UNITED STATES OF AMERICA SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., 20549
FORM 10-Q
|
|
|
þ
|
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the Quarterly Period ended September 30, 2009
Commission File: 001-15849
SANTANDER BANCORP
(Exact name of Corporation as specified in its charter)
|
|
|
Commonwealth of Puerto Rico
|
|
66-0573723
|
|
|
|
(State or other jurisdiction of incorporation or organization)
|
|
(I.R.S. Employer Identification No.)
|
|
|
|
B7 Tabonuco Street, 18th Floor, San Patricio, Guaynabo,
Puerto Rico
|
|
00968-3028
|
|
|
|
(Address of principal executive offices)
|
|
(Zip Code)
|
Registrants telephone number, including area code:
(787) 777-4100
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
þ
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes
o
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
o
|
Accelerated filer
þ
|
Non-accelerated filer
o
(Do not check if a smaller reporting company)
|
Smaller reporting company
o
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes
o
No
þ
Indicate the number of shares outstanding of each of the Registrants classes of common stock as of
the last practicable date.
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
|
|
|
Title of each class
|
|
Outstanding as of September 30, 2009
|
|
|
|
|
Common Stock, $2.50 par value
|
|
46,639,104
|
SANTANDER BANCORP
CONTENTS
Forward-Looking Statements
. When used in this Form 10-Q or future filings by Santander BanCorp
(the Corporation) with the Securities and Exchange Commission, in the Corporations press
releases or other public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the word or phrases would be, will allow, intends
to, will likely result, are expected to, will continue, 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.
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 Corporations 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 Corporations financial performance
and could cause the Corporations 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.
PART I ITEM 1
FINANCIAL STATEMENTS (UNAUDITED)
SANTANDER BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
AS OF SEPTEMBER 30, 2009 AND DECEMBER 31, 2008
(Dollars in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents:
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
260,277
|
|
|
$
|
217,311
|
|
Interest-bearing deposits
|
|
|
787
|
|
|
|
976
|
|
Federal funds sold
|
|
|
47,825
|
|
|
|
64,871
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents
|
|
|
308,889
|
|
|
|
283,158
|
|
Interest-Bearing Deposits
|
|
|
9,178
|
|
|
|
7,394
|
|
Trading Securities,
at fair value:
|
|
|
30,061
|
|
|
|
64,719
|
|
Investment Securities Available for Sale,
at fair value:
|
|
|
|
|
|
|
|
|
Securities pledged that can be repledged
|
|
|
|
|
|
|
408,650
|
|
Other investment securities available for sale
|
|
|
423,538
|
|
|
|
393,462
|
|
|
|
|
|
|
|
|
Total investment securities available for sale
|
|
|
423,538
|
|
|
|
802,112
|
|
|
|
|
|
|
|
|
Other Investment Securities,
at amortized cost
|
|
|
53,631
|
|
|
|
61,632
|
|
Loans Held for Sale,
net
|
|
|
25,173
|
|
|
|
38,459
|
|
Loans,
net
|
|
|
5,343,466
|
|
|
|
5,929,499
|
|
Accrued Interest Receivable
|
|
|
44,922
|
|
|
|
45,953
|
|
Premises and Equipment,
net
|
|
|
21,061
|
|
|
|
19,368
|
|
Real Estate Held for Sale
|
|
|
2,818
|
|
|
|
8,075
|
|
Goodwill
|
|
|
121,482
|
|
|
|
121,482
|
|
Intangible Assets
|
|
|
29,194
|
|
|
|
29,842
|
|
Other Assets
|
|
|
425,218
|
|
|
|
485,883
|
|
|
|
|
|
|
|
|
|
|
$
|
6,838,631
|
|
|
$
|
7,897,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
Non interest-bearing
|
|
$
|
692,538
|
|
|
$
|
692,963
|
|
Interest-bearing, including $12.4 million and $101.4 million at fair value in 2009 and 2008, respectively
|
|
|
3,740,157
|
|
|
|
4,321,939
|
|
|
|
|
|
|
|
|
Total deposits
|
|
|
4,432,695
|
|
|
|
5,014,902
|
|
|
|
|
|
|
|
|
Federal Funds Purchased and Other Borrowings
|
|
|
47,500
|
|
|
|
2,040
|
|
Securities Sold Under Agreements to Repurchase
|
|
|
|
|
|
|
375,000
|
|
Commercial Paper Issued
|
|
|
116,961
|
|
|
|
50,985
|
|
Federal Home Loan Bank Advances
|
|
|
1,020,000
|
|
|
|
1,185,000
|
|
Term Notes
|
|
|
20,424
|
|
|
|
19,967
|
|
Subordinated Capital Notes,
including $123.2 million and $118.3 million at fair value in 2009 and 2008,
respectively
|
|
|
311,336
|
|
|
|
306,392
|
|
Accrued Interest Payable
|
|
|
31,106
|
|
|
|
45,419
|
|
Other Liabilities
|
|
|
282,920
|
|
|
|
346,235
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
6,262,942
|
|
|
|
7,345,940
|
|
|
|
|
|
|
|
|
Contingencies and Commitments (Notes 8, 9, 10, 11, 12, 13, 14 and 16)
|
|
|
|
|
|
|
|
|
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
|
|
|
318,282
|
|
|
|
317,141
|
|
Treasury stock at cost, 4,011,260 shares
|
|
|
(67,552
|
)
|
|
|
(67,552
|
)
|
Accumulated other comprehensive loss, net of taxes
|
|
|
(22,173
|
)
|
|
|
(22,563
|
)
|
Retained earnings:
|
|
|
|
|
|
|
|
|
Reserve fund
|
|
|
139,250
|
|
|
|
139,250
|
|
Undivided profits
|
|
|
81,256
|
|
|
|
58,734
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
575,689
|
|
|
|
551,636
|
|
|
|
|
|
|
|
|
|
|
$
|
6,838,631
|
|
|
$
|
7,897,576
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements
1
SANTANDER BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) (UNAUDITED)
FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(Dollars in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended
|
|
|
For the three months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Interest Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
348,861
|
|
|
$
|
417,070
|
|
|
$
|
113,844
|
|
|
$
|
135,263
|
|
Investment securities
|
|
|
17,479
|
|
|
|
38,758
|
|
|
|
4,132
|
|
|
|
11,442
|
|
Interest-bearing deposits
|
|
|
433
|
|
|
|
750
|
|
|
|
89
|
|
|
|
174
|
|
Federal funds sold
|
|
|
58
|
|
|
|
3,897
|
|
|
|
15
|
|
|
|
1,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
366,831
|
|
|
|
460,475
|
|
|
|
118,080
|
|
|
|
148,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
68,723
|
|
|
|
117,403
|
|
|
|
18,410
|
|
|
|
37,235
|
|
Securities sold under agreements to repurchase and
other borrowings
|
|
|
28,242
|
|
|
|
65,047
|
|
|
|
8,054
|
|
|
|
15,240
|
|
Subordinated capital notes
|
|
|
11,243
|
|
|
|
9,974
|
|
|
|
3,561
|
|
|
|
3,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
108,208
|
|
|
|
192,424
|
|
|
|
30,025
|
|
|
|
55,605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
258,623
|
|
|
|
268,051
|
|
|
|
88,055
|
|
|
|
92,406
|
|
Provision for Loan Losses
|
|
|
115,525
|
|
|
|
123,650
|
|
|
|
40,689
|
|
|
|
45,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses
|
|
|
143,098
|
|
|
|
144,401
|
|
|
|
47,366
|
|
|
|
46,846
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank service charges, fees and other
|
|
|
30,097
|
|
|
|
33,744
|
|
|
|
9,746
|
|
|
|
10,220
|
|
Broker-dealer, asset management and insurance fees
|
|
|
45,165
|
|
|
|
58,110
|
|
|
|
13,986
|
|
|
|
16,137
|
|
Gain on sale of securities available for sale
|
|
|
9,251
|
|
|
|
5,153
|
|
|
|
|
|
|
|
2,279
|
|
Gain on sale of loans
|
|
|
3,820
|
|
|
|
3,004
|
|
|
|
1,019
|
|
|
|
737
|
|
Other (loss) income
|
|
|
(3,025
|
)
|
|
|
19,756
|
|
|
|
(2,806
|
)
|
|
|
7,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
85,308
|
|
|
|
119,767
|
|
|
|
21,945
|
|
|
|
36,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
79,513
|
|
|
|
92,883
|
|
|
|
24,633
|
|
|
|
31,372
|
|
Occupancy costs
|
|
|
18,976
|
|
|
|
20,631
|
|
|
|
6,597
|
|
|
|
7,409
|
|
Equipment expenses
|
|
|
3,032
|
|
|
|
3,340
|
|
|
|
988
|
|
|
|
1,087
|
|
EDP servicing, amortization and technical assistance
|
|
|
29,782
|
|
|
|
31,208
|
|
|
|
9,760
|
|
|
|
10,147
|
|
Communication expenses
|
|
|
6,988
|
|
|
|
7,724
|
|
|
|
2,193
|
|
|
|
2,544
|
|
Business promotion
|
|
|
2,794
|
|
|
|
5,438
|
|
|
|
926
|
|
|
|
1,652
|
|
Provision for claim receivable
|
|
|
|
|
|
|
25,120
|
|
|
|
|
|
|
|
25,120
|
|
Other taxes
|
|
|
9,895
|
|
|
|
10,150
|
|
|
|
3,179
|
|
|
|
3,394
|
|
Other operating expenses
|
|
|
49,565
|
|
|
|
52,947
|
|
|
|
13,369
|
|
|
|
19,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other operating expenses
|
|
|
200,545
|
|
|
|
249,441
|
|
|
|
61,645
|
|
|
|
101,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax
|
|
|
27,861
|
|
|
|
14,727
|
|
|
|
7,666
|
|
|
|
(18,493
|
)
|
Provision (Benefit) for Income Tax
|
|
|
5,336
|
|
|
|
(1,349
|
)
|
|
|
(2,805
|
)
|
|
|
(10,331
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) Available to Common Shareholders
|
|
$
|
22,525
|
|
|
$
|
16,076
|
|
|
$
|
10,471
|
|
|
$
|
(8,162
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted Earnings (Loss) per Common Share
|
|
$
|
0.48
|
|
|
$
|
0.34
|
|
|
$
|
0.22
|
|
|
$
|
(0.18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements
2
SANTANDER BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND YEAR ENDED DECEMBER 31, 2008
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended
|
|
|
Year ended
|
|
|
|
September 30, 2009
|
|
|
December 31, 2008
|
|
Common Stock:
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
126,626
|
|
|
$
|
126,626
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
126,626
|
|
|
|
126,626
|
|
|
|
|
|
|
|
|
Capital Paid in Excess of Par Value:
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
|
317,141
|
|
|
|
308,373
|
|
Share based compensation sponsored by the ultimate
parent
|
|
|
1,974
|
|
|
|
9,710
|
|
Payments to ultimate parent for long-term incentive plan
|
|
|
(833
|
)
|
|
|
(942
|
)
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
318,282
|
|
|
|
317,141
|
|
|
|
|
|
|
|
|
Treasury Stock at cost:
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
|
(67,552
|
)
|
|
|
(67,552
|
)
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
(67,552
|
)
|
|
|
(67,552
|
)
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Loss, net of tax:
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
|
(22,563
|
)
|
|
|
(24,478
|
)
|
Unrealized net (loss) gain on investment securities
available
for sale, net of tax
|
|
|
(3,181
|
)
|
|
|
13,449
|
|
Unrealized net gain on cash flow hedges, net of tax
|
|
|
|
|
|
|
1,237
|
|
Minimum pension benefit (liability), net of tax
|
|
|
3,571
|
|
|
|
(12,771
|
)
|
|
|
|
|
|
|
|
Balance at end of the period
|
|
|
(22,173
|
)
|
|
|
(22,563
|
)
|
|
|
|
|
|
|
|
Reserve Fund:
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
|
139,250
|
|
|
|
139,250
|
|
|
|
|
|
|
|
|
Balance at end of the period
|
|
|
139,250
|
|
|
|
139,250
|
|
|
|
|
|
|
|
|
Undivided Profits:
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
|
58,734
|
|
|
|
54,317
|
|
Net income
|
|
|
22,525
|
|
|
|
10,531
|
|
Deferred tax benefit amortization
|
|
|
(3
|
)
|
|
|
(4
|
)
|
Common stock cash dividends
|
|
|
|
|
|
|
(9,329
|
)
|
Cummulative effect of the adoption of FASB ASC
|
|
|
|
|
|
|
|
|
Topic 825, Fair Value Option
|
|
|
|
|
|
|
3,219
|
|
|
|
|
|
|
|
|
Balance at end of the period
|
|
|
81,256
|
|
|
|
58,734
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
$
|
575,689
|
|
|
$
|
551,636
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements
3
SANTANDER BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
FOR THE NINE MONTHS AND THREE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended
|
|
|
For the three months ended
|
|
|
|
Sept. 30,
|
|
|
Sept. 30,
|
|
|
Sept. 30,
|
|
|
Sept. 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
22,525
|
|
|
$
|
16,076
|
|
|
$
|
10,471
|
|
|
$
|
(8,162
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding losses on investment securities
available for sale, net of tax
|
|
|
1,522
|
|
|
|
1,408
|
|
|
|
2,606
|
|
|
|
3,557
|
|
Reclassification adjustment for gains on
investment securities available for sale
included in net income (loss), net of tax
|
|
|
(4,703
|
)
|
|
|
(1,689
|
)
|
|
|
|
|
|
|
(2,093
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized net (loss) gain on investment
securities available for sale, net of tax
|
|
|
(3,181
|
)
|
|
|
(281
|
)
|
|
|
2,606
|
|
|
|
1,464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized net gain on cash flow hedges, net of tax
|
|
|
|
|
|
|
1,049
|
|
|
|
|
|
|
|
573
|
|
Minimum pension benefit, net of tax
|
|
|
3,571
|
|
|
|
|
|
|
|
2,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income, net of tax
|
|
|
390
|
|
|
|
768
|
|
|
|
5,377
|
|
|
|
2,037
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
22,915
|
|
|
$
|
16,844
|
|
|
$
|
15,848
|
|
|
$
|
(6,125
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these condensed consolidated financial
statements
4
SANTANDER BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
22,525
|
|
|
$
|
16,076
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
9,512
|
|
|
|
11,515
|
|
Deferred tax benefit
|
|
|
(6,307
|
)
|
|
|
(9,895
|
)
|
Provision for loan losses
|
|
|
115,525
|
|
|
|
123,650
|
|
Gain on sale of securities available for sale
|
|
|
(9,251
|
)
|
|
|
(5,153
|
)
|
Gain on sale of loans
|
|
|
(3,820
|
)
|
|
|
(3,004
|
)
|
Loss (gain) on financial instruments measured at fair value
|
|
|
8,356
|
|
|
|
(4,135
|
)
|
Gain on trading securities
|
|
|
(1,537
|
)
|
|
|
(2,798
|
)
|
Valuation (gain) loss on loans held for sale
|
|
|
|
|
|
|
6,902
|
|
Net premium amortization (discount accretion) on securities
|
|
|
366
|
|
|
|
(2,732
|
)
|
Net (discount acretion) premium amortization on loans
|
|
|
(359
|
)
|
|
|
281
|
|
Accretion of debt discount
|
|
|
478
|
|
|
|
470
|
|
Share based compensation sponsored by the ultimate parent
|
|
|
1,974
|
|
|
|
8,039
|
|
Provision for claim receivable
|
|
|
|
|
|
|
25,120
|
|
Purchases and originations of loans held for sale
|
|
|
(150,373
|
)
|
|
|
(294,294
|
)
|
Proceeds from sales of loans
|
|
|
187,494
|
|
|
|
317,536
|
|
Repayments of loans held for sale
|
|
|
506
|
|
|
|
16,710
|
|
Proceeds from sales of trading securities
|
|
|
709,324
|
|
|
|
1,869,182
|
|
Purchases of trading securities
|
|
|
(588,996
|
)
|
|
|
(1,798,473
|
)
|
Decrease in accrued interest receivable
|
|
|
1,031
|
|
|
|
28,834
|
|
Decrease in other assets
|
|
|
8,968
|
|
|
|
18,172
|
|
Decrease in accrued interest payable
|
|
|
(14,314
|
)
|
|
|
(32,265
|
)
|
Drecrease in other liabilities
|
|
|
(9,445
|
)
|
|
|
(513
|
)
|
|
|
|
|
|
|
|
Total adjustments
|
|
|
259,132
|
|
|
|
273,149
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
281,657
|
|
|
|
289,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Increase in interest-bearing deposits
|
|
|
(1,784
|
)
|
|
|
(866
|
)
|
Proceeds from sales of investment securities available for sale
|
|
|
507,258
|
|
|
|
129,451
|
|
Proceeds from maturities of investment securities available for sale
|
|
|
196,240
|
|
|
|
8,621,004
|
|
Purchases of investment securities available for sale
|
|
|
(346,155
|
)
|
|
|
(8,537,194
|
)
|
Proceeds from maturities of other investment securities
|
|
|
83,151
|
|
|
|
38,477
|
|
Purchases of other investments
|
|
|
(75,150
|
)
|
|
|
(28,800
|
)
|
Repayment of securities and securities called
|
|
|
26,274
|
|
|
|
72,952
|
|
Payments on derivative transactions
|
|
|
|
|
|
|
(1,497
|
)
|
Net decrease in loans
|
|
|
366,213
|
|
|
|
425,921
|
|
Purchases of premises and equipment
|
|
|
(1,088
|
)
|
|
|
(4,634
|
)
|
|
|
|
|
|
|
|
Net cash provided by investing activities
|
|
|
754,959
|
|
|
|
714,814
|
|
|
|
|
|
|
|
|
(Continued)
The
accompanying notes are an integral part of these condensed consolidated financial
statements
5
SANTANDER BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net (decrease) increase in deposits
|
|
|
(581,488
|
)
|
|
|
426,042
|
|
Net decrease in federal funds purchased and other borrowings
|
|
|
(119,540
|
)
|
|
|
(916,110
|
)
|
Net decrease in securities sold under agreements to repurchase
|
|
|
(375,000
|
)
|
|
|
(60,597
|
)
|
Net increase (decrease) in commercial paper issued
|
|
|
65,976
|
|
|
|
(234,624
|
)
|
Payment to ultimate parent for long-term incentive plan
|
|
|
(833
|
)
|
|
|
|
|
Dividends paid
|
|
|
|
|
|
|
(16,790
|
)
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(1,010,885
|
)
|
|
|
(802,079)
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CHANGE IN CASH AND CASH EQUIVALENTS
|
|
|
25,731
|
|
|
|
201,960
|
|
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
|
|
|
283,158
|
|
|
|
201,697
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF PERIOD
|
|
$
|
308,889
|
|
|
$
|
403,657
|
|
|
|
|
|
|
|
|
Concluded
Supplemental Disclosures of Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
121,204
|
|
|
$
|
223,877
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
5,915
|
|
|
$
|
10,038
|
|
|
|
|
|
|
|
|
Noncash transactions:
|
|
|
|
|
|
|
|
|
Minimum pension benefit
|
|
$
|
3,571
|
|
|
$
|
|
|
|
|
|
|
|
|
|
Loan securitizations
|
|
$
|
84,312
|
|
|
$
|
69,401
|
|
|
|
|
|
|
|
|
Reclassification of premises to real estate held for sale
|
|
$
|
|
|
|
$
|
8,076
|
|
|
|
|
|
|
|
|
Reclassification of real estate held for sale to premises
|
|
$
|
5,257
|
|
|
$
|
|
|
|
|
|
|
|
|
|
Assets received in full satisfaction of loans
|
|
$
|
19,030
|
|
|
$
|
10,431
|
|
|
|
|
|
|
|
|
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 condensed consolidated financial statements
6
SANTANDER BANCORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
1. Summary of Significant Accounting Policies:
The accounting and reporting policies of 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. The unaudited quarterly
condensed consolidated financial statements have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC). Certain information and footnote
disclosures normally included in the annual financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted pursuant to such SEC rules
and regulations. The results of the operations and cash flows for the nine month periods ended
September 30, 2009 and 2008 are not necessarily indicative of the results to be expected for the
full year.
These statements should be read in conjunction with the consolidated financial statements
included in the Corporations Form 10-K for the year ended December 31, 2008. The accounting
policies used in preparing these condensed consolidated financial statements are substantially the
same as those described in Note 1 to the 2008 consolidated financial statements in the
Corporations Form 10-K.
Following is a summary of the Corporations most significant policies:
Nature of Operations and Use of Estimates
The Corporation 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 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.
The Corporation is subject to the Federal Bank Holding Company Act and to the regulations,
supervision, and examination of the Federal Reserve Board.
In preparing the condensed 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 condensed 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 condensed consolidated financial statements include the accounts of the Corporation, the
Bank and the Banks 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.
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 Corporations
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.
7
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 condensed consolidated statements of
income 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 condensed consolidated statements of income 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 condensed consolidated statements of income.
|
|
|
|
|
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.
|
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 condensed consolidated statements of income, 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 Corporations 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 Financial Accounting Standard Board (FASB) Accounting Standard
Codification (ASC) Topic 825,
Fair Value Option
, 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 condensed consolidated statements of income 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. In connection with the adoption of FASB ASC Topic 825,
Fair
Value Option
, the Corporation carries certain callable brokered
8
certificates of deposits and subordinated capital notes at fair value with changes in fair value
included in other income in the condensed consolidated statements of income (loss). The cost of
funding of the Corporations borrowings, as well as derivatives, continues to be included in
interest expense and income, as applicable, in the condensed consolidated statements of income
(loss). See Note 18 to the condensed 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 condensed 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
condensed consolidated statements of income 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 managements 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 FASB ASC Topic 840,
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.
9
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 condensed 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 September 30, 2009 had terms ranging from one month to four 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 managements 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,
managements 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 managements estimate of the borrowers 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 FASB ASC
Topic 310,
Receivables
. 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 collectibity of both principal and interest when
assessing the need for loss accrual.
Historical loss rates for commercial and consumer loans may also be adjusted for significant
factors that, in managements 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 Corporations
internal credit examiners.
Allowances on individual loans and historical loss rates are reviewed quarterly and adjusted
as necessary based on changing borrower and/or collateral conditions, actual collection, charge-off
experience and other factor that, based on management judgment, reflect the impact of any current
condition.
10
Effective July 1, 2009, the Corporation revised its quantitative methodology for estimating
the allowance for loan losses for the consumer and consumer finance portfolios. Through the end of
the second quarter ended June 30, 2009, the Corporations quantitative methodology for estimating
the allowance for loan losses for the consumer and consumer finance portfolios was based on a
historical loss rate analysis, which relied on historical loss experience over a defined period for
pools of loans with common characteristics. The revised quantitative methodology is based on a
migration analysis/roll rate and considers both historical loss rates and loss rates based on the
likelihood of credit deterioration (expectation of current loans becoming delinquent in monthly
increments until they default and are charged-off). The loss factor estimated based on this
methodology may be adjusted to incorporate seasonality attributes as well as to reflect recent
economic or business trends that may affect the collectability of the portfolio. The loss factor is
then applied to the outstanding portfolio at period end to estimate the amount of expected charge
offs and the provision for loan losses required to support an adequate allowance for loan losses.
The Corporations decision to revise and improve its methodology was made after a thorough
evaluation of the reliability of the revised methodology including a back testing analysis.
Management believes that the revised quantitative methodology provides a more reliable estimate of
probable losses on its existing consumer and consumer finance portfolios. The application of this
revised methodology for the quarter ended September 30, 2009 resulted in a provision for loan
losses on consumer and consumer finance loans which is $305,000 lower than the amount that would
have been determined under the previous quantitative method. The positive effect on earnings per
share for the quarter ended September 30, 2009 was less than $.01.
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.
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.
Goodwill and Intangible Assets
The Corporation accounts for goodwill in accordance with FASB ASC Topic 350,
Intangible-Goodwill and Others
. 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 condensed consolidated statements of income
(loss).
In accordance with FASB ASC Topic 360 Property, Plant and Equipment, 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 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 condensed
consolidated statements of income (loss).
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.
Effective January 1, 2009, the Corporation has adopted FASB ASC Topic 820,
Fair Value Measurements
and Disclosures
for fair value measurement of goodwill and intangible assets. The adoption of this
accounting standard for nonfinancial assets and nonfinancial liabilities did not have a material
impact on the Corporations condensed consolidated financial statements and disclosures.
11
As a result of the purchase price allocations from prior acquisitions and the Corporations
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 Corporations 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 Corporations reporting units, the Corporations 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 the nine-month periods ended September 30, 2009 and 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 condensed 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 condensed consolidated
balance sheets. At September 30, 2009 and December 31, 2008, the unpaid principal balances of
mortgage loans serviced for others amounted to approximately $1,346,000,000 and $1,281,000,000,
respectively. In connection with these mortgage-servicing activities, the Corporation administered
escrow and other custodial funds which amounted to approximately $3,489,000 and $4,001,000 at
September 30, 2009 and December 31, 2008, respectively.
Trust Services
In connection with its trust activities, the Corporation administers and is custodian of
assets amounting to approximately $139,000,000 and $200,000,000 at September 30, 2009 and December
31, 2008, respectively. Due to the nature of trust activities, these assets are not included in
the Corporations consolidated balance sheets. The Corporations 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 Corporations 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
12
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 Corporations 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 managements
estimate of future insurance policy cancellations as a result of historical turnover rates by types
of credit facilities subject to insurance.
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 Corporations financial statements or tax returns. Deferred income tax
assets and liabilities are determined for differences between financial statement and tax basis 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 ASC Topic 740,
Income Taxes
. 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 Corporations average number of common shares outstanding, used in the computation of earnings
per common share was 46,639,104 for each of the quarters ended September 30, 2009 and 2008. Basic
and diluted earnings per common share are the same since no stock options or other potentially
dilutive common shares were outstanding during the periods ended September 30, 2009 and 2008.
Recent Accounting Pronouncements that Affect the Corporation
The adoption of these accounting standards had the following impact on the Corporations
condensed consolidated statements of income and financial condition:
13
|
|
|
FASB ASC Topic 855, Subsequent Events
. In May 2009, the FASB issued FASB ASC Topic
855, which establish general standards of accounting and disclosure of events that occur
after the balance sheet date but before financial statements are issued or are available to
be issued. In particular, this Statement sets forth : (i) the period after the balance
sheet date during which management of a reporting entity should evaluate events or
transactions that may occur for potential recognition or disclosure in the financial
statements, (ii) the circumstances under which an entity should recognize events or
transactions occurring after the balance sheet date in its financial statements, (iii) the
disclosures that an entity should make about events or transactions that occurred after the
balance sheet date. This FASB ASC Topic should be applied to the accounting and disclosure
of subsequent events. This FASB ASC Topic does not apply to subsequent events or
transactions that are within the scope of other applicable accounting standards that
provide different guidance on the accounting treatment for subsequent events or
transactions. This FASB ASC Topic was effective for interim and annual periods ending after
June 15, 2009, which was June 30, 2009 for the Corporation. The adoption of this Topic did
not have a material impact on the Corporations condensed consolidated financial statements
and disclosures.
|
|
|
|
|
FASB ASC Topic 105, The FASB Accounting Standard Codification and the
Hierarchy of Generally Accepted Accounting Principles.
In June 2009, the FASB issued FASB
ASC Topic 105, which became the source of authoritative GAAP recognized by the FASB to be
applied by nongovernmental entities. Rules and interpretive releases of the SEC under
authority of federal securities laws are also sources of authoritative GAAP for SEC
registrants. On the effective date of this FASB ASC Topic, the Codification will supersede
all then-existing non-SEC accounting and reporting standards. All other non-SEC accounting
literature not included in the Codification will become non-authoritative. This FASB ASC
Topic identify the sources of accounting principles and the framework for selecting the
principles used in preparing the financial statements of nongovernmental entities that are
presented in conformity with GAAP. Also, arranged these sources of GAAP in a hierarchy for
users to apply accordingly. In other words, the GAAP hierarchy will be modified to include
only two levels of GAAP: authoritative and non-authoritative. This FASB ASC Topic is
effective for financial statements issued for interim and annual periods ending after
September 15, 2009. The adoption of this topic did not have a material impact on the
Corporation disclosure of the condensed financial statements
|
|
|
|
|
FASB ASC Topic 320, Recognition and Presentation of Other-Than-Temporary Impairments.
In April 2009, the FASB issued FASB ASC Topic 320 amends the other-than-temporary
impairment guidance in GAAP for debt securities to make the guidance more operational and
to improve the presentation and disclosure of other-than-temporary impairments on debt and
equity securities in the financial statements. This FASB ASC Topic does not amend existing
recognition and measurement guidance related to other-than-temporary impairments of equity
securities. The FASB ASC Topic shall be effective for interim and annual reporting periods
ending after June 15, 2009, with early adoption permitted for periods ending after March
15, 2009. Earlier adoption for periods ending before March 15, 2009, is not permitted. This
FASB ASC Topic does not require disclosures for earlier periods presented for comparative
purposes at initial adoption. In periods after initial adoption, this FASB ASC Topic
requires comparative disclosures only for periods ending after initial adoption. The
adoption of this Topic did not have a material impact on the Corporations condensed
consolidated financial statements and disclosures.
|
The Corporation is evaluating the impact that the following recently issued accounting
pronouncements may have on its condensed consolidated financial statements and disclosures.
14
|
|
|
FASB ASC Topic 860, Accounting for Transfer of Financial Asset.,
In June 2009, the
FASB issued additional guidance under FASB ASC Topic 860,
Accounting for Transfer and
Servicing of Financial Assets and Extinguishment of Liabilities"
, which improves the
relevance, representational faithfulness, and comparability of the information that a
reporting entity provides in its financial statements about a transfer of financial assets;
the effects of a transfer on its financial position, financial performance, and cash flows;
and a transferors continuing involvement, if any, in transferred financial assets. The
Board undertook this project to address (i) practices that have developed since the
issuance of FASB ASC Topic 860, that are not consistent with the original intent and key
requirements of that statement and (ii) concerns of financial statement users that many of
the financial assets (and related obligations) that have been derecognized should continue
to be reported in the financial statements of transferors. This additional guidance
requires that a transferor recognize and initially measure at fair value all assets
obtained (including a transferors beneficial interest) and liabilities incurred as a
result of a transfer of financial assets accounted for as a sale. Enhanced disclosures are
required to provide financial statement users with greater transparency about transfers of
financial assets and a transferors continuing involvement with transferred financial
assets. This additional guidance must be applied as of the beginning of each reporting
entitys first annual reporting period that begins after November 15, 2009, for interim
periods within that first annual reporting period and for interim and annual reporting
periods thereafter. Earlier application is prohibited. This additional guidance must be
applied to transfers occurring on or after the effective date.
|
|
|
|
|
FASB ASC Topic 810, Variables Interest Entities
. In June 2009, the FASB issued
FASB ASC Topic 810, which requires an enterprise to perform an analysis to determine
whether the enterprises variable interest or interests give it a controlling financial
interest in a variable interest entity. This analysis identifies the primary beneficiary of
a variable interest entity as the enterprise that has both of the following
characteristics: (i)The power to direct the activities of a variable interest entity that
most significantly impact the entitys economic performance and (ii)The obligation to
absorb losses of the entity that could potentially be significant to the variable interest
entity or the right to receive benefits from the entity that could potentially be
significant to the variable interest entity. Additionally, an enterprise is required to
assess whether it has an implicit financial responsibility to ensure that a variable
interest entity operates as designed when determining whether it has the power to direct
the activities of the variable interest entity that most significantly impact the entitys
economic performance. This FASB Topic requires ongoing reassessments of whether an
enterprise is the primary beneficiary of a variable interest entity and eliminate the
quantitative approach previously required for determining the primary beneficiary of a
variable interest entity, which was based on determining which enterprise absorbs the
majority of the entitys expected losses, receives a majority of the entitys expected
residual returns, or both. This FASB ASC Topic shall be effective as of the beginning of
each reporting entitys first annual reporting period that begins after November 15, 2009,
for interim periods within that first annual reporting period, and for interim and annual
reporting periods thereafter. Earlier application is prohibited.
|
|
|
|
|
FASB ASC Topic 820
,
Fair Value measurement and Disclosures
, an Accounting Standard
Update. In September 2009, the FASB issued this Update to amendments to Subtopic 82010,
Fair Value Measurements and Disclosures
. Overall, for the fair value measurement of
investments in certain entities that calculates net asset value per share (or its
equivalent). The amendments in this Update permit, as a practical expedient, a reporting
entity to measure the fair value of an investment that is within the scope of the
amendments in this Update on the basis of the net asset value per share of the investment
(or its equivalent) if the net asset value of the investment (or its equivalent) is
calculated in a manner consistent with the measurement principles of Topic 946 as of the
reporting entitys measurement date, including measurement of all or substantially all of
the underlying investments of the investee in accordance with Topic 820. The amendments in
this Update also require disclosures by major category of investment about the attributes
of investments within the scope of the amendments in this Update, such as the nature of any
restrictions on the investors ability to redeem its investments at the measurement date,
any unfunded commitments (for example, a contractual commitment by the investor to invest a
specified amount of additional capital at a future date to fund investments that will be
made by the investee), and the investment strategies of the investees. The major category
of investment is required to be determined on the basis of the nature and risks of the
investment in a manner consistent with the guidance for major security types in GAAP on
investments in debt and equity securities in paragraph 320-10-50-lB. The disclosures are
required for all investments within the scope of the amendments in this Update regardless
of whether the fair value of the investment is measured using the practical expedient. The
amendments in this Update apply to all reporting entities that hold an investment that is
required or permitted to be measured or disclosed at fair value on a recurring or non
recurring basis and, as of the reporting entitys measurement date, if the investment meets
certain criteria The amendments in this Update are effective for the interim and annual
periods ending after December 15, 2009. Early application is permitted in financial
statements for earlier interim and annual periods that have not been issued.
|
|
|
|
|
FASB ASC Topic 740
,
Income Taxes
, an Accounting Standard Update. In September 2009,
the FASB issued this Update to address the need for additional implementation guidance on
accounting for uncertainty in income taxes. The
|
15
|
|
|
guidance answers the following questions: (i) Is the income tax paid by the entity
attributable to the entity or its owners? (ii) What constitutes a tax position for a
pass-through entity or a tax-exempt not-for-profit entity? (iii) How should accounting for
uncertainty in income taxes be applied when a group of related entities comprise both taxable
and nontaxable entities? In addition, this Updated decided to eliminate the disclosures
required by paragraph 740-10-50-15(a) through (b) for nonpublic entities. The implementation
guidance will apply to financial statements of nongovernmental entities that are presented in
conformity with GAAP. The disclosure amendments will apply only to nonpublic entities as
defined in Section 740-10-20. For entities that are currently applying the standards for
accounting for uncertainty in income taxes, the guidance and disclosure amendments are
effective for financial statements issued for interim and annual periods ending after
September 15, 2009.
|
2. 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:
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
|
|
|
|
|
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
|
|
$
|
102,826
|
|
|
$
|
330
|
|
|
$
|
|
|
|
$
|
103,156
|
|
|
|
0.78
|
%
|
After one year to five years
|
|
|
77,461
|
|
|
|
795
|
|
|
|
|
|
|
|
78,256
|
|
|
|
1.05
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
180,287
|
|
|
|
1,125
|
|
|
|
|
|
|
|
181,412
|
|
|
|
0.89
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commonwealth of Puerto Rico and its subdivisions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within one year
|
|
|
1,675
|
|
|
|
3
|
|
|
|
3
|
|
|
|
1,675
|
|
|
|
3.46
|
%
|
After one year to five years
|
|
|
73,897
|
|
|
|
295
|
|
|
|
83
|
|
|
|
74,109
|
|
|
|
5.03
|
%
|
After five years to ten years
|
|
|
7,176
|
|
|
|
169
|
|
|
|
|
|
|
|
7,345
|
|
|
|
5.24
|
%
|
Over ten years
|
|
|
4,430
|
|
|
|
95
|
|
|
|
|
|
|
|
4,525
|
|
|
|
5.55
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
87,178
|
|
|
|
562
|
|
|
|
86
|
|
|
|
87,654
|
|
|
|
5.05
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After one year to five years
|
|
|
141,665
|
|
|
|
1,232
|
|
|
|
|
|
|
|
142,897
|
|
|
|
1.85
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Over ten years
|
|
|
11,251
|
|
|
|
324
|
|
|
|
|
|
|
|
11,575
|
|
|
|
5.63
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
420,381
|
|
|
$
|
3,243
|
|
|
$
|
86
|
|
|
$
|
423,538
|
|
|
|
2.20
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The duration of long-term (over one year) investment securities in the available for sale
portfolio is approximately 1.9 years at September 30, 2009, comprised of approximately 1.3 years
for treasuries and agencies of the United States Government, 2.2 years for instruments of the
Commonwealth of Puerto Rico and its subdivisions, 2.4 years for corporate bonds and 3.3 years for
mortgage backed securities.
17
The number of positions, fair value and unrealized losses at September 30, 2009 and December
31, 2008, 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
|
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
|
|
Commonwealth of
Puerto
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rico and its
subdivisions
|
|
|
4
|
|
|
$
|
9,004
|
|
|
$
|
63
|
|
|
|
6
|
|
|
$
|
6,277
|
|
|
$
|
23
|
|
|
|
10
|
|
|
$
|
15,281
|
|
|
$
|
86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Corporation evaluates its investment securities for other-than-temporary impairment
on a quarterly basis or earlier if other factors indicate that potential impairment exists. An
impairment charge in the condensed consolidated statements of income 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 Corporations intent to sell and the situation that
it most likely-than-not that the Corporation will be required to sell the security prior to
recovery of the carrying amount of the investment.
As of September 30, 2009 and December 31, 2008, management concluded that there was no
other-than-temporary impairment in its investment securities portfolio.
The unrealized losses in the Corporations investments in debt securities were caused by
changes in market interest rates and not credit quality. All debt 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 amortized cost of the investment. The
Corporation evaluates debt securities for other than temporary impairment based on any of the
following triggering events: (1) the Corporation has the intent to sell the security, (2) it is
more likely than not that the Corporation will be required to sell the security before recovery, or
(3) the Corporation does not expect to recover the entire amortized cost basis of the security.
Upon evaluation of these triggering events, the Corporation believes that none of such conditions
are present at September 30, 2009 because the Corporation has sufficient capital and liquidity to
operate its business and it has no requirements or needs to sell such securities, and the
Corporation is not subject to any contractual arrangements that would require the Corporation to
sell such securities.
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.
18
3. Assets Pledged:
At September 30, 2009 and December 31, 2008, 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 September 30, and December 31 were as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Investment securities available for sale
|
|
$
|
166,339
|
|
|
$
|
227,658
|
|
Other investment securities
|
|
|
45,900
|
|
|
|
53,325
|
|
Loans
|
|
|
2,309,607
|
|
|
|
2,511,098
|
|
|
|
|
|
|
|
|
|
|
$
|
2,521,846
|
|
|
$
|
2,792,081
|
|
|
|
|
|
|
|
|
Pledged securities that the creditor has the right or contract to repledge, are presented
separately on the consolidated balance sheets. At December 31, 2008, investment securities with a
carrying value of approximately $408,650,000 were pledged to securities sold under agreements to
repurchase.
4. Loans:
The Corporations loan portfolio consists of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
Commercial and industrial
|
|
$
|
1,967,172
|
|
|
$
|
2,165,613
|
|
Consumer
|
|
|
472,844
|
|
|
|
565,833
|
|
Consumer finance
|
|
|
828,271
|
|
|
|
996,919
|
|
Leasing
|
|
|
42,859
|
|
|
|
64,065
|
|
Construction
|
|
|
83,313
|
|
|
|
194,596
|
|
Mortgage
|
|
|
2,413,572
|
|
|
|
2,553,328
|
|
|
|
|
|
|
|
|
|
|
|
5,808,031
|
|
|
|
6,540,354
|
|
|
|
|
|
|
|
|
|
|
Unearned income and deferred fees (costs):
|
|
|
|
|
|
|
|
|
Commercial, industrial and others
|
|
|
219
|
|
|
|
(290
|
)
|
Consumer finance
|
|
|
(269,989
|
)
|
|
|
(418,676
|
)
|
Allowance for loan losses
|
|
|
(194,795
|
)
|
|
|
(191,889
|
)
|
|
|
|
|
|
|
|
Loans, net
|
|
$
|
5,343,466
|
|
|
$
|
5,929,499
|
|
|
|
|
|
|
|
|
During the nine months ended September 30, 2009, the Corporation sold certain loans including
some classified as impaired to an affiliate for $142.0 million in cash. These loans had a net book
value of $142.0 million comprised of an outstanding principal balance of $149.2 million and a
specific valuation allowance of $7.2 million. The type of loans sold, at net book value, was $65.5
million in construction loans, $61.2 million in commercial loans and $15.3 million in mortgage
loans. No gain or loss was recognized on this transaction.
19
5. Allowance for Loan Losses:
Changes in the allowance for loan losses are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended
|
|
|
For the three months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
191,889
|
|
|
$
|
166,952
|
|
|
$
|
193,186
|
|
|
$
|
186,889
|
|
Provision for loan losses
|
|
|
115,525
|
|
|
|
123,650
|
|
|
|
40,689
|
|
|
|
45,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
307,414
|
|
|
|
290,602
|
|
|
|
233,875
|
|
|
|
232,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses charged to the allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
18,568
|
|
|
|
10,589
|
|
|
|
10,225
|
|
|
|
6,439
|
|
Construction
|
|
|
2,254
|
|
|
|
28,128
|
|
|
|
|
|
|
|
22,770
|
|
Mortgage
|
|
|
6,498
|
|
|
|
64
|
|
|
|
945
|
|
|
|
|
|
Consumer
|
|
|
40,642
|
|
|
|
30,370
|
|
|
|
13,241
|
|
|
|
10,395
|
|
Consumer finance
|
|
|
47,533
|
|
|
|
42,764
|
|
|
|
15,734
|
|
|
|
13,306
|
|
Leasing
|
|
|
1,334
|
|
|
|
1,497
|
|
|
|
386
|
|
|
|
447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
116,829
|
|
|
|
113,412
|
|
|
|
40,531
|
|
|
|
53,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
1,870
|
|
|
|
501
|
|
|
|
697
|
|
|
|
208
|
|
Construction
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortage
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
991
|
|
|
|
887
|
|
|
|
220
|
|
|
|
308
|
|
Consumer finance
|
|
|
1,028
|
|
|
|
1,179
|
|
|
|
389
|
|
|
|
400
|
|
Leasing
|
|
|
296
|
|
|
|
333
|
|
|
|
145
|
|
|
|
82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,210
|
|
|
|
2,900
|
|
|
|
1,451
|
|
|
|
998
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans charged-off
|
|
|
112,619
|
|
|
|
110,512
|
|
|
|
39,080
|
|
|
|
52,359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
194,795
|
|
|
$
|
180,090
|
|
|
$
|
194,795
|
|
|
$
|
180,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6. Goodwill and Other Intangible Assets:
Goodwill
The Corporation 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:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(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 Lynchs 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.
20
Other Intangible Assets
Other intangible assets at September 30, 2009 and December 31, 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
December 31, 2008
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Commercial Banking Mortgage-servicing rights
|
|
$
|
9,856
|
|
|
$
|
10,175
|
|
Wealth Management Advisory-servicing rights
|
|
|
1,038
|
|
|
|
1,267
|
|
Consumer Finance:
|
|
|
|
|
|
|
|
|
Trade name
|
|
|
18,300
|
|
|
|
18,300
|
|
Non-compete agreement
|
|
|
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
$
|
29,194
|
|
|
$
|
29,842
|
|
|
|
|
|
|
|
|
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 Corporations
subsidiary acquisition of the right to serve as the investment advisor for 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. These intangible assets are
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 agreement was intangible asset related to the
acquisition of Island Finance. The non-compete agreements has been fully amortized.
The following table reflects the components of other intangible assets at September 30, 2009
and December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Banking Mortgage-servicing rights
|
|
$
|
19,871
|
|
|
$
|
10,015
|
|
|
$
|
9,856
|
|
Wealth Management Advisory-servicing rights
|
|
|
3,050
|
|
|
|
2,012
|
|
|
|
1,038
|
|
Consumer Finance Trade Name
|
|
|
18,300
|
|
|
|
|
|
|
|
18,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
41,221
|
|
|
$
|
12,027
|
|
|
$
|
29,194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of the other intangibles assets for the nine-month periods ended September 30,
2009 and 2008 was approximately $2.1 million and $2.3 million, respectively.
21
7. Other Assets:
The Corporations other assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
December 31, 2008
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets, net
|
|
$
|
61,224
|
|
|
$
|
56,542
|
|
Accounts receivable, net of allowance for claim receivable
of $25.1 million
|
|
|
47,412
|
|
|
|
40,581
|
|
Repossesed assets, net
|
|
|
33,161
|
|
|
|
22,306
|
|
Software, net
|
|
|
5,879
|
|
|
|
7,295
|
|
Prepaid expenses
|
|
|
16,747
|
|
|
|
13,835
|
|
Income tax credits
|
|
|
12,022
|
|
|
|
19,645
|
|
Customers liabilities on acceptances
|
|
|
359
|
|
|
|
610
|
|
Derivative assets
|
|
|
144,560
|
|
|
|
197,192
|
|
Confirming advances
|
|
|
98,215
|
|
|
|
122,540
|
|
Other
|
|
|
5,639
|
|
|
|
5,337
|
|
|
|
|
|
|
|
|
|
|
$
|
425,218
|
|
|
$
|
485,883
|
|
|
|
|
|
|
|
|
Amortization of software assets for the nine-month periods ended September 30, 2009 and 2008
was approximately $2.7 million and $3.7 million, respectively.
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 Corporations total
assets of $225.3 million and a reduction in its total liabilities of $200.2 million in 2008. During
2009, the Corporation filed a claim for the amount $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 all amounts due. The tax effect related to the recognition of this valuation
allowance was a deferred tax benefit of $9.8 million.
The Law 197 of Puerto Rico (Law 197) of 2007 granted certain credits to home buyers on the
purchase of certain qualified new or existing homes. The incentives were 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 were generally granted to home buyers by the financial
institutions financing the home acquisition and later claimed on the financial institutions tax
return as a tax credit. Credits available under Law 197 needed 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 commencing after December 31, 2010. The Corporation had $12.0 million unused income
tax credits certified by the Secretary at September 30, 2009.
22
8. Other Borrowings:
Following are summaries of borrowings as of and for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
|
Federal Funds
|
|
|
Securities Sold
|
|
|
Commercial
|
|
|
|
Purchased and
|
|
|
Under Agreements
|
|
|
Paper
|
|
|
|
Other Borrowings
|
|
|
to Repurchase
|
|
|
Issued
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount outstanding at period-end
|
|
$
|
47,500
|
|
|
$
|
|
|
|
$
|
116,961
|
|
|
|
|
|
|
|
|
|
|
|
Average indebtedness outstanding during the period
|
|
$
|
5,605
|
|
|
$
|
102,747
|
|
|
$
|
85,088
|
|
|
|
|
|
|
|
|
|
|
|
Maximum amount outstanding during the period
|
|
$
|
47,500
|
|
|
$
|
375,000
|
|
|
$
|
175,000
|
|
|
|
|
|
|
|
|
|
|
|
Average interest rate for the period
|
|
|
2.11
|
%
|
|
|
4.43
|
%
|
|
|
1.07
|
%
|
|
|
|
|
|
|
|
|
|
|
Average interest rate at period-end
|
|
|
2.10
|
%
|
|
|
|
|
|
|
0.55
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
%
|
|
|
|
|
|
|
|
|
|
|
Federal funds purchased and other borrowings, securities sold under agreements to repurchase
and commercial paper issued mature as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
December 31, 2008
|
|
|
|
(In thousands)
|
|
Federal funds purchased and other borrowings:
|
|
|
|
|
|
|
|
|
Thirty to ninety days
|
|
$
|
47,500
|
|
|
$
|
|
|
Over ninety days
|
|
|
|
|
|
|
2,040
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
47,500
|
|
|
$
|
2,040
|
|
|
|
|
|
|
|
|
Securities sold under agreements to repurchase:
|
|
|
|
|
|
|
|
|
Thirty to ninety days
|
|
$
|
|
|
|
$
|
75,000
|
|
Over ninety days
|
|
|
|
|
|
|
300,000
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
375,000
|
|
|
|
|
|
|
|
|
Commercial paper issued:
|
|
|
|
|
|
|
|
|
Within thirty days
|
|
$
|
116,961
|
|
|
$
|
50,985
|
|
|
|
|
|
|
|
|
23
As of December 31, 2008, 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
|
|
|
|
|
|
|
|
|
|
|
|
During the first quarter ended March 31, 2009, the Corporation cancelled $300 million of
securities sold under agreement to repurchase. As a result of this early cancellation, the
Corporation paid $9.6 million of penalty which was recognized as a loss included within other
income in the condensed consolidated statements of income.
The followings investments 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
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
9. Advances from Federal Home Loan Bank:
Advances from Federal Home Loan Bank consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
December 31, 2008
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Non-callable advances at 2.77% and 2.63% average fixed rate at September
30, 2009
and December 31, 2008 , respectively, with maturities during 2009
|
|
$
|
50,000
|
|
|
$
|
310,000
|
|
Non-callable advances at 2.61% and 2.98% average fixed rate at September
30, 2009
and December 31, 2008 , respectively, with maturities during 2010
|
|
|
645,000
|
|
|
|
500,000
|
|
Non-callable advances at 3.85% average fixed rate at September 30, 2009
and
December 31, 2008 with maturities during 2011
|
|
|
325,000
|
|
|
|
325,000
|
|
Non-callable advances at 4.28% average floating rate tied to 3-month LIBOR
with maturities during 2009
|
|
|
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
$
|
1,020,000
|
|
|
$
|
1,185,000
|
|
|
|
|
|
|
|
|
The Corporation had approximately $2.0 billion in mortgage loans and investment securities
pledged as collateral for Federal Home Loan Bank advances as of September 30, 2009 and December 31,
2008.
10. Term Notes, Subordinated Capital Notes and Trust Preferred Securities:
Term Notes
Term notes payable outstanding consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
December 31, 2008
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Term notes maturing January 29, 2010 linked to the S&P 500 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
|
|
|
(1,391
|
)
|
|
|
(1,848
|
)
|
|
|
|
|
|
|
|
|
|
$
|
20,424
|
|
|
$
|
19,967
|
|
|
|
|
|
|
|
|
25
Subordinated Capital Notes
Subordinated capital notes consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Subordinated notes with fixed interest of 7.50% maturing December
10, 2028
|
|
$
|
60,000
|
|
|
$
|
60,000
|
|
Subordinated notes with fixed interest of 6.30% maturing June 1,
2032, at fair value
|
|
|
74,965
|
|
|
|
72,076
|
|
Subordinated notes with fixed interest of 6.10% maturing June 1,
2032, at fair value
|
|
|
48,239
|
|
|
|
46,206
|
|
Subordinated notes with fixed interest of 6.75% maturing July 1, 2036
|
|
|
129,000
|
|
|
|
129,000
|
|
|
|
|
|
|
|
|
|
|
|
312,204
|
|
|
|
307,282
|
|
Unamortized discount
|
|
|
(868
|
)
|
|
|
(890
|
)
|
|
|
|
|
|
|
|
|
|
$
|
311,336
|
|
|
$
|
306,392
|
|
|
|
|
|
|
|
|
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 condensed
consolidated statements of income.
11. Income Tax:
A reconciliation of beginning and ending amount of the accrual for uncertain income tax positions,
including interest and penalties, is as follows:
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of the year
|
|
$
|
31,570
|
|
|
$
|
16,507
|
|
Gross increases for tax positions of prior years
|
|
|
3,140
|
|
|
|
544
|
|
Gross decrease for tax positions of prior year
|
|
|
(653
|
)
|
|
|
|
|
Gross increases for tax positions of current year
|
|
|
3,708
|
|
|
|
2,614
|
|
Release of contingencies
|
|
|
(7,868
|
)
|
|
|
(958
|
)
|
|
|
|
|
|
|
|
Balance at end of the year
|
|
$
|
29,897
|
|
|
$
|
18,707
|
|
|
|
|
|
|
|
|
For the nine months ended September 30, 2009 and 2008, the Corporation recognized $1.6 million
and $0.9 million of interest and penalties, respectively, for uncertain tax positions in accordance
with provisions of SFAB ASC Topic 740. As of September 30, 2009 and December 31, 2008, the related
accrued interest amounted to approximated $3.0 million and $3.7 million, respectively. As of
September 30, 2009 and December 31, 2008, the Corporation had $7.2 million and $10.3 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 statute of limitation, changes in managements judgment about the level of
uncertainty, status of examinations, litigation and legislative activity, and the addition or
elimination of uncertain tax positions.
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 $18.6 million and
$0.1 million, respectively, at September 30, 2009. Accordingly, deferred tax asset valuation
allowances of $18.6 million and $0.1 million for Santander Financial Services, Inc and Santander
Bancorp (parent company only), respectively, were recorded at September 30, 2009.
26
12. Derivative Financial Instruments:
The Corporations 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
following summarizes the derivatives used by the Corporation in managing interest rate and fair
values exposures:
Interest rate Swaps
. An interest rate swap is an agreement between two entities to exchange cash
flows in the future. The agreement sets the dates on which the cash flows will be paid and the
manner in which the cash flows will be calculated. It involves the promise by one party to pay cash
flows equivalent to the interest on a notional principal amount at a predetermined fixed rate for a
given period of time. In return for this promise, this party receives cash flows equivalent to the
interest on the same notional principal amount at a variable rate index for the same period of
time. The variable interest rate received by the Corporation is London Interbank Offered Rate
(LIBOR).
Interest rate Caps and Floors.
In a cap agreement, a cash flow is generated if the price or rate of
an underlying variable rises above a certain threshold (or cap) price. In a floor agreement, a
cash flow is generated if the price or rate of an underlying variable falls below a certain
threshold (or floor) price.
Indexed Options.
Options are generally over-the-counter (OTC) contracts that the Corporation enters
into in an order to receive the appreciation of a specified Stock Index (e.g. Dow Jones Industrial
Composite Stock Index, S&P 500, Nikkei, and Dow Jones Euro Stoxx) over a specified period in
exchange for a premium paid at the contracts inception. The option period is determined by the
contractual maturity of the certificates of deposits tied to the performance of the Index.
Loan Commitment
. Commitment to a borrower by a lending institution that it will loan a specific
amount at a certain rate on a particular piece of real estate.
As of September 30, 2009, the Corporation had the following derivative financial instruments
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) for
|
|
|
|
|
|
|
|
|
|
|
|
the nine months
|
|
|
|
Notional
|
|
|
|
|
|
|
ended
|
|
|
|
Value
|
|
|
Fair Value
|
|
|
September 30, 2009
|
|
|
|
(Dollars in thousands)
|
|
ECONOMIC UNDESIGNATED HEDGES
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
125,000
|
|
|
$
|
1,074
|
|
|
$
|
(4,136
|
)
|
OTHER DERIVATIVES
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
107,642
|
|
|
|
3,575
|
|
|
|
(199
|
)
|
Embedded options on stock-indexed deposits
|
|
|
107,642
|
|
|
|
(3,575
|
)
|
|
|
199
|
|
Interest rate caps
|
|
|
439
|
|
|
|
(10
|
)
|
|
|
3
|
|
Customer interest rate caps
|
|
|
439
|
|
|
|
10
|
|
|
|
(3
|
)
|
Customer interest rate swaps
|
|
|
1,749,558
|
|
|
|
136,836
|
|
|
|
(39,612
|
)
|
Interest rate swaps-offsetting position of customer swaps
|
|
|
1,749,559
|
|
|
|
(136,730
|
)
|
|
|
39,891
|
|
Interest rate swaps
|
|
|
|
|
|
|
|
|
|
|
(287
|
)
|
Loan commitments
|
|
|
2,859
|
|
|
|
83
|
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(4,154
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
27
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
|
|
|
Fair
|
|
|
ended
|
|
|
year ended
|
|
|
|
Value
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior to the adoption of FASB ASC Topic 825, 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 FASB ASC Topic 825 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 FASB ASC Topic 825 as of
January 1, 2008, these swaps were designated for hedge accounting treatment under FASB ASC Topic
815. 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 condensed consolidated statements of income. In
connection with the adoption of FASB ASC Topic 825, 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 September 30, 2009, the Corporation had outstanding interest rate swap agreements with a
notional amount of approximately $125 million, maturing through the year 2032. The weighted
average rate paid and received on these contracts is 0.79% and 6.22%, respectively. As of
September 30, 2009, the Corporation had two subordinated notes aggregating approximately $125
million, with a fair value of $123.2 million, swapped to create a floating rate source of funds.
For the nine-month periods ended September 30, 2009 and 2008, the Corporation recognized a loss of
approximately $4.1 million and a gain of $3.9 million, respectively, on these economic hedges,
which is included in other income in the condensed consolidated statements of income.
As of December 31, 2008, the Corporation had outstanding interest rate swap agreements with a
notional amount of approximately $125 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 two subordinated notes aggregating 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 Lehman Brothers Holding, Inc. (LBHI) and the default on its
contractual payments as of September
28
19, 2008, the Corporation terminated $23.8 million of fixed-for-floating interest rate swaps. The
derivative liability of the swaps with Lehman Brothers Special Financing (LBSF) was $681,535 as
of September 19, 2008 and was paid on December 5, 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
condensed consolidated statements of operating. For the nine-month period ended September 30, 2009,
a gain of approximately $0.2 million was recorded on embedded options on stock-indexed deposits and
notes and a loss of approximately $0.2 million was recorded on the option contracts. For the
nine-month period ended September 30, 2008, a gain of approximately $6.7 million was recorded on
embedded options on stock-indexed deposits and notes and a loss of approximately $6.7 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
Corporations 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. These derivatives are carried at fair value with
changes in fair value recorded as part of other income. For the nine months ended September 30,
2009 and 2008, the Corporation recognized a net gain and a net loss on these transactions of
$279,000 and $628,000, 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 nine months ended
September 30, 2009 and 2008, the Corporation recognized a net loss of $287,000 and a net gain of
$987,000, respectively, on these transactions. There were no outstanding freestanding derivatives
contracts as of September 30, 2009.
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 FASB ASC Topic 820 and FASB ASC Topic 815. As of September 30, 2009 and December 31, 2008, the
Corporation had loan commitments outstanding for approximately $2.9 million and $3.9 million,
respectively. The Corporation recognized a net loss of $10,000 for the nine months ended September
30, 2009 and a net loss of $52,000 for the nine months ended September 30, 2008 on these
commitments.
The Corporation is exposed to certain risk relating to its ongoing business operations. The
primary risk managed by using derivative instruments is the interest rate risk. The following table
presents the fair value of derivative instruments in a statement of financial position:
29
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets Derivatives
|
|
|
|
|
|
Fair Value
|
|
|
|
Balance Sheet
|
|
as of
|
|
|
|
Location
|
|
September 30, 2009
|
|
|
December 31, 2008
|
|
Derivatives not designated as hedging instruments
under FASB ASC Topic 815:
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
Other assets
|
|
$
|
140,890
|
|
|
$
|
193,312
|
|
Interest rate caps
|
|
Other assets
|
|
|
12
|
|
|
|
13
|
|
Options
|
|
Other assets
|
|
|
3,575
|
|
|
|
3,774
|
|
Loan commitment
|
|
Other assets
|
|
|
83
|
|
|
|
93
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
144,560
|
|
|
$
|
197,192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities Derivatives
|
|
|
|
|
|
Fair Value
|
|
|
|
Balance Sheet
|
|
as of
|
|
|
|
Location
|
|
September 30, 2009
|
|
|
December 31, 2008
|
|
Derivatives not designated as hedging instruments
under FASB ASC Topic 815:
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
Other liabilities
|
|
$
|
139,710
|
|
|
$
|
187,525
|
|
Interest rate caps
|
|
Other liabilities
|
|
|
12
|
|
|
|
13
|
|
Options
|
|
Other liabilities
|
|
|
3,575
|
|
|
|
3,774
|
|
Loan commitment
|
|
Other liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
143,297
|
|
|
$
|
191,312
|
|
|
|
|
|
|
|
|
|
|
The following table presents the effect of the derivative instruments on the statement of
results of operations:
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Gain or (Loss) recognized in
|
|
|
|
Location of Gain or (Loss)
|
|
Income on derivatives
|
|
|
|
recognized in Income on
|
|
for the nine months ended
|
|
|
|
Derivatives
|
|
September 30, 2009
|
|
Derivatives not
designated as hedging
instruments
under FASB ASC Topic 815:
|
|
|
|
|
|
|
Interest rate swaps
|
|
Interest Income (Expense)
|
|
$
|
4,317
|
|
Interest rate swaps
|
|
Other Income (Loss)
|
|
|
(3,751
|
)
|
Loan commitment
|
|
Other Income (Loss)
|
|
|
(10
|
)
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
556
|
|
|
|
|
|
|
|
Contingent Features
Certain of the Corporations derivative instruments contain provisions that require the
Corporations debt to maintain an investment grade credit rating from each of the major credit
rating agencies. If the Corporations debt were to fall below investment grade, it would be a
violation of these provisions and the counterparties to the derivative instruments could demand
immediate payment or immediate and ongoing full overnight collateralization on derivative
instruments in net liability positions. The aggregate fair value of all derivative instruments with
credit-risk-related contingent features that are in a liability position on September 30, 2009 is
$15.5 million, for which the Corporation has posted collateral of $9.2 million in the normal course
of business.
30
13. Contingencies:
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 condensed consolidated statements of income or
condensed consolidated financial position of the Corporation.
14. 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 components of net periodic cost (benefit) for the Plan for the nine-month and three-month
periods ended September 30, 2009 and 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended
|
|
|
For the three months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
(Dollars in thousands)
|
|
|
Interest cost on projected benefit obligation
|
|
$
|
1,781
|
|
|
$
|
1,761
|
|
|
$
|
594
|
|
|
$
|
587
|
|
Expected return on assets
|
|
|
(1,544
|
)
|
|
|
(2,019
|
)
|
|
|
(515
|
)
|
|
|
(673
|
)
|
Net amortization
|
|
|
877
|
|
|
|
162
|
|
|
|
292
|
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost (benefit)
|
|
$
|
1,114
|
|
|
$
|
(96
|
)
|
|
$
|
371
|
|
|
$
|
(32
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The expected contribution to the Plan for 2009 is $584,000.
The components of net periodic pension cost for the Central Hispano Plan for nine-month and
three-month periods ended September 30, 2009 and 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended
|
|
|
For the three months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
(Dollars in thousands)
|
|
|
Interest cost on projected benefit obligation
|
|
$
|
1,428
|
|
|
$
|
1,383
|
|
|
$
|
476
|
|
|
$
|
461
|
|
Expected return on assets
|
|
|
(1,168
|
)
|
|
|
(1,554
|
)
|
|
|
(389
|
)
|
|
|
(518
|
)
|
Net amortization
|
|
|
575
|
|
|
|
375
|
|
|
|
192
|
|
|
|
125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost
|
|
$
|
836
|
|
|
$
|
204
|
|
|
$
|
279
|
|
|
$
|
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The expected contribution to the Central Hispano Plan for 2009 is $522,000.
Savings Plan
The Corporation also sponsors 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
employers contribution after three and five years of service, respectively. The Corporations
contribution to the plans for the
31
nine months ended September 30, 2009 and 2008, were approximately
$188,000 and $425,000, respectively. Effective March 2009, the Corporation amended the plans to
suspend monthly contributions.
15. 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 accrues a liability and recognizes 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
$4.0 million due to a favorable change in plan valuation during the nine-month period
ended September 30, 2008. As options were exercised on September 30, 2008, $6.7 million
was reclassified from liabilities to capital paid in excess of par value, as a capital
contribution.
|
|
|
|
|
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 Group 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 $1.7 million and 1.9 million for the
nine months ended September 30, 2009 and 2008, respectively.
|
|
|
|
|
A long term incentive plan for certain eligible officers and key employees which
contains service, performance and market conditions. This plan comprehends one cycle
expiring in 2011. This plan provides for settlement in stock of Santander Group to the
participants and is classified as an equity plan. Accordingly, the Corporation recognizes
monthly compensation expense and credits additional
paid in capital. The Corporation recognized compensation expense under this plan
amounting to $0.3 million for the nine months ended September 30, 2009.
|
16. Guarantees:
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 the payment to the guaranteed
party. In accordance with the provisions of FASB ASC Topic 460,
Guarantees,
the Corporation
recorded a liability of $256,000 at September 30, 2009, which represents the fair value of the
obligations undertaken in issuing the guarantees under the standby letters of credit issued or
modified, net of the related amortization. The fair value at inception of the obligation undertaken
when issuing the guarantees and commitments that qualify under FASB ASC Topic 460 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 and
deposit-related fees over the life of the guarantee contract. Standby letters of credit outstanding
at September 30, 2009 and December 31, 2008 had terms ranging from one month to four years. The
aggregate contract amount of the standby letters of credit of approximately $39,898,000 and
$95,660,000 at September 30, 2009 and December 31, 2008, 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 its customers. These standby letters of credit typically expire
without being drawn upon. Management does not anticipate any material losses related to these
guarantees.
32
17. 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 Corporations 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 nine
months ended September 30, 2009 and 2008. 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 comptrollers departments. The
Eliminations column includes all intercompany eliminations for consolidation purposes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
Commercial
|
|
Mortgage
|
|
Consumer
|
|
Treasury and
|
|
Wealth
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
Banking
|
|
Banking
|
|
Finance
|
|
Investments
|
|
Management
|
|
Other
|
|
Eliminations
|
|
Total
|
|
|
(Dollars in thousands)
|
Total external
revenue
|
|
$
|
165,842
|
|
|
$
|
121,160
|
|
|
$
|
102,665
|
|
|
$
|
19,840
|
|
|
$
|
45,303
|
|
|
$
|
39,198
|
|
|
$
|
(41,869
|
)
|
|
$
|
452,139
|
|
Intersegment revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,595
|
|
|
|
135
|
|
|
|
39,139
|
|
|
|
(41,869
|
)
|
|
|
|
|
Interest income
|
|
|
134,426
|
|
|
|
115,232
|
|
|
|
100,559
|
|
|
|
14,623
|
|
|
|
2,195
|
|
|
|
35,670
|
|
|
|
(35,874
|
)
|
|
|
366,831
|
|
Interest expense
|
|
|
14,503
|
|
|
|
40,375
|
|
|
|
22,145
|
|
|
|
25,599
|
|
|
|
740
|
|
|
|
34,853
|
|
|
|
(30,007
|
)
|
|
|
108,208
|
|
Depreciation and
amortization
|
|
|
3,348
|
|
|
|
2,019
|
|
|
|
709
|
|
|
|
672
|
|
|
|
1,132
|
|
|
|
1,632
|
|
|
|
|
|
|
|
9,512
|
|
Segment income (loss)
before income tax
|
|
|
24,421
|
|
|
|
58,893
|
|
|
|
6,541
|
|
|
|
(13,737
|
)
|
|
|
14,243
|
|
|
|
(54,039
|
)
|
|
|
(8,461
|
)
|
|
|
27,861
|
|
Segment assets
|
|
|
2,593,426
|
|
|
|
2,485,504
|
|
|
|
669,454
|
|
|
|
660,546
|
|
|
|
128,945
|
|
|
|
1,304,233
|
|
|
|
(1,003,477
|
)
|
|
|
6,838,631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
|
Commercial
|
|
Mortgage
|
|
Consumer
|
|
Treasury and
|
|
Wealth
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
Banking
|
|
Banking
|
|
Finance
|
|
Investments
|
|
Management
|
|
Other
|
|
Eliminations
|
|
Total
|
|
|
(Dollars in thousands)
|
Total external
revenue
|
|
$
|
235,558
|
|
|
$
|
124,688
|
|
|
$
|
107,674
|
|
|
$
|
47,558
|
|
|
$
|
57,335
|
|
|
$
|
37,162
|
|
|
$
|
(29,733
|
)
|
|
$
|
580,242
|
|
Intersegment revenue
|
|
|
10,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
508
|
|
|
|
19,044
|
|
|
|
(29,733
|
)
|
|
|
|
|
Interest income
|
|
|
195,109
|
|
|
|
125,488
|
|
|
|
107,168
|
|
|
|
41,926
|
|
|
|
2,205
|
|
|
|
16,446
|
|
|
|
(27,867
|
)
|
|
|
460,475
|
|
Interest expense
|
|
|
51,564
|
|
|
|
55,689
|
|
|
|
19,632
|
|
|
|
70,496
|
|
|
|
1,694
|
|
|
|
15,459
|
|
|
|
(22,110
|
)
|
|
|
192,424
|
|
Depreciation and
amortization
|
|
|
3,274
|
|
|
|
1,876
|
|
|
|
2,325
|
|
|
|
709
|
|
|
|
974
|
|
|
|
2,357
|
|
|
|
|
|
|
|
11,515
|
|
Segment income (loss)
before income tax
|
|
|
36,417
|
|
|
|
59,139
|
|
|
|
5,650
|
|
|
|
(54,323
|
)
|
|
|
19,167
|
|
|
|
(45,566
|
)
|
|
|
(5,757
|
)
|
|
|
14,727
|
|
Segment assets
|
|
|
3,876,429
|
|
|
|
2,720,289
|
|
|
|
651,586
|
|
|
|
1,168,991
|
|
|
|
139,908
|
|
|
|
633,939
|
|
|
|
(1,055,963
|
)
|
|
|
8,135,179
|
|
33
Reconciliation of Segment Information to Consolidated Amounts
Information for the Corporations reportable segments in relation to the consolidated totals
follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Total revenues for reportable segments
|
|
$
|
454,810
|
|
|
$
|
572,813
|
|
Other revenues
|
|
|
39,198
|
|
|
|
37,162
|
|
Elimination of intersegment revenues
|
|
|
(41,869
|
)
|
|
|
(29,733
|
)
|
|
|
|
|
|
|
|
Total consolidated revenues
|
|
$
|
452,139
|
|
|
$
|
580,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income before tax of reportable segments
|
|
$
|
90,361
|
|
|
$
|
66,050
|
|
Loss before tax of other segments
|
|
|
(54,039
|
)
|
|
|
(45,566
|
)
|
Elimination of intersegment profits
|
|
|
(8,461
|
)
|
|
|
(5,757
|
)
|
|
|
|
|
|
|
|
Consolidated income before tax
|
|
$
|
27,861
|
|
|
$
|
14,727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Total assets for reportable segments
|
|
|
6,537,875
|
|
|
$
|
8,557,203
|
|
Assets not attributed to segments
|
|
|
1,304,233
|
|
|
|
633,939
|
|
Elimination of intersegment assets
|
|
|
(1,003,477
|
)
|
|
|
(1,055,963
|
)
|
|
|
|
|
|
|
|
Total consolidated assets
|
|
$
|
6,838,631
|
|
|
$
|
8,135,179
|
|
|
|
|
|
|
|
|
18. Fair Value of Financial Instruments:
As discussed in Note 1, Summary of Significant Accounting Policies and Other Matters to the
condensed consolidated financial statement, effective January 1, 2008, the Corporation adopted FASB
ASC Topic 820, which provides a framework for measuring fair value.
The Corporation also adopted FASB ASC Topic 825 on January 1, 2008. FASB ASC Topic 825 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. FASB ASC Topic 825 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.
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 FASB
ASC Topic 825.
34
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Opening Balance as
|
|
|
|
Ending Balance as of
|
|
|
|
|
|
|
of
|
|
|
|
December 31, 2007
|
|
|
Adoption Net
|
|
|
January 1, 2008
|
|
|
|
(Prior to Adoption)*
|
|
|
Gain (Loss)
|
|
|
(After Adoption)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of Electing the Fair Value Option under Topic 825:
|
|
|
|
|
|
|
|
|
|
|
|
|
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
FASB ASC Topic 820 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. FASB
ASC Topic 820 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, agency mortgage-backed debt securities and FDIC
insured corporate bonds 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.
|
|
|
|
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 Corporations 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 September 30, 2009 and December 31,
2008.
35
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading Securities
|
|
$
|
1,212
|
|
|
$
|
10,216
|
|
|
$
|
18,633
|
|
|
$
|
30,061
|
|
Investment Securities Available for Sale
|
|
|
324,309
|
|
|
|
99,229
|
|
|
|
|
|
|
|
423,538
|
|
Derivative Assets
|
|
|
|
|
|
|
144,211
|
|
|
|
349
|
|
|
|
144,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets reported at Fair Value
|
|
$
|
325,521
|
|
|
$
|
253,656
|
|
|
$
|
18,982
|
|
|
$
|
598,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits (1)
|
|
$
|
|
|
|
$
|
12,407
|
|
|
$
|
|
|
|
$
|
12,407
|
|
Subordinated Capital Notes (2)
|
|
|
|
|
|
|
123,204
|
|
|
|
|
|
|
|
123,204
|
|
Derivative Liabilities
|
|
|
|
|
|
|
143,032
|
|
|
|
265
|
|
|
|
143,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities reported at Fair Value
|
|
$
|
|
|
|
$
|
278,643
|
|
|
$
|
265
|
|
|
$
|
278,908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
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 reported 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 reported 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 FASB ASC Topic 825.
|
|
(2)
|
|
Amounts represent certain subordinated capital notes for which the Corporation has elected the fair value option under FASB ASC Topic 825.
|
Level 3 assets and liabilities were 3.2% and 0.10% of total assets reported at fair value
and total liabilities reported at fair value, respectively, as of September 30, 2009 and 2.8% and
0.16% as of December 31, 2008, 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, 2009 to September 30, 2009 and January 1, 2008 to September 30, 2008:
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized/unrealized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
loss included in
|
|
|
Transfers
|
|
|
Purchases,
|
|
|
|
|
|
|
Unrealized
|
|
|
|
Balance
|
|
|
|
|
|
|
Other
|
|
|
in and/or
|
|
|
issuances
|
|
|
Balance
|
|
|
losses
|
|
|
|
January 1,
|
|
|
|
|
|
|
Comprehensive
|
|
|
out of
|
|
|
and
|
|
|
September 30,
|
|
|
still
|
|
|
|
2009
|
|
|
Earnings
|
|
|
Income
|
|
|
Level 3
|
|
|
settlements
|
|
|
2009
|
|
|
held (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading Securities (1)
|
|
$
|
29,519
|
|
|
$
|
(2,107
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(8,779
|
)
|
|
$
|
18,633
|
|
|
$
|
(298
|
)
|
Derivatives, net
|
|
|
93
|
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84
|
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
29,612
|
|
|
$
|
(2,116
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(8,779
|
)
|
|
$
|
18,717
|
|
|
$
|
(308
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized/unrealized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
gains included in
|
|
|
Transfers
|
|
|
Purchases,
|
|
|
|
|
|
|
Unrealized
|
|
|
|
Balance
|
|
|
|
|
|
|
Other
|
|
|
in and/or
|
|
|
issuances
|
|
|
Balance
|
|
|
gains (loss)
|
|
|
|
January 1,
|
|
|
|
|
|
|
Comprehensive
|
|
|
out of
|
|
|
and
|
|
|
September 30,
|
|
|
still
|
|
|
|
2008
|
|
|
Earnings
|
|
|
Income
|
|
|
Level 3
|
|
|
settlements
|
|
|
2008
|
|
|
held (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading Securities (1)
|
|
$
|
20,150
|
|
|
$
|
1,960
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
25,234
|
|
|
$
|
47,344
|
|
|
$
|
155
|
|
Derivatives, net
|
|
|
45
|
|
|
|
(52
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7
|
)
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20,195
|
|
|
$
|
1,908
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
25,234
|
|
|
$
|
47,337
|
|
|
$
|
148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 September 30, 2009 and 2008.
|
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 nine-month and three-month period ended September 30, 2009 and 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 FASB ASC Topic 825.
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gains (Losses)
|
|
|
|
For the nine months ended
|
|
|
|
September 30, 2009
|
|
|
September 30, 2008
|
|
|
|
Trading
|
|
|
Net
|
|
|
Trading
|
|
|
Net
|
|
|
|
Securities
|
|
|
Derivatives
|
|
|
Securities
|
|
|
Derivatives
|
|
Classification of gains and losses
(realized/unrealized)
included in earnings for the period :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (loss)
|
|
$
|
(2,107
|
)
|
|
$
|
(9
|
)
|
|
$
|
1,960
|
|
|
$
|
(52
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gains (Losses)
|
|
|
|
For the three months ended
|
|
|
|
September 30, 2009
|
|
|
September 30, 2008
|
|
|
|
Trading
|
|
|
Net
|
|
|
Trading
|
|
|
Net
|
|
|
|
Securities
|
|
|
Derivatives
|
|
|
Securities
|
|
|
Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classification of gains and losses
(realized/unrealized)
included in earnings for the period :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (loss)
|
|
$
|
(904
|
)
|
|
$
|
(98
|
)
|
|
$
|
431
|
|
|
$
|
64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table below summarizes changes in unrealized gains or losses recorded in earnings for
the nine-month and three-month periods ended September 30, 2009 and 2008 for Level 3 assets and
liabilities that are still held at September 30, 2009 and 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 Topic 825.
37
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in Unrealized Gains (Loss)
|
|
|
|
For the nine months ended
|
|
|
|
September 30, 2009
|
|
|
September 30, 2008
|
|
|
|
Trading
|
|
|
Net
|
|
|
Trading
|
|
|
Net
|
|
|
|
Securities
|
|
|
Derivatives
|
|
|
Securities
|
|
|
Derivatives
|
|
Classification of unrealized gains (losses)
included in earnings for the period :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
$
|
(298
|
)
|
|
$
|
(10
|
)
|
|
$
|
155
|
|
|
$
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in Unrealized Gains (Loss)
|
|
|
|
For the three months ended
|
|
|
|
September 30, 2009
|
|
|
September 30, 2008
|
|
|
|
Trading
|
|
|
Net
|
|
|
Trading
|
|
|
Net
|
|
|
|
Securities
|
|
|
Derivatives
|
|
|
Securities
|
|
|
Derivatives
|
|
Classification of unrealized gains (losses)
included in earnings for the period :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
$
|
80
|
|
|
$
|
(98
|
)
|
|
$
|
123
|
|
|
$
|
109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
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 September 30, 2009 the majority of these
instruments were valued based on dealer indicative quotes.
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 securitys 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.
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
38
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 may be 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 FASB ASC Topic 820, these values
must also take into account the Corporations 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 FASB ASC Topic 825, 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, 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 FASB ASC Topic 825, are carried at
historical cost.
Non-Recurring Measurements for Assets
The following table presents the carrying value of those assets measured at fair value on a
non-recurring basis, for which impairment was recognized during the six months ended September 30,
2009 and the year ended December 31, 2008.
39
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Value as of September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
Using
|
|
|
|
|
|
|
Carrying
|
|
|
Quoted Prices in
|
|
|
Significant
|
|
|
Significant
|
|
|
Valuation
|
|
|
|
Value
|
|
|
Active Markets for
|
|
|
Other
|
|
|
Unobservable
|
|
|
Allowance
|
|
|
|
as of
|
|
|
Identical Assets
|
|
|
Observable Inputs
|
|
|
Inputs
|
|
|
as of
|
|
|
|
Sept. 30, 2009
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Sept. 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net(1)
|
|
$
|
55,695
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
55,695
|
|
|
$
|
13,759
|
|
Repossesed Assets (2)
|
|
|
20,428
|
|
|
|
|
|
|
|
|
|
|
|
20,428
|
|
|
|
4,259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
76,123
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
76,123
|
|
|
$
|
18,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Amount represented loans measured for impairment during the period based on the fair value of the collateral using the practical
expedient in FASB ASC Topic 310.
|
|
(2)
|
|
Amount represented real estate owned properties measured for impairment during the period based on the fair value of the collateral
accordance with the adoption of FASB ASC Topic 820
.
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Value as of December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
Using
|
|
|
|
|
|
|
Carriying
|
|
|
Quoted Prices in
|
|
|
Significant
|
|
|
Significant
|
|
|
Valuation
|
|
|
|
Value
|
|
|
Active Markets for
|
|
|
Other
|
|
|
Unobservable
|
|
|
Allowance
|
|
|
|
as of
|
|
|
Identical Assets
|
|
|
Observable Inputs
|
|
|
Inputs
|
|
|
as of
|
|
|
|
Dec. 31, 2008
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Dec. 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net(1)
|
|
$
|
59,152
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
59,152
|
|
|
$
|
18,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Amount represented loans measured for impairment during the period based on the fair value of the collateral using the
practical expedient in FASB ASC Topic 310.
|
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 FASB ASC Topic 815. As of September 30, 2009, these
callable brokered certificates of deposits had a fair value of $12.4 million and principal balance
of $12.5 million recorded in interest-bearing deposits; and subordinated capital notes had a fair
value of $123.2 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 Corporations condensed consolidated
statements of income. Electing the fair value option allows the Corporation to avoid the burden of
complying with the requirements for hedge accounting under FASB ASC Topic 815 (e.g., documentation
and effectiveness assessment) without introducing earnings volatility. Subsequent to the adoption
of FASB ASC Topic 825, debt issuance costs are recognized in Net Interest Income when incurred.
Interest rate risk on the callable brokered certificates of deposits and subordinated capital notes
measured at fair value under FASB ASC Topic 825 continues to be economically hedged with callable
interest rate swaps with the same terms and conditions.
As a result of the adoption of FASB ASC Topic 825, the Corporation elected to also apply the
fair value option to new positions within the brokered certificates of deposits and subordinated
capital notes.
The following table represents changes in fair value for the nine months ended September 30,
2009 and 2008 which includes the interest expense on callable brokered certificates of deposits and
interest expense on subordinated capital notes.
40
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 FASB ASC Topic 825 are recorded in interest expense in the condensed
consolidated statements of income based on their contractual coupons.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended
|
|
|
|
September 30, 2009
|
|
|
|
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
|
|
|
Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Callable Brokered Certificates of Deposits
|
|
$
|
(1,798
|
)
|
|
$
|
719
|
|
|
$
|
(1,079
|
)
|
Subordinated Capital Notes
|
|
|
(5,831
|
)
|
|
|
(4,922
|
)
|
|
|
(10,753
|
)
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(7,629
|
)
|
|
$
|
(4,203
|
)
|
|
$
|
(11,832
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended
|
|
|
|
September 30, 2008
|
|
|
|
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
|
|
|
Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Callable Brokered Certificates of Deposits
|
|
$
|
(16,336
|
)
|
|
$
|
(1,066
|
)
|
|
$
|
(17,402
|
)
|
Subordinated Capital Notes
|
|
|
(5,831
|
)
|
|
|
6,497
|
|
|
|
666
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(22,167
|
)
|
|
$
|
5,431
|
|
|
$
|
(16,736
|
)
|
|
|
|
|
|
|
|
|
|
|
The impact of changes in the Corporations credit risk on subordinated capital notes for
the nine and three months ended September 30, 2009 and 2008 presented in the table below has 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.
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended
|
|
|
|
September 30, 2009
|
|
|
September 30, 2008
|
|
|
|
Gain (Loss)
|
|
|
Gain (Loss)
|
|
|
Total
|
|
|
Gain (Loss)
|
|
|
Gain (Loss)
|
|
|
Total
|
|
|
|
related
|
|
|
not related
|
|
|
Gains
|
|
|
related
|
|
|
not related
|
|
|
Gains
|
|
(Dollars in thousands)
|
|
Credit Risk
|
|
|
Credit Risk
|
|
|
(Losses)
|
|
|
Credit Risk
|
|
|
Credit Risk
|
|
|
(Losses)
|
|
Subordinated Capital Notes
|
|
$
|
(9,286
|
)
|
|
$
|
(1,467
|
)
|
|
$
|
(10,753
|
)
|
|
$
|
5,661
|
|
|
$
|
(4,995
|
)
|
|
$
|
666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended
|
|
|
|
September 30, 2009
|
|
|
September 30, 2008
|
|
|
|
Gain (Loss)
|
|
|
Gain (Loss)
|
|
|
Total
|
|
|
Gain (Loss)
|
|
|
Gain (Loss)
|
|
|
Total
|
|
|
|
related
|
|
|
not related
|
|
|
Gains
|
|
|
related
|
|
|
not related
|
|
|
Gains
|
|
|
|
Credit Risk
|
|
|
Credit Risk
|
|
|
(Losses)
|
|
|
Credit Risk
|
|
|
Credit Risk
|
|
|
(Losses)
|
|
Subordinated Capital Notes
|
|
$
|
(8,816
|
)
|
|
$
|
(3,071
|
)
|
|
$
|
(11,887
|
)
|
|
$
|
3,490
|
|
|
$
|
(1,515
|
)
|
|
$
|
1,975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FASB ASC Topic 825 Disclosures about Fair Value of Financial Instruments
The table below is a summary of fair value estimates as of September 30, 2009 and December 31,
2008, for financial instruments, as defined by FASB ASC Topic 825, 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 Corporations 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.
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
December 31, 2008
|
|
|
|
Carrying
|
|
|
|
|
|
|
Carrying
|
|
|
|
|
|
|
Amount
|
|
|
Fair Value
|
|
|
Amount
|
|
|
Fair Value
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Consolidated balance sheets financial instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other investment securities
|
|
$
|
53,631
|
|
|
$
|
53,631
|
|
|
$
|
61,632
|
|
|
$
|
61,632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale
|
|
$
|
25,173
|
|
|
$
|
25,559
|
|
|
$
|
38,459
|
|
|
$
|
38,740
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans (1)
|
|
$
|
5,274,012
|
|
|
$
|
5,082,406
|
|
|
$
|
5,929,499
|
|
|
$
|
5,862,539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits interest-bearing (2)
|
|
|
3,727,672
|
|
|
|
3,737,362
|
|
|
|
4,321,939
|
|
|
|
4,311,104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold under agreements to repurchase
|
|
$
|
|
|
|
$
|
|
|
|
$
|
375,000
|
|
|
$
|
365,314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Home Loan Advances
|
|
$
|
1,020,000
|
|
|
$
|
1,035,519
|
|
|
$
|
1,185,000
|
|
|
$
|
1,159,619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated capital note (2)
|
|
$
|
189,000
|
|
|
$
|
197,077
|
|
|
$
|
189,000
|
|
|
$
|
203,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term notes
|
|
$
|
21,815
|
|
|
$
|
20,823
|
|
|
$
|
19,967
|
|
|
$
|
22,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
December 31, 2008
|
|
|
|
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
|
|
$
|
39,898
|
|
|
$
|
(256
|
)
|
|
$
|
95,660
|
|
|
$
|
(1,102
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments to extend credit, approved loans
not yet disbursed and unused lines of credit
|
|
$
|
1,237,129
|
|
|
$
|
(1,237
|
)
|
|
$
|
1,193,875
|
|
|
$
|
(1,194
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
This amount does not include loans measured for impairment during the period based on the fair value of the
collateral using the practical expedient in FASB ASC Topic 310.
|
|
(2)
|
|
This amount does not include callable brokered certificates of deposits of $12.4 million and $101.4 million as
of September 30, 2009 and December 31, 2008, respectively, and subordinated capital notes of $123.2 million and
$118.3 million as of September 30, 2009 December 31, 2008, respectively, measured at fair value under FASB ASC Topic
825.
|
19. Subsequent Events Reviews:
The Corporation has evaluated all subsequent events through November 9, 2009, the date this Quarterly Report on Form 10-Q was filed with the SEC.
No recognized or unrecognized events require
disclosure as significant subsequent events.
43
PART I ITEM 2
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
44
Santander BanCorp
Selected Financial Data
(Dollars in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
Three months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
366,831
|
|
|
$
|
460,475
|
|
|
$
|
118,080
|
|
|
$
|
148,011
|
|
Interest expense
|
|
|
108,208
|
|
|
|
192,424
|
|
|
|
30,025
|
|
|
|
55,605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
258,623
|
|
|
|
268,051
|
|
|
|
88,055
|
|
|
|
92,406
|
|
Gain on sale of securities available for sale
|
|
|
9,251
|
|
|
|
5,153
|
|
|
|
|
|
|
|
2,279
|
|
Loss on early termination of repurchase agreements
|
|
|
(9,600
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Broker-deaker, asset management and insurance fees
|
|
|
45,165
|
|
|
|
58,110
|
|
|
|
13,986
|
|
|
|
16,137
|
|
Other income
|
|
|
40,492
|
|
|
|
56,504
|
|
|
|
7,959
|
|
|
|
17,997
|
|
Operating expenses
|
|
|
200,545
|
|
|
|
224,321
|
|
|
|
61,645
|
|
|
|
76,632
|
|
Provision for claim receivable
|
|
|
|
|
|
|
25,120
|
|
|
|
|
|
|
|
25,120
|
|
Provision for loan losses
|
|
|
115,525
|
|
|
|
123,650
|
|
|
|
40,689
|
|
|
|
45,560
|
|
Income tax provision
|
|
|
5,336
|
|
|
|
(1,349
|
)
|
|
|
(2,805
|
)
|
|
|
(10,331
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
22,525
|
|
|
$
|
16,076
|
|
|
$
|
10,471
|
|
|
$
|
(8,162
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PER COMMON SHARE DATA*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
0.48
|
|
|
$
|
0.34
|
|
|
$
|
0.22
|
|
|
$
|
(0.18
|
)
|
Book value
|
|
$
|
12.34
|
|
|
$
|
11.91
|
|
|
$
|
12.34
|
|
|
$
|
11.91
|
|
Outstanding shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
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
|
|
Cash Dividend per Share
|
|
$
|
|
|
|
$
|
0.20
|
|
|
$
|
|
|
|
$
|
|
|
AVERAGE BALANCES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale and loans, net of allowance for loans losses
|
|
$
|
5,609,498
|
|
|
$
|
6,732,106
|
|
|
$
|
5,446,670
|
|
|
$
|
6,485,861
|
|
Allowance for loan losses
|
|
|
191,374
|
|
|
|
172,764
|
|
|
|
189,333
|
|
|
|
176,267
|
|
Earning assets
|
|
|
6,485,761
|
|
|
|
8,262,315
|
|
|
|
6,200,156
|
|
|
|
7,849,123
|
|
Total assets
|
|
|
7,232,790
|
|
|
|
8,978,663
|
|
|
|
6,889,995
|
|
|
|
8,530,640
|
|
Deposits
|
|
|
4,755,452
|
|
|
|
5,617,668
|
|
|
|
4,507,697
|
|
|
|
5,778,670
|
|
Borrowings
|
|
|
1,572,764
|
|
|
|
2,499,362
|
|
|
|
1,478,364
|
|
|
|
1,905,542
|
|
Common equity
|
|
|
563,118
|
|
|
|
564,672
|
|
|
|
574,327
|
|
|
|
568,568
|
|
PERIOD END BALANCES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale and loans, net of allowance for loans losses
|
|
$
|
5,368,639
|
|
|
$
|
6,248,276
|
|
|
$
|
5,368,639
|
|
|
$
|
6,248,276
|
|
Allowance for loan losses
|
|
|
194,795
|
|
|
|
180,090
|
|
|
|
194,795
|
|
|
|
180,090
|
|
Earning assets
|
|
|
6,193,936
|
|
|
|
7,549,266
|
|
|
|
6,193,936
|
|
|
|
7,549,266
|
|
Total assets
|
|
|
6,838,631
|
|
|
|
8,135,179
|
|
|
|
6,838,631
|
|
|
|
8,135,179
|
|
Deposits
|
|
|
4,432,695
|
|
|
|
5,589,900
|
|
|
|
4,432,695
|
|
|
|
5,589,900
|
|
Borrowings
|
|
|
1,516,221
|
|
|
|
1,720,830
|
|
|
|
1,516,221
|
|
|
|
1,720,830
|
|
Common equity
|
|
|
575,689
|
|
|
|
555,306
|
|
|
|
575,689
|
|
|
|
555,306
|
|
Continued
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
Three months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
SELECTED RATIOS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin on a tax-equivalent basis (on an annualized basis)
|
|
|
5.38
|
%
|
|
|
4.40
|
%
|
|
|
5.67
|
%
|
|
|
4.76
|
%
|
Efficiency ratio (1)
|
|
|
58.45
|
%
|
|
|
59.21
|
%
|
|
|
57.51
|
%
|
|
|
59.00
|
%
|
Return on average total assets (on an annualized basis)
|
|
|
0.42
|
%
|
|
|
0.24
|
%
|
|
|
0.60
|
%
|
|
|
-0.38
|
%
|
Return on average common equity (on an annualized basis)
|
|
|
5.35
|
%
|
|
|
3.80
|
%
|
|
|
7.23
|
%
|
|
|
-5.71
|
%
|
Dividend payout
|
|
|
0.00
|
%
|
|
|
58.82
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Average net loans/average total deposits
|
|
|
117.96
|
%
|
|
|
119.84
|
%
|
|
|
120.83
|
%
|
|
|
112.24
|
%
|
Average earning assets/average total assets
|
|
|
89.67
|
%
|
|
|
92.02
|
%
|
|
|
89.99
|
%
|
|
|
92.01
|
%
|
Average stockholders equity/average assets
|
|
|
7.79
|
%
|
|
|
6.29
|
%
|
|
|
8.34
|
%
|
|
|
6.67
|
%
|
Fee income to average assets (annualized)
|
|
|
1.39
|
%
|
|
|
1.37
|
%
|
|
|
1.37
|
%
|
|
|
1.23
|
%
|
Capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I capital to risk-adjusted assets
|
|
|
10.11
|
%
|
|
|
8.65
|
%
|
|
|
10.11
|
%
|
|
|
8.65
|
%
|
Total capital to risk-adjusted assets
|
|
|
15.10
|
%
|
|
|
11.84
|
%
|
|
|
15.10
|
%
|
|
|
11.84
|
%
|
Leverage Ratio
|
|
|
7.46
|
%
|
|
|
6.05
|
%
|
|
|
7.46
|
%
|
|
|
6.05
|
%
|
Asset quality:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing loans to total loans
|
|
|
4.53
|
%
|
|
|
3.26
|
%
|
|
|
4.53
|
%
|
|
|
3.26
|
%
|
Annualized net charge-offs to average loans
|
|
|
2.60
|
%
|
|
|
2.14
|
%
|
|
|
2.75
|
%
|
|
|
3.13
|
%
|
Allowance for loan losses to period-end loans
|
|
|
3.50
|
%
|
|
|
2.80
|
%
|
|
|
3.50
|
%
|
|
|
2.80
|
%
|
Allowance for loan losses to non-performing loans
|
|
|
77.37
|
%
|
|
|
85.91
|
%
|
|
|
77.37
|
%
|
|
|
85.91
|
%
|
Allowance for loan losses to non-performing loans plus
accruing loans past-due 90 days or more
|
|
|
74.26
|
%
|
|
|
80.69
|
%
|
|
|
74.26
|
%
|
|
|
80.69
|
%
|
Non-performing assets to total assets
|
|
|
4.17
|
%
|
|
|
2.81
|
%
|
|
|
4.17
|
%
|
|
|
2.81
|
%
|
Recoveries to charge-offs
|
|
|
3.60
|
%
|
|
|
2.56
|
%
|
|
|
3.58
|
%
|
|
|
1.87
|
%
|
EARNINGS TO FIXED CHARGES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excluding interest on deposits
|
|
|
1.64
|
x
|
|
|
1.19
|
x
|
|
|
1.59
|
x
|
|
|
0.05
|
x
|
Including interest on deposits
|
|
|
1.25
|
x
|
|
|
1.08
|
x
|
|
|
1.24
|
x
|
|
|
0.67
|
x
|
OTHER DATA AT END OF PERIOD
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer financial assets under management
|
|
$
|
13,333,000
|
|
|
$
|
13,957,000
|
|
|
$
|
13,333,000
|
|
|
$
|
13,957,000
|
|
Bank branches
|
|
|
54
|
|
|
|
57
|
|
|
|
54
|
|
|
|
57
|
|
Consumer Finance branches
|
|
|
60
|
|
|
|
68
|
|
|
|
60
|
|
|
|
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Branches
|
|
|
114
|
|
|
|
125
|
|
|
|
114
|
|
|
|
125
|
|
ATMs
|
|
|
148
|
|
|
|
162
|
|
|
|
148
|
|
|
|
162
|
|
(Concluded)
|
|
|
*
|
|
Per share data is based on the average number of shares
outstanding during the periods.
|
|
(1)
|
|
Operating expenses less provision for claim receivable divided by net interest income on a tax equivalent basis, plus other income excluding gain on sale of securities
available for sale, gain on equity securities and loss on early termination of repurchase agreements.
|
46
MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This financial discussion contains an analysis of the consolidated financial position and
consolidated results of operations of Santander BanCorp and its wholly-owned subsidiaries (the
Corporation) and should be read in conjunction with the consolidated financial statements, notes
and tables included elsewhere in this report.
The Corporation, similarly to other financial institutions, is subject to certain risks, many
of which are beyond managements 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
Corporations financial condition or results of operations, (2) liquidity risk, which is the risk
that the Corporation will have insufficient cash or access to cash to meet operating needs and
financial obligations, (3) credit risk, which is the risk that loan customers or other
counterparties will be unable to perform their contractual obligations, and (4) operational risk,
which is the risk of loss resulting from inadequate or failed internal processes, people and
systems, or from external events. In addition, the Corporation is subject to legal, compliance and
reputational risks, among others.
As a provider of financial services, the Corporations 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 Corporations
profitability.
In addition to the information contained in this Form 10-Q, readers should consider the
description of the Corporations business contained in Item 1 of the Corporations Form 10-K for
the year ended December 31, 2008. While not all inclusive, Item 1 of the Form 10-K, discusses
additional information about the business of the Corporation and risk factors, many beyond the
Corporations control, that provides further discussion of the operating results, financial
condition and credit, market and liquidity risks is presented in the narrative and tables included
herein.
Critical Accounting Policies
The consolidated financial statements of the Corporation and its wholly-owned subsidiaries are
prepared in accordance with GAAP and with general practices within the financial services industry.
In preparing the condensed consolidated financial statements, management is required to make
estimates and assumptions that affect the reported amount of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the consolidated financial statements and the
reported amount of revenues and expenses during the reporting periods. Actual results could differ
from those estimates. The Corporations critical accounting policies are detailed in the Financial
Review and Supplementary Information section of the Corporations Form 10-K for the year ended
December 31, 2008.
Current Accounting Developments
The Corporations condensed consolidated financial statements provide a complete discussion of
the recently issued accounting pronouncements adopted by the Corporation. Refer to Note 1 to the
condensed consolidated financial statements.
47
Overview of Results of Operations for the Nine-Month and Three-Month Periods Ended September 30, 2009 and 2008
Santander BanCorp is the financial holding company for Banco Santander Puerto Rico and
subsidiary (the Bank), Santander Securities Corporation and subsidiary (SSC), Santander
Financial Services, Inc. (SFS), Santander Insurance Agency, Inc. (SIA) and Island Insurance
Corporation (IIC).
For the nine-month and three-month periods ended September 30, 2009 and 2008, net income and
other selected financial information, as reported are the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
Three months ended
|
($ in thousands, except earnings per share)
|
|
30-Sep-09
|
|
30-Sep-08
|
|
30-Sep-09
|
|
30-Sep-08
|
Net income
|
|
$
|
22,525
|
|
|
$
|
16,076
|
|
|
$
|
10,471
|
|
|
$
|
(8,162
|
)
|
EPS
|
|
$
|
0.48
|
|
|
$
|
0.34
|
|
|
$
|
0.22
|
|
|
$
|
(0.18
|
)
|
ROA
|
|
|
0.42
|
%
|
|
|
0.24
|
%
|
|
|
0.60
|
%
|
|
|
(0.38
|
)%
|
ROE
|
|
|
5.35
|
%
|
|
|
3.80
|
%
|
|
|
7.23
|
%
|
|
|
(5.71
|
)%
|
Efficiency Ratio (*)
|
|
|
58.45
|
%
|
|
|
59.21
|
%
|
|
|
57.51
|
%
|
|
|
59.00
|
%
|
|
|
|
(*)
|
|
Operating expenses less provision for claim receivable divided by net interest income on a tax equivalent basis plus
other income ecluding a gain on sale of securities available for sale, gain on equity securities and loss on
early termination of repurchase agreements
|
Overview of Financial Results for the Nine-Month and Three-Month Periods Ended September 30,
2009 and 2008
The Corporations financial results for the nine-month and three-month periods ended September
30, 2009 were impacted by the following:
|
(i)
|
|
The Corporation experienced an improvement of 98 basis points in net interest margin,
on a tax equivalent basis, to 5.38% for the nine months ended September 30, 2009 from 4.40%
for the same period in 2008. Also, there was an improvement of 91 basis points in net
interest margin, on a tax equivalent basis, to 5.67% for the three months ended September
30, 2009 from 4.76% for the same period in 2008;
|
|
|
(ii)
|
|
The provision for loan losses decreased $8.1 million or 6.6% and $4.9 million or 10.7%
for the nine-month and three month periods ended September 30, 2009 compared to the same
period in 2008, respectively. The provision for loan losses represented 102.6% and 111.9%
of the net charge-offs for the nine months ended September 30, 2009 and 2008, respectively
and 104.1% and 87.0% of the net charge-offs for the three months ended September 30, 2009
and 2008, respectively;
|
|
|
(iii)
|
|
The allowance for loan losses of $194.8 million as of September 30, 2009 represented
3.5% of total loans and 77.4% of non-performing loans and 258.1% of non-performing loans
excluding loans secured by real estate. As of December 31, 2008 and September 30, 2008,
the allowance for loan losses was $191.9 million and $180.1 million, respectively,
represented 3.1% and 2.8% of total loans, and 90.2% and 85.9% of non-performing loans and
225.1% and 216.2% of non-performing loans excluding loans secured by real estate,
respectively;
|
|
|
(iv)
|
|
Non-interest income decreased $34.5 million or 28.8% for the nine months ended
September 30, 2009 as compared to the same period in 2008. Non-interest income was impacted
principally by: (i) a gain of $9.3 million on investment securities available for sale
partially offset by a loss of $9.6 million on the early termination of a repurchase
agreements, compared with a gain of $5.2 million for the same period in the prior year ;
(ii) a decrease in broker-dealer, asset management and insurance fees of $12.9
million;(iii) a gain of $3.3 million on the sale of a portion of the Corporations
investment in Visa, Inc. during the third quarter of 2009 compared with a gain of $8.6
million during the first quarter 2008 in connection with Visas initial public offering;(iv) a
loss of $8.4
|
48
|
|
|
million on derivatives and other financial instruments compared with a gain of
$6.2 million for the same period in prior year, and (v) an unfavorable valuation
adjustment of $7.0 million for loans held for sale recorded during 2008. For the quarter
ended September 30, 2009, non-interest income decreased $14.5 million when compared with
the quarter ended September 30, 2008, impacted principally by: (i) a $2.3 million decrease
in gain on investment securities available for sale; (ii) a loss of $9.3 million on
derivatives and other financial instruments for the quarter ended September 30, 2009
compared with a gain of $5.0 million for the same period in prior year; (iii) a gain of
$3.3 million on the sale of part of the investment in Visa, Inc., (iv) an unfavorable
valuation adjustment of $2.9 million for loans held for sale recorded during 2008 and (v) a
decrease in broker-dealer, asset management and insurance fees of $2.2 million.
|
|
|
(v)
|
|
Operating expenses reflected a decrease of $48.9 million or 19.6% for the nine months
ended September 30, 2009 when compared to the same period in the prior year. This decrease
was affected principally by: (i) $19.6 million decrease in salaries and other employee
benefits partially offset by increases of 4.0 million in incentive stock plan expense and
$2.2 million in expense from loan origination cost being deferred; (ii) a provision for
claim receivable of $25.1 million from Lehman Brother Inc (LBI) recognized during the third
quarter of 2008; (iii) $4.7 million decrease in professional fees; (iv) decreases of $2.6
million in business promotion , $1.7 million in occupancy cost, $1.4 million in EDP and
technical services and amortization and $1.3 million in repossessed expenses, (v)
partially offset by $5.9 million increase in FDIC assessment due to the assessment systems
implemented under the Federal Deposit Insurance Reform Act of 2005. For the quarter ended
September 30, 2009, operating expenses decreased $40.1 million or 39.4% when compared with
the same quarter in 2008, impacted principally by: (i) decrease of $7.6 million in salaries
and other employee benefits partially offset by $0.5 million incentive stock plan expense;
(ii) a provision for claim receivable of $25.1 million from LBI in 2008; (iii) decreases of
$3.1 million in decrease in professional fees, $0.8 million
in occupancy cost and 0.7
million in business promotion.
|
|
|
(vi)
|
|
During 2009, the Corporation sold certain loans, including some classified as impaired,
to an affiliate for $142.0 million in cash. These loans had a net book value of $142.0
million comprised of an outstanding principal balance of $149.2 million and a specific
valuation allowance of $7.2 million. The type of loans by net book value was $65.5 million
in construction loans, $61.2 million in commercial loans and $15.3 million in mortgage
loans. No gain or loss was recognized on these transactions.
|
|
|
(vii)
|
|
The Efficiency Ratio, on a tax equivalent basis, for the nine months ended September
30, 2009 and 2008 was 58.45% and 59.21%, respectively, reflecting an improvement of 76
basis points. The Efficiency Ratio, on a tax
equivalent basis, for the three months ended September 30, 2009 and 2008 was 57.51% and
59.00%, respectively, reflecting an improvement of 149 basis points.
|
Net Interest Income
The Corporations net interest income for the nine months ended September 30, 2009 and 2008
was $258.6 million and $268.1 million, respectively. The $9.4 million or 3.5% decrease was mainly
due to decreases of $68.2 million, $21.3 million and $3.8 million in interest income on loans,
investment securities and federal funds sold, respectively. These decreases reflected the impact of
the sale of commercial, construction and mortgage loans to an affiliate and the sale of investment
securities available for sale resulting in the decrease of interest income and the decline in the
average volume of these portfolios. Offsetting the decrease in net interest income was the $48.7
million decrease in interest expense on deposits and $36.8 million decrease on other borrowings
when compared with the same period in prior year. The average cost of funds on interest-bearing
liabilities was 2.57% for the nine months ended September 30, 2009, reflecting a 92 basis points
decrease from 3.49% for the same period in 2008. This was influenced by the reduction in federal
funds rates made by the Federal Reserve (FED) from 2.0% in September 30, 2008 to between 0% and
0.25% at September 30, 2009 and managements actions to lower the rates on certain deposits. The
average yield on interest-earning assets reflected an increase of 10 basis points to reach 7.61% in
the nine months ended September 30, 2009 compared with 7.51% for the same period in the prior year.
The Corporations net interest income for the three months ended September 30, 2009 decreased
$4.4 million or 4.7% when compared to the same quarter in 2008. The $4.4 million decrease was
principally due to a reduction in interest
49
income on loans of $21.4 million and reduction in
interest income on investment securities of $7.3 million. This decline can be attributed to the
decrease in volume as the result of the sale of loans and investment securities and the decline in
market rates. Offsetting the reduction in interest income was a $25.6 million decrease in interest
expense mainly due to $18.8 million decrease in interest expense on deposits and $7.2 million
decrease on other borrowings for the quarter ended September 30, 2009 when compared with the same
period in prior year. The average cost of funds on interest-bearing liabilities experienced a
decrease of 93 basis points from 3.17% for the three-month period ended September 30, 2008 to 2.24%
for the same period in 2009. This was influenced by the reduction in federal funds rates made by
the FED and management actions to lower the rates on certain deposits. The average yield on
interest-earning assets remained basically flat to reach 7.59% in the quarter ended September 30,
2009.
The
tables on page 54 and 55, Year to Date Average Balance Sheet and Summary of Net Interest
Income Tax Equivalent Basis and Quarter to Date Average Balance Sheet and Summary of Net
Interest Income Tax Equivalent Basis, presents average balance sheets, net interest income on a
tax equivalent basis and average interest rates for the nine-month periods and quarters ended
September 30, 2009 and 2008. The table on Interest Variance Analysis Tax Equivalent Basis on
page 53, allocates changes in the Corporations interest income (on a tax-equivalent basis) and
interest expense among changes in the average volume of interest earning assets and interest
bearing liabilities and changes in their respective interest rates for the nine-month and
three-month periods ended September 30, 2009 compared with the same periods of 2008.
To permit the comparison of returns on assets with different tax attributes, the interest
income on tax-exempt assets has been adjusted by an amount equal to the income taxes which would
have been paid had the income been fully taxable. This tax equivalent adjustment is derived using
the applicable statutory tax rate and resulted in adjustments of $2.1 million and $3.9 million for
the nine months ended September 30, 2009 and 2008, respectively. For the quarters ended September
30, 2009 and 2008, the tax equivalent adjustments were $0.5 million and $1.4 million, respectively.
The following table sets forth the principal components of the Corporations net interest
income for the nine-month and three-month periods ended September 30, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
Quarter ended
|
|
|
|
Sept. 30, 2009
|
|
|
Sept. 30, 2008
|
|
|
Sept. 30, 2009
|
|
|
Sept. 30, 2008
|
|
|
|
(Dollars in thousands)
|
|
|
(Dollars in thousands)
|
|
Interest income tax equivalent basis
|
|
$
|
368,973
|
|
|
$
|
464,379
|
|
|
$
|
118,599
|
|
|
$
|
149,441
|
|
Interest expense
|
|
|
108,208
|
|
|
|
192,424
|
|
|
|
30,025
|
|
|
|
55,605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income tax equivalent basis
|
|
$
|
260,765
|
|
|
$
|
271,955
|
|
|
$
|
88,574
|
|
|
$
|
93,836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin tax equivalent basis (1)
|
|
|
5.38
|
%
|
|
|
4.40
|
%
|
|
|
5.67
|
%
|
|
|
4.76
|
%
|
|
|
|
(1)
|
|
Net interest margin for any period equals tax-equivalent net interest income divided by average interest-earning assets for the period
(on an annualized basis.)
|
For the nine-month period ended September 30, 2009, net interest margin, on a tax
equivalent basis, was 5.38% compared to net interest margin, on a tax equivalent basis, of 4.40%
for the same period in 2008. The 98 basis points increase in net interest margin, on a tax
equivalent basis, was mainly due to a decrease in the cost of average interest-bearing liabilities
of 92 basis points resulting in a decrease of $84.2 million in interest expense. The reduction of
$84.2 million or 43.8% in interest expense was principally due to the significant reductions of 96
basis points in the cost of funds of average interest-bearing deposits from 3.22% for the nine
months ended September 30, 2008 to 2.26% for the nine months ended September 30, 2009 reflecting
the Federal Reserves interest rate cuts. The yield on the average interest-earning assets
reflected an increase of 10 basis points from 7.51% to 7.61% for the nine months ended September
30, 2008 and 2009, respectively, principally due to a change in the mix of the assets portfolios,
which also was affected for the reduction of average volume in portfolios.
For the three-month period ended September 30, 2009, net interest margin, on a tax equivalent
basis, was 5.67% compared to net interest margin, on a tax equivalent basis, of 4.76% for the same
period in 2008. The 91 basis points increase in net interest margin, on a tax equivalent basis, was
mainly due to a decrease in the cost of average interest-bearing liabilities of 93 basis points
resulting in a decrease of $25.6 million or 46.0% in interest expense. The reduction in interest
expense was principally due to the significant reductions of 101 basis points in the cost of funds
of average interest-bearing deposits from 2.92% for the three months ended September 30, 2008 to
1.91% for the three months ended
50
September 30, 2009. The average yield on interest-earning assets
remained basically flat to reach 7.59% in the quarter ended September 30, 2009.
For the nine-month period ended September 30, 2009, the average interest-earning assets
decreased $1.8 billion or 21.5% when compared with figures reported at September 30, 2008. This
decrease was mainly due to a decrease of $1.1 billion in average net loans mainly due to the sale
of commercial and construction loans, including some classified as impaired, to an affiliate and
repayments on loans, net of originations. The decrease in average net loans was comprised of the
following items:
|
(i)
|
|
a decrease in the average commercial and construction loans of $443.5 million or 17.8%
and $315.7 million or 74.2%, respectively, for the nine months ended September 30, 2009
when compared with the same period in 2008, which considers the effect of the sale of loans
to an affiliate and net repayments during the period;
|
|
|
(ii)
|
|
a decrease of $167.1 million or 6.2% in average mortgage loans mainly due to a $143.9
million decrease in mortgage loans originations;
|
|
|
(iii)
|
|
a decrease in average consumer loans (including consumer finance) of $147.8 million or
12.1% which comprised $106.0 million and $41.7 million decreases in average personal loans
and consumer finance, respectively;
|
|
|
(iv)
|
|
a decrease in average leasing portfolio of $29.9 million or 37.4% since the Corporation
has strategically reduced this line of lending;
|
|
|
(v)
|
|
an increase in the average allowance for loan losses of $18.6 million when compared
with figures reported in 2008.
|
Also, there was a decrease of $631.7 million or 50.5% in average investment securities mainly
due to a sale of investment securities available for sale of $441.0 million during the first
quarter of 2009 and $346.7 million during 2008.
The average interest-bearing liabilities decreased $1.7 billion or 23.6% for the nine-month
period ended September 30, 2009 driven by a decrease in average borrowings of $926.6 million when
compared to the nine-month period ended September 30, 2008. The decrease in average
interest-bearing liabilities was composed of:
|
(i)
|
|
a reduction in average securities sold under agreements to repurchase of $471.1 million
mainly caused by the cancellation of $200 million of securities sold under agreements to
repurchase with Lehman Brothers Inc. (LBI) as result of the bankruptcy of its parent,
Lehman Brothers Holding Inc. (LBHI) during 2008 and the early termination of repurchase
agreements of $375 million that were funding investment securities sold during the first
quarter of 2009;
|
|
|
(ii)
|
|
a decrease in average federal funds and other borrowings of $247.8 million mainly due
to the repayment of the outstanding indebtedness incurred under a bridge facility agreement
among the Corporation, SFS and National Australia Bank Limited during 2008;
|
|
|
(iii)
|
|
reductions of $180.7 million in average commercial paper ;
|
|
|
(iv)
|
|
a decrease in average Federal Home Loan Bank Advances (FHLB) of $85.7 million for
the nine months ended September 30, 2009 compared with the same period in 2008;
|
|
|
(v)
|
|
a decrease of $810 million in average total interest bearing deposits comprised of
$853.5 million decrease in average brokered deposits and $42.6 million decrease in average
other time deposits offset by an increase of $86.1 million average savings and NOW
accounts.
|
|
|
(vi)
|
|
partially offset by an increase of $58.1 million in average subordinated capital notes
due to a subordinated purchase agreement undertook with an affiliate;
|
For the three-month period ended September 30, 2009, the average interest-earning assets
decreased $1.6 billion or 21.1% when compared with the same period in prior year. This decrease was
mainly due to a decrease of $1.0 billion in average net loans mainly due to the sale of commercial
and construction loans, including some classified as impaired, to an affiliate and repayments on
loans, net of originations and a decrease of $538.1 million or 49.0% in average investment
securities. The decrease in average net loans was comprised of the following items:
51
|
(i)
|
|
a decrease in the average commercial and construction loans of $366.6 million or 15.5%
and $276.9 million or 76.7%, respectively, for the three months ended September 30, 2009
when compared with the same period in 2008, which considers the effect of the sale of loans
to an affiliate and net repayments during the period;
|
|
|
(ii)
|
|
a decrease of $194.6 million or 7.3% in average mortgage loans, mainly due to a $44.9
million decrease in mortgage loans originations and $151.5 million in repayments net of
loans sold for the period;
|
|
|
(iii)
|
|
a decrease in average consumer loans (including consumer finance) of $159.5 million or
13.3% principally due to $121.3 million and $38.2 million decreases in average personal and
consumer finance loans, respectively.
|
|
|
(iv)
|
|
a decrease in average leasing portfolio of $28.5 million or 39.5% for the three-month
periods ended September 30, 2009, compared with the same periods in 2008, since the
Corporation has strategically reduced this line of lending;
|
|
|
(v)
|
|
an increase in the average allowance for loan losses of $13.1 million when compared
with figures reported in 2008.
|
There was a decrease of $538.1 million or 49.0% in average investment securities mainly due to
a sale of investment securities available for sale of $441.0 million during the first quarter of
2009 and $346.7 million during 2008. Also there was a decrease in average interest-bearing deposits
of $71.7 million or 27.1%.
The decrease in average interest-bearing liabilities of $1.7 billion or 23.8% for the
three-month period ended September 30, 2009, was driven by a decrease in average interest-bearing
deposits and average borrowings of $1.2 billion and $0.5 billion, respectively, when compared to
the three-month period ended September 30, 2008. The decrease in average interest-bearing
liabilities was composed of:
|
(i)
|
|
a decrease of $1.2 million in average total interest bearing deposits comprised of
decreases of $1.0 billion and $311.2 million decrease in average brokered deposits and
average other time deposits, respectively, offset by increases of $91.2 million in average
savings and NOW accounts;
|
|
|
(ii)
|
|
a reduction in average securities sold under agreements to repurchase of $550.2 million
mainly caused by the cancellation of $200 million of securities sold under agreements to
repurchase with LBI as result of the bankruptcy of its parent, LBHI during 2008 and the
early termination of repurchase agreements of $375 million that were funding investment
securities sold during the first quarter of 2009.
|
|
|
(iii)
|
|
an increase of $43.9 million in average commercial paper ;
|
|
|
(iv)
|
|
an increase in average FHLB of $13.3 million for the three months ended September 30,
2009 compared with the same period in 2008;
|
|
|
(v)
|
|
an increase in average federal funds and other borrowings of $3.1 million;
|
|
|
(vi)
|
|
an increase of $62.1 million in average subordinated capital notes due to a
subordinated purchase agreement undertook with an affiliate;
|
The following table allocates changes in the Corporations interest income, on a
tax-equivalent basis, and interest expense for the nine-month and three-month periods ended
September 30, 2009, compared to the nine-month and three-month periods ended September 30, 2008,
among changes related to the average volume of interest-earning assets and interest-bearing
liabilities, and changes related to interest rates. Volume and rate variances have been calculated
based on the activity in average balances over the period and changes in interest rates on average
interest-earning assets and average interest-bearing liabilities. The changes that are not due
solely to volume or rate are allocated to volume and rate based on the proportion of change in each
category.
52
INTEREST VARIANCE ANALYSIS
on a Tax Equivalent Basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2009
|
|
|
Three Months Ended September 30, 2009
|
|
|
|
Compared to the Nine Months
|
|
|
Compared to the Three Months
|
|
|
|
Ended September 30, 2008
|
|
|
Ended September 30, 2008
|
|
|
|
Increase (Decrease) Due to Change in:
|
|
|
Increase (Decrease) Due to Change in:
|
|
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
Interest income, on a tax equivalent basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold and securities purchased
under agreements to resell
|
|
$
|
(2,106
|
)
|
|
$
|
(1,733
|
)
|
|
$
|
(3,839
|
)
|
|
$
|
(591
|
)
|
|
$
|
(525
|
)
|
|
$
|
(1,116
|
)
|
Time deposits with other banks
|
|
|
819
|
|
|
|
(1,136
|
)
|
|
|
(317
|
)
|
|
|
161
|
|
|
|
(246
|
)
|
|
|
(85
|
)
|
Investment securities
|
|
|
(19,173
|
)
|
|
|
(2,743
|
)
|
|
|
(21,916
|
)
|
|
|
(4,796
|
)
|
|
|
(3,082
|
)
|
|
|
(7,878
|
)
|
Loans
|
|
|
(70,018
|
)
|
|
|
684
|
|
|
|
(69,334
|
)
|
|
|
(21,801
|
)
|
|
|
38
|
|
|
|
(21,763
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income, on a tax equivalent basis
|
|
|
(90,478
|
)
|
|
|
(4,928
|
)
|
|
|
(95,406
|
)
|
|
|
(27,027
|
)
|
|
|
(3,815
|
)
|
|
|
(30,842
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings and NOW accounts
|
|
|
1,302
|
|
|
|
(13,248
|
)
|
|
|
(11,946
|
)
|
|
|
393
|
|
|
|
(4,275
|
)
|
|
|
(3,882
|
)
|
Other time deposits
|
|
|
(22,792
|
)
|
|
|
(13,942
|
)
|
|
|
(36,734
|
)
|
|
|
(10,213
|
)
|
|
|
(4,730
|
)
|
|
|
(14,943
|
)
|
Borrowings
|
|
|
(24,167
|
)
|
|
|
(12,637
|
)
|
|
|
(36,804
|
)
|
|
|
(3,880
|
)
|
|
|
(3,303
|
)
|
|
|
(7,183
|
)
|
Long-term borrowings
|
|
|
2,172
|
|
|
|
(904
|
)
|
|
|
1,268
|
|
|
|
734
|
|
|
|
(306
|
)
|
|
|
428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
(43,485
|
)
|
|
|
(40,731
|
)
|
|
|
(84,216
|
)
|
|
|
(12,966
|
)
|
|
|
(12,614
|
)
|
|
|
(25,580
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income, on a tax equivalent basis
|
|
$
|
(46,993
|
)
|
|
$
|
35,803
|
|
|
$
|
(11,190
|
)
|
|
$
|
(14,061
|
)
|
|
$
|
8,799
|
|
|
$
|
(5,262
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table shows average balances and, where applicable, interest amounts earned
on a tax-equivalent basis and average rates for the Corporations assets and liabilities and
stockholders equity for the nine-month and three-month periods ended September 30, 2009 and 2008.
53
SANTANDER BANCORP
YEAR TO DATE AVERAGE BALANCE SHEET AND SUMMARY OF NET INTEREST INCOME
Tax Equivalent Basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
Annualized
|
|
|
|
|
|
|
|
|
|
|
Annualized
|
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits
|
|
$
|
242,567
|
|
|
$
|
433
|
|
|
|
0.24
|
%
|
|
$
|
49,840
|
|
|
$
|
750
|
|
|
|
2.01
|
%
|
Federal funds sold and securities purchased
under agreements to resell
|
|
|
14,834
|
|
|
|
58
|
|
|
|
0.52
|
%
|
|
|
229,758
|
|
|
|
3,897
|
|
|
|
2.27
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing deposits
|
|
|
257,401
|
|
|
|
491
|
|
|
|
0.26
|
%
|
|
|
279,598
|
|
|
|
4,647
|
|
|
|
2.22
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.Treasury securities
|
|
|
119,512
|
|
|
|
650
|
|
|
|
0.73
|
%
|
|
|
45,955
|
|
|
|
981
|
|
|
|
2.85
|
%
|
Obligations of other U.S.government
agencies and corporations
|
|
|
58,094
|
|
|
|
1,398
|
|
|
|
3.22
|
%
|
|
|
506,839
|
|
|
|
13,000
|
|
|
|
3.43
|
%
|
Obligations of government of Puerto Rico
and political subdivisions
|
|
|
159,406
|
|
|
|
7,750
|
|
|
|
6.50
|
%
|
|
|
100,500
|
|
|
|
4,283
|
|
|
|
5.69
|
%
|
Corporate bonds
|
|
|
72,034
|
|
|
|
963
|
|
|
|
1.79
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage obligations and
mortgage backed securities
|
|
|
153,653
|
|
|
|
5,861
|
|
|
|
5.10
|
%
|
|
|
529,362
|
|
|
|
18,780
|
|
|
|
4.74
|
%
|
Other
|
|
|
56,163
|
|
|
|
1,979
|
|
|
|
4.71
|
%
|
|
|
67,955
|
|
|
|
3,473
|
|
|
|
6.83
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
|
618,862
|
|
|
|
18,601
|
|
|
|
4.02
|
%
|
|
|
1,250,611
|
|
|
|
40,517
|
|
|
|
4.33
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
2,049,106
|
|
|
|
70,796
|
|
|
|
4.62
|
%
|
|
|
2,492,613
|
|
|
|
105,940
|
|
|
|
5.68
|
%
|
Construction
|
|
|
109,477
|
|
|
|
2,389
|
|
|
|
2.92
|
%
|
|
|
425,152
|
|
|
|
13,787
|
|
|
|
4.33
|
%
|
Consumer
|
|
|
518,230
|
|
|
|
61,331
|
|
|
|
15.82
|
%
|
|
|
624,355
|
|
|
|
65,153
|
|
|
|
13.94
|
%
|
Consumer Finance
|
|
|
559,522
|
|
|
|
99,207
|
|
|
|
23.71
|
%
|
|
|
601,212
|
|
|
|
106,620
|
|
|
|
23.69
|
%
|
Mortgage
|
|
|
2,514,429
|
|
|
|
113,680
|
|
|
|
6.03
|
%
|
|
|
2,681,527
|
|
|
|
123,763
|
|
|
|
6.15
|
%
|
Lease financing
|
|
|
50,108
|
|
|
|
2,478
|
|
|
|
6.61
|
%
|
|
|
80,011
|
|
|
|
3,952
|
|
|
|
6.60
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loans
|
|
|
5,800,872
|
|
|
|
349,881
|
|
|
|
8.06
|
%
|
|
|
6,904,870
|
|
|
|
419,215
|
|
|
|
8.11
|
%
|
Allowance for loan losses
|
|
|
(191,374
|
)
|
|
|
|
|
|
|
|
|
|
|
(172,764
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net
|
|
|
5,609,498
|
|
|
|
349,881
|
|
|
|
8.34
|
%
|
|
|
6,732,106
|
|
|
|
419,215
|
|
|
|
8.32
|
%
|
Total interest earning assets/ interest
income (on a tax equivalent basis)
|
|
|
6,485,761
|
|
|
|
368,973
|
|
|
|
7.61
|
%
|
|
|
8,262,315
|
|
|
|
464,379
|
|
|
|
7.51
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest earning assests
|
|
|
747,029
|
|
|
|
|
|
|
|
|
|
|
|
716,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
7,232,790
|
|
|
|
|
|
|
|
|
|
|
$
|
8,978,663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings and NOW accounts
|
|
$
|
1,776,330
|
|
|
$
|
14,852
|
|
|
|
1.12
|
%
|
|
$
|
1,690,276
|
|
|
$
|
26,798
|
|
|
|
2.12
|
%
|
Other time deposits
|
|
|
1,647,187
|
|
|
|
38,201
|
|
|
|
3.10
|
%
|
|
|
1,689,747
|
|
|
|
40,095
|
|
|
|
3.17
|
%
|
Brokered deposits
|
|
|
637,915
|
|
|
|
15,670
|
|
|
|
3.28
|
%
|
|
|
1,491,372
|
|
|
|
50,510
|
|
|
|
4.52
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing deposits
|
|
|
4,061,432
|
|
|
|
68,723
|
|
|
|
2.26
|
%
|
|
|
4,871,395
|
|
|
|
117,403
|
|
|
|
3.22
|
%
|
Federal funds purchased and other borrowings
|
|
|
5,605
|
|
|
|
9
|
|
|
|
0.21
|
%
|
|
|
253,441
|
|
|
|
7,849
|
|
|
|
4.14
|
%
|
Securities sold under agreements to repurchase
|
|
|
102,747
|
|
|
|
3,396
|
|
|
|
4.42
|
%
|
|
|
573,860
|
|
|
|
21,290
|
|
|
|
4.96
|
%
|
Federal Home Loan advances
|
|
|
1,055,256
|
|
|
|
23,916
|
|
|
|
3.03
|
%
|
|
|
1,140,916
|
|
|
|
28,164
|
|
|
|
3.30
|
%
|
Commercial paper
|
|
|
85,089
|
|
|
|
450
|
|
|
|
0.71
|
%
|
|
|
265,748
|
|
|
|
7,272
|
|
|
|
3.66
|
%
|
Term Notes
|
|
|
20,201
|
|
|
|
471
|
|
|
|
3.12
|
%
|
|
|
19,599
|
|
|
|
472
|
|
|
|
3.22
|
%
|
Subordinated Notes
|
|
|
303,866
|
|
|
|
11,243
|
|
|
|
4.95
|
%
|
|
|
245,798
|
|
|
|
9,974
|
|
|
|
5.42
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing liabilities/interest expense
|
|
|
5,634,196
|
|
|
|
108,208
|
|
|
|
2.57
|
%
|
|
|
7,370,757
|
|
|
|
192,424
|
|
|
|
3.49
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest bearing liabilities
|
|
|
1,035,476
|
|
|
|
|
|
|
|
|
|
|
|
1,043,234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
6,669,672
|
|
|
|
|
|
|
|
|
|
|
|
8,413,991
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity
|
|
|
563,118
|
|
|
|
|
|
|
|
|
|
|
|
564,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
7,232,790
|
|
|
|
|
|
|
|
|
|
|
$
|
8,978,663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income, on a tax equivalent basis
|
|
|
|
|
|
$
|
260,765
|
|
|
|
|
|
|
|
|
|
|
$
|
271,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread
|
|
|
|
|
|
|
|
|
|
|
5.04
|
%
|
|
|
|
|
|
|
|
|
|
|
4.02
|
%
|
Cost of funding earning assets
|
|
|
|
|
|
|
|
|
|
|
2.23
|
%
|
|
|
|
|
|
|
|
|
|
|
3.11
|
%
|
Net interest margin, on a tax equivalent basis
|
|
|
|
|
|
|
|
|
|
|
5.38
|
%
|
|
|
|
|
|
|
|
|
|
|
4.40
|
%
|
54
SANTANDER BANCORP
QUARTER TO DATE AVERAGE BALANCE SHEET AND SUMMARY OF NET INTEREST INCOME
Tax Equivalent Basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
Annualized
|
|
|
|
|
|
|
|
|
|
|
Annualized
|
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits
|
|
$
|
177,277
|
|
|
$
|
89
|
|
|
|
0.20
|
%
|
|
$
|
49,071
|
|
|
$
|
174
|
|
|
|
1.41
|
%
|
Federal funds sold and securities purchased
under agreements to resell
|
|
|
16,132
|
|
|
|
15
|
|
|
|
0.37
|
%
|
|
|
216,062
|
|
|
|
1,131
|
|
|
|
2.08
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing deposits
|
|
|
193,409
|
|
|
|
104
|
|
|
|
0.21
|
%
|
|
|
265,133
|
|
|
|
1,305
|
|
|
|
1.96
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.Treasury securities
|
|
|
175,126
|
|
|
|
346
|
|
|
|
0.78
|
%
|
|
|
33,033
|
|
|
|
123
|
|
|
|
1.48
|
%
|
Obligations of other U.S.government
agencies and corporations
|
|
|
35,736
|
|
|
|
189
|
|
|
|
2.10
|
%
|
|
|
396,693
|
|
|
|
3,557
|
|
|
|
3.57
|
%
|
Obligations of government of Puerto Rico
and political subdivisions
|
|
|
127,710
|
|
|
|
2,013
|
|
|
|
6.25
|
%
|
|
|
99,538
|
|
|
|
1,428
|
|
|
|
5.71
|
%
|
Corporate bonds
|
|
|
141,534
|
|
|
|
657
|
|
|
|
1.84
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage obligations and
mortgage backed securities
|
|
|
24,395
|
|
|
|
278
|
|
|
|
4.52
|
%
|
|
|
513,567
|
|
|
|
6,098
|
|
|
|
4.72
|
%
|
Other
|
|
|
55,576
|
|
|
|
749
|
|
|
|
5.35
|
%
|
|
|
55,298
|
|
|
|
904
|
|
|
|
6.50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
|
560,077
|
|
|
|
4,232
|
|
|
|
3.00
|
%
|
|
|
1,098,129
|
|
|
|
12,110
|
|
|
|
4.39
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
2,002,758
|
|
|
|
23,221
|
|
|
|
4.60
|
%
|
|
|
2,369,368
|
|
|
|
32,687
|
|
|
|
5.49
|
%
|
Construction
|
|
|
84,257
|
|
|
|
627
|
|
|
|
2.95
|
%
|
|
|
361,139
|
|
|
|
3,551
|
|
|
|
3.91
|
%
|
Consumer
|
|
|
487,368
|
|
|
|
19,251
|
|
|
|
15.67
|
%
|
|
|
608,694
|
|
|
|
22,137
|
|
|
|
14.47
|
%
|
Consumer Finance
|
|
|
556,049
|
|
|
|
33,287
|
|
|
|
23.75
|
%
|
|
|
594,260
|
|
|
|
35,523
|
|
|
|
23.78
|
%
|
Mortgage
|
|
|
2,461,913
|
|
|
|
37,168
|
|
|
|
6.04
|
%
|
|
|
2,656,530
|
|
|
|
40,949
|
|
|
|
6.17
|
%
|
Lease financing
|
|
|
43,658
|
|
|
|
709
|
|
|
|
6.44
|
%
|
|
|
72,137
|
|
|
|
1,179
|
|
|
|
6.50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loans
|
|
|
5,636,003
|
|
|
|
114,263
|
|
|
|
8.04
|
%
|
|
|
6,662,128
|
|
|
|
136,026
|
|
|
|
8.12
|
%
|
Allowance for loan losses
|
|
|
(189,333
|
)
|
|
|
|
|
|
|
|
|
|
|
(176,267
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net
|
|
|
5,446,670
|
|
|
|
114,263
|
|
|
|
8.32
|
%
|
|
|
6,485,861
|
|
|
|
136,026
|
|
|
|
8.34
|
%
|
Total interest earning assets/ interest
income (on a tax equivalent basis)
|
|
|
6,200,156
|
|
|
|
118,599
|
|
|
|
7.59
|
%
|
|
|
7,849,123
|
|
|
|
149,441
|
|
|
|
7.57
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest earning assests
|
|
|
689,838
|
|
|
|
|
|
|
|
|
|
|
|
681,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
6,889,994
|
|
|
|
|
|
|
|
|
|
|
$
|
8,530,640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings and NOW accounts
|
|
$
|
1,818,030
|
|
|
$
|
3,934
|
|
|
|
0.86
|
%
|
|
$
|
1,726,829
|
|
|
$
|
7,816
|
|
|
|
1.80
|
%
|
Other time deposits
|
|
|
1,596,022
|
|
|
|
11,562
|
|
|
|
2.87
|
%
|
|
|
1,907,268
|
|
|
|
14,136
|
|
|
|
2.95
|
%
|
Brokered deposits
|
|
|
417,397
|
|
|
|
2,914
|
|
|
|
2.77
|
%
|
|
|
1,431,987
|
|
|
|
15,283
|
|
|
|
4.25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing deposits
|
|
|
3,831,449
|
|
|
|
18,410
|
|
|
|
1.91
|
%
|
|
|
5,066,084
|
|
|
|
37,235
|
|
|
|
2.92
|
%
|
Federal funds purchased and other borrowings
|
|
|
14,660
|
|
|
|
9
|
|
|
|
0.24
|
%
|
|
|
11,519
|
|
|
|
203
|
|
|
|
7.01
|
%
|
Securities sold under agreements to repurchase
|
|
|
|
|
|
|
|
|
|
|
0.00
|
%
|
|
|
550,167
|
|
|
|
6,781
|
|
|
|
4.90
|
%
|
Federal Home Loan advances
|
|
|
1,051,576
|
|
|
|
7,758
|
|
|
|
2.93
|
%
|
|
|
1,038,325
|
|
|
|
7,785
|
|
|
|
2.98
|
%
|
Commercial paper
|
|
|
86,288
|
|
|
|
127
|
|
|
|
0.58
|
%
|
|
|
42,374
|
|
|
|
308
|
|
|
|
2.89
|
%
|
Term Notes
|
|
|
20,353
|
|
|
|
160
|
|
|
|
3.12
|
%
|
|
|
19,747
|
|
|
|
163
|
|
|
|
3.28
|
%
|
Subordinated Notes
|
|
|
305,487
|
|
|
|
3,561
|
|
|
|
4.62
|
%
|
|
|
243,410
|
|
|
|
3,130
|
|
|
|
5.12
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing liabilities/interest expense
|
|
|
5,309,813
|
|
|
|
30,025
|
|
|
|
2.24
|
%
|
|
|
6,971,626
|
|
|
|
55,605
|
|
|
|
3.17
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest bearing liabilities
|
|
|
1,005,854
|
|
|
|
|
|
|
|
|
|
|
|
990,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
6,315,667
|
|
|
|
|
|
|
|
|
|
|
|
7,962,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity
|
|
|
574,327
|
|
|
|
|
|
|
|
|
|
|
|
568,568
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
6,889,994
|
|
|
|
|
|
|
|
|
|
|
$
|
8,530,640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income, on a tax equivalent basis
|
|
|
|
|
|
$
|
88,574
|
|
|
|
|
|
|
|
|
|
|
$
|
93,836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread
|
|
|
|
|
|
|
|
|
|
|
5.35
|
%
|
|
|
|
|
|
|
|
|
|
|
4.40
|
%
|
Cost of funding earning assets
|
|
|
|
|
|
|
|
|
|
|
1.92
|
%
|
|
|
|
|
|
|
|
|
|
|
2.82
|
%
|
Net interest margin, on a tax equivalent basis
|
|
|
|
|
|
|
|
|
|
|
5.67
|
%
|
|
|
|
|
|
|
|
|
|
|
4.76
|
%
|
55
Provision for Loan Losses
The Corporations provision for loan losses decreased $8.1 million or 6.6% to reach $115.5
million for the nine-month period ended September 30, 2009. For the quarter ended September 30,
2009, the provision for loan losses was $40.7 million, reflecting a decrease of $4.9 million when
compared with quarter ended September 30, 2008. These reductions in provision for loan losses was
mainly due to the sale of certain loans including some classified as impaired to an affiliate
during the year.
Refer to the discussions under Allowance for Loan Losses and Risk Management for further
analysis of the allowance for loan losses and non-performing assets and related ratios.
Other Income
Other income consists of service charges on the Corporations 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 the Corporations other income for the
periods indicated:
OTHER INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended
|
|
|
For the three months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank service fees on deposit accounts
|
|
$
|
9,458
|
|
|
$
|
10,015
|
|
|
$
|
3,003
|
|
|
$
|
3,094
|
|
Other service fees:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit card and payment processing fees
|
|
|
6,832
|
|
|
|
6,142
|
|
|
|
2,350
|
|
|
|
2,014
|
|
Mortgage servicing fees
|
|
|
3,044
|
|
|
|
2,561
|
|
|
|
1,033
|
|
|
|
859
|
|
Trust fees
|
|
|
812
|
|
|
|
1,235
|
|
|
|
261
|
|
|
|
411
|
|
Confirming advances fees
|
|
|
1,629
|
|
|
|
5,110
|
|
|
|
403
|
|
|
|
1,120
|
|
Other fees
|
|
|
8,322
|
|
|
|
8,681
|
|
|
|
2,696
|
|
|
|
2,722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fee income
|
|
|
30,097
|
|
|
|
33,744
|
|
|
|
9,746
|
|
|
|
10,220
|
|
Broker/dealer, asset management, and insurance fees
|
|
|
45,165
|
|
|
|
58,110
|
|
|
|
13,986
|
|
|
|
16,137
|
|
Gain on sale of securities available for sale
|
|
|
9,251
|
|
|
|
5,153
|
|
|
|
|
|
|
|
2,279
|
|
Gain on sale of loans
|
|
|
3,820
|
|
|
|
3,004
|
|
|
|
1,019
|
|
|
|
737
|
|
Trading gains
|
|
|
1,541
|
|
|
|
2,798
|
|
|
|
138
|
|
|
|
804
|
|
Gain (loss) on derivatives and other financial instruments
|
|
|
(8,356
|
)
|
|
|
6,224
|
|
|
|
(9,267
|
)
|
|
|
5,029
|
|
Other (losses) gains, net
|
|
|
(2,796
|
)
|
|
|
5,375
|
|
|
|
4,281
|
|
|
|
(731
|
)
|
Other
|
|
|
6,586
|
|
|
|
5,359
|
|
|
|
2,042
|
|
|
|
1,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
85,308
|
|
|
$
|
119,767
|
|
|
$
|
21,945
|
|
|
$
|
36,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56
The table below details the breakdown of fees from broker-dealer, asset management and
insurance agency operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended
|
|
|
For the three months ended
|
|
|
|
September 30, 2009
|
|
|
September 30, 2008
|
|
|
September 30, 2009
|
|
|
September 30, 2008
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
Broker-dealer
|
|
$
|
23,673
|
|
|
$
|
31,604
|
|
|
$
|
6,447
|
|
|
$
|
7,427
|
|
Asset management
|
|
|
18,800
|
|
|
|
20,038
|
|
|
|
6,396
|
|
|
|
6,757
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Santander Securities
|
|
|
42,473
|
|
|
|
51,642
|
|
|
|
12,843
|
|
|
|
14,184
|
|
Insurance
|
|
|
2,692
|
|
|
|
6,468
|
|
|
|
1,143
|
|
|
|
1,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
45,165
|
|
|
$
|
58,110
|
|
|
$
|
13,986
|
|
|
$
|
16,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine-month period ended September 30, 2009, other income reflected a decrease of 34.5
million or 28.8% when compared to $119.8 million for the same period in 2008. The changes in other
income for the nine-month period ended September 30, 2009 as compared with the same period in prior
year was follows:
|
(i)
|
|
Broker-dealer, asset management and insurance fees reflected a decrease of $12.9
million due to decreases in broker-dealer and asset management fees of $9.2 million and a
decrease of $3.8 million in insurance fees due to a reduction in credit life commissions
generated from the Bank and Island Finance operations. The broker-dealer operation is
carried out through Santander Securities Corporation, whose business includes securities
underwriting and distribution, sales, trading, financial planning and securities brokerage
services. In addition, Santander Securities provides investment management services through
its wholly-owned subsidiary, Santander Asset Management Corporation. The broker-dealer,
asset management and insurance operations contributed 52.9% and 48.5% to the Corporations
other income for the nine-month period ended September 30, 2009, respectively.
|
|
|
(ii)
|
|
There was an increase in gain on sale of securities available for sale of $4.1 million.
During the first quarter of 2009, the Corporation sold $441 million of investment
securities available for sale and realized a gain of $9.3 million. This gain was offset by
a loss of $9.6 million, included in other gains (losses), on the early termination of
repurchase agreements that were funding the securities sold. During 2008, the Corporation
sold $346.7 million of investment securities available for sale resulting in a gain of $5.2
million.
|
|
|
(iii)
|
|
The Corporation recognized a gain of $3.3 million on the sale of part of the
investment in Visa, Inc. compared with a gain of $8.6 million during 2008 in connection
with Visas initial public offering recognize through earnings and included within other gains
(losses).
|
|
|
(iv)
|
|
A loss of $8.4 million on derivatives and other financial instruments during 2009
compared with a gain of $6.2 million for the same period in prior year mostly resulting
from the credit risk component incorporated into the fair value calculation of a
subordinated notes and brokered deposits.
|
|
|
(v)
|
|
An unfavorable valuation adjustment of $7.0 million for loans held for sale was
recorded through earnings and included within other gains (losses) during 2008 offset by an
amortization of $0.5 million of previously recorded unrealized losses on loans reclassified
to held to maturity recognized during 2009.
|
For the quarter ended September 30, 2009, a decrease of $14.5 million was reported reaching
$21.9 million when compared to $36.4 million for the same period in 2008. The changes in other
income for the three-month period ended September 30, 2009 as compared with the same period in prior
year was follows:
|
(i)
|
|
Broker-dealer, asset management and insurance fees decreased of $2.2 million due to
decreases in broker-dealer and asset management fees of $1.3 million and a decrease of $0.8
million in insurance fees. The broker-dealer, asset management and insurance operations
contributed 48.5% to the Corporations other income for the quarter ended September 30,
2009 and 44.3% for the same period in prior year.
|
57
|
(ii)
|
|
There was a decrease of $2.3 million in gain on sale of investment available for sale
for the quarter ended September 30, 2009.
|
|
|
(iii)
|
|
The Corporation recognized a gain of $3.3 million on the sale of part of the
investment in Visa, Inc. recognized through earnings and included within other gains
(losses) in the third quarter of 2009 in connection with Visas initial public offering
during 2008.
|
|
|
(iv)
|
|
The Corporation reported a loss on derivatives and other financial instruments of $9.3
million for the quarter ended September 30, 2009 compared with a gain of $5.0 million
reported for the quarter ended September 30, 2008.
|
|
|
(v)
|
|
An unfavorable valuation adjustment of $2.9 million for loans held for sale was
recorded through earnings and included within other gains (losses) during the quarter ended
September 30, 2008.
|
58
OPERATING EXPENSES
The following table presents the detail of other operating expenses for the periods indicated:
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
Three months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Salaries
|
|
$
|
44,833
|
|
|
$
|
54,784
|
|
|
$
|
14,933
|
|
|
$
|
19,938
|
|
Share based compensation (benefit)
|
|
|
1,973
|
|
|
|
(2,059
|
)
|
|
|
517
|
|
|
|
35
|
|
Pension and other benefits
|
|
|
36,958
|
|
|
|
46,573
|
|
|
|
10,729
|
|
|
|
13,297
|
|
Expenses deferred as loan origination costs
|
|
|
(4,251
|
)
|
|
|
(6,415
|
)
|
|
|
(1,546
|
)
|
|
|
(1,898
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total personnel costs
|
|
|
79,513
|
|
|
|
92,883
|
|
|
|
24,633
|
|
|
|
31,372
|
|
|
Occupancy costs
|
|
|
18,976
|
|
|
|
20,631
|
|
|
|
6,597
|
|
|
|
7,409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment expenses
|
|
|
3,032
|
|
|
|
3,340
|
|
|
|
988
|
|
|
|
1,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EDP servicing expense, amortization and
technical services
|
|
|
29,782
|
|
|
|
31,208
|
|
|
|
9,760
|
|
|
|
10,147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Communication expenses
|
|
|
6,988
|
|
|
|
7,724
|
|
|
|
2,193
|
|
|
|
2,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business promotion
|
|
|
2,794
|
|
|
|
5,438
|
|
|
|
926
|
|
|
|
1,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for claim receivable
|
|
|
|
|
|
|
25,120
|
|
|
|
|
|
|
|
25,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other taxes
|
|
|
9,895
|
|
|
|
10,150
|
|
|
|
3,179
|
|
|
|
3,394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional fees
|
|
|
10,828
|
|
|
|
15,550
|
|
|
|
3,216
|
|
|
|
6,328
|
|
Amortization of intangibles
|
|
|
2,137
|
|
|
|
2,264
|
|
|
|
671
|
|
|
|
779
|
|
Printing and supplies
|
|
|
1,050
|
|
|
|
1,360
|
|
|
|
354
|
|
|
|
438
|
|
Credit card expenses
|
|
|
4,709
|
|
|
|
3,411
|
|
|
|
1,534
|
|
|
|
1,192
|
|
Insurance
|
|
|
1,687
|
|
|
|
2,792
|
|
|
|
576
|
|
|
|
868
|
|
Examinations and FDIC assessment
|
|
|
10,286
|
|
|
|
4,431
|
|
|
|
1,879
|
|
|
|
1,454
|
|
Transportation and travel
|
|
|
1,362
|
|
|
|
1,972
|
|
|
|
426
|
|
|
|
566
|
|
Repossessed assets provision and expenses
|
|
|
3,270
|
|
|
|
4,579
|
|
|
|
1,695
|
|
|
|
1,996
|
|
Collections and related legal costs
|
|
|
1,477
|
|
|
|
1,027
|
|
|
|
588
|
|
|
|
365
|
|
All other
|
|
|
12,759
|
|
|
|
15,561
|
|
|
|
2,430
|
|
|
|
5,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating expenses
|
|
|
49,565
|
|
|
|
52,947
|
|
|
|
13,369
|
|
|
|
19,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-personnel expenses
|
|
|
121,032
|
|
|
|
156,558
|
|
|
|
37,012
|
|
|
|
70,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating expenses
|
|
$
|
200,545
|
|
|
$
|
249,441
|
|
|
$
|
61,645
|
|
|
$
|
101,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Corporations operating expenses reflected a decrease of $48.9 million or 19.6% to
reach $200.5 million for the nine-month periods ended September 30, 2009 when compared with the
nine-month period ended September 30, 2008. The major variances in operating expenses are described
below:
|
(i)
|
|
a decrease in net salaries and other employee benefits of $13.4 million principally
attributed to $10.0 million decrease in salaries and $9.6 million decrease in other employee
benefits (which comprised principally a $6.7 million decrease in bonuses and commissions)
partially offset by increases of 4.0 million in incentive stock plan expense and $2.2
million expense of loan origination cost being deferred;
|
|
|
(ii)
|
|
a provision for claim receivable of $25.1 million recognized during the third quarter of
2008 which represent the excess of the value of the securities held by LBI over the amount
owned by the Corporation under the securities sold under agreement to repurchase;
|
|
|
(iii)
|
|
a $4.7 million decrease in professional fees due to a decrease in consulting fees
related to the review of certain operational procedures during 2008;
|
59
|
(iv)
|
|
decreases of $2.6 million in business promotion , $1.7 million in occupancy cost, $1.4
million in EDP and technical services and $1.3 million in repossessed expenses;
|
|
|
(v)
|
|
partially offset by $5.9 million increase in FDIC assessment due to the 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 risk information and special assessment of 5 basis points, and no more
than 10 basis points, of insured depository institutions assets minus Tier 1 capital.
|
For the three-month period ended September 30, 2009 operating expense decreased $40.1 million
or 39.4% when compared with the same period in 2008. The variances in operating expenses are
described below:
|
(i)
|
|
a decrease net salaries and other employee benefits of $6.7 mainly due to decreases in
salaries of $5.0 million and a decrease of $2.6 million in other employee benefit (which
comprised a reduction of $1.4 million in bonuses and commissions), partially offset by an
increase of $0.5 million in stock incentive plans;
|
|
|
(ii)
|
|
a provision for claim receivable of $25.1 million recognized during the third quarter of
2008 which represent the excess of the value of the securities held by LBI over the amount
owned by the Corporation under the securities sold under agreement to repurchase;
|
|
|
(iii)
|
|
decreases of $3.1 million in professional fees, $0.8 million in occupancy expense and
$0.7 million in business promotions.
|
The Efficiency Ratio, on a tax equivalent basis, for the nine months ended September 30, 2009
and 2008 was 58.45% and 59.21%, respectively, reflecting an improvement of 76 basis points. The
Efficiency Ratio, on a tax equivalent basis, for the three months ended September 30, 2009 and 2008
was 57.51% and 59.00%, respectively, reflecting an increase of 149 basis points.
Provision for Income Tax
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 Corporation is also subject to municipal license tax at various rates that do not exceed
1.5% on the Corporations taxable gross income. 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. The PR Code provides
dividends received deduction of 100% on dividends received from controlled subsidiaries subject to
taxation in Puerto Rico.
On July 2009, Governor of Puerto Rico signed Act No. 37, which amends Act No. 7 of March 9,
2009. This law imposed a temporary three-year surcharge of 5% commencing on taxable year 2009.
Since the 5% surcharge is imposed on the tax liability instead of the income subject to tax, the
effect of the 5% surcharge will be that during the temporary period the 39% maximum statutory
marginal corporate income tax rate may be increased to 40.95%. Also, the amendments of Act No. 7 of
March 9, 2009, particularly to alternative minimum tax (AMT), eliminates the deduction for
expenses incurred outside Puerto Rico unless these payments are subject to income tax in Puerto
Rico.
This law, also, includes a temporary 5% special income tax applicable to Puerto Rico
international banking entities, or IBEs, such as Santander International Bank (SIB), which, before
this law, was exempt from taxation under Puerto Rico law. This special income tax shall be
applicable for taxable years 2009, 2010 and 2011
The Corporation adopted the provisions under FASB ASC Topic 740,
Income Tax.
These
provisions clarify the accounting for uncertainty of income tax recognized in a enterprises
financial statements in accordance with FASB ASC Topic 740
.
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.
60
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 $18.6 million and
$0.1 million, respectively, at September 30, 2009. Accordingly, deferred tax asset valuation
allowances of $18.6 million and $0.1 million for Santander Financial Services, Inc and Santander
Bancorp (parent company only), respectively, were recorded at September 30, 2009.
The income tax provision increased $6.7 million to reach $5.3 million for the nine-month
period ended September 30, 2009 compared to an income tax benefit of $1.3 million for the same
period in 2008. For the quarter ended September 30, 2009, the benefit for income tax amounted $2.8
million reflecting an increase of $7.5 million from a $10.3 million of income tax benefit for the
quarter ended September 30, 2008. This increase in the provision for income tax resulted from a
higher taxable income in 2009 compared with the same period in 2008 and 5% additional surcharge
imposed for a temporary three-year period commencing in taxable year 2009 and ending in taxable
year 2011.
Financial Position September 30, 2009
Assets
The Corporations assets reached $6.8 billion as of September 30, 2009, a $1.1 billion or
13.4% decrease compared to total assets of $7.9 billion at December 31, 2008 and a $1.3 billion or
15.9% decrease compared to total assets of $8.1 billion at September 30, 2008. The reduction of
$1.1 billion, for the nine-month period ended September 30, 2009, on Corporations total assets
was driven by decreases of $599.3 million in net loan portfolio and $342.4 million in investment
securities available for sale mainly due to a sale of $441.0 million investment securities during
the first quarter of 2009. Also, there was a decrease of $94.8 million in cash and cash
equivalents. The reduction of $1.3 billion compared to September 30, 2008 balances was principally
due to a $879.6 million decrease in net loan portfolio and $378.6 million decrease in investment
securities available for sale due to the sale of investment securities of $441.0 million during the
first quarter of 2009.
The composition of the loan portfolio, including loans held for sale, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sept. 30,
|
|
|
Dec. 31,
|
|
|
Sept. 09/Dec. 08
|
|
|
Sept. 30,
|
|
|
Sept. 09/Sept. 08
|
|
|
|
2009
|
|
|
2008
|
|
|
Variance
|
|
|
2008
|
|
|
Variance
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and
industrial
|
|
$
|
1,965,867
|
|
|
$
|
2,164,786
|
|
|
$
|
(198,919
|
)
|
|
$
|
2,291,376
|
|
|
$
|
(325,509
|
)
|
Construction
|
|
|
83,096
|
|
|
|
194,026
|
|
|
|
(110,930
|
)
|
|
|
241,669
|
|
|
|
(158,573
|
)
|
Mortgage
|
|
|
2,442,049
|
|
|
|
2,595,588
|
|
|
|
(153,539
|
)
|
|
|
2,639,940
|
|
|
|
(197,891
|
)
|
Consumer
|
|
|
473,341
|
|
|
|
566,589
|
|
|
|
(93,248
|
)
|
|
|
595,569
|
|
|
|
(122,228
|
)
|
Consumer Finance
|
|
|
558,283
|
|
|
|
578,243
|
|
|
|
(19,960
|
)
|
|
|
591,435
|
|
|
|
(33,152
|
)
|
Leasing
|
|
|
40,798
|
|
|
|
60,615
|
|
|
|
(19,817
|
)
|
|
|
68,377
|
|
|
|
(27,579
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Loans
|
|
|
5,563,434
|
|
|
|
6,159,847
|
|
|
|
(596,413
|
)
|
|
|
6,428,366
|
|
|
|
(864,932
|
)
|
Allowance for loan
losses
|
|
|
(194,795
|
)
|
|
|
(191,889
|
)
|
|
|
(2,906
|
)
|
|
|
(180,090
|
)
|
|
|
(14,705
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loans
|
|
$
|
5,368,639
|
|
|
$
|
5,967,958
|
|
|
$
|
(599,319
|
)
|
|
$
|
6,248,276
|
|
|
$
|
(879,637
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The net loan portfolio, including loans held for sale, reflected a decrease of $599.3
million or 10.0%, reaching $5.4 billion at September 30, 2009, compared to the figures reported as
of December 31, 2008, and a decrease of $879.6 million or 14.1%, when compared to September 30,
2008. The commercial and industrial and construction loans portfolios decreased $198.9 million and
$110.9 million, respectively, when compared to the December 31, 2008 balances. The reduction in
these portfolios was basically due to the sale to an affiliate of $131.2 million of commercial and
industrial and construction loans, including some classified as impaired, and $178.7 million of
repayments, net of
61
originations for the nine months ended September 30, 2009. Compared with
September 30, 2008 balances, the
commercial and construction loans portfolios reflected decreases of $325.5 million and $158.6
million, respectively, due to $242.2 million loans sold to an affiliate and $241.9 million of
repayments, net of originations.
The mortgage portfolio reflected a decrease of $153.5 million, or 5.9%, and $197.9 million, or
7.5%, decreases compared to December 31, 2008 and September 30, 2008 balances. Residential mortgage
loan origination for the nine months ended September 30, 2009 was $150.4 million, $143.9 million or
48.9% less than the $294.3 million originated during the same period in 2008.
Also, the Corporation reported a decrease in consumer loans (including consumer finance) of
$113.2 million or 9.9% when compared with December 31, 2008 balances and $155.4 million or 13.1%
when compared with September 30, 2008 balances. The leasing portfolio reflected decreases of $19.8
million and $27.6 million when compared with December 31, 2008 and September 30, 2008,
respectively, reflecting the Corporations strategy to reduce this line of lending.
For the nine months ended September 30, 2009, the Corporation sold loans, including certain
impaired loans, to an affiliate with a net book value of $142.0 million which comprised of an
outstanding principal balance of $149.2 million and a specific valuation allowance of $7.2 million.
The type of loans sold, at net book value, was $65.5 million in construction loans, $61.2 million
in commercial loans and $15.3 million in mortgage loans.
Allowance for Loan Losses
The Corporation 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 the Corporations loan portfolio. The Corporations 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 Corporations management makes. The allowance for loan losses is composed
of three different components. An asset-specific reserve based on the provisions of accounting
standard FASB ASC Topic 310 Receivables (as amended), an expected loss estimate based on the
provisions of FASB ASC Topic 450 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 accounting
standard Topic 310. 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 loans
effective interest rate, except as a practical expedient, the Corporation may measure impairment
based on the loans 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
Corporations 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 FASB ASC Topic 450 for all
loans not evaluated individually for impairment. Effective July 1, 2009, the Corporation revised
its quantitative methodology for estimating the allowance for loan losses for the consumer and
consumer finance portfolios. Through the end of the second quarter ended June 30, 2009, the
Corporations quantitative methodology for estimating the allowance for loan losses for the
consumer and consumer finance portfolios was based on a historical loss rate analysis, which relied
on historical loss experience over a defined period for pools of loans with common characteristics.
The revised quantitative methodology is based on a migration analysis/roll rate and considers both
historical loss rates and loss rates based on the likelihood of credit deterioration (expectation
of current loans becoming delinquent in monthly increments until they default and are charged-off).
The loss factor estimated based on this methodology may be adjusted to incorporate seasonality
attributes as well as to reflect recent economic or business trends that may affect the
collectability of the portfolio. The loss factor is then applied to the outstanding portfolio at
period end to estimate the amount of expected charge offs and the provision for loan losses
required to support an adequate allowance for loan losses. The Corporations decision to revise
and improve its methodology was made after a thorough evaluation of the reliability of the revised
methodology including a back testing analysis. Management believes that the revised quantitative
methodology provides
62
a more reliable estimate of probable losses on its existing consumer and
consumer finance portfolios. The application of this revised methodology for the quarter ended
September 30, 2009 resulted in a provision for loan
losses on consumer and consumer finance loans which is $305,000 lower than the amount that would
have been determined under the previous quantitative method. The positive effect on earnings per
share for the quarter ended September 30, 2009 was less than $.01.
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 managements 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
managements 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.
63
ALLOWANCE FOR LOAN LOSSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine month ended
|
|
|
For the three months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
191,889
|
|
|
$
|
166,952
|
|
|
$
|
193,186
|
|
|
$
|
186,889
|
|
Provision for loan losses
|
|
|
115,525
|
|
|
|
123,650
|
|
|
|
40,689
|
|
|
|
45,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
307,414
|
|
|
|
290,602
|
|
|
|
233,875
|
|
|
|
232,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses charged to the allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
18,568
|
|
|
|
10,589
|
|
|
|
10,225
|
|
|
|
6,439
|
|
Construction
|
|
|
2,254
|
|
|
|
28,128
|
|
|
|
|
|
|
|
22,770
|
|
Mortgage
|
|
|
6,498
|
|
|
|
64
|
|
|
|
945
|
|
|
|
|
|
Consumer
|
|
|
40,642
|
|
|
|
30,370
|
|
|
|
13,241
|
|
|
|
10,395
|
|
Consumer finance
|
|
|
47,533
|
|
|
|
42,764
|
|
|
|
15,734
|
|
|
|
13,306
|
|
Leasing
|
|
|
1,334
|
|
|
|
1,497
|
|
|
|
386
|
|
|
|
447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
116,829
|
|
|
|
113,412
|
|
|
|
40,531
|
|
|
|
53,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
1,870
|
|
|
|
501
|
|
|
|
697
|
|
|
|
208
|
|
Construction
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
991
|
|
|
|
887
|
|
|
|
220
|
|
|
|
308
|
|
Consumer finance
|
|
|
1,028
|
|
|
|
1,179
|
|
|
|
389
|
|
|
|
400
|
|
Leasing
|
|
|
296
|
|
|
|
333
|
|
|
|
145
|
|
|
|
82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,210
|
|
|
|
2,900
|
|
|
|
1,451
|
|
|
|
998
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans charged-off
|
|
|
112,619
|
|
|
|
110,512
|
|
|
|
39,080
|
|
|
|
52,359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
194,795
|
|
|
$
|
180,090
|
|
|
$
|
194,795
|
|
|
$
|
180,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses to period-end loans
|
|
|
3.50
|
%
|
|
|
2.80
|
%
|
|
|
3.50
|
%
|
|
|
2.80
|
%
|
Recoveries to charge-offs
|
|
|
3.60
|
%
|
|
|
2.56
|
%
|
|
|
3.58
|
%
|
|
|
1.87
|
%
|
Annualized net charge-offs to average loans
|
|
|
2.60
|
%
|
|
|
2.14
|
%
|
|
|
2.75
|
%
|
|
|
3.13
|
%
|
The Corporations
allowance for loan losses was $194.8 million or 3.50% of period-end
loans at September 30, 2009, a 70 basis point increase compared to $180.1 million, or 2.80% of
period-end loans at September 30, 2008. The $194.8 million in the allowance for loan losses is
comprised of $128.9 million related to the Bank and $65.9 million related to Island Finance entity,
with a provision for loan losses of $72.3 million and $43.3 million for each respective segment for
the nine months ended September 30, 2009. At September 30, 2008, the composition of the allowance
for loan losses of $180.1 million was comprised of $110.5 million related to the Bank and $69.6
million related to Island Finance entity, with a provision for loan
losses of $80.9 million and
$42.8 million for the same period for each respective entities.
The 70 basis points increment in the ratio of allowance for loan losses to period-end loan for
the nine months ended September 30, 2009 as compared with the same period in 2008 was driven by
$42.1 million increase in non-performing loans which amounted $251.8 million as of September 30,
2009 versus $209.6 million as of September 30, 2008. The allowance for loan losses is a current
estimate of the losses inherent in the present portfolio based on managements ongoing quarterly
evaluations of the loan portfolio. On a quarterly basis, the Corporation reviews and evaluates
historical loss experience by loan type, quantitative factors (historical net charge-offs,
statistical loss estimates, etc.) as well as qualitative factors (current economics conditions,
portfolio composition, delinquency trends, industry concentrations, etc.).
The ratio of the allowance for loan losses to non-performing loans and accruing loans past due
90 days or more was 74.3%, 84.8% and 80.7% at September 30, 2009, December 30, 2008 and September
30, 2008, respectively. Excluding non-performing mortgage loans this ratio was 226.5% at September
30, 2009 compared to 186.0% at September 30, 2008 and 194.4% at December 31, 2008.
64
The annualized ratio of net charge-offs to average loans for the nine-month period ended
September 30, 2009 was 2.60%, increasing 46 basis points from 2.14% for the same period in 2008.
This change was due to an increment in net charge-offs of $2.1 million during the nine months ended
September 30, 2009 when compared with the same period in 2008 combined with a decrease in average
gross loans of $1.1 billion for the nine months ended September 30, 2009 compared with the same
period in 2008.
At September 30, 2009, impaired loans (loans evaluated individually for impairment) and
related allowance amounted to approximately $145.8 million and $23.1 million, respectively. At
December 31, 2008 impaired loans and related allowance amounted to $100.9 million and $18.4
million, respectively.
Although the Corporations provision and allowance for loan losses will fluctuate from time to
time based on economic conditions, net charge-off levels and changes in the level and mix of the
loan portfolio, management considers that the allowance for loan losses is adequate to absorb
probable losses on its loan portfolio.
Non-performing Assets and Past Due Loans
As of September 30, 2009, the Corporations total non-performing loans (excluding other
real estate owned) reached $251.8 million or 4.53% of total loans from $212.7 million or 3.45% of
total loans as of December 31, 2008 and from $209.6 million or 3.26% of total loans as of September
30, 2008. The Corporations non-performing loans reflected an
increase of $42.1 million or 20.1%
compared to non-performing loans as of September 30, 2008 and an increase of $39.1 million or 18.4%
compared to non-performing loans as of December 31, 2008. The $42.1 million increase in
non-performing loans was principally to $46.6 million increase in non-performing residential
mortgage loans and $5.8 million increase in non-performing consumer loans (including consumer
finance). These increases were offset by decreases of $7.5 million and $2.3 million in
non-performing commercial and construction loans, respectively, when compared to September 30,
2008. Compared to December 31, 2008, the increase of $39.1 million was composed mainly of $45.1
million and $5.2 million increases in non-performing residential mortgage loans and consumer loans
(including consumer finance) partially offset by $7.5 million decrease in non-performing
construction loans and $3.8 million in non-performing commercial loans.
The Corporation continuously monitors non-performing assets and has deployed significant
resources to manage the non-performing loan portfolio. Management expects to continue to improve
its collection efforts by devoting more full time employees and outside resources.
Non-performing Assets and Past Due Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
Commercial and Industrial
|
|
$
|
26,801
|
|
|
$
|
30,564
|
|
|
$
|
34,299
|
|
Construction
|
|
|
6,383
|
|
|
|
13,856
|
|
|
|
8,904
|
|
Mortgage
|
|
|
161,523
|
|
|
|
116,473
|
|
|
|
114,923
|
|
Consumer
|
|
|
10,067
|
|
|
|
13,479
|
|
|
|
13,122
|
|
Consumer Finance
|
|
|
44,102
|
|
|
|
35,508
|
|
|
|
35,248
|
|
Leasing
|
|
|
2,055
|
|
|
|
2,493
|
|
|
|
2,786
|
|
Restructured Loans
|
|
|
843
|
|
|
|
341
|
|
|
|
346
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing loans
|
|
|
251,774
|
|
|
|
212,714
|
|
|
|
209,628
|
|
Repossessed Assets
|
|
|
33,161
|
|
|
|
22,306
|
|
|
|
18,908
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing assets
|
|
$
|
284,935
|
|
|
$
|
235,020
|
|
|
$
|
228,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruing loans past-due 90 days or more
|
|
$
|
10,536
|
|
|
$
|
13,462
|
|
|
$
|
13,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Performing loans to total loans
|
|
|
4.53
|
%
|
|
|
3.45
|
%
|
|
|
3.26
|
%
|
Non-Performing loans plus accruing loans
past due 90 days or more to total loans
|
|
|
4.71
|
%
|
|
|
3.67
|
%
|
|
|
3.47
|
%
|
Non-Performing assets to total assets
|
|
|
4.17
|
%
|
|
|
2.97
|
%
|
|
|
2.81
|
%
|
65
Liabilities
The Corporations total liabilities reached $6.3 billion as of September 30, 2009, reflecting
a decrease of $1.1 billion or 14.7% compared to December 31, 2008. This reduction in total
liabilities was principally due to a decrease in total deposits of $582.2 million or 11.6% to $4.4
billion balance reported as of September 30, 2009 and a decrease in total borrowings (comprised of
federal funds purchased and other borrowings, securities sold under agreements to repurchase,
commercial paper issued, federal home loan advances, term and capital notes) of $423.2 million or
21.8% as of September 30, 2009 from $1.9 billion at December 31, 2008.
Total deposits of $4.4 billion as of September 30, 2009 were composed of $0.4 billion in
brokered deposits and $4.0 billion of customer deposits. Compared to December 31, 2008, brokered
deposits reflected a decrease of $583.1 million or 59.9% and customer deposits reflected an
increase of $0.9 million s of September 30, 2009. Total deposits reflected a decrease of $1.2
billion compared with $5.6 billion as of September 30, 2008 which comprised decreases of $0.7
billion and $0.5 billion in brokered deposits and customer deposits, respectively.
Total borrowings at September 30, 2009 (comprised of federal funds purchased and other
borrowings, securities sold under agreements to repurchase, commercial paper issued, federal home
loan bank advances and term and capital notes) decreased $423.2 million or 21.8% and 204.6 million
or 11.9% compared to borrowings at December 31, 2008 and September 30, 2008, respectively. The
$423.2 million reduction was mainly due to the cancellation of $375 million in securities sold
under agreements to repurchase, $165.0 million decrease in federal home loan bank advances
partially offset by an increase of $66.0 million in commercial paper issued and $45.5 million in
federal funds purchased. The $204.6 million reduction compared with September 30, 2008 balances was
mainly due to the cancellation of $375 million in securities sold under agreements to repurchase
and $15.0 million decrease in federal funds purchased partially offset by $71.2 million, $67.1
million and $46.5 million increases in subordinated notes, commercial paper issued and federal
funds purchased, respectively.
On September 24, 2009, 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 $190 million and $440 million (the Loans) to the Corporation
and Santander Financial, respectively. The proceeds of the Loans were used to refinance the
outstanding indebtedness incurred under a loan agreement dated September 24, 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 December 10, 2008, the Bank 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.
During October 2006, the Corporation 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.
66
Capital and Dividends
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 issuance
alternatives. It may issue capital in the future, as needed, to maintain its well-capitalized
status.
Stockholders equity was $575.7 million, or 8.4% of total assets at September 30, 2009,
compared to $551.6 million or 7.0% of total assets at December 31, 2008. The $24.0 million increase
in stockholders equity was composed of net income of $22.5 million, an increase in minimum pension
benefit of $3.6 million and stock incentive plan expense recognized as capital contribution of $1.1
million during the nine-month period ended September 30, 2009. These changes were offset an
increase in accumulated other comprehensive loss of $3.2 million related unrealized gains on
investment securities available for sale.
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 dividends on the Corporations common stock to
strengthen the institutions core capital position. The Corporation may use a portion of the funds
previously paid as dividends to reduce its outstanding debt. The Corporations 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 Corporations
capital position.
The Corporation adopted and implemented various 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 planned to acquire 3% of its outstanding common shares. In November 2002,
the Corporations Board of Directors authorized the Corporation to repurchase up to 928,204 shares,
or approximately 3%, of its shares of outstanding common stock, of which 325,100 shares have been
purchased. The Board felt that the Corporations 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 any significant impact on the Corporations 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 Corporations 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 nine months ended September 30, 2009 and 2008, the Corporation did not repurchase
any shares of common stock. As of September 30, 2009, the Corporation had repurchased 4,011,260
shares of its common stock under these programs at a cost of $67.6 million. The Corporations
management believes that the repurchase program will not have a significant effect on the
Corporations 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. Shareholders may also make, as frequently as once a month, optional cash payments
for investment in additional shares of the Corporations common stock.
Up to September 30, 2009, the 3
nd
quarter of 2009, the Corporations stock price
traded consistently below (from $5.18 to $10.80) the book value per
share of $12.34 as of September
30, 2009. This is mainly attributed to the current condition of the worldwide and Puerto Rico
economy which has affected the stock market, where all stocks and specially the ones in the
financial sector both in Puerto Rico and the United States have experienced a depression in price.
Also, the Corporations stock experienced a limited float, due to 91% were owned by Santander SA.
These situations impact a relatively small changes or trends in volume triggers a significant
impact in the share price.
The Corporation is 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 Corporations
67
consolidated financial statements. The regulations require the Corporation to meet specific
capital guidelines that involve quantitative measures of the Corporations assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting practices. The
Corporations capital classification is also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
At September 30, 2009 the Corporation continued to exceed the regulatory risk-based capital
requirements. Tier I capital to risk-adjusted assets and total capital ratios at September 30,
2009 were 10.11% and 15.10%, respectively, and the leverage ratio was 7.46%.
Liquidity
The Corporations general policy is to maintain liquidity adequate to ensure its ability to
honor withdrawals of deposits, make repayments at maturity of other liabilities, extend loans and
meet its own working capital needs. Liquidity is derived from the Corporations capital, reserves,
and 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.
Management monitors liquidity levels continuously. The focus is on the liquidity ratio, which
presents total liquid assets over net volatile liabilities and core deposits. The Corporation
believes it has sufficient liquidity to meet current obligations.
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. Refer to Notes 1,
12 and 18 to the accompanying consolidated financial statements for additional details of the
Corporations derivative transactions as of September 30, 2009 and December 31, 2008.
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.
Economic Undesignated Hedges:
The following table summarizes the derivative contracts designated as economic undesignated
hedges as of September 30, 2009 and December 31, 2008, respectively:
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
|
Notional
|
|
|
|
|
|
|
|
(In thousands)
|
|
Amounts
|
|
|
Fair Value
|
|
|
Loss
|
|
Economic Undesignated Hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps
|
|
$
|
125,000
|
|
|
$
|
1,074
|
|
|
$
|
(4,136
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
125,000
|
|
|
$
|
1,074
|
|
|
$
|
(4,136
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
Notional
|
|
|
|
|
|
|
|
(In thousands)
|
|
Amounts
|
|
|
Fair Value
|
|
|
Gain
|
|
Economic Undesignated Hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps
|
|
$
|
125,000
|
|
|
$
|
5,210
|
|
|
$
|
4,311
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
125,000
|
|
|
$
|
5,210
|
|
|
$
|
4,311
|
|
|
|
|
|
|
|
|
|
|
|
The Corporation adopted the accounting standard FASB ASC Topic 825 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 FASB ASC Topic
815. The selected financial instruments are reported at fair value with changes in fair value
reported in condensed consolidated statements of income.
As of September 30, 2009 and December 31, 2008, the economic undesignated hedges have
maturities through the year 2032. The weighted average rate paid and received on these contracts is
0.79% and 6.22% as of September 30, 2009 and 3.24% and 6.22% as of December 31, 2008, respectively.
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 economic 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. As of September 30, 2009 and December 31, 2008, the
Corporation has $1.1 million and $5.2 million, respectively, in fair value of these economic
undesignated hedges.
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 Corporations 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 Corporations 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. 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 Corporations 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 September 30, 2009 and December
31, 2008, respectively:
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
|
Notional
|
|
|
|
|
|
|
|
(In thousands)
|
|
Amounts *
|
|
|
Fair Value
|
|
|
Gain (Loss)
|
|
Interest Rate Contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps
|
|
$
|
3,499,117
|
|
|
$
|
106
|
|
|
$
|
(8
|
)
|
Interest Rate Caps
|
|
|
878
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
2,859
|
|
|
|
83
|
|
|
|
(10
|
)
|
Equity Derivatives
|
|
|
215,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
3,718,138
|
|
|
$
|
189
|
|
|
$
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
Notional
|
|
|
|
|
|
|
|
(In thousands)
|
|
Amounts *
|
|
|
Fair Value
|
|
|
Gain (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
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
The notional amount represents the gross sum of long and short.
|
70
PART I ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
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 Corporations 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
continuously evaluates its underwriting and lending criteria.
Credit risk management for our portfolio begins with initial underwriting and continues
throughout the borrowers 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 Corporations 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 Corporations
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.
71
The following table provides the composition of the Corporations loan portfolio as of
September 30, 2009 and December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
December 31, 2008
|
|
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
1,967,172
|
|
|
$
|
2,165,613
|
|
|
|
|
|
|
|
|
Consumer banking operations
|
|
|
472,844
|
|
|
|
565,833
|
|
|
|
|
|
|
|
|
Consumer Finance:
|
|
|
|
|
|
|
|
|
Consumer Installment Loans
|
|
|
540,907
|
|
|
|
686,277
|
|
Mortgage Loans
|
|
|
287,364
|
|
|
|
310,642
|
|
|
|
|
|
|
|
|
|
|
|
828,271
|
|
|
|
996,919
|
|
|
|
|
|
|
|
|
Leasing
|
|
|
42,859
|
|
|
|
64,065
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
83,313
|
|
|
|
194,596
|
|
|
|
|
|
|
|
|
Mortgage Loans
|
|
|
2,413,572
|
|
|
|
2,553,328
|
|
|
|
|
|
|
|
|
Sub-total
|
|
|
5,808,031
|
|
|
|
6,540,354
|
|
|
|
|
|
|
|
|
|
|
Unearned income and deferred fees/cost:
|
|
|
|
|
|
|
|
|
Banking operations
|
|
|
219
|
|
|
|
(290
|
)
|
Consumer finance
|
|
|
(269,989
|
)
|
|
|
(418,676
|
)
|
|
Allowance for loans losses:
|
|
|
|
|
|
|
|
|
Banking operations
|
|
|
(128,871
|
)
|
|
|
(122,761
|
)
|
Consumer finance
|
|
|
(65,924
|
)
|
|
|
(69,128
|
)
|
|
|
|
|
|
|
|
|
|
$
|
5,343,466
|
|
|
$
|
5,929,499
|
|
|
|
|
|
|
|
|
The Corporations gross loan portfolio as of September 30, 2009 and December 31, 2008 amounted
to $5.8 billion and $6.5 billion respectively, which represented 93.7% and 90.9%, respectively, of
the Corporations 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 September 30, 2009 and December 31, 2008, there was no obligor group that
represented more than 2.5% of the Corporations total loan portfolio. Obligors resident or having
a principal place of business in Puerto Rico comprised approximately 99% of the Corporations loan
portfolio.
As of September 30, 2009 and December 31, 2008, the Corporation had over 318,000 consumer loan
customers each and over 8,000 and 7,000 commercial loan customers, respectively, As of such dates,
the Corporation had 38 and 50 clients with commercial loans outstanding over $10.0 million,
respectively. Although the Corporation has generally avoided cross-border loans, the Corporation
had approximately $12.0 and $31.3 million in cross-border loans as of September 30,
2009 and December 31, 2008, 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 mortgagors 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 borrowers 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
borrowers 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.
72
The purpose of mortgage credit analysis is to determine the borrowers 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 assessing a borrowers ability and
willingness to repay the mortgage debt and the property to determine it complies with the agency
and investors 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.
The Corporations underwriting policies 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 Corporations 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 Corporations 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
|
First
|
|
|
Second
|
|
|
Total
|
|
|
Vintage
|
|
|
Non-performing
|
|
|
% of
|
|
|
|
mortgage
|
|
|
mortgage
|
|
|
Mortgage
|
|
|
% of total
|
|
|
loans
|
|
|
total loans
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vintage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
$
|
32,358
|
|
|
$
|
235
|
|
|
$
|
32,593
|
|
|
|
1
|
%
|
|
$
|
|
|
|
|
0.00
|
%
|
2008
|
|
|
104,289
|
|
|
|
2,078
|
|
|
|
106,367
|
|
|
|
4
|
%
|
|
|
1,371
|
|
|
|
1.29
|
%
|
2007
|
|
|
254,402
|
|
|
|
2,196
|
|
|
|
256,598
|
|
|
|
11
|
%
|
|
|
10,969
|
|
|
|
4.27
|
%
|
2006
|
|
|
538,310
|
|
|
|
3,966
|
|
|
|
542,276
|
|
|
|
22
|
%
|
|
|
41,069
|
|
|
|
7.57
|
%
|
2005
|
|
|
553,228
|
|
|
|
534
|
|
|
|
553,762
|
|
|
|
23
|
%
|
|
|
36,535
|
|
|
|
6.60
|
%
|
2004 and earlier
|
|
|
920,146
|
|
|
|
1,830
|
|
|
|
921,976
|
|
|
|
39
|
%
|
|
|
44,928
|
|
|
|
4.87
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub- Total
|
|
$
|
2,402,733
|
|
|
$
|
10,839
|
|
|
$
|
2,413,572
|
|
|
|
100
|
%
|
|
$
|
134,872
|
|
|
|
5.59
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
109,195
|
|
|
|
4
|
%
|
|
$
|
638
|
|
|
|
0.58
|
%
|
2007
|
|
|
269,220
|
|
|
|
2,546
|
|
|
|
|
|
|
|
|
|
|
|
271,766
|
|
|
|
11
|
%
|
|
|
5,701
|
|
|
|
2.10
|
%
|
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 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 59% and 44% of the total mortgage originations for the nine months
ended September 30, 2009 and the year ended December 31, 2008, respectively. The Corporation
performed strict quality control reviews of third party originated loans, which represented 41% for
the nine-month period ended September 30, 2009 and 55% of the total originated mortgage portfolio
for the year ended December 31, 2008. 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 42% and 39% of total gross loans at September 30, 2009 and
December 31, 2008, respectively. As of September 30, 2009 and December 31, 2008, the first mortgage
portfolio totaled approximately $2.4 billion while the second mortgage portfolio was approximately
$10.8 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 Corporations consumer finance subsidiary Santander
Financial Services, Inc. (Island Finance) are presented in the followings tables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
|
First
|
|
|
Second
|
|
|
ARM
|
|
|
Total
|
|
|
Vintage
|
|
|
Non-performing
|
|
|
% of
|
|
|
|
mortgage
|
|
|
mortgage
|
|
|
mortgage
|
|
|
Mortgage*
|
|
|
% of total
|
|
|
loans
|
|
|
total loans
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vintage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
$
|
9,543
|
|
|
$
|
95
|
|
|
$
|
|
|
|
$
|
9,638
|
|
|
|
6
|
%
|
|
$
|
|
|
|
|
0.00
|
%
|
2008
|
|
|
29,244
|
|
|
|
407
|
|
|
|
|
|
|
|
29,651
|
|
|
|
18
|
%
|
|
|
2,076
|
|
|
|
7.00
|
%
|
2007
|
|
|
25,613
|
|
|
|
1,067
|
|
|
|
1,084
|
|
|
|
27,764
|
|
|
|
17
|
%
|
|
|
2,253
|
|
|
|
8.11
|
%
|
2006
|
|
|
12,805
|
|
|
|
918
|
|
|
|
21,178
|
|
|
|
34,901
|
|
|
|
22
|
%
|
|
|
4,367
|
|
|
|
12.51
|
%
|
2005
|
|
|
11,278
|
|
|
|
1,124
|
|
|
|
17,731
|
|
|
|
30,133
|
|
|
|
19
|
%
|
|
|
3,041
|
|
|
|
10.09
|
%
|
2004 and earlier
|
|
|
22,422
|
|
|
|
6,524
|
|
|
|
|
|
|
|
28,946
|
|
|
|
18
|
%
|
|
|
3,971
|
|
|
|
13.72
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
110,905
|
|
|
$
|
10,135
|
|
|
$
|
39,993
|
|
|
$
|
161,033
|
|
|
|
100
|
%
|
|
$
|
15,708
|
|
|
|
9.75
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Net of unearned finance charges and deferred income/cost
|
74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
19
|
%
|
|
$
|
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
|
|
|
|
21
|
%
|
|
|
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
|
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,). The following table provides information on the Corporations residential
mortgage and consumer installments loans exposure from banking operations and consumer finance
business, including near prime or Band C loans at September 30, 2009 and December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
|
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
|
|
$
|
1,529,773
|
|
|
|
72
|
%
|
|
$
|
270,392
|
|
|
|
70
|
%
|
|
$
|
613,407
|
|
|
|
73
|
%
|
|
$
|
2,413,572
|
|
|
|
72
|
%
|
Consumer Finance
|
|
|
68,641
|
|
|
|
66
|
%
|
|
|
39,278
|
|
|
|
67
|
%
|
|
|
53,114
|
|
|
|
65
|
%
|
|
|
161,033
|
|
|
|
64
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,598,414
|
|
|
|
|
|
|
$
|
309,670
|
|
|
|
|
|
|
$
|
666,521
|
|
|
|
|
|
|
$
|
2,574,605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Installment
Loans*:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banking Operations
|
|
$
|
303,590
|
|
|
|
n/a
|
|
|
$
|
56,367
|
|
|
|
n/a
|
|
|
$
|
112,887
|
|
|
|
n/a
|
|
|
$
|
472,844
|
|
|
|
n/a
|
|
Consumer Finance
|
|
|
181,603
|
|
|
|
n/a
|
|
|
|
111,920
|
|
|
|
n/a
|
|
|
|
103,400
|
|
|
|
n/a
|
|
|
|
396,923
|
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
485,193
|
|
|
|
|
|
|
$
|
168,287
|
|
|
|
|
|
|
$
|
216,287
|
|
|
|
|
|
|
$
|
869,767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Net of unearned finance charges and deferred income/cost
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
At September 30, 2009, residential mortgage portfolio categorized as near prime or Band C
loans was approximately $613.4 million and $53 million for banking operations and consumer finance
business, respectively, a 25% and 33% of its total residential mortgage portfolio, respectively.
The mortgage loans amounts reported in Band C as of September 30, 2009 includes $2.7 million or
1.0% of originated loans during the year for banking operations and $1.9 million or 3.6% for
consumer finance portfolio. 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.
The Corporations 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 September 30, 2009 and December 31,
2008 was 676 and 706, respectively and an average LTV of 72% as compared to 80% as of December 31,
2008. For its consumer finance business residential mortgages, average FICO score, as of September
30, 2009 and December 31, 2008 was 642 and 648, respectively and an average LTV of 66% as of
September 30, 2009 as compared to 61% as of December 31, 2008. The actual rates of delinquencies,
foreclosures and losses on these loans could be higher than anticipated during economic slowdowns.
Residential mortgage loan origination for banking operations was $150.4 million for the nine
months ended September 30, 2009, $345.7 million for the year ended December 31, 2008 and $294.3
million for the nine months ended September 30, 2008. The Corporation sold and securitized $143.8
million, $213.4 million and $160.8 million for the nine months ended September 30, 2009, the year
ended December 31, 2008 and nine months ended September 30, 2008, respectively, to third parties.
Within the sales and securitizations numbers mentioned above, the Corporation sold and securitized
$7.5 million and $18.8 million of near prime or Band C loans for the nine-month period ended
September 30, 2009 and the year ended December 31, 2008, 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 Corporations 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 Corporations 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 Corporations consumer lending business, including personal loans,
credit cards and credit lines and mortgage business including conforming, guaranteed & insured
mortgages and non-conforming mortgages. Loss
76
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 Corporations 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.
Asset and Liability Management
The Corporations 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 Corporations 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 and Chief Executive Officer, Chief Accounting Officer,
Treasurer and other executive officers of the Corporation. The ALCO reports on a monthly basis to
the members of the Banks Board of Directors.
Market Risk and Interest Rate Sensitivity
A key component of the Corporations 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 Corporations one-year cumulative GAP position at September 30, 2009, was negative $658.6
million or -10.3% of total earning assets. This is a one-day position that is continually changing
and is not indicative of the Corporations 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 Corporations 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 Corporations 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 Corporations interest earning assets and
interest bearing liabilities at September 30, 2009 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 are made, 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.
77
SANTANDER BANCORP
MATURING GAP ANALYSIS
As of SEPTEMBER 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
More
|
|
No
|
|
|
|
|
0 to 3
|
|
3 months
|
|
1 to 3
|
|
3 to 5
|
|
5 to 10
|
|
than
|
|
Interest
|
|
|
|
|
months
|
|
to a Year
|
|
Years
|
|
Years
|
|
Years
|
|
10 Years
|
|
Rate Risk
|
|
Total
|
|
|
(dollars in thousands)
|
ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Portfolio
|
|
$
|
10,073
|
|
|
$
|
104,501
|
|
|
$
|
271,896
|
|
|
$
|
23,353
|
|
|
$
|
9,785
|
|
|
$
|
|
|
|
$
|
87,622
|
|
|
$
|
507,230
|
|
Deposits in Other Banks
|
|
|
258,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59,308
|
|
|
|
318,067
|
|
Loan Portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
1,117,441
|
|
|
|
180,870
|
|
|
|
228,389
|
|
|
|
170,181
|
|
|
|
127,611
|
|
|
|
66,982
|
|
|
|
115,190
|
|
|
|
2,006,664
|
|
Construction
|
|
|
49,716
|
|
|
|
11,912
|
|
|
|
10,127
|
|
|
|
2,086
|
|
|
|
3,898
|
|
|
|
1,967
|
|
|
|
3,390
|
|
|
|
83,096
|
|
Consumer
|
|
|
320,199
|
|
|
|
190,029
|
|
|
|
316,343
|
|
|
|
167,269
|
|
|
|
27,761
|
|
|
|
14
|
|
|
|
10,009
|
|
|
|
1,031,624
|
|
Mortgage
|
|
|
104,886
|
|
|
|
276,003
|
|
|
|
538,766
|
|
|
|
439,380
|
|
|
|
806,532
|
|
|
|
160,544
|
|
|
|
115,938
|
|
|
|
2,442,049
|
|
Fixed and Other Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
449,901
|
|
|
|
449,901
|
|
|
|
|
Total Assets
|
|
$
|
1,861,074
|
|
|
$
|
763,315
|
|
|
$
|
1,365,521
|
|
|
$
|
802,269
|
|
|
$
|
975,587
|
|
|
$
|
229,507
|
|
|
$
|
841,358
|
|
|
$
|
6,838,631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External Funds Purchased
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Paper
|
|
$
|
117,000
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(39
|
)
|
|
$
|
116,961
|
|
Repurchase Agreements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
Funds Purchased and Other
Borrowings
|
|
|
97,500
|
|
|
|
445,000
|
|
|
|
525,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,067,500
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of Deposit
|
|
|
754,899
|
|
|
|
929,406
|
|
|
|
143,522
|
|
|
|
28,275
|
|
|
|
|
|
|
|
12,489
|
|
|
|
44
|
|
|
|
1,868,635
|
|
Demand Deposits and Savings Accounts
|
|
|
103,461
|
|
|
|
38,918
|
|
|
|
333,805
|
|
|
|
97,228
|
|
|
|
119,125
|
|
|
|
|
|
|
|
|
|
|
|
692,537
|
|
Transactional Accounts
|
|
|
301,261
|
|
|
|
365,497
|
|
|
|
553,930
|
|
|
|
80,983
|
|
|
|
569,852
|
|
|
|
|
|
|
|
|
|
|
|
1,871,523
|
|
Term and Subordinated Debt
|
|
|
|
|
|
|
4,815
|
|
|
|
15,569
|
|
|
|
75,000
|
|
|
|
172,336
|
|
|
|
60,000
|
|
|
|
4,040
|
|
|
|
331,760
|
|
Other Liabilities and Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
889,715
|
|
|
|
889,715
|
|
|
|
|
Total Liabilities and Capital
|
|
$
|
1,374,121
|
|
|
$
|
1,783,636
|
|
|
$
|
1,571,826
|
|
|
$
|
281,486
|
|
|
$
|
861,313
|
|
|
$
|
72,489
|
|
|
$
|
893,760
|
|
|
$
|
6,838,631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-Balance Sheet Financial Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps (Assets)
|
|
$
|
1,718,975
|
|
|
$
|
72,338
|
|
|
$
|
2,323
|
|
|
$
|
111,630
|
|
|
$
|
1,557,851
|
|
|
$
|
36,000
|
|
|
$
|
|
|
|
$
|
3,499,117
|
|
Interest Rate Swaps (Liabilities)
|
|
|
1,854,256
|
|
|
|
62,338
|
|
|
|
2,151
|
|
|
|
36,521
|
|
|
|
1,507,851
|
|
|
|
36,000
|
|
|
|
|
|
|
|
3,499,117
|
|
Caps
|
|
|
879
|
|
|
|
235
|
|
|
|
643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,757
|
|
Caps Final Maturity
|
|
|
879
|
|
|
|
235
|
|
|
|
643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,757
|
|
|
|
|
GAP
|
|
$
|
351,672
|
|
|
$
|
(1,010,321
|
)
|
|
$
|
(206,133
|
)
|
|
$
|
595,892
|
|
|
$
|
164,274
|
|
|
$
|
157,018
|
|
|
$
|
(52,402
|
)
|
|
$
|
|
|
|
|
|
Cumulative GAP
|
|
$
|
351,672
|
|
|
$
|
(658,649
|
)
|
|
$
|
(864,782
|
)
|
|
$
|
(268,890
|
)
|
|
$
|
(104,616
|
)
|
|
$
|
52,402
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
Cumulative interest rate gap to
earning assets
|
|
|
5.50
|
%
|
|
|
-10.31
|
%
|
|
|
-13.54
|
%
|
|
|
-4.21
|
%
|
|
|
-1.64
|
%
|
|
|
0.82
|
%
|
|
|
|
|
|
|
|
|
Interest rate risk is the primary market risk to which the Corporation is exposed. Nearly all
of the Corporations 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 Corporations
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.
78
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 $27.0 million of NIM sensitivity
for a 1% parallel shock and $115 million of MVE sensitivity for a 1% parallel shock.
As of September 30, 2009, 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 $4.4
million if market rates were to increase 100 basis points immediately parallel across the yield
curve, less than the $27.0 million limit. For purposes of the Market Value Shock Report it was
determined that the Corporation had a potential loss of approximately $38.1 million if market rates
were to increase 100 basis points immediately parallel across the yield curve, less than the $115.0
million limit. The tables below present a summary of the Corporations net interest margin and
market value shock reports, considering several scenarios as of
September 30, 2009.
NET INTEREST MARGIN SHOCK REPORT
September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
-200 BPs
|
|
-100 BPs
|
|
-50 BPs
|
|
Base Case
|
|
+50 BPs
|
|
+100 BPs
|
|
+200 BPs
|
Gross Interest Margin
|
|
$
|
370.1
|
|
|
$
|
402.0
|
|
|
$
|
402.4
|
|
|
$
|
399.5
|
|
|
$
|
397.7
|
|
|
$
|
395.1
|
|
|
$
|
388.6
|
|
Sensitivity
|
|
$
|
(29.4
|
)
|
|
$
|
2.5
|
|
|
$
|
2.9
|
|
|
|
|
|
|
$
|
(1.8
|
)
|
|
$
|
(4.4
|
)
|
|
$
|
(10.9
|
)
|
MARKET VALUE SHOCK REPORT
September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
-200 BPs
|
|
-100 BPs
|
|
-50 BPs
|
|
Base Case
|
|
+50 BPs
|
|
+100 BPs
|
|
+200 BPs
|
Market Value of Equity
|
|
$
|
771.7
|
|
|
$
|
804.6
|
|
|
$
|
796.1
|
|
|
$
|
773.7
|
|
|
$
|
771.9
|
|
|
$
|
735.6
|
|
|
$
|
703.5
|
|
Sensitivity
|
|
$
|
(2.0
|
)
|
|
$
|
30.9
|
|
|
$
|
22.4
|
|
|
|
|
|
|
$
|
(1.8
|
)
|
|
$
|
(38.1
|
)
|
|
$
|
(70.2
|
)
|
As of September 30, 2009 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.
79
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 Corporations general
policy is to maintain liquidity adequate to ensure its ability to honor withdrawals of deposits,
make repayments at maturity of other liabilities, extend loans and meet its own working capital
needs. The Corporations 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 September 30, 2009, the Corporation had $1.5 billion in
unsecured lines of credit ($649.2 million available) and $3.7 billion in collateralized lines of
credit with banks and financial entities ($2.6 billion available). All securities in portfolio are
highly rated and very liquid enabling the Corporation to treat them as a secondary source of
liquidity.
The Corporation does not have significant usage or limitations on the ability to upstream or
downstream funds as a method of liquidity. However, the Corporation faces certain tax constraints
when borrowing funds (excluding the placement of deposits) from Santander Group or affiliates
because Puerto Ricos tax code requires local corporations to withhold 29% of the interest income
paid to non-resident affiliates. The current intra-group credit line provided by Santander Group
and affiliates to the Corporation is $1.4 billion.
Liquidity is derived from the Corporations capital, reserves and 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 September 24, 2009, 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 $190 million and $440 million (the Loans) to the Corporation
and Santander Financial, respectively. The proceeds of the Loans were used to refinance the
outstanding indebtedness incurred under a loan agreement dated September 24, 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 December 10, 2008, the Bank 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.
In 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 to the Trust.
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 September 30, 2009, the Corporation
had a liquidity ratio of 11.70%. At September 30, 2009, the Corporation had total available liquid
assets of $767.4 million. The Corporation believes 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.
80
PART I. ITEM 4
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, the Corporations
management, including the Chief Executive Officer and the Chief Accounting Officer (as the
Corporations principal financial officer), conducted an evaluation of the effectiveness of the
design and operation of the Corporations disclosure controls and procedures (as defined in Rule
13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934). Based upon that
evaluation, the Chief Executive Officer and the Chief Accounting Officer (as the Corporations
principal financial officer) concluded that the design and operation of these disclosure controls
and procedures were effective.
On February 2009, SFS conducted a conversion of its loan platform and cash collection systems.
Management understands that this system conversion, which includes significant modifications to
procedures, could represent a material change in internal control over financial reporting. Also,
the Corporation completed the outsourcing of its payroll systems on June 2009. Changes to certain
processes, and information systems and other components of internal control over financial
reporting (as defined in Rule 13-159(e) and 15d-15(e) under the Securities Exchange Act of 1934)
resulting from the system conversion and payroll outsourcing, referred to above, may occur and are
in the process of being evaluated by management as certain processes, activities and controls are
implemented. Management intends to complete its assessment of the effectiveness of internal control
over financial reporting for the 2009 annual management report on internal control over financial
reporting.
Changes in Internal Controls
Besides the matter described above, there have been no changes in the Corporations internal
controls over financial reporting during the three-month periods covered by this Quarterly Report
on Form 10-Q that have materially affected, or are reasonably likely to materially affect, the
Corporations internal controls over financial reporting.
81
PART II OTHER INFORMATION
ITEM I 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 there
from would not have a material adverse effect on the consolidated results of operations or
consolidated financial condition of the Corporation. For discussion of certain other legal
proceedings involving the Corporation, please, refer to the Corporations Annual Report on Form 10K
for the year ended December 31, 2008.
ITEM 1A. RISK FACTORS
There are no material changes in risk factors as previously disclosed under Item 1A of the
Corporations Form 10-K for the year ended December 31, 2008.
ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5 OTHER INFORMATION
None
82
ITEM 6 EXHIBITS
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
Reference
|
(3.1)
|
|
Amendment to the Articles of Incorporation
|
|
Exhibit 3.1 10-Q-06/30/09
|
(10.0)
|
|
Code of Ethics
|
|
Exhibit 8-K-04/01/09
|
(10.1)
|
|
Loan Agreement Agreement between Santander BanCorp, Santander Financial
Services, Inc. and Banco Santander Puerto Rico
|
|
Exhibit 8K-09/30/09
|
(12)
|
|
Computation of Ratio of Earnings to Fixed Charges
|
|
Exihbit 12
|
(31.1)
|
|
Certification from the Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
Exhibit 31.1
|
(31.2)
|
|
Certification from the Chief Accounting Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
Exhibit 31.2
|
(32.1)
|
|
Certification from the Chief Executive Officer and Chief Accounting
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
Exhibit 32.2
|
83
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 thereunto duly
authorized.
|
|
|
|
|
|
SANTANDER BANCORP
Name of Registrant
|
|
Dated: November 9, 2009
|
By:
|
/s/ Juan Moreno
|
|
|
|
President and Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
Dated: November 9, 2009
|
By:
|
/s/ Roberto Jara
|
|
|
|
Executive Vice President and
|
|
|
|
Chief Accounting Officer
|
|
|
84
Santander (NYSE:SBP)
Historical Stock Chart
From Jun 2024 to Jul 2024
Santander (NYSE:SBP)
Historical Stock Chart
From Jul 2023 to Jul 2024