense as incurred. Costs of renewals and improvements are capitalized. When
assets are sold or disposed of, their cost and related accumulated depreciation are removed from
the accounts and any gain or loss is reflected in earnings when realized.
Real Estate Held for Sale
The Corporation owns certain real estate properties held for sale which are carried at the lower of
cost or fair value, less estimated selling costs.
Other Real Estate
Other real estate, normally obtained through foreclosure or other workout situations, is included
in other assets and stated at the lower of fair value or carrying value less estimated costs to
sell. Upon foreclosure, the recorded amount of the loan is written-down, if applicable, to the
fair value less estimated costs of disposal of the real estate acquired, by charging the allowance
for loan losses. Subsequent to foreclosure, any losses in the carrying value of the asset resulting
from periodic valuations of the properties are charged to expense in the period incurred. Gains or
losses on disposition of other real estate and related maintenance expenses are included in current
operations.
Goodwill and Intangible Assets
The Corporation accounts for goodwill in accordance with SFAS No. 142, “
Goodwill and Other
Intangible Assets
.” The reporting units are tested for impairment annually to determine whether
their carrying value exceeds their fair market value. Should this be the case, the value of
goodwill or indefinite-lived intangibles may be impaired and written down. Goodwill and other
indefinite lived intangible assets are also tested for impairment on an interim basis if an event
occurs or circumstances change between annual tests that would more likely than not reduce the fair
value of the reporting unit below its carrying amount. If there is a determination that the fair
value of the goodwill or other identifiable intangible asset is less than the carrying value, an
impairment loss is recognized in an amount equal to the difference. Impairment losses, if any, are
reflected in operating expenses in the consolidated statement of operations.
In accordance with SFAS No. 144 “
Accounting for the Impairment or Disposal of Long-Lived Assets
”,
the Corporation reviews finite-lived intangible assets for impairment whenever an event occurs or
circumstances change which indicate that the carrying amount of such assets may not be fully
recoverable. Determination of recoverability is based on the estimate of undiscounted future cash
flows resulting from the use of the asset and its eventual disposition. Measurement of an
impairment loss is based on the fair value of the asset compared to its carrying value. If the fair
value of the asset is determined to be less that the
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carrying value, an impairment loss is incurred in the amount equal to the difference. Impairment
losses, if any, are reflected in operation expenses in the consolidated statements of operations.
The Corporation uses judgment in assessing goodwill and intangible assets for impairment.
Estimates of fair value are based on projections of revenues, operating costs and cash flows of
each reporting unit considering historical and anticipated future results, general economic and
market conditions as well as the impact of planned business or operational strategies. The
valuations employ a combination of present value techniques to measure fair value and consider
market factors. Generally, the Corporation engages third party specialists to assist with its
valuations. Additionally, judgment is used in determining the useful lives of finite-lived
intangible assets. Changes in judgments and projections could result in a significantly different
estimate of the fair value of the reporting units and could result in an impairment of goodwill.
The Corporation has not adopted SFAS 157 for fair value measurement of goodwill and intangible
assets pursuant to FASB Staff Position (“FSP”) FAS 157-2 “
Effective Date of FASB Statement No. 157”
issued in February 2008.
As a result of the purchase price allocations from prior acquisitions and the Corporation’s
decentralized structure, goodwill is included in multiple reporting units. Due to certain factors
such as the highly competitive environment, cyclical nature of the business in some of the
reporting units, general economic and market conditions as well as planned business or operational
strategies, among others, the profitability of the Corporation’s individual reporting units may
periodically suffer from downturns in these factors. These factors may have a relatively more
pronounced impact on the individual reporting units as compared to the Corporation as a whole and
might adversely affect the fair value of the reporting units. If material adverse conditions occur
that impact the Corporation’s reporting units, the Corporation’s reporting units, and the related
goodwill would need to be written down to an amount considered recoverable.
Mortgage-servicing Rights
Mortgage-servicing rights (“MSRs”) represent the cost of acquiring the contractual rights to
service loans for others. On a quarterly basis the Corporation evaluates its MSRs for impairment
and charges any such impairment to current period earnings. In order to evaluate its MSRs the
Corporation stratifies the related mortgage loans on the basis of their risk characteristics which
have been determined to be: type of loan (government-guaranteed, conventional, conforming and
non-conforming), interest rates and maturities. Impairment of MSRs is determined by estimating the
fair value of each stratum and comparing it to its carrying value. No impairment loss was
recognized for each of the three years in the period ended December 31, 2008.
MSRs are also subject to periodic amortization. The amortization of MSRs is based on the amount
and timing of estimated cash flows to be recovered with respect to the MSRs over their expected
lives. Amortization may be accelerated or decelerated to the extent that changes in interest rates
or prepayment rates warrant.
Mortgage Banking
Mortgage loan servicing includes collecting monthly mortgagor payments, forwarding payments and
related accounting reports to investors, collecting escrow deposits for the payment of mortgagor
property taxes and insurance, and paying taxes and insurance from escrow funds when due. No asset
or liability is recorded by the Corporation for mortgages serviced, except for mortgage-servicing
rights arising from the sale of mortgages, advances to investors and escrow advances.
The Corporation recognizes as a separate asset the right to service mortgage loans for others
whenever those servicing rights are acquired. The Corporation acquires MSRs by purchasing or
originating loans and selling or securitizing those loans (with the servicing rights retained) and
allocates the total cost of the mortgage loans sold to the MSRs (included in intangible assets in
the accompanying consolidated balance sheets) and the loans based on their relative fair values.
Further, mortgage-servicing rights are assessed for impairment based on the fair value of those
rights. MSRs are amortized over the estimated life of the related servicing income. Mortgage
loan-servicing fees, which are based on a percentage of the principal balances of the mortgages
serviced, are credited to income as mortgage payments are collected.
Mortgage loans serviced for others are not included in the accompanying consolidated balance
sheets. At December 31, 2008 and 2007, the unpaid principal balances of mortgage loans serviced for
others amounted to approximately $1,281,000,000 and $1,056,000,000, respectively. In connection
with these mortgage-servicing activities, the Corporation administered escrow and other custodial
funds which amounted to approximately $4,001,000 and $3,254,000 at December 31, 2008 and 2007,
respectively.
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Trust Services
In connection with its trust activities, the Corporation administers and is custodian of assets
amounting to approximately $200,000,000 and $1,113,000,000 at December 31, 2008 and 2007,
respectively. Due to the nature of trust activities, these assets are not included in the
Corporation’s consolidated balance sheets. Since December 31, 2006, when the Corporation sold to an
unaffiliated third party the servicing rights for certain trust accounts, the Corporation’s Trust
Division is focusing its efforts on transfer and paying agent and Individual Retirement Account
(IRA) services.
Broker-dealer and Asset Management Commissions
Commissions of the Corporation’s broker-dealer operations are composed of brokerage commission
income and expenses recorded on a trade date basis and proprietary securities transactions recorded
on a trade date basis. Investment banking revenues include gains, losses and fees net of syndicate
expenses, arising from securities offerings in which the Corporation acts as an underwriter or
agent. Investment banking management fees are recorded on offering date, sales concessions on trade
date, and underwriting fees at the time the underwriting is completed and the income is reasonably
determinable. Revenues from portfolio and other management and advisory fees include fees and
advisory charges resulting from the asset management of certain funds and are recognized over the
period when services are rendered.
Insurance Commissions
The Corporation’s insurance agency operation earns commissions on the sale of insurance policies
issued by unaffiliated insurance companies. Commission revenue is reported net of the provision for
commission returns on insurance policy cancellations, which is based on management’s estimate of
future insurance policy cancellations as a result of historical turnover rates by types of credit
facilities subject to insurance.
Treasury Stock
Treasury stock is recorded at cost and is carried as a reduction of stockholders’ equity in the
consolidated balance sheets. As of December 31, 2008 treasury stock has not been retired or
reissued.
Income Taxes
The Corporation uses the asset and liability balance sheet method for the recognition of deferred
tax assets and liabilities for the expected future tax consequences of events that have been
recognized in the Corporation’s financial statements or tax returns. Deferred income tax assets
and liabilities are determined for differences between financial statement and tax bases of assets
and liabilities that will result in taxable or deductible amounts in the future. The computation
is based on enacted tax laws and rates applicable to periods in which the temporary differences are
expected to be recovered or settled. Valuation allowances are established, when necessary, to
reduce deferred tax assets to the amount that is more likely than not to be realized.
The Corporation accounts for uncertain tax positions in accordance with FASB Interpretation No. 48,
"
Accounting for Uncertainty in Income Taxes
” (“FIN 48”). Accordingly, the Corporation reports a
liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to
be taken in a tax return. The Corporation recognizes interest and penalties, if any, related to
unrecognized tax benefits in income tax expense.
Earnings Per Common Share
Basic and diluted earnings per common share are computed by dividing net income available to common
stockholders, by the weighted average number of common shares outstanding during the period. The
Corporation’s average number of common shares outstanding, used in the computation of earnings per
common share was 46,639,104 for the years ended December 31, 2008 and 2007. Basic and diluted
earnings per common share are the same since no stock options or other potentially dilutive common
stock equivalents were outstanding during the periods ended December 31, 2008, 2007 and 2006.
Reclassifications
Certain immaterial reclassifications were made to the 2007 consolidated financial statements to
conform them with the current period financial statements presentation.
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Recent Accounting Pronouncements that Affect the Corporation
The adoption of these accounting pronouncements had the following impact on the Corporation’s
consolidated statements of income and financial condition:
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Staff Accounting Bulletin No. 109 (“SAB 109”) “Written Loan Commitments Recorded at Fair
Value through Earnings.”
On November 5, 2007, the SEC issued SAB 109, which requires that
the fair value of a written loan commitment that is marked to market through earnings
should include the future cash flows related to the loan’s servicing rights. However, the
fair value measurement of a written loan commitment still must exclude the expected net
cash flows related to internally developed intangible assets (such as customer relationship
intangible assets). SAB 109 applies to two types of loan commitments: (1) written mortgage
loan commitments for loans that will be held-for-sale when funded that are marked to market
as derivatives under FAS 133 (derivative loan commitments); and (2) other written loan
commitments that are accounted for at fair value through earnings under Statement 159’s
fair-value election. SAB 109 supersedes SAB 105, which applied only to derivative loan
commitments and allowed the expected future cash flows related to the associated servicing
of the loan to be recognized only after the servicing asset had been contractually
separated from the underlying loan by sale or securitization of the loan with servicing
retained. SAB 109 will be applied prospectively to derivative loan commitments issued or
modified in fiscal quarters beginning after December 15, 2007. The adoption of this
statement did not have material impact on the Corporation’s consolidated financial
statements and disclosures.
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SFAS No. 157, “Fair Value Measurements.”
In September 2006, the FASB issued SFAS No.
157, “Fair Value Measurements,” which establishes a framework for measuring fair value
under GAAP and enhances disclosures about fair value measurements. The Corporation adopted
SFAS 157, as of January 1, 2008 for financial assets and liabilities. SFAS 157 defines fair
value, establishes a framework for measuring fair value under GAAP and enhances disclosures
about fair value measurements. Fair value is defined under SFAS 157 as the price that
would be received for an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in an orderly transaction
between market participants on the measurement date. In February 2008, the FASB issued
FASB Staff Position FAS 157-2, “
Effective Date of FASB Statement No. 157
” (FSP 157-2) that
partially delayed the effective date of SFAS 157 for one year for certain nonfinancial
assets and nonfinancial liabilities, except for items that are recognized or disclosed at
fair value in the financial statements on a recurring basis. FSP FAS 157-2 states that a
measurement is recurring if it happens at least annually and defines nonfinancial assets
and nonfinancial liabilities as all assets and liabilities other than those meeting the
definition of a financial asset or financial liability in SFAS 159. As such, the
Corporation did not adopt SFAS 157 for certain nonfinancial assets and liabilities, and is
evaluating the impact, that the adoption may have on its consolidated financial statements
and disclosures. In October 2008 the FASB issued FASB Staff Position (FSP) No. 157-3,
“Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not
Active”
(FSP 157-3). FSP 157-3 clarifies how SFAS 157 should be applied when valuing
securities in markets that are not active. The adoption of FSP 157-3 did not impact the
Corporation’s financial condition and results of operations. See Note 24 for additional
information.
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SFAS No. 159, “Fair Value Option for Financial Assets and Financial Liabilities-
including an amendment of FASB Statements No. 115.”
In February 2007, the FASB issued SFAS
No. 159. In conjunction with the adoption of SFAS 157, the Corporation adopted SFAS 159, as
of January 1, 2008. SFAS 159 provides an option for most financial assets and liabilities
to be reported at fair value on an instrument-by-instrument basis with changes in fair
value reported in earnings. The election is made at the initial adoption, at the
acquisition of a financial asset, financial liability or a firm commitment and it may not
be revoked. Under the SFAS 159 transition provisions, the Corporation has elected to report
certain callable brokered certificates of deposits and subordinated notes at fair value
with future changes in value reported in earnings. SFAS 159 provides an opportunity to
mitigate volatility in reported earnings as well as reducing the burden associated with
complex hedge accounting requirements. As a result of this adoption and election under the
fair value option, the Corporation reported an after-tax increase in opening retained
earnings of $3.2 million. See Note 24 for additional information.
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FSP FIN No. 39-1 “Amendment of FASB Interpretation No. 39”
In April 2007, the FASB
issued FASB Staff Position FSP FIN No. 39-1, which defines “right of setoff” and specifies
what conditions must be met for a derivative contract to qualify for this right of setoff.
It also addresses the applicability of a right of setoff to derivative instruments and
clarifies the circumstances in which it is appropriate to offset amounts recognized for
those instruments in the statement of financial position. In addition, this FSP permits the
offsetting of fair value amounts recognized for multiple derivative instruments executed
with the same counterparty under a master netting arrangement and fair value amounts
recognized for the right to reclaim cash collateral (a receivable) or the obligation to
return cash collateral (a payable) arising from the same master netting arrangement as the
derivative instruments. This interpretation is effective for fiscal years beginning after
November 15, 2007, with early application permitted. The
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adoption of FSP FIN No. 39-1 in 2008 did not have a material impact on the Corporation’s
consolidated financial statements and disclosures.
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FSP No. FAS 133-1 and FIN 45-4 “Disclosures about Credit Derivatives and Certain
Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and
Clarification of the Effective Date of FASB Statement No. 161”
FSP FAS 133-1 and FIN 45-4
requires disclosures by sellers of credit derivatives and additional disclosures about the
current status of the payment/performance risk of financial guarantees. FSP FAS 133-1 and
FIN 45-4 are effective for financial reporting periods (annual or interim) ending after
November 15, 2008. Accordingly, the Corporation adopted the provisions of FSP FAS 133-1 and
FIN 45-4 as of December 31, 2008. The adoption of FAS 133-1 and FIN45-4 did not impact the
Corporation’s financial condition and results of operations.
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FSP 140-4 and FIN 46(R)-8, “Disclosures by Public Entities (Enterprises) about Transfers
of Financial Assets and Interests in Variable Interest Entities”.
In December 2008, the
FASB issued FSP 140-4 and FIN 46(R)-8, which intended to improve disclosures about a
company’s involvement with variable interest entities by requiring more information about
the assumptions made in determining whether or not to consolidate a variable interest
entity, the nature of restrictions on a variable interest entity’s assets, as well as the
risks associated with an enterprise’s involvement with the variable interest entity. FSP
140-4 and FIN46(R)-8 are effective December 15, 2008. This statement did not have an impact
on the Corporation’s financial statement.
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The Corporation is evaluating the impact that the following recently issued accounting
pronouncements may have on its consolidated financial condition and results of operations.
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SFAS No. 141-R “Statement of Financial Accounting Standards No. 141(R), Business
Combinations (a revision of SFAS No. 141.)”
In December 2007, the FASB issued SFAS No.
141(R). SFAS No. 141(R) will significantly change how entities apply the acquisition method
to business combinations. The most significant changes affecting how the Corporation will
account for business combinations under this statement include the following: the
acquisition date will be the date the acquirer obtains control; all (and only) identifiable
assets acquired, liabilities assumed, and noncontrolling interests in the acquiree will be
stated at fair value on the acquisition date; assets or liabilities arising from
noncontractual contingencies will be measured at their acquisition date at fair value only
if it is more likely than not that they meet the definition of an asset or liability on the
acquisition date; adjustments subsequently made to the provisional amounts recorded on the
acquisition date will be made retroactively during a measurement period not to exceed one
year; acquisition-related restructuring costs that do not meet the criteria in SFAS No. 146
“
Accounting for Costs Associated with Exit or Disposal Activities
” will be expensed as
incurred; transaction costs will be expensed as incurred; reversals of deferred income tax
valuation allowances and income tax contingencies will be recognized in earnings subsequent
to the measurement period; and the allowance for loan losses of an acquiree will not be
permitted to be recognized by the acquirer. Additionally, SFAS 141(R) will require new and
modified disclosures surrounding subsequent changes to acquisition-related contingencies,
contingent consideration, noncontrolling interests, acquisition-related transaction costs,
fair values and cash flows not expected to be collected for acquired loans, and an enhanced
goodwill rollforward. The Corporation will be required to prospectively apply SFAS 141(R)
to all business combinations completed on or after January 1, 2009. Early adoption is not
permitted. For business combinations in which the acquisition date was before the effective
date, the provisions of SFAS 141(R) will apply to the subsequent accounting for deferred
income tax valuation allowances and income tax contingencies and will require any changes
in those amounts to be recorded in earnings.
|
|
|
|
|
•
|
|
SFAS No. 160,“Noncontrolling Interest in Consolidated Financial Statements, an amendment
of ARB No. 51.”
In December 2007, the FASB issued SFAS No. 160, which amends ARB No. 51, to
establish accounting and reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 will require entities
to classify noncontrolling interests as a component of stockholders’ equity on the
consolidated financial statements and will require subsequent changes in ownership
interests in a subsidiary to be accounted for as an equity transaction. Additionally, SFAS
No. 160 will require entities to recognize a gain or loss upon the loss of control of a
subsidiary and to remeasure any ownership interest retained at fair value on that date.
This statement also requires expanded disclosures that clearly identify and distinguish
between the interests of the parent and the interests of the noncontrolling owners. This
Statement is effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008 (that is, January 1, 2009, for entities with
calendar year-ends). Earlier adoption is prohibited. The effective date of this Statement
is the same as that of the related Statement 141(R). Management is evaluating the effects,
if any, that the adoption of this statement will have on its consolidated financial
statements.
|
|
|
|
|
•
|
|
SFAS No. 161 “Disclosure about Derivative Instruments and Hedging Activities, an
amendment of FASB Statements No. 133.”
In March 2008, the FASB issued SFAS No. 161, which
requires the enhancement of the current disclosure
|
97
|
|
|
|
framework in Statement 133. The Statement requires that objectives for using derivative
instruments be disclosed in terms of underlying risk and accounting designation. This
disclosure better conveys the purpose of derivative use in terms of the risks that the
entity is intending to manage. Disclosing the fair values of derivative instruments and
their gains and losses in a tabular format should provide a more complete picture of the
location in an entity’s financial statements of both the derivative positions existing at
period end and the effect of using derivatives during the reporting period. Disclosing
information about credit-risk-related contingent features should provide information on the
potential effect on an entity’s liquidity from using derivatives. Finally, this Statement
requires cross-referencing within the footnotes, which should help users of financial
statements locate important information about derivative instruments. This Statement is
effective for financial statements issued for fiscal years and interim periods beginning
after November 15, 2008, with early application encouraged. This Statement encourages, but
does not require, comparative disclosures for earlier periods at initial adoption. The
Corporation is evaluating the effects, if any, that the adoption of this statement will have
on its consolidated financial statements.
|
|
|
|
|
•
|
|
Staff Position (FSP) FAS 142-3, “Determination of Useful Life of Intangible Assets"(“FSP
FAS 142-3”).
In April 2008, the FASB issued FASB Staff Position (FSP) FAS 142-3. This FASB
Staff Position amends the factors that should be considered in developing renewal or
extension assumptions used to determine the useful life of a recognized intangible asset
under FASB Statement No. 142,
Goodwill and Other Intangible Assets
. The intent of this FSP
is to improve the consistency between the useful life of a recognized intangible asset
under Statement 142 and the period of expected cash flows used to measure the fair value of
the asset under FASB Statement No. 141(R) (revised 2007),
Business Combinations,
and other
U.S. generally accepted accounting principles. An intangible asset may be acquired
individually or with a group of other assets. This FSP applies regardless of the nature of
the transaction that resulted in the recognition of the intangible asset, that is, whether
acquired in a business combination or otherwise. In developing assumptions about renewal or
extension used to determine the useful life of a recognized intangible asset, an entity
shall consider its own historical experience in renewing or extending similar arrangements;
however, these assumptions should be adjusted for the entity-specific factors in paragraph
11 of Statement 142. In the absence of that experience, an entity shall consider the
assumptions that market participants would use about renewal or extension (consistent with
the highest and best use of the asset by market participants), adjusted for the
entity-specific factors in paragraph 11 of Statement 142. The Corporation is evaluating the
potential impact of adopting this FSP.
|
|
|
|
|
•
|
|
SFAS No. 162 “The Hierarchy of Generally Accepted Accounting Principles.”
In May 2008,
the FASB issued SFAS No. 162, which identifies the sources of accounting principles and the
framework for selecting the principles to be used in the preparation of financial
statements of nongovernmental entities that are presented in conformity with generally
accepted accounting principles in the United States (the GAAP hierarchy). The current GAAP
hierarchy, as set forth in the American Institute of Certified Public Accountants (AICPA)
Statement on Auditing Standards No. 69,
The Meaning of Present Fairly in Conformity With
Generally Accepted Accounting Principles
, has been criticized because (1) it is directed to
the auditor rather than the entity, (2) it is complex, and (3) it ranks FASB Statements of
Financial Accounting Concepts, which are subject to the same level of due process as FASB
Statements of Financial Accounting Standards, below industry practices that are widely
recognized as generally accepted but that are not subject to due process. The Board
believes that the GAAP hierarchy should be directed to entities because it is the entity
(not its auditor) that is responsible for selecting accounting principles for financial
statements that are presented in conformity with GAAP. Accordingly, the Board concluded
that the GAAP hierarchy should reside in the accounting literature established by the FASB
and is issuing this Statement to achieve that result. This Statement is effective 60 days
following the SEC’s approval of the Public Company Accounting Oversight Board amendments to
AU Section 411,
The Meaning of Present Fairly in Conformity With Generally Accepted
Accounting Principles
. The Corporation is evaluating the effects, if any, that the adoption
of this statement may have on its consolidated financial statements.
|
|
|
|
|
•
|
|
FSP 132(R)-1,“Employers’ Disclosures about Postretirement Benefit Plan Assets”.
In
December of 2008, the FASB issued FSP 132(R)-1 which intend to improve disclosures about a
company’s postretirement benefit plan assets by requiring more information about how
investment allocation decisions are made, major categories of plan assets, fair value
assumptions and concentrations of risk. FSP 132(R)-1 will be applicable to the Corporation
on January 1, 2009. The Corporation is currently evaluating the requirements of FSP
132(R)-1 will have on its financial statements.
|
98
2. Trading Securities:
Proceeds from sales of trading securities during 2008, 2007 and 2006 were approximately
$2,215,946,000, $2,553,127,000 and $9,750,934,000, respectively. Net realized gains of
approximately $4,157,000, $2,660,000 and $1,117,000 were recognized during 2008, 2007 and 2006,
respectively. During 2008 an unrealized holding loss of $1,327,000 was recognized and during 2007
and 2006, unrealized holding gains of $3,000 and $96,000 were recognized, respectively. A trading
loss on futures transactions of $222,000 was realized in 2008 and gains on futures transactions of
$168,000 and $30,000 were realized in 2007 and 2006, respectively.
99
3. Investment Securities Available for Sale:
The amortized cost, gross unrealized gains and losses, fair value and weighted average yield of
investment securities available for sale by contractual maturity are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Average
|
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Yield
|
|
|
|
|
(Dollars in thousands)
|
|
|
Treasury and agencies of the United States
Government:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within one year
|
|
$
|
164,844
|
|
|
$
|
1,164
|
|
|
$
|
1
|
|
|
$
|
166,007
|
|
|
|
2.30
|
%
|
|
After one year to five years
|
|
|
5,658
|
|
|
|
251
|
|
|
|
—
|
|
|
|
5,909
|
|
|
|
3.99
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
170,502
|
|
|
|
1,415
|
|
|
|
1
|
|
|
|
171,916
|
|
|
|
2.36
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commonwealth of Puerto Rico and its subdivisions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within one year
|
|
|
1,460
|
|
|
|
—
|
|
|
|
6
|
|
|
|
1,454
|
|
|
|
4.23
|
%
|
|
After one year to five years
|
|
|
133,185
|
|
|
|
347
|
|
|
|
384
|
|
|
|
133,148
|
|
|
|
5.23
|
%
|
|
After five years to ten years
|
|
|
9,545
|
|
|
|
29
|
|
|
|
95
|
|
|
|
9,479
|
|
|
|
5.18
|
%
|
|
Over ten years
|
|
|
4,505
|
|
|
|
33
|
|
|
|
3
|
|
|
|
4,535
|
|
|
|
5.55
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
148,695
|
|
|
|
409
|
|
|
|
488
|
|
|
|
148,616
|
|
|
|
5.22
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After five years to ten years
|
|
|
193,630
|
|
|
|
2,258
|
|
|
|
73
|
|
|
|
195,815
|
|
|
|
4.39
|
%
|
|
Over ten years
|
|
|
282,235
|
|
|
|
3,525
|
|
|
|
45
|
|
|
|
285,715
|
|
|
|
5.41
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
475,865
|
|
|
|
5,783
|
|
|
|
118
|
|
|
|
481,530
|
|
|
|
4.99
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within one year
|
|
|
50
|
|
|
|
—
|
|
|
|
—
|
|
|
|
50
|
|
|
|
4.65
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
795,112
|
|
|
$
|
7,607
|
|
|
$
|
607
|
|
|
$
|
802,112
|
|
|
|
4.47
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Average
|
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Yield
|
|
|
|
|
(Dollars in thousands)
|
|
|
Treasury and agencies of the United States
Government:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within one year
|
|
$
|
317,974
|
|
|
$
|
137
|
|
|
$
|
233
|
|
|
$
|
317,878
|
|
|
|
3.63
|
%
|
|
After one year to five years
|
|
|
354,281
|
|
|
|
1,703
|
|
|
|
184
|
|
|
|
355,800
|
|
|
|
3.91
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
672,255
|
|
|
|
1,840
|
|
|
|
417
|
|
|
|
673,678
|
|
|
|
3.78
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commonwealth of Puerto Rico and its subdivisions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within one year
|
|
|
1,370
|
|
|
|
—
|
|
|
|
3
|
|
|
|
1,367
|
|
|
|
3.99
|
%
|
|
After one year to five years
|
|
|
20,245
|
|
|
|
—
|
|
|
|
470
|
|
|
|
19,775
|
|
|
|
4.44
|
%
|
|
After five years to ten years
|
|
|
15,186
|
|
|
|
84
|
|
|
|
159
|
|
|
|
15,111
|
|
|
|
5.21
|
%
|
|
Over ten years
|
|
|
13,091
|
|
|
|
62
|
|
|
|
118
|
|
|
|
13,035
|
|
|
|
5.73
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49,892
|
|
|
|
146
|
|
|
|
750
|
|
|
|
49,288
|
|
|
|
5.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After five years to ten years
|
|
|
232,420
|
|
|
|
—
|
|
|
|
7,296
|
|
|
|
225,124
|
|
|
|
4.40
|
%
|
|
Over ten years
|
|
|
324,112
|
|
|
|
—
|
|
|
|
4,054
|
|
|
|
320,058
|
|
|
|
5.41
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
556,532
|
|
|
|
—
|
|
|
|
11,350
|
|
|
|
545,182
|
|
|
|
4.99
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After one year to five years
|
|
|
50
|
|
|
|
—
|
|
|
|
—
|
|
|
|
50
|
|
|
|
4.65
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,278,729
|
|
|
$
|
1,986
|
|
|
$
|
12,517
|
|
|
$
|
1,268,198
|
|
|
|
4.35
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
The duration of long-term (over one year) investment securities in the available for sale portfolio
is approximately 2.1 years at December 31, 2008, comprised of approximately 0.3 years for
treasuries and agencies of the United States Government, 3.3 years for instruments from the
Commonwealth of Puerto Rico and its subdivisions, 2.3 years for mortgage backed securities and 0.8
year for all other securities.
The number of positions, fair value and unrealized losses at December 31, 2008 and 2007, of
investment securities available for sale that have been in a continuous unrealized loss position
for less than twelve months and for twelve months or more, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
|
Less than 12 months
|
|
|
12 months or more
|
|
|
Total
|
|
|
|
|
Number
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
|
|
|
|
|
of
|
|
|
Fair
|
|
|
Unrealized
|
|
|
of
|
|
|
Fair
|
|
|
Unrealized
|
|
|
of
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
|
Positions
|
|
|
Value
|
|
|
Losses
|
|
|
Positions
|
|
|
Value
|
|
|
Losses
|
|
|
Positions
|
|
|
Value
|
|
|
Losses
|
|
|
|
|
(Dollars in thousands)
|
|
|
Treasury and agencies
of the United States
Government
|
|
|
1
|
|
|
$
|
30,000
|
|
|
$
|
1
|
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
1
|
|
|
$
|
30,000
|
|
|
$
|
1
|
|
|
Commonwealth of Puerto
Rico and its
subdivisions
|
|
|
1
|
|
|
|
705
|
|
|
|
72
|
|
|
|
14
|
|
|
|
19,338
|
|
|
|
416
|
|
|
|
15
|
|
|
|
20,043
|
|
|
|
488
|
|
|
Mortgage-backed
securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4
|
|
|
|
33,091
|
|
|
|
118
|
|
|
|
4
|
|
|
|
33,091
|
|
|
|
118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
$
|
30,705
|
|
|
$
|
73
|
|
|
|
18
|
|
|
$
|
52,429
|
|
|
$
|
534
|
|
|
|
20
|
|
|
$
|
83,134
|
|
|
$
|
607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
Less than 12 months
|
|
|
12 months or more
|
|
|
Total
|
|
|
|
|
Number
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
|
|
|
|
|
of
|
|
|
Fair
|
|
|
Unrealized
|
|
|
of
|
|
|
Fair
|
|
|
Unrealized
|
|
|
of
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
|
Positions
|
|
|
Value
|
|
|
Losses
|
|
|
Positions
|
|
|
Value
|
|
|
Losses
|
|
|
Positions
|
|
|
Value
|
|
|
Losses
|
|
|
|
|
(Dollars in thousands)
|
|
|
Treasury and agencies
of the United States
Government
|
|
|
5
|
|
|
$
|
228,590
|
|
|
$
|
57
|
|
|
|
4
|
|
|
$
|
152,132
|
|
|
$
|
360
|
|
|
|
9
|
|
|
$
|
380,722
|
|
|
$
|
417
|
|
|
Commonwealth of Puerto
Rico and its
subdivisions
|
|
|
1
|
|
|
|
9,162
|
|
|
|
118
|
|
|
|
18
|
|
|
|
30,420
|
|
|
|
632
|
|
|
|
19
|
|
|
|
39,582
|
|
|
|
750
|
|
|
Mortgage-backed
securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
31
|
|
|
|
545,182
|
|
|
|
11,350
|
|
|
|
31
|
|
|
|
545,182
|
|
|
|
11,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
$
|
237,752
|
|
|
$
|
175
|
|
|
|
53
|
|
|
$
|
727,734
|
|
|
$
|
12,342
|
|
|
|
59
|
|
|
$
|
965,486
|
|
|
$
|
12,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Corporation evaluates its investment securities for other-than-temporary impairment on a
quarterly basis or earlier if other factors indicative of potential impairment exist. An
impairment charge in the consolidated statements of operations is recognized when the decline in
the fair value of the securities below their cost basis is judged to be other-than-temporary. The
Corporation considers various factors in determining whether it should recognize an impairment
charge, including, but not limited to the length of time and extent to which the fair value has
been less than its cost basis, expectation of recoverability of its original investment in the
securities and the Corporation’s intent and ability to hold the securities for a period of time
sufficient to allow for any forecasted recovery of fair value up to (or beyond) the cost of the
investment.
As of December 31, 2008 and 2007, management concluded that there was no other-than-temporary
impairment in its investment securities portfolio. The unrealized losses in the Corporation’s
investments in U.S. and P.R. Government agencies and subdivisions were caused by changes in market
interest rates. All U.S. and P.R. Government agencies securities are investment grade, as rated by
major rating agencies. The contractual terms of these investments do not permit the issuer to
settle the securities at a price less than the face value of the investment. Since the Corporation
has the ability and intent to hold these investments until a recovery of fair value, which may be
maturity, the Corporation does not consider these investments to be other-than-temporarily
impaired at December 31, 2008 and 2007. The unrealized losses in the Corporation’s investment in
mortgage-backed securities were also caused by changes in market interest rates. The Corporation
purchased these investments at a discount relative to their face amount, and the contractual cash
flows of these investments are guaranteed by an agency of the U.S. government or by other
government-sponsored corporations. Accordingly, it is expected that the securities will be settled
at a price not less than the amortized cost of the Corporation’s investment. The decline in market
value is attributable to changes in interest rates and not credit quality and since the
Corporation has the ability and intent to hold these investments until a recovery of fair value,
which may be maturity, the Corporation does not consider these investments to be
other-than-temporarily impaired at December 31, 2008 and 2007.
101
Contractual maturities on certain securities, including mortgage-backed securities, could differ
from actual maturities since certain issuers may have the right to call or prepay these
securities.
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.
Proceeds from sales of investment securities available for sale were approximately $129,451,000 and
$149,413,000 in 2008 and 2007, respectively. There were no sales of investment securities available
for sale during 2006. Net gains of approximately $5,154,000 and $1,265,000 were realized in 2008
and 2007, respectively.
4. Assets Pledged:
At December 31, 2008 and 2007, investment securities and loans were pledged to secure deposits of
public funds and Federal Home Loan Bank advances. The classification and carrying amount of pledged
assets, which the secured parties are not permitted to sell or repledge as of December 31 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
Investment securities available for sale
|
|
$
|
227,658
|
|
|
$
|
425,754
|
|
|
Other investment securities
|
|
|
53,325
|
|
|
|
56,025
|
|
|
Loans
|
|
|
2,511,098
|
|
|
|
2,314,359
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,792,081
|
|
|
$
|
2,796,138
|
|
|
|
|
|
|
|
|
|
Pledged securities that the creditor has the right or contract to repledge, are presented
separately on the consolidated balance sheets. At December 31, 2008 and 2007, investment securities
with a carrying value of approximately $408,650,000 and $683,326,000, respectively, were pledged to
securities sold under agreements to repurchase.
5. Loans:
The Corporation’s loan portfolio at December 31 consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
Commercial and industrial
|
|
$
|
2,165,613
|
|
|
$
|
2,562,101
|
|
|
Consumer
|
|
|
565,833
|
|
|
|
641,593
|
|
|
Consumer finance
|
|
|
996,919
|
|
|
|
946,209
|
|
|
Leasing
|
|
|
64,065
|
|
|
|
98,987
|
|
|
Construction
|
|
|
194,596
|
|
|
|
486,284
|
|
|
Mortgage
|
|
|
2,553,328
|
|
|
|
2,539,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,540,354
|
|
|
|
7,274,985
|
|
|
Unearned income and deferred fees/costs:
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
(290
|
)
|
|
|
(3,459
|
)
|
|
Consumer finance
|
|
|
(418,676
|
)
|
|
|
(335,096
|
)
|
|
Allowance for loan losses
|
|
|
(191,889
|
)
|
|
|
(166,952
|
)
|
|
|
|
|
|
|
|
|
|
Loans, net
|
|
$
|
5,929,499
|
|
|
$
|
6,769,478
|
|
|
|
|
|
|
|
|
|
102
During the year ended December 31, 2008, the Corporation sold certain loans including some
classified as impaired to an affiliate for $300.1 million in cash. These loans had a net book value
of $300.1 million comprised of an outstanding principal balance
of $334.6 million and a specific
valuation allowance of $34.5 million. The type of loans sold, at
net book value was $212.3 million
in construction loans and $87.8 million in commercial loans. No gain or loss was recognized on this
transaction.
At December 31, the recorded investment in loans that were considered impaired is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans which require allowance
|
|
$
|
77,562
|
|
|
$
|
152,907
|
|
|
Impaired loans that did not require allowance
|
|
|
23,317
|
|
|
|
52,681
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans
|
|
$
|
100,879
|
|
|
$
|
205,588
|
|
|
|
|
|
|
|
|
|
|
Allowance for impaired loans
|
|
$
|
18,410
|
|
|
$
|
25,594
|
|
|
|
|
|
|
|
|
|
|
Impaired loans measured based on fair value of collateral
|
|
$
|
87,637
|
|
|
$
|
81,260
|
|
|
|
|
|
|
|
|
|
|
Impaired loans measured based on discounted cash flows
|
|
$
|
13,242
|
|
|
$
|
124,328
|
|
|
|
|
|
|
|
|
|
|
Interest income recognized on impaired loans
|
|
$
|
554
|
|
|
$
|
705
|
|
|
|
|
|
|
|
|
|
The average balance of impaired loans for the years ended December 31, 2008 and 2007 was
approximately $143 million and $105 million, respectively.
The following schedule reflects the approximate outstanding principal amount and the effect on
earnings of non-accruing loans and past due loans still on an interest accrual basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal balance as of December 31
|
|
$
|
212,714
|
|
|
$
|
294,438
|
|
|
$
|
106,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income which would have been recorded had the
loans not been classified as non-accruing
|
|
$
|
9,268
|
|
|
$
|
7,708
|
|
|
$
|
3,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans past due ninety days or more and still accruing
interest
|
|
$
|
13,462
|
|
|
$
|
7,162
|
|
|
$
|
20,938
|
|
|
|
|
|
|
|
|
|
|
|
|
103
6. Allowance for Loan Losses:
Changes in the allowance for loan losses are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
$
|
166,952
|
|
|
$
|
106,863
|
|
|
$
|
66,842
|
|
|
Allowance acquired (Island Finance)
|
|
|
—
|
|
|
|
—
|
|
|
|
35,104
|
|
|
Provision for loan losses
|
|
|
175,523
|
|
|
|
147,824
|
|
|
|
65,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
342,475
|
|
|
|
254,687
|
|
|
|
167,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses charged to the allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
17,782
|
|
|
|
10,375
|
|
|
|
9,792
|
|
|
Construction
|
|
|
32,257
|
|
|
|
2,710
|
|
|
|
—
|
|
|
Mortgage
|
|
|
1,257
|
|
|
|
1,768
|
|
|
|
—
|
|
|
Consumer
|
|
|
44,682
|
|
|
|
29,281
|
|
|
|
16,679
|
|
|
Consumer Finance
|
|
|
56,444
|
|
|
|
44,484
|
|
|
|
38,345
|
|
|
Leasing
|
|
|
2,064
|
|
|
|
2,742
|
|
|
|
2,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
154,486
|
|
|
|
91,360
|
|
|
|
66,887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
626
|
|
|
|
1,192
|
|
|
|
2,463
|
|
|
Construction
|
|
|
20
|
|
|
|
—
|
|
|
|
—
|
|
|
Consumer
|
|
|
1,256
|
|
|
|
904
|
|
|
|
1,677
|
|
|
Consumer Finance
|
|
|
1,517
|
|
|
|
1,088
|
|
|
|
1,314
|
|
|
Leasing
|
|
|
481
|
|
|
|
441
|
|
|
|
767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,900
|
|
|
|
3,625
|
|
|
|
6,221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans charged-off
|
|
|
150,586
|
|
|
|
87,735
|
|
|
|
60,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
191,889
|
|
|
$
|
166,952
|
|
|
$
|
106,863
|
|
|
|
|
|
|
|
|
|
|
|
|
7. Premises and Equipment:
The Corporation’s premises and equipment at December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful life
|
|
|
|
|
|
|
|
|
|
|
in years
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
|
|
|
|
$
|
1,037
|
|
|
$
|
5,273
|
|
|
Buildings
|
|
|
50
|
|
|
|
1,110
|
|
|
|
9,940
|
|
|
Equipment
|
|
|
3-10
|
|
|
|
43,649
|
|
|
|
43,498
|
|
|
Leasehold improvements
|
|
Various
|
|
|
30,230
|
|
|
|
27,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76,026
|
|
|
|
85,741
|
|
|
Accumulated depreciation and amortization
|
|
|
|
|
|
|
(56,658
|
)
|
|
|
(56,218
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premises and Equipment, net
|
|
|
|
|
|
$
|
19,368
|
|
|
$
|
29,523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization of premises and equipment for the years ended December 31, 2008, 2007
and 2006 were approximately $7.2 million, $8.1 million and $7.6 million, respectively.
104
On December 20, 2007, the Bank, after a bidding process that included the participation of several
potential purchasers, consummated sale and lease-back transactions (the “Agreements”) with two
unaffiliated third parties for the Bank’s two principal properties and 200 parking spaces in a
parking facility currently under construction, which is pending acquisition from Crefisa, Inc., an
affiliate. The two properties are (i) the Banco Santander Headquarters Building, a seven story
corporate headquarters building located at 207 Ponce de León Avenue, Hato Rey, Puerto Rico,
including a related parking facility (the “Headquarters Facility”); and (ii) the Santander
Operations Facility, a nine story building located at No. 3 Arterial Hostos Avenue, New San Juan
Center, Hato Rey, Puerto Rico (the “Operations Facility”). The Bank has entered into an agreement
with Crefisa to purchase 200 parking spaces in a parking facility under construction, at terms and
conditions similar to those that Crefisa has under an option agreement with the developer of the
parking facility. The Headquarters Facility and the Operations Facility were sold on an “as-is,
where-is” basis for a sales prices of $31.5 million and $25.3 million in cash, respectively, and
resulted in a gain which has been deferred (as described below) of $20.0 million and $12.6 million,
respectively. The sales price of the 200 parking spaces is $5.5 million which equals the purchase
price that they will be acquired from Crefisa, Inc., and accordingly there is no gain or loss on
such transaction.
In connection with the execution of the Agreements, the Bank entered into long-term lease
agreements for the properties and the parking spaces. The lease agreements are for an initial term
of fifteen (15) years, commencing on December 20, 2007 (the “Effective Date”) for the properties
and June 2008 for the parking spaces, and ending on December 31, 2022. The Bank may extend each
lease for two (2) consecutive five (5) year periods (the “Option Terms”), on substantially the same
terms and conditions; provided, that, in the case of the Headquarters Facility, the Bank may, at
its discretion, extend the lease for all or a portion of the building, as described in the lease
agreements. Commencing on the Effective Date and continuing throughout the initial term, the Bank
will pay a monthly rent of $224,270 for the Headquarters Facility, $174,542 for the Operations
Facility, and $25,000 for the parking spaces, subject to certain escalation provisions (related to
changes in the U.S. CPI) described in the lease agreements. In addition, the monthly rent payable
under each of the agreements is subject to a fair market value adjustment at the beginning of each
of Option Terms. Management has classified these leases as operating leases. The gain on the sale
of the properties, which aggregated $32.6 million, was recognized in 2007 as a deferred gain and is
being amortized in proportion to the related gross rental charged to expense over the lease term of
the properties.
As of December 31, 2008, the Corporation owned nineteen facilities, which consisted of eleven
branches and eight parking lots. The Corporation occupies one hundred twenty-two leased branch
premises, while warehouse space is rented in one location. In addition, office spaces are rented at
Torre Santander building in Hato Rey Puerto Rico, at the Santander Tower in Galeria San Patricio
building, in Guaynabo, Puerto Rico, at Professional Office Park IV building, in Río Piedras, Puerto
Rico and at the Operational Center in Hato Rey, Puerto Rico. The Corporation’s management believes
that each of its facilities is well maintained and suitable for its purpose.
In addition, during 2008, the Corporation reclassified $8.1 million from Premises and Equipment to Real Estate held for Sale.
8. Real Estate Held for Sale:
The Corporation owns certain real estate properties held for sale which are carried at the lower of
cost or fair value, less estimated selling cost.
9. Goodwill and Other Intangible Assets:
Goodwill
The Corporation has assigned goodwill to reporting units at the time of acquisition. Goodwill was
allocated to the Commercial Banking segment, the Wealth Management segment and the Consumer Finance
segment as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Banking
|
|
$
|
10,537
|
|
|
$
|
10,537
|
|
|
Wealth Management
|
|
|
24,254
|
|
|
|
24,254
|
|
|
Consumer Finance
|
|
|
86,691
|
|
|
|
86,691
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
121,482
|
|
|
$
|
121,482
|
|
|
|
|
|
|
|
|
|
Goodwill assigned to the Commercial Banking segment is related to the acquisition of Banco Central
Hispano Puerto Rico in 1996, the goodwill assigned to the Wealth Management segment is related to
the acquisition of Merrill Lynch’s retail brokerage business in Puerto Rico by Santander Securities
Corporation in 2000 and the goodwill assigned to the Consumer Finance segment is related to the
acquisition of Island Finance in 2006.
105
As a result of the unfavorable economic environment in Puerto Rico, Island Finance’s short-term
financial performance and profitability declined significantly during 2007, caused by reduced
lending activity and increases in non-performing assets and charge-offs. The Corporation, with the
assistance of an independent valuation firm, performed an interim impairment test of the goodwill
and other intangibles of Island Finance as of July 1, 2007. SFAS No. 142 provides a two-step
impairment test. The first step of the impairment test compares the fair value of a reporting unit
with its carrying amount, including goodwill. If the carrying amount of a reporting unit exceeds
its fair value, the second step of the goodwill impairment test is performed to measure the amount
of the impairment loss, if any. The Corporation completed the first step of the impairment test and
determined that the carrying amount of the goodwill and other intangible assets of Island Finance
exceeded their fair value, thereby requiring performance of the second step of the impairment test
to calculate the amount of the impairment. Based upon the completed impairment test, the
Corporation determined that the actual non-cash impairment charges as of July 1, 2007 were $43.3
million, which included $26.8 of goodwill and $16.5 million of other intangibles assets (comprised
of $9.2 million of customer relationships, $5.4 million of trade name and $1.9 million of
non-compete agreement). These impairment charges did not result in cash expenditures and will not
result in future cash expenditures. The Corporation performed its annual impairment assessments as
of October 1, 2007 with the assistance of the independent valuation specialist. The Corporation
determined that no impairment charge was necessary as of October 1, 2007. Based on management’s
assessment of the value of the Corporation’s goodwill at October 1, 2008, which includes an
independent valuation, among others, management determined that the Corporation’s goodwill and
other intangibles were not impaired.
Other
Intangible Assets
Other intangible assets at December 31, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Banking — Mortgage-servicing rights
|
|
$
|
10,175
|
|
|
$
|
9,631
|
|
|
Wealth Management — Advisory-servicing rights
|
|
|
1,267
|
|
|
|
1,572
|
|
|
Consumer Finance:
|
|
|
|
|
|
|
|
|
|
Trade name
|
|
|
18,300
|
|
|
|
18,300
|
|
|
Non-compete agreements
|
|
|
100
|
|
|
|
700
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
29,842
|
|
|
$
|
30,203
|
|
|
|
|
|
|
|
|
|
Mortgage-servicing rights arise from the right to service mortgages sold and have an estimated
useful life of eight years. The advisory-servicing rights are related to the Corporation’s
subsidiary acquisition of the right to serve as the investment advisor for the First Puerto Rico
Tax-Exempt Fund, Inc. acquired in 2002 and for First Puerto Rico Growth and Income Fund Inc. and
First Puerto Rico Daily Liquidity Fund Inc. acquired in December 2006. This intangible asset is
being amortized over a 10-year estimated useful life. Trade name is related to the acquisition of
Island Finance and has an indefinite useful life and is therefore not being amortized but is tested
for impairment at least annually. Non-compete agreements are intangible assets related to the
acquisition of Island Finance. Non-compete agreements are being amortized approximately over 1
year.
The following table reflects the components of other intangible assets at December 31:
106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
|
Gross
|
|
|
Accumulated
|
|
|
|
|
|
|
Carrying
|
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Impairment
|
|
|
Amount
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
Banking —
Mortgage-servicing
rights
|
|
$
|
18,382
|
|
|
$
|
8,207
|
|
|
$
|
—
|
|
|
$
|
10,175
|
|
|
Wealth
Management —
Advisory-servicing
rights
|
|
|
3,050
|
|
|
|
1,783
|
|
|
|
—
|
|
|
|
1,267
|
|
|
Consumer Finance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade name
|
|
|
18,300
|
|
|
|
—
|
|
|
|
—
|
|
|
|
18,300
|
|
|
Non-compete agreements
|
|
|
3,356
|
|
|
|
3,256
|
|
|
|
—
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
43,088
|
|
|
$
|
13,246
|
|
|
$
|
—
|
|
|
$
|
29,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
Gross
|
|
|
Accumulated
|
|
|
|
|
|
|
Carrying
|
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Impairment
|
|
|
Amount
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Banking -
Mortgage-servicing
rights
|
|
$
|
15,670
|
|
|
$
|
6,039
|
|
|
$
|
—
|
|
|
$
|
9,631
|
|
|
Wealth Management -
Advisory-servicing
rights
|
|
|
3,050
|
|
|
|
1,478
|
|
|
|
—
|
|
|
|
1,572
|
|
|
Consumer Finance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade name
|
|
|
23,700
|
|
|
|
—
|
|
|
|
5,400
|
|
|
|
18,300
|
|
|
Customer relationships
|
|
|
10,600
|
|
|
|
1,413
|
|
|
|
9,187
|
|
|
|
—
|
|
|
Non-compete agreements
|
|
|
5,300
|
|
|
|
2,656
|
|
|
|
1,944
|
|
|
|
700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
58,320
|
|
|
$
|
11,586
|
|
|
$
|
16,531
|
|
|
$
|
30,203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of the other intangibles assets for the period ended December 31, 2008, 2007 and 2006
were approximately $3.1 million, $3.8 million and $4.1 million, respectively.
The estimated amortization expense for each of the next five years and thereafter of the
finite lived intangible assets is the following:
|
|
|
|
|
|
|
Year
|
|
Amortization
|
|
|
|
|
( in thousands)
|
|
|
|
|
|
|
|
|
2009
|
|
$
|
2,560
|
|
|
2010
|
|
|
2,146
|
|
|
2011
|
|
|
1,999
|
|
|
2012
|
|
|
1,646
|
|
|
2013
|
|
|
999
|
|
|
Thereafter
|
|
|
2,192
|
|
|
|
|
|
|
|
|
|
$
|
11,542
|
|
|
|
|
|
|
107
10. Other Assets:
Other assets at December 31 consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets, net (See note 17)
|
|
$
|
56,542
|
|
|
$
|
37,199
|
|
|
Accounts receivable, net of allowance for claim receivable
of $25.1 million in 2008
|
|
|
40,581
|
|
|
|
38,617
|
|
|
Repossesed assets, net
|
|
|
22,306
|
|
|
|
16,448
|
|
|
Software, net
|
|
|
7,295
|
|
|
|
8,069
|
|
|
Prepaid expenses
|
|
|
13,835
|
|
|
|
13,987
|
|
|
Income tax credit
|
|
|
19,645
|
|
|
|
237
|
|
|
Customers’ liabilities on acceptances
|
|
|
610
|
|
|
|
783
|
|
|
Derivative assets
|
|
|
197,192
|
|
|
|
79,969
|
|
|
Confirming advances
|
|
|
122,540
|
|
|
|
179,376
|
|
|
Other
|
|
|
5,337
|
|
|
|
8,518
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
485,883
|
|
|
$
|
383,203
|
|
|
|
|
|
|
|
|
|
Amortization of software assets for the years ended December 31, 2008, 2007 and 2006 was
approximately $4.8 million, $4.4 million and $5.9 million, respectively.
The Law 197 of Puerto Rico (“Law 197”) of 2007 grants certain credits to home buyers on the
purchase of certain qualified new or existing homes. The incentives are as follows: (a) for a newly
constructed home that will constitute the individuals principal residence, a credit equal to 20% of
the sales price or $25,000, whichever is lower; (b) for newly constructed homes that will not
constitute the individuals principal residence, a credit of 10% of the sales price or $15,000,
whichever is lower; and (c) for existing homes a credit of 10% of the sales price or $10,000,
whichever is lower. The credits are generally granted to home buyers by the financial institutions
financing the home acquisition and later claimed on the financial institution’s tax return as a tax
credit. Credits available under Law 197 need to be certified by the Puerto Rico Secretary of
Treasury and the total amount of credits available under the law was $220,000,000, which was
depleted in December of 2008.
The tax credits do not expire and may be used against income taxes, including estimated income
taxes, for tax years commencing after December 31, 2007 in three installments, subject to certain
limitations. In addition, the tax credits may be ceded, sold or otherwise transferred to any other
person; and any tax credit not used in a given tax year, may be
claimed as a refund but only for taxable years commenced after
December 31, 2010. The
Corporation had $19.6 million unused income tax credits certified by the Secretary at December 31,
2008. Management is evaluating the effects that the implementation of
this law will have on its results of operations.
11. Deposits:
At December 31, 2008 and 2007, interest-bearing deposits, including time deposits, amounted to
$4,322 million and $4,405 million, respectively. At December 31, 2008 and 2007, time deposits
amounted to approximately $2,617 million and $2,772 million, respectively, of which approximately
$299 million and $927 million, respectively, mature after one year.
Maturities of time deposits for the next five years and thereafter follow:
108
|
|
|
|
|
|
|
Year
|
|
Amount
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
2009
|
|
$
|
2,318,234
|
|
|
2010
|
|
|
146,874
|
|
|
2011
|
|
|
43,111
|
|
|
2012
|
|
|
32,239
|
|
|
2013
|
|
|
28,498
|
|
|
Thereafter
|
|
|
47,892
|
|
|
|
|
|
|
|
|
|
$
|
2,616,848
|
|
|
|
|
|
|
The detail of deposits and interest expense are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Carrying
|
|
|
Interest
|
|
|
Carrying
|
|
|
Interest
|
|
|
Carrying
|
|
|
Interest
|
|
|
|
|
Amount
|
|
|
Expense
|
|
|
Amount
|
|
|
Expense
|
|
|
Amount
|
|
|
Expense
|
|
|
|
|
(Dollars in thousands)
|
|
|
Non interest bearing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private demand
|
|
$
|
692,681
|
|
|
$
|
—
|
|
|
$
|
755,077
|
|
|
$
|
—
|
|
|
$
|
745,685
|
|
|
$
|
—
|
|
|
Public demand
|
|
|
282
|
|
|
|
—
|
|
|
|
380
|
|
|
|
—
|
|
|
|
404
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
692,963
|
|
|
|
—
|
|
|
|
755,457
|
|
|
|
—
|
|
|
|
746,089
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
|
|
|
675,885
|
|
|
|
16,923
|
|
|
|
608,195
|
|
|
|
20,673
|
|
|
|
707,695
|
|
|
|
21,668
|
|
|
NOW and other
transactions
|
|
|
1,029,206
|
|
|
|
18,021
|
|
|
|
1,025,490
|
|
|
|
31,112
|
|
|
|
1,053,612
|
|
|
|
27,802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,705,091
|
|
|
|
34,944
|
|
|
|
1,633,685
|
|
|
|
51,785
|
|
|
|
1,761,307
|
|
|
|
49,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under $100,000
|
|
|
254,368
|
|
|
|
8,886
|
|
|
|
271,782
|
|
|
|
13,715
|
|
|
|
265,567
|
|
|
|
12,833
|
|
|
$100,000 and over
|
|
|
2,362,480
|
|
|
|
108,622
|
|
|
|
2,499,779
|
|
|
|
127,160
|
|
|
|
2,541,011
|
|
|
|
111,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,616,848
|
|
|
|
117,508
|
|
|
|
2,771,561
|
|
|
|
140,875
|
|
|
|
2,806,578
|
|
|
|
124,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,014,902
|
|
|
$
|
152,452
|
|
|
$
|
5,160,703
|
|
|
$
|
192,660
|
|
|
$
|
5,313,974
|
|
|
$
|
173,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
109
12. Other Borrowings:
Following are summaries of borrowings as of and for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
|
Federal Funds
|
|
|
Securities Sold
|
|
|
Commercial
|
|
|
|
|
Purchased and
|
|
|
Under Agreements
|
|
|
Paper
|
|
|
|
|
Other Borrowings
|
|
|
to Repurchase
|
|
|
Issued
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount outstanding at year-end
|
|
$
|
2,040
|
|
|
$
|
375,000
|
|
|
$
|
50,985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average indebtedness outstanding during the year
|
|
$
|
190,097
|
|
|
$
|
523,873
|
|
|
$
|
209,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum amount outstanding during the year
|
|
$
|
751,000
|
|
|
$
|
625,006
|
|
|
$
|
625,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average interest rate for the year
|
|
|
4.21
|
%
|
|
|
4.87
|
%
|
|
|
3.60
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Average interest rate at year-end
|
|
|
0.09
|
%
|
|
|
4.35
|
%
|
|
|
0.75
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
Federal Funds
|
|
|
Securities Sold
|
|
|
Commercial
|
|
|
|
|
Purchased and
|
|
|
Under Agreements
|
|
|
Paper
|
|
|
|
|
Other Borrowings
|
|
|
to Repurchase
|
|
|
Issued
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount outstanding at year-end
|
|
$
|
707,110
|
|
|
$
|
635,597
|
|
|
$
|
284,482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average indebtedness outstanding during the year
|
|
$
|
723,364
|
|
|
$
|
756,117
|
|
|
$
|
379,351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum amount outstanding during the year
|
|
$
|
800,000
|
|
|
$
|
851,578
|
|
|
$
|
676,957
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average interest rate for the year
|
|
|
5.77
|
%
|
|
|
5.48
|
%
|
|
|
5.48
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Average interest rate at year-end
|
|
|
5.14
|
%
|
|
|
5.43
|
%
|
|
|
5.31
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds purchased and other borrowings, securities sold under agreements to repurchase and
commercial paper issued mature as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
|
|
(In thousands)
|
|
|
Federal funds purchased and other borrowings:
|
|
|
|
|
|
|
|
|
|
Within thirty days
|
|
$
|
—
|
|
|
$
|
7,110
|
|
|
Thirty to ninety days
|
|
|
—
|
|
|
|
700,000
|
|
|
Over ninety days
|
|
|
2,040
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,040
|
|
|
$
|
707,110
|
|
|
|
|
|
|
|
|
|
|
Securities sold under agreements to repurchase:
|
|
|
|
|
|
|
|
|
|
Within thirty days
|
|
$
|
—
|
|
|
$
|
10,591
|
|
|
Thirty to ninety days
|
|
|
75,000
|
|
|
|
—
|
|
|
Over ninety days
|
|
|
300,000
|
|
|
|
625,006
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
375,000
|
|
|
$
|
635,597
|
|
|
|
|
|
|
|
|
|
|
Commercial paper issued:
|
|
|
|
|
|
|
|
|
|
Within thirty days
|
|
$
|
50,985
|
|
|
$
|
284,482
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008 the weighted average maturity of Federal funds purchased and other
borrowings over ninety days was 11.97 months.
110
As of December 31, 2008 and 2007, securities sold under agreements to repurchase (classified by
counterparty) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
Fair Value of
|
|
|
Average
|
|
|
|
|
Balance of
|
|
|
Underlying
|
|
|
Maturity
|
|
|
|
|
Borrowings
|
|
|
Securities
|
|
|
in Months
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
JP Morgan Chase Bank, N.A.
|
|
$
|
375,000
|
|
|
$
|
408,650
|
|
|
|
10.98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
Fair Value of
|
|
|
Average
|
|
|
|
|
Balance of
|
|
|
Underlying
|
|
|
Maturity
|
|
|
|
|
Borrowings
|
|
|
Securities
|
|
|
in Months
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
JP Morgan Chase Bank, N.A.
|
|
$
|
375,000
|
|
|
$
|
396,540
|
|
|
|
23.05
|
|
|
Lehman Brothers, Inc.
|
|
|
255,590
|
|
|
|
279,786
|
|
|
|
49.09
|
|
|
First Puerto Rico Daily Liquidity Fund
|
|
|
5,007
|
|
|
|
7,000
|
|
|
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
635,597
|
|
|
$
|
683,326
|
|
|
|
33.34
|
|
|
|
|
|
|
|
|
|
|
|
|
The following investment securities were sold under agreements to repurchase:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
|
Carrying
|
|
|
|
|
|
|
Fair
|
|
|
Weighted-
|
|
|
Weighted-
|
|
|
|
|
Value of
|
|
|
|
|
|
|
Value of
|
|
|
Average
|
|
|
Average
|
|
|
|
|
Underlying
|
|
|
Balance of
|
|
|
Underlying
|
|
|
Interest Rate
|
|
|
Interest Rate
|
|
|
Underlying Securities
|
|
Securities
|
|
|
Borrowings
|
|
|
Securities
|
|
|
Securities
|
|
|
Borrowings
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
$
|
408,650
|
|
|
$
|
375,000
|
|
|
$
|
408,650
|
|
|
|
5.12
|
%
|
|
|
4.35
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
Carrying
|
|
|
|
|
|
|
Fair
|
|
|
Weighted-
|
|
|
Weighted-
|
|
|
|
|
Value of
|
|
|
|
|
|
|
Value of
|
|
|
Average
|
|
|
Average
|
|
|
|
|
Underlying
|
|
|
Balance of
|
|
|
Underlying
|
|
|
Interest Rate
|
|
|
Interest Rate
|
|
|
Underlying Securities
|
|
Securities
|
|
|
Borrowings
|
|
|
Securities
|
|
|
Securities
|
|
|
Borrowings
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of U.S. Government and agencies
|
|
$
|
270,821
|
|
|
$
|
250,006
|
|
|
$
|
270,821
|
|
|
|
4.79
|
%
|
|
|
5.76
|
%
|
|
Mortgage-backed securities
|
|
|
412,505
|
|
|
|
385,591
|
|
|
|
412,505
|
|
|
|
5.22
|
%
|
|
|
5.22
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
683,326
|
|
|
$
|
635,597
|
|
|
$
|
683,326
|
|
|
|
5.05
|
%
|
|
|
5.43
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
111
13. Advances from Federal Home Loan Bank:
Advances from Federal Home Loan Bank consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-callable advances at 4.74% average fixed rate with maturities during 2008
|
|
$
|
—
|
|
|
$
|
420,000
|
|
|
Non-callable advances at 2.63% average fixed rate with maturities during 2009
|
|
|
310,000
|
|
|
|
—
|
|
|
Non-callable advances at 2.98% average fixed rate with maturities during 2010
|
|
|
500,000
|
|
|
|
—
|
|
|
Non-callable advances at 3.85% average fixed rate with maturities during 2011
|
|
|
325,000
|
|
|
|
—
|
|
|
Non-callable advances at 5.07% averages floating rates tied to 3-month LIBOR
with maturities during 2008
|
|
|
—
|
|
|
|
825,000
|
|
|
Non-callable advances at 4.28% average floating rate tied to 3-month LIBOR
with maturities during 2009
|
|
|
50,000
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,185,000
|
|
|
$
|
1,245,000
|
|
|
|
|
|
|
|
|
|
The Corporation had $2.1 billion and $2.0 billion in mortgage loans and investment securities
pledged as collateral for Federal Home Loan Bank advances as of December 31, 2008 and December 31,
2007, respectively.
14. Term Notes, Subordinated Capital Notes and Trust Preferred Securities:
Term notes payable outstanding consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
|
|
(Dollars in thousands)
|
|
|
Term notes maturing January 29, 2010 linked to the S&P500 index
|
|
$
|
4,815
|
|
|
$
|
4,815
|
|
|
Term notes maturing May 31, 2011 with a spread of 0.25%:
|
|
|
|
|
|
|
|
|
|
Linked to
the S&P 500
|
|
|
4,000
|
|
|
|
4,000
|
|
|
Linked to the Dow Jones Euro STOXX 50
|
|
|
3,000
|
|
|
|
3,000
|
|
|
Term notes maturing May 25, 2012 linked to the Euro STOXX 50
|
|
|
5,000
|
|
|
|
5,000
|
|
|
Term notes maturing May 25, 2012 linked to the NIKKEI
|
|
|
5,000
|
|
|
|
5,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,815
|
|
|
|
21,815
|
|
|
Unamortized discount
|
|
|
(1,848
|
)
|
|
|
(2,444
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
19,967
|
|
|
$
|
19,371
|
|
|
|
|
|
|
|
|
|
112
Subordinated Capital Notes
Subordinated capital notes at December 31 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(Dollars in thousands)
|
|
|
Subordinated notes with fixed interest of 7.50% maturing December 10, 2028
|
|
$
|
60,000
|
|
|
$
|
—
|
|
|
Subordinated notes with fixed interest of 6.30% maturing June 1, 2032, at
fair value
|
|
|
72,076
|
|
|
|
73,260
|
|
|
Subordinated notes with fixed interest of 6.10% maturing June 1, 2032, at
fair value
|
|
|
46,206
|
|
|
|
50,236
|
|
|
Subordinated notes with fixed interest of 6.75% maturing July 1, 2036
|
|
|
129,000
|
|
|
|
129,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
307,282
|
|
|
|
252,496
|
|
|
Unamortized discount
|
|
|
(890
|
)
|
|
|
(1,326
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
306,392
|
|
|
$
|
251,170
|
|
|
|
|
|
|
|
|
|
Trust Preferred Securities
At December 31, 2006, the Corporation had established a trust for the purpose of issuing trust
preferred securities to the public in connection with the acquisition of Island Finance. In
connection with this financing arrangement, the Corporation completed the private placement of $125
million Preferred Securities and issued Junior Subordinated Debentures in the aggregate principal
amount of $129 million in connection with the issuance of the Preferred Securities. The Preferred
Securities are classified as subordinated notes (included on the table for subordinated capital
notes above) and the dividends are classified as interest expense in the accompanying consolidated
statements of operations.
15. Reserve Fund:
The Banking Law of Puerto Rico requires that a reserve fund be created and that annual transfers of
at least 10% of the Bank’s annual net income be made, until such fund equals 100% of total paid-in
capital, on common and preferred stock. Such transfers restrict the retained earnings, which would
otherwise be available for dividends. At December 31, 2008 and 2007, the reserve fund amounted to
approximately $139.3 million. A transfer to Reserve Fund was not required in 2008 because the Bank
had a net loss for the period.
16. Common Stock Transactions:
During 2008 and 2007, the Corporation declared and paid a cash dividend of $0.20 and $0.64 per
common share, respectively. The current annualized dividend yield is 1.6% and 7.4% for the years
ended December 31, 2008 and 2007, respectively. In light of the continuing challenging general
economic conditions in Puerto Rico and the global capital markets, the Board of Directors of the
Corporation voted during August 2008 to discontinue the payment of the quarterly cash dividend on
the Corporation’s common stock to strengthen the institution’s core capital position. The
Corporation’s decision is part of the significant actions it has proactively taken in order to face
the on-going challenges presented by the Puerto Rico economy, which among others, include: selling
the merchant business to an unrelated third party; maintaining an on-going strict control on
operating expenses; an efficiency plan driven to lower its current efficiency ratio; and merging
its mortgage banking and commercial banking subsidiaries. While each of the Corporation and its
banking subsidiary remain above well capitalized ratios, these prudent measures will preserve and
continue to reinforce the Corporation’s capital position.
The Corporation adopted and implemented Stock Repurchase Programs in May 2000, December 2000 and
June 2001. Under these programs, the Corporation acquired 3% of its then outstanding common
shares. During November 2002, the Corporation started a fourth Stock Repurchase Program under which
it may acquire up to 3% of its outstanding common shares. As of
December 31, 2008 and 2007, a total of 4,011,260 common shares with a cost of approximately
$67,552,000 had been repurchased under these programs and are recorded as treasury stock in the
accompanying consolidated balance sheets.
113
The Corporation started a Dividend Reinvestment and Cash Purchase Plan in May 2000 under which
holders of common stock have the opportunity to automatically invest cash dividends to purchase
more shares of the Corporation. Stockholders may also make, as frequently as once a month,
optional cash payments for investment in additional shares of common stock.
17. Income Tax:
The Corporation is subject to regular or the alternative minimum tax, whichever is higher. The
effective tax rate is lower than the statutory rate primarily because interest income on certain
United States and Puerto Rico debt securities is exempt from Puerto Rico income taxes.
The Corporation is also subject to federal income tax on its United States (U.S.) source income.
However, the Corporation had no taxable U.S. income for each of the three years in the period ended
December 31, 2008. The Corporation is not subject to federal income tax on U.S. Treasury
securities that qualify as portfolio interest.
Puerto Rico international banking entities, or IBEs, such as Santander International Bank (SIB),
are currently exempt from taxation under Puerto Rico law. During 2004, the Legislature of Puerto
Rico and the Governor of Puerto Rico approved a law amending the IBE Act. This law imposes income
taxes at normal statutory rates on each IBE that operates as a unit of a bank, if the IBE’s net
income generated was 20% of the bank’s net income in the taxable year commencing on July 1, 2005,
and thereafter. It does not impose income taxation on an IBE that operates as a subsidiary of a
bank as is the case of SIB.
The components of the provision for income tax for the years ended December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current tax provision
|
|
$
|
11,559
|
|
|
$
|
28,037
|
|
|
$
|
24,663
|
|
|
Deferred tax benefit
|
|
|
(18,083
|
)
|
|
|
(23,833
|
)
|
|
|
(2,123
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(Benefit) provision for income tax
|
|
$
|
(6,524
|
)
|
|
$
|
4,204
|
|
|
$
|
22,540
|
|
|
|
|
|
|
|
|
|
|
|
|
The difference between the income tax provision (benefit) and the amount computed using the
statutory rate is due to the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Income tax at statutory rate
|
|
$
|
1,563
|
|
|
|
39
|
%
|
|
$
|
(12,496
|
)
|
|
|
39
|
%
|
|
$
|
25,626
|
|
|
|
39
|
%
|
|
Benefits of net tax-exempt income
|
|
|
(5,917
|
)
|
|
|
(148
|
%)
|
|
|
(6,247
|
)
|
|
|
19
|
%
|
|
|
(5,684
|
)
|
|
|
(9
|
%)
|
|
Effect of surtaxes
|
|
|
—
|
|
|
|
0
|
%
|
|
|
—
|
|
|
|
0
|
%
|
|
|
2,269
|
|
|
|
3
|
%
|
|
Deferred tax valuation allowance
change
|
|
|
(2,458
|
)
|
|
|
(61
|
%)
|
|
|
23,103
|
|
|
|
(72
|
%)
|
|
|
—
|
|
|
|
0
|
%
|
|
Other
|
|
|
288
|
|
|
|
7
|
%
|
|
|
(156
|
)
|
|
|
0
|
%
|
|
|
329
|
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Benefit ) provision for income tax
|
|
$
|
(6,524
|
)
|
|
|
(163
|
%)
|
|
$
|
4,204
|
|
|
|
(14
|
%)
|
|
$
|
22,540
|
|
|
|
34
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the amounts used for income
tax purposes. Significant components of the Corporation’s deferred tax assets and liabilities at
December 31, were as follows:
114
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(Dollars in thousands)
|
|
|
Deferred Tax Assets:
|
|
|
|
|
|
|
|
|
|
Unrealized loss on investment securities available for sale
|
|
$
|
—
|
|
|
$
|
2,902
|
|
|
Valuation of mortgage loans
|
|
|
2,869
|
|
|
|
—
|
|
|
Allowance for loan losses
|
|
|
39,613
|
|
|
|
28,680
|
|
|
Long term incentive plans
|
|
|
3,939
|
|
|
|
6,788
|
|
|
Deferred gain on sale of properties
|
|
|
4,560
|
|
|
|
4,966
|
|
|
Postretirement and pension benefits
|
|
|
18,126
|
|
|
|
9,961
|
|
|
Amortization of intangibles and impairment charges
|
|
|
—
|
|
|
|
3,047
|
|
|
Insurance cancellations
|
|
|
1,499
|
|
|
|
2,255
|
|
|
Valuation on claim receivable
|
|
|
9,797
|
|
|
|
—
|
|
|
Other
|
|
|
9,950
|
|
|
|
5,785
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90,352
|
|
|
|
64,384
|
|
|
|
|
|
|
|
|
|
|
Deferred Tax Liabilities:
|
|
|
|
|
|
|
|
|
|
Net deferred loan origination costs
|
|
|
(971
|
)
|
|
|
(1,160
|
)
|
|
Unrealized gain on investment securities available for sale
|
|
|
(1,777
|
)
|
|
|
—
|
|
|
Unrealized gain on derivatives
|
|
|
(1,972
|
)
|
|
|
—
|
|
|
Valuation subordinated note
|
|
|
(2,620
|
)
|
|
|
—
|
|
|
Mortgage-servicing rights and other
|
|
|
5,735
|
|
|
|
(2,922
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
13,075
|
|
|
|
(4,082
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(20,735
|
)
|
|
|
(23,103
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax asset, net
|
|
$
|
56,542
|
|
|
$
|
37,199
|
|
|
|
|
|
|
|
|
|
In assessing the realization of deferred tax assets, management considers whether it is more likely
than not that some portion or all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future taxable income during
the periods in which the temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning
strategies in making this assessment. Based upon the level of historical taxable income and
projections for future taxable income, management believes it is more likely than not, the
Corporation will not realize the benefits of the deferred tax assets related to Santander Financial
Services, Inc. and Santander Bancorp (parent company only) amounting to $20.6 million and $0.1
million at December 31, 2008. Accordingly, a deferred tax asset valuation allowance of $20.6
million and $0.1 million for Santander Financial Services, Inc and Santander Bancorp (parent
company only), respectively, were recorded at December 31, 2008.
Under the Puerto Rico Income Tax Law, the Corporation and its subsidiaries are treated as separate
taxable entities and are not entitled to file consolidated tax returns.
The Corporation adopted the provisions of FIN 48 on January 1, 2007. As a result of the
implementation of FIN 48, the Corporation recognized a decrease of $0.5 million in the January 1,
2007 balance of retained earnings and an increase in the liability for unrecognized tax benefits. A
reconciliation of beginning and ending amount of the accrual for
uncertain income tax positions, including interest and penalties, is
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended
|
|
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at begining of the year
|
|
$
|
16,507
|
|
|
$
|
12,676
|
|
|
Gross increases for tax positions of
prior years
|
|
|
15,429
|
|
|
|
2,980
|
|
|
Gross decreases for tax positions of
prior year
|
|
|
(1,931
|
)
|
|
|
—
|
|
|
Gross increases for tax positions of
current year
|
|
|
2,523
|
|
|
|
2,424
|
|
|
Release of contingencies
|
|
|
(958
|
)
|
|
|
(1,573
|
)
|
|
|
|
|
|
|
|
|
|
Balance at end of the year
|
|
$
|
31,570
|
|
|
$
|
16,507
|
|
|
|
|
|
|
|
|
|
The Corporation’s policy is to report interest and penalties related to unrecognized tax benefits
in income tax expense. For the years ended December 31, 2008 and 2007, the Corporation recognized
$1.3 million and $1.4 million of interest and penalties,
115
respectively, for uncertain tax positions. As of December 31, 2008 and 2007, the related accrued
interest amounted to approximated $3.7 million and $2.6 million, respectively. As of December 31,
2008 and 2007, the Corporation had $10.3 million and $10.4 million, respectively, of unrecognized
tax benefits which, if recognized, would decrease the effective income tax rate in future periods.
The amount of unrecognized tax benefits may increase or decrease in the future for various reasons
including adding amounts for current tax year positions, expiration of open income tax returns due
to the statutes of limitation, changes in management’s judgment about the level of uncertainty,
status of examinations, litigation and legislative activity, and the addition or elimination of
uncertain tax positions. As of December 31, 2008, the years 2004 through 2007 remain subject to
examination by the Puerto Rico tax authorities. The Corporation does not anticipate a significant
change to the total amount of unrecognized tax benefits within the next 12 months.
18. Contingencies and Commitments:
The Corporation is involved as plaintiff or defendant in a variety of routine litigation incidental
to the normal course of business. Management believes, based on the opinion of legal counsel, that
it has adequate defense with respect to such litigation and that any losses therefrom will not have
a material adverse effect on the consolidated results of operations or consolidated financial
position of the Corporation.
The Corporation leases certain operating facilities under non-cancelable operating leases,
including leases with related parties, and has other agreements expiring at various dates through
2027. Rent expense charged to operations related to these leases was approximately $13,570,000,
$10,271,000 and $10,269,000 for 2008, 2007 and 2006, respectively. At December 31, 2008, the
minimum unexpired commitments for leases and other commitments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
Leases
|
|
|
Other commitments
|
|
|
Total
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
$
|
12,872
|
|
|
$
|
19,206
|
|
|
$
|
32,078
|
|
|
2010
|
|
|
11,627
|
|
|
|
—
|
|
|
|
11,627
|
|
|
2011
|
|
|
10,323
|
|
|
|
—
|
|
|
|
10,323
|
|
|
2012
|
|
|
9,502
|
|
|
|
—
|
|
|
|
9,502
|
|
|
2013
|
|
|
8,782
|
|
|
|
—
|
|
|
|
8,782
|
|
|
Thereafter
|
|
|
56,142
|
|
|
|
—
|
|
|
|
56,142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
109,248
|
|
|
$
|
19,206
|
|
|
$
|
128,454
|
|
|
|
|
|
|
|
|
|
|
|
|
19. Employee Benefits Plan:
Pension Plan
The Corporation maintains two inactive qualified noncontributory defined benefit pension plans. One
plan covers substantially all active employees of the Corporation (the “Plan”) before January 1,
2007, while the other plan was assumed in connection with the 1996 acquisition of Banco Central
Hispano de Puerto Rico (the “Central Hispano Plan”). The Corporation’s Plan uses a December 31
measurement date for both plans.
The Corporation requires recognition of a plan’s over-funded or under-funded status as an asset or
liability with an offsetting adjustment to accumulated other comprehensive loss (AOCL) pursuant the
SFAS No. 158. Actuarial gains or losses, prior service costs and transition assets or obligations
will be subsequently recognized as components of net periodic benefit costs. Additional minimum
pension liabilities (AMPL) and related intangible assets are derecognized upon adoption of the
standard.
Amounts included in AOCL (pre-tax) as of December 31, 2008 were as follows:
116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
Post retirement
|
|
|
|
|
|
|
|
Plans
|
|
|
Benefit Plans
|
|
|
Total
|
|
|
|
|
(Dollars in thousands)
|
|
|
Net transition asset
|
|
$
|
(15
|
)
|
|
$
|
—
|
|
|
$
|
(15
|
)
|
|
Net actuarial loss
|
|
|
46,384
|
|
|
|
108
|
|
|
|
46,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
46,369
|
|
|
$
|
108
|
|
|
$
|
46,477
|
|
|
|
|
|
|
|
|
|
|
|
|
The amounts in AOCL that are expected to be recognized as components of net periodic benefit cost
during 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
Post retirement
|
|
|
|
|
|
|
|
Plans
|
|
|
Benefit Plans
|
|
|
Total
|
|
|
|
|
(Dollars in thousands)
|
|
|
Net transition asset
|
|
$
|
(2
|
)
|
|
$
|
—
|
|
|
$
|
(2
|
)
|
|
Net actuarial loss
|
|
|
1,936
|
|
|
|
10
|
|
|
|
1,946
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,934
|
|
|
$
|
10
|
|
|
$
|
1,944
|
|
|
|
|
|
|
|
|
|
|
|
|
117
The following presents the funded status of the Corporation’s Plan at December 31, based on the
actuarial assumptions described below.
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(Dollars in thousands)
|
|
|
Change in projected benefit obligation:
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation at beginning of year
|
|
$
|
36,923
|
|
|
$
|
39,444
|
|
|
Interest cost on projected benefit obligation
|
|
|
2,355
|
|
|
|
2,279
|
|
|
Actuarial (gain) loss
|
|
|
2,820
|
|
|
|
(3,243
|
)
|
|
Benefit distributions
|
|
|
(1,683
|
)
|
|
|
(1,557
|
)
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation at end of year
|
|
|
40,415
|
|
|
|
36,923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
|
35,740
|
|
|
|
30,266
|
|
|
Actual return on plan assets
|
|
|
(8,028
|
)
|
|
|
1,288
|
|
|
Employer contributions
|
|
|
1,990
|
|
|
|
5,743
|
|
|
Benefit distributions
|
|
|
(1,683
|
)
|
|
|
(1,557
|
)
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
|
28,019
|
|
|
|
35,740
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status
|
|
|
(12,396
|
)
|
|
|
(1,183
|
)
|
|
Unrecognized net actuarial gain
|
|
|
20,103
|
|
|
|
6,756
|
|
|
Unrecognized transition amount
|
|
|
(15
|
)
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
Prepaid (accrued) pension benefit
|
|
$
|
7,692
|
|
|
$
|
5,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized on the consolidated balance sheets consist of:
|
|
|
|
|
|
|
|
|
|
Accrued benefit liability, net of prepaid benefit cost
|
|
$
|
(12,396
|
)
|
|
$
|
(1,183
|
)
|
|
Accumulated other comprehensive income
|
|
|
20,088
|
|
|
|
6,740
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
7,692
|
|
|
$
|
5,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in minimum liability included in
other comprehensive income
|
|
$
|
13,348
|
|
|
$
|
(2,225
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation
|
|
$
|
40,415
|
|
|
$
|
36,923
|
|
|
Accumulated benefit obligation
|
|
$
|
40,415
|
|
|
$
|
36,923
|
|
|
Fair value of plan assets
|
|
$
|
28,019
|
|
|
$
|
35,740
|
|
For each of the three years in the period ended December 31, the pension costs for the
Corporation’s Plan included the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost during the year
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,762
|
|
|
Interest cost on projected benefit obligation
|
|
|
2,355
|
|
|
|
2,279
|
|
|
|
2,369
|
|
|
Expected return on assets
|
|
|
(2,729
|
)
|
|
|
(2,718
|
)
|
|
|
(2,228
|
)
|
|
Net amortization
|
|
|
229
|
|
|
|
411
|
|
|
|
773
|
|
|
Curtailment loss
|
|
|
—
|
|
|
|
—
|
|
|
|
754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension (benefit) cost
|
|
$
|
(145
|
)
|
|
$
|
(28
|
)
|
|
$
|
3,430
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumptions used to determine benefit obligation for the Corporation’s Plan as of December 31,
included:
118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
6.00
|
%
|
|
|
6.50
|
%
|
|
|
5.75
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate of compensation increase
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
3.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Assumptions used to determine net periodic pension cost for the Corporation’s Plan as of December
31 included:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
6.50
|
%
|
|
|
5.75
|
%
|
|
|
6.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate of compensation increase
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
3.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected return on plan assets
|
|
|
7.50
|
%
|
|
|
8.50
|
%
|
|
|
8.50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
In developing the expected long-term rate of return assumption, the Corporation evaluated input
from the Corporation’s Plan actuaries, financial analysts and the Corporation’s long-term inflation
assumptions and interest rate scenarios. Projected returns by such consultants are based on broad
equity and bond indices. The Corporation also considered historical returns on its plan assets. The
Corporation anticipates the investment managers for the plan will generate annual long term rate of
returns of at least 7.50%.
The Corporation’s Plan asset allocations at December 31, by asset category are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Category:
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
50
|
%
|
|
|
56
|
%
|
|
Debt securities
|
|
|
48
|
%
|
|
|
38
|
%
|
|
Other
|
|
|
2
|
%
|
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
The expected contribution to the Corporation’s Plan for 2009 is $584,000.
119
The following presents the funded status of the BCH Plan at December 31, 2008 and November 30, 2007
based on the actuarial assumptions described below:
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(Dollars in thousands)
|
|
|
Change in projected benefit obligation
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation at beginning of year
|
|
$
|
32,931
|
|
|
$
|
32,889
|
|
|
Interest cost on projected benefit obligation
|
|
|
2,008
|
|
|
|
1,838
|
|
|
Actuarial (gain) loss
|
|
|
(470
|
)
|
|
|
195
|
|
|
Benefit distributions
|
|
|
(1,723
|
)
|
|
|
(1,991
|
)
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation at end of year
|
|
|
32,746
|
|
|
|
32,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
|
27,625
|
|
|
|
25,385
|
|
|
Actual return on plan assets
|
|
|
(6,298
|
)
|
|
|
1,991
|
|
|
Employer contributions
|
|
|
1,956
|
|
|
|
2,240
|
|
|
Benefit distributions
|
|
|
(1,723
|
)
|
|
|
(1,991
|
)
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
|
21,560
|
|
|
|
27,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status
|
|
|
(11,186
|
)
|
|
|
(5,306
|
)
|
|
Contributions after measurement date and/or
before end of year
|
|
|
—
|
|
|
|
610
|
|
|
Unrecognized actuarial gain
|
|
|
26,281
|
|
|
|
18,749
|
|
|
|
|
|
|
|
|
|
|
Prepaid pension benefit
|
|
$
|
15,095
|
|
|
$
|
14,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized on the consolidated balance sheets consist of:
|
|
|
|
|
|
|
|
|
|
Accrued benefit liability, net of prepaid benefit cost
|
|
$
|
(11,186
|
)
|
|
$
|
(4,696
|
)
|
|
Accumulated other comprehensive income
|
|
|
26,281
|
|
|
|
18,749
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
15,095
|
|
|
$
|
14,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in minimum liability included
in other comprehensive income
|
|
$
|
7,532
|
|
|
$
|
(1,801
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation
|
|
$
|
32,746
|
|
|
$
|
32,931
|
|
|
Accumulated benefit obligation
|
|
$
|
32,746
|
|
|
$
|
32,931
|
|
|
Fair value of plan assets
|
|
$
|
21,560
|
|
|
$
|
27,625
|
|
For each of the three years in the period ended December 31, 2008 and November 30, 2007 and 2006,
the pension costs for the BCH Plan included the following components. Effective November 30, 1996,
the benefits in this plan were frozen.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost on projected benefit obligation
|
|
$
|
1,853
|
|
|
$
|
1,838
|
|
|
$
|
1,998
|
|
|
Expected return on assets
|
|
|
(2,092
|
)
|
|
|
(2,170
|
)
|
|
|
(2,199
|
)
|
|
Net amortization
|
|
|
520
|
|
|
|
513
|
|
|
|
513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost
|
|
$
|
281
|
|
|
$
|
181
|
|
|
$
|
312
|
|
|
|
|
|
|
|
|
|
|
|
|
120
Assumptions used to determine benefit obligation for the BCH Plan as of December 31, 2008 and
November 30, 2007 and 2006, included:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
6.00
|
%
|
|
|
5.75
|
%
|
|
|
5.75
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate of compensation increase
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumptions used to determine net periodic pension cost for the BCH Plan as of December 31, 2008
and November 30, 2007 and 2006 included:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
5.75
|
%
|
|
|
5.75
|
%
|
|
|
6.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate of compensation increase
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected return on plan assets
|
|
|
7.50
|
%
|
|
|
8.50
|
%
|
|
|
8.50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In developing the expected long-term rate of return assumption, the Corporation evaluated input
from the BCH Plan’s actuaries, financial analysts and the Corporation’s long-term inflation
assumptions and interest rate scenarios. Projected returns by such consultants are based on broad
equity and bond indices. The Corporation also considered historical returns on its plan assets. The
Corporation anticipates that the BCH Plan’s investment managers for the plan will generate annual
long term rate of returns of at least 7.50%.
The Corporation’s asset allocations for the BCH Plan at November 30 by asset category are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Asset Category:
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
49
|
%
|
|
|
57
|
%
|
|
Debt securities
|
|
|
49
|
%
|
|
|
36
|
%
|
|
Other
|
|
|
2
|
%
|
|
|
7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
The expected contribution to the BCH Plan for 2009 is $522,000.
The Corporation’s investment policy with respect to the Corporation’s Plan and the BCH Plan is to
optimize, without undue risk, the total return on investment of the Plan assets after inflation,
within a framework of prudent and reasonable portfolio risk. The investment portfolio is
diversified in multiple asset classes to reduce portfolio risk, and assets may be shifted between
asset classes to reduce volatility when warranted by projections of the economic and/or financial
market environment, consistent with ERISA diversification principles. The Corporation’s target
asset allocations for both plans are 60% equity and 40% fixed/variable income. As circumstances and
market conditions change, these allocations may be amended to reflect the most appropriate
distribution given the new environment consistent with the investment objectives.
121
Expected future benefit payments for the plans at the end of their respective fiscal years are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation’s
|
|
BCH
|
|
|
|
Plan
|
|
Plan
|
|
|
|
(Dollars in thousands)
|
|
2009
|
|
$
|
1,668
|
|
|
$
|
2,026
|
|
|
2010
|
|
|
1,742
|
|
|
|
2,077
|
|
|
2011
|
|
|
1,806
|
|
|
|
2,509
|
|
|
2012
|
|
|
1,891
|
|
|
|
2,163
|
|
|
2013
|
|
|
2,007
|
|
|
|
3,868
|
|
|
2014 through 2018
|
|
|
11,375
|
|
|
|
16,265
|
|
Savings Plan
The Corporation also provides three contributory savings plans pursuant to Section 1165(e) of the
Puerto Rico Internal Revenue Code for substantially all the employees of the Corporation.
Investments in the plans are participant-directed, and employer matching contributions are
determined based on the specific provisions of each plan. Employees are fully vested in the
employer’s contribution after three and five years of service, respectively. The Corporation’s
contributions for the years ended December 31, 2008, 2007 and 2006, amounted to $1,110,000,
$1,476,000 and $1,554,000, respectively.
20. Long Term Incentive Plans:
Santander Group sponsors various non-qualified share-based compensation programs for certain of its
employees and those of its subsidiaries, including the Corporation. All of these plans have been
approved by the Board of Directors of the Corporation. A summary of each of the plans follows:
|
|
•
|
|
A long term incentive plan for certain eligible officers and key employees which
contains service, performance and market conditions. This plan provides for settlement in
cash or stock of Santander Group to the participants and is classified as a liability
plan. Accordingly, the Corporation accrued a liability and recognized monthly
compensation expense over the fourteen month vesting period through January 2008. The
Corporation recognized a reversal of compensation expense under this plan amounting to
$4.1 million due to a favorable change in plan valuation during the year ended December
31, 2008 and $10.3 million of compensation expense for the same period in 2007. As options
were exercised during 2008, $6.7 million was reclassified to additional paid in capital.
|
|
|
|
|
•
|
|
The grant of 100 shares of Santander Spain stock to all employees of Santander Group’s
operating entities as part of the celebration of Santander Group 150th Anniversary during
2007. The Corporation recognized compensation expense under this plan amounting to $4.3
million in 2007. The shares granted were purchased by an affiliate and recorded as a
capital contribution in the Corporations’ 2007 consolidated statement of changes in
stockholders equity.
|
|
|
|
|
•
|
|
A long term incentive plan for certain eligible officers and key employees which
contains service, performance and market conditions. This plan comprehends two cycles,
one expiring in 2009 and another expiring in 2010. This plan provides for settlement in
stock of Santander Spain to the participants and is classified as an equity plan.
Accordingly, the Corporation recognizes monthly compensation expense over the two and
three year cycles and credits additional paid in capital. The Corporation recognized
compensation expense under this plan amounting to $2.9 million for the year ended December
31, 2008 and $0.2 million for the year ended December 31, 2007.
|
122
21. Related Party Transactions:
The Corporation engages in transactions with affiliated companies in the ordinary course of
business. At December 31, 2008, 2007 and 2006 and for the years then ended, the Corporation had the
following balances and/or transactions with related parties:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
Deposits from related parties
|
|
$
|
695,948
|
|
|
$
|
17,344
|
|
|
$
|
60,062
|
|
|
Interest-bearing deposits with affiliates
|
|
|
3,757
|
|
|
|
1,106
|
|
|
|
555
|
|
|
Other borrowings from an affiliate
|
|
|
60,000
|
|
|
|
—
|
|
|
|
—
|
|
|
Loans to directors, officers, and related parties
(on substantially the same terms and credit risks
as loans to third parties)
|
|
|
2,604
|
|
|
|
3,288
|
|
|
|
4,388
|
|
|
Technical assistance income for services rendered
|
|
|
3,651
|
|
|
|
2,769
|
|
|
|
2,893
|
|
|
Operating expenses for EDP services received
|
|
|
17,288
|
|
|
|
13,461
|
|
|
|
14,527
|
|
|
Technical assistance expense for software development
|
|
|
753
|
|
|
|
199
|
|
|
|
595
|
|
|
Rental income
|
|
|
439
|
|
|
|
441
|
|
|
|
319
|
|
|
Fair value of derivative financial instruments
purchased from affiliates
|
|
|
(158,552
|
)
|
|
|
(26,917
|
)
|
|
|
21,780
|
|
|
Fair value of derivative financial instruments
sold to affiliates
|
|
|
(1,417
|
)
|
|
|
354
|
|
|
|
1,000
|
|
|
Loans sold to an affiliate
|
|
|
300,097
|
|
|
|
10,465
|
|
|
|
—
|
|
123
22. Derivative Financial Instruments:
As of December 31, 2008, the Corporation had the following derivative financial instruments
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) for
|
|
|
Comprehensive
|
|
|
|
|
|
|
|
|
|
|
|
|
the year
|
|
|
Gain* for the
|
|
|
|
|
Notional
|
|
|
|
|
|
|
ended
|
|
|
year ended
|
|
|
|
|
Value
|
|
|
Fair Value
|
|
|
Dec. 31, 2008
|
|
|
Dec. 31, 2008
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
CASH FLOW HEDGES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,237
|
|
|
ECONOMIC UNDESIGNATED HEDGES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
|
125,000
|
|
|
|
5,210
|
|
|
|
4,311
|
|
|
|
—
|
|
|
OTHER DERIVATIVES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
118,214
|
|
|
|
3,774
|
|
|
|
(18,995
|
)
|
|
|
—
|
|
|
Embedded options on stock-indexed deposits
|
|
|
118,214
|
|
|
|
(3,774
|
)
|
|
|
18,974
|
|
|
|
—
|
|
|
Interest rate caps
|
|
|
583
|
|
|
|
(13
|
)
|
|
|
(20
|
)
|
|
|
—
|
|
|
Customer interest rate caps
|
|
|
583
|
|
|
|
13
|
|
|
|
20
|
|
|
|
—
|
|
|
Customer interest rate swaps
|
|
|
1,729,209
|
|
|
|
176,447
|
|
|
|
130,778
|
|
|
|
—
|
|
|
Interest rate swaps-offsetting position of customer swaps
|
|
|
1,729,209
|
|
|
|
(176,787
|
)
|
|
|
(131,991
|
)
|
|
|
—
|
|
|
Interest rate swaps
|
|
|
90,000
|
|
|
|
287
|
|
|
|
821
|
|
|
|
—
|
|
|
Loan commitments
|
|
|
3,862
|
|
|
|
93
|
|
|
|
48
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,946
|
|
|
$
|
1,237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007, the Corporation had the following derivative financial instruments
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) for
|
|
|
Comprehensive
|
|
|
|
|
|
|
|
|
|
|
|
|
the year
|
|
|
Loss* for the
|
|
|
|
|
Notional
|
|
|
|
|
|
|
ended
|
|
|
year ended
|
|
|
|
|
Value
|
|
|
Fair Value
|
|
|
Dec. 31, 2007
|
|
|
Dec. 31, 2007
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
CASH FLOW HEDGES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
650,000
|
|
|
$
|
(2,027
|
)
|
|
$
|
—
|
|
|
$
|
(1,023
|
)
|
|
FAIR VALUE HEDGES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
|
937,863
|
|
|
|
(4,425
|
)
|
|
|
(465
|
)
|
|
|
—
|
|
|
OTHER DERIVATIVES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
133,562
|
|
|
|
22,590
|
|
|
|
134
|
|
|
|
—
|
|
|
Embedded options on stock-indexed deposits
|
|
|
133,562
|
|
|
|
(22,590
|
)
|
|
|
(134
|
)
|
|
|
—
|
|
|
Interest rate caps
|
|
|
7,381
|
|
|
|
7
|
|
|
|
(58
|
)
|
|
|
—
|
|
|
Customer interest rate caps
|
|
|
7,381
|
|
|
|
(7
|
)
|
|
|
58
|
|
|
|
—
|
|
|
Customer interest rate swaps
|
|
|
1,496,798
|
|
|
|
44,380
|
|
|
|
44,432
|
|
|
|
—
|
|
|
Interest rate swaps-offsetting position
of customer swaps
|
|
|
1,498,381
|
|
|
|
(43,589
|
)
|
|
|
(44,068
|
)
|
|
|
—
|
|
|
Interest rate swaps
|
|
|
242,000
|
|
|
|
(534
|
)
|
|
|
315
|
|
|
|
—
|
|
|
Loan commitments
|
|
|
1,451
|
|
|
|
45
|
|
|
|
35
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
249
|
|
|
$
|
(1,023
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Corporation’s principal objective in holding interest rate swap agreements is the management of
interest rate risk and changes in the fair value of assets and liabilities. The Corporation’s
policy is that each swap contract be specifically tied to assets or liabilities with the objective
of transforming the interest rate characteristic of the hedged instrument. During 2006, the
Corporation swapped $825 million of FHLB Adjustable Rate Credit Advances with maturities between
July 2007 and
124
November 2008. The purpose of this swap was to fix the interest paid on the
underlying borrowings. These swaps were designated as cash flow hedges. The Corporation had a $100
million floating-for-fixed interest rate swap with Lehman Brothers Special Financing Inc. (“LBSF”).
The derivative liability of this swap was $371,736 as of September 19, 2008 and was paid on
December 5, 2008. As a result of the bankruptcy filing of Lehman Brothers Holding, Inc. (“LBHI”)
and the default on its contractual payments as of September 19, 2008, the Corporation terminated
the swap and the cash flow hedge designation on these swaps. The net loss of $371,000 was
reclassified into earnings in the last quarter of 2008. As of December 31, 2007, the Corporation
had outstanding $650 million of interest rate swaps designed as cash flow hedges. As of December
31, 2007 the total amount, net of tax, included in accumulated other comprehensive income was an
unrealized loss of $1.2 million.
Prior to the adoption of SFAS 159, changes in the value of the derivatives instruments qualifying
as fair value hedges that have been highly effective were recognized in the current period results
of operations along with the change in the value of the designated hedged item. If the hedge
relationship was terminated, hedge accounting was discontinued and any balance related to the
derivative was recognized in current operations, and fair value adjustment to the hedge item
continued to be reported as part of the basis of the item and was amortized to earnings as a yield
adjustment. After adoption of SFAS 159 for certain callable brokered certificates of deposit and
subordinated capital notes, the hedge relationship was terminated, and both previously hedged items
and the respective hedging derivatives are presented at fair value with changes recorded in the
current period results of operations.
The Corporation hedges certain callable brokered certificates of deposit and subordinated capital
notes by using interest rate swaps. Prior to the adoption of SFAS 159 as of January 1, 2008, these
swaps were designated for hedge accounting treatment under SFAS 133. For designated fair value
hedges, the changes in the fair value of both the hedging instrument and the underlying hedged
instrument were included in other income and the interest flows were included in the net interest
income in the consolidated statements of operations. In connection with the adoption of SFAS 159,
the Corporation elected the fair value option for certain callable brokered certificates of deposit
and subordinated capital notes and is no longer required to maintain hedge accounting documentation
to achieve a similar financial statements outcome.
As of December 31, 2008, the Corporation had outstanding interest rate swap agreements with a
notional amount of approximately $125.0 million, maturing through the year 2032. The weighted
average rate paid and received on these contracts is 3.24% and 6.22%, respectively. As of December
31, 2008, the Corporation had a subordinated note amounting to approximately $125 million, with a
fair value of $118.3 million, swapped to create a floating rate source of funds. As a result of the
bankruptcy filing of LBHI and the default on its contractual payments as of September 19, 2008, the
Corporation terminated $23.8 million of fixed-for-floating interest rate swaps. The derivative
liability of the swaps with LBSF was $681,535 as of September 19, 2008 and was paid on December 5,
2008. For the year ended December 31, 2008, the Corporation recognized a gain of approximately $5.8
million on these economic hedges, which is included in other income in the consolidated statements
of operations and was the result of incorporating the credit risk component in the fair value of
the subordinated note.
As of December 31, 2007, the Corporation also had outstanding interest rate swap agreements with a
notional amount of approximately $937.9 million, maturing through the year 2032. The weighted
average rate paid and received on these contracts is 5.10% and 5.39%, respectively. As of December
31, 2007, the Corporation had retail fixed rate certificates of deposit amounting to approximately
$786 million and a subordinated note amounting to approximately $125 million swapped to create a
floating rate source of funds. For the year ended December 31, 2007, the Corporation recognized a
loss of approximately $465,000 on these swaps that were classified as fair value hedges prior to
the adoption of SFAS 159 on January 1, 2008.
The Corporation issues certificates of deposit, individual retirement accounts and notes with
returns linked to the different equity indexes, which constitute embedded derivative instruments
that are bifurcated from the host deposit and recognized on the consolidated balance sheets. The
Corporation enters into option agreements in order to manage the interest rate risk on these
deposits and notes; however, these options have not been designated for hedge accounting, therefore
gains and losses on the market value of both the embedded derivative instruments and the option
contracts are marked to market through results of operations and recorded in other income in the
consolidated statements of income. For the year ended December 31, 2008, a gain of approximately
$19.0 million was recorded on embedded options on stock-indexed deposits and notes and a loss of
approximately $19.0 million was recorded on the option contracts. For the year ended December 31,
2007, a loss of approximately $0.1 million was recorded on embedded options on stock-index deposits
and notes and a gain of approximately $0.1 million was recorded on the option contracts.
The Corporation enters into certain derivative transactions to provide derivative products to
customers, which includes interest rate caps, collars and swaps, and simultaneously covers the
Corporation’s position with related and unrelated third parties under substantially the same terms
and conditions. These derivatives are not linked to specific assets and liabilities on the
consolidated balance sheets or to forecasted transactions in an accounting hedge relationship and,
therefore, do not qualify for hedge accounting. As a result of the bankruptcy filing of LBHI and
the default on its contractual payments as of September 19, 2008, the Corporation terminated $13.8
million of interest rate swaps with LBSF. The derivative liability of this swaps was $166,333 as of
September 19, 2008 and was paid on December 5, 2008. These derivatives are carried at fair value
with changes
125
in fair value recorded as part of other income. For the years ended December 31, 2008
and 2007, the Corporation recognized a loss on these transactions of $1,213,000 and a gain of
$364,000 respectively.
To a lesser extent, the Corporation enters into freestanding derivative contracts as a proprietary
position taker, based on market expectations or on benefits from price differentials between
financial instruments and markets. These derivatives are not linked to specific assets and
liabilities on the consolidated balance sheets or to forecasted transactions in an accounting hedge
relationship and, therefore, do not qualify for hedge accounting. For the year ended December 31,
2008 and 2007, the Corporation recognized a gain of $821,000 and $315,000, respectively, on these
transactions.
The Corporation enters into loan commitments with customers to extend mortgage loans at a specified
rate. These loan commitments are written options and are measured at fair value pursuant to SFAS
157 and SFAS 133. As of December 31, 2008, the Corporation had loan commitments outstanding for
approximately $3.9 million and recognized a gain of $48,000 on these commitments. As of December
31, 2007, the Corporation had loan commitments outstanding for approximately $1.5 million and
recognized a gain of $35,000 on these commitments.
23. Financial Instruments with Off-Balance Sheet Risk:
In the normal course of business, the Corporation is a party to transactions of financial
instruments with off-balance sheet risk to meet the financing needs of its customers. These
financial instruments may include commitments to extend credit, standby letters of credit,
financial guarantees and interest rate caps, swaps and floors written. Those instruments involve,
to varying degrees, elements of credit and interest rate risk in excess of the amount recognized on
the consolidated balance sheets. The contract or notional amounts of those instruments reflect the
extent of involvement the Corporation has in the different classes of financial instruments.
FIN 45 establishes accounting and disclosure requirements for guarantees, requiring that a
guarantor recognize, at the inception of a guarantee, a liability in an amount equal to the fair
value of the obligation undertaken in issuing the guarantee. FIN 45 defines a guarantee as a
contract that contingently requires the guarantor to pay a guaranteed party, based upon: (a)
changes in an underlying asset, liability or equity security of the guaranteed party; or (b) a
third party’s failure to perform under a specified agreement. The Corporation considers the
following off-balance sheet lending-related arrangements to be guarantees under FIN 45: standby
letters of credit and commitments to extend credit.
The fair value at inception of the obligation undertaken when issuing the guarantees and
commitments that qualify under FIN 45 is typically equal to the net present value of the future
amount of premium receivable under the contract. The fair value of the liability recorded at
inception is amortized into income as lending & deposit-related fees over the life of the guarantee
contract. .
The Corporation’s exposure to credit loss, in the event of nonperformance by the counterparties to
the financial instrument for commitments to extend credit and 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 commitments and conditional obligations as
it does for on-balance sheet instruments. Standby letters of credit and other commitments to extend
credit are subject to the Corporation’s internal risk rating systems. The contract amount of
financial instruments with off-balance sheet risk, whose amounts represent credit risk as of
December 31, 2008 and 2007, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Standby letters of credit and financial guarantees written
|
|
$
|
95,660
|
|
|
$
|
134,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments to extend credit, approved loans not yet
disbursed and unused lines of credit
|
|
$
|
1,193,875
|
|
|
$
|
1,530,017
|
|
|
|
|
|
|
|
|
|
The Corporation issues financial standby letters of credit to guarantee the performance of its
customers to third parties. If the customer fails to meet its financial performance obligation to
the third party, then the Corporation would be obligated to make
126
the payment to the guaranteed
party. At December 31, 2008 and 2007, the Corporation’s liabilities include $1,102,000 and
$1,479,000, respectively, which represents the fair value of the obligations undertaken in issuing
the guarantees under the standby letters of credit issued or modified after December 31, 2002. The
fair value approximates the unamortized fees received from the customers for issuing the standby
letters of credit. The fees are deferred and recognized on a straight-line basis over the
commitment period. Standby letters of credit outstanding at December 31, 2008 had terms ranging
from one month to five years. The contract amounts of the standby letters of credit of
approximately $95,660,000 and $134,470,000 at December 31, 2008 and 2007, respectively, represent
the maximum potential amount of future payments the Corporation could be required to make under the
guarantees in the event of non-performance by all its customers. These standby letters of credit
typically expire without being drawn upon. Management does not anticipate any material losses
related to these guarantees.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation
of any condition established in the contract. Commitments generally have fixed expiration dates or
other termination clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Corporation evaluates each customer’s credit worthiness on
a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Corporation
upon extension of credit, is based on management’s credit evaluation of the counterparty.
Collateral held varies but may include accounts receivable, inventory, property, plant and
equipment, income-producing commercial properties and real estate. The Corporation holds
collateral as guarantee for most of these financial instruments. The Corporation’s commitment to
extend credit, approved loans not yet disbursed and unused lines of credit amounted to
approximately $1.2 billion and $1.5 billion at December 31, 2008 and 2007, respectively, and had a
fair value of $1.2 million and $1.5 million, respectively.
127
24. Fair Value of Financial Instruments:
As discussed in Note 1, “Summary of Significant Accounting Policies and Other Matters” to the
Consolidated Financial Statement, effective January 1, 2008, the Corporation adopted SFAS 157,
which provides a framework for measuring fair value under US GAAP.
The Corporation also adopted SFAS 159 on January 1, 2008. SFAS 159 allows an entity the irrevocable
option to elect fair value for the initial and subsequent measurement for certain financial assets
and liabilities on a contract-by-contract basis. The Corporation elected to adopt the fair value
option for callable brokered certificates of deposits and subordinated notes on the adoption date.
SFAS 159 requires that the difference between the carrying value before election of the fair value
option and the fair value of these instruments be recorded as an adjustment to beginning retained
earnings in the period of adoption.
Additionally, SFAS 157 amended SFAS 107,
“Disclosures about Fair Value of Financial Instruments”
(SFAS 107), and, as such the Corporation follows SFAS 157 in the determination of SFAS 107 fair
value disclosure amounts. The disclosures required under SFAS 159, SFAS 157 and SFAS 107 have been
included in this note.
The following table summarizes the impact of adopting the fair value option for certain financial
instruments on January 1, 2008. Amounts shown represent the carrying value of the affected
instruments before and after the changes in accounting resulting from the adoption SFAS 159.
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance as of
|
|
|
|
|
|
|
Opening Balance as of
|
|
|
|
|
December 31, 2007
|
|
|
Adoption Net
|
|
|
January 01, 2008
|
|
|
|
|
(Prior to Adoption)*
|
|
|
Gain (Loss)
|
|
|
(After Adoption)
|
|
|
Impact of Electing the Fair Value Option under SFAS 159:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Callable Brokered Certificates of Deposits
|
|
$
|
(763,476
|
)
|
|
$
|
64
|
|
|
$
|
(763,412
|
)
|
|
Subordinated Capital Notes
|
|
|
(123,686
|
)
|
|
|
5,134
|
|
|
|
(118,552
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative-effect Adjustments (pre-tax)
|
|
$
|
(887,162
|
)
|
|
|
5,198
|
|
|
$
|
(881,964
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax Impact
|
|
|
|
|
|
|
(1,979
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative-effect Adjustment Increase to Retained
Earmings, net of tax
|
|
|
|
|
|
$
|
3,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Net of debt issue cost, placement fees and basis adjustments as of December 31, 2007
|
Fair Value Hierarchy
SFAS 157 defines fair value as the price that would be received for an asset or paid to transfer a
liability (an exit price) in the principal or most advantageous market for the asset or liability
in an orderly transaction between market participants on the measurement date. SFAS 157 also
establishes a fair value hierarchy which requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair value. The standard
describes three levels of inputs that may be used to measure fair value:
|
|
|
|
|
Level 1
|
|
Quoted prices in active markets for identical assets or
liabilities. Level 1 assets and liabilities include debt and
equity securities and derivative contracts that are traded in an
active exchange market, as well as certain U.S. treasury, other
U.S. government and agency mortgage-backed debt securities that
are highly liquid and are actively traded in over-the-counter
markets.
|
|
|
|
|
|
Level 2
|
|
Observable inputs other than Level 1 prices, such as quoted prices
for similar assets or liabilities; quoted prices in markets that
are not active; or other inputs that are observable or can be
corroborated by observable market data for substantially the full
term of the assets or liabilities. Level 2 assets and liabilities
include securities with quoted prices that are traded less
frequently than exchange-traded instruments, securities and
derivative contracts and financial liabilities whose value is
determined using a pricing model with inputs that are observable
in the market or can be derived principally from or corroborated
by observable market data. This category generally includes
certain mortgage-backed debt securities, corporate debt
securities, derivative contracts, callable brokered certificates
of deposits and subordinated notes.
|
128
|
|
|
|
|
Level 3
|
|
Unobservable inputs that are supported by little or no market
activity and that are significant to the fair value of the assets
or liabilities. Level 3 assets and liabilities include financial
instruments whose value is determined using pricing models,
discounted cash flow methodologies, or similar techniques, as well
as instruments for which the determination of fair value requires
significant management judgment or estimation. This category
generally includes certain Puerto Rico corporate debt securities,
closed end funds, and certain derivative contracts.
|
Recurring Measurements
The following table presents for each of these hierarchy levels, the Corporation’s assets and
liabilities that are measured at fair value on a recurring basis, including financial instruments
for which the Corporation has elected the fair value option at December 31, 2008.
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading Securities
|
|
$
|
117
|
|
|
$
|
35,083
|
|
|
$
|
29,519
|
|
|
$
|
64,719
|
|
|
Investment Securities Available for Sale
|
|
|
171,916
|
|
|
|
630,196
|
|
|
|
—
|
|
|
|
802,112
|
|
|
Derivative Assets
|
|
|
463
|
|
|
|
195,993
|
|
|
|
736
|
|
|
|
197,192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets, at Fair Value
|
|
$
|
172,496
|
|
|
$
|
861,272
|
|
|
$
|
30,255
|
|
|
$
|
1,064,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits (1)
|
|
$
|
—
|
|
|
$
|
101,401
|
|
|
$
|
—
|
|
|
$
|
101,401
|
|
|
Subordinated Capital Notes (2)
|
|
|
—
|
|
|
|
118,282
|
|
|
|
—
|
|
|
|
118,282
|
|
|
Derivative Liabilities
|
|
|
—
|
|
|
|
190,669
|
|
|
|
643
|
|
|
|
191,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities, at Fair Value
|
|
$
|
—
|
|
|
$
|
410,352
|
|
|
$
|
643
|
|
|
$
|
410,995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Amounts represent certain callable brokered certificates of deposits for which the Corporation has elected the fair value option
under SFAS 159.
|
|
|
|
(2)
|
|
Amounts represent certain subordinated capital notes for which the Corporation has elected the fair value option under SFAS 159.
|
Level 3 assets and liabilities were 2.8% and 0.16% of total assets at fair value and total
liabilities at fair value respectively.
The following table presents the reconciliation for all assets and liabilities measured at fair
value on a recurring basis using significant unobservable inputs (Level 3) for the period from
January 1, 2008 to December 31, 2008:
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized/unrealized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
gains included in
|
|
|
Transfers
|
|
|
Purchases,
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
Balance
|
|
|
|
|
|
|
Other
|
|
|
in and/or
|
|
|
issuances
|
|
|
Balance
|
|
|
gains
|
|
|
|
|
January 1,
|
|
|
|
|
|
|
Comprehensive
|
|
|
out of
|
|
|
and
|
|
|
Dec. 31,
|
|
|
still
|
|
|
|
|
2008
|
|
|
Earnings
|
|
|
Income
|
|
|
Level 3
|
|
|
settlements
|
|
|
2008
|
|
|
held (2)
|
|
|
Trading Securities (1)
|
|
$
|
20,150
|
|
|
$
|
1,888
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,481
|
|
|
$
|
29,519
|
|
|
$
|
45
|
|
|
Derivatives, net
|
|
|
45
|
|
|
|
48
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
93
|
|
|
|
93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20,195
|
|
|
$
|
1,936
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,481
|
|
|
$
|
29,612
|
|
|
$
|
138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Changes in fair value and gains and losses from sales for these instruments are recorded in other income while interest revenue and expense are included
in the net interest income based on the contractual coupons on the consolidated statements of income. The amounts above do not include interest.
|
|
|
|
(2)
|
|
Represents the amount of total gains or losses for the period, included in earmings, attributable to the change in unrealized gains (losses)
relating to assets and liabilities classified as Level 3 that are still held at December 31, 2008.
|
129
The table below summarizes gains and losses due to changes in fair value, including both realized
and unrealized gains and losses, recorded in earnings for Level 3 assets and liabilities for the
period from January 1, 2008 to December 31, 2008. These amounts include gains and losses generated
by derivative contracts and trading securities, which were carried at fair value prior to the
adoption of SFAS 159.
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gains (Losses)
|
|
|
|
|
Trading
|
|
|
Net
|
|
|
(Dollars in thousands)
|
|
Securities
|
|
|
Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
Classification of gains and losses (realized/unrealized)
included in earnings for the period :
|
|
|
|
|
|
|
|
|
|
Other income
|
|
$
|
1,888
|
|
|
$
|
48
|
|
|
|
|
|
|
|
|
|
The table below summarizes changes in unrealized gains or losses recorded in earnings for the
period from January 1, 2008 to December 31, 2008 for Level 3 assets and liabilities that are still
held at December 31, 2008. These amounts include changes in fair value for derivative contracts and
trading securities, which were carried at fair value prior to the adoption of SFAS 159.
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in Unrealized Gains (Loss)
|
|
|
|
|
Trading
|
|
|
Net
|
|
|
(Dollars in thousands)
|
|
Securities
|
|
|
Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
Classification of unrealized gains (losses)
included in earnings for the period :
|
|
|
|
|
|
|
|
|
|
Other income
|
|
$
|
45
|
|
|
$
|
93
|
|
|
|
|
|
|
|
|
|
Determination of Fair Value
The following is a description of the valuation methodologies used for instruments recorded at fair
value and for estimating fair value for financial instruments not recorded, but disclosed at fair
value. The estimated fair value was calculated using certain facts and assumptions, which vary
depending on the specific financial instrument.
Short-Term Financial Instruments
Short-term financial instruments, including cash and cash equivalents, interest-bearing deposits
placed, federal funds purchased and other borrowings, commercial paper issued, accrued interest
receivable and payable, certain other assets and liabilities, are carried at historical cost. The
carrying amount is a reasonable estimate of fair value of these instruments. These financial
instruments generally expose the Corporation to limited credit risk and have no stated maturities
or have short-term maturities and carry interest rates that approximate market.
Trading Securities
Trading securities are recorded at fair value and consist primarily of US Government and agencies,
US corporate debt and equity securities, Puerto Rico Government, corporate debt and equity
securities. Fair value is generally based on quoted market prices. Level 1 trading securities
include those identical securities traded in active markets. If these market prices are not
available, fair values are estimated based on dealer quotes, pricing models, discounted cash flow
methodologies or similar techniques for which the determination of fair value may require
significant management judgment or estimation. Level 2 trading securities primarily include Puerto
Rico Government and open ended funds. Investments in Puerto Rico open ended funds are valued using
a net asset value approach and can be redeemed at net asset value.
Level 3 trading securities primarily include Puerto Rico Government and Agencies debt securities
and fixed income closed end funds. At December 31, 2008 the majority of these instruments were
valued based on dealer indicative quotes.
130
Investment Securities Available for Sale
Investment securities available for sale are recorded at fair value on a recurring basis. Fair
value measurement is based upon quoted prices, if available. If quoted prices are not available,
fair values are measured using independent pricing models or other model-based valuation techniques
such as discounted cash flow methodologies, adjusted for the security’s credit rating, prepayment
assumptions and other factors such as credit loss assumptions. Level 1 Investment securities
available for sale include those identical securities traded in active markets, such as U.S.
treasury and agency securities. Level 2 securities primarily include Puerto Rico Government
securities and mortgage-backed securities.
Other Investment Securities
Federal Home Loan Bank (FHLB) stocks are recorded under the cost method of accounting. There are
restrictions on the sale of FHLB stocks, however they are redeemable at par. The carrying amount is
a reasonable estimate of fair value.
Loans Held for Sale
Loans held for sale are carried at the lower of cost or market. Fair values for loans held for sale
are based on observable inputs, such as observable market prices, credit spreads and interest rate
yield curves when available. In instances when significant valuation assumptions are not readily
observable in the market, instruments are valued based on the best available data in order to
approximate fair value. This data may be internally developed and considers types of loans,
conformity of loans, delinquency statistics and risk premiums that a market participant would
require, and accordingly classified as Level 3 in a non-recurring fair value measurement.
Loans
Loans are not recorded at fair value on a recurring basis. As such, valuation techniques discussed
herein for loans are primarily for estimating fair value for disclosure purposes. However, any
allowance for collateral dependent loans deemed impaired is measured based on the fair value of the
underlying collateral and its estimated disposition costs. The fair value of collateral is
determined by external valuation specialists, and accordingly classified as Level 3 inputs for
impaired loans in a non-recurring fair value measurement disclosure.
The fair value for disclosure purposes are estimated for portfolios of loans held to maturity with
similar financial characteristics, such as loan category, pricing features and remaining maturity.
Loans are segregated by type such as commercial, consumer, mortgage, construction, and other loans.
Each loan category is further segmented based on similar market and credit risk characteristics.
The fair value is calculated by discounting the contractual cash flows using discount rates that
reflect the current pricing for loans with similar characteristics and remaining maturity. Fair
values consider the credit risk of the counterparties.
Derivatives
For exchange-traded contracts, fair value is based on quoted market prices, and accordingly,
classified as Level 1. For non-exchange traded contracts, fair value is based on internally
developed proprietary models or discounted cash flow methodology using various inputs. The inputs
include those characteristics of the derivative that have a bearing on the economics of the
instrument.
The determination of the fair value of many derivatives is mainly derived from inputs that are
observable in the market place. Such inputs include yield curves, publicly available volatilities,
floating indexes, foreign exchange prices, and accordingly, are classified as Level 2 inputs.
Level 3 derivatives include interest rate lock commitments (IRLC), the fair value for which is
derived from the fair value of related mortgage loans primarily based on observable inputs. In
estimating the fair value of an IRLC, the Corporation assigns a probability to the loan commitment
based on an expectation that it will be exercised and the loan will be funded. In addition, certain
OTC equity linked options are priced by counterparties, and accordingly are classified as Level 3
inputs.
Valuations of derivative assets and liabilities reflect the value of the instruments including the
values associated with counterparty risk. With the issuance of SFAS 157, these values must also
take into account the Corporation’s own credit standing, thus including in the valuation of the
derivative instrument the value of the net credit differential between the counterparties to the
derivative contract. Effective January 1, 2008, the Corporation updated its methodology to include
the impact of both counterparty and its own credit standing.
Deposits and Subordinated Capital Notes
Under SFAS 159, the Corporation elected to carry callable brokered certificates of deposits and
subordinated notes at fair value. The fair value of callable brokered certificates of deposits,
included within deposits, and subordinated capital notes is
determined using discounted cash flow analyses over the full term of the instruments. The valuation
uses an industry-standard model for the instruments with callable option components. The model
incorporates such observable inputs as yield curves,
131
publicly available volatilities and floating
indexes and accordingly, is classified as Level 2 inputs. Effective January 1, 2008, the
Corporation updated its methodology to include the impact of its own credit standing.
Deposits, other than those recorded at fair value under SFAS 159, are carried at historical cost.
For SFAS 107 disclosures, fair value of deposits with no stated maturity, such as demand deposits,
savings and NOW accounts, money market and checking accounts is equal to the amount payable on
demand as of December 31, 2008. The fair value of fixed maturity certificates of deposit is based
on the discounted value of contractual cash flows. The discount rate is estimated using the rates
currently offered for deposits of similar remaining maturities, including adjustments to reflect
the current credit worthiness of the Corporation.
Securities
Sold under Agreements to Repurchase and Federal Home Loan Bank Advances
Securities sold under agreements to repurchase and Federal Home Loan Bank advances are carried at
historical cost. For SFAS 107 disclosures, the fair value is determined by discounting cash flows
by market rates currently offered for similar instruments.
Term Notes
Term notes are carried at historical cost. For SFAS 107 disclosures, the fair value is determined
using discounted cash flows method, which considers an estimated discount rate currently offered
for similar borrowings, including adjustments to reflect the current credit worthiness of the
Corporation.
Standby Letters Of Credit and Commitments to Extend Credit
Standby letters of credit, financial guarantees, commitments to extend credit, and unused lines of
credit generally have stated maturities within one year and are recorded off-balance sheet. As
such, valuation techniques discussed herein are for estimating fair value for disclosure purposes.
The unamortized fees collected for theses instruments are considered a reasonable approximation of
fair value.
Non-Recurring Measurements
The following table presents the change in carrying value of those financial assets measured at
fair value on a non-recurring basis, for which impairment was recognized in the current period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Value as of December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
Using
|
|
|
|
|
|
|
|
Carrying
|
|
|
Quoted Prices in
|
|
|
Significant
|
|
|
Significant
|
|
|
Valuation
|
|
|
|
|
Value
|
|
|
Active Markets for
|
|
|
Other
|
|
|
Unobservable
|
|
|
Allowance
|
|
|
|
|
as of
|
|
|
Identical Assets
|
|
|
Observable Inputs
|
|
|
Inputs
|
|
|
as of
|
|
|
(Dollars in thousands)
|
|
Dec. 31, 2008
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Dec. 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net(1)
|
|
|
59,152
|
|
|
|
—
|
|
|
|
—
|
|
|
|
59,152
|
|
|
|
18,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
59,152
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
59,152
|
|
|
$
|
18,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Amount represented loans measured for impairment based on the fair value of the collateral using the practical expedient in SFAS 114,
“
Accounting by Creditors for Impairment of a Loan”.
|
Fair Value Option
Callable Brokered Certificates of Deposits and Subordinated Capital Notes
The Corporation elected to account at fair value certain of its callable brokered certificates of
deposits and subordinated capital notes that were hedged with interest rate swaps designated for
fair value hedge accounting in accordance with SFAS 133. As of
December 31, 2008, these callable brokered certificates of deposits had a fair value of $101.4
million and principal balance of $100.8 million recorded in interest-bearing deposits; and
subordinated capital notes had a fair value of $118.3 million and principal balance of $125.0
million. Interest expense on these items is recorded in Net Interest Income whereas net gains
(losses) resulting from the changes in fair value of these items, were recorded within Other Income
on the Corporation’s consolidated statement of operations. Electing the fair value option allows
the Corporation to avoid the burden of complying with the requirements for hedge accounting under
SFAS 133 (e.g., documentation and effectiveness assessment) without introducing earnings
volatility. Subsequent to the adoption of SFAS 159, debt issuance costs are recognized in Net
Interest
132
Income when incurred. Interest rate risk on the callable brokered certificates of
deposits and subordinated capital notes measured at fair value under SFAS 159 continues to be
economically hedged with callable interest rate swaps with the same terms and conditions.
As a result of the adoption of SFAS 159, the Corporation elected to also apply the fair value
option to new positions within the brokered certificates of deposits and subordinated capital
notes, where the Corporation would otherwise have hedged with interest rate swaps designated as a
fair value hedge in accordance with SFAS 133.
The following table represents changes in fair value for the year ended December 31, 2008 which
includes the interest expense on callable brokered certificates of deposits of $18.2 million and
interest expense on subordinated capital notes of $7.8 million. Interest expense on callable
brokered certificates of deposits and subordinated capitals notes that the Corporation has elected
to carry at fair value under the provisions of SFAS 159 are recorded in interest expense in the
Consolidated Statements of Operations based on their contractual coupons.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in
|
|
|
Changes in
|
|
|
Total Changes in
|
|
|
|
|
Fair Value
|
|
|
Fair Value
|
|
|
Fair Value
|
|
|
|
|
included in
|
|
|
included in
|
|
|
included in
|
|
|
(Dollars in thousands)
|
|
Interest Expense
|
|
|
Other Income
|
|
|
Current Period Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Callable Brokered Certificates of Deposits
|
|
$
|
(18,245
|
)
|
|
$
|
(4,159
|
)
|
|
$
|
(22,404
|
)
|
|
Subordinated Capital Notes
|
|
|
(7,775
|
)
|
|
|
270
|
|
|
|
(7,505
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(26,020
|
)
|
|
$
|
(3,889
|
)
|
|
$
|
(29,909
|
)
|
|
|
|
|
|
|
|
|
|
|
|
The impacts of changes in the Corporation’s credit risk on subordinated capital notes for the year
ended December 31, 2008 presented in the table below have been calculated as the difference between
the fair value of those instruments as of the reporting date and the theoretical fair values of
those instruments calculated by using the yield curve prevailing at the end of the reporting
period, adjusted up or down for changes in credit spreads from the transition date to the reporting
date.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss)
|
|
|
Gain (Loss)
|
|
|
Total
|
|
|
|
|
related
|
|
|
not related
|
|
|
Gains
|
|
|
(Dollars in thousands)
|
|
Credit Risk
|
|
|
Credit Risk
|
|
|
(Losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated Capital Notes
|
|
$
|
6,667
|
|
|
$
|
(14,172
|
)
|
|
$
|
(7,505
|
)
|
|
|
|
|
|
|
|
|
|
|
|
SFAS 107 Disclosures about Fair Value of Financial Instruments
The table below is a summary of fair value estimates as of December 31, 2008 and 2007, for
financial instruments, as defined by SFAS 107, excluding short-term financial assets and
liabilities, for which carrying amounts approximate fair value, and excluding financial instruments
recorded at fair value on a recurring basis. The fair value estimates are made at a discrete point
in time based on relevant market information and information about the financial instruments.
Because no market exists for a significant portion of the Corporation’s financial instruments, fair
value estimates are based on judgments regarding risk
characteristics of various financial instruments, current economic conditions, and other factors.
These estimates are subjective in nature and involve uncertainties and matters of significant
judgment and, therefore, cannot be determined with precision. Changes in assumptions could
significantly affect the estimates. In addition, the fair value estimates are based on existing
on- and off-balance sheet financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that are not considered
financial instruments.
133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
|
|
Carrying
|
|
|
|
|
|
|
Carrying
|
|
|
|
|
|
|
|
Amount
|
|
|
Fair Value
|
|
|
Amount
|
|
|
Fair Value
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated balance sheets financial instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other investment securities
|
|
$
|
61,632
|
|
|
$
|
61,632
|
|
|
$
|
64,559
|
|
|
$
|
64,559
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale
|
|
$
|
38,459
|
|
|
$
|
38,740
|
|
|
$
|
141,902
|
|
|
$
|
141,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
5,929,499
|
|
|
$
|
5,862,539
|
|
|
$
|
6,769,478
|
|
|
$
|
7,137,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits — interest-bearing
|
|
|
4,321,939
|
|
|
|
4,311,104
|
|
|
|
4,405,246
|
|
|
|
4,404,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold under agreements to repurchase
|
|
$
|
375,000
|
|
|
$
|
365,314
|
|
|
$
|
635,597
|
|
|
$
|
635,597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Home Loan Advances
|
|
$
|
1,185,000
|
|
|
$
|
1,159,619
|
|
|
$
|
1,245,000
|
|
|
$
|
1,245,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated capital note
|
|
$
|
189,000
|
|
|
$
|
203,516
|
|
|
$
|
247,170
|
|
|
$
|
264,162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term notes
|
|
$
|
19,967
|
|
|
$
|
22,977
|
|
|
$
|
19,371
|
|
|
$
|
21,820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
|
|
Contract or
|
|
|
|
|
|
|
Contract or
|
|
|
|
|
|
|
|
Notional
|
|
|
|
|
|
|
Notional
|
|
|
|
|
|
|
|
Amount
|
|
|
Fair Value
|
|
|
Amount
|
|
|
Fair Value
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off balance sheet financial instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standby letters of credit and financial
guarantees written
|
|
$
|
95,660
|
|
|
$
|
(1,102
|
)
|
|
$
|
134,470
|
|
|
$
|
(1,479
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments to extend credit, approved loans
not yet disbursed and unused lines of credit
|
|
$
|
1,193,875
|
|
|
$
|
(1,194
|
)
|
|
$
|
1,530,017
|
|
|
$
|
(1,530
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25. Significant Group Concentrations of Credit Risk:
Most of the Corporation’s business activities are with customers located within Puerto Rico. The
Corporation has a diversified loan portfolio with no significant concentration in any economic
sector.
134
26. Regulatory Matters:
The Corporation and the Bank are subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can initiate certain
mandatory and possibly additional discretionary actions by regulators that, if undertaken, could
have a direct material effect on the Corporation’s consolidated financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective action, the
Corporation and the Bank must meet specific capital guidelines that involve quantitative measures
of the assets, liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Corporation’s and the Bank’s capital classification is also subject to
qualitative judgments by the regulators about components, risk weightings, and other factors.
Prompt corrective action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy require the Corporation
and the Bank to maintain minimum amounts and ratios, as indicated below, of Total and Tier I
capital (as defined) to risk-weighted assets (as defined), and of Tier I capital (as defined) to
average assets (as defined). In management’s opinion, the Corporation and the Bank met all capital
adequacy requirements to which they were subject as of December 31, 2008 and 2007.
At December 31, 2008 and 2007, the Corporation’s required and actual regulatory capital amounts and
ratios follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
Required
|
|
Actual
|
|
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
|
|
(Dollars in thousands)
|
|
|
Total Capital (to Risk Weighted Assets)
|
|
$
|
453,114
|
|
|
|
8
|
%
|
|
$
|
726,863
|
|
|
|
12.83
|
%
|
|
Tier I Capital (to Risk Weighted Assets)
|
|
$
|
226,557
|
|
|
|
4
|
%
|
|
$
|
476,268
|
|
|
|
8.41
|
%
|
|
Leverage Ratio
|
|
$
|
234,278
|
|
|
|
3
|
%
|
|
$
|
476,268
|
|
|
|
6.10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
Required
|
|
Actual
|
|
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
|
|
(Dollars in thousands)
|
|
|
Total Capital (to Risk Weighted Assets)
|
|
$
|
528,134
|
|
|
|
8
|
%
|
|
$
|
697,009
|
|
|
|
10.55
|
%
|
|
Tier I Capital (to Risk Weighted Assets)
|
|
$
|
264,067
|
|
|
|
4
|
%
|
|
$
|
490,259
|
|
|
|
7.42
|
%
|
|
Leverage Ratio
|
|
$
|
273,298
|
|
|
|
3
|
%
|
|
$
|
490,259
|
|
|
|
5.38
|
%
|
135
As of December 31, 2008, the Bank qualified as a well-capitalized institution under the regulatory
framework. To be categorized as well capitalized, an institution must maintain minimum total
risk-based, Tier I risk based and Tier I leverage ratios as set forth in the table below. At
December 31, 2008, there are no conditions or events that management believes to have changed the
Bank’s category since the regulator’s last examination.
At December 31, 2008 and 2007, the Bank’s required and actual regulatory capital amounts and ratios
follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
Required
|
|
Actual
|
|
Well-Capitalized
|
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Ratio
|
|
|
|
(Dollars in thousands)
|
|
Total Capital (to
Risk Weighted
Assets)
|
|
$
|
411,725
|
|
|
|
8
|
%
|
|
$
|
662,161
|
|
|
|
12.87
|
%
|
|
≥
|
10
|
%
|
|
Tier I Capital (to
Risk Weighted
Assets)
|
|
$
|
205,863
|
|
|
|
4
|
%
|
|
$
|
537,395
|
|
|
|
10.44
|
%
|
|
≥
|
6
|
%
|
|
Leverage Ratio
|
|
$
|
234,488
|
|
|
|
3
|
%
|
|
$
|
537,395
|
|
|
|
6.88
|
%
|
|
≥
|
5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
Required
|
|
Actual
|
|
Well-Capitalized
|
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Ratio
|
|
|
|
(Dollars in thousands)
|
|
Total Capital (to
Risk Weighted
Assets)
|
|
$
|
474,647
|
|
|
|
8
|
%
|
|
$
|
647,481
|
|
|
|
10.91
|
%
|
|
≥
|
10
|
%
|
|
Tier I Capital (to
Risk Weighted
Assets)
|
|
$
|
237,324
|
|
|
|
4
|
%
|
|
$
|
573,022
|
|
|
|
9.66
|
%
|
|
≥
|
6
|
%
|
|
Leverage Ratio
|
|
$
|
251,493
|
|
|
|
3
|
%
|
|
$
|
573,022
|
|
|
|
6.84
|
%
|
|
≥
|
5
|
%
|
136
27. Segment Information:
Types of Products and Services
The Corporation has five reportable segments: Commercial Banking, Mortgage Banking, Consumer
Finance, Treasury and Investments and Wealth Management. Insurance operations and International
Banking are other lines of business in which the Corporation commenced its involvement during 2000
and 2001, respectively, and are included in the “Other” column below since they did not meet the
quantitative thresholds for disclosure of segment information.
Measurement of Segment Profit or Loss and Segment Assets
The Corporation’s reportable business segments are strategic business units that offer distinctive
products and services that are marketed through different channels. These are managed separately
because of their unique technology, marketing and distribution requirements.
The following present financial information of reportable segments as of and for the years ended
December 31, 2008, 2007 and 2006. General corporate expenses and income taxes have not been added
or deducted in the determination of operating segment profits. The “Other” column includes
insurance and international banking operations and the items necessary to reconcile the identified
segments to the reported consolidated amounts. Included in the “Other” column are expenses of the
internal audit, investors’ relations, strategic planning, administrative services, mail, marketing,
public relations, electronic data processing departments and comptroller’s departments. The
“Eliminations” column includes all intercompany eliminations for consolidation purposes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
Commercial
|
|
Mortgage
|
|
Consumer
|
|
Treasury and
|
|
Wealth
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
|
Banking
|
|
Banking
|
|
Finance
|
|
Investments
|
|
Management
|
|
Other
|
|
Eliminations
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
Total external
revenue
|
|
$
|
308,646
|
|
|
$
|
166,480
|
|
|
$
|
142,986
|
|
|
$
|
53,627
|
|
|
$
|
73,145
|
|
|
$
|
49,416
|
|
|
$
|
(45,694
|
)
|
|
$
|
748,606
|
|
|
Intersegment revenue
|
|
|
17,320
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
557
|
|
|
|
27,817
|
|
|
|
(45,694
|
)
|
|
|
—
|
|
|
Interest income
|
|
|
257,835
|
|
|
|
165,729
|
|
|
|
142,428
|
|
|
|
50,930
|
|
|
|
2,941
|
|
|
|
22,002
|
|
|
|
(41,094
|
)
|
|
|
600,771
|
|
|
Interest expense
|
|
|
64,700
|
|
|
|
73,179
|
|
|
|
27,160
|
|
|
|
89,669
|
|
|
|
2,249
|
|
|
|
20,875
|
|
|
|
(33,383
|
)
|
|
|
244,449
|
|
|
Depreciation and
amortization
|
|
|
4,367
|
|
|
|
2,538
|
|
|
|
2,988
|
|
|
|
945
|
|
|
|
1,307
|
|
|
|
2,951
|
|
|
|
—
|
|
|
|
15,096
|
|
|
Segment income (loss)
before income tax
|
|
|
29,911
|
|
|
|
79,906
|
|
|
|
6,262
|
|
|
|
(69,225
|
)
|
|
|
22,027
|
|
|
|
(57,163
|
)
|
|
|
(7,711
|
)
|
|
|
4,007
|
|
|
Segment assets
|
|
|
3,641,521
|
|
|
|
2,679,466
|
|
|
|
659,054
|
|
|
|
1,210,654
|
|
|
|
149,149
|
|
|
|
631,091
|
|
|
|
(1,073,359
|
)
|
|
|
7,897,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
Commercial
|
|
Mortgage
|
|
Consumer
|
|
Treasury and
|
|
Wealth
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
|
Banking
|
|
Banking
|
|
Finance
|
|
Investments
|
|
Management
|
|
Other
|
|
Eliminations
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
Total external
revenue
|
|
$
|
351,120
|
|
|
$
|
190,889
|
|
|
$
|
144,027
|
|
|
$
|
75,821
|
|
|
$
|
64,378
|
|
|
$
|
46,671
|
|
|
$
|
(50,576
|
)
|
|
$
|
822,330
|
|
|
Intersegment revenue
|
|
|
9,458
|
|
|
|
13,571
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,074
|
|
|
|
25,473
|
|
|
|
(50,576
|
)
|
|
|
—
|
|
|
Interest income
|
|
|
299,105
|
|
|
|
168,238
|
|
|
|
140,881
|
|
|
|
71,418
|
|
|
|
2,667
|
|
|
|
24,607
|
|
|
|
(32,706
|
)
|
|
|
674,210
|
|
|
Interest expense
|
|
|
99,409
|
|
|
|
102,038
|
|
|
|
36,898
|
|
|
|
116,669
|
|
|
|
3,613
|
|
|
|
30,081
|
|
|
|
(26,177
|
)
|
|
|
362,531
|
|
|
Depreciation and
amortization
|
|
|
4,092
|
|
|
|
2,066
|
|
|
|
3,645
|
|
|
|
816
|
|
|
|
1,220
|
|
|
|
4,437
|
|
|
|
—
|
|
|
|
16,276
|
|
|
Segment income (loss)
before income tax
|
|
|
79,406
|
|
|
|
51,596
|
|
|
|
(57,991
|
)
|
|
|
(47,203
|
)
|
|
|
16,359
|
|
|
|
(66,544
|
)
|
|
|
(7,664
|
)
|
|
|
(32,041
|
)
|
|
Segment assets
|
|
|
4,014,385
|
|
|
|
2,752,186
|
|
|
|
684,115
|
|
|
|
1,533,832
|
|
|
|
130,229
|
|
|
|
541,792
|
|
|
|
(492,326
|
)
|
|
|
9,164,213
|
|
137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
Commercial
|
|
Mortgage
|
|
Consumer
|
|
Treasury and
|
|
Wealth
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
|
Banking
|
|
Banking
|
|
Finance
|
|
Investments
|
|
Management
|
|
Other
|
|
Eliminations
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
Total external
revenue
|
|
$
|
311,451
|
|
|
$
|
175,877
|
|
|
$
|
121,159
|
|
|
$
|
80,630
|
|
|
$
|
49,865
|
|
|
$
|
64,956
|
|
|
$
|
(67,149
|
)
|
|
$
|
736,789
|
|
|
Intersegment revenue
|
|
|
11,472
|
|
|
|
8,698
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,400
|
|
|
|
45,579
|
|
|
|
(67,149
|
)
|
|
|
—
|
|
|
Interest income
|
|
|
268,806
|
|
|
|
162,572
|
|
|
|
118,154
|
|
|
|
80,275
|
|
|
|
2,283
|
|
|
|
41,359
|
|
|
|
(55,129
|
)
|
|
|
618,320
|
|
|
Interest expense
|
|
|
87,654
|
|
|
|
90,423
|
|
|
|
34,738
|
|
|
|
113,878
|
|
|
|
3,183
|
|
|
|
46,096
|
|
|
|
(48,258
|
)
|
|
|
327,714
|
|
|
Depreciation and
amortization
|
|
|
5,567
|
|
|
|
1,852
|
|
|
|
3,633
|
|
|
|
776
|
|
|
|
1,030
|
|
|
|
4,737
|
|
|
|
—
|
|
|
|
17,595
|
|
|
Segment income (loss)
before income tax
|
|
|
95,180
|
|
|
|
60,595
|
|
|
|
(1,287
|
)
|
|
|
(38,101
|
)
|
|
|
13,185
|
|
|
|
(56,442
|
)
|
|
|
(7,421
|
)
|
|
|
65,709
|
|
|
Segment assets
|
|
|
3,929,196
|
|
|
|
2,715,577
|
|
|
|
805,173
|
|
|
|
1,684,649
|
|
|
|
100,585
|
|
|
|
510,587
|
|
|
|
(553,599
|
)
|
|
|
9,192,168
|
|
Reconciliation of Segment Information to Consolidated Amounts
Information for the Corporation’s reportable segments in relation to the consolidated totals at
December 31, follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(Dollars in thousands)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues for reportable segments
|
|
$
|
744,884
|
|
|
$
|
826,235
|
|
|
$
|
733,421
|
|
|
Other revenues
|
|
|
49,416
|
|
|
|
46,671
|
|
|
|
70,517
|
|
|
Elimination of intersegment revenues
|
|
|
(45,694
|
)
|
|
|
(50,576
|
)
|
|
|
(67,149
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated revenues
|
|
$
|
748,606
|
|
|
$
|
822,330
|
|
|
$
|
736,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income before tax of reportable segments
|
|
$
|
68,881
|
|
|
$
|
42,167
|
|
|
$
|
127,299
|
|
|
Loss before tax of other segments
|
|
|
(57,163
|
)
|
|
|
(66,544
|
)
|
|
|
(54,169
|
)
|
|
Elimination of intersegment profits
|
|
|
(7,711
|
)
|
|
|
(7,664
|
)
|
|
|
(7,421
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated income (loss) before tax
|
|
$
|
4,007
|
|
|
$
|
(32,041
|
)
|
|
$
|
65,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets for reportable segments
|
|
$
|
8,339,844
|
|
|
$
|
9,114,747
|
|
|
$
|
9,146,499
|
|
|
Assets not attributed to segments
|
|
|
631,091
|
|
|
|
541,792
|
|
|
|
599,268
|
|
|
Elimination of intersegment assets
|
|
|
(1,073,359
|
)
|
|
|
(492,326
|
)
|
|
|
(553,599
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated assets
|
|
$
|
7,897,576
|
|
|
$
|
9,164,213
|
|
|
$
|
9,192,168
|
|
|
|
|
|
|
|
|
|
|
|
|
138
28. Quarterly Results (Unaudited):
The following table reflects the unaudited quarterly results of the Corporation during the years
ended December 31, 2008, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended 2008
|
|
|
|
March 31
|
|
|
|
|
|
June 30
|
|
September 30
|
|
December 31
|
|
|
|
(Dollars in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income
|
|
$
|
159,029
|
|
|
|
|
|
|
$
|
153,436
|
|
|
$
|
148,011
|
|
|
$
|
140,295
|
|
|
Net Interest Income
|
|
|
84,599
|
|
|
|
|
|
|
|
91,045
|
|
|
|
92,406
|
|
|
|
88,272
|
|
|
Net Interest Income after Provision
for Loan Losses
|
|
|
45,024
|
|
|
|
|
|
|
|
52,530
|
|
|
|
46,846
|
|
|
|
36,399
|
|
|
Income (Loss) before Provision for Income Tax
|
|
|
25,939
|
|
|
|
|
|
|
|
7,281
|
|
|
|
(18,493
|
)
|
|
|
(10,720
|
)
|
|
Net Income (Loss)
|
|
|
17,722
|
|
|
|
|
|
|
|
6,516
|
|
|
|
(8,162
|
)
|
|
|
(5,545
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (Loss) per Common Share
|
|
|
0.38
|
|
|
|
|
|
|
|
0.14
|
|
|
|
(0.18
|
)
|
|
|
(0.11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended 2007
|
|
|
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
|
|
|
(Dollars in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income
|
|
$
|
167,077
|
|
|
$
|
168,242
|
|
|
$
|
170,149
|
|
|
$
|
168,742
|
|
|
Net Interest Income
|
|
|
79,402
|
|
|
|
78,197
|
|
|
|
76,039
|
|
|
|
78,041
|
|
|
Net Interest Income after Provision
for Loan Losses
|
|
|
57,378
|
|
|
|
47,347
|
|
|
|
28,689
|
|
|
|
30,441
|
|
|
Income before Provision for Income Tax
|
|
|
19,383
|
|
|
|
5,505
|
|
|
|
(55,011
|
)
|
|
|
(1,918
|
)
|
|
Net Income (Loss)
|
|
|
11,729
|
|
|
|
4,096
|
|
|
|
(50,099
|
)
|
|
|
(1,971
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (Loss) per Common Share
|
|
|
0.25
|
|
|
|
0.09
|
|
|
|
(1.07
|
)
|
|
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended 2006
|
|
|
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
|
|
|
(Dollars in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income
|
|
$
|
132,084
|
|
|
$
|
158,534
|
|
|
$
|
162,086
|
|
|
$
|
165,616
|
|
|
Net Interest Income
|
|
|
62,786
|
|
|
|
77,856
|
|
|
|
74,708
|
|
|
|
75,256
|
|
|
Net Interest Income after Provision
for Loan Losses
|
|
|
55,248
|
|
|
|
61,881
|
|
|
|
54,308
|
|
|
|
53,586
|
|
|
Income before Provision for Income Tax
|
|
|
21,951
|
|
|
|
18,383
|
|
|
|
9,692
|
|
|
|
15,683
|
|
|
Net Income
|
|
|
13,356
|
|
|
|
11,028
|
|
|
|
8,726
|
|
|
|
10,059
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per Common Share
|
|
|
0.29
|
|
|
|
0.23
|
|
|
|
0.19
|
|
|
|
0.22
|
|
139
29. Credit Losses Arising from the Bankruptcy of Lehman Brothers, Inc.:
The Corporation had counterparty exposure to Lehman Brothers, Inc. (“LBI”) in connection with the
sale of securities sold under agreements to repurchase amounting to $200.2 million at September 19,
2008 under a Master Repurchase Agreement. LBI was placed in a Securities Investor Protection
Corporation (“SIPC”) liquidation proceeding on September 19, 2008. The filing of the SIPC
liquidation proceeding was an event of default under the terms of the Master Repurchase Agreement,
which resulted in the acceleration of repurchase dates under the Master Repurchase Agreement to
September 19, 2008. This action resulted in a reduction in the Corporation’s total assets of
$225.3 million and a reduction in its total liabilities of $200.2 million. As soon as claims
procedures have been established in the LBI liquidation proceeding, the Corporation intends to file
a claim for the amount $25.1 million, which is the amount it is owed by LBI as a result of the
acceleration of repurchase date and the exercise by the Corporation of its rights under the Master
Repurchase Agreement, plus incidental expenses and damages. The Corporation has recognized a claim
receivable from LBI for $25.1 million and has established a valuation allowance for the same amount
since management, in consultation with legal counsel, believes that based on current information
and events, it is probable that the Corporation will be unable to collect all amounts due. The tax
effect related to the recognition of this valuation allowance was a deferred tax benefit of $9.8
million.
The Corporation had a $100 million floating-for-fixed interest rate swap designated as a cash flow
hedge with LBI affiliate Lehman Brothers Special Financing Inc. (“LBSF”). The derivative liability
of this swap was $371,736 as of September 19, 2008 and was paid on December 5, 2008. As a result of
the bankruptcy filing of LBHI and default on its contractual payments as of September 19, 2008, the
Corporation terminated the swap and the cash flow hedge designation on this swap. The net loss of
$371,000 was reclassified into earnings in the last quarter of 2008. In addition, The Corporation
terminated $23.8 million fixed-for-floating interest rate swaps with LBSF, which was classified as
undesignated economic hedges of certain fixed rate deposits. The derivative liability of this swap
was $681,535 as of September 19, 2008 and was paid on December 5, 2008. The Corporation, also,
terminated $13.8 million of interest rate swaps with LBSF. The derivative liability of this swap
was $166,333 as of September 19, 2008 and was paid on December 5, 2008.
30. Santander BanCorp (Parent Company Only) Financial Information
:
The following financial information presents the financial position of the Parent Company only, as
of December 31, 2008 and 2007, and the results of its operations and its cash flows for each of the
years in the three year period ended December 31, 2008.
The net income of Santander Bancorp (parent company only) nominally is not equal to the
consolidated net income of Santander BanCorp and subsidiaries, because it includes a transaction
between Santander BanCorp’s wholly owned subsidiaries, Banco Santander Puerto Rico and Santander
Securities Corporation, which has a different accounting treatment in the stand-alone financial
statements of each of these entities. Such transaction is eliminated in consolidation.
140
Santander Bancorp
Balance Sheet Information
December 31, 2008 and 2007
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
3,430
|
|
|
$
|
11,875
|
|
|
Interest-bearing deposits
|
|
|
—
|
|
|
|
30,079
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents
|
|
|
3,430
|
|
|
|
41,954
|
|
|
Loans
|
|
|
221,256
|
|
|
|
235,469
|
|
|
Investment in Subsidiaries
|
|
|
772,249
|
|
|
|
755,670
|
|
|
Accrued Interest Receivable
|
|
|
5,928
|
|
|
|
6,534
|
|
|
Other Assets
|
|
|
9,297
|
|
|
|
921
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,012,160
|
|
|
$
|
1,040,548
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
Borrowings
|
|
$
|
200,000
|
|
|
$
|
235,000
|
|
|
Subordinated Capital Notes,
including $118.3 million at fair value in 2008
|
|
|
246,392
|
|
|
|
251,045
|
|
|
Accrued Interest Payable
|
|
|
7,724
|
|
|
|
5,830
|
|
|
Other Liabilities
|
|
|
5,195
|
|
|
|
10,073
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
459,311
|
|
|
|
501,948
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY:
|
|
|
|
|
|
|
|
|
|
Common stock, $2.50 par value; 200,000,000 shares authorized, 50,650,364 shares
issued; 46,639,104 shares outstanding at December 31, 2008 and 2007
|
|
|
126,626
|
|
|
|
126,626
|
|
|
Capital paid in excess of par value
|
|
|
565,165
|
|
|
|
556,192
|
|
|
Treasury stock at cost, 4,011,260 shares at December 31, 2008 and 2007
|
|
|
(67,552
|
)
|
|
|
(67,552
|
)
|
|
Accumulated other comprehensive loss from unconsolidated subsidiaries, net of tax
|
|
|
(22,563
|
)
|
|
|
(24,478
|
)
|
|
Deficit
|
|
|
(48,827
|
)
|
|
|
(52,188
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders’ equity
|
|
|
552,849
|
|
|
|
538,600
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,012,160
|
|
|
$
|
1,040,548
|
|
|
|
|
|
|
|
|
|
141
Santander BanCorp
Statements of Operations Information
Years Ended December 31, 2008, 2007 and 2006
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
13,914
|
|
|
$
|
17,883
|
|
|
$
|
42,472
|
|
|
Interest-bearing deposits
|
|
|
818
|
|
|
|
1,867
|
|
|
|
1,952
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
14,732
|
|
|
|
19,750
|
|
|
|
44,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings
|
|
|
7,549
|
|
|
|
13,931
|
|
|
|
34,661
|
|
|
Term and subordinated capital notes
|
|
|
13,325
|
|
|
|
16,157
|
|
|
|
14,619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
20,874
|
|
|
|
30,088
|
|
|
|
49,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest loss
|
|
|
(6,142
|
)
|
|
|
(10,338
|
)
|
|
|
(4,856
|
)
|
|
Provision for loan losses
|
|
|
740
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest loss after provision for loan losses
|
|
|
(6,882
|
)
|
|
|
(10,338
|
)
|
|
|
(4,856
|
)
|
|
Other Income (Loss) :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative gains (losses)
|
|
|
6,770
|
|
|
|
(10
|
)
|
|
|
40
|
|
|
Equity in earnings (losses) of subsidiaries
|
|
|
15,017
|
|
|
|
(24,524
|
)
|
|
|
50,327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (loss)
|
|
|
21,787
|
|
|
|
(24,534
|
)
|
|
|
50,367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional fees
|
|
|
881
|
|
|
|
844
|
|
|
|
1,419
|
|
|
Other taxes
|
|
|
586
|
|
|
|
(615
|
)
|
|
|
475
|
|
|
Other operating expenses
|
|
|
911
|
|
|
|
774
|
|
|
|
376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other operating expenses
|
|
|
2,378
|
|
|
|
1,003
|
|
|
|
2,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision (benefit) for income tax
|
|
|
12,527
|
|
|
|
(35,875
|
)
|
|
|
43,241
|
|
|
Provision (benefit) for Income Tax
|
|
|
2,723
|
|
|
|
(88
|
)
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
9,804
|
|
|
$
|
(35,787
|
)
|
|
$
|
43,225
|
|
|
|
|
|
|
|
|
|
|
|
|
142
Santander BanCorp
Statements of Cash Flows Information
Years Ended December 31, 2008, 2007 and 2006
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
9,804
|
|
|
$
|
(35,787
|
)
|
|
$
|
43,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in losses (earnings) of subsidiaries, net of dividends received
|
|
|
48,868
|
|
|
|
54,487
|
|
|
|
(15,684
|
)
|
|
Deferred tax provision (benefit)
|
|
|
2,723
|
|
|
|
(88
|
)
|
|
|
16
|
|
|
Provision for loan losses
|
|
|
740
|
|
|
|
—
|
|
|
|
—
|
|
|
Gain (loss) on derivatives
|
|
|
(6,770
|
)
|
|
|
10
|
|
|
|
(40
|
)
|
|
Net discount accretion on debt
|
|
|
32
|
|
|
|
55
|
|
|
|
28
|
|
|
Net premiun amortization on loans
|
|
|
109
|
|
|
|
177
|
|
|
|
298
|
|
|
(Increase) decrease in other assets and accrued interest receivable
|
|
|
(5,083
|
)
|
|
|
3,968
|
|
|
|
(6,564
|
)
|
|
Increase (decrease) in other liabilities and accrued interest payable
|
|
|
4,479
|
|
|
|
(5,087
|
)
|
|
|
7,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustments
|
|
|
45,098
|
|
|
|
53,522
|
|
|
|
(14,300
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
54,902
|
|
|
|
17,735
|
|
|
|
28,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease (increase) in loans
|
|
|
13,364
|
|
|
|
27,178
|
|
|
|
(123,687
|
)
|
|
Investment in subsidiary
|
|
|
(55,000
|
)
|
|
|
—
|
|
|
|
(147,029
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
(41,636
|
)
|
|
|
27,178
|
|
|
|
(270,716
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of borrowings
|
|
|
200,000
|
|
|
|
235,000
|
|
|
|
1,000,000
|
|
|
Repayment of borrowings
|
|
|
(235,000
|
)
|
|
|
(275,000
|
)
|
|
|
(843,846
|
)
|
|
Issuance of subordinated capital notes
|
|
|
—
|
|
|
|
—
|
|
|
|
128,050
|
|
|
Dividends paid
|
|
|
(16,790
|
)
|
|
|
(29,849
|
)
|
|
|
(29,849
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(51,790
|
)
|
|
|
(69,849
|
)
|
|
|
254,355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CHANGE IN CASH AND CASH EQUIVALENTS
|
|
|
(38,524
|
)
|
|
|
(24,936
|
)
|
|
|
12,564
|
|
|
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
|
|
|
41,954
|
|
|
|
66,890
|
|
|
|
54,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF YEAR
|
|
$
|
3,430
|
|
|
$
|
41,954
|
|
|
$
|
66,890
|
|
|
|
|
|
|
|
|
|
|
|
|
31. Subsequent Events:
On February 12, 2009, the Corporation completed the sale of certain impaired loans to an
affiliate for $54.9 million in cash. These loans had an
outstanding principal balance of $57.4
million and a specific valuation allowance of $2.5 million. No gain or loss was recognized on this
transaction.
Recent Puerto Rico Legislation
On March 9, 2009, the Governor of Puerto Rico signed Law 7 (“Law 7”) which seeks to increase the
tax revenues of the Puerto Rico Government with certain permanent and temporary measures. Law 7
includes the following amendments: (i) for taxable years commenced after December 31, 2008 and
before January 1, 2012, taxable corporations (such as the
Corporation and its subsidiaries) would be
subject to a separate tax of 5% based on their total tax liability; (ii) for taxable years
commenced after December 31, 2008 and before January 1, 2012, international banking entities that
do not operate as bank units would be subject to a 5% income tax on their entire net income
computed in accordance with the Puerto Rico Internal Revenue Code of 1994, as amended (the “PR
Code”); (iii) certain income tax credits granted to financial institutions in relation to
financing provided for the acquisition of new or existing homes may no longer generate a tax refund
for any taxable year commenced on or before December 31, 2010 and after such date, this refundable
tax credit will not generate interest for the period elapsed between the claim of refund and its
payment by the Puerto Rico Treasury Department (as further discussed below); (iv) certain income
tax credits granted to developers of projects in designated urban areas which serve as source of
repayment for construction loans will not be available during the taxable years commenced after
December 31, 2008 and before January 1, 2012; and (v) net income subject to alternative minimum tax
in the case of individuals (“AMT”) now includes various categories of exempt income and income
subject to preferential tax rates under the PR Code (as further discussed below).
Shareholders of the Corporation will now have to take into consideration for purposes of computing
their AMT income subject to preferential tax rates such as: (i) long-term capital gains on the sale
of their Corporation stock which enjoys a preferential tax rate of 10% under PR Code Section 1014;
(ii) dividends from the Corporation that are taxable at the rate of 10% under PR Code Section 1012;
(iii) interest on bank deposits and individual retirement accounts subject to the special 10% and
17% preferential income tax rates, respectively; and (iv) interest from notes or bonds eligible for
the special 10% tax rate provided by Section 1013A of the PR Code. These changes may affect this
income by subjecting it to AMT. The AMT top rate of 20% starts on alternative minimum taxable
income in excess of $175,000. Also, the vast majority of tax-exempt income covered by Section 1022
of the PR Code and other special laws is subject to AMT pursuant to the provisions of Law 7. A
notable exception is the interest income derived from U.S. and Puerto Rico Government obligations
which continues to be exempt for AMT purposes even after the enactment of Law 7.
143
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Corporation maintains a system of disclosure controls and procedures that are designed to
provide reasonable assurance that material information, which is required to be timely disclosed,
is accumulated and communicated to management in a timely manner. An evaluation of the
effectiveness of the design and operation of our disclosure controls and procedures (as defined in
Rules 13a-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)) was performed as of
the end of the period covered by this report. This evaluation was performed under the supervision
and with the participation of the Corporation’s Chief Executive Officer and Chief Accounting
Officer. Based upon that evaluation, the Chief Executive Officer and Chief Accounting Officer
concluded that the Corporation’s disclosure controls and procedures are effective to provide
reasonable assurance that information required to be disclosed by the Corporation in the
Corporation’s reports that it files or submits under the Exchange Act is accumulated and
communicated to management, including its Chief Executive Officer and Chief Accounting Officer, as
appropriate, to allow timely decisions regarding required disclosure and are effective to provide
reasonable assurance that such information is recorded, processed, summarized and reported within
the time periods specified by the SEC’s rules and forms.
Management’s Report on Internal Control over Financial Reporting
Management of the Corporation is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities
Exchange Act of 1934. The Corporation’s internal control over financial reporting is designed to
provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with accounting principles generally
accepted in the United States of America (“GAAP”).
All internal control systems, no matter how well designed, have inherent limitations. Therefore,
even those systems determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation. Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements.
Management has assessed the effectiveness of the Corporation’s internal control over financial
reporting as of December 31, 2008, based on the criteria set forth by the Committee of Sponsoring
Organizations (“COSO”) of the Treadway Commission in their Internal Control — Integrated Framework.
In making its assessment of internal control over financial reporting, management has concluded
that the Corporation’s internal control over financial reporting was effective as of December 31,
2008.
The Corporation’s independent registered public accounting firm, Deloitte & Touche LLP, has
audited the effectiveness of the Corporation’s internal control over financial reporting. Their
report appears herein.
Change in Internal Control Over Financial Reporting
None
ITEM 9B. OTHER INFORMATION
None
144
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information contained under the captions “Principal Holders of Capital Stock”, “Section 16(a)
Beneficial Ownership Reporting Compliance”, “Board of Directors”, “Nominees for Election”,
“Meetings of the Board of Directors and Committees”, “Executive Officers” and “Corporate Governance” of the Corporation’s
definitive Proxy Statement to be filed with the SEC on or about March 30 2009, is incorporated
herein by reference.
The Corporation has adopted a Code of Business Conduct within
the meaning of Item 406(b) of Regulation S-K of the Securities Exchange Act
of 1934, as amended. This Code applies to the directors, the President and CEO, the
CAO, and other executive officers of the Corporation and its subsidiaries in order to achieve a
conduct that reflects the Corporation’s ethical principles. The Corporation’s Code of Business Conduct was
amended during fiscal year 2005 to expressly apply to the directors of the Corporation, as required by the
NYSE’s Corporate Governance Rule 303A.10. The Corporation has posted a copy of the Code of Business Conduct,
as amended, on its website at
www.santandernet.com
. The Corporation also adopted Corporate Governance Guidelines
which are available on the Investor Relations website at
www.santandernet.com
, as required by the NYSE’s Corporate
Governance Rule 303A.09. Copies of the Code of Business Conduct and the Corporate Governance Guidelines may be
obtained free of charge from the Corporation’s website at the abovementioned internet address.
ITEM 11. EXECUTIVE COMPENSATION
The information under the caption “Compensation of Executive Officers” of the definitive Proxy
Statement to be filed with the SEC on or about March 30, 2009, is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The information under the caption “Principal Holders of Capital Stock” of the definitive Proxy
Statement to be filed with the SEC on or about March 30, 2009, is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information under the caption “Transactions with Related Parties” of the definitive Proxy
Statement to be filed with the SEC on or about March 30, 2009, is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information under the caption “Disclosure of Audit Fees” of the definitive Proxy Statement to
be filed with the SEC on or about March 30, 2009, is incorporated herein by reference.
145
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES
|
|
|
|
|
|
|
A. The following documents are incorporated by reference from Item 8 hereof:
|
|
|
|
|
|
|
|
|
|
|
|
(1) Consolidated Financial Statements:
|
|
|
|
|
|
Reports of Independent Registered Public Accounting Firm
|
|
|
|
|
|
|
|
|
83
|
|
|
|
|
|
84
|
|
|
|
|
|
85
|
|
|
|
|
|
86
|
|
|
|
|
|
87
|
|
|
|
|
|
89
|
|
|
|
|
|
|
|
|
(2) Financial Statement Schedules are not presented because the information
is not applicable or is included in the Consolidated Financial Statements described
in A (1) above or in the notes thereto.
|
|
|
|
|
|
|
|
|
|
|
|
(3) The exhibits listed on the Exhibit Index on page 146 of this report are
filed herewith or are incorporated herein by reference.
|
|
|
|
|
146
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, there
unto duly authorized
|
|
|
|
|
|
|
|
SANTANDER BANCORP
(REGISTRANT)
|
|
|
Dated: 03/13/2009
|
By:
|
S/ JUAN MORENO BLANCO
|
|
|
|
|
President and Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dated: 03/13/2009
|
By:
|
S/ ROBERTO JARA
|
|
|
|
|
Executive Vice President and
|
|
|
|
|
Chief Accounting Officer
|
|
|
|
Pursuant to the requirement of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of this Registrant and in the capacities and
on the dates indicated.
|
|
|
|
|
|
|
S: GONZALO DE LAS HERAS
|
|
Chairman
|
|
03/13/2009
|
|
|
|
|
|
|
|
S: JESUS M. ZABALZA
|
|
Director
|
|
03/13/2009
|
|
|
|
|
|
|
|
S: VICTOR ARBULU
|
|
Director
|
|
03/13/2009
|
|
|
|
|
|
|
|
S: ROBERTO VALENTIN
|
|
Director
|
|
03/13/2009
|
|
|
|
|
|
|
|
S: STEPHEN FERRISS
|
|
Director
|
|
03/13/2009
|
|
|
|
|
|
|
|
S: MARIA CALERO
|
|
Director
|
|
03/13/2009
|
|
|
|
|
|
|
|
S:
JOSE R. GONZALEZ
|
|
Director
|
|
03/13/2009
|
147
EXHIBIT INDEX
|
|
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
Reference
|
|
|
|
|
|
|
|
(2.0)
|
|
Agreement and Plan of Merger-Banco Santander Puerto Rico and
Santander BanCorp
|
|
Exhibit 3.3 8-A12B
|
|
|
|
|
|
|
|
(2.1)
|
|
Stock Purchase Agreement Santander BanCorp and Banco Santander
Central Hispano, S.A.
|
|
Exhibit 2.1 10K-12/31/00
|
|
|
|
|
|
|
|
(2.2)
|
|
Stock Purchase Agreement dated as of November 28, 2003 by and among
Santander BanCorp, Administración de Bancos Latinoamericanos
Santander, S.L. and Santander Securities Corporation
|
|
Exhibit 2.2 10Q-06/30/04
|
|
|
|
|
|
|
|
(2.3)
|
|
Settlement Agreement between Santander BanCorp and Administración
de Bancos Latinoamericanos Santander, S.L.
|
|
Exhibit 2.3 10Q-06/30/04
|
|
|
|
|
|
|
|
(3.1)
|
|
Articles of Incorporation
|
|
Exhibit 3.1 8-A12B
|
|
|
|
|
|
|
|
(3.2)
|
|
Bylaws
|
|
Exhibit 3.1 8-A12B
|
|
|
|
|
|
|
|
(4.1)
|
|
Authoring and Enabling Resolutions 7% Noncumulative Perpetual
Monthly Income Preferred Stock, Series A
|
|
Exhibit 4.1 10Q-06/30/04
|
|
|
|
|
|
|
|
(4.2)
|
|
Offering Circular for $30,000,000 Banco Santander PR Stock Market Growth
Notes Linked to the S&P 500 Index
|
|
Exhibit 4.6 10Q-03/31/04
|
|
|
|
|
|
|
|
(4.3)
|
|
Private Placement Memorandum Santander BanCorp $75,000,000 6.30%
Subordinated Notes
|
|
Exhibit 4.3 10KA-12/31/04
|
|
|
|
|
|
|
|
(4.4)
|
|
Private Placement Memorandum Santander BanCorp $50,000,000 6.10%
Subordinated Notes
|
|
Exhibit 4.4 10K-12/31/05
|
|
|
|
|
|
|
|
(4.5)
|
|
Indenture dated as of February 28, 2006, between the Santander BanCorp and
Banco Popular de Puerto Rico
|
|
Exhibit 4.6 10Q-03/31/06
|
|
|
|
|
|
|
|
(4.6)
|
|
First Supplemental Indenture, dated as of February 28, 2006, between Santander
Bancorp and Banco Popular de Puerto Rico
|
|
Exhibit 4.7 10Q-03/31/06
|
|
|
|
|
|
|
|
(4.7)
|
|
Amended and Restated Declaration of Trust and Trust Agreement, dated as of
February 28, 2006, among Santander BanCorp, Banco Popular de Puerto Rico
Wilmintong Trust Company, the Administrative Trustees named therein and
the holders from time to time, of the undivided beneficial ownership interest
in the assets of the Trust.
|
|
Exhibit 4.8 10-Q-03/31/06
|
|
|
|
|
|
|
|
(4.8)
|
|
Guarantee Agreement, dated as of February 28, 2006 between Santander
BanCorp and Banco Popular de Puerto Rico
|
|
Exhibit 4.9 10-Q-03/31/06
|
|
|
|
|
|
|
|
(4.9)
|
|
Global Capital Securities Certificate
|
|
Exhibit 4.10 10Q-03/31/06
|
|
|
|
|
|
|
|
(4.10)
|
|
Certificate of Junior Subordinated Debenture
|
|
Exhibit 4.11 10Q-03/31/06
|
|
|
|
|
|
|
|
(4.11)
|
|
Private Placement Memorandum Santander BanCorp $60,000,000 7.50%
Subordinated Notes
|
|
Exhibit 4.11
|
|
|
|
|
|
|
|
(10)
|
|
Code of Ethics
|
|
Exhibit 14 10-KA-12/31/04
|
|
|
|
|
|
|
|
(10.1)
|
|
Contract for Systems Maintenance between ALTEC & Banco
Santander Puerto Rico
|
|
Exhibit 10A 10K-12/31/02
|
|
|
|
|
|
|
|
(10.2)
|
|
Deferred Compensation Contract-María Calero
|
|
Exhibit 10C 10K-12/31/02
|
|
|
|
|
|
|
|
(10.3)
|
|
Information Processing Services Agreement between America Latina
Tecnología de Mexico, SA and Banco Santander Puerto Rico, Santander
International Bank of Puerto Rico and Santander Investment International
Bank, Inc.
|
|
Exhibit 10A 10Q-06/30/03
|
|
|
|
|
|
|
|
(10.4)
|
|
Employment Contract-Lillian Díaz
|
|
Exhibit 10.5 10Q-03/31/05
|
|
|
|
|
|
|
|
(10.5)
|
|
Technology Assignment Agreement between CREFISA, Inc. and Banco
Santander Puerto Rico
|
|
Exhibit 10.12 10KA-12/31/04
|
|
|
|
|
|
|
|
(10.6)
|
|
Altair System License Agreement between CREFISA, Inc. and Banco
Santander Puerto Rico
|
|
Exhibit 10.13 10KA-12/31/04
|
|
|
|
|
|
|
|
(10.7)
|
|
2005 Employee Stock Option Plan
|
|
Exhibit B Def14-03/26/05
|
|
|
|
|
|
|
|
(10.8)
|
|
Asset Purchase Agreement by and among Wells Fargo & Company, Island
Finance Puerto Rico, Inc., Island Finance Sales Finance Corporation and
Santander BanCorp and Santander Financial Services, Inc. for the purpose
and sale of certain assets of Island Finance Puerto Rico, Inc. and Island
Finance Sales Corporation dated as of January 22, 2006.
|
|
Exhibit 10.1 8K-01/25/06
|
148
EXHIBIT INDEX — Con’t
|
|
|
|
|
|
|
Exhibit No.
|
|
Exhibit Description
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Reference
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(10.9)
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Employment Contract-Tomás Torres
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Exhibit 10.16 10Q-09/30/06
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(10.10)
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Employment Contract-Eric Delgado
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Exhibit 10.17 10Q-09/30/06
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(10.11)
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Agreement of Benefits Coverage Agreed with Officers of Grupo Santander
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Exhibit 10.18 10K-12/31/06
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(10.12)
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Employment Contract-Justo Muñoz
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Exhibit 10.18 10Q-06/30/07
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(10.13)
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Sales and Leaseback Agreement with Corporación Hato Rey Uno
and Corporación Hato Rey Dos for the Bank’s two principal properties and
certain parking spaces
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Exhibit 10.18 10K-12/31/07
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(10.14)
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Option Agreement among Crefisa, Inc., D&D Investment Group, S.E.,
and Quisqueya 12, Inc.
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Exhibit 10.19 10K-12/31/07
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(10.15)
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Merge Agreement among Banco Santander Puerto Rico and Santander
Mortgage Corporation
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Exhibit 10.20 10K-12/31/07
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(10.16)
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Regulations for the first and second cycle of The Share Plan (“Long Term
Incentive Plan”) among Santander BanCorp and Santander Spain
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Exhibit 10.21 10K-12/31/07
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(10.17)
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Loan Agreement between Santander BanCorp, Santander Financial
Services, Inc. and Banco Santander Puerto Rico
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Exhibit 10.1 8K-09/24/08
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(10.18)
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Employment Contract-Juan Moreno Blanco
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Exhibit 10.18
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(10.19)
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Agreement and General Release (the “Agreement”) entered into between
Carlos M. García, Santander BanCorp (the “Company”), Banco Santander
Puerto Rico and Santander Overseas Bank, Inc.
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Exhibit 10.19
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(12)
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Computation of Ratio of Earnings to Fixed Charges
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Exihbit 12
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(21)
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Subsidiaries of Registrant
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Exhibit 21
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(31.1)
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Certification from the Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
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Exhibit 31.1
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(31.2)
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Certification from the Chief Accounting Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
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Exhibit 31.2
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(32.1)
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Certification from the Chief Executive Officer and Chief Accounting
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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Exhibit 32.1
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149
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