UNITED STATES OF AMERICA SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., 20549
FORM 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OF
THE SECURITIES
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EXCHANGE ACT OF 1934
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For the Quarterly Period ended September 30, 2008
Commission File: 001-15849
SANTANDER BANCORP
(Exact name of Corporation as specified in its charter)
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Commonwealth of Puerto Rico
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66-0573723
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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207 Ponce de León Avenue, Hato Rey, Puerto Rico
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00917
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(Address of principal executive offices)
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(Zip Code)
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Registrant’s 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 is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company.
See the definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer
o
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Accelerated filer
þ
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Non-accelerated filer
o
(Do not check if a smaller reporting company)
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Smaller reporting company
o
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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 Registrant’s classes of common stock as of
the last practicable date.
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
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Title of each class
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Outstanding as of September 30, 2008
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Common Stock, $2.50 par value
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46,639,104
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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 Corporation’s press
releases or other public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the word 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 Corporation’s assumptions, the actual results could vary significantly
from the performance projected in the forward-looking statements.
The Corporation wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made, and to advise readers that
various factors, including regional and national conditions, substantial changes in levels of
market interest rates, credit and other risks of lending and investment activities, competitive and
regulatory factors and legislative changes, could affect the Corporation’s financial performance
and could cause the Corporation’s actual results for future periods to differ materially from those
anticipated or projected. The Corporation does not undertake, and specifically disclaims any
obligation, to update any forward-looking statements to reflect occurrences or unanticipated events
or circumstances after the date of such statements.
PART I — ITEM 1
FINANCIAL STATEMENTS (UNAUDITED)
SANTANDER BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
AS OF SEPTEMBER 30, 2008 AND DECEMBER 31, 2007
(Dollars in thousands, except share data)
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September 30,
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December 31,
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ASSETS
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2008
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2007
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Cash and Cash Equivalents:
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Cash and due from banks
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$
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251,425
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$
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118,096
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Interest-bearing deposits
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861
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1,167
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Federal funds sold and securities purchased under agreements to resell
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151,371
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82,434
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Total cash and cash equivalents
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403,657
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201,697
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Interest-Bearing Deposits
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6,305
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5,439
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Trading Securities,
at fair value:
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Securities pledged that can be repledged
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—
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15,965
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Other trading securities
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70,208
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52,535
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Total trading securities
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70,208
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68,500
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Investment Securities Available for Sale,
at fair value:
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Securities pledged that can be repledged
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398,945
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667,361
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Other investment securities available for sale
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366,993
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600,837
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Total investment securities available for sale
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765,938
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1,268,198
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Other Investment Securities,
at amortized cost
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54,882
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64,559
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Loans Held for Sale,
net
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79,666
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141,902
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Loans,
net
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6,168,610
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6,769,478
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Accrued Interest Receivable
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49,502
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80,029
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Premises and Equipment,
net
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20,579
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29,523
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Real Estate Held for Sale
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8,076
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—
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Goodwill
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121,482
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121,482
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Intangible Assets
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29,940
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30,203
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Other Assets
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356,334
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383,203
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$
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8,135,179
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$
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9,164,213
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LIABILITIES AND STOCKHOLDERS’ EQUITY
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Deposits:
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Non interest-bearing
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$
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721,713
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$
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755,457
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Interest-bearing, including $209.7 million at fair value in 2008
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4,868,187
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4,405,246
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Total deposits
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5,589,900
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5,160,703
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Federal Funds Purchased and Other Borrowings
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1,000
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707,110
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Securities Sold Under Agreements to Repurchase
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375,000
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635,597
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Commercial Paper Issued
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49,858
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284,482
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Federal Home Loan Bank Advances
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1,035,000
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1,245,000
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Term Notes, net
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19,816
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19,371
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Subordinated Capital Notes,
including $112.1 million at fair value in 2008
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240,156
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251,170
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Accrued Interest Payable
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44,863
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77,356
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Other Liabilities
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224,280
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246,888
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Total liabilities
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7,579,873
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8,627,677
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Contingencies
and Commitments (Notes 9, 10, 11, 13, 14, 15 and 17)
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STOCKHOLDERS’ EQUITY:
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Series A Preferred stock, $25 par value; 10,000,000 shares authorized, none issued and
outstanding
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—
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—
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Common stock, $2.50 par value; 200,000,000 shares authorized, 50,650,364 shares issued;
46,639,104 shares outstanding
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126,626
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126,626
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Capital paid in excess of par value
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316,412
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308,373
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Treasury stock at cost, 4,011,260 shares
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(67,552
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)
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(67,552
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)
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Accumulated other comprehensive loss, net of tax
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(23,710
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)
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(24,478
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)
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Retained earnings:
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Reserve fund
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139,250
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139,250
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Undivided profits
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64,280
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54,317
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Total stockholders’ equity
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555,306
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536,536
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$
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8,135,179
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$
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9,164,213
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The accompanying notes are an integral part of these condensed consolidated financial statements
1
SANTANDER BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
(Dollars in thousands, except per share data)
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For the nine months ended
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For the three months ended
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September 30,
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September 30,
|
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September 30,
|
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September 30,
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2008
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2007
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2008
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2007
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Interest Income:
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|
|
|
|
|
|
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|
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Loans
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$
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417,070
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$
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448,859
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|
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$
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135,263
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$
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150,670
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|
|
Investment securities
|
|
|
38,758
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|
|
|
50,846
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|
|
|
11,442
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|
|
|
17,196
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|
|
Interest-bearing deposits
|
|
|
750
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|
|
|
2,974
|
|
|
|
174
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|
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|
715
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|
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Federal funds sold and securities purchased under agreements to
resell
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|
3,897
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|
|
|
2,789
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|
|
|
1,132
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|
|
|
1,568
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
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|
460,475
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|
|
|
505,468
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|
|
|
148,011
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170,149
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|
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|
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Interest Expense:
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|
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|
|
|
|
|
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Deposits
|
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|
117,403
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|
|
|
144,052
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|
|
|
37,235
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|
|
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51,223
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Securities sold under agreements to repurchase and other borrowings
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|
65,047
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|
115,862
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|
|
|
15,240
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|
|
38,882
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|
|
Subordinated capital notes
|
|
|
9,974
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|
|
|
11,917
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|
|
|
3,130
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|
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|
4,005
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|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
Total interest expense
|
|
|
192,424
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|
|
|
271,831
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|
|
|
55,605
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|
|
|
94,110
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
268,051
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|
|
|
233,637
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|
|
|
92,406
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|
|
|
76,039
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for Loan Losses
|
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|
123,650
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|
|
|
100,224
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|
|
|
45,560
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|
|
|
47,350
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|
|
|
|
|
|
|
|
|
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|
|
|
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Net interest income after provision for loan losses
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|
144,401
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|
|
|
133,413
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|
|
|
46,846
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|
|
|
28,689
|
|
|
|
|
|
|
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|
|
|
|
|
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|
|
|
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|
|
|
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|
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|
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Other Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Bank service charges, fees and other
|
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|
33,744
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|
|
|
34,162
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|
|
|
10,220
|
|
|
|
9,711
|
|
|
Broker-dealer, asset management and insurance fees
|
|
|
58,110
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|
|
|
49,086
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|
|
|
16,137
|
|
|
|
16,717
|
|
|
Gain on sale of securities
|
|
|
5,153
|
|
|
|
238
|
|
|
|
2,279
|
|
|
|
—
|
|
|
Gain on sale of loans
|
|
|
3,004
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|
|
|
5,121
|
|
|
|
737
|
|
|
|
782
|
|
|
Other income
|
|
|
19,756
|
|
|
|
7,851
|
|
|
|
7,040
|
|
|
|
3,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
119,767
|
|
|
|
96,458
|
|
|
|
36,413
|
|
|
|
30,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
92,883
|
|
|
|
97,249
|
|
|
|
31,372
|
|
|
|
31,347
|
|
|
Occupancy costs
|
|
|
20,631
|
|
|
|
17,686
|
|
|
|
7,409
|
|
|
|
6,198
|
|
|
Equipment expenses
|
|
|
3,340
|
|
|
|
3,379
|
|
|
|
1,087
|
|
|
|
1,139
|
|
|
EDP servicing, amortization and technical assistance
|
|
|
31,208
|
|
|
|
27,317
|
|
|
|
10,147
|
|
|
|
9,243
|
|
|
Communication expenses
|
|
|
7,724
|
|
|
|
8,157
|
|
|
|
2,544
|
|
|
|
2,706
|
|
|
Business promotion
|
|
|
5,438
|
|
|
|
12,338
|
|
|
|
1,652
|
|
|
|
4,338
|
|
|
Goodwill and other intangibles impairment charges
|
|
|
—
|
|
|
|
39,705
|
|
|
|
—
|
|
|
|
39,705
|
|
|
Provision
for claim receivable
|
|
|
25,120
|
|
|
|
—
|
|
|
|
25,120
|
|
|
|
—
|
|
|
Other taxes
|
|
|
10,150
|
|
|
|
8,486
|
|
|
|
3,394
|
|
|
|
3,537
|
|
|
Other operating expenses
|
|
|
52,947
|
|
|
|
45,677
|
|
|
|
19,027
|
|
|
|
15,980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other operating expenses
|
|
|
249,441
|
|
|
|
259,994
|
|
|
|
101,752
|
|
|
|
114,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) before provision for income tax
|
|
|
14,727
|
|
|
|
(30,123
|
)
|
|
|
(18,493
|
)
|
|
|
(55,011
|
)
|
|
(Benefit) Provision for Income Tax
|
|
|
(1,349
|
)
|
|
|
4,151
|
|
|
|
(10,331
|
)
|
|
|
(4,912
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) Available to Common Shareholders
|
|
$
|
16,076
|
|
|
$
|
(34,274
|
)
|
|
$
|
(8,162
|
)
|
|
$
|
(50,099
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted Earnings (Loss) per Common Share
|
|
$
|
0.34
|
|
|
$
|
(0.73
|
)
|
|
$
|
(0.18
|
)
|
|
$
|
(1.07
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2008 AND YEAR ENDED DECEMBER 31, 2007
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended
|
|
|
Year ended
|
|
|
|
|
September 30, 2008
|
|
|
December 31, 2007
|
|
|
Common Stock:
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
$
|
126,626
|
|
|
$
|
126,626
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
126,626
|
|
|
|
126,626
|
|
|
|
|
|
|
|
|
|
|
Capital Paid in Excess of Par Value:
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
308,373
|
|
|
|
304,171
|
|
|
Capital contribution
|
|
|
8,039
|
|
|
|
4,202
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
316,412
|
|
|
|
308,373
|
|
|
|
|
|
|
|
|
|
|
Treasury Stock at cost:
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
(67,552
|
)
|
|
|
(67,552
|
)
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
(67,552
|
)
|
|
|
(67,552
|
)
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Loss, net of tax:
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
(24,478
|
)
|
|
|
(44,213
|
)
|
|
Unrealized net (loss) gain on investment securities available
for sale, net of tax
|
|
|
(281
|
)
|
|
|
18,227
|
|
|
Unrealized net gain (loss) on cash flow hedges, net of tax
|
|
|
1,049
|
|
|
|
(1,023
|
)
|
|
Change in retirement plan’s funded status, net of tax
|
|
|
—
|
|
|
|
2,531
|
|
|
|
|
|
|
|
|
|
|
Balance at end of the period
|
|
|
(23,710
|
)
|
|
|
(24,478
|
)
|
|
|
|
|
|
|
|
|
|
Reserve Fund:
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
139,250
|
|
|
|
137,511
|
|
|
Transfer from undivided profits
|
|
|
—
|
|
|
|
1,739
|
|
|
|
|
|
|
|
|
|
|
Balance at end of the period
|
|
|
139,250
|
|
|
|
139,250
|
|
|
|
|
|
|
|
|
|
|
Undivided Profits:
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
54,317
|
|
|
|
122,677
|
|
|
Net income (loss)
|
|
|
16,076
|
|
|
|
(36,245
|
)
|
|
Transfer to reserve fund
|
|
|
—
|
|
|
|
(1,739
|
)
|
|
Deferred tax benefit amortization
|
|
|
(3
|
)
|
|
|
(3
|
)
|
|
Common stock cash dividends
|
|
|
(9,329
|
)
|
|
|
(29,849
|
)
|
|
Cummulative effect of the adoption of SFAS 159 (See notes 1, 13 and 19)
|
|
|
3,219
|
|
|
|
—
|
|
|
Cummulative effect of the adoption of FIN No. 48 (See note 12)
|
|
|
—
|
|
|
|
(524
|
)
|
|
|
|
|
|
|
|
|
|
Balance at end of the period
|
|
|
64,280
|
|
|
|
54,317
|
|
|
|
|
|
|
|
|
|
|
Total stockholders’ equity
|
|
$
|
555,306
|
|
|
$
|
536,536
|
|
|
|
|
|
|
|
|
|
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, 2008 AND 2007
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended
|
|
|
For the three months ended
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
16,076
|
|
|
$
|
(34,274
|
)
|
|
$
|
(8,162
|
)
|
|
$
|
(50,099
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains on investment securities available for sale, net of tax
|
|
|
1,408
|
|
|
|
4,396
|
|
|
|
3,557
|
|
|
|
12,676
|
|
|
Reclassification
adjustment for losses included in net income or loss, net of tax
|
|
|
(1,689
|
)
|
|
|
—
|
|
|
|
(2,093
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized net (loss) gain on investment securities available for sale, net
of tax
|
|
|
(281
|
)
|
|
|
4,396
|
|
|
|
1,464
|
|
|
|
12,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized net gain (loss) on cash flow hedges, net of tax
|
|
|
1,049
|
|
|
|
(439
|
)
|
|
|
573
|
|
|
|
(970
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive gain, net of tax
|
|
|
768
|
|
|
|
3,957
|
|
|
|
2,037
|
|
|
|
11,706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
16,844
|
|
|
$
|
(30,317
|
)
|
|
$
|
(6,125
|
)
|
|
$
|
(38,393
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2008 AND 2007
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Net income
(loss)
|
|
$
|
16,076
|
|
|
$
|
(34,274
|
)
|
|
|
|
|
|
|
|
|
|
Adjustments
to reconcile net income (loss) to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
11,515
|
|
|
|
12,803
|
|
|
Deferred tax benefit
|
|
|
(9,895
|
)
|
|
|
(13,407
|
)
|
|
Provision for loan losses
|
|
|
123,650
|
|
|
|
100,224
|
|
|
Goodwill and other intangibles impairment charges
|
|
|
—
|
|
|
|
39,705
|
|
|
Gain on sale of securities
|
|
|
(5,153
|
)
|
|
|
(238
|
)
|
|
Gain on sale of loans
|
|
|
(3,004
|
)
|
|
|
(5,121
|
)
|
|
Gain on sale of mortgage-servicing rights
|
|
|
—
|
|
|
|
(206
|
)
|
|
(Gain) loss on derivatives
|
|
|
(4,135
|
)
|
|
|
31
|
|
|
Trading gains
|
|
|
(2,798
|
)
|
|
|
(1,766
|
)
|
|
Valuation loss on loans held for sale
|
|
|
6,902
|
|
|
|
—
|
|
|
Net discount accretion on securities
|
|
|
(2,732
|
)
|
|
|
(4,532
|
)
|
|
Net premium (discount) amortization (accretion) on loans
|
|
|
281
|
|
|
|
(1,639
|
)
|
|
Accretion of debt discount
|
|
|
470
|
|
|
|
1,005
|
|
|
Share-based compensation
|
|
|
8,039
|
|
|
|
—
|
|
|
Provision
for claim receivable
|
|
|
25,120
|
|
|
|
—
|
|
|
Purchases and originations of loans held for sale
|
|
|
(294,294
|
)
|
|
|
(455,524
|
)
|
|
Proceeds from sales of loans
|
|
|
317,536
|
|
|
|
222,726
|
|
|
Repayments of loans held for sale
|
|
|
16,710
|
|
|
|
17,983
|
|
|
Proceeds from sales of trading securities
|
|
|
1,869,182
|
|
|
|
1,773,247
|
|
|
Purchases of trading securities
|
|
|
(1,798,473
|
)
|
|
|
(1,786,744
|
)
|
|
Decrease in accrued interest receivable
|
|
|
28,834
|
|
|
|
19,682
|
|
|
Decrease (increase) in other assets
|
|
|
18,172
|
|
|
|
(19,577
|
)
|
|
Decrease in accrued interest payable
|
|
|
(32,265
|
)
|
|
|
(13,293
|
)
|
|
Decrease in other liabilities
|
|
|
(513
|
)
|
|
|
(7,228
|
)
|
|
|
|
|
|
|
|
|
|
Total adjustments
|
|
|
273,149
|
|
|
|
(121,869
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
289,225
|
|
|
|
(156,143
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in interest-bearing deposits
|
|
|
(866
|
)
|
|
|
49,835
|
|
|
Proceeds from sales of investment securities available for sale
|
|
|
129,451
|
|
|
|
20,301
|
|
|
Proceeds from maturities of investment securities available for sale
|
|
|
8,621,004
|
|
|
|
26,353,520
|
|
|
Purchases of investment securities available for sale
|
|
|
(8,537,194
|
)
|
|
|
(26,432,349
|
)
|
|
Purchases of other investments
|
|
|
9,677
|
|
|
|
1,901
|
|
|
Repayment of securities and securities called
|
|
|
72,952
|
|
|
|
75,984
|
|
|
Payments on derivative transactions
|
|
|
(1,497
|
)
|
|
|
—
|
|
|
Net decrease in loans
|
|
|
425,921
|
|
|
|
57,784
|
|
|
Proceeds from sales of mortgage-servicing rights
|
|
|
—
|
|
|
|
206
|
|
|
Purchases of premises and equipment
|
|
|
(4,634
|
)
|
|
|
(2,480
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities
|
|
|
714,814
|
|
|
|
124,702
|
|
|
|
|
|
|
|
|
|
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, 2008 AND 2007
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Net increase in deposits
|
|
|
426,042
|
|
|
|
751,007
|
|
|
Net decrease in federal funds purchased and other borrowings
|
|
|
(916,110
|
)
|
|
|
(728,180
|
)
|
|
Net decrease in securities sold under agreements to repurchase
|
|
|
(60,597
|
)
|
|
|
(97,263
|
)
|
|
Net (decrease) increase in commercial paper issued
|
|
|
(234,624
|
)
|
|
|
194,111
|
|
|
Capital contribution
|
|
|
—
|
|
|
|
4,000
|
|
|
Dividends paid
|
|
|
(16,790
|
)
|
|
|
(22,387
|
)
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(802,079
|
)
|
|
|
101,288
|
|
|
|
|
|
|
|
|
|
|
NET CHANGE IN CASH AND CASH EQUIVALENTS
|
|
|
201,960
|
|
|
|
69,847
|
|
|
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
|
|
|
201,697
|
|
|
|
199,264
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF PERIOD
|
|
$
|
403,657
|
|
|
$
|
269,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2008
|
|
2007
|
|
Supplemental disclosure of noncash transactions:
|
|
|
|
|
|
|
|
|
|
Loan securitization
|
|
|
69,401
|
|
|
|
16,243
|
|
|
Reclassification
of premises to real estate held for sale (See Note 6)
|
|
|
8,076
|
|
|
|
—
|
|
|
Settlement by counterparty in bankruptcy of securities
sold under agreement to repurchase (See Note 20)
|
220,228
|
|
|
|
—
|
|
|
Settlement by counterparty in bankruptcy of investment securities
available for sale pledged under agreement to repurchase (See Note 20)
|
225,348
|
|
|
|
—
|
|
Concluded
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, 2008 AND 2007
1. Summary of Significant Accounting Policies:
The accounting and reporting policies of Santander BanCorp (the “Corporation”), a 91% owned
subsidiary of Banco Santander, S.A. (“Santander Spain”) 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, 2008 and 2007 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 Corporation’s Form 10-K for the year ended December 31, 2007. The accounting
policies used in preparing these condensed consolidated financial statements are substantially the
same as those described in Note 1 to the 2007 consolidated financial statements in the
Corporation’s Form 10-K.
Following is a summary of the Corporation’s most significant policies:
Nature of Operations and Use of Estimates
Santander BanCorp is a financial holding company offering a full range of financial services
(including mortgage banking) through its wholly owned banking subsidiary Banco Santander Puerto
Rico and subsidiary (the “Bank”). The Corporation also engages in broker-dealer, asset management,
consumer finance, international banking, insurance agency services and insurance products through
its subsidiaries, Santander Securities Corporation, Santander Asset Management Corporation,
Santander Financial Services, Inc. (“Island Finance”), Santander International Bank and Santander
Insurance Agency and Island Insurance Corporation (currently inactive), respectively.
Santander BanCorp is subject to the Federal Bank Holding Company Act and to the regulations,
supervision, and examination of the Federal Reserve Board.
In preparing the 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 Bank’s wholly owned subsidiary, Santander International Bank; Santander Securities
Corporation and its wholly owned subsidiary, Santander Asset Management Corporation; Santander
Financial Services, Inc., Santander Insurance Agency and Island Insurance Corporation. All
significant intercompany balances and transactions have been eliminated in consolidation. Effective
January 1, 2008, Santander Mortgage Corporation (a wholly owned subsidiary of the Bank) was merged
into the Bank and ceased to operate as a separate legal entity.
Securities Purchased/Sold under Agreements to Resell/Repurchase
Repurchase and resell agreements are treated as collateralized financing transactions and are
carried at the amounts at which the assets will be reacquired or resold at the contractual maturity.
The settlement of these agreements prior to maturity may be subject to early termination penalties.
The counterparties to securities purchased under resell agreements maintain effective control
over such securities and accordingly, those securities are not reflected in the Corporation’s
condensed consolidated balance sheets. The Corporation
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monitors the market value of the underlying securities as compared to the related receivable,
including accrued interest, and requests additional collateral where deemed appropriate.
The Corporation maintains effective control over assets sold under agreements to repurchase;
accordingly, such securities continue to be carried on the condensed consolidated balance sheets.
Investment
Securities
Investment securities are classified in four categories and accounted for as follows:
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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 other
securities to maturity, unless a nonrecurring or unusual event that could not have been
reasonably anticipated has occurred.
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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 the 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.
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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.
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Investments in debt, equity or other securities, that do not have readily determinable
fair values, are classified as other investment securities in the condensed consolidated
balance sheets. These securities are stated at cost. Stock that is owned by the
Corporation to comply with regulatory requirements, such as Federal Home Loan Bank (FHLB)
stock, is included in this category.
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The amortization of premiums is deducted and the accretion of discounts is added to net
interest income based on a method which approximates the interest method, over the outstanding life
of the related securities. The cost of securities sold is determined by specific identification.
For securities available for sale, held to maturity and other investment securities, the
Corporation reports separately in the 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.
8
Derivative Financial Instruments
The Corporation uses derivative financial instruments mostly as hedges of interest rate risk,
changes in fair value of assets and liabilities and to secure future cash flows.
All of the Corporation’s derivative instruments are recognized as assets and liabilities at
fair value. If certain conditions are met, the derivative may qualify for hedge accounting
treatment and be designated as one of the following types of hedges: (a) hedge of the exposure to
changes in the fair value of a recognized asset or liability or an unrecognized firm commitment
(“fair value hedge”); (b) a hedge of the exposure to variability of cash flows of a recognized
asset, liability or forecasted transaction (“cash flow hedge”) or (c) a hedge of foreign currency
exposure (“foreign currency hedge”).
Prior to the adoption of Statement of Financial Accounting Standard (“SFAS” ) No. 159,
, “Fair
Value Option for Financial Assets and Financial Liabilities- including an amendment of FASB
Statements No. 115"
, in the case of a qualifying fair value hedge, changes in the value of the
derivative instruments that have been highly effective were recognized in current period 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. Prior to the adoption of SFAS 159 as of January 1, 2008, these swaps were designated for the
hedge accounting treatment under SFAS 133, “
Accounting for Derivatives Instruments and Hedging
Activities”
as amended and interpreted (“SFAS 133”). These financial instruments were accounted for
as fair value hedges, with changes in the fair value of both the derivative and the hedged item
included in other income and the interest included in net interest income in the condensed
consolidated statements of income. In connection with the adoption of SFAS 159 the Corporation
carries certain callable brokered certificates of deposits and subordinated capital notes at fair
value with changes in fair value included in other income in the condensed consolidated statements
of income. The cost of funding on the Corporation’s borrowings, as well as derivatives, continue to
be included in interest expense and income, as applicable, in the condensed consolidated statements
of income. See Note 13 of 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 net income 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 statement of income as part of other income.
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Loans
Loans that management has the intent and ability to hold for the foreseeable future or until
maturity or pay-off are reported at their outstanding unpaid principal balances adjusted for the
allowance for loan losses, unearned finance charges and any deferred fees or costs on originated
loans.
Interest income is accrued on the unpaid principal balance. Loan origination fees, net of
certain direct origination costs, are deferred and amortized using methods that approximate the
interest method over the term of the loans as an adjustment to interest yield. Discounts and
premiums on purchased loans are amortized to results of operations over the expected lives of the
loans using a method that approximates the interest method.
The accrual of interest on commercial loans, construction loans, lease financing and
closed-end consumer loans is discontinued when, in management’s opinion, the borrower may be unable
to meet payments as they become due, but in no event is it recognized after 90 days in arrears on
payments of principal or interest. Interest on mortgage loans is not recognized after four months
in arrears on payments of principal or interest. Income is generally recognized on open-end
(revolving credit) consumer loans until the loans are charged off. When interest accrual is
discontinued, unpaid interest is reversed on all closed-end portfolios. Interest income is
subsequently recognized only to the extent that it is received. 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 Statement of Financial Accounting Standards (“SFAS”) No. 13, “Accounting for Leases,”
as amended. Aggregate rentals due over the term of the leases less unearned income are included in
lease receivable, which is part of “Loans, net” in the condensed 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.
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, 2008 had terms ranging from one month to six years.
Fees received for providing loan commitments and letters of credit that result in loans are
typically deferred and amortized to interest income over the life of the related loan, beginning
with the initial borrowing. Fees on commitments and letters of credit are amortized to other
income as banking fees and commissions over the commitment period when funding is not expected.
Allowance for Loan Losses
The allowance for loan losses is a current estimate of the losses inherent in the present
portfolio based on management’s ongoing quarterly evaluations of the loan portfolio. Estimates of
losses inherent in the loan portfolio involve the exercise of judgment and the use of assumptions.
This evaluation is inherently subjective as it requires estimates that are susceptible to
significant revision as more information becomes available. The allowance is increased by a
provision for loan losses, which is charged to expense and reduced by charge-offs, net of
recoveries. Changes in the allowance relating to impaired loans are charged or credited to the
provision for loan losses. Because of uncertainties inherent in the estimation process,
management’s estimate of credit losses in the loan portfolio and the related allowance may change
in the near term.
The Corporation follows a systematic methodology to establish and evaluate the adequacy of the
allowance for loan losses. This methodology consists of several key elements.
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Larger commercial, construction loans and certain mortgage loans that exhibit potential or
observed credit weaknesses are subject to individual review. Where appropriate, allowances are
allocated to individual loans based on management’s estimate of the borrower’s ability to repay the
loan given the availability of collateral, other sources of cash flow and legal options available
to the Corporation.
Included in the review of individual loans are those that are impaired as defined by GAAP. Any
allowances for loans deemed impaired are measured based on the present value of expected future
cash flows discounted at the loans’ effective interest rate or on the fair value of the underlying
collateral if the loan is collateral dependent. Commercial business, commercial real estate,
construction and mortgage loans exceeding a predetermined monetary threshold are individually
evaluated for impairment. Other loans are evaluated in homogeneous groups and collectively
evaluated for impairment. Loans that are recorded at fair value or at the lower of cost or fair
value are not evaluated for impairment. Impaired loans for which the discounted cash flows,
collateral value or fair value exceeds its carrying value do not require an allowance. The
Corporation evaluates the collectability of both principal and interest when assessing the need for
loss accrual.
Historical loss rates are applied to other commercial loans not subject to individual review.
The loss rates are derived from historical loss trends.
Homogeneous loans, such as consumer installment, credit card, residential mortgage and
consumer finance are not individually risk graded. Allowances are established for each pool of
loans based on the expected net charge-offs for one year. Loss rates are based on the average net
charge-off history by loan category, market loss trends and other relevant economic factors.
An unallocated allowance is maintained to recognize the imprecision in estimating and
measuring loss when evaluating allowances for individual loans or pools of loans.
Historical loss rates for commercial and consumer loans may also be adjusted for significant
factors that, in management’s judgment, reflect the impact of any current condition on loss
recognition. Factors which management considers in the analysis include the effect of the national
and local economies, trends in the nature and volume of loans (delinquencies, charge-offs,
non-accrual and problem loans), changes in the internal lending policies and credit standards,
collection practices, and examination results from bank regulatory agencies and the Corporation’s
internal credit examiners.
Allowances on individual loans and historical loss rates are reviewed quarterly and adjusted
as necessary based on changing borrower and/or collateral conditions and actual collection and
charge-off experience.
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities
Transfers of financial assets are accounted for as sales, when control over the transferred
assets is deemed to be surrendered: (1) the assets have been isolated from the Corporation, (2) the
transferee obtains the right (free of conditions that constrain it from taking advantage of that
right) to pledge or exchange the transferred assets, and (3) the Corporation does not maintain
effective control over the transferred assets through an agreement to repurchase them before their
maturity. The Corporation recognizes the financial assets and servicing assets it controls and the
liabilities it has incurred. At the same time, it ceases to recognize financial assets when control
has been surrendered and liabilities when they are extinguished.
Goodwill and Intangible Assets
The Corporation accounts for goodwill in accordance with SFAS No. 142, “Goodwill and Other
Intangible Assets.” The reporting units are tested for impairment annually on October 1
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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 statement of income.
In accordance with SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived
Assets”, the Corporation reviews finite-lived intangible assets for impairment whenever an event
occurs or circumstances change which indicate that the carrying amount of such assets may not be
fully recoverable. Determination of recoverability is based on the estimate of undiscounted future
cash flows resulting from the use of the asset and its eventual disposition. Measurement of an
impairment loss is based on the fair value of the asset compared to its carrying value. If the fair
value of the asset is determined to be less that
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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.
The Corporation uses judgment in assessing goodwill and intangible assets for impairment.
Estimates of fair value are based on projections of revenues, operating costs and cash flows of
each reporting unit considering historical and anticipated future results, general economic and
market conditions as well as the impact of planned business or operational strategies. The
valuations employ a combination of present value techniques to measure fair value and consider
market factors. Generally, the Corporation engages third party specialists to assist with its
valuations. Additionally, judgment is used in determining the useful lives of finite-lived
intangible assets. Changes in judgments and projections could result in a significantly different
estimate of the fair value of the reporting units and could result in an impairment of goodwill.
The Corporation has not adopted SFAS 157 for fair value measurement of goodwill and intangible
assets pursuant FASB Staff Position (“FSP”) FAS 157-2 “
Effective Date of FASB Statement No. 157”
issued in February 2008.
As a result of the purchase price allocations from prior acquisitions and the Corporation’s
decentralized structure, goodwill is included in multiple reporting units. Due to certain factors
such as the highly competitive environment, cyclical nature of the business in some of the
reporting units, general economic and market conditions as well as planned business or operational
strategies, among others, the profitability of the Corporation’s individual reporting units may
periodically suffer from downturns in these factors. These factors may have a relatively more
pronounced impact on the individual reporting units as compared to the Corporation as a whole and
might adversely affect the fair value of the reporting units. If material adverse conditions occur
that impact the Corporation’s reporting units, the Corporation’s reporting units, and the related
goodwill would need to be written down to an amount considered recoverable.
Mortgage-servicing Rights
Mortgage-servicing rights (“MSRs”) represent the cost of acquiring the contractual rights to
service loans for others. On a quarterly basis the Corporation evaluates its MSRs for impairment
and charges any such impairment to current period earnings. In order to evaluate its MSRs the
Corporation stratifies the related mortgage loans on the basis of their risk characteristics which
have been determined to be: type of loan (government-guaranteed, conventional, conforming and
non-conforming), interest rates and maturities. Impairment of MSRs is determined by estimating the
fair value of each stratum and comparing it to its carrying value. No impairment loss was
recognized for the nine months ended September 30, 2008 and 2007.
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, 2008 and December 31, 2007, the unpaid principal balances of
mortgage loans serviced for others amounted to approximately $1,225,000,000 and $1,056,000,000,
respectively. In connection with these mortgage-servicing activities, the Corporation administered
escrow and other custodial funds which amounted to approximately $3,303,000 and $3,254,000 at
September 30, 2008 and December 31, 2007, respectively.
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Trust Services
In connection with its trust activities, the Corporation administers and is custodian of
assets amounting to approximately $212,000,000 and $1,113,000,000 at September 30, 2008 and at
December 31, 2007, respectively. Due to the nature of trust activities, these assets are not
included in the Corporation’s condensed consolidated balance sheets. Since December 31, 2006, when
the Corporation sold to an unaffiliated third party the servicing rights for certain trust
accounts, the Corporation’s Trust Division is focusing its efforts on transfer and paying agent and
Individual Retirement Account (IRA) services.
Broker-dealer and Asset Management Commissions
Commissions of the Corporation’s broker-dealer operations are composed of brokerage commission
income and expenses recorded on a trade date basis and proprietary securities transactions recorded
on a trade date basis. Investment banking revenues include gains, losses and fees net of syndicate
expenses, arising from securities offerings in which the Corporation acts as an underwriter or
agent. Investment banking management fees are recorded on offering date, sales concessions on trade
date, and underwriting fees at the time the underwriting is completed and the income is reasonably
determinable. Revenues from portfolio and other management and advisory fees include fees and
advisory charges resulting from the asset management of certain funds and are recognized over the
period when services are rendered.
Insurance Commissions
The Corporation’s insurance agency operation earns commissions on the sale of insurance
policies issued by unaffiliated insurance companies. Commission revenue is reported net of the
provision for commission returns on insurance policy cancellations, which is based on management’s
estimate of future insurance policy cancellations as a result of historical turnover rates by types
of credit facilities subject to insurance.
Income Taxes
The Corporation uses the asset and liability balance sheet method for the recognition of
deferred tax assets and liabilities for the expected future tax consequences of events that have
been recognized in the Corporation’s financial statements or tax returns. Deferred income tax
assets and liabilities are determined for differences between financial statement and tax bases of
assets and liabilities that will result in taxable or deductible amounts in the future. The
computation is based on enacted tax laws and rates applicable to periods in which the temporary
differences are expected to be recovered or settled. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount that is more likely than not to be realized.
The Corporation accounts for uncertain tax positions in accordance with FASB Interpretation
No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). Accordingly, the Corporation
reports a liability for unrecognized tax benefits resulting from uncertain tax positions taken or
expected to be taken in a tax return. The Corporation recognizes interest and penalties, if any,
related to unrecognized tax benefits in income tax expense.
Earnings Per Common Share
Basic and diluted earnings per common share are computed by dividing net income available to
common stockholders, by the weighted average number of common shares outstanding during the period.
The Corporation’s average number of common shares outstanding, used in the computation of earnings
per common share was 46,639,104 for each of the quarters ended September 30, 2008 and 2007. 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, 2008 and 2007.
Reclassifications
Certain immaterial reclassifications were made to the 2007 financial
statements to conform them with the current period financial statement presentation.
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Recent Accounting Pronouncements that Affect the Corporation
The adoption of these accounting pronouncements had the following impact on the Corporation’s
condensed consolidated statements of income and financial condition:
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Staff Accounting Bulletin No. 109 (“SAB 109”) “Written Loan Commitments Recorded at Fair
Value through Earnings.”
On November 5, 2007, the SEC issued Staff Accounting Bulletin No.
109 (SAB 109), which requires that the fair value of a written loan commitment that is
marked to market through earnings should include the future cash flows related to the
loan’s servicing rights. However, the fair value measurement of a written loan commitment
still must exclude the expected net cash flows related to internally developed intangible
assets (such as customer relationship intangible assets). SAB 109 applies to two types of
loan commitments: (1) written mortgage loan commitments for loans that will be
held-for-sale when funded that are marked to market as derivatives under FAS 133
(derivative loan commitments); and (2) other written loan commitments that are accounted
for at fair value through earnings under Statement 159’s fair-value election. SAB 109
supersedes SAB 105, which applied only to derivative loan commitments and allowed the
expected future cash flows related to the associated servicing of the loan to be recognized
only after the servicing asset had been contractually separated from the underlying loan by
sale or securitization of the loan with servicing retained. SAB 109 will be applied
prospectively to derivative loan commitments issued or modified in fiscal quarters
beginning after December 15, 2007. The adoption of this statement did not have material
impact on the Corporation’s condensed consolidated financial statements and disclosures.
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SFAS No. 157, “Fair Value Measurements.”
In September 2006, the FASB issued SFAS No.
157, “Fair Value Measurements,” which establishes a framework for measuring fair value
under GAAP and enhances disclosures about fair value measurements. The Corporation adopted
SFAS 157, as of January 1, 2008 for financial assets and liabilities. Fair value is defined
under SFAS 157 as the price that would be received for an asset or paid to transfer a
liability (an exit price) in the principal or most advantageous market for the asset or
liability in an orderly transaction between market participants on the measurement date.
In February 2008, the FASB issued a FASB Staff Position (FSP FAS 157-2) that partially
delayed the effective date of SFAS 157 for one year for certain nonfinancial assets and
nonfinancial liabilities, except for items that are recognized or disclosed at fair value
in the financial statements on a recurring basis. FSP FAS 157-2 states that a measurement
is recurring if it happens at least annually and defines nonfinancial assets and
nonfinancial liabilities as all assets and liabilities other than those meeting the
definition of a financial asset or financial liability in SFAS No. 159. As such, the
Corporation did not adopt SFAS 157 for nonfinancial assets and liabilities eligible for
deferral under FSP FAS 157-2, and is evaluating the impact, that this adoption may have on
its condensed consolidated financial statements and disclosures. See Note 19 for
additional information.
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SFAS No. 159, “Fair Value Option for Financial Assets and Financial Liabilities-
including an amendment of FASB Statements No. 115.”
In February 2007, the FASB issued SFAS
No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”. In
conjunction with the adoption of SFAS 157, the Corporation adopted SFAS 159, as of
January 1, 2008. SFAS 159 provides an option for most financial assets and liabilities to
be reported at fair value on an instrument-by-instrument basis with changes in fair value
reported in earnings. The election is made at the initial adoption, at the acquisition of a
financial asset, financial liability or a firm commitment and it may not be revoked. Under
the SFAS 159 transition provisions, the Corporation has elected to report certain callable
brokered certificates of deposits and subordinated notes at fair value with future changes
in value reported in earnings. SFAS 159 provides an opportunity to mitigate volatility in
reported earnings as well as reducing the burden associated with complex hedge accounting
requirements. As a result of this adoption and election under the fair value option, the
Corporation reported an after-tax increase to beginning of year retained earnings of $3.2
million.
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FSP FIN No. 39-1 “Amendment of FASB Interpretation No. 39”
In April 2007, the FASB
issued Staff Position FSP FIN No. 39-1, which defines “right of setoff” and specifies what
conditions must be met for a derivative contract to qualify for this right of setoff. It
also addresses the applicability of a right of setoff to derivative instruments and
clarifies the circumstances in which it is appropriate to offset amounts recognized for
those instruments in the statement of financial position. In addition, this FSP permits the
offsetting of fair value amounts recognized for multiple derivative instruments executed
with the same counterparty under a master netting arrangement and fair value amounts
recognized for the right to reclaim cash collateral (a receivable) or the obligation to
return cash collateral (a payable) arising from the same master netting arrangement as the
derivative instruments. This interpretation is effective for fiscal years beginning after
November 15, 2007, with early application permitted. The adoption of FSP FIN No. 39-1 in
2008 did not have a material impact on the Corporation’s condensed consolidated financial
statements and disclosures.
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The Corporation is evaluating the impact that the following recently issued accounting
pronouncements may have on its consolidated financial condition and results of operations.
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SFAS No. 161 “Disclosure about Derivative Instruments and Hedging Activities, an
amendment of FASB Statements No. 133.”
In March 2008, the FASB issued SFAS No. 161, which
requires the enhancement of the current disclosure framework in Statement 133. The
Statement requires that objectives for using derivative instruments be disclosed in terms
of underlying risk and accounting designation. This disclosure better conveys the purpose
of derivative use in terms of the risks that the entity is intending to manage. Disclosing
the fair values of derivative instruments and their gains and losses in a tabular format
should provide a more complete picture of the location in an entity’s financial statements
of both the derivative positions existing at period end and the effect of using derivatives
during the reporting period. Disclosing information about credit-risk-related contingent
features should provide information on the potential effect on an entity’s liquidity from
using derivatives. Finally, this Statement requires cross-referencing within the footnotes,
which should help users of financial statements locate important information about
derivative instruments. This Statement is effective for financial statements issued for
fiscal years and interim periods beginning after November 15, 2008, with early application
encouraged. This Statement encourages, but does not require, comparative disclosures for
earlier periods at initial adoption. The Corporation is evaluating the effects, if any,
that the adoption of this statement will have on its consolidated financial statements.
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Staff Position (FSP) FAS 142-3, “Determination of Useful Life of Intangible Assets"(“FSP
FAS 142-3”).
In April 2008, the FASB issued FASB Staff Position (FSP) FAS 142-3,
“Determination of Useful Life of Intangible Assets. This FASB Staff Position (FSP) amends
the factors that should be considered in developing renewal or extension assumptions used
to determine the useful life of a recognized intangible asset under FASB Statement No. 142,
Goodwill and Other Intangible Assets
. The intent of this FSP is to improve the consistency
between the useful life of a recognized intangible asset under Statement 142 and the period
of expected cash flows used to measure the fair value of the asset under FASB Statement No.
141 (revised 2007),
Business Combinations,
and other U.S. generally accepted accounting
principles (GAAP). An intangible asset may be acquired individually or with a group of
other assets. This FSP applies regardless of the nature of the transaction that resulted in
the recognition of the intangible asset, that is, whether acquired in a business
combination or otherwise. In developing assumptions about renewal or extension used to
determine the useful life of a recognized intangible asset, an entity shall consider its
own historical experience in renewing or extending similar arrangements; however, these
assumptions should be adjusted for the entity-specific factors in paragraph 11 of Statement
142. In the absence of that experience, an entity shall consider the assumptions that
market participants would use about renewal or extension (consistent with the highest and
best use of the asset by market participants), adjusted for the entity-specific factors in
paragraph 11 of Statement 142. The Corporation is evaluating the potential impact of
adopting this FSP.
|
|
|
|
|
•
|
|
SFAS No. 162 “The Hierarchy of Generally Accepted Accounting Principles.”
In May 2008,
the FASB issued SFAS No. 162, which identifies the sources of accounting principles and the
framework for selecting the principles to be used in the preparation of financial
statements of nongovernmental entities that are presented in conformity with generally
accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). The
current GAAP hierarchy, as set forth in the American Institute of Certified Public
Accountants (AICPA) Statement on Auditing Standards No. 69,
The Meaning of
Present Fairly
in Conformity With Generally Accepted Accounting Principles, has been criticized because
(1) it is directed to the auditor rather than the entity, (2) it is complex, and (3) it
ranks FASB Statements of Financial Accounting Concepts, which are subject to the same level
of due process as FASB Statements of Financial Accounting Standards, below industry
practices that are widely recognized as generally accepted but that are not subject to due
process. The Board believes that the GAAP hierarchy should be directed to entities because
it is the entity (not its auditor) that is responsible for selecting accounting principles
for financial statements that are presented in conformity with GAAP. Accordingly, the Board
concluded that the GAAP hierarchy should reside in the accounting literature established by
the FASB and is issuing this Statement to achieve that result. This Statement is effective
60 days following the SEC’s approval of the Public Company Accounting Oversight Board
amendments to AU Section 411,
The Meaning of
Present Fairly in Conformity With Generally
Accepted Accounting Principles. The Corporation will be evaluating the effects, if any,
that the adoption of this statement may have on its consolidated financial statements.
|
15
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 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
|
|
$
|
173,029
|
|
|
$
|
77
|
|
|
$
|
1
|
|
|
$
|
173,105
|
|
|
|
2.13
|
%
|
|
After one year to five years
|
|
|
63,626
|
|
|
|
272
|
|
|
|
—
|
|
|
|
63,898
|
|
|
|
3.70
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
236,655
|
|
|
|
349
|
|
|
|
1
|
|
|
|
237,003
|
|
|
|
2.55
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commonwealth of Puerto Rico and its subdivisions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within one year
|
|
|
1,465
|
|
|
|
—
|
|
|
|
8
|
|
|
|
1,457
|
|
|
|
4.23
|
%
|
|
After one year to five years
|
|
|
24,487
|
|
|
|
—
|
|
|
|
398
|
|
|
|
24,089
|
|
|
|
4.20
|
%
|
|
After five years to ten years
|
|
|
17,080
|
|
|
|
10
|
|
|
|
239
|
|
|
|
16,851
|
|
|
|
5.10
|
%
|
|
Over ten years
|
|
|
4,520
|
|
|
|
—
|
|
|
|
147
|
|
|
|
4,373
|
|
|
|
5.55
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47,552
|
|
|
|
10
|
|
|
|
792
|
|
|
|
46,770
|
|
|
|
4.65
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After five years to ten years
|
|
|
171,447
|
|
|
|
—
|
|
|
|
4,840
|
|
|
|
166,607
|
|
|
|
4.37
|
%
|
|
Over ten years
|
|
|
321,075
|
|
|
|
—
|
|
|
|
5,567
|
|
|
|
315,508
|
|
|
|
5.33
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
492,522
|
|
|
|
—
|
|
|
|
10,407
|
|
|
|
482,115
|
|
|
|
5.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After one year to five years
|
|
|
50
|
|
|
|
—
|
|
|
|
—
|
|
|
|
50
|
|
|
|
4.65
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
776,779
|
|
|
$
|
359
|
|
|
$
|
11,200
|
|
|
$
|
765,938
|
|
|
|
4.23
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Average
|
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Yield
|
|
|
|
|
(Dollars in thousands)
|
|
|
Treasury and agencies of the United States Government:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within one year
|
|
$
|
317,974
|
|
|
$
|
137
|
|
|
$
|
233
|
|
|
$
|
317,878
|
|
|
|
3.63
|
%
|
|
After one year to five years
|
|
|
354,281
|
|
|
|
1,703
|
|
|
|
184
|
|
|
|
355,800
|
|
|
|
3.91
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
672,255
|
|
|
|
1,840
|
|
|
|
417
|
|
|
|
673,678
|
|
|
|
3.78
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commonwealth of Puerto Rico and its subdivisions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within one year
|
|
|
1,370
|
|
|
|
—
|
|
|
|
3
|
|
|
|
1,367
|
|
|
|
3.99
|
%
|
|
After one year to five years
|
|
|
20,245
|
|
|
|
—
|
|
|
|
470
|
|
|
|
19,775
|
|
|
|
4.44
|
%
|
|
After five years to ten years
|
|
|
15,186
|
|
|
|
84
|
|
|
|
159
|
|
|
|
15,111
|
|
|
|
5.21
|
%
|
|
Over ten years
|
|
|
13,091
|
|
|
|
62
|
|
|
|
118
|
|
|
|
13,035
|
|
|
|
5.73
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49,892
|
|
|
|
146
|
|
|
|
750
|
|
|
|
49,288
|
|
|
|
5.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After five years to ten years
|
|
|
232,420
|
|
|
|
—
|
|
|
|
7,296
|
|
|
|
225,124
|
|
|
|
4.40
|
%
|
|
Over ten years
|
|
|
324,112
|
|
|
|
—
|
|
|
|
4,054
|
|
|
|
320,058
|
|
|
|
5.41
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
556,532
|
|
|
|
—
|
|
|
|
11,350
|
|
|
|
545,182
|
|
|
|
4.99
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After one year to five years
|
|
|
50
|
|
|
|
—
|
|
|
|
—
|
|
|
|
50
|
|
|
|
4.65
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,278,729
|
|
|
$
|
1,986
|
|
|
$
|
12,517
|
|
|
$
|
1,268,198
|
|
|
|
4.35
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
The duration of long-term (over one year) investment securities in the available for sale portfolio
is approximately 3.4 years at September 30, 2008, comprised of approximately 0.3 years for
treasuries and agencies of the United States Government, 3.9 years for instruments from the
Commonwealth of Puerto Rico and its subdivisions, 4.8 years for mortgage backed securities and 0.8
year for all other securities.
The number of positions, fair value and unrealized losses at September 30, 2008 and December
31, 2007, of investment securities available for sale that have been in a continuous unrealized
loss position for less than twelve months and for twelve months or more, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 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
|
|
|
$
|
2,227
|
|
|
$
|
1
|
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
1
|
|
|
$
|
2,227
|
|
|
$
|
1
|
|
|
Commonwealth of Puerto
Rico and its subdivisions
|
|
|
11
|
|
|
|
19,277
|
|
|
|
290
|
|
|
|
14
|
|
|
|
22,483
|
|
|
|
502
|
|
|
|
25
|
|
|
|
41,760
|
|
|
|
792
|
|
|
Mortgage-backed
securities
|
|
|
14
|
|
|
|
176,959
|
|
|
|
2,038
|
|
|
|
16
|
|
|
|
305,156
|
|
|
|
8,369
|
|
|
|
30
|
|
|
|
482,115
|
|
|
|
10,407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
|
|
|
$
|
198,463
|
|
|
$
|
2,329
|
|
|
|
30
|
|
|
$
|
327,639
|
|
|
$
|
8,871
|
|
|
|
56
|
|
|
$
|
526,102
|
|
|
$
|
11,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
Less than 12 months
|
|
|
12 months or more
|
|
|
Total
|
|
|
|
|
Number
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
|
|
|
|
|
of
|
|
|
Fair
|
|
|
Unrealized
|
|
|
of
|
|
|
Fair
|
|
|
Unrealized
|
|
|
of
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
|
Positions
|
|
|
Value
|
|
|
Losses
|
|
|
Positions
|
|
|
Value
|
|
|
Losses
|
|
|
Positions
|
|
|
Value
|
|
|
Losses
|
|
|
|
|
(Dollars in thousands)
|
|
|
Treasury and agencies
of the United States
Government
|
|
|
5
|
|
|
$
|
228,590
|
|
|
$
|
57
|
|
|
|
4
|
|
|
$
|
152,132
|
|
|
$
|
360
|
|
|
|
9
|
|
|
$
|
380,722
|
|
|
$
|
417
|
|
|
Commonwealth of Puerto
Rico and its subdivisions
|
|
|
1
|
|
|
|
9,162
|
|
|
|
118
|
|
|
|
18
|
|
|
|
30,420
|
|
|
|
632
|
|
|
|
19
|
|
|
|
39,582
|
|
|
|
750
|
|
|
Mortgage-backed
securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
31
|
|
|
|
545,182
|
|
|
|
11,350
|
|
|
|
31
|
|
|
|
545,182
|
|
|
|
11,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
$
|
237,752
|
|
|
$
|
175
|
|
|
|
53
|
|
|
$
|
727,734
|
|
|
$
|
12,342
|
|
|
|
59
|
|
|
$
|
965,486
|
|
|
$
|
12,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Corporation evaluates its investment securities for other-than-temporary impairment on a
quarterly basis or earlier if other factors indicative of potential impairment exist. An
impairment charge in the 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,
17
including, but not limited to the
length of time and extent to which the fair value has been less than its cost basis, expectation
of recoverability of its original investment in the securities and the Corporation’s intent and
ability to hold the securities for a period of time sufficient to allow for any forecasted
recovery of fair value up to (or beyond) the cost of the investment.
As of September 30, 2008 and December 31, 2007, management concluded that there was no
other-than-temporary impairment in its investment securities portfolio. The unrealized losses in
the Corporation’s investments in U.S. and P.R. Government agencies and subdivisions were caused by
changes in market interest rates. Substantially, all U.S. and P.R. Government agencies securities
are rated the equivalent of AAA and BBB-, respectively, by major rating agencies. The contractual
terms of these investments do not permit the issuer to settle the securities at a price less than
the face value of the investment. Since the Corporation has the ability and intent to hold these
investments until a recovery of fair value, which may be maturity, the Corporation does not
consider these investments to be other-than-temporarily impaired at September 30, 2008 and
December 31, 2007. The unrealized losses in the Corporation’s investment in mortgage-backed
securities were also caused by changes in market interest rates. The Corporation purchased these
investments at a discount relative to their face amount, and the contractual cash flows of these
investments are guaranteed by an agency of the U.S. government or by other government-sponsored
corporations. Accordingly, it is expected that the securities will be settled at a price not less
than the amortized cost of the Corporation’s investment. The decline in market value is
attributable to changes in interest rates and not credit quality and since the Corporation has the
ability and intent to hold these investments until a recovery of fair value, which may be
maturity, the Corporation does not consider these investments to be other-than-temporarily
impaired at September 30, 2008 and December 31, 2007.
Contractual maturities on certain securities, including mortgage-backed securities, could
differ from actual maturities since certain issuers 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.
3. Assets Pledged:
At September 30, 2008 and December 31, 2007, investment securities and loans were pledged to
secure deposits of public funds and Federal Home Loan Bank Advances. The classification and
carrying amount of pledged assets, which the secured parties are not permitted to sell or repledge
as of September 30 and December 31, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
|
December 31, 2007
|
|
|
|
|
(Dollars in thousands)
|
|
|
Investment securities available for sale
|
|
$
|
333,813
|
|
|
$
|
425,754
|
|
|
Other investment securities
|
|
|
46,575
|
|
|
|
56,025
|
|
|
Loans
|
|
|
2,489,676
|
|
|
|
2,314,359
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,870,064
|
|
|
$
|
2,796,138
|
|
|
|
|
|
|
|
|
|
Pledged securities, that the creditor has the right or contract to repledge, are presented
separately on the condensed consolidated balance sheet. At September 30, 2008 and December 31,
2007, investment securities with a carrying value of approximately $398,945,000 and $683,326,000,
respectively, were pledged to securities sold under agreements to repurchase.
18
4. Loans:
The Corporation’s loan portfolio consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
|
December 31, 2007
|
|
|
|
|
(Dollars in thousands)
|
|
|
Commercial and industrial
|
|
$
|
2,311,867
|
|
|
$
|
2,530,806
|
|
|
Consumer
|
|
|
594,526
|
|
|
|
672,888
|
|
|
Consumer finance
|
|
|
1,005,306
|
|
|
|
946,209
|
|
|
Leasing
|
|
|
72,419
|
|
|
|
98,987
|
|
|
Construction
|
|
|
222,762
|
|
|
|
486,284
|
|
|
Mortgage
|
|
|
2,556,952
|
|
|
|
2,539,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,763,832
|
|
|
|
7,274,985
|
|
|
Unearned income and deferred fees/costs:
|
|
|
|
|
|
|
|
|
|
Commercial, industrial and others
|
|
|
(1,261
|
)
|
|
|
(3,459
|
)
|
|
Consumer finance
|
|
|
(413,871
|
)
|
|
|
(335,096
|
)
|
|
Allowance for loan losses
|
|
|
(180,090
|
)
|
|
|
(166,952
|
)
|
|
|
|
|
|
|
|
|
|
Loans, net
|
|
$
|
6,168,610
|
|
|
$
|
6,769,478
|
|
|
|
|
|
|
|
|
|
During the nine months ended September 30, 2008, the Corporation sold certain impaired loans
to an affiliate for $194.7 million in cash. These loans had a
net book value of $194.7 million
comprised of an outstanding principal balance of $223.3 million and a specific valuation allowance
of $28.6 million. The type of loans sold by net book value was
$163.6 million in construction loans and
$31.1 million in commercial loans. No gain or loss was recognized on this transaction.
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, 2008
|
|
|
September 30, 2007
|
|
|
September 30, 2008
|
|
|
September 30, 2007
|
|
|
|
|
(Dollars in thousands)
|
|
|
(Dollars in thousands)
|
|
|
Balance at beginning of period
|
|
$
|
166,952
|
|
|
$
|
106,863
|
|
|
$
|
186,889
|
|
|
$
|
127,916
|
|
|
Provision for loan losses
|
|
|
123,650
|
|
|
|
100,224
|
|
|
|
45,560
|
|
|
|
47,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
290,602
|
|
|
|
207,087
|
|
|
|
232,449
|
|
|
|
175,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses charged to the allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
10,589
|
|
|
|
7,217
|
|
|
|
6,439
|
|
|
|
3,733
|
|
|
Construction
|
|
|
28,128
|
|
|
|
2,632
|
|
|
|
22,770
|
|
|
|
2,632
|
|
|
Mortgage
|
|
|
64
|
|
|
|
1,768
|
|
|
|
—
|
|
|
|
618
|
|
|
Consumer
|
|
|
30,370
|
|
|
|
19,351
|
|
|
|
10,395
|
|
|
|
7,634
|
|
|
Consumer finance
|
|
|
42,764
|
|
|
|
32,080
|
|
|
|
13,306
|
|
|
|
15,890
|
|
|
Leasing
|
|
|
1,497
|
|
|
|
2,349
|
|
|
|
447
|
|
|
|
864
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
113,412
|
|
|
|
65,397
|
|
|
|
53,357
|
|
|
|
31,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
501
|
|
|
|
1,050
|
|
|
|
208
|
|
|
|
251
|
|
|
Consumer
|
|
|
887
|
|
|
|
612
|
|
|
|
308
|
|
|
|
183
|
|
|
Consumer finance
|
|
|
1,179
|
|
|
|
852
|
|
|
|
400
|
|
|
|
129
|
|
|
Leasing
|
|
|
333
|
|
|
|
340
|
|
|
|
82
|
|
|
|
86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,900
|
|
|
|
2,854
|
|
|
|
998
|
|
|
|
649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans charged-off
|
|
|
110,512
|
|
|
|
62,543
|
|
|
|
52,359
|
|
|
|
30,722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
180,090
|
|
|
$
|
144,544
|
|
|
$
|
180,090
|
|
|
$
|
144,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
6. Real Estate Held for Sale:
The Corporation owns certain real estate properties held for sale which are carried at the
lower of cost or fair value, less estimated selling cost.
7. 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, 2008
|
|
|
December 31, 2007
|
|
|
|
|
(Dollars in thousands)
|
|
|
Commercial Banking
|
|
$
|
10,537
|
|
|
$
|
10,537
|
|
|
Wealth Management
|
|
|
24,254
|
|
|
|
24,254
|
|
|
Consumer Finance
|
|
|
86,691
|
|
|
|
86,691
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
121,482
|
|
|
$
|
121,482
|
|
|
|
|
|
|
|
|
|
Goodwill assigned to the Commercial Banking segment is related to the acquisition of Banco
Central Hispano Puerto Rico in 1996, the goodwill assigned to the Wealth Management segment is
related to the acquisition of Merrill Lynch’s retail brokerage business in Puerto Rico by Santander
Securities Corporation in 2000 and goodwill assigned to the Consumer Finance segment is related to
the acquisition of Island Finance in 2006.
As a result of the unfavorable economic environment in Puerto Rico, Island Finance’s
short-term financial performance and profitability declined significantly during 2007, caused by
reduced lending activity and increases in non-performing assets and charge-offs. The Corporation,
with the assistance of an independent valuation firm, performed an interim impairment test of the
goodwill and other intangibles of Island Finance as of July 1,
2007. SFAS No. 142 provides a
two-step impairment test. The first step of the impairment test compares the fair value of a
reporting unit with its carrying amount, including goodwill. If the carrying amount of a reporting
unit exceeds its fair value, the second step of the goodwill impairment test is performed to
measure the amount of the impairment loss, if any. The Corporation completed the first step of the
impairment test and determined that the carrying amount of the goodwill and other intangible assets
of Island Finance exceeded their fair value, thereby requiring performance of the second step of
the impairment test to calculate the amount of the impairment. Based upon the completed impairment
test, the Corporation determined that the actual non-cash impairment charges as of July 1, 2007
were $43.3 million, which included $26.8 of goodwill and $16.5 million of other intangibles assets
(comprised of $9.2 million of customer relationships, $5.4 million of trade name and $1.9 million
of non-compete agreement). These impairment charges did not result in cash expenditures and will
not result in future cash expenditures.
Other Intangible Assets
Other intangible assets at September 30, 2008 and December 31, 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
|
December 31, 2007
|
|
|
|
|
(Dollars in thousands)
|
|
|
Commercial Banking — Mortgage-servicing rights
|
|
$
|
10,047
|
|
|
$
|
9,631
|
|
|
Wealth Management — Advisory-servicing rights
|
|
|
1,343
|
|
|
|
1,572
|
|
|
Consumer Finance:
|
|
|
|
|
|
|
|
|
|
Trade name
|
|
|
18,300
|
|
|
|
18,300
|
|
|
Non-compete agreements
|
|
|
250
|
|
|
|
700
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
29,940
|
|
|
$
|
30,203
|
|
|
|
|
|
|
|
|
|
Mortgage-servicing rights arise from the right to serve mortgages sold and have an estimated
useful life of eight years. The advisory-servicing rights are related to the Corporation’s
subsidiary acquisition of the right to serve as the investment advisor for the First Puerto Rico
Tax-Exempt Fund, Inc. acquired in 2002 and for First Puerto Rico Growth and Income Fund Inc. and
First Puerto Rico Daily Liquidity Fund Inc. acquired in December 2006. This intangible asset is
being amortized over a 10-year estimated useful life. Trade name is related to the acquisition of
Island Finance and has an indefinite useful life and is therefore not being amortized but is tested
for impairment at least annually. Non-compete agreements are intangible assets related to the
acquisition of Island Finance. Non-compete agreements are being amortized over 1 year.
20
The following table reflects the components of other intangible assets subject to amortization
at September 30, 2008 and December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
|
|
|
Gross
|
|
|
Accumulated
|
|
|
|
|
|
|
Carrying
|
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Impairment
|
|
|
Amount
|
|
|
|
|
(Dollars in thousands)
|
|
Commercial Banking — Mortgage-servicing rights
|
|
$
|
17,671
|
|
|
$
|
7,624
|
|
|
$
|
—
|
|
|
$
|
10,047
|
|
|
Wealth Management — Advisory-servicing rights
|
|
|
3,050
|
|
|
|
1,707
|
|
|
|
—
|
|
|
|
1,343
|
|
|
Consumer Finance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade name
|
|
|
23,700
|
|
|
|
—
|
|
|
|
5,400
|
|
|
|
18,300
|
|
|
Non-compete agreements
|
|
|
5,300
|
|
|
|
3,106
|
|
|
|
1,944
|
|
|
|
250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
49,721
|
|
|
$
|
12,437
|
|
|
$
|
7,344
|
|
|
$
|
29,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
Gross
|
|
|
Accumulated
|
|
|
|
|
|
|
Carrying
|
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Impairment
|
|
|
Amount
|
|
|
|
|
(Dollars in thousands)
|
|
Commercial Banking — Mortgage-servicing
rights
|
|
$
|
15,670
|
|
|
$
|
6,039
|
|
|
$
|
—
|
|
|
$
|
9,631
|
|
|
Wealth Management — Advisory-servicing rights
|
|
|
3,050
|
|
|
|
1,478
|
|
|
|
—
|
|
|
|
1,572
|
|
|
Consumer Finance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade name
|
|
|
23,700
|
|
|
|
—
|
|
|
|
5,400
|
|
|
|
18,300
|
|
|
Customer relationships
|
|
|
10,600
|
|
|
|
1,413
|
|
|
|
9,187
|
|
|
|
—
|
|
|
Non-compete agreements
|
|
|
5,300
|
|
|
|
2,656
|
|
|
|
1,944
|
|
|
|
700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
58,320
|
|
|
$
|
11,586
|
|
|
$
|
16,531
|
|
|
$
|
30,203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of the other intangibles assets for the nine month period ended September 30,
2008 and year ended December 31, 2007 was approximately $2.3 million and $3.8 million,
respectively.
8. Other Assets:
The Corporation’s other assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
|
December 31, 2007
|
|
|
|
|
(Dollars in thousands)
|
|
|
Deferred tax assets, net
|
|
$
|
45,487
|
|
|
$
|
37,199
|
|
|
Accounts
receivable, net of allowance for claim receivable of $25.1 million in
2008
|
|
|
43,318
|
|
|
|
38,617
|
|
|
Repossesed assets, net
|
|
|
18,908
|
|
|
|
16,448
|
|
|
Software, net
|
|
|
6,167
|
|
|
|
8,069
|
|
|
Prepaid expenses
|
|
|
18,562
|
|
|
|
13,987
|
|
|
Income tax
credits
|
|
|
16,880
|
|
|
|
237
|
|
|
Customers’ liabilities on acceptances
|
|
|
527
|
|
|
|
783
|
|
|
Derivative assets
|
|
|
67,825
|
|
|
|
79,969
|
|
|
Confirming advances
|
|
|
130,793
|
|
|
|
179,376
|
|
|
Other
|
|
|
7,867
|
|
|
|
8,518
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
356,334
|
|
|
$
|
383,203
|
|
|
|
|
|
|
|
|
|
Amortization of software assets for the nine month period ended September 30, 2008 and year
ended December 31, 2007 was approximately $3.7 million and $4.4 million, respectively.
21
9. Other Borrowings:
Following are summaries of borrowings as of and for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
|
|
|
Federal Funds
|
|
|
Securities Sold
|
|
|
Commercial
|
|
|
|
|
Purchased and
|
|
|
Under Agreements
|
|
|
Paper
|
|
|
|
|
Other Borrowings
|
|
|
to Repurchase
|
|
|
Issued
|
|
|
|
|
(Dollars in thousands)
|
|
|
Amount outstanding at period-end
|
|
$
|
1,000
|
|
|
$
|
375,000
|
|
|
$
|
49,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average indebtedness outstanding during the period
|
|
$
|
253,441
|
|
|
$
|
581,889
|
|
|
$
|
265,748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum amount outstanding during the period
|
|
$
|
751,000
|
|
|
$
|
625,006
|
|
|
$
|
625,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average interest rate for the period
|
|
|
4.14
|
%
|
|
|
4.97
|
%
|
|
|
3.66
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Average interest rate at period-end
|
|
|
2.03
|
%
|
|
|
4.35
|
%
|
|
|
2.76
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
Federal Funds
|
|
|
Securities Sold
|
|
|
Commercial
|
|
|
|
|
Purchased and
|
|
|
Under Agreements
|
|
|
Paper
|
|
|
|
|
Other Borrowings
|
|
|
to Repurchase
|
|
|
Issued
|
|
|
|
|
(Dollars in thousands)
|
|
|
Amount outstanding at year-end
|
|
$
|
707,110
|
|
|
$
|
635,597
|
|
|
$
|
284,482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average indebtedness outstanding during the year
|
|
$
|
723,364
|
|
|
$
|
756,117
|
|
|
$
|
379,351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum amount outstanding during the year
|
|
$
|
800,000
|
|
|
$
|
851,578
|
|
|
$
|
676,957
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average interest rate for the year
|
|
|
5.77
|
%
|
|
|
5.48
|
%
|
|
|
5.48
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Average interest rate at year-end
|
|
|
5.14
|
%
|
|
|
5.43
|
%
|
|
|
5.31
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds purchased and other borrowings, securities sold under agreements to repurchase and
commercial paper issued mature as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
|
December 31, 2007
|
|
|
|
|
(In thousands)
|
|
|
Federal funds purchased and other borrowings:
|
|
|
|
|
|
|
|
|
|
Within thirty days
|
|
$
|
—
|
|
|
$
|
7,110
|
|
|
Thirty to ninety days
|
|
|
—
|
|
|
|
700,000
|
|
|
Over ninety days
|
|
|
1,000
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,000
|
|
|
$
|
707,110
|
|
|
|
|
|
|
|
|
|
|
Securities sold under agreements to repurchase:
|
|
|
|
|
|
|
|
|
|
Within thirty days
|
|
$
|
—
|
|
|
$
|
10,591
|
|
|
Over ninety days
|
|
|
375,000
|
|
|
|
625,006
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
375,000
|
|
|
$
|
635,597
|
|
|
|
|
|
|
|
|
|
|
Commercial paper issued:
|
|
|
|
|
|
|
|
|
|
Within thirty days
|
|
$
|
—
|
|
|
$
|
284,482
|
|
|
Thirty to ninety days
|
|
|
49,858
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
49,858
|
|
|
$
|
284,482
|
|
|
|
|
|
|
|
|
|
22
As of September 30, 2008 the weighted average maturity of Federal funds purchased and other
borrowings over ninety days was 3.02 months.
As of September 30, 2008 and December 31, 2007, securities sold under agreements to repurchase
(classified by counterparty) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 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
|
|
|
$
|
398,945
|
|
|
|
14.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
Fair Value of
|
|
|
Average
|
|
|
|
|
Balance of
|
|
|
Underlying
|
|
|
Maturity
|
|
|
|
|
Borrowings
|
|
|
Securities
|
|
|
in Months
|
|
|
|
|
(Dollars in thousands)
|
|
|
JP Morgan Chase Bank, N.A.
|
|
$
|
375,000
|
|
|
$
|
396,540
|
|
|
|
23.05
|
|
|
Lehman Brothers, Inc.
|
|
|
255,590
|
|
|
|
279,786
|
|
|
|
49.09
|
|
|
First Puerto Rico Daily Liquidity Fund
|
|
|
5,007
|
|
|
|
7,000
|
|
|
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
635,597
|
|
|
$
|
683,326
|
|
|
|
33.34
|
|
|
|
|
|
|
|
|
|
|
|
|
The following investment securities were sold under agreements to repurchase:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 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
|
|
$
|
398,945
|
|
|
$
|
375,000
|
|
|
$
|
398,945
|
|
|
|
5.11
|
%
|
|
|
4.35
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
Carrying
|
|
|
|
|
|
|
Fair
|
|
|
Weighted-
|
|
|
Weighted-
|
|
|
|
|
Value of
|
|
|
|
|
|
|
Value of
|
|
|
Average
|
|
|
Average
|
|
|
|
|
Underlying
|
|
|
Balance of
|
|
|
Underlying
|
|
|
Interest Rate
|
|
|
Interest Rate
|
|
|
Underlying Securities
|
|
Securities
|
|
|
Borrowings
|
|
|
Securities
|
|
|
Securities
|
|
|
Borrowings
|
|
|
|
|
(Dollars in thousands)
|
|
|
Obligations of U.S. Government agencies and corporations
|
|
$
|
270,821
|
|
|
$
|
250,006
|
|
|
$
|
270,821
|
|
|
|
4.79
|
%
|
|
|
5.76
|
%
|
|
Mortgage-backed securities
|
|
|
412,505
|
|
|
|
385,591
|
|
|
|
412,505
|
|
|
|
5.22
|
%
|
|
|
5.22
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
683,326
|
|
|
$
|
635,597
|
|
|
$
|
683,326
|
|
|
|
5.05
|
%
|
|
|
5.43
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
10. Advances from Federal Home Loan Bank:
Advances from Federal Home Loan Bank consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
|
December 31, 2007
|
|
|
|
|
(Dollars in thousands)
|
|
|
Non-callable advances at 4.74% average fixed rate with maturities during 2008
|
|
$
|
—
|
|
|
$
|
420,000
|
|
|
Non-callable advances at 2.60% average fixed rate with maturities during 2009
|
|
|
260,000
|
|
|
|
—
|
|
|
Non-callable advances at 2.71% average fixed rate with maturities during 2010
|
|
|
300,000
|
|
|
|
—
|
|
|
Non-callable advances at 3.85% average fixed rate with maturities during 2011
|
|
|
325,000
|
|
|
|
—
|
|
|
Non-callable advances at 2.76% and 5.07% averages floating rates tied to 3-month LIBOR
at September 30, 2008 and December 31, 2007, respectively, with maturities during 2008
|
|
|
100,000
|
|
|
|
825,000
|
|
|
Non-callable advances at 2.73% average floating rate tied to 3-month LIBOR
with maturities during 2009
|
|
|
50,000
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,035,000
|
|
|
$
|
1,245,000
|
|
|
|
|
|
|
|
|
|
The Corporation had $2.2 billion and $2.1 billion in mortgage loans and investment securities
pledged as collateral for Federal Home Loan Bank advances as of September 30, 2008 and December 31,
2007, respectively.
24
11. Term Notes, Subordinated Capital Notes and Trust Preferred Securities:
Term Notes
Term notes payable outstanding consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
|
December 31, 2007
|
|
|
|
|
(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
|
|
|
(1,999
|
)
|
|
|
(2,444
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
19,816
|
|
|
$
|
19,371
|
|
|
|
|
|
|
|
|
|
Subordinated Capital Notes
Subordinated capital notes consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
|
December 31, 2007
|
|
|
|
|
(Dollars in thousands)
|
|
|
Subordinated notes with fixed interest of 6.30% maturing June 1, 2032, at fair value in 2008
|
|
$
|
68,968
|
|
|
$
|
73,260
|
|
|
Subordinated notes with fixed interest of 6.10% maturing June 1, 2032, at fair value in 2008
|
|
|
43,086
|
|
|
|
50,236
|
|
|
Subordinated notes with fixed interest of 6.75% maturing July 1, 2036
|
|
|
129,000
|
|
|
|
129,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
241,054
|
|
|
|
252,496
|
|
|
Unamortized discount
|
|
|
(898
|
)
|
|
|
(1,326
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
240,156
|
|
|
$
|
251,170
|
|
|
|
|
|
|
|
|
|
Trust Preferred Securities:
At December 31, 2006, the Corporation had established a trust for the purpose of issuing trust
preferred securities to the public in connection with the acquisition of Island Finance. In
connection with this financing arrangement, the Corporation completed the private placement of $125
million Preferred Securities and issued Junior Subordinated Debentures in the aggregate principal
amount of $129 million in connection with the issuance of the Preferred Securities. The Preferred
Securities are classified as subordinated notes (included on the table for subordinated capital
notes above) and the dividends are classified as interest expense in the accompanying consolidated
statements of operations.
25
12. Income Tax:
The Corporation adopted the provisions of FIN No. 48 on January 1, 2007. As a result of the
implementation of FIN 48, the Corporation recognized a decrease of $0.5 million in the January 1,
2007 balance of retained earnings and an increase in the liability for unrecognized tax benefits. A
reconciliation of beginning and ending amount of the accrual for uncertain income tax positions is
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended
|
|
|
|
|
September 30, 2008
|
|
|
December 31, 2007
|
|
|
|
|
(in thousands)
|
|
|
Balance at
beginning of the period
|
|
$
|
16,507
|
|
|
$
|
12,676
|
|
|
Additions for tax positions of prior years
|
|
|
544
|
|
|
|
2,614
|
|
|
Additions for tax positions of current year
|
|
|
2,614
|
|
|
|
2,422
|
|
|
Release of contingencies
|
|
|
(958
|
)
|
|
|
(1,571
|
)
|
|
|
|
|
|
|
|
|
|
Balance at end of the period
|
|
$
|
18,707
|
|
|
$
|
16,507
|
|
|
|
|
|
|
|
|
|
The Corporation’s policy is to report interest and penalties related to unrecognized tax
benefits in income tax expense. For the nine months ended September 30, 2008 and the year ended
December 31, 2007, the Corporation recognized $0.9 million and $1.4 million of interest and
penalties, respectively, for uncertain tax positions. As of September 30, 2008 and December 31,
2007, the related accrued interest amounted to approximated $3.2 million and $2.6 million, respectively. As of
September 30, 2008 and December 31, 2007, the Corporation had $9.8 million and $10.4 million,
respectively, of unrecognized tax benefits which, if recognized, would decrease the effective
income tax rate in future periods.
The amount of unrecognized tax benefits may increase or decrease in the future for various
reasons including adding amounts for current tax year positions, expiration of open income tax
returns due to the statutes of limitation, changes in management’s judgment about the level of
uncertainty, status of examinations, litigation and legislative activity, and the addition or
elimination of uncertain tax positions. As of September 30, 2008, the years 2004 through 2007
remain subject to examination by the Puerto Rico tax authorities. The Corporation does not
anticipate a significant change to the total amount of unrecognized tax benefits within the next
12 months.
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.
26
13. Derivative Financial Instruments:
As of September 30, 2008, the Corporation had the following derivative financial instruments
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) for
|
|
|
Comprehensive
|
|
|
|
|
|
|
|
|
|
|
|
|
the nine months
|
|
|
Gain* for the
|
|
|
|
|
Notional
|
|
|
|
|
|
|
ended
|
|
|
nine months ended
|
|
|
|
|
Value
|
|
|
Fair Value
|
|
|
Sept. 30, 2008
|
|
|
Sept. 30, 2008
|
|
|
|
|
(Dollars in thousands)
|
|
|
CASH FLOW HEDGES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,049
|
|
|
ECONOMIC UNDESIGNATED HEDGES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
|
148,486
|
|
|
|
(1,820
|
)
|
|
|
3,850
|
|
|
|
—
|
|
|
OTHER DERIVATIVES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
118,194
|
|
|
|
6,727
|
|
|
|
(16,042
|
)
|
|
|
—
|
|
|
Embedded options on stock-indexed deposits
|
|
|
118,194
|
|
|
|
(6,727
|
)
|
|
|
16,020
|
|
|
|
—
|
|
|
Interest rate caps
|
|
|
629
|
|
|
|
(1
|
)
|
|
|
(7
|
)
|
|
|
—
|
|
|
Customer interest rate caps
|
|
|
629
|
|
|
|
1
|
|
|
|
7
|
|
|
|
—
|
|
|
Customer interest rate swaps
|
|
|
1,750,820
|
|
|
|
57,890
|
|
|
|
12,221
|
|
|
|
—
|
|
|
Interest rate swaps-offsetting position of customer swaps
|
|
|
1,750,820
|
|
|
|
(57,480
|
)
|
|
|
(12,849
|
)
|
|
|
—
|
|
|
Interest rate swaps
|
|
|
90,000
|
|
|
|
454
|
|
|
|
987
|
|
|
|
—
|
|
|
Loan commitments
|
|
|
1,018
|
|
|
|
(7
|
)
|
|
|
(52
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,135
|
|
|
$
|
1,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007, the Corporation had the following derivative financial instruments
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) for
|
|
|
Comprehensive
|
|
|
|
|
|
|
|
|
|
|
|
|
the year
|
|
|
Loss* for the
|
|
|
|
|
Notional
|
|
|
|
|
|
|
ended
|
|
|
year ended
|
|
|
|
|
Value
|
|
|
Fair Value
|
|
|
Dec. 31, 2007
|
|
|
Dec. 31, 2007
|
|
|
|
|
(Dollars in thousands)
|
|
|
CASH FLOW HEDGES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
650,000
|
|
|
$
|
(2,027
|
)
|
|
$
|
—
|
|
|
$
|
(1,023
|
)
|
|
FAIR VALUE HEDGES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
|
937,863
|
|
|
|
(4,425
|
)
|
|
|
(465
|
)
|
|
|
—
|
|
|
OTHER DERIVATIVES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
133,562
|
|
|
|
22,590
|
|
|
|
134
|
|
|
|
—
|
|
|
Embedded options on stock-indexed deposits
|
|
|
133,562
|
|
|
|
(22,590
|
)
|
|
|
(134
|
)
|
|
|
—
|
|
|
Interest rate caps
|
|
|
7,381
|
|
|
|
7
|
|
|
|
(58
|
)
|
|
|
—
|
|
|
Customer interest rate caps
|
|
|
7,381
|
|
|
|
(7
|
)
|
|
|
58
|
|
|
|
—
|
|
|
Customer interest rate swaps
|
|
|
1,496,798
|
|
|
|
44,380
|
|
|
|
44,432
|
|
|
|
—
|
|
|
Interest rate swaps-offsetting position of customer swaps
|
|
|
1,498,381
|
|
|
|
(43,589
|
)
|
|
|
(44,068
|
)
|
|
|
—
|
|
|
Interest rate swaps
|
|
|
242,000
|
|
|
|
(534
|
)
|
|
|
315
|
|
|
|
—
|
|
|
Loan commitments
|
|
|
1,451
|
|
|
|
45
|
|
|
|
35
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
249
|
|
|
$
|
(1,023
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Corporation’s principal objective in holding interest rate swap agreements is the
management of interest rate risk and changes in the fair value of assets and liabilities. The
Corporation’s policy is that each swap contract be specifically tied to assets or liabilities with
the objective of transforming the interest rate characteristic of the hedged instrument. During
2006, the Corporation swapped $825 million of FHLB Adjustable Rate Credit Advances with maturities
between July 2007 and November 2008. The purpose of this swap is to fix the interest paid on the
underlying borrowings. These swaps were designated as cash
27
flow
hedges. The Corporation had a $100 million floating-for-fixed
interest rate swap with Lehman Brothers Special Financing
(“LBSF”).
The derivative liability of this swap was $371,736 as of September 19,
2008. As a result of the bankruptcy filing of Lehman Brothers
Holding, Inc. (“LBHI”) and, the default on its contractual payments as of
September 19, 2008, the Corporation terminated the swap and the cash flow hedge designation on
these swaps. The net loss of $371,000 remains in accumulated other comprehensive income and will be
reclassified into earnings when the cash flows that were hedged
occur. As of December 31, 2007, the Corporation had outstanding $650 million of interest rate
swaps designed as cash flow hedges. As of September 30, 2008 and December 31, 2007 the total amount, net of tax, included
in accumulated other comprehensive income was an unrealized loss of
$187,000 and $1.2 million, respectively, of which the Corporation expects to reclassify $0.2
million into earnings during the next quarter of 2008.
Prior to the adoption of SFAS 159, changes in the value of the derivatives instruments
qualifying as fair value hedge that have been highly effective were recognized in the current
period results of operations along with the change in the value of the designated hedge 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 yield
adjustment. After adoption of SFAS 159 for certain callable brokered certificates of deposits 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 deposits and subordinated
capital notes by using interest rate swaps. Prior to the adoption of SFAS 159 as of January 1,
2008, these swaps were designated for hedge accounting treatment under SFAS 133. For designated
fair value hedges, the changes in the fair value of both the hedging instrument and the underlying
hedged instrument were included in other income and the interest flows were included in the net
interest income in the condensed consolidated statements of income. In connection with the adoption
of SFAS 159, the Corporation has the option to elect fair value for these callable brokered
certificates of deposits and subordinated capital notes and is no longer required to maintain hedge
documentation to achieve a similar financial statements outcome.
As of September 30, 2008, the Corporation had outstanding interest rate swap agreements with a
notional amount of approximately $148.5 million, maturing through the year 2032. The weighted
average rate paid and received on these contracts is 3.23% and 6.03%, respectively. As of
September 30, 2008, the Corporation had retail fixed rate certificates of deposit amounting to
approximately $23.4 million, with a fair value of $23.1 million, and a subordinated note amounting
to approximately $125 million, with a fair value of $112.1 million, swapped to create a floating
rate source of funds. The Corporation had $23.8 million fixed-for-floating interest rate swaps with
LBSF. The derivative liability of this swap was $681,535 as of
September 19, 2008. As a result of the bankruptcy filing of LBHI
and the default on its contractual
payments as of September 19, 2008, the Corporation terminated these swaps. For the nine months
ended September 30, 2008, the Corporation recognized a gain of approximately $5.3 million on these
economic hedges, which is included in other income in the condensed consolidated statements of
income and was the result of incorporating the credit risk component in the fair value of the
subordinated note. For the nine months ended September 30, 2007, the Corporation recognized a loss
of approximately $589,000 on these swaps that were classified as fair value hedges prior to the
adoption of SFAS 159 on January 1, 2008.
As of December 31, 2007, the Corporation also had outstanding interest rate swap agreements
with a notional amount of approximately $937.9 million, maturing through the year 2032. The
weighted average rate paid and received on these contracts is 5.10% and 5.39%, respectively. As of
December 31, 2007, the Corporation had retail fixed rate certificates of deposit amounting to
approximately $786 million and a subordinated note amounting to approximately $125 million swapped
to create a floating rate source of funds.
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 condensed 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 income. For the nine months ended September 30, 2008, a
gain of approximately $16.0 million was recorded on embedded options on stock-indexed deposits and
notes and a loss of approximately $16.0 million was recorded on the option contracts. For the nine
months ended September 30, 2007, a loss of approximately $1.1 million was recorded on embedded
options on stock-index deposits and notes and a gain of approximately $1.1 million was recorded on
the option contracts.
The Corporation enters into certain derivative transactions to provide derivative products to
customers, which includes interest rate caps, collars and swaps, and simultaneously covers the
Corporation’s position with related and unrelated third
28
parties under substantially the same terms and conditions. These derivatives are not linked to
specific assets and liabilities on the condensed consolidated balance sheets or to forecasted
transactions in an accounting hedge relationship and, therefore, do not qualify for hedge
accounting. The Corporation had $13.8 million of interest rate
swaps with LBSF. The derivative liability
of this swap was $166,333 as of September 19, 2008. As a
result of the bankruptcy filing of LBHI and the default on its contractual payments as of September 19,
2008, the Corporation terminated these swaps. These derivatives are carried at fair value with
changes in fair value recorded as part of other income. For the nine months ended September 30,
2008 and 2007, the Corporation recognized a loss on these transactions of $628,000 and a gain of
$130,000 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 condensed 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, 2008 and 2007, the Corporation recognized a gain of $987,000 and
$315,000, respectively, on these transactions.
The Corporation enters into loan commitments with customers to extend mortgage loans at a
specified rate. These loan commitments are written options and are measured at fair value pursuant
to SFAS 157 and SFAS 133. As of September 30, 2008, the Corporation had loan commitments
outstanding for approximately $1.0 million and recognized a loss of $52,000 on these commitments.
As of September 30, 2007, a gain of $113,000 was recognized on these commitments.
14. 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 there from
will not have a material adverse effect on the condensed consolidated statements of income or
condensed consolidated financial position of the Corporation.
15. 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 benefit for the Plan for the nine and three month periods ended
September 30, 2008 and 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended
|
|
|
For the three months ended
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(Dollars in thousands)
|
|
|
(Dollars in thousands)
|
|
|
Interest cost on projected benefit obligation
|
|
$
|
1,761
|
|
|
$
|
1,710
|
|
|
$
|
587
|
|
|
$
|
570
|
|
|
Expected return on assets
|
|
|
(2,019
|
)
|
|
|
(2,040
|
)
|
|
|
(673
|
)
|
|
|
(680
|
)
|
|
Net amortization
|
|
|
162
|
|
|
|
312
|
|
|
|
54
|
|
|
|
104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension benefit
|
|
$
|
(96
|
)
|
|
$
|
(18
|
)
|
|
$
|
(32
|
)
|
|
$
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The expected contribution to the Plan for 2008 is $1,581,000.
29
The components of net periodic pension cost for the Central Hispano Plan for nine and three
month periods ended September 30, 2008 and 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended
|
|
|
For the three months ended
|
|
|
|
|
September 30
|
|
|
September 30
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(Dollars in thousands)
|
|
|
(Dollars in thousands)
|
|
|
Interest cost on projected benefit obligation
|
|
$
|
1,383
|
|
|
$
|
1,380
|
|
|
$
|
461
|
|
|
$
|
460
|
|
|
Expected return on assets
|
|
|
(1,554
|
)
|
|
|
(1,629
|
)
|
|
|
(518
|
)
|
|
|
(543
|
)
|
|
Net amortization
|
|
|
375
|
|
|
|
387
|
|
|
|
125
|
|
|
|
129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost
|
|
$
|
204
|
|
|
$
|
138
|
|
|
$
|
68
|
|
|
$
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The expected contribution to the Central Hispano Plan for 2008 is $1,816,000.
Savings Plan
The Corporation also provides three contributory savings plans pursuant to Section 1165(e) of
the Puerto Rico Internal Revenue Code for substantially all the employees of the Corporation.
Investments in the plans are participant-directed, and employer matching contributions are
determined based on the specific provisions of each plan. Employees are fully vested in the
employer’s contribution after three and five years of service, respectively. The Corporation’s
plans contribution for the nine months ended September 30, 2008 and 2007 were approximately
$425,000 and $358,000, respectively.
16. Long Term Incentive Plans:
Santander Spain 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 Spain 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 months ended
September 30, 2008 and $5.8 million of compensation expense for the same period in 2007.
As options were exercised as of September 30, 2008, $6.7 million has been reclassified as
a capital contribution.
|
|
|
|
|
•
|
|
The grant of 100 shares of Santander Spain stock to all employees of Santander Group’s
operating entities as part of the celebration of Santander Group 150th Anniversary during
2007. The Corporation recognized compensation expense under this plan amounting to $4.3
million in 2007. The shares granted were purchased by an affiliate and recorded as a
capital contribution.
|
|
|
|
|
•
|
|
A long term incentive plan for certain eligible officers and key employees which
contains service, performance and market conditions. This plan comprehends two cycles,
one expiring in 2009 and another expiring in 2010. This plan provides for settlement in
stock of Santander Spain to the participants and is classified as an equity plan.
Accordingly, the Corporation recognizes monthly compensation expense over the two and
three year cycles and credits additional paid in capital. The Corporation recognized
compensation expense under this plan amounting to $1.9 million for the nine months ended
September 30, 2008.
|
17. 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 FIN 45,
“Guarantor’s Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others – An
Interpretation of FASB
30
Statement No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34”,
the Corporation recorded a liability of $1,000,000 at September 30, 2008, which represents the fair
value of the obligations undertaken in issuing the guarantees under the standby letters of credit
issued or modified after December 31, 2002, net of the related amortization. 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, 2008 had terms ranging from one month to six
years. The aggregate contract amount of the standby letters of credit of approximately $95,449,000
at September 30, 2008, 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.
18. Segment Information:
Types of Products and Services
The Corporation has five reportable segments: Commercial Banking, Mortgage Banking, Consumer
Finance, Treasury and Investments and Wealth Management. Insurance operations and International
Banking are other lines of business in which the Corporation commenced its involvement during 2000
and 2001, respectively, and are included in the “Other” column below since they did not meet the
quantitative thresholds for disclosure of segment information.
Measurement of Segment Profit or Loss and Segment Assets
The Corporation’s reportable business segments are strategic business units that offer
distinctive products and services that are marketed through different channels. These are managed
separately because of their unique technology, marketing and distribution requirements.
The following present financial information of reportable segments as of and for the nine
months ended September 30, 2008 and 2007. General corporate expenses and income taxes have not been
added or deducted in the determination of operating segment profits. The “Other” column includes
insurance and international banking operations and the items necessary to reconcile the identified
segments to the reported consolidated amounts. Included in the “Other” column are expenses of the
internal audit, investors’ relations, strategic planning, administrative services, mail, marketing,
public relations, electronic data processing departments and comptroller’s departments. The
“Eliminations” column includes all intercompany eliminations for consolidation purposes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
|
|
|
Commercial
|
|
|
Mortgage
|
|
|
Consumer
|
|
|
Treasury and
|
|
|
Wealth
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
|
|
Banking
|
|
|
Banking
|
|
|
Finance
|
|
|
Investments
|
|
|
Management
|
|
|
Other
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
|
(Dollars in thousands)
|
|
|
Total external revenue
|
|
$
|
251,528
|
|
|
|
140,270 $
|
|
|
|
108,314
|
|
|
$
|
56,510
|
|
|
$
|
45,531
|
|
|
$
|
36,248
|
|
|
$
|
(36,475
|
)
|
|
$
|
601,926
|
|
|
Intersegment revenue
|
|
|
6,960
|
|
|
|
8,443
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,706
|
|
|
|
19,366
|
|
|
|
(36,475
|
)
|
|
|
—
|
|
|
Interest income
|
|
|
223,732
|
|
|
|
125,701
|
|
|
|
105,947
|
|
|
|
54,173
|
|
|
|
2,021
|
|
|
|
18,547
|
|
|
|
(24,653
|
)
|
|
|
505,468
|
|
|
Interest expense
|
|
|
71,673
|
|
|
|
76,105
|
|
|
|
28,112
|
|
|
|
90,161
|
|
|
|
2,811
|
|
|
|
22,810
|
|
|
|
(19,841
|
)
|
|
|
271,831
|
|
|
Depreciation and
amortization
|
|
|
3,084
|
|
|
|
1,638
|
|
|
|
3,415
|
|
|
|
570
|
|
|
|
905
|
|
|
|
3,191
|
|
|
|
—
|
|
|
|
12,803
|
|
|
Segment income (loss)
before income tax
|
|
|
62,193
|
|
|
|
38,344
|
|
|
|
(49,895
|
)
|
|
|
(38,075
|
)
|
|
|
11,196
|
|
|
|
(48,247
|
)
|
|
|
(5,639
|
)
|
|
|
(30,123
|
)
|
|
Segment assets
|
|
|
3,862,242
|
|
|
|
2.791,709
|
|
|
|
668,981
|
|
|
|
1,666,353
|
|
|
|
122,773
|
|
|
|
610,628
|
|
|
|
(477,372
|
)
|
|
|
9,245,314
|
|
31
Reconciliation of Segment Information to Consolidated Amounts
Information for the Corporation’s reportable segments in relation to the consolidated totals
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
|
September 30, 2007
|
|
|
|
|
(Dollars in thousands)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Total revenues for reportable segments
|
|
$
|
572,813
|
|
|
$
|
602,153
|
|
|
Other revenues
|
|
|
37,162
|
|
|
|
36,248
|
|
|
Elimination of intersegment revenues
|
|
|
(29,733
|
)
|
|
|
(36,475
|
)
|
|
|
|
|
|
|
|
|
|
Total consolidated revenues
|
|
$
|
580,242
|
|
|
$
|
601,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income
before tax of reportable segments
|
|
$
|
66,050
|
|
|
$
|
23,763
|
|
|
Loss before tax of other segments
|
|
|
(45,566
|
)
|
|
|
(48,247
|
)
|
|
Elimination of intersegment profits
|
|
|
(5,757
|
)
|
|
|
(5,639
|
)
|
|
|
|
|
|
|
|
|
|
Consolidated income before tax
|
|
$
|
14,727
|
|
|
$
|
(30,123
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Total assets for reportable segments
|
|
$
|
8,557,203
|
|
|
$
|
9,111,958
|
|
|
Assets not attributed to segments
|
|
|
633,939
|
|
|
|
610,728
|
|
|
Elimination of intersegment assets
|
|
|
(1,055,963
|
)
|
|
|
(477,372
|
)
|
|
|
|
|
|
|
|
|
|
Total consolidated assets
|
|
$
|
8,135,179
|
|
|
$
|
9,245,314
|
|
|
|
|
|
|
|
|
|
19. Fair Value Disclosures:
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 SFAS
157, which provides a framework for measuring fair value under GAAP.
The Corporation also adopted SFAS 159 on January 1, 2008. SFAS 159 allows an entity the
irrevocable option to elect fair value for the initial and subsequent measurement for certain
financial assets and liabilities on a contract-by-contract basis. The Corporation elected to adopt
the fair value option for certain callable brokered certificates of deposits and subordinated notes
on the adoption date. SFAS 159 requires that the difference between the carrying value before
election of the fair value option and the fair value of these instruments be recorded as an
adjustment to beginning retained earnings in the period of adoption.
The following table summarizes the impact of adopting the fair value option for certain
financial instruments on January 1, 2008. Amounts shown represent the carrying value of the
affected instruments before and after the changes in accounting resulting from the adoption SFAS
159.
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance as of
|
|
|
|
|
|
|
Opening Balance as of
|
|
|
|
|
December 31, 2007
|
|
|
Adoption Net
|
|
|
January 01, 2008
|
|
|
(Dollars in thousands)
|
|
(Prior to Adoption)*
|
|
|
Gain (Loss)
|
|
|
(After Adoption)
|
|
|
Impact of Electing the Fair Value Option under SFAS 159:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Callable Brokered Certificates of Deposits
|
|
$
|
(763,476
|
)
|
|
$
|
64
|
|
|
$
|
(763,412
|
)
|
|
Subordinated Capital Notes
|
|
|
(123,686
|
)
|
|
|
5,134
|
|
|
|
(118,552
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative-effect Adjustments (pre-tax)
|
|
$
|
(887,162
|
)
|
|
|
5,198
|
|
|
$
|
(881,964
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax Impact
|
|
|
|
|
|
|
(1,979
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative-effect Adjustment Increase to Retained
Earmings, net of tax
|
|
|
|
|
|
$
|
3,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Net of debt issue cost, placement fees and basis
adjustments as of December 31, 2007
|
Fair Value Measurement
The Corporation uses fair value measurements to record fair value adjustments to certain
financial instruments. Trading securities, securities available for sale, derivatives and certain
brokered deposits and subordinate notes are financial instruments recorded at fair value on a
recurring basis. The Corporation may be required to record at fair value other financial assets on
a nonrecurring basis such as loans held for sale. These nonrecurring fair value adjustments involve
the application of lower of cost or market accounting.
SFAS 157 defines fair value as the price that would be received for an asset or paid to
transfer a liability (an exit price) in the principal or most advantageous market for the asset or
liability in an orderly transaction between market participants on the measurement date. SFAS 157
also establishes a fair value hierarchy which requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair value. The standard
describes three levels of inputs that may be used to measure fair value:
|
|
|
|
|
|
|
|
|
Level 1:
|
|
Quoted prices in active markets for identical assets or liabilities. Level 1 assets
and liabilities include debt and equity securities and derivative contracts that are traded in an
active exchange market, as well as certain U.S. treasury, other U.S. Government and agency
mortgage-backed debt securities that are highly liquid and are actively traded in over-the-counter
markets.
|
|
|
|
|
|
|
|
|
|
Level 2:
|
|
Observable inputs other than Level 1 prices, such as quoted prices for similar assets
or liabilities; quoted prices in markets that are not active; or other inputs that are observable
or can be corroborated by observable market data for substantially the full term of the assets or
liabilities. Level 2 assets and liabilities include securities with quoted prices that are traded
less frequently than exchange-traded instruments, securities and derivative contracts and financial
liabilities whose value is determined using a pricing model with inputs that
are observable in the market or can be derived principally from or corroborated by observable
market data. This category generally includes certain mortgage-backed debt securities, corporate
debt securities, derivative contracts, callable brokered certificates of deposits and subordinated
notes.
|
|
|
|
|
|
|
|
|
|
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 such as 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 derivatives contract.
|
The following table presents for each of these hierarchy levels, the Corporation’s assets and
liabilities that are measured at fair value on a recurring basis at September 30, 2008, including
financial instruments for which the Corporation has elected the fair value option:
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading Securities
|
|
$
|
13,723
|
|
|
$
|
9,141
|
|
|
$
|
47,344
|
|
|
$
|
70,208
|
|
|
Investment Securities AFS
|
|
|
237,003
|
|
|
|
528,935
|
|
|
|
—
|
|
|
|
765,938
|
|
|
Derivative Assets
|
|
|
463
|
|
|
|
66,011
|
|
|
|
1,351
|
|
|
|
67,825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets, at Fair Value
|
|
$
|
251,189
|
|
|
$
|
604,087
|
|
|
$
|
48,695
|
|
|
$
|
903,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits (1)
|
|
$
|
—
|
|
|
$
|
209,749
|
|
|
$
|
—
|
|
|
$
|
209,749
|
|
|
Subordinated Capital Notes (2)
|
|
|
—
|
|
|
|
112,054
|
|
|
|
—
|
|
|
|
112,054
|
|
|
Derivative Liabilities
|
|
|
—
|
|
|
|
66,967
|
|
|
|
1,358
|
|
|
|
68,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities, at Fair Value
|
|
$
|
-
|
|
|
$
|
388,770
|
|
|
$
|
1,358
|
|
|
$
|
390,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Amounts represent certain callable brokered certificates of deposits for which the Corporation has elected the fair value option
|
|
|
|
|
|
under SFAS 159.
|
|
|
|
(2)
|
|
Amounts represent certain subordinated capital notes for which the Corporation has elected the fair value option under SFAS 159.
|
Level 3 assets and liabilities were 4.30% and 0.35% of Total Assets at fair value and Total
Liabilities at fair value, respectively, at September 30, 2008.
The following table presents the reconciliation for all assets and liabilities measured at
fair value on a recurring basis using significant unobservable inputs (Level 3) for the period from
January 1, 2008 to September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized/unrealized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
gains included in
|
|
|
Transfers
|
|
|
Purchases,
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
in and/or
|
|
|
issuances
|
|
|
|
|
|
|
gains (loss)
|
|
|
|
|
January 1,
|
|
|
|
|
|
Comprehensive
|
|
|
out of
|
|
|
and
|
|
|
Sept. 30,
|
|
|
still
|
|
|
(Dollars in thousands)
|
|
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, 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 period from January 1, 2008 to September 30, 2008. These amounts include gains and losses
generated by derivative contracts and trading securities, which are continued to carry at fair
value after the adoption of SFAS 159.
34
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gains and Losses
|
|
|
|
|
Trading
|
|
|
Net
|
|
|
|
|
Securities
|
|
|
Derivatives
|
|
|
(Dollars in thousands)
|
|
(1)
|
|
|
(1)
|
|
|
Classification of gains and losses
(realized/unrealized)
included in earnings for the period :
|
|
|
|
|
|
|
|
|
|
Other income
|
|
$
|
1,960
|
|
|
$
|
(52
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Amounts represented items which were carried at fair value prior to the adoption of SFAS 159.
|
The table below summarizes changes in unrealized gains or losses recorded in earnings for the
period from January 1, 2008 to September 30, 2008 for Level 3 assets and liabilities that are still
held at September 30, 2008. These amounts include changes in fair value for derivative contracts
and trading securities which are continued to carry at fair value after the adoption of SFAS 159.
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in Unrealized Gains (Loss)
|
|
|
|
|
Trading
|
|
|
Net
|
|
|
|
|
Securities
|
|
|
Derivatives
|
|
|
(Dollars in thousands)
|
|
(1)
|
|
|
(1)
|
|
|
Classification of unrealized gains (losses)
included in earnings for the period :
|
|
|
|
|
|
|
|
|
|
Other income
|
|
$
|
155
|
|
|
$
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Amounts represented items which were carried at fair value prior to the adoption of SFAS 159.
|
Determination of Fair Value
The following is a description of the valuation methodologies used for instruments for which
fair value is presented as well as for instruments that the Corporation has elected the fair value
option. 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. 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 1 trading securities include those identical
securities traded in active markets. . 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 if redeemed must be at net asset value.
Level 3 trading securities primarily include Puerto Rico corporate debt securities and fixed
income closed end funds. At September 30, 2008 the majority of these instruments were valued based
on dealer indicative quotes.
Available for Sale Investment Securities
Investment securities available for sale are recorded at fair value on a recurring basis. Fair
value measurement is based upon quoted prices, if available. If quoted prices are not available,
fair values are measured using independent pricing models or other model-based valuation techniques
such as discounted cash flow methodologies, adjusted for the security’s credit rating, prepayment
assumptions and other factors such as credit loss assumptions. Level 1 Investment securities
available for sale
35
include those identical securities traded in active markets, such as U.S.
treasury and agency securities. Level 2 securities primarily include Puerto Rico Government and
mortgage-backed securities.
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 (IRLCs), 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 such values cannot be observed or
corroborated with market data. Accordingly, these derivatives are classified as Level 3 inputs.
Valuations of derivative assets and liabilities reflect the value of the instruments including
the values associated with counterparty risk. With the issuance of SFAS 157, these values must also
take into account the Corporation’s own credit standing, thus including in the valuation of the
derivative instrument the value of the net credit differential between the counterparties to the
derivative contract. Effective January 1, 2008, the Corporation updated its methodology to include
the impact of both counterparty and its own credit standing.
Loans Held for Sale
Fair values for loans held for sale are based on observable inputs, such as observable market
prices, credit spreads and interest rate yield curves when available. In instances when significant
valuation assumptions are not readily observable in the market, instruments are valued based on the
best available data in order to approximate fair value. This data may be internally developed and
independent pricing models may be used and considers types of loans, conformity of loans,
delinquency statistics and risk premiums that a market participant would require. Since these
values cannot be observed or corroborated with market data, they are classified as Level 3.
Loans
Any allowance for collateral dependent loans deemed impaired is measured based on the fair
value of the underlying collateral and its estimated dispositions costs. The fair value of
collateral is determined by external valuation specialist, and accordingly classified as Level 3
inputs.
Deposits and Subordinated Capital Notes
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 a Level 2 inputs.
Effective January 1, 2008, the Corporation updated its methodology to include the impact of its own
credit standing. As such, the effect of credit component on the fair value of subordinated capital
notes was determined based on the CORP Curve 70 (the US Banks A-rated curve) from Bloomberg.
36
Non-Recurring Measurements
The following table presents the change in carrying value of those financial assets measured
at fair value on a non-recurring basis, for which impairment was recognized in the current period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Value as of September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
Using
|
|
|
|
|
|
|
|
Carrying
|
|
|
Quoted Prices in
|
|
|
Significant
|
|
|
Significant
|
|
|
Valuation
|
|
|
|
|
Value
|
|
|
Active Markets for
|
|
|
Other
|
|
|
Unobservable
|
|
|
Allowance
|
|
|
|
|
as of
|
|
|
Identical Assets
|
|
|
Observable Inputs
|
|
|
Inputs
|
|
|
as of
|
|
|
(Dollars in thousands)
|
|
Sept. 30, 2008
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Sept. 30, 2008
|
|
|
Loans Held for Sale (1)
|
|
$
|
79,666
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
79,666
|
|
|
$
|
2,334
|
|
|
Loans, net(2)
|
|
|
87,567
|
|
|
|
—
|
|
|
|
—
|
|
|
|
87,567
|
|
|
|
9,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
167,233
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
167,233
|
|
|
$
|
11,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
These balances were not impacted by the election of the fair value option and are measured at fair value on a non-recurring basis in accordance with
applicable accounting policies.
|
|
|
|
(2)
|
|
Amount represented loans measured for impairment based on the fair value of the collateral using the practical expedient in SFAS 114,
“
Accounting by Creditors for Impairment of a Loan”.
|
Fair Value Option
Callable Brokered Certificates of Deposits and Subordinated Capital Notes
The Corporation elected to account at fair value certain of its callable brokered certificates
of deposits and subordinated capital notes that were hedged with interest rate swaps designated for
fair value hedge accounting in accordance with SFAS 133. As of September 30, 2008, these callable
brokered certificates of deposits had a fair value of $209.7 million and principal balance of
$212.2 million recorded in interest-bearing deposits; and subordinated capital notes had a fair
value of $112.1 million and principal balance of $125.0 million. Interest expense on these items
is recorded in Net Interest Income whereas net gains (losses) resulting from the changes in fair
value of these items, were recorded within Other Income on the Corporation’s condensed consolidated
statement of income. Electing the fair value option allows the Corporation to be relieved of the
burden of complying with the requirements for hedge accounting under SFAS 133 (e.g., documentation
and effectiveness assessment) without incremental earnings volatility. Subsequent to the adoption
of SFAS 159, 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 SFAS 159 continues to be economically hedged with callable interest rate swaps
with the same terms and conditions.
As a result of the adoption of SFAS 159, the Corporation elected to also apply the fair value
option to new positions within the brokered certificates of deposits and subordinated capital
notes, where the Corporation would otherwise have hedged with interest rate swaps designated as a
fair value hedge in accordance with SFAS 133.
The following table represents changes in fair value for the nine months ended September 30,
2008 which includes the interest expense on callable brokered certificates of deposits of $16.3
million and interest expense on subordinated capital notes of $5.8 million. Interest expense on
callable brokered certificates of deposits and subordinated capitals notes that the Corporation has
elected to carry at fair value under the provisions of SFAS 159 are recorded in interest expense in
the Condensed consolidated Statements of Income based on their contractual coupons.
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in
|
|
|
Changes in
|
|
|
Total Changes in
|
|
|
|
|
Fair Value
|
|
|
Fair Value
|
|
|
Fair Value
|
|
|
|
|
included in
|
|
|
included in
|
|
|
included in
|
|
|
(Dollars in thousands)
|
|
Interest Expense
|
|
|
Other Income
|
|
|
Current Period Earnings
|
|
|
Callable Brokered Certificates of Deposits
|
|
$
|
(16,336
|
)
|
|
$
|
(1,066
|
)
|
|
$
|
(17,402
|
)
|
|
Subordinated Capital Notes
|
|
|
(5,831
|
)
|
|
|
6,497
|
|
|
|
666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(22,167
|
)
|
|
$
|
5,431
|
|
|
$
|
(16,736
|
)
|
|
|
|
|
|
|
|
|
|
|
|
The impacts of changes in the Corporation’ credit risk on subordinated capital notes for the
nine months ended September 30, 2008 presented in the table below have been calculated as the
difference between the fair value of those instruments as of the reporting date and the theoretical
fair values of those instruments calculated by using the yield curve prevailing at the end of the
reporting period, adjusted up or down for changes in the Corporation’s credit spreads from the
transition date to the reporting date.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss)
|
|
|
Gain (Loss)
|
|
|
Total
|
|
|
|
|
related
|
|
|
not related
|
|
|
Gains
|
|
|
(Dollars in thousands)
|
|
Credit Risk
|
|
|
Credit Risk
|
|
|
(Losses)
|
|
|
Subordinated Capital Notes
|
|
$
|
5,661
|
|
|
$
|
(4,995
|
)
|
|
$
|
666
|
|
|
|
|
|
|
|
|
|
|
|
|
20.
Credit Losses arising from the Bankruptcy of Lehman Brothers,
Inc.:
The Corporation had counterparty exposure to Lehman Brothers, Inc. (“LBI”)
in connection with the sale of securities sold under agreements to repurchase amounting to
$200.2 million at September 19, 2008 under a Master Repurchase Agreement. LBI was placed in a Securities Investor
Protection Corporation (“SIPC”) liquidation proceeding on
September 19, 2008. The filing of the SIPC liquidation proceeding was an event of default under the terms of the
Master Repurchase Agreement, which resulted in the acceleration of
repurchase dates under the Master Repurchase Agreement to
September 19, 2008. This action resulted in
a reduction in the Corporation’s total assets of $225.3 million
and a reduction in its total liabilities of $200.2 million. As soon as
claims procedures have been established in the LBI liquidation
proceeding, the Corporation intends to file a claim for the amount $25.1 million, which is the amount
it is owed by LBI as a result of the acceleration of repurchase date
and the exercise by the Corporation of its rights under the Master
Repurchase Agreement, plus incidental expenses and damages. The Corporation has recognized a claim receivable from
LBI for $25.1 million and has established a valuation allowance for the same amount since management, in consultation
with legal counsel, believes that based on current information and events, it is probable that the Corporation will be
unable to collect all amounts due. The tax effect related to the recognition of this valuation allowance
was a deferred benefit of $9.8 million.
The Corporation had a $100 million
floating-for-fixed interest rate swap designated as a cash flow hedge with LBI affiliate Lehman Brothers Special Financing
Inc. (“LBSF”). The derivative liability of this swap was $371,736 as of September 19, 2008. As a result of the bankruptcy
filing of LBHI and default on its contractual payments as of September 19, 2008, the Corporation terminated the swap and
the cash flow hedge designation on this swap. The net loss of $371,000 remains in accumulated other comprehensive income
and will be reclassified into earnings when the cash flows that were hedged occur. In addition, The Corporation had $23.8
million fixed-for-floating interest rate swaps with LBSF, which was classified as undesignated economic hedges of certain
fixed rate deposits. The derivative liability of this swap was $681,535 as of September 19, 2008. As a result of the
bankruptcy filing of LBHI and the default on its contractual payments as of September 19, 2008, the Corporation terminated
these swaps. The Corporation had $13.8 million of interest rate swaps with LBSF. The derivative liability of this swap was
$166,333 as of September 19, 2008. As a result of the bankruptcy filing of LBHI and the default on its contractual
payments as of September 19, 2008, the Corporation terminated these swaps.
38
PART I — ITEM 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Santander BanCorp
Selected Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
Three months ended
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
(Dollars in thousands, except per share data)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
460,475
|
|
|
$
|
505,468
|
|
|
$
|
148,011
|
|
|
$
|
170,149
|
|
|
Interest expense
|
|
|
192,424
|
|
|
|
271,831
|
|
|
|
55,605
|
|
|
|
94,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
268,051
|
|
|
|
233,637
|
|
|
|
92,406
|
|
|
|
76,039
|
|
|
Gain on sale of securities
|
|
|
5,153
|
|
|
|
238
|
|
|
|
2,279
|
|
|
|
—
|
|
|
Broker-deaker, asset management and insurance fees
|
|
|
58,110
|
|
|
|
49,086
|
|
|
|
16,137
|
|
|
|
16,717
|
|
|
Other income
|
|
|
56,504
|
|
|
|
47,134
|
|
|
|
17,997
|
|
|
|
13,776
|
|
|
Operating expenses
|
|
|
224,321
|
|
|
|
220,289
|
|
|
|
76,632
|
|
|
|
74,488
|
|
|
Goodwill and other intangibles impairment charges
|
|
|
—
|
|
|
|
39,705
|
|
|
|
—
|
|
|
|
39,705
|
|
|
Provision
for claim receivable
|
|
|
25,120
|
|
|
|
—
|
|
|
|
25,120
|
|
|
|
—
|
|
|
Provision for loan losses
|
|
|
123,650
|
|
|
|
100,224
|
|
|
|
45,560
|
|
|
|
47,350
|
|
|
Income tax (benefit) provision
|
|
|
(1,349
|
)
|
|
|
4,151
|
|
|
|
(10,331
|
)
|
|
|
(4,912
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
16,076
|
|
|
$
|
(34,274
|
)
|
|
$
|
(8,162
|
)
|
|
$
|
(50,099
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PER COMMON SHARE DATA*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
0.34
|
|
|
$
|
(0.73
|
)
|
|
$
|
(0.18
|
)
|
|
$
|
(1.07
|
)
|
|
Book value
|
|
$
|
11.91
|
|
|
$
|
11.36
|
|
|
$
|
11.91
|
|
|
$
|
11.36
|
|
|
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
|
|
|
$
|
0.48
|
|
|
$
|
0.10
|
|
|
$
|
0.16
|
|
|
AVERAGE BALANCES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale and loans, net of allowance for loans losses
|
|
$
|
6,732,106
|
|
|
$
|
6,897,835
|
|
|
$
|
6,485,861
|
|
|
$
|
6,916,691
|
|
|
Allowance for loan losses
|
|
|
172,764
|
|
|
|
119,059
|
|
|
|
176,267
|
|
|
|
131,938
|
|
|
Earning assets
|
|
|
8,262,316
|
|
|
|
8,531,286
|
|
|
|
7,849,123
|
|
|
|
8,656,943
|
|
|
Total assets
|
|
|
8,978,664
|
|
|
|
9,173,901
|
|
|
|
8,530,640
|
|
|
|
9,291,722
|
|
|
Deposits
|
|
|
5,617,668
|
|
|
|
5,232,073
|
|
|
|
5,778,670
|
|
|
|
5,394,209
|
|
|
Borrowings
|
|
|
2,499,362
|
|
|
|
3,043,964
|
|
|
|
1,905,542
|
|
|
|
3,006,182
|
|
|
Common equity
|
|
|
564,672
|
|
|
|
583,809
|
|
|
|
568,568
|
|
|
|
574,776
|
|
|
PERIOD END BALANCES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale and loans, net of allowance for loans losses
|
|
$
|
6,248,276
|
|
|
$
|
6,900,259
|
|
|
$
|
6,248,276
|
|
|
$
|
6,900,259
|
|
|
Allowance for loan losses
|
|
|
180,090
|
|
|
|
144,544
|
|
|
|
180,090
|
|
|
|
144,544
|
|
|
Earning assets
|
|
|
7,549,266
|
|
|
|
8,690,883
|
|
|
|
7,549,266
|
|
|
|
8,690,883
|
|
|
Total assets
|
|
|
8,135,179
|
|
|
|
9,245,314
|
|
|
|
8,135,179
|
|
|
|
9,245,314
|
|
|
Deposits
|
|
|
5,589,900
|
|
|
|
6,072,736
|
|
|
|
5,589,900
|
|
|
|
6,072,736
|
|
|
Borrowings
|
|
|
1,720,830
|
|
|
|
2,322,817
|
|
|
|
1,720,830
|
|
|
|
2,322,817
|
|
|
Common equity
|
|
|
555,306
|
|
|
|
529,990
|
|
|
|
555,306
|
|
|
|
529,990
|
|
Continued
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
Three months ended
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
SELECTED RATIOS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin on a tax-equivalent basis (on an annualized basis)
|
|
|
4.40
|
%
|
|
|
3.76
|
%
|
|
|
4.76
|
%
|
|
|
3.56
|
%
|
|
Efficiency ratio (1)
|
|
|
59.21
|
%
|
|
|
65.59
|
%
|
|
|
59.00
|
%
|
|
|
68.81
|
%
|
|
Return on average total assets (on an annualized basis)
|
|
|
0.24
|
%
|
|
|
-0.50
|
%
|
|
|
-0.38
|
%
|
|
|
-2.14
|
%
|
|
Return on average common equity (on an annualized basis)
|
|
|
3.80
|
%
|
|
|
-7.85
|
%
|
|
|
-5.71
|
%
|
|
|
-34.58
|
%
|
|
Dividend payout
|
|
|
58.82
|
%
|
|
|
-65.75
|
%
|
|
|
0.00
|
%
|
|
|
-14.95
|
%
|
|
Average net loans/average total deposits
|
|
|
119.84
|
%
|
|
|
131.84
|
%
|
|
|
112.24
|
%
|
|
|
128.22
|
%
|
|
Average earning assets/average total assets
|
|
|
92.02
|
%
|
|
|
93.00
|
%
|
|
|
92.01
|
%
|
|
|
93.17
|
%
|
|
Average stockholders’ equity/average assets
|
|
|
6.29
|
%
|
|
|
6.36
|
%
|
|
|
6.67
|
%
|
|
|
6.19
|
%
|
|
Fee income to average assets (annualized)
|
|
|
1.37
|
%
|
|
|
1.21
|
%
|
|
|
1.23
|
%
|
|
|
1.13
|
%
|
|
Capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I capital to risk-adjusted assets
|
|
|
8.65
|
%
|
|
|
7.61
|
%
|
|
|
8.65
|
%
|
|
|
7.61
|
%
|
|
Total capital to risk-adjusted assets
|
|
|
11.84
|
%
|
|
|
10.69
|
%
|
|
|
11.84
|
%
|
|
|
10.69
|
%
|
|
Leverage Ratio
|
|
|
6.05
|
%
|
|
|
5.44
|
%
|
|
|
6.05
|
%
|
|
|
5.44
|
%
|
|
Asset quality:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing loans to total loans
|
|
|
3.26
|
%
|
|
|
2.80
|
%
|
|
|
3.26
|
%
|
|
|
2.80
|
%
|
|
Annualized net charge-offs to average loans
|
|
|
2.14
|
%
|
|
|
1.19
|
%
|
|
|
3.13
|
%
|
|
|
1.73
|
%
|
|
Allowance for loan losses to period-end loans
|
|
|
2.80
|
%
|
|
|
2.05
|
%
|
|
|
2.80
|
%
|
|
|
2.05
|
%
|
|
Allowance for loan losses to non-performing loans
|
|
|
85.91
|
%
|
|
|
73.33
|
%
|
|
|
85.91
|
%
|
|
|
73.33
|
%
|
|
Allowance for loan losses to non-performing loans plus
accruing loans past-due 90 days or more
|
|
|
80.69
|
%
|
|
|
70.77
|
%
|
|
|
80.69
|
%
|
|
|
70.77
|
%
|
|
Non-performing assets to total assets
|
|
|
2.81
|
%
|
|
|
2.28
|
%
|
|
|
2.81
|
%
|
|
|
2.28
|
%
|
|
Recoveries to charge-offs
|
|
|
2.56
|
%
|
|
|
4.36
|
%
|
|
|
1.87
|
%
|
|
|
2.07
|
%
|
|
EARNINGS TO FIXED CHARGES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excluding interest on deposits
|
|
|
1.19x
|
|
|
|
0.77x
|
|
|
|
0.05x
|
|
|
|
-0.26x
|
|
|
Including interest on deposits
|
|
|
1.08x
|
|
|
|
0.89x
|
|
|
|
0.67x
|
|
|
|
0.42x
|
|
|
OTHER DATA AT END OF PERIOD
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer financial assets under management
|
|
$
|
13,957,000
|
|
|
$
|
14,244,000
|
|
|
$
|
13,957,000
|
|
|
$
|
14,244,000
|
|
|
Bank branches
|
|
|
57
|
|
|
|
61
|
|
|
|
57
|
|
|
|
61
|
|
|
Consumer Finance branches
|
|
|
68
|
|
|
|
69
|
|
|
|
68
|
|
|
|
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Branches
|
|
|
125
|
|
|
|
130
|
|
|
|
125
|
|
|
|
130
|
|
|
ATMs
|
|
|
162
|
|
|
|
142
|
|
|
|
162
|
|
|
|
142
|
|
(Concluded)
|
|
|
|
|
*
|
|
Per share data is based on the average number of shares outstanding during the periods.
|
|
|
|
(1)
|
|
Operating expenses less provision for claim receivable and impairment charges, divided by net interest income on a tax equivalent basis, plus other income
excluding gain on sale of securities, gain on equity securities and loss on extinguisment of debts and derivatives.
|
41
MANAGEMENT’S 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 management’s control, though efforts and initiatives are undertaken to manage
those risks in conjunction with return optimization. Among the risks being managed are: (1) market
risk, which is the risk that changes in market rates and prices will adversely affect the
Corporation’s financial condition or results of operations, (2) liquidity risk, which is the risk
that the Corporation will have insufficient cash or access to cash to meet operating needs and
financial obligations, (3) credit risk, which is the risk that loan customers or other
counterparties will be unable to perform their contractual obligations, and (4) operational risk,
which is the risk of loss resulting from inadequate or failed internal processes, people and
systems, or from external events. In addition, the Corporation is subject to legal, compliance and
reputational risks, among others.
The
Corporation had counterparty exposure to Lehman Brothers, Inc. (“LBI”)
in connection with the sale of securities sold under agreements to repurchase amounting to $200.2 million at
September 19, 2008 under a Master Repurchase Agreement. LBI was placed in a Securities
Investor Protection Corporation (“SIPC”) liquidation proceeding on September 19, 2008.
The filing of the SIPC liquidation proceeding was an event of default under the terms
of the Master Repurchase Agreement, which resulted in the acceleration of repurchase dates
under the Master Repurchase Agreement to September 19, 2008.
This action resulted in a reduction in the Corporation’s total
assets of $225.3 million and a reduction in its total liabilities of $200.2 million.
As soon as claims procedures have been established in the LBI liquidation proceeding,
the Corporation intends to file a claim for the amount $25.1 million, which is the amount
it is owed by LBI, as a result of the acceleration of repurchase
date, and the exercise by the Corporation of its rights under the Master
Repurchase Agreement, plus incidental expenses and damages.
The Corporation has recognized a claim receivable from LBI for $25.1 million and has established a valuation
allowance for the same amount since management, in consultation with legal counsel, believes that based on current
information and events, it is probable that the Corporation will be unable to collect all amounts due.
The tax effect related to the recognition of this valuation
allowance was a deferred benefit of $9.8 million.
The Corporation had a $100 million floating-for-fixed interest rate swap designated as a cash flow hedge with LBI affiliate
Lehman Brothers Special Financing Inc. (“LBSF”). The derivative liability of this swap was $371,736 as of
September 19, 2008. As a result of the
bankruptcy filing of LBHI and default on its contractual payments as of September 19, 2008, the Corporation
terminated the swap and the cash flow hedge designation on this swap. The net loss of $371,000 remains in accumulated
other comprehensive income and will be reclassified into earnings when the cash flows that were hedged occur.
In addition, The Corporation had $23.8 million fixed-for-floating interest rate swaps with LBSF, which was
classified as undesignated economic hedges of certain fixed rate deposits. The derivative liability of this swap
was $681,535 as of September 19, 2008. As a result of the bankruptcy filing of LBHI and the default on its contractual
payments as of September 19, 2008, the Corporation terminated these swaps. The Corporation had $13.8 million of interest
rate swaps with LBSF. The derivative liability of this swap was $166,333 as of September 19, 2008. As a result of the
bankruptcy filing of LBHI and the default on its contractual payments as of September 19, 2008, the Corporation terminated
these swaps.
During the nine months ended September 30, 2008, the Corporation sold certain impaired loans
to an affiliate for $194.7 million in cash. These loans had a
net book values of $194.7 million
comprised of an outstanding principal balance of $223.3 million and a specific valuation allowance
of $28.6 million. The type of loans by net book value was $163.6 million in construction loans and
$31.1 million in commercial loans.
As a provider of financial services, the Corporation’s earnings are significantly affected by
general economic and business conditions. Credit, funding, including deposit origination and fee
income generation activities are influenced by the level of business spending and investment,
consumer income, spending and savings, capital market activities, competition, customer
preferences, interest rate conditions and prevailing market rates on competing products. The
Corporation constantly monitors general business and economic conditions, industry-related trends
and indicators, competition from traditional and non-traditional financial services providers,
interest rate volatility, indicators of credit quality, demand for loans and deposits, operational
efficiencies, including systems, revenue and profitability improvement and regulatory changes in
the financial services industry, among others. The Corporation operates in a highly regulated
42
environment and may be adversely affected by changes in federal and local laws and regulations.
Also, competition with other financial services providers could adversely affect the Corporation’s
profitability.
In addition to the information contained in this Form 10-Q, readers should consider the
description of the Corporation’s business contained in Item 1 of the Corporation’s Form 10-K for
the year ended December 31, 2007. 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
Corporation’s 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 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. In preparing the 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 Corporation’s critical
accounting policies are detailed in the Financial Review and Supplementary Information section of
the Corporation’s Form 10-K for the year ended December 31, 2007.
Current Accounting Developments
Effective January 1, 2008, the Corporation adopted Financial Accounting Standards Board (FASB)
Statement of Financial Accounting Standards (SFAS) 157,
Fair Value Measurements
, for all financial
instruments accounted for at fair value on a recurring basis. In February 2008, the FASB issued a
final staff position (FSP FAS 157-2) that partially delayed the effective date of SFAS 157 for one
year for certain nonfinancial assets and nonfinancial liabilities, except for items that are
recognized or disclosed at fair value in the financial statements on a recurring basis. As such,
the Corporation did not adopt SFAS 157 for those nonfinancial assets and liabilities eligible for
deferral under FSP FAS 157-2 and is evaluating the impact that this adoption may have on its
consolidated financial statements and disclosures. Adoption of SFAS 157 did not have a material
effect on the Corporation’s financial position and results of operations. Illiquidity in the credit
markets contributed to the amount of our reported Level 3 instruments, primarily in our trading and
loan portfolios. At September 30, 2008, the aggregate amount of instruments requiring fair value
measurement on a recurring basis included in Level 3 represented approximately 5.40% and 0.35% of
the aggregate amount of consolidated assets and liabilities recorded at fair value, respectively.
The amount we report in Level 3 in future periods will be affected by market conditions. See Notes
1 and 19 to the accompanying consolidated financial statements for further information related to
the adoption of SFAS 157.
In conjunction with the adoption of SFAS 157, effective January 1, 2008, the Corporation
adopted Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards
(SFAS) 159,
The Fair Value Option for Financial Assets and Financial Liabilities.
SFAS 159 provides
an option for most financial assets and liabilities to be reported at fair value on an
instrument-by-instrument basis with changes in fair value reported in earnings. The election is
made at the initial adoption, at the acquisition of a financial asset, financial liability or a
firm commitment and it may not be revoked. Under the SFAS 159 transition provisions, the
Corporation has elected to report certain callable brokered certificates of deposits and
subordinated notes at fair value with future changes in value reported in earnings. SFAS 159
provides an opportunity to mitigate volatility in reported earnings as well as reducing the burden
associated with complex hedge accounting requirements. As a result of this adoption and election
under the fair value option, the Corporation reported an after-tax increase in opening retained
earnings of $3.2 million. See Notes 1 and 19 to the accompanying consolidated financial statements
for further information related to the adoption of SFAS 159.
Fair Value Measurement
The Corporation’s estimates of fair value for financial instruments are based on the framework
established in SFAS 157. The fair value of a financial instrument is the estimated amount at which
the instrument could be exchanged in an orderly transaction between knowledgeable, unrelated
willing parties, i.e., not in a forced transaction. The disclosure of fair value estimates in the
SFAS 157 hierarchy is based on whether the significant inputs into the valuation are observable.
In determining such estimates and the level of the hierarchy in which the estimate is disclosed,
the highest priority is given to unadjusted quoted prices in active markets, the lowest priority to
unobservable inputs that reflect the Corporation’s market assumptions. SFAS 157 requires the use
of observable inputs when available. Additionally, the level at which a financial instrument is
reported is based on the lowest level of any significant input into the estimation of fair value.
The three levels of the hierarchy are as follows:
43
|
|
•
|
|
Level 1
—
Unadjusted quoted market prices for identical assets or liabilities in active
markets that the Corporation has the ability to access.
|
|
|
|
|
•
|
|
Level 2
—
Quoted prices for similar assets or liabilities in active markets; quoted
prices for identical or similar assets or liabilities in inactive markets; or valuations
based on models where the significant inputs are observable (e.g., interest rates, yield
curves, prepayment speeds, default rates, loss severities, etc.) or can be corroborated by
observable market data.
|
|
|
|
|
•
|
|
Level 3
—
Valuations based on models where significant inputs are not observable. The
unobservable inputs reflect the Corporation’s own assumptions about the assumptions that
market participants would use.
|
The Corporation uses quoted market prices, when available, to determine estimates of fair
value and includes these prices in the amounts disclosed in Level 1 of the hierarchy. When quoted
market prices are unavailable, the Corporation is assisted to obtain fair value estimates from a
nationally recognized pricing service that determines fair value estimates based on objectively
verifiable information: relevant market information, relevant credit information, perceived market
movements and sector news. The market inputs utilized in the pricing evaluation, listed in the
approximate order of priority, include: benchmark yields, reported trades, broker/dealer quotes,
issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data, and industry
and economic events. Depending on the security, the priority of the use of inputs may change or
some market inputs may not be relevant. For some securities additional inputs may be necessary.
The Corporation reviews the estimates of fair value provided by the pricing service and compares
the estimates to the Corporation’s knowledge of the market to determine if the estimates obtained
are representative of the prices in the market. The Corporation will challenge any prices deemed
not to be representative of fair value. The fair value estimates provided from this pricing service
are included in the amount disclosed in Level 2 of the hierarchy.
If quoted market prices and an estimate from a pricing service are unavailable, the
Corporation produces an estimate of fair value based on internally developed valuation techniques,
which, depending on the level of observable market inputs, will render the fair value estimate as
Level 2 or Level 3. See Note 19 to the accompanying consolidated financial statements for further
information related to valuation methods used by the Corporation for each type of financial
instruments that are carried at fair value.
The Corporation employs control processes to validate the fair value of its financial
instruments. These control processes are designed to assure that the values used for financial
reporting are based on observable inputs wherever possible. In the event that observable inputs are
not available, the control processes are designed to assure that the valuation approach utilized is
appropriate and consistently applied, and the assumptions are reasonable. These control processes
include validation and corroboration procedures over the quotes and prices obtained from brokers
and counterparties, as well as reviews of the pricing models’ appropriateness by the personnel with
relevant expertise, which are independent from the trading desks on a quarterly basis. In addition,
the Corporation is considering recently executed comparable transaction and other observable market
data for purposes of validating assumptions used in the models.
The Corporation understands that any increases and/or decreases in the aggregate fair value of
its assets and liabilities will not materially affect its liquidity and capital resources
Overview of Results of Operations for the Nine-Month and Three-Month Periods Ended September 30,
2008 and 2007
Santander BanCorp is the financial holding company for Banco Santander Puerto Rico and
subsidiary (the “Bank”), Santander Securities Corporation and subsidiary, Santander Financial
Services, Inc., Santander Insurance Agency, Inc. and Island Insurance Corporation.
For the nine-month and three-month periods ended September 30, 2008 and 2007, net income and
other selected financial information, as reported are the following:
44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
Three months ended
|
|
($ in thousands, except earnings per share)
|
|
30-Sep-08
|
|
30-Sep-07
|
|
30-Sep-08
|
|
30-Sep-07
|
|
Net Income (Loss)
|
|
$
|
16,076
|
|
|
$
|
(34,274
|
)
|
|
$
|
(8,162
|
)
|
|
$
|
(50,099
|
)
|
|
EPS
|
|
$
|
0.34
|
|
|
$
|
(0.73
|
)
|
|
$
|
(0.18
|
)
|
|
$
|
(1.07
|
)
|
|
ROA
|
|
|
0.24
|
%
|
|
|
(0.50
|
)%
|
|
|
(0.38
|
)%
|
|
|
(2.14
|
)%
|
|
ROE
|
|
|
3.80
|
%
|
|
|
(7.85
|
)%
|
|
|
(5.71
|
)%
|
|
|
(34.58
|
)%
|
|
Efficiency Ratio (*)
|
|
|
59.21
|
%
|
|
|
65.59
|
%
|
|
|
59.00
|
%
|
|
|
68.81
|
%
|
|
|
|
|
|
(*)
|
|
Operating expenses less provision for claim receivable and impairment charges
divided by net interest income on a tax equivalent basis plus a gain on sale of securities, gain on equity securities and
loss on extinguishment of debts and derivatives.
|
During the nine and three-month periods ended September 30, 2008 and 2007, the Corporation had
recognized certain non-recurring transactions impacting the results of operations. These
transactions are described below:
|
|
•
|
|
The Corporation had counterparty exposure to Lehman Brothers, Inc. (“LBI”)
in connection with the sale of securities sold under agreements to repurchase amounting to $200.2 million at
September 19, 2008 under a Master Repurchase Agreement. LBI was placed in a Securities
Investor Protection Corporation (“SIPC”) liquidation proceeding on September 19, 2008.
The filing of the SIPC liquidation proceeding was an event of default under the terms
of the Master Repurchase Agreement, which resulted in the acceleration of repurchase dates
under the Master Repurchase Agreement to September 19, 2008.
This action resulted in a reduction in the Corporation’s total
assets of $225.3 million and a reduction in its total liabilities of $200.2 million.
As soon as claims procedures have been established in the LBI liquidation proceeding,
the Corporation intends to file a claim for the amount $25.1 million, which is the amount
it is owed by LBI, as a result of the acceleration of repurchase
date, and the exercise by the Corporation of its rights under the Master
Repurchase Agreement, plus incidental expenses and damages.
The Corporation has recognized a claim receivable from LBI for $25.1 million and has established a valuation
allowance for the same amount since management, in consultation with legal counsel, believes that based on current
information and events, it is probable that the Corporation will be unable to collect all amounts due.
The tax effect related to the recognition of this valuation
allowance was a deferred benefit of $9.8 million.
|
|
|
|
|
•
|
|
The Corporation had a $100 million floating-for-fixed interest rate swap designated as a cash flow hedge with LBI affiliate
Lehman Brothers Special Financing Inc. (“LBSF”). The derivative liability of this swap was $371,736 as of
September 19, 2008. As a result of the
bankruptcy filing of LBHI and default on its contractual payments as of September 19, 2008, the Corporation
terminated the swap and the cash flow hedge designation on this swap. The net loss of $371,000 remains in accumulated
other comprehensive income and will be reclassified into earnings when the cash flows that were hedged occur.
In addition, The Corporation had $23.8 million fixed-for-floating interest rate swaps with LBSF, which was
classified as undesignated economic hedges of certain fixed rate deposits. The derivative liability of this swap
was $681,535 as of September 19, 2008. As a result of the bankruptcy filing of LBHI and the default on its contractual
payments as of September 19, 2008, the Corporation terminated these swaps. The Corporation had $13.8 million of interest
rate swaps with LBSF. The derivative liability of this swap was $166,333 as of September 19, 2008. As a result of the
bankruptcy filing of LBHI and the default on its contractual payments as of September 19, 2008, the Corporation terminated
these swaps.
|
|
|
|
|
•
|
|
During the third quarter ended September 30, 2007, the Corporation had, in accordance
with SFAS No. 142, recorded preliminary estimated non-cash impairment charges of
approximately $34.3 million and $5.4 million, which have been recorded as reductions to
goodwill and trade name, respectively. The estimated impairment charges were calculated
based on market and income approach valuation methodologies. These impairment charges did
not result in cash expenditures and will not result in future cash expenditures.
|
45
|
|
•
|
|
During 2007, Santander Spain sponsored various non-qualified share-based compensation
programs for certain eligible officers and key employees: (i) A long term incentive plan
which provides for settlement in cash or stock of Santander Spain 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
months ended September 30, 2008 and $5.8 million of compensation expense for the same
period in 2007. As options were exercised as of September 30, 2008, $6.7 million has been
reclassified as a capital contribution; (ii) The grant of 100 shares of Santander Spain
stock to all employees of Santander Group’s operating entities as part of the celebration
of Santander Group 150th Anniversary during 2007. The Corporation recognized compensation
expense under this plan amounting to $4.3 million for the nine months ended September 30,
2007. The shares granted were purchased by an affiliate and recorded as a capital
contribution; (iii) A long term incentive plan for certain eligible officers and key
employees which contains service, performance and market conditions. This plan comprehends
two cycles, one expiring in 2009 and another expiring in 2010. This plan provides for
settlement in stock of Santander Spain to the participants and is classified as an equity
plan. Accordingly, the Corporation recognizes monthly compensation expense over the two
and three year cycles and credits additional paid in capital. The Corporation recognized
compensation expense under this plan amounting to $1.9 million for the nine months ended
September 30, 2008.
|
Use of NON-GAAP Financial Measures
The following tables summarize the effects in operating results of these non-recurring
transactions in non-GAAP financial measures for purpose of comparing the operating results of the
nine-month period and quarter ended September 30, 2008 with the results of the same period for 2007
excluding non-recurring transactions. Non-GAAP financial measures for the nine month-period and
quarter ended September 30, 2008 and 2007 excludes the goodwill and trade name impairment charges,
the after-tax compensation expense associated with certain incentive plans and after tax of
provision for claim receivable.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
Three Months Ended
|
|
(in thousands)
|
|
30-Sep-08
|
|
30-Sep-07
|
|
30-Sep-08
|
|
30-Sep-07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill and trade name impairment charges
|
|
$
|
—
|
|
|
$
|
39,705
|
|
|
$
|
—
|
|
|
$
|
39,705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in compensation expense sponsored by Santander
Group, net of tax
|
|
$
|
(1,256
|
)
|
|
$
|
6,169
|
|
|
$
|
22
|
|
|
$
|
1,113
|
|
|
Gain realized on settlement by counterparty of
investment securities pledged under agreement
to repurchase, net of tax
|
|
$
|
1,924
|
|
|
$
|
—
|
|
|
$
|
1,924
|
|
|
$
|
—
|
|
|
Provision
for claim receivable, net of tax
|
|
$
|
15,323
|
|
|
$
|
—
|
|
|
$
|
15,323
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
Three Months Ended
|
|
($ in thousands, except earnings per share)
|
|
30-Sep-08
|
|
30-Sep-07
|
|
30-Sep-08
|
|
30-Sep-07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Earnings (Loss)
|
|
$
|
28,222
|
|
|
$
|
11,600
|
|
|
$
|
5,258
|
|
|
$
|
(9,281
|
)
|
|
EPS
|
|
$
|
0.61
|
|
|
$
|
0.25
|
|
|
$
|
0.11
|
|
|
$
|
(0.20
|
)
|
|
ROA
|
|
|
0.42
|
%
|
|
|
0.17
|
%
|
|
|
0.25
|
%
|
|
|
(0.40
|
)%
|
|
ROE
|
|
|
6.68
|
%
|
|
|
2.66
|
%
|
|
|
3.68
|
%
|
|
|
(6.41
|
)%
|
|
Efficiency Ratio
|
|
|
59.75
|
%
|
|
|
62.58
|
%
|
|
|
58.97
|
%
|
|
|
67.13
|
%
|
46
Results of Operations for the Nine-Month Periods and Three-Month Periods ended September 30, 2008
and 2007
The Corporation reported a net income of $16.1 million for the nine-month period ended
September 30, 2008, an increase of $50.4 million compared with net loss of $34.3 million for the
same period in 2007. Earnings (loss) per common share (EPS) for the nine-month periods ended
September 30, 2008 and 2007 were $0.34 and $(0.73), respectively, based on 46,639,104 average
common shares for each period. Returns on average total assets (ROA) on an annualized basis and
return on average common equity (ROE) on an annualized basis for the nine-month period ended
September 30, 2008 were 0.24% and 3.80%, respectively, compared with (0.50)% and (7.85)% reported
during the same nine-month period of 2007. The Efficiency Ratio, on a tax equivalent basis, for the
nine months ended September 30, 2008 reflected an improvement of 638 basis points to reached 59.21%
compared to 65.59% for the nine months ended September 30, 2007. This improvement was mainly due to
higher net interest income and higher other income.
For the quarter ended September 30, 2008, the Corporation reported net loss of $8.2 million
compared with a net loss of $50.1 million for the same quarter in 2007. Loss per common share (EPS)
for the quarters ended September 30, 2008 and 2007 were $(0.18) and $(1.07), respectively, based on
46,639,104 average common shares for each period. ROA, on annualized basis, was (0.38)% for the
quarter ended September 30, 2008 and (2.14)% for the quarter ended September 30, 2007. ROE, on
annualized basis, were (5.71)% and (34.58)% for the quarters ended September 30, 2008 and 2007,
respectively. The Efficiency Ratio, on a tax equivalent basis, for the quarter ended September 30,
2008 was 59.00%, reflecting a significant improvement of 981 basis points when compared with 68.81%
for the quarter ended September 30, 2007.
Overview of Financial Results
The Corporation’s financial results for the nine-month and three-month periods ended September
30, 2008 were impacted by the following:
|
|
•
|
|
The Corporation recognized a provision for claim receivable of $25.1
million which represent the excess of the value of the securities held LBSF above the
amounts owned by the Corporation under the securities sold under agreements to repurchase.
The related tax effect of this valuation amounts to $9.8 million.
|
|
|
|
|
•
|
|
The Corporation experienced an improvement of 64 basis points in net interest margin, on
a tax equivalent basis, to 4.40% for the nine months ended September 30, 2008 versus 3.76%
for the same period in 2007 and an improvement of 120 basis points to 4.76% for the quarter
ended September 30, 2008 compared to 3.56% for the same quarter in 2007;
|
|
|
|
|
•
|
|
The provision for loan losses increased $23.4 million or 23.4% for the nine months ended
September 30, 2008 compared to the same period in 2007 and a decrease of $1.8 million or
3.8% for the quarter ended September 30, 2008 compared to the same period in the prior
year. The increase in the provision for loan losses reflects the current recessionary cycle
in Puerto Rico affecting the loan portfolio, including commercial and construction loans.
The provision for loan losses represented 111.89% and 87.01% of the net charge-offs for the
nine and three months ended September 30, 2008;
|
|
|
|
|
•
|
|
The allowance for loan losses of $180.1 million as of September 30, 2008 represented
2.80% of total loans, 85.91% of non-performing loans and 216.21% of non-performing loans
excluding loans secured by real estate. As of December 31, 2007 and September 30, 2007,
the allowance for loan losses was $167.0 million and $144.5 million, respectively,
represented 2.36% and 2.05% of total loans, and 56.70% and 73.33% of non-performing loans
and 82.32% and 128.26% of non-performing loans excluding loans secured by real estate,
respectively.
|
|
|
|
|
•
|
|
Non-interest income increased $23.3 million or 24.2% and $5.9 million or 19.4% as
compared to the nine and three-month periods ended September 30, 2008 and 2007,
respectively. Non-interest income was impacted principally by: (i) an increase in
broker-dealer, asset management and insurance fees of $9.0 million for nine months ended
September 30, 2008; (ii) a gain of $8.6 million on the sale of a portion of the
Corporation’s investment in Visa, Inc. in connection with its initial public offering
during the first quarter of 2008; (iii) an increase in gain on
derivatives of $4.1 million
and $2.1 million for nine and three-months ended September 30,
|
47
|
|
|
|
2008, respectively; (iv) an increase in gains on sale of securities of $4.9 million and $2.3 million for nine and
three-months ended September 30, 2008, respectively; (v) an unfavorable valuation
adjustment of $6.9 million and $2.9 million for loans held for sale recorded through earnings for the nine and three months
ended September 30, 2008.
|
|
|
|
|
•
|
|
Operating expenses reflected a decrease of $10.6 million or 4.1% and $12.4 million or
10.9% as compared to the nine and three-month periods ended September 30, 2008 and 2007,
respectively. These decrease was affected principally by:
(i) $39.7 million to related
goodwill and trade name impairment charges recognized during the third quarter of 2007;
(ii) $10.1 million of stock incentive compensation expense sponsored Santander Group
recorded during the nine-month period ended September 30, 2007; (iii) a $2.0 million credit
to compensation expense related to the same stock incentive plan for the nine-month period
ended September 30, 2008; (iv) a provision for claim
receivable of
$25.1 million recognized during the third quarter of 2008; (v) $5.7 million and $2.9
million increase in professional fees for the nine and three-month periods ended September
30, 2008 and 2007, respectively; (vi) $4.6 million increase in commissions and bonuses for
the nine-month period ended September 30, 2008 as compared to the same period of last year.
|
|
|
|
|
•
|
|
During the nine-month period ended September 30, 2008, the Corporation sold certain
impaired loans to an affiliate for $194.7 million in cash. These loans had a net book value
of $194.7 million comprised of an outstanding principal balance of $223.3 million and a
specific valuation allowance of $28.6 million. The type of loans by net book value was
$163.6 million in construction loans and $31.1 million in commercial loans. No gains or
losses were recognized on these transactions. For the quarter ended September 30, 2008 the
sale of impaired loans to the affiliate amounted $103.4 million. These loans had a net book
value of $103.4 million comprised of an outstanding principal
balance of $126.5 million and
a specific valuation allowance of $23.1 million. The type of loans by net book value was
$86.9 million and $16.5 million in commercial loans. No gains or losses were recognized on
these transactions.
|
|
|
|
|
•
|
|
The common stock dividend for the nine-month period ended September 30, 2008 was $0.20
per share resulting in a current annualized dividend yield of 2.47%.
In August 2008, the Board of Directors of the Corporation determined
to discontinue the payment of the quarterly cash dividend in the
Corporation’s common stock to strengthen the institution’s
core capital position. The Corporation may use a portion of the funds
previously paid as dividend to reduce its outstanding debt.
|
Net Interest Income
The Corporation’s net interest income for the nine months ended September 30, 2008 was $268.1
million, an increase of $34.4 million, or 14.7%, compared with $233.6 million for the nine months
ended September 30, 2007. This improvement was mainly due to a decrease in interest expense of
$79.4 million or 29.2% when compared with the same period in prior year. The average cost of funds
on interest-bearing liabilities experienced a decrease of 129 basis points from 4.78% for the
nine-month period ended September 30, 2007 to 3.49% for the same period in 2008. This was
influenced by the reduction in federal funds rates made by the Federal Reserve since June 2007
which resulted in a lower cost of short term borrowings. Interest income reflected a reduction of
$45.0 million or 8.9% for the nine-month period ended September 30, 2008 compared to the same
period in 2007 mainly due to decreases of $31.8 million or 7.1% principally caused by changes in
rate and to a lesser extent to a decline in volume in interest income on loans and $12.1 million or
23.8% in interest income on investment securities attributed a decline in volume and also a
decrease from a rates.
The Corporation’s net interest income for the three months ended September 30, 2008 reached
$92.4 million compared with $76.0 million for the same period in 2007, reflecting an increase of
$16.4 million, or 21.5%. There was a decrease in interest expense of $38.5 million or 40.9% when
compared with the same period in prior year due to a decrease in average cost of funds of 164 basis
points from 4.81% to 3.17% for the quarter ended September 30, 2008. Interest income reflected a
reduction of $22.1 million or 13.0% for the quarter ended September 30, 2008 from $170.1 million
for the quarter ended September 30, 2007 to $148.0 million mainly due to a decrease of $15.4
million or 10.2% in interest income on loans.
The
table on page 52 and 53, 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 six-month periods and quarters ended
September 30, 2008 and 2007. The table on Interest Variance Analysis — Tax Equivalent Basis on
page 51, allocates changes in the Corporation’s interest income (on a tax-equivalent basis) and
interest expense among
48
changes in the average volume of interest earning assets and interest
bearing liabilities and changes in their respective interest rates for the nine and three-month
periods ended September 30, 2008 compared with the same periods of 2007.
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 $3.9 million and $6.0 million for
the nine months ended September 30, 2008 and 2007, respectively. For the quarters ended September
30, 2008 and 2007, the tax equivalent adjustments were $1.4 million and $1.7 million, respectively.
The following table sets forth the principal components of the Corporation’s net interest
income for the nine and three-month periods ended September 30, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
Three months ended
|
|
|
|
|
Sept. 30, 2008
|
|
|
Sept. 30, 2007
|
|
|
Sept. 30, 2008
|
|
|
Sept. 30, 2007
|
|
|
|
|
(Dollars in thousands)
|
|
|
(Dollars in thousands)
|
|
|
Interest income — tax equivalent basis
|
|
$
|
464,379
|
|
|
$
|
511,462
|
|
|
$
|
149,441
|
|
|
$
|
171,862
|
|
|
Interest expense
|
|
|
192,424
|
|
|
|
271,831
|
|
|
|
55,605
|
|
|
|
94,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income — tax equivalent basis
|
|
$
|
271,955
|
|
|
$
|
239,631
|
|
|
$
|
93,836
|
|
|
$
|
77,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin — tax equivalent basis (1)
|
|
|
4.40
|
%
|
|
|
3.76
|
%
|
|
|
4.76
|
%
|
|
|
3.56
|
%
|
|
|
|
|
|
(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, 2008, net interest margin, on a tax equivalent
basis, was 4.40% compared to net interest margin, on a tax equivalent basis, of 3.76% for the same
period in 2007. The 64 basis points increase in net interest margin, on a tax equivalent basis, was
mainly due a decrease in interest expense on average interest-bearing liabilities of $79.4 million
or 29.2% principally due to decrease in the cost of average interest-bearing liabilities of 129
basis points. This reduction in interest expense was principally due to the significant reduction
of 170 basis points in the cost of funds of average borrowings (comprised of federal funds
purchased and other borrowings, securities sold under agreements to repurchase and commercial paper
issued) from 5.57% for the nine months ended September 30, 2008 to 3.86% for the nine months ended
September 30, 2008 reflecting the Federal Reserve’s interest rate cuts. The impact of the decrease
in average cost of funds was partially offset by a 51 basis points decrease in yield on the average
interest-earning assets resulting in a decrease of $47.1 million in interest income, on a tax
equivalent basis, on average interest-earning assets. This decrease was mainly due to a 50 basis
points decrease in the yield on average gross loans.
The average interest-earning assets at September 30, 2008 decreased $269.0 million or 3.2%
when compared with figures reported at September 30, 2007. This decrease was mainly due to a
decrease of $210.0 million in average investment securities due to a reduction of $347 million of
investment securities available for sale during the nine-month period ended September 30, 2008,
which includes $221 million of investment held as collateral of the securities sold under agreements
to repurchase with LBI. There was a decrease of $165.8 million in average net loans for the nine
months ended September 30, 2008 compared with the same period in 2007. The decrease in average net
loans was comprised of the following items:
|
|
•
|
|
a decrease in the average construction loans of $77.3 million which considers the effect
of the sale of impaired construction loans to an affiliate during the period;
|
|
|
|
|
•
|
|
a decrease in average leasing portfolio of $37.2 million, since the Corporation has
strategically reduced this line of lending;
|
|
|
|
|
•
|
|
a decrease in average mortgage portfolio of $8.4 million and average consumer loans
(including average consumer finance) of $5.7 million;
|
|
|
|
|
•
|
|
an increase of $16.6 million in average commercial loans;
|
|
|
|
|
•
|
|
an increase in the average allowance for loan losses of $53.7 million when compared with
figures reported in 2007.
|
49
For the nine-month period ended September 30, 2008, the decrease in average investment
available for sale and average net loans was partially offset by an increase of $106.7 million in
average interest bearing deposits.
The decrease in average interest-bearing liabilities of $229.6 million or 3.0% for the
nine-month period ended September 30, 2008, was driven by a decrease in average borrowings of
$524.1 million when compared to the nine-month period ended September 30, 2007. The decrease in
average interest-bearing liabilities was composed of:
|
|
•
|
|
a decrease in average federal funds and other borrowings of $482.7 million mainly due to
the payment of the $700.0 million outstanding indebtedness incurred under bridge facility
agreement among the Corporation, SFS and National Australia Bank Limited during the third
quarter of 2007;
|
|
|
|
|
•
|
|
a reduction in average securities sold under agreements to repurchase of $201.1 million
mainly caused by the cancellation on September 19, 2008 of $200 million of securities sold
under agreements to repurchase held by LBI as result of bankruptcy of its parent LBHI;
|
|
|
|
|
•
|
|
reductions of $141.9 million and $22.5 million in average commercial paper and average
term notes, respectively;
|
|
|
|
|
•
|
|
an increase in average FHLB advances of $301.6 million for the nine months ended
September 30, 2008 compared with the same period in 2007;
|
|
|
|
|
•
|
|
an increase in average total interest bearing deposits composed of $245.3 million and
$97.2 million in average other time deposits and average brokered deposits, respectively,
offset by a $27.6 million decrease in average savings and NOW accounts. The increase in
average total interest bearing deposits was principally due to a certificate of deposit for
the amount of $630 million opened by Banco Santander, S.A. in Banco Santander Puerto Rico
during first quarter of 2008.
|
For the three-month period ended September 30, 2008, net interest margin, on a tax equivalent
basis, reflected an increase of 120 basis points from 3.56% for the quarter ended September 30,
2007 to 4.76% for the quarter ended September 30, 2008. The 120 basis points increase in net
interest margin, on a tax equivalent basis, was mainly due a decrease in interest expense on
average interest-bearing liabilities of $38.5 million or 40.9% principally due to a decrease in the
cost of average interest-bearing liabilities of 164 basis points. This reduction in interest
expense was principally due to the significant reduction of 197 basis points in the cost of average
borrowings (comprised of federal funds purchased and other borrowings, securities sold under
agreements to repurchase and commercial paper issued) from 5.62% for the third quarter of 2007 to
3.65% for the same quarter of 2008, reflecting the Federal Reserve’s interest rate cuts. The impact
of the decrease in average cost of funds was partially offset by a 31 basis points decrease in
yield on the average interest-earning assets resulting in a decrease of $22.4 million in interest
income, on a tax equivalent basis, on average interest-earning assets. This decrease was mainly due
to a 42 basis points decrease in the yield on average gross loans.
For the three months ended September 30, 2008, average interest-earning assets decreased
$807.8 million or 9.3% when compared to same period the prior year. This reduction was mainly due a
decrease of $430.8 million or 6.2% in average net loans and $393.0 million or 26.4% in average
investment securities due to a sale of $347 million of investment securities available for sale
during the year of 2008 which includes $221.0 million of investment securities held by LBI as
collateral for the securities sold under agreements to repurchase. These reductions were partially offset
by an increase of $16.1 million or 6.4% in average interest-bearing deposits. The decrease in
average net loans was driven principally by:
|
|
•
|
|
a $162.2 million decrease in average construction loans as a result of the sale of
impaired construction loans to an affiliate;
|
|
|
|
|
•
|
|
a decrease of $46.9 million in average consumer loans (including average consumer
finance);
|
|
|
|
|
•
|
|
a decrease of $88.7 million and $34.9 million in average commercial loans and average
leasing portfolio;
|
|
|
|
|
•
|
|
a reduction of $53.9 million in average mortgage loans;
|
|
|
|
|
•
|
|
an increase in the average allowance for loan losses of $44.3 million when compared with
figures reported in 2007.
|
The $793.2 million increase in average interest-bearing liabilities for the quarter ended
September 30, 2008, was driven by $1.1 billion decrease in average borrowings offset by an increase
of $307.4 million in average interest bearing deposits. The significant reduction in average
interest-bearing liabilities was due to:
50
|
|
•
|
|
a decrease of $638.8 million in average federal funds purchased and other borrowings due
to the payment of the $700 million outstanding indebtedness incurred under bridge facility
agreement among the Corporation, SFS and National Australia Bank Limited during the third
quarter of 2007;
|
|
|
|
|
•
|
|
there were decreases in commercial paper of $421.2 million and average securities sold
under agreements to repurchase of $175.0 million due to the cancellation of $200 million of
securities sold under agreements to repurchase held by LBI;
|
|
|
|
|
•
|
|
an increase in average FHLB advances of $175.0 million for the quarter ended September
30, 2008 compared with the same period in 2007;
|
|
|
|
|
•
|
|
a $307.4 million increase in the average interest bearing deposits comprised $328.6
million increase in other time deposits and $31.2 million increase in savings and NOW
accounts offset by $52.4 million decrease in average brokered deposits. The increase in
average interest bearing deposits is mainly due to a certificate of deposit for the amount
of $630 million opened by Banco Santander, S.A. in Banco Santander Puerto Rico during the
first quarter of 2008.
|
The following table allocates changes in the Corporation’s interest income, on a
tax-equivalent basis, and interest expense for the nine-month and three-month periods ended
September 30, 2008, compared to the nine-month and three-month periods ended September 30, 2007,
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.
INTEREST VARIANCE ANALYSIS
on a Tax Equivalent Basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2008
|
|
|
Three Months Ended September 30, 2008
|
|
|
|
|
Compared to the Nine Months
|
|
|
Compared to the Three Months
|
|
|
|
|
Ended September 30, 2007
|
|
|
Ended September 30, 2007
|
|
|
|
|
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
|
|
$
|
3,395
|
|
|
$
|
(2,287
|
)
|
|
$
|
1,108
|
|
|
$
|
792
|
|
|
$
|
(1,229
|
)
|
|
$
|
(437
|
)
|
|
Time deposits with other banks
|
|
|
(1,136
|
)
|
|
|
(1,088
|
)
|
|
|
(2,224
|
)
|
|
|
(335
|
)
|
|
|
(206
|
)
|
|
|
(541
|
)
|
|
Investment securities
|
|
|
(7,208
|
)
|
|
|
(5,877
|
)
|
|
|
(13,085
|
)
|
|
|
(4,428
|
)
|
|
|
(1,388
|
)
|
|
|
(5,816
|
)
|
|
Loans
|
|
|
(10,686
|
)
|
|
|
(22,196
|
)
|
|
|
(32,882
|
)
|
|
|
(9,204
|
)
|
|
|
(6,423
|
)
|
|
|
(15,627
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income, on a tax equivalent basis
|
|
|
(15,635
|
)
|
|
|
(31,448
|
)
|
|
|
(47,083
|
)
|
|
|
(13,175
|
)
|
|
|
(9,246
|
)
|
|
|
(22,421
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings and NOW accounts
|
|
|
(608
|
)
|
|
|
(11,081
|
)
|
|
|
(11,689
|
)
|
|
|
224
|
|
|
|
(4,795
|
)
|
|
|
(4,571
|
)
|
|
Other time deposits
|
|
|
11,725
|
|
|
|
(26,685
|
)
|
|
|
(14,960
|
)
|
|
|
3,258
|
|
|
|
(12,675
|
)
|
|
|
(9,417
|
)
|
|
Borrowings
|
|
|
(19,261
|
)
|
|
|
(30,974
|
)
|
|
|
(50,235
|
)
|
|
|
(12,427
|
)
|
|
|
(11,013
|
)
|
|
|
(23,440
|
)
|
|
Long-term borrowings
|
|
|
(885
|
)
|
|
|
(1,638
|
)
|
|
|
(2,523
|
)
|
|
|
(314
|
)
|
|
|
(763
|
)
|
|
|
(1,077
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
(9,029
|
)
|
|
|
(70,378
|
)
|
|
|
(79,407
|
)
|
|
|
(9,259
|
)
|
|
|
(29,246
|
)
|
|
|
(38,505
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income, on a tax equivalent basis
|
|
$
|
(6,606
|
)
|
|
$
|
38,930
|
|
|
$
|
32,324
|
|
|
$
|
(3,916
|
)
|
|
$
|
20,000
|
|
|
$
|
16,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table shows average balances and, where applicable, interest amounts earned on a
tax-equivalent basis and average rates for the Corporation’s assets and liabilities and
stockholders’ equity for the nine and three-month periods ended September 30, 2008 and 2007.
51
SANTANDER BANCORP
YEAR TO DATE AVERAGE BALANCE SHEET AND SUMMARY OF NET INTEREST INCOME
Tax Equivalent Basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
|
September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Annualized
|
|
|
|
|
|
|
|
|
|
|
Annualized
|
|
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits
|
|
$
|
49,840
|
|
|
$
|
750
|
|
|
|
2.01
|
%
|
|
$
|
101,400
|
|
|
$
|
2,974
|
|
|
|
3.92
|
%
|
|
Federal funds sold and securities purchased
under agreements to resell
|
|
|
229,758
|
|
|
|
3,897
|
|
|
|
2.27
|
%
|
|
|
71,475
|
|
|
|
2,789
|
|
|
|
5.22
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing deposits
|
|
|
279,598
|
|
|
|
4,647
|
|
|
|
2.22
|
%
|
|
|
172,875
|
|
|
|
5,763
|
|
|
|
4.46
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.Treasury securities
|
|
|
45,955
|
|
|
|
981
|
|
|
|
2.85
|
%
|
|
|
89,412
|
|
|
|
3,119
|
|
|
|
4.66
|
%
|
|
Obligations of other U.S.government
agencies and corporations
|
|
|
506,839
|
|
|
|
13,000
|
|
|
|
3.43
|
%
|
|
|
616,577
|
|
|
|
22,000
|
|
|
|
4.77
|
%
|
|
Obligations of government of Puerto Rico
and political subdivisions
|
|
|
100,500
|
|
|
|
4,283
|
|
|
|
5.69
|
%
|
|
|
98,296
|
|
|
|
3,861
|
|
|
|
5.25
|
%
|
|
Collateralized mortgage obligations and
mortgage backed securities
|
|
|
529,362
|
|
|
|
18,780
|
|
|
|
4.74
|
%
|
|
|
597,413
|
|
|
|
21,734
|
|
|
|
4.86
|
%
|
|
Other
|
|
|
67,955
|
|
|
|
3,473
|
|
|
|
6.83
|
%
|
|
|
58,878
|
|
|
|
2,888
|
|
|
|
6.56
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
|
1,250,611
|
|
|
|
40,517
|
|
|
|
4.33
|
%
|
|
|
1,460,576
|
|
|
|
53,602
|
|
|
|
4.91
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
2,510,369
|
|
|
|
105,940
|
|
|
|
5.64
|
%
|
|
|
2,493,741
|
|
|
|
129,005
|
|
|
|
6.92
|
%
|
|
Construction
|
|
|
407,396
|
|
|
|
13,787
|
|
|
|
4.52
|
%
|
|
|
484,704
|
|
|
|
30,120
|
|
|
|
8.31
|
%
|
|
Consumer
|
|
|
624,355
|
|
|
|
65,153
|
|
|
|
13.94
|
%
|
|
|
621,543
|
|
|
|
58,301
|
|
|
|
12.54
|
%
|
|
Consumer Finance
|
|
|
601,212
|
|
|
|
106,620
|
|
|
|
23.69
|
%
|
|
|
609,713
|
|
|
|
104,476
|
|
|
|
22.91
|
%
|
|
Mortgage
|
|
|
2,681,527
|
|
|
|
123,763
|
|
|
|
6.15
|
%
|
|
|
2,689,971
|
|
|
|
124,188
|
|
|
|
6.16
|
%
|
|
Lease financing
|
|
|
80,011
|
|
|
|
3,952
|
|
|
|
6.60
|
%
|
|
|
117,222
|
|
|
|
6,007
|
|
|
|
6.85
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loans
|
|
|
6,904,870
|
|
|
|
419,215
|
|
|
|
8.11
|
%
|
|
|
7,016,894
|
|
|
|
452,097
|
|
|
|
8.61
|
%
|
|
Allowance for loan losses
|
|
|
(172,764
|
)
|
|
|
|
|
|
|
|
|
|
|
(119,059
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net
|
|
|
6,732,106
|
|
|
|
419,215
|
|
|
|
8.32
|
%
|
|
|
6,897,835
|
|
|
|
452,097
|
|
|
|
8.76
|
%
|
|
Total interest earning assets/ interest
income (on a tax equivalent basis)
|
|
|
8,262,315
|
|
|
|
464,379
|
|
|
|
7.51
|
%
|
|
|
8,531,286
|
|
|
|
511,462
|
|
|
|
8.02
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest earning assests
|
|
|
716,348
|
|
|
|
|
|
|
|
|
|
|
|
642,615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
8,978,663
|
|
|
|
|
|
|
|
|
|
|
$
|
9,173,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders’ equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings and NOW accounts
|
|
$
|
1,690,276
|
|
|
$
|
26,798
|
|
|
|
2.12
|
%
|
|
$
|
1,717,838
|
|
|
$
|
38,487
|
|
|
|
3.00
|
%
|
|
Other time deposits
|
|
|
1,689,747
|
|
|
|
40,095
|
|
|
|
3.17
|
%
|
|
|
1,444,422
|
|
|
|
50,470
|
|
|
|
4.67
|
%
|
|
Brokered deposits
|
|
|
1,491,372
|
|
|
|
50,510
|
|
|
|
4.52
|
%
|
|
|
1,394,147
|
|
|
|
55,095
|
|
|
|
5.28
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing deposits
|
|
|
4,871,395
|
|
|
|
117,403
|
|
|
|
3.22
|
%
|
|
|
4,556,407
|
|
|
|
144,052
|
|
|
|
4.23
|
%
|
|
Federal funds purchased and other borrowings
|
|
|
253,441
|
|
|
|
7,849
|
|
|
|
4.14
|
%
|
|
|
736,164
|
|
|
|
31,880
|
|
|
|
5.79
|
%
|
|
Securities sold under agreements to repurchase
|
|
|
573,860
|
|
|
|
21,290
|
|
|
|
4.96
|
%
|
|
|
774,958
|
|
|
|
32,123
|
|
|
|
5.54
|
%
|
|
Federal Home Loan Bank advances
|
|
|
1,140,916
|
|
|
|
28,164
|
|
|
|
3.30
|
%
|
|
|
839,362
|
|
|
|
34,041
|
|
|
|
5.42
|
%
|
|
Commercial paper
|
|
|
265,748
|
|
|
|
7,272
|
|
|
|
3.66
|
%
|
|
|
407,616
|
|
|
|
16,766
|
|
|
|
5.50
|
%
|
|
Term Notes
|
|
|
19,599
|
|
|
|
472
|
|
|
|
3.22
|
%
|
|
|
42,017
|
|
|
|
1,052
|
|
|
|
3.35
|
%
|
|
Subordinated Notes
|
|
|
245,798
|
|
|
|
9,974
|
|
|
|
5.42
|
%
|
|
|
243,847
|
|
|
|
11,917
|
|
|
|
6.53
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing liabilities/interest expense
|
|
|
7,370,757
|
|
|
|
192,424
|
|
|
|
3.49
|
%
|
|
|
7,600,371
|
|
|
|
271,831
|
|
|
|
4.78
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest bearing liabilities
|
|
|
1,043,234
|
|
|
|
|
|
|
|
|
|
|
|
989,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
8,413,991
|
|
|
|
|
|
|
|
|
|
|
|
8,590,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity
|
|
|
564,672
|
|
|
|
|
|
|
|
|
|
|
|
583,809
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
8,978,663
|
|
|
|
|
|
|
|
|
|
|
$
|
9,173,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income, on a tax equivalent basis
|
|
|
|
|
|
$
|
271,955
|
|
|
|
|
|
|
|
|
|
|
$
|
239,631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread
|
|
|
|
|
|
|
|
|
|
|
4.02
|
%
|
|
|
|
|
|
|
|
|
|
|
3.24
|
%
|
|
Cost of funding earning assets
|
|
|
|
|
|
|
|
|
|
|
3.11
|
%
|
|
|
|
|
|
|
|
|
|
|
4.26
|
%
|
|
Net interest margin, on a tax equivalent basis
|
|
|
|
|
|
|
|
|
|
|
4.40
|
%
|
|
|
|
|
|
|
|
|
|
|
3.76
|
%
|
52
SANTANDER BANCORP
QUARTER TO DATE AVERAGE BALANCE SHEET AND SUMMARY OF NET INTEREST INCOME
Tax Equivalent Basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
|
September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Annualized
|
|
|
|
|
|
|
|
|
|
|
Annualized
|
|
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits
|
|
$
|
49,071
|
|
|
$
|
174
|
|
|
|
1.41
|
%
|
|
$
|
125,919
|
|
|
$
|
715
|
|
|
|
2.25
|
%
|
|
Federal funds sold and securities purchased
under agreements to resell
|
|
|
216,062
|
|
|
|
1,131
|
|
|
|
2.08
|
%
|
|
|
123,162
|
|
|
|
1,568
|
|
|
|
5.05
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing deposits
|
|
|
265,133
|
|
|
|
1,305
|
|
|
|
1.96
|
%
|
|
|
249,081
|
|
|
|
2,283
|
|
|
|
3.64
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.Treasury securities
|
|
|
33,033
|
|
|
|
123
|
|
|
|
1.48
|
%
|
|
|
138,777
|
|
|
|
1,514
|
|
|
|
4.33
|
%
|
|
Obligations of other U.S.government
agencies and corporations
|
|
|
396,693
|
|
|
|
3,557
|
|
|
|
3.57
|
%
|
|
|
619,884
|
|
|
|
7,139
|
|
|
|
4.57
|
%
|
|
Obligations of government of Puerto Rico
and political subdivisions
|
|
|
99,538
|
|
|
|
1,428
|
|
|
|
5.71
|
%
|
|
|
114,386
|
|
|
|
1,425
|
|
|
|
4.94
|
%
|
|
Collateralized mortgage obligations and
mortgage backed securities
|
|
|
513,567
|
|
|
|
6,098
|
|
|
|
4.72
|
%
|
|
|
562,985
|
|
|
|
6,868
|
|
|
|
4.84
|
%
|
|
Other
|
|
|
55,298
|
|
|
|
904
|
|
|
|
6.50
|
%
|
|
|
55,139
|
|
|
|
980
|
|
|
|
7.05
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
|
1,098,129
|
|
|
|
12,110
|
|
|
|
4.39
|
%
|
|
|
1,491,171
|
|
|
|
17,926
|
|
|
|
4.77
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
2,388,802
|
|
|
|
32,687
|
|
|
|
5.44
|
%
|
|
|
2,477,469
|
|
|
|
43,214
|
|
|
|
6.92
|
%
|
|
Construction
|
|
|
341,705
|
|
|
|
3,551
|
|
|
|
4.13
|
%
|
|
|
503,855
|
|
|
|
9,597
|
|
|
|
7.56
|
%
|
|
Consumer
|
|
|
608,694
|
|
|
|
22,137
|
|
|
|
14.47
|
%
|
|
|
643,558
|
|
|
|
20,832
|
|
|
|
12.84
|
%
|
|
Consumer Finance
|
|
|
594,260
|
|
|
|
35,523
|
|
|
|
23.78
|
%
|
|
|
606,306
|
|
|
|
34,483
|
|
|
|
22.56
|
%
|
|
Mortgage
|
|
|
2,656,530
|
|
|
|
40,949
|
|
|
|
6.17
|
%
|
|
|
2,710,404
|
|
|
|
41,713
|
|
|
|
6.16
|
%
|
|
Lease financing
|
|
|
72,137
|
|
|
|
1,179
|
|
|
|
6.50
|
%
|
|
|
107,037
|
|
|
|
1,814
|
|
|
|
6.72
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loans
|
|
|
6,662,128
|
|
|
|
136,026
|
|
|
|
8.12
|
%
|
|
|
7,048,629
|
|
|
|
151,653
|
|
|
|
8.54
|
%
|
|
Allowance for loan losses
|
|
|
(176,267
|
)
|
|
|
|
|
|
|
|
|
|
|
(131,938
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net
|
|
|
6,485,861
|
|
|
|
136,026
|
|
|
|
8.34
|
%
|
|
|
6,916,691
|
|
|
|
151,653
|
|
|
|
8.70
|
%
|
|
Total interest earning assets/ interest
income (on a tax equivalent basis)
|
|
|
7,849,123
|
|
|
|
149,441
|
|
|
|
7.57
|
%
|
|
|
8,656,943
|
|
|
|
171,862
|
|
|
|
7.88
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest earning assests
|
|
|
681,517
|
|
|
|
|
|
|
|
|
|
|
|
634,779
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
8,530,640
|
|
|
|
|
|
|
|
|
|
|
$
|
9,291,722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders’ equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings and NOW accounts
|
|
$
|
1,726,829
|
|
|
$
|
7,816
|
|
|
|
1.80
|
%
|
|
$
|
1,695,628
|
|
|
$
|
12,387
|
|
|
|
2.90
|
%
|
|
Other time deposits
|
|
|
1,907,268
|
|
|
|
14,136
|
|
|
|
2.95
|
%
|
|
|
1,578,677
|
|
|
|
19,058
|
|
|
|
4.79
|
%
|
|
Brokered deposits
|
|
|
1,431,987
|
|
|
|
15,283
|
|
|
|
4.25
|
%
|
|
|
1,484,377
|
|
|
|
19,778
|
|
|
|
5.29
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing deposits
|
|
|
5,066,084
|
|
|
|
37,235
|
|
|
|
2.92
|
%
|
|
|
4,758,682
|
|
|
|
51,223
|
|
|
|
4.27
|
%
|
|
Federal funds purchased and other borrowings
|
|
|
11,519
|
|
|
|
203
|
|
|
|
7.01
|
%
|
|
|
650,314
|
|
|
|
9,621
|
|
|
|
5.87
|
%
|
|
Securities sold under agreements to repurchase
|
|
|
550,167
|
|
|
|
6,781
|
|
|
|
4.90
|
%
|
|
|
744,160
|
|
|
|
10,449
|
|
|
|
5.57
|
%
|
|
Federal Home Loan advances
|
|
|
1,038,325
|
|
|
|
7,785
|
|
|
|
2.98
|
%
|
|
|
863,350
|
|
|
|
11,800
|
|
|
|
5.42
|
%
|
|
Commercial paper
|
|
|
42,374
|
|
|
|
308
|
|
|
|
2.89
|
%
|
|
|
463,553
|
|
|
|
6,647
|
|
|
|
5.69
|
%
|
|
Term Notes
|
|
|
19,747
|
|
|
|
163
|
|
|
|
3.28
|
%
|
|
|
42,329
|
|
|
|
366
|
|
|
|
3.43
|
%
|
|
Subordinated Notes
|
|
|
243,410
|
|
|
|
3,130
|
|
|
|
5.12
|
%
|
|
|
242,476
|
|
|
|
4,004
|
|
|
|
6.55
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing liabilities/interest expense
|
|
|
6,971,626
|
|
|
|
55,605
|
|
|
|
3.17
|
%
|
|
|
7,764,864
|
|
|
|
94,110
|
|
|
|
4.81
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest bearing liabilities
|
|
|
990,446
|
|
|
|
|
|
|
|
|
|
|
|
952,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
7,962,072
|
|
|
|
|
|
|
|
|
|
|
|
8,716,946
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity
|
|
|
568,568
|
|
|
|
|
|
|
|
|
|
|
|
574,776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
8,530,640
|
|
|
|
|
|
|
|
|
|
|
$
|
9,291,722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income, on a tax equivalent basis
|
|
|
|
|
|
$
|
93,836
|
|
|
|
|
|
|
|
|
|
|
$
|
77,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread
|
|
|
|
|
|
|
|
|
|
|
4.40
|
%
|
|
|
|
|
|
|
|
|
|
|
3.07
|
%
|
|
Cost of funding earning assets
|
|
|
|
|
|
|
|
|
|
|
2.82
|
%
|
|
|
|
|
|
|
|
|
|
|
4.31
|
%
|
|
Net interest margin, on a tax equivalent basis
|
|
|
|
|
|
|
|
|
|
|
4.76
|
%
|
|
|
|
|
|
|
|
|
|
|
3.56
|
%
|
53
Provision for Loan Losses
The Corporation’s provision for loan losses increased $23.4 million or 23.4% from $100.2
million for the nine months ended September 30, 2007 to $123.7 million for the same period in 2008
and decreased $1.8 million or 3.8% for the quarter ended September 30, 2008 when compared with the
same period in prior year. The increase in the provision for loan losses was due primarily to
increases in non-performing loans due to the deterioration in economic conditions in Puerto Rico,
requiring the Corporation to increase the level of its allowance for loan losses. There was an
increase of $18.9 million in past-due loans (non-performing loans and accruing loans past-due 90
days or more) which reached $223.2 million as of September 30, 2008, from $204.3 million as of
September 30, 2007. Non-performing loans were $209.6 million as of September 30, 2008, an increase
of $12.5 million or 6.3%, compared to non-performing loans as of September 30, 2007.
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 Corporation’s 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 Corporation’s 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,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank service fees on deposit accounts
|
|
$
|
10,015
|
|
|
$
|
9,983
|
|
|
$
|
3,094
|
|
|
$
|
3,444
|
|
|
Other service fees:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit card and payment processing fees
|
|
|
6,142
|
|
|
|
8,656
|
|
|
|
2,014
|
|
|
|
2,118
|
|
|
Mortgage servicing fees
|
|
|
2,561
|
|
|
|
2,182
|
|
|
|
859
|
|
|
|
742
|
|
|
Trust fees
|
|
|
1,235
|
|
|
|
1,504
|
|
|
|
411
|
|
|
|
515
|
|
|
Confirming advances fees
|
|
|
5,110
|
|
|
|
2,483
|
|
|
|
1,120
|
|
|
|
757
|
|
|
Other fees
|
|
|
8,681
|
|
|
|
9,354
|
|
|
|
2,722
|
|
|
|
2,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fee income
|
|
|
33,744
|
|
|
|
34,162
|
|
|
|
10,220
|
|
|
|
9,711
|
|
|
Broker/dealer, asset management, and
insurance fees
|
|
|
58,110
|
|
|
|
49,086
|
|
|
|
16,137
|
|
|
|
16,717
|
|
|
Gain on sale of securities, net
|
|
|
5,153
|
|
|
|
238
|
|
|
|
2,279
|
|
|
|
—
|
|
|
Gain on sale of loans
|
|
|
3,004
|
|
|
|
5,121
|
|
|
|
737
|
|
|
|
782
|
|
|
Gain on sale of mortgage servicing rights
|
|
|
—
|
|
|
|
206
|
|
|
|
—
|
|
|
|
38
|
|
|
Trading gains
|
|
|
2,798
|
|
|
|
1,766
|
|
|
|
804
|
|
|
|
525
|
|
|
Gain (loss) on derivatives
|
|
|
4,136
|
|
|
|
(31
|
)
|
|
|
2,832
|
|
|
|
727
|
|
|
Other gains (losses), net
|
|
|
5,375
|
|
|
|
3,505
|
|
|
|
(731
|
)
|
|
|
1,401
|
|
|
Other
|
|
|
7,447
|
|
|
|
2,405
|
|
|
|
4,136
|
|
|
|
592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
119,767
|
|
|
$
|
96,458
|
|
|
$
|
36,413
|
|
|
$
|
30,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54
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
|
|
|
|
|
Sept. 30, 2008
|
|
|
Sept. 30, 2007
|
|
|
Sept. 30, 2008
|
|
|
Sept. 30, 2007
|
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
|
Broker-dealer
|
|
$
|
31,604
|
|
|
$
|
21,865
|
|
|
$
|
7,427
|
|
|
$
|
8,341
|
|
|
Asset management
|
|
|
20,038
|
|
|
|
17,764
|
|
|
|
6,757
|
|
|
|
5,968
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Santander Securities
|
|
|
51,642
|
|
|
|
39,629
|
|
|
|
14,184
|
|
|
|
14,309
|
|
|
Insurance
|
|
|
6,468
|
|
|
|
9,457
|
|
|
|
1,953
|
|
|
|
2,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
58,110
|
|
|
$
|
49,086
|
|
|
$
|
16,137
|
|
|
$
|
16,717
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30, 2008, other income reached $119.8 million, a $23.3
million or 24.2% increase when compared to $96.5 million for the same period in 2007. For the
quarter ended September 30, 2008, other income reflected an increase of $5.9 million or 19.4% to
$36.4 million when compared to the figures reported in the same period in 2007. The other income
was impacted by the following:
|
|
•
|
|
Broker-dealer, asset management and insurance fees reflected an increase of $9.0 million
for the nine-month period ended September 30, 2008, due to increases in broker-dealer and
asset management fees of $12.0 million partially offset by a decrease of $3.0 million in
insurance fees due to a reduction in credit life commissions generated from the Island
Finance operation. For the quarter ended September 30, 2008, the broker-dealer and asset
management fees and insurance fees remained basically unchanged when compared with the
third quarter of 2007. 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 48.5% and 44.3% to the Corporation’s other income for the
nine and three-month period ended September 30, 2008, respectively, and 50.9% and 54.8% to
the for the nine and three-month period ended September 30, 2007.
|
|
|
|
|
•
|
|
There was an increase in gain on sale of securities available for sale of $4.9 million
for the nine months ended September 30, 2008 principally due to a reduction of $347 million
of investment securities available for sale during the nine-month period ended September
30, 2008. This reduction of balance includes sale of investment available for sale to a
third party of 125.3 million, resulting in a gain of $2.9 million during the first quarter
of 2008 and $221.4 million related to investment securities available for sale held as
collateral by LBI under securities sold under agreements to repurchase. The Corporation
recognized $2.3 million gain in connection with the settlement of the securities sold under
agreements to repurchase.
|
|
|
|
|
•
|
|
The Corporation reported an increase in gain on derivative
instruments of $4.1 million
for the nine months ended September 30, 2008 compared with the same period during the prior
year mainly due to the net effect of incorporating the Corporation’s credit risk in the
derivative fair value calculation methodology pursuant the adoption of SFAS 157. For the
quarter ended September 30, 2008, there was an increase in gain on derivative instruments
of $2.1 million when compared with the quarter ended September 30, 2007 mostly resulting
from a gain arising from the credit risk component incorporated into the
fair value calculation of a subordinated note recognized during the quarter pursuant to
SFAS 157.
|
|
|
|
|
•
|
|
There were decreases in gain on sale of residential mortgage loans of $2.1 million for
the nine-month periods ended September 30, 2008 compared with the same periods the prior
year, due to a decrease in mortgage loans
sold of $109.9 million and $22.1 million for the nine and three-month period ended September
30, 2008, respectively, compared with the same period in 2007.
|
55
|
|
•
|
|
During the first quarter of 2008 a gain of $8.6 million on the sale of part of the
investment in Visa, Inc. in connection with its initial public offering was recognized
through earnings and included within other gains and losses, net.
|
|
|
|
|
•
|
|
An unfavorable valuation adjustment of $6.9 million and $2.3 million for loans held for
sale was recorded through earnings and included within other gains and losses during the
nine and three-month period ended September 30, 2008.
|
|
|
|
|
•
|
|
There was an increase in other income of $5.0 million for the nine months ended September 30, 2008 compared with the same period in 2007.
This increase was mainly due to the market valuation on broker
CD’s accounted for as per SFAS No. 159 of $2.1 million, a commission of $1.0 million received from NOVA as part of the sale of the Corporation’s merchant
business during 2007, $0.7 million of swap income not hedged, $0.6
million of a gain on tax credit purchased and $0.4 million incentive from Mastercard based on customer volume affiliated. For the quarter ended September 30, 2008
compared with the same quarter in 2007, other income reflected an
increase of $3.5 million principally due to a valuation on broker
CD’s not hedge of $2.1 million, $0.6 million of tax credit purchased and $0.4 million of swap income no hedge.
|
Operating Expenses
The following table presents the detail of other operating expenses for the periods indicated:
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
Three months ended
|
|
|
|
|
Sept. 30
|
|
|
Sept. 30
|
|
|
Sept. 30
|
|
|
Sept. 30
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
|
|
$
|
54,784
|
|
|
$
|
54,125
|
|
|
$
|
19,938
|
|
|
$
|
18,242
|
|
|
Stock incentive plans
|
|
|
(2,059
|
)
|
|
|
10,113
|
|
|
|
35
|
|
|
|
1,825
|
|
|
Pension and other benefits
|
|
|
46,573
|
|
|
|
41,983
|
|
|
|
13,297
|
|
|
|
13,963
|
|
|
Expenses deferred as loan origination costs
|
|
|
(6,415
|
)
|
|
|
(8,972
|
)
|
|
|
(1,898
|
)
|
|
|
(2,683
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total personnel costs
|
|
|
92,883
|
|
|
|
97,249
|
|
|
|
31,372
|
|
|
|
31,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Occupancy costs
|
|
|
20,631
|
|
|
|
17,686
|
|
|
|
7,409
|
|
|
|
6,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment expenses
|
|
|
3,340
|
|
|
|
3,379
|
|
|
|
1,087
|
|
|
|
1,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EDP servicing expense, amortization and technical services
|
|
|
31,208
|
|
|
|
27,317
|
|
|
|
10,147
|
|
|
|
9,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Communication expenses
|
|
|
7,724
|
|
|
|
8,157
|
|
|
|
2,544
|
|
|
|
2,706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business promotion
|
|
|
5,438
|
|
|
|
12,338
|
|
|
|
1,652
|
|
|
|
4,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill and other intangibles impairment charges
|
|
|
—
|
|
|
|
39,705
|
|
|
|
—
|
|
|
|
39,705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for claim receivable
|
|
|
25,120
|
|
|
|
—
|
|
|
|
25,120
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other taxes
|
|
|
10,150
|
|
|
|
8,486
|
|
|
|
3,394
|
|
|
|
3,537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional fees
|
|
|
15,550
|
|
|
|
9,824
|
|
|
|
6,328
|
|
|
|
3,441
|
|
|
Amortization of intangibles
|
|
|
2,264
|
|
|
|
3,675
|
|
|
|
779
|
|
|
|
1,247
|
|
|
Printing and supplies
|
|
|
1,360
|
|
|
|
1,537
|
|
|
|
438
|
|
|
|
479
|
|
|
Credit card expenses
|
|
|
3,411
|
|
|
|
5,119
|
|
|
|
1,192
|
|
|
|
1,016
|
|
|
Insurance
|
|
|
2,792
|
|
|
|
3,005
|
|
|
|
868
|
|
|
|
1,100
|
|
|
Examinations and FDIC assessment
|
|
|
4,431
|
|
|
|
1,455
|
|
|
|
1,454
|
|
|
|
497
|
|
|
Transportation and travel
|
|
|
1,972
|
|
|
|
2,208
|
|
|
|
566
|
|
|
|
682
|
|
|
Repossessed assets provision and expenses
|
|
|
4,579
|
|
|
|
5,705
|
|
|
|
1,996
|
|
|
|
3,178
|
|
|
Collections and related legal costs
|
|
|
1,027
|
|
|
|
906
|
|
|
|
365
|
|
|
|
253
|
|
|
All other
|
|
|
15,561
|
|
|
|
12,243
|
|
|
|
5,041
|
|
|
|
4,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating expenses
|
|
|
52,947
|
|
|
|
45,677
|
|
|
|
19,027
|
|
|
|
15,980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-personnel expenses
|
|
|
156,558
|
|
|
|
162,745
|
|
|
|
70,380
|
|
|
|
82,846
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating expenses
|
|
$
|
249,441
|
|
|
$
|
259,994
|
|
|
$
|
101,752
|
|
|
$
|
114,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Corporation’s operating expenses reflected a decrease of $10.6 million and $12.4 million
for the nine and three-month periods ended September 30, 2008, respectively, when compared with
nine and three-month period ended September 30, 2007. The variances in operating expenses are
described below:
56
|
|
•
|
|
Total salaries and other employee benefits reflected a decrease of $4.4 million during
the nine months ended September 30, 2008 compared with the same period the prior year. This
reduction is mostly attributed to a decrease in stock incentive compensation expense
sponsored Santander Group, of $12.2 million which is partially offset by an increase of
$4.6 million in other compensation, mainly due to a $4.4 million increment in commissions
and bonuses. There was also a reduction in deferred loan origination costs of
$2.6 million, which also offset the decrease in stock incentive compensation expense
described above. For the quarter ended September 30, 2008, total salaries and other
employee benefits remained basically flat when compared with the quarter ended September
30, 2007.
|
|
|
|
|
•
|
|
The Corporation’s non-personnel expenses decreased $6.2 million for the nine months
ended September 30, 2008 compared with the same period in prior year. This decrease was
mainly due to $39.7 million related goodwill and trade name impairment charges recognized
during the third quarter of 2007; 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 agreements to repurchase, described previously. Other increases in
non-personnel expenses includes: $5.7 million in professional fees principally due to an
increment in consulting fees regarding the adoption of new accounting pronouncements and
review of other operational procedures; $3.0 million in occupancy cost due to the sale and
leaseback of the Corporation’s two principal properties in December 2007; $3.9 million in
EDP servicing expenses, amortization and technical services and $3.0 million in FDIC
assessment due to the 2007 assessment systems implemented under the Federal Deposit
Insurance Reform Act of 2005 that imposed insurance premiums based on factors such as
capital level, supervisory rating, certain financial ratios and risk information. These
increases were partially offset by a decrease of $6.9 million in business promotion.
|
|
|
|
|
•
|
|
For the quarter ended September 30, 2008, non-personal expenses reflected a decrease of
$12.5 million principally due to $39.7 million related to goodwill and trade name
impairment charges recognized during the third quarter of 2007 partially offset by a
provision for claim receivable of $25.1 million recognized during the
third quarter of 2008, described previously. Other increases were $2.9 million in
professional services; $1.2 million in occupancy cost and $0.9 million in EDP servicing
expenses, amortization and technical services. These increases were partially offset by a
decrease in business promotion of $2.7 million for the quarter ended September 30, 2008
when compared with the same period in 2007.
|
The Efficiency Ratio, on a tax equivalent basis, for the nine months ended September 30, 2008
and 2007 was 59.21% and 65.59%, respectively, reflecting an improvement of 638 basis points. For
the quarter ended September 30, 2008 and 2007, the Efficiency ratio, on a tax equivalent basis, was
59.00% and 68.81%, respectively, reflecting an improvement of 981 basis points. This improvement
was mainly the result of higher net interest income and reduction in operating expenses. As
previously discussed, the Corporation recorded $25.1 million provision for claim receivable. For the third quarter of 2007, the Corporation recorded an estimated
impairment charge of $39.7 million for goodwill and other intangible assets as operating expense.
The effect of these non-recurring transactions was excluded from operating expenses to determine
the Efficiency Ratio, on a tax equivalent basis.
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 Corporation’s 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.
57
Puerto Rico international banking entities, or IBEs, such as Santander International Bank
(SIB), are currently exempt from taxation under Puerto Rico law. During 2004, the Legislature of
Puerto Rico and the Governor of Puerto Rico approved a law amending the IBE Act. This law imposes
income taxes at normal statutory rates on each IBE that operates as a unit of a bank, if the IBE’s
net income generated was 20% of the bank’s net income in the taxable year commencing on July 1,
2005, and thereafter. It does not impose income taxation on an IBE that operates as a subsidiary of
a bank as is the case of SIB.
During June 2006, the FASB issued Interpretation No.48 (“FIN 48”), “
Accounting for Uncertainty
in Income Tax — an interpretation of FASB Statement No 109”.
FIN 48 clarifies the accounting for
uncertainty of income tax recognized in a enterprise’s financial statements in accordance with SFAS
No 109, “
Accounting for Income Tax”.
This interpretation prescribes a recognition threshold and
measurement attribute for the financial statements recognition and measurement of a tax position
taken or expected to be taken in a tax return. This interpretation also provides guidance on
derecognition, classification, interest and penalties, accounting in interim periods, disclosure
and transition.
The Corporation adopted the provisions of FIN No. 48 on January 1, 2007. As a result of the
implementation of FIN 48, the Corporation recognized a decrease of $0.5 million in the January 1,
2007 balance of retained earnings and an increase in the liability for unrecognized tax benefits.
In
assessing the realization of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the generation of future taxable
income during the periods in which the temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and
tax planning strategies in making this assessment. Based upon the level of historical taxable
income and projections for future taxable income, management believes it is more likely than not,
the Corporation will not realize the benefits of the deferred tax assets related to Santander
Financial Services, Inc and Santander Bancorp (parent company only) amounting to $20.9 million and
$0.1 million at September 30, 2008. Accordingly, a deferred tax asset valuation allowance of $20.9
million and $0.1 million for Santander Financial Services, Inc and Santander Bancorp (parent
company only), respectively, were recorded at September 30, 2008.
The income tax benefit amounted to $1.3 million, or (9.2)% of pretax earnings, for the nine
months ended September 30, 2008 compared to the provision of $4.2 million, or (13.8)% of pretax
earnings, for the same period in 2007. The decrease in provision for income tax for nine month
ended September 30, 2008 when compared with prior year resulted from a gain of $8.6 million on the
sale of a portion of the Corporation’s investment in Visa, Inc. recognized during 2008 in
connection with its initial public offering qualify as a capital gain at a preferential rate of 15%
and a deferred tax benefit $9.8 million related to $25.1 million provision for claim receivable. For the quarter ended September 30, 2008, the income tax benefit amounted
$10.3 million or (55.9)% of pretax earnings compared to income tax
benefit of $4.9 million or (8.9)% pretax earnings for the same period in 2007. The decrease in
provision for income tax for the quarter ended September 30, 2008 when compared to the same period
in prior year was principally due to the deferred tax benefit of
$9.8 million related to $25.1 million of provision for claim receivable.
58
Financial Position — September 30, 2008
Assets
The
Corporation’s assets reached $8.1 billion as of September 30, 2008, an 11.2% or $1.0
billion decrease compared to total assets of $9.2 billion at December 31, 2007 and a 12.1% or $1.1
billion decrease compared to total assets of $9.2 billion at September 30, 2007. The reduction on
Corporation’s total assets was mainly due to a decrease of $663.1 million in net loan portfolio as
of September 30, 2008 compared with December 31, 2007 and a decrease of $502.3 million in
investment securities due to $347 million securities sold which
includes $221 million related to
investment securities held by LBI as collateral of securities sold under agreements to repurchase.
These decreases were partially offset by an increase in cash and cash equivalents of $202.0
million.
The composition of the loan portfolio, including loans held for sale, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sept. 30,
|
|
|
Dec. 31,
|
|
|
Sept. 08/Dec. 07
|
|
|
Sept. 30,
|
|
|
Sept. 08/Sept. 07
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Variance
|
|
|
2007
|
|
|
Variance
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and
industrial
|
|
$
|
2,310,740
|
|
|
$
|
2,561,325
|
|
|
$
|
(250,585
|
)
|
|
$
|
2,474,795
|
|
|
$
|
(164,055
|
)
|
|
Construction
|
|
|
222,304
|
|
|
|
484,237
|
|
|
|
(261,933
|
)
|
|
|
492,970
|
|
|
|
(270,666
|
)
|
|
Mortgage
|
|
|
2,639,940
|
|
|
|
2,685,962
|
|
|
|
(46,022
|
)
|
|
|
2,728,306
|
|
|
|
(88,366
|
)
|
|
Consumer
|
|
|
595,570
|
|
|
|
643,054
|
|
|
|
(47,484
|
)
|
|
|
638,812
|
|
|
|
(43,242
|
)
|
|
Consumer Finance
|
|
|
591,435
|
|
|
|
611,113
|
|
|
|
(19,678
|
)
|
|
|
607,623
|
|
|
|
(16,188
|
)
|
|
Leasing
|
|
|
68,377
|
|
|
|
92,641
|
|
|
|
(24,264
|
)
|
|
|
102,297
|
|
|
|
(33,920
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Loans
|
|
|
6,428,366
|
|
|
|
7,078,332
|
|
|
|
(649,966
|
)
|
|
|
7,044,803
|
|
|
|
(616,437
|
)
|
|
Allowance for loan
losses
|
|
|
(180,090
|
)
|
|
|
(166,952
|
)
|
|
|
(13,138
|
)
|
|
|
(144,544
|
)
|
|
|
(35,546
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loans
|
|
$
|
6,248,276
|
|
|
$
|
6,911,380
|
|
|
$
|
(663,104
|
)
|
|
$
|
6,900,259
|
|
|
$
|
(651,983
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The net loan portfolio, including loans held for sale, reflected a decrease of $663.1 million
or 10.0%, reaching $6.2 billion at September 30, 2008, compared to the figures reported as of
December 31, 2007, and a decrease of $652.0 million or 9.5%, when compared to September 30, 2007.
The construction and commercial loan portfolio decreased $261.9 million, or 54.1% and $250.6
million or 10.0%, respectively, when compared to the December 31, 2007 balance and $270.7 million,
or 55.0% and $164.1 million or 6.6% respectively, when compared to the September 30, 2007 balance.
The reduction in these portfolios was basically due to the sale of
$223.3 million of certain
impaired commercial and construction loans to an affiliate and net repayments of approximately of
$289.4 million during the nine months ended September 30, 2008. The Corporation reported decrease
in consumer loans (including consumer finance) of $67.2 million or 5.4% when compared with December
31, 2007 balances and $59.4 million or 4.8% when compared with September 30, 2007 balances. A
leasing portfolio also reflected decreases of $24.3 million and $33.9 million when compared with
December 31, 2007 and September 30, 2007, respectively.
The $88.4 million reduction in mortgage loan portfolio at September 30, 2008 compared to
September 30, 2007 was principally due to a decrease in residential mortgage loan origination of
$173.2 million. Residential mortgage loan origination for the nine months ended September 30, 2008
was $294.3 million, 37.1% less than the $467.5 million originated during the same period in 2007.
Total mortgage loans sold and securitized during the nine months ended September 30, 2008 were
$160.8 million compared to $217.6 million during the same period in 2007.
59
Allowance for Loan Losses
The Corporation assesses the overall risks in its loan portfolio and establishes and maintains
a reserve for probable losses thereon. The allowance for loan losses is maintained at a level
sufficient to provide for estimated loan losses based on the evaluation of known and inherent risks
in the Corporation’s loan portfolio. The Corporation’s management evaluates the adequacy of the
allowance for loan losses on a monthly basis.
The determination of the allowance for loan losses is one of the most complex and critical
accounting estimates the Corporation’s management makes. The allowance for loan losses is composed
of three different components. An asset-specific reserve based on the provisions of Statements of
Financial Accounting Standards (“SFAS”) No. 114 “Accounting by Creditors for Impairment of a Loan”
(as amended), an expected loss estimate based on the provisions of SFAS No. 5 “Accounting for
Contingencies”, and an unallocated reserve based on the effect of probable economic deterioration
above and beyond what is reflected in the asset-specific component of the allowance.
Commercial, construction loans and certain mortgage loans exceeding a predetermined monetary
threshold are identified for evaluation of impairment on an individual basis pursuant to SFAS No.
114. The Corporation considers a loan impaired when interest and/or principal is past due 90 days
or more, or, when based on current information and events it is probable that the Corporation will
be unable to collect all amounts due according to the contractual terms of the loan agreement. The
asset-specific reserve on each individual loan identified as impaired is measured based on the
present value of expected future cash flows discounted at the loan’s effective interest rate,
except as a practical expedient, the Corporation may measure impairment based on the loan’s
observable market price, or the fair value of the collateral, net of estimated disposal costs, if
the loan is collateral dependent. Most of the asset-specific reserves of the Corporation’s impaired
loans are measured on the basis of the fair value of the collateral. The fair value of the
collateral is determined by external valuation specialist and since these values cannot be observed
or corroborated with market data, they are classified as Level 3 and presented as part of
non-recurring measurement disclosures.
A reserve for expected losses is determined under the provisions of SFAS No. 5 for all loans
not evaluated individually for impairment, based on historical loss experience by loan type,
management judgment of the quantitative factors (historical net charge-offs, statistical loss
estimates, etc.), as well as qualitative factors (current economic conditions, portfolio
composition, delinquency trends, industry concentrations, etc.). The Corporation groups small
homogeneous loans by type of loan (consumer, credit card, mortgage, etc.) and applies a loss
factor, which is determined using an average history of actual net losses and other statistical
loss estimates. Historical loss rates are reviewed at least quarterly and adjusted based on
changing borrower and/or collateral conditions and actual collections and charge-off experience.
Historical loss rates for the different portfolios may be adjusted for significant factors that in
management’s judgment reflect the impact of any current conditions on loss recognition. Factors
that management considers in the analysis include the effect of the trends in the nature and volume
of loans (delinquency, charge-offs, non accrual), changes in the mix or type of collateral, asset
quality trends, changes in the internal lending policies and credit standards, collection practices
and examination results from internal and external agencies.
An additional, or unallocated, reserve is maintained to cover the effect of probable economic
deterioration above and beyond what is reflected in the asset-specific component of the allowance.
This component represents management’s view that given the complexities of the lending portfolio
and the assessment process, including the inherent imprecision in the financial models used in the
loss forecasting process, there are estimable losses that have been incurred but not yet
specifically identified, and as a result not fully provided for in the asset-specific component of
the allowance. The level of the unallocated reserve may change periodically after evaluating
factors impacting assumptions used in the calculation of the asset specific component of the
reserve.
The underlying assumptions, estimates and assessments used by management to determine the
components of the allowance for loan losses are periodically evaluated and updated to reflect
management’s current view of overall economic conditions and other relevant factors impacting
credit quality and inherent losses. Changes in such estimates could significantly impact the
allowance and provision for loan losses. The Corporation could experience loan losses that are
different from the current estimates made by management. Based on current and expected economic
conditions, the expected level of net loan losses and the methodology established to evaluate the
adequacy of the allowance for loan losses, management considers that the Corporation has
established an adequate position in its allowance for loan losses. Refer to the Non-performing
Assets and Past Due Loans section for further information.
60
ALLOWANCE FOR LOAN LOSSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended
|
|
|
For the three months ended
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
166,952
|
|
|
$
|
106,863
|
|
|
$
|
186,889
|
|
|
$
|
127,916
|
|
|
Provision for loan losses
|
|
|
123,650
|
|
|
|
100,224
|
|
|
|
45,560
|
|
|
|
47,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
290,602
|
|
|
|
207,087
|
|
|
|
232,449
|
|
|
|
175,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses charged to the allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
10,589
|
|
|
|
7,217
|
|
|
|
6,439
|
|
|
|
3,733
|
|
|
Construction
|
|
|
28,128
|
|
|
|
2,632
|
|
|
|
22,770
|
|
|
|
2,632
|
|
|
Mortgage
|
|
|
64
|
|
|
|
1,768
|
|
|
|
—
|
|
|
|
618
|
|
|
Consumer
|
|
|
30,370
|
|
|
|
19,351
|
|
|
|
10,395
|
|
|
|
7,634
|
|
|
Consumer finance
|
|
|
42,764
|
|
|
|
32,080
|
|
|
|
13,306
|
|
|
|
15,890
|
|
|
Leasing
|
|
|
1,497
|
|
|
|
2,349
|
|
|
|
447
|
|
|
|
864
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
113,412
|
|
|
|
65,397
|
|
|
|
53,357
|
|
|
|
31,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
501
|
|
|
|
1,050
|
|
|
|
208
|
|
|
|
251
|
|
|
Consumer
|
|
|
887
|
|
|
|
612
|
|
|
|
308
|
|
|
|
183
|
|
|
Consumer finance
|
|
|
1,179
|
|
|
|
852
|
|
|
|
400
|
|
|
|
129
|
|
|
Leasing
|
|
|
333
|
|
|
|
340
|
|
|
|
82
|
|
|
|
86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,900
|
|
|
|
2,854
|
|
|
|
998
|
|
|
|
649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans charged-off
|
|
|
110,512
|
|
|
|
62,543
|
|
|
|
52,359
|
|
|
|
30,722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
180,090
|
|
|
$
|
144,544
|
|
|
$
|
180,090
|
|
|
$
|
144,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses to period-end loans
|
|
|
2.80
|
%
|
|
|
2.05
|
%
|
|
|
2.80
|
%
|
|
|
2.05
|
%
|
|
Recoveries to charge-offs
|
|
|
2.56
|
%
|
|
|
4.36
|
%
|
|
|
1.87
|
%
|
|
|
2.07
|
%
|
|
Annualized net charge-offs to average loans
|
|
|
2.14
|
%
|
|
|
1.19
|
%
|
|
|
3.13
|
%
|
|
|
1.73
|
%
|
The Corporation’s allowance for loan losses was $180.1 million or 2.80% of period-end loans at
September 30, 2008, a 75 basis point increase compared to $144.5 million, or 2.05% of period-end
loans at September 30, 2007. The $180.1 million in the allowance for loan losses is comprised of
$110.5 million related to commercial banking and $69.6 million to the consumer finance operations,
with a provision for loan losses of $80.8 million and $42.8 million for each respective segment for
the nine months ended September 30, 2008. At September 30, 2007, the composition of the allowance
for loan losses of $144.5 million was of $83.1 million related to commercial banking and $61.4
million to the consumer finance operations, with a provision for loan losses of $48.9 million and
$51.4 million for the same period for each respective segment.
The 75 basis points increment in the allowance for loan losses to period-end loan was due to
the increase in non-performing loans and loans past due 90 days or more of $18.9 million from
$204.3 million at September 30, 2007 to $223.2 million at September 30, 2008.
The ratio of allowance for loan losses to non-performing loans and accruing loans past due 90
days or more was 80.69% and 70.77% at September 30, 2008 and September 30, 2007, respectively, an
increase of 992 basis points. At September 30, 2008, this ratio increased 25.33 percentage points
when compared to 55.36% at December 31, 2007. Excluding non-performing mortgage loans (for which
the Corporation has historically had a minimal loss experience) this ratio was 186.0% at September
30, 2008 compared to 120.6% as of September 30, 2007 and 79.51% as of December 31, 2007.
The annualized ratio of net charge-offs to average loans for the nine-month period ended
September 30, 2008 was 2.14%, increasing 95 basis points from 1.19% for the same period in 2007.
This change was due to an increment in net charge-offs of $48.0 million during 2008 when compared
with the same period in 2007 mainly due to $28.6 million charge-offs resulting from the sale of
construction and commercial loans of $223.3 million to an affiliate during the nine-month period
ended September 30, 2008.
61
At September 30, 2008, impaired loans (loans evaluated individually for impairment) and
related allowance amounted to approximately $97.1 million and $9.8 million, respectively. At
December 31, 2007 impaired loans and related allowance amounted to $205.6 million and $25.6
million, respectively.
Although the Corporation’s 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, 2008, the Corporation’s total non-performing loans (excluding other real
estate owned) reached $209.6 million or 3.26% of total loans from $294.4 million or 4.16% of total
loans as of December 31, 2007 and from $197.1 million or 2.80% of total loans as of September 30,
2007. The Corporation’s non-performing loans reflected an increase of $12.5 million or 6.3%
compared to non-performing loans as of September 30, 2007 and a decrease of $84.8 million or 28.8%
compared to non-performing loans as of December 31, 2007. The $12.5 million increase in
non-performing loans was principally due to the $41.6 million increase in nonperforming residential
mortgage loans and $10.6 million in commercial loans partially offset by a decrease in construction
loans of $41.5 million when compared to September 30, 2007. Compared to December 31, 2007, the
decrease of $84.8 million was composed mainly of $132.2 million or 93.7% decrease in non-performing
construction loans due to the sale of certain impaired construction loans to an
affiliate during the nine-month ended September 30, 2008. This decrease was partially offset by
increases of $34.1 million or 42.2% in residential mortgages and $13.1 million or 61.5% in
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,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and Industrial
|
|
$
|
34,299
|
|
|
$
|
21,236
|
|
|
$
|
23,681
|
|
|
Construction
|
|
|
8,904
|
|
|
|
141,140
|
|
|
|
50,431
|
|
|
Mortgage
|
|
|
114,923
|
|
|
|
80,805
|
|
|
|
73,321
|
|
|
Consumer
|
|
|
13,122
|
|
|
|
10,818
|
|
|
|
10,194
|
|
|
Consumer Finance
|
|
|
35,248
|
|
|
|
37,412
|
|
|
|
37,039
|
|
|
Leasing
|
|
|
2,786
|
|
|
|
2,334
|
|
|
|
1,762
|
|
|
Restructured Loans
|
|
|
346
|
|
|
|
693
|
|
|
|
694
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing loans
|
|
|
209,628
|
|
|
|
294,438
|
|
|
|
197,122
|
|
|
Repossessed Assets
|
|
|
18,908
|
|
|
|
16,447
|
|
|
|
13,738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing assets
|
|
$
|
228,536
|
|
|
$
|
310,885
|
|
|
$
|
210,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruing loans past-due 90 days or more
|
|
$
|
13,551
|
|
|
$
|
7,162
|
|
|
$
|
7,134
|
|
|
|
|
Non-Performing loans to total loans
|
|
|
3.26
|
%
|
|
|
4.16
|
%
|
|
|
2.80
|
%
|
|
Non-Performing loans plus accruing loans
past due 90 days or more to total loans
|
|
|
3.47
|
%
|
|
|
4.26
|
%
|
|
|
2.90
|
%
|
|
Non-Performing assets to total assets
|
|
|
2.81
|
%
|
|
|
3.39
|
%
|
|
|
2.28
|
%
|
62
Liabilities
The Corporation’s total liabilities reached $7.6 billion as of September 30, 2008, reflecting
a decrease of $1.1 billion or 12.1% compared to December 31, 2007. This reduction in total
liabilities was principally due to 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 $1.4 billion or 45.2% at September
30, 2008 from $3.1 billion at December 31, 2007. This decrease was partially offset by an increase
in total deposits of $429.2 million or 8.3% to $5.6 billion as of September 30, 2008 from $5.2
billion as of December 31, 2007.
Total deposits of $5.6 billion as of September 30, 2008 were composed of $1.1 billion in
brokered deposits and $4.5 billion of customer deposits. Compared to December 31, 2007, brokered
deposits reflected a decrease of $358.6 million or 24.6% and customer deposits reflected increases
of $787.8 million, or 21.3% as of September 30, 2008. The increase in customer deposits was due to
a certificate of deposit for the amount of $630 million opened by Banco Santander, S.A. at Banco
Santander Puerto Rico, described below.
Total borrowings at September 30, 2008 (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 $1.4 billion or 45.2% and 606.0 million or
26.0% compared to borrowings at December 31, 2007 and September 30, 2007, respectively. The $1.4
billion decrease includes a decrease in fed funds purchased and other borrowings of $706.1 million
due to the refinancing of the $700 million outstanding indebtedness incurred under bridge facility
agreement among the Corporation, SFS and National Australia Bank Limited compared at December 31,
2007. Securities sold under agreements to repurchases decrease by $260.6 million due to the
cancellation of $200 million of securities sold under agreements
to repurchase due to LBI. Also, there were decreases in commercial paper issued of $234.6 million, federal home loan bank advances
of $210.0 million and subordinated capital notes of $11.0 million compared at December 31, 2007.
On September 24, 2008, Santander BanCorp (the “Corporation”) and Santander Financial Services,
Inc., a wholly owned subsidiary of the Corporation (“Santander Financial”), entered into a
collateralized loan agreement (the “Loan Agreement”) with Banco Santander Puerto Rico (the “Bank”).
Under the Loan Agreement, the Bank advanced $200 million and $430 million (the “Loans”) to the
Corporation and Santander Financial, respectively. The proceeds of the Loans were used to refinance
the outstanding indebtedness incurred under the previously announced loan agreement 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.
The Loans bear interest at a fixed rate of 4.4343% per annum. Interest is payable at maturity
of the Loans. The Corporation and Santander Financial did not pay any fee or commission to the Bank
in connection with the Loans. The entire principal balance of the Loans is due and payable on
September 24, 2009. Upon the occurrence and during the continuance of an Event of Default (as
defined in the Loan Agreement) under the Loan Agreement, the Bank shall have the right to declare
the outstanding balance of the Loans, together with accrued interest and any other amount owing to
the Bank, due and payable on demand or immediately due for payment. In addition, the Corporation
and Santander Financial will be required to pay interest on any overdue amounts at a default rate
that is equal to the fixed interest rate payable on the Loans plus 2% per annum. The Corporation’s
and Santander Financial’s obligations to pay interest and principal under the Loan Agreement are
several and not joint. However, the Corporation and Santander Financial are jointly and severally
responsible for all other amounts payable under the Loan Agreement, including any indemnification
payments due to the Bank thereunder.
On March 25, 2008, the Corporation and SFS entered into a fully-collateralized Loan Agreement
(the “Loan”) with the Bank. The proceeds of the Loan were used to refinance the outstanding
indebtedness incurred under the previously announced bridge facility agreement among the
Corporation, SFS and National Australia Bank Limited, and for general corporate purposes. Under the
Loan, the Corporation and SFS had available $186 million and $454 million, respectively, all of
which was drawn on March 25, 2008. The Loan is fully-collateralized by a certificate of deposit in
the amount of $640 million opened by Banco Santander, S.A., the parent of the Corporation, and
provided as security for the Loan pursuant to the terms of a Security Agreement, Pledge and
Assignment between the Bank and Banco Santander, S.A. The Corporation and SFS have agreed to pay a
fee of 0.10% net of taxes, deduction and withholdings, on an annualized basis, to Banco Santander,
S.A. in connection with its agreement to collateralize the loan with the deposit.
63
The amounts drawn under the Loan bear interest at an annual rate equal to the applicable LIBOR
rate plus 0.465% per annum. Interest under the Loan is payable at maturity. The Corporation and SFS
did not pay any facility fee or commission to the Bank in connection with the Loan. The entire
principal balance of the Loan was paid on September 25, 2008. Upon the occurrence and during the
continuance of an Event of Default as defined in the Loan the Bank shall have the right to declare
the outstanding balance of the Loan, together with accrued interest and any other amount owing to
the Bank, due and payable on demand or immediately due for payment. In addition, the Corporation
and SFS will be required to pay interest on any overdue amounts at a default rate that is equal to
the then applicable interest rate payable on the Loan plus 2% per annum. The Corporation’s and
SFS’s obligations to pay interest and principal under the Loan are several and not joint. However,
the Corporation and SFS are jointly and severally responsible for all other amounts payable under
the Loan.
During October 2006, the Corporation also completed the private placement of $125 million
Trust Preferred Securities (“Preferred Securities”) and issued Junior Subordinated Debentures in
the aggregate principal amount of $129 million in connection with the issuance of the Preferred
Securities. The Preferred Securities are fully and unconditionally guaranteed (to the extent
described in the guarantee agreement between the Corporation and the guarantee trustee, for the
benefit of the holders from time to time of the Preferred Securities) by the Corporation. The Trust
Preferred Securities were acquired by an affiliate of the Corporation. In connection with the
issuance of the Preferred Securities, the Corporation issued an aggregate principal amount of
$129,000,000 of its 7.00% Junior Subordinated Debentures, Series A, due July 1, 2037.
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 $555.3 million, or 6.8% of total assets at September 30, 2008,
compared to $536.5 million or 5.9% of total assets at December 31, 2007. The $18.8 million increase
in stockholders’ equity was composed of net income of $16.1 million, stock incentive plan expense
recognized as capital contribution of $8.0 million, the cumulative effect of the adoption of SFAS
159 of $3.2 million and a decrease in accumulated other comprehensive loss of $0.8 million. This increase was partially offset by dividend declared of $9.3 million during the nine months
ended September 30, 2008.
The Corporation declared a cash dividend of $0.20 per common share during the nine-month
period ended September 30, 2008 to all stockholders. The current annualized dividend yield is 2.5%.
In light of the continuing challenging general economic conditions in Puerto Rico and the global
capital markets, the Board of Directors of the Corporation voted during August 2008 to discontinue
the payment of the quarterly cash dividend on the Corporation’s common stock to strengthen the
institution’s core capital position. The Corporation may use a portion of the funds previously paid
as dividends to reduce its outstanding debt. The Corporation’s decision is part of the significant
actions it has proactively taken in order to face the on-going challenges presented by the Puerto
Rico economy, which among others, include: selling the merchant business to an unrelated third
party; maintaining an on-going strict control on operating expenses; an efficiency plan driven to
lower its current efficiency ratio; and merging its mortgage banking and commercial banking
subsidiaries.. While each of the Corporation and its banking subsidiary remain above well
capitalized ratios, this prudent measure will preserve and continue to reinforce the Corporation’s
capital position.
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 Corporation’s 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 Corporation’s shares of common stock represented an attractive
investment at prevailing market prices at the time of the adoption of the common stock repurchase
program and that, given the relatively small amount of the program, the stock repurchases would not
have any significant impact on the Corporation’s liquidity and capital positions. The program has
no time limitation and management is authorized to effect repurchases at its discretion. The
authorization permits the Corporation to repurchase shares from time to time in the open market or
in privately negotiated transactions. The timing and amount of any repurchases will depend on many
factors, including the Corporation’s capital structure, the market price of the common stock and
overall market conditions. All of the repurchased shares will be held by the Corporation as
treasury stock and reserved for future issuance for general corporate purposes.
64
During the nine months ended September 30, 2008 and 2007, the Corporation did not repurchase
any shares of common stock. As of September 30, 2008, the Corporation had repurchased 4,011,260
shares of its common stock under these programs at a cost of $67.6 million. The Corporation’s
management believes that the repurchase program will not have a significant effect on the
Corporation’s liquidity and capital positions.
The Corporation has a Dividend Reinvestment Plan and a Cash Purchase Plan wherein holders of
common stock have the opportunity to automatically invest cash dividends to purchase more shares of
the Corporation. Shareholders may also make, as frequently as once a month, optional cash payments
for investment in additional shares of the Corporation’s common stock.
As of September 30, 2008, the Corporation’s common stock price per share was $10.80, resulting
in a market capitalization of $503.7 million, including affiliated holdings compared to book value
equity of $555.3 million.
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 Corporation’s consolidated financial statements. The
regulations require the Corporation to meet specific capital guidelines that involve quantitative
measures of the Corporation’s assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. The Corporation’s capital classification is also
subject to qualitative judgments by the regulators about components, risk weightings, and other
factors.
As of September 30, 2008, the Corporation was well capitalized under the regulatory framework
for prompt corrective action. At September 30, 2008 the Corporation continued to exceed the
regulatory risk-based capital requirements for well-capitalized institutions. Tier I capital to
risk-adjusted assets and total capital ratios at September 30,
2008 were 8.65% and 11.84%,
respectively, and the leverage ratio was 6.05%.
Liquidity
The Corporation’s 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 Corporation’s 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,
13 and 19 to the accompanying consolidated financial statements for additional details of the
Corporation’s derivative transactions as of September 30, 2008 and December 31, 2007.
In the normal course of business, the Corporation utilizes derivative instruments to manage
exposure to fluctuations in interest rates, currencies and other markets, to meet the needs of
customers and for proprietary trading activities. The Corporation uses the same credit risk
management procedures to assess and approve potential credit exposures when entering into
derivative transactions as those used for traditional lending.
65
Hedging Activities:
The following table summarizes the derivative contracts designated as hedges and economic
undesignated hedges as of September 30, 2008 and December 31, 2007, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
Notional
|
|
|
Fair
|
|
|
|
|
|
|
Comprehensive
|
|
|
(In thousands)
|
|
Amounts
|
|
|
Value
|
|
|
Gain
|
|
|
Income*
|
|
|
Cash Flow Hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,049
|
|
|
Economic Undesignated Hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps
|
|
|
148,486
|
|
|
|
(1,820
|
)
|
|
|
3,850
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
148,486
|
|
|
$
|
(1,820
|
)
|
|
$
|
3,850
|
|
|
$
|
1,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
Notional
|
|
|
Fair
|
|
|
|
|
|
|
Comprehensive
|
|
|
(In thousands)
|
|
Amounts
|
|
|
Value
|
|
|
Loss
|
|
|
Loss*
|
|
|
Cash Flow Hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps
|
|
$
|
650,000
|
|
|
$
|
(2,027
|
)
|
|
$
|
—
|
|
|
$
|
(1,023
|
)
|
|
Fair Value Hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps
|
|
|
937,863
|
|
|
|
(4,425
|
)
|
|
|
(465
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
1,587,863
|
|
|
$
|
(6,452
|
)
|
|
$
|
(465
|
)
|
|
$
|
(1,023
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flow Hedges:
The Corporation designates hedges as Cash Flow Hedges when its main purpose is to reduce the
exposure associated with the variability of future cash flows related to fluctuations in short term
financing rates (such as LIBOR). At the inception of each hedge, management documents the hedging
relationship, including its objective and probable effectiveness. To assess ongoing effectiveness
of the hedges, the Corporation compares the hedged item’s periodic variable rate with the hedging
item’s benchmark rate (LIBOR) at every reporting period to determine the effectiveness of the
hedge. Any hedge ineffectiveness is recorded currently as a derivative gain or loss in condensed
consolidated statements of income.
The Corporation had a $100 million floating-for-fixed interest rate swap designated as cash
flow hedge with LBSF. The derivative liability of this swap was
$371,736 as of September 19, 2008. As a result of the bankruptcy
filing of LBHI and the default on its
contractual payments as of September 19, 2008, the Corporation terminated the swap and the cash
flow hedge designation on these swaps. As of September 30, 2008 and December 31, 2007, the total amount, net of tax,
included in accumulated other comprehensive income pertaining to the cash flow hedges was an
unrealized loss of $0.2 million and $1.2 million, respectively. The net loss of $371,000 remains in accumulated other
comprehensive income and will be reclassified into earnings when the
cash flows that were hedged occur.
Economic Undesignated Hedges:
The Corporation adopted SFAS 159 effective January 1, 2008 which permit the measurement of
selected financial instruments at fair value. The Corporation elected to account at fair value
certain of its brokered deposits and subordinated capital notes that were previously designated for
fair value hedge accounting in accordance with SFAS 133. The selected financial instruments are
reported at fair value with changes in fair value reported in condensed consolidated statements of
income.
66
As of September 30, 2008 the economic undesignated hedges have maturities through the year
2032. The weighted average rate paid and received on these contracts is 3.23% and 6.03% as of
September 30, 2008.
The Corporation had issued fixed rate debt swapped to create a floating rate source of funds.
In this case, the Corporation matches all of the relevant economics variables (notional, coupon,
payments date and exchanges, etc) of the fixed rate sources of funds to the fixed rate portion of
the interest rate swaps, (which it received from counterparty), and pays the floating rate portion
of the interest swaps. The effectiveness of these transactions is very high since all of the
relevant economic variables are matched. The Corporation had $23.8 million fixed-for-floating
interest rate swaps with LBSF. The derivative liability of these
swaps was $681,535
as of September 19, 2008. As a result of the bankruptcy filing
of LBHI and the default
on its contractual payments as of September 19, 2008, the Corporation terminated these swaps. As
of September 30, 2008, the Corporation has $148.5 million of these economic undesignated hedges.
Fair Value Hedges:
The Corporation designates hedges as Fair Value Hedges when its main purpose is to hedge the
changes in market value of an associated asset or liability. The Corporation only designates these
types of hedges if at inception it is believed that the relationship in the changes in the market
value of the hedged item and hedging item will offset each other in a highly effective manner. At
the inception of each hedge, management documents the hedging relationship, including its objective
and probable effectiveness. To assess ongoing effectiveness of the hedges, the Corporation marks to
market both the hedging item and the hedged item at every reporting period to determine the
effectiveness of the hedge. Any hedge ineffectiveness is recorded currently as a derivative gain or
loss in condensed consolidated statements of income.
The Corporation hedges its certain callable brokered certificates of deposits and subordinated
capital notes by using interest rate swaps. These swaps were designated for hedge accounting
treatment under SFAS 133. For designated fair value hedges, the changes in the fair value of both
the hedging instrument and the underlying hedged instrument were included in other income and the
interest flows were included in the net interest income in condensed consolidated statements of
income.
Prior to the adoption of SFAS 159, changes in the value of the derivatives instruments
qualifying as fair value hedge that have been highly effective were recognized in the current
period results of operations along with the change in the value of the designated hedge 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 yield
adjustment. After adoption of SFAS 159 for certain callable brokered certificates of deposits 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
condensed consolidated statements of income.
The fair value hedges have maturities through the year 2032 as of December 31, 2007. The
weighted-average rate paid and received on these contracts is 5.10% and 5.39%, as of December 31,
2007.
The $937.9 million fair value hedges are associated to the swapping of fixed rate debt as
December 31, 2007. The Corporation regularly issues term fixed rate debt, which it in turn swaps to
floating rate debt via interest rate swaps. In these cases the Corporation matches all of the
relevant economic variables (notional, coupon, payment dates and conventions etc.) of the fixed
rate debt it issues to the fixed rate leg of the interest rate swap ( which it receives from the
counterparty) and pays the floating rate leg of the interest rate swap. The effectiveness of these
transactions is very high since all of the relevant economic variables are matched.
Derivative instruments not designated as hedging instruments:
Any derivative not associated to hedging activity is booked as a freestanding derivative. In
the normal course of business the Corporation may enter into derivative contracts as either a
market maker or proprietary position taker. The Corporation’s mission as a market maker is to meet
the clients’ needs by providing them with a wide array of financial products, which include
derivative contracts. The Corporation’s major role in this aspect is to serve as a derivative
counterparty to these clients. Positions taken with these clients are hedged (although not
designated as hedges) in the OTC market with interbank participants or in the organized futures
markets. To a lesser extent, the Corporation enters into freestanding derivative contracts as a
proprietary position taker, based on market expectations or to benefit from price differentials
between financial instruments and markets. The Corporation had $13.8 million of interest rate
swaps with LBSF. The derivative liability of these swaps was $166,333 as
of September 19, 2008. As a result of the bankruptcy filing of
LBHI and the default on its contractual
payments as of September 19, 2008, the Corporation
67
terminated these swaps. These derivatives are not linked to specific assets and liabilities on the balance sheet or to forecasted transactions in
an accounting hedge relationship and, therefore, do not qualify for hedge accounting. These
derivatives are carried at fair value and changes in fair value are recorded in earnings. The
market and credit risk associated with these activities is measured, monitored and controlled by
the Corporation’s Market Risk Group, a unit independent from the treasury department. Among other
things, this group is responsible for: policy, analysis, methodology and reporting of anything
related to market risk and credit risk. The following table summarizes the aggregate notional
amounts and the reported derivative assets or liabilities (i.e. the fair value of the derivative
contracts) as of September 30, 2008 and December 31, 2007, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
|
|
|
Notional
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Amounts *
|
|
|
Fair Value
|
|
|
Gain
|
|
|
Interest Rate Contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps
|
|
$
|
3,591,640
|
|
|
$
|
864
|
|
|
$
|
359
|
|
|
Interest Rate Caps
|
|
|
1,258
|
|
|
|
—
|
|
|
|
—
|
|
|
Other
|
|
|
1,018
|
|
|
|
(7
|
)
|
|
|
(52
|
)
|
|
Equity Derivatives
|
|
|
236,388
|
|
|
|
—
|
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
3,830,304
|
|
|
$
|
857
|
|
|
$
|
285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
Notional
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Amounts *
|
|
|
Fair Value
|
|
|
Gain
|
|
|
Interest Rate Contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps
|
|
$
|
3,237,179
|
|
|
$
|
257
|
|
|
$
|
679
|
|
|
Interest Rate Caps
|
|
|
14,762
|
|
|
|
—
|
|
|
|
—
|
|
|
Other
|
|
|
1,451
|
|
|
|
45
|
|
|
|
35
|
|
|
Equity Derivatives
|
|
|
267,124
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
3,520,516
|
|
|
$
|
302
|
|
|
$
|
714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
The notional amount represents the gross sum of long and short.
|
68
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 Corporation’s lending activity has
been considered when establishing functional responsibilities, organizational reporting, lending
policies and procedures, and various monitoring processes and controls.
Critical risk management responsibilities include establishing sound lending standards,
monitoring the quality of the loan portfolio, establishing loan rating systems, assessing reserves
and loan concentrations, supervising document control and accounting, providing necessary training
and resources to credit officers, implementing lending policies and loan documentation procedures,
identifying problem loans as early as possible, and instituting procedures to ensure appropriate
actions to comply with laws and regulations. Due to the challenging environment, the Corporation
implemented during the second semester of 2006 more stringent underwriting and lending criteria.
Credit risk management for our portfolio begins with initial underwriting and continues
throughout the borrower’s credit cycle. Experiential judgment in conjunction with statistical
techniques are used in all aspects of portfolio management including underwriting, product pricing,
risk appetite, setting credit limits, operating processes and metrics to quantify balance risks and
returns. In addition to judgmental decisions, statistical models are used for credit decisions.
Tolerance levels are set to decrease the percentage of approvals as the risk profile increases.
Statistical models are based on detailed behavioral information from external sources such as
credit bureaus and/or internal historical experience. These models are an integral part of our
credit management process and are used in the assessment of both new and existing credit decisions,
portfolio management, strategies including authorizations and line management, collection practices
and strategies and determination of the allowance for credit losses.
The Corporation has also established an internal risk rating system and internal
classifications which serve as timely identification of potential deterioration in loan quality
attributes in the loan portfolio.
Credit extensions for commercial loans are approved by credit committees including the Small
Loan Credit Committee, the Regional Credit Committee, the Credit Administration Committee, the
Management Credit Committee, and the Board of Directors Credit Committee. A centralized department
of the Consumer Lending Division approves all consumer loans.
The Corporation’s collateral requirements for loans depend on the financial strength and
liquidity of the prospective borrower and the principal amount and term of the proposed financing.
Acceptable collateral includes cash, marketable securities, mortgages on real and personal
property, accounts receivable, and inventory.
In addition, the Corporation has an independent Loan Review Department and an independent
Internal Audit Division, each of which conducts monitoring and evaluation of loan portfolio
quality, loan administration, and other related activities, carried on as part of the Corporation’s
lending activity. Both departments provide periodic reports to the Board of Directors,
continuously assess the validity of information reported to the Board of Directors and maintain
compliance with established lending policies.
69
The following table provides the composition of the Corporation’s loan portfolio as of
September 30, 2008 and December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
|
December 31, 2007
|
|
|
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
2,311,867
|
|
|
$
|
2,562,101
|
|
|
|
|
|
|
|
|
|
|
Consumer — banking operations
|
|
|
594,526
|
|
|
|
641,593
|
|
|
|
|
|
|
|
|
|
|
Consumer Finance:
|
|
|
|
|
|
|
|
|
|
Consumer Installment Loans
|
|
|
690,474
|
|
|
|
667,327
|
|
|
Mortgage Loans
|
|
|
314,832
|
|
|
|
278,882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,005,306
|
|
|
|
946,209
|
|
|
|
|
|
|
|
|
|
|
Leasing
|
|
|
72,419
|
|
|
|
98,987
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
222,762
|
|
|
|
486,284
|
|
|
|
|
|
|
|
|
|
|
Mortgage Loans
|
|
|
2,556,952
|
|
|
|
2,539,811
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
|
6,763,832
|
|
|
|
7,274,985
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned income and deferred fees/cost:
|
|
|
|
|
|
|
|
|
|
Banking operations
|
|
|
(1,261
|
)
|
|
|
(3,459
|
)
|
|
Consumer finance
|
|
|
(413,871
|
)
|
|
|
(335,096
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loans losses:
|
|
|
|
|
|
|
|
|
|
Banking operations
|
|
|
(110,480
|
)
|
|
|
(98,593
|
)
|
|
Consumer finance
|
|
|
(69,610
|
)
|
|
|
(68,359
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,168,610
|
|
|
$
|
6,769,478
|
|
|
|
|
|
|
|
|
|
The Corporation’s gross loan portfolio as of September 30, 2008 and December 31, 2007 amounted
to $6.8 billion and $7.3 billion respectively, which represented 90.5% and 84.9%, respectively, of
the Corporation’s total earning assets. The loan portfolio is distributed among various types of
credit, including commercial business loans, commercial real estate loans, construction loans,
small business loans, consumer lending and residential mortgage loans. The credit risk exposure
provides for diversification among specific industries, specific types of business, and related
individuals. As of September 30, 2008 and December 31, 2007, there was no obligor group that
represented more than 2.5% of the Corporation’s total loan portfolio. Obligors’ resident or having
a principal place of business in Puerto Rico comprised approximately 99% of the Corporation’s loan
portfolio.
As of September 30, 2008 and December 31, 2007, the Corporation had over 380,000 consumer loan
customers each and over 9,000 and 8,000 commercial loan customers, respectively, As of such dates,
the Corporation had 43 and 52 clients with commercial loans outstanding over $10.0 million,
respectively. Although the Corporation has generally avoided cross-border loans, the Corporation
had approximately $41.3 and $33.6 million in cross-border loans as of September 30,
2008 and December 31, 2007, respectively, which are collateralized with real estate in the United
States of America, cash and marketable securities.
The Corporation uses an underwriting system for the origination of residential mortgage loans.
These loans are fully underwritten by experienced underwriters. The methodology used in
underwriting the extension of credit for each residential mortgage loan employs objective
mathematical principles which relate the mortgagor’s income, assets, and liabilities to the
proposed payment and such underwriting methodology confirmed that at the time of origination
(application/approval) the borrower had a reasonable ability to make timely payments on the
residential mortgage loan. Also the character of the borrower or willingness to pay is evaluated by
analyzing the credit report. We apply the basic principles of the borrower’s willingness and
ability to pay.
The risk involved with a loan decision is kept in perspective and must be considered in the
analysis of a loan. Certain characteristics of the transaction are indicators of risk such as
occupancy, loan amount, purpose, product type, property type, loan amount size in relation to
borrower’s previous credit depth and loan to value, cash out of the transaction, time of occupancy,
etc. Risk will be mitigated, in part, by requiring a higher equity, risk pricing, additional
documentation and obtaining and documenting compensating factors.
70
The purpose of mortgage credit analysis is to determine the borrower’s ability and willingness
to repay the mortgage debt, and thus, limit the probability of default or collection difficulties.
There are four major elements which, typically, are evaluated in assessing a borrower’s ability and
willingness to repay the mortgage debt and the property to determine it complies with the agency
and investor’s requirement, has marketability, and is a sound collateral for the loan. The elements
above mentioned comprised (1) stability documentation, (2) continuity and adequacy of income, (3)
credit and assets and (4) collateral.
The Corporation follows the established guidelines and requirements for all government insured
or guaranteed loans such as FHA, VA, RURAL, PR government products, as well as conforming loans
sold to FHLMC and FNMA. In addition to conforming loans and government insured or guaranteed loans,
we also provide loans designed to offer an alternative to individuals who do not qualify for an
Agency conforming mortgage loan. These non-conforming loans typically have: (1) LTV higher than
80% with mortgage insurance or additional collateral; (2) the mortgage amount may exceed the
FNMA/FHLMC limits and (3) may have different documentation requirements.
Commencing in late 2006, the Corporation adjusted the underwriting policies to take into
consideration the worsening macroeconomic conditions in PR. The implementation of more tight
underwriting standards to reduce the exposure of risks, has contributed to a significant reduction
of mortgage loans originations, and to improve the credit quality of our portfolio. These
underwriting criteria reflect the Corporation’s effort to minimize the impact of the local
recession on its overall loan portfolio, including its mortgage business and protect the value of
its franchise from the higher risk levels caused by declining assets quality.
Residential real estate mortgages are one of the Corporation’s core products and pursuant to
our credit management strategy the Corporation offers a broad range of alternatives of this product
to borrowers that are considered mostly prime or near prime or “Band C” (borrowers with Fair Isaac
Corporation (“Fico Scores”) of 620 or less among other factors including income and its source,
nature and location of collateral, loan-to-value and other guarantees, if any). Near prime or “Band
C” lending policies and procedures do not differ from our general residential mortgages and
consumer lending policies and procedures to other customers. The concentration of residential
mortgages loans of the Bank are presented in the followings tables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 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
|
|
$
|
79,614
|
|
|
$
|
1,346
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
80,960
|
|
|
|
3
|
%
|
|
$
|
—
|
|
|
|
0.00
|
%
|
|
2007
|
|
|
260,036
|
|
|
|
3,374
|
|
|
|
|
|
|
|
—
|
|
|
|
263,410
|
|
|
|
10
|
%
|
|
|
2,167
|
|
|
|
0.82
|
%
|
|
2006
|
|
|
585,678
|
|
|
|
4,446
|
|
|
|
37
|
|
|
|
610
|
|
|
|
590,771
|
|
|
|
23
|
%
|
|
|
23,669
|
|
|
|
4.01
|
%
|
|
2005
|
|
|
614,449
|
|
|
|
648
|
|
|
|
—
|
|
|
|
—
|
|
|
|
615,097
|
|
|
|
24
|
%
|
|
|
19,771
|
|
|
|
3.21
|
%
|
|
2004
|
|
|
447,376
|
|
|
|
520
|
|
|
|
|
|
|
|
—
|
|
|
|
447,896
|
|
|
|
18
|
%
|
|
|
14,729
|
|
|
|
3.29
|
%
|
|
2003 and earlier
|
|
|
556,826
|
|
|
|
1,634
|
|
|
|
65
|
|
|
|
293
|
|
|
|
558,818
|
|
|
|
22
|
%
|
|
|
18,024
|
|
|
|
3.23
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub- Total
|
|
$
|
2,543,979
|
|
|
$
|
11,968
|
|
|
$
|
102
|
|
|
$
|
903
|
|
|
|
2,556,952
|
|
|
|
100
|
%
|
|
$
|
78,360
|
|
|
|
3.06
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
First
|
|
|
Second
|
|
|
Consumer
|
|
|
Other
|
|
|
Total
|
|
|
Vintage
|
|
|
Non-performing
|
|
|
% of
|
|
|
|
|
mortgage
|
|
|
mortgage
|
|
|
mortgage
|
|
|
mortgage
|
|
|
Mortgage
|
|
|
% of total
|
|
|
loans
|
|
|
total loans
|
|
|
|
|
(Dollars in thousands)
|
|
|
Vintage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
$
|
225,340
|
|
|
$
|
2,931
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
228,271
|
|
|
|
9
|
%
|
|
$
|
—
|
|
|
|
0.00
|
%
|
|
2006
|
|
|
588,575
|
|
|
|
5,258
|
|
|
|
52
|
|
|
|
—
|
|
|
|
593,885
|
|
|
|
23
|
%
|
|
|
8,696
|
|
|
|
1.46
|
%
|
|
2005
|
|
|
633,798
|
|
|
|
869
|
|
|
|
—
|
|
|
|
—
|
|
|
|
634,667
|
|
|
|
25
|
%
|
|
|
15,918
|
|
|
|
2.51
|
%
|
|
2004
|
|
|
473,550
|
|
|
|
532
|
|
|
|
|
|
|
|
21
|
|
|
|
474,103
|
|
|
|
19
|
%
|
|
|
11,751
|
|
|
|
2.48
|
%
|
|
2003 and earlier
|
|
|
605,350
|
|
|
|
1,758
|
|
|
|
131
|
|
|
|
1,646
|
|
|
|
608,885
|
|
|
|
24
|
%
|
|
|
15,644
|
|
|
|
2.57
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,526,613
|
|
|
$
|
11,348
|
|
|
$
|
183
|
|
|
$
|
1,667
|
|
|
|
2,539,811
|
|
|
|
100
|
%
|
|
$
|
52,009
|
|
|
|
2.05
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 46% and 48% of the total mortgage originations for the nine months
ended September 30, 2008 and the year ended December 31, 2007, respectively. The Corporation
performed strict quality control reviews of third party originated loans, which represented 55% for
the nine-month period ended September 30, 2008 and 52% of the total originated mortgage portfolio
for the year ended December 31, 2007. The Corporation offered fixed rate first and second mortgages
which are almost entirely secured by a primary residence for the purpose of purchase money,
refinance, debt consolidation, or home equity loans. Residential real estate mortgages of banking
operations represent approximately 38% and 35% of total gross loans at September 30, 2008 and
December 31, 2007, respectively. As of September 30, 2008 and December 31, 2007, the first mortgage
portfolio totaled approximately $2.5 billion while the second mortgage portfolio was approximately
$12 million for both periods from banking operations.
The Corporation has not originated option adjustable-rate mortgage products (option ARMs) or
variable-rate mortgage products with fixed payment amounts, commonly referred to within the
financial services industry as negative amortizing mortgage loans, as the Corporation believes
these products rarely provide a benefit to our customers. The interest rates impact the amount and
timing of origination and servicing fees because consumer demand for new mortgages and the level of
refinancing activity are sensitive to changes in mortgage interest rates. The ARMs currently
outstanding in the residential mortgage portfolio came from previous acquisitions made by the
Corporation. The Corporation also mitigated its credit risk in its residential mortgage loan
portfolio through sales and securitizations transactions.
The mortgage real estate loans in the Corporation’s consumer finance subsidiary Santander
Financial Services, Inc. (“Island Finance”) are presented in the followings tables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
|
|
|
First
|
|
|
Second
|
|
|
ARM
|
|
|
Total
|
|
|
Vintage
|
|
|
Non-performing
|
|
|
% of
|
|
|
|
|
mortgage
|
|
|
mortgage
|
|
|
mortgage
|
|
|
Mortgage*
|
|
|
% of total
|
|
|
loans
|
|
|
total loans
|
|
|
|
|
(Dollars in thousands)
|
|
|
Vintage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
$
|
28,158
|
|
|
$
|
670
|
|
|
$
|
—
|
|
|
$
|
28,828
|
|
|
|
18
|
%
|
|
$
|
—
|
|
|
|
0.00
|
%
|
|
2007
|
|
|
29,088
|
|
|
|
1,549
|
|
|
|
1,285
|
|
|
|
31,922
|
|
|
|
19
|
%
|
|
|
533
|
|
|
|
1.67
|
%
|
|
2006
|
|
|
13,864
|
|
|
|
1,263
|
|
|
|
22,987
|
|
|
|
38,114
|
|
|
|
22
|
%
|
|
|
2,500
|
|
|
|
6.56
|
%
|
|
2005
|
|
|
12,579
|
|
|
|
1,261
|
|
|
|
20,735
|
|
|
|
34,575
|
|
|
|
20
|
%
|
|
|
3,792
|
|
|
|
10.97
|
%
|
|
2004
|
|
|
12,210
|
|
|
|
3,287
|
|
|
|
—
|
|
|
|
15,497
|
|
|
|
9
|
%
|
|
|
1,937
|
|
|
|
12.50
|
%
|
|
2003 and earlier
|
|
|
14,440
|
|
|
|
6,654
|
|
|
|
—
|
|
|
|
21,094
|
|
|
|
12
|
%
|
|
|
2,649
|
|
|
|
12.56
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
110,339
|
|
|
$
|
14,684
|
|
|
$
|
45,007
|
|
|
$
|
170,030
|
|
|
|
100
|
%
|
|
$
|
11,411
|
|
|
|
6.71
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Net of unearned finance charges and deferred income/cost
|
72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
First
|
|
|
Second
|
|
|
ARM
|
|
|
Total
|
|
|
Vintage
|
|
|
Non-performing
|
|
|
% of
|
|
|
|
|
mortgage
|
|
|
mortgage
|
|
|
mortgage
|
|
|
Mortgage*
|
|
|
% of total
|
|
|
loans
|
|
|
total loans
|
|
|
|
|
(Dollars in thousands)
|
|
|
Vintage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
$
|
32,007
|
|
|
$
|
1,859
|
|
|
$
|
1,354
|
|
|
$
|
35,220
|
|
|
|
22
|
%
|
|
$
|
24
|
|
|
|
0.07
|
%
|
|
2006
|
|
|
15,965
|
|
|
|
1,424
|
|
|
|
25,771
|
|
|
|
43,160
|
|
|
|
27
|
%
|
|
|
1,634
|
|
|
|
3.79
|
%
|
|
2005
|
|
|
14,434
|
|
|
|
1,556
|
|
|
|
23,445
|
|
|
|
39,435
|
|
|
|
24
|
%
|
|
|
3,405
|
|
|
|
8.63
|
%
|
|
2004
|
|
|
13,898
|
|
|
|
3,960
|
|
|
|
—
|
|
|
|
17,858
|
|
|
|
11
|
%
|
|
|
2,319
|
|
|
|
12.99
|
%
|
|
2003 and earlier
|
|
|
17,530
|
|
|
|
7,982
|
|
|
|
—
|
|
|
|
25,512
|
|
|
|
16
|
%
|
|
|
3,449
|
|
|
|
13.52
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
93,834
|
|
|
$
|
16,781
|
|
|
$
|
50,570
|
|
|
$
|
161,185
|
|
|
|
100
|
%
|
|
$
|
10,831
|
|
|
|
6.72
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Net of unearned finance charges and deferred income/cost
|
The Corporation originates loans to near prime or “Band C” borrowers (customers with Fair
Isaac Corporation (“FICO”) scores of 620 or less among other factors, including level of income and
its source, loan-to-value (LTV), other guarantees and banking relationships and nature and location
of collateral, if any,) mainly through Island Finance and to a lesser extent at the Bank. The
following table provides information on the Corporation’s residential mortgage and consumer
installments loans exposure from banking operations and consumer finance business, including near
prime or “Band C” loans at September 30, 2008 and December 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 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
|
|
$
|
1,976,059
|
|
|
|
80
|
%
|
|
$
|
312,006
|
|
|
|
81
|
%
|
|
$
|
268,887
|
|
|
|
77
|
%
|
|
$
|
2,556,952
|
|
|
|
80
|
%
|
|
Consumer Finance
|
|
|
65,302
|
|
|
|
61
|
%
|
|
|
42,794
|
|
|
|
62
|
%
|
|
|
61,934
|
|
|
|
61
|
%
|
|
|
170,030
|
|
|
|
61
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,041,361
|
|
|
|
|
|
|
$
|
354,800
|
|
|
|
|
|
|
$
|
330,821
|
|
|
|
|
|
|
$
|
2,726,982
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Installment
Loans*:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banking Operations
|
|
$
|
483,802
|
|
|
|
n/a
|
|
|
$
|
48,872
|
|
|
|
n/a
|
|
|
$
|
61,852
|
|
|
|
n/a
|
|
|
$
|
594,526
|
|
|
|
n/a
|
|
|
Consumer Finance
|
|
|
176,414
|
|
|
|
n/a
|
|
|
|
125,353
|
|
|
|
n/a
|
|
|
|
119,638
|
|
|
|
n/a
|
|
|
|
421,405
|
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
660,216
|
|
|
|
|
|
|
$
|
174,225
|
|
|
|
|
|
|
$
|
181,490
|
|
|
|
|
|
|
$
|
1,015,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Net of unearned finance charges and deferred income/cost
|
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
“BAND A”
|
|
|
Avg.
|
|
|
“BAND B”
|
|
|
Avg.
|
|
|
“BAND C”
|
|
|
Avg.
|
|
|
Total
|
|
|
Avg.
|
|
|
|
|
FICO>=660
|
|
|
LTV
|
|
|
FICO>620 and <660
|
|
|
LTV
|
|
|
FICO<=620
|
|
|
LTV
|
|
|
Loans
|
|
|
LTV
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Loan portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banking Operations
|
|
$
|
1,901,868
|
|
|
|
81
|
%
|
|
$
|
309,770
|
|
|
|
82
|
%
|
|
$
|
328,173
|
|
|
|
80
|
%
|
|
$
|
2,539,811
|
|
|
|
81
|
%
|
|
Consumer Finance
|
|
|
56,535
|
|
|
|
58
|
%
|
|
|
40,389
|
|
|
|
60
|
%
|
|
|
64,261
|
|
|
|
57
|
%
|
|
|
161,185
|
|
|
|
58
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,958,403
|
|
|
|
|
|
|
$
|
350,159
|
|
|
|
|
|
|
$
|
392,434
|
|
|
|
|
|
|
$
|
2,700,996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Installment
Loans*:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banking Operations
|
|
$
|
510,844
|
|
|
|
n/a
|
|
|
$
|
54,943
|
|
|
|
n/a
|
|
|
$
|
75,806
|
|
|
|
n/a
|
|
|
$
|
641,593
|
|
|
|
n/a
|
|
|
Consumer Finance
|
|
|
178,745
|
|
|
|
n/a
|
|
|
|
130,202
|
|
|
|
n/a
|
|
|
|
140,981
|
|
|
|
n/a
|
|
|
|
449,928
|
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
689,589
|
|
|
|
|
|
|
$
|
185,145
|
|
|
|
|
|
|
$
|
216,787
|
|
|
|
|
|
|
$
|
1,091,521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Net of unearned finance charges and deferred income/cost
|
At September 30, 2008, residential mortgage portfolio categorized as near prime or “Band C”
loans was approximately $269 million and $62 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 September 30, 2008 includes $6.1 million or
2.2% of originated loans during the year for banking operations and $7.0 million or 11.2% for
consumer finance portfolio. At December 31, 2007 residential mortgage portfolio categorized as near
prime or “Band C” loans was approximately $328 million and $64 million for banking operations and
consumer finance portfolios, respectively, a 13% and 40% of its total residential mortgage
portfolio, respectively. The amounts reported in “Band C” as of December 31, 2007 includes $17.2
million or 5.3% of originated loans during the year for banking operations and $8.0 million or
12.4% for consumer finance portfolio. The Corporation’s risk management considers a “FICO” credit
score, an indicator of credit rating and credit profile, and loan-to value ratios, the proportional
lending exposure relative to property value, as a key determinant of credit performance. The
average FICO score for the residential mortgage portfolio of banking operations, as of September
30, 2008 and December 31, 2007 was 706 and 697, respectively and an average LTV of 80% as compared
to 81% in 2007. For its consumer finance business residential mortgages, average FICO score, as of
September 30, 2008 and December 31, 2007 was 644 and 641, respectively and an average LTV of 61% in
2008 as compared to 58% in 2007. The actual rates of delinquencies, foreclosures and losses on
these loans could be higher than anticipated during economic slowdowns.
Residential mortgage loan origination for banking operations was $294.3 million for the nine
months ended September 30, 2008 and $562.4 million for the year ended December 31, 2007. The
Corporation sold and securitized $160.8 million and $298.6 million for the nine months ended
September 30, 2008 and the year ended December 31, 2007, respectively to unaffiliated third
parties. Within the sales and securitizations numbers mentioned above, the Corporation sold and
securitized $8.8 million and $12.9 million of near prime or “Band C” loans for the nine months
ended September 30, 2008 and the year ended December 31, 2007, respectively.
The Corporation added strength to the control over its credit activities and does not pursue
near prime or “Band C” residential mortgage and consumer installment as a core product of its
lending activities. Under the Corporation’s Loss Mitigation Policy (“LMP”), we evaluate, several
alternatives for identifying near prime or “Band C” residential mortgage loan borrowers who are at
risk of default in order to design and offer loan mitigation strategies, including repayment plans
and loan modifications to such borrowers. The objective of the Loss Mitigation Policy is to
document the approach to loss mitigation manage and reduce the risk of loss for the consumer and
mortgage portfolios and takes into consideration the current stress that consumer and mortgage
borrowers are facing in Puerto Rico. The Corporation’s strategy is to maximize the recovery from
delinquent and past due consumer and mortgage loans by actively working with borrowers to develop
repayment plans that avoid foreclosure or other legal remedies.
The policy applies to the Corporation’s consumer lending business, including personal loans,
credit cards and credit lines and mortgage business including conforming, guaranteed & insured
mortgages and non-conforming mortgages. Loss
mitigation, where applicable, is intended to benefit both the Corporation and the borrower. The
Corporation avoids a costly and time consuming foreclosure process while the borrower maintains
ownership of his/her home. The Loss Mitigation Policy describes the Corporation’s approach to
identifying borrowers with higher risk of default, assessing their ability to pay taking into
account various factors, including debt to income ratios; assessing the likelihood of default;
explore loss
74
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 Corporation’s policy with respect to asset liability management is to maximize its net
interest income, return on assets and return on equity while remaining within the established
parameters of interest rate and liquidity risks provided by the Board of Directors and the relevant
regulatory authorities. Subject to these constraints, the Corporation takes mismatched interest
rate positions. The Corporation’s asset and liability management policies are developed and
implemented by its Asset and Liability Committee (“ALCO”), which is composed of senior members of
the Corporation including the President, Chief Operating Officer, Chief Accounting Officer,
Treasurer and other executive officers of the Corporation. The ALCO reports on a monthly basis to
the members of the Bank’s Board of Directors.
Market Risk and Interest Rate Sensitivity
A key component of the Corporation’s asset and liability policy is the management of interest
rate sensitivity. Interest rate sensitivity is the relationship between market interest rates and
net interest income due to the maturity or repricing characteristics of interest-earning assets and
interest-bearing liabilities. For any given period, the pricing structure is matched when an equal
amount of such assets and liabilities mature or reprice in that period. Any mismatch of
interest-earning assets and interest-bearing liabilities is known as a gap position. A positive
gap denotes asset sensitivity, which means that an increase in interest rates would have a positive
effect on net interest income, while a decrease in interest rates would have a negative effect on
net interest income. A negative gap denotes liability sensitivity, which means that a decrease in
interest rates would have a positive effect on net interest income, while an increase in interest
rates would have a negative effect on net interest income. Because different types of assets and
liabilities with the same or similar maturities may react differently to changes in overall market
rates or conditions, changes in interest rates may affect net interest income positively or
negatively even if an institution were perfectly matched in each maturity category.
The Corporation’s one-year cumulative GAP position at September 30, 2008, was negative $1.8
billion or -23.6% of total earning assets. This is a one-day position that is continually changing
and is not indicative of the Corporation’s position at any other time. This denotes liability
sensitivity, which means that an increase in interest rates would have a negative effect on net
interest income while a decrease in interest rates would have a positive effect on net interest
income. While the GAP position is a useful tool in measuring interest rate risk and contributes
toward effective asset and liability management, shortcomings are inherent in GAP analysis since
certain assets and liabilities may not move proportionally as interest rates change.
The Corporation’s interest rate sensitivity strategy takes into account not only rates of
return and the underlying degree of risk, but also liquidity requirements, capital costs and
additional demand for funds. The Corporation’s maturity mismatches and positions are monitored by
the ALCO and managed within limits established by the Board of Directors.
The following table sets forth the repricing of the Corporation’s interest earning assets and
interest bearing liabilities at September 30, 2008 and may not be representative of interest rate
gap positions at other times. In addition, variations in interest rate sensitivity may exist
within the repricing period presented due to the differing repricing dates within the period. In
preparing the interest rate gap report, the following assumptions 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.
75
SANTANDER BANCORP
MATURING GAP ANALYSIS
As of September 30, 2008
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0 to 3
|
|
3 months
|
|
1 to 3
|
|
3 to 5
|
|
5 to 10
|
|
More than
|
|
No Interest
|
|
|
|
|
|
months
|
|
to a Year
|
|
Years
|
|
Years
|
|
Years
|
|
10 Years
|
|
Rate Risk
|
|
Total
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Portfolio
|
|
$
|
173,105
|
|
|
$
|
59,655
|
|
|
$
|
34,292
|
|
|
$
|
305,625
|
|
|
$
|
192,494
|
|
|
$
|
—
|
|
|
$
|
125,857
|
|
|
$
|
891,028
|
|
|
Deposits in Other Banks
|
|
|
163,415
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
246,547
|
|
|
|
409,962
|
|
|
Loan Portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
596,487
|
|
|
|
814,061
|
|
|
|
322,420
|
|
|
|
317,390
|
|
|
|
91,705
|
|
|
|
72,663
|
|
|
|
164,391
|
|
|
|
2,379,117
|
|
|
Construction
|
|
|
188,926
|
|
|
|
4,346
|
|
|
|
11,205
|
|
|
|
9,144
|
|
|
|
5,437
|
|
|
|
3,246
|
|
|
|
—
|
|
|
|
222,304
|
|
|
Consumer
|
|
|
383,808
|
|
|
|
197,116
|
|
|
|
383,636
|
|
|
|
173,589
|
|
|
|
48,695
|
|
|
|
27
|
|
|
|
134
|
|
|
|
1,187,005
|
|
|
Mortgage
|
|
|
132,196
|
|
|
|
252,303
|
|
|
|
629,656
|
|
|
|
548,965
|
|
|
|
1,005,891
|
|
|
|
60,595
|
|
|
|
10,334
|
|
|
|
2,639,940
|
|
|
Fixed and Other Assets
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
55,931
|
|
|
|
349,892
|
|
|
|
405,823
|
|
|
|
|
|
|
Total Assets
|
|
$
|
1,637,937
|
|
|
$
|
1,327,481
|
|
|
$
|
1,381,209
|
|
|
$
|
1,354,713
|
|
|
$
|
1,344,222
|
|
|
$
|
192,462
|
|
|
$
|
897,155
|
|
|
$
|
8,135,179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External Funds Purchased
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Paper
|
|
$
|
49,858
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
49,858
|
|
|
Repurchase Agreements
|
|
|
75,000
|
|
|
|
300,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
375,000
|
|
|
Federal FundsPurchased and Other
Borrowings
|
|
|
151,000
|
|
|
|
460,000
|
|
|
|
425,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,036,000
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of Deposit
|
|
|
1,485,798
|
|
|
|
1,326,057
|
|
|
|
161,851
|
|
|
|
73,234
|
|
|
|
68,309
|
|
|
|
28,356
|
|
|
|
41
|
|
|
|
3,143,646
|
|
|
Demand Deposits and Savings Accounts
|
|
|
149,104
|
|
|
|
—
|
|
|
|
144,677
|
|
|
|
424,792
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,141
|
|
|
|
721,714
|
|
|
Transactional Accounts
|
|
|
247,900
|
|
|
|
354,943
|
|
|
|
—
|
|
|
|
1,101,452
|
|
|
|
—
|
|
|
|
—
|
|
|
|
20,245
|
|
|
|
1,724,540
|
|
|
Term and Subordinated Debt
|
|
|
4,487
|
|
|
|
—
|
|
|
|
9,653
|
|
|
|
135,000
|
|
|
|
111,156
|
|
|
|
—
|
|
|
|
(324
|
)
|
|
|
259,972
|
|
|
Other Liabilities and Capital
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10,400
|
|
|
|
814,049
|
|
|
|
824,449
|
|
|
|
|
|
|
Total Liabilities and Capital
|
|
$
|
2,163,147
|
|
|
$
|
2,441,000
|
|
|
$
|
741,181
|
|
|
$
|
1,734,478
|
|
|
$
|
179,465
|
|
|
$
|
38,756
|
|
|
$
|
837,152
|
|
|
$
|
8,135,179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-Balance Sheet Financial Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps (Assets)
|
|
$
|
1,967,097
|
|
|
$
|
46,000
|
|
|
$
|
146,641
|
|
|
$
|
14,068
|
|
|
$
|
1,504,981
|
|
|
$
|
186,340
|
|
|
$
|
—
|
|
|
$
|
3,865,127
|
|
|
Interest Rate Swaps (Liabilities)
|
|
|
2,142,437
|
|
|
|
56,000
|
|
|
|
136,641
|
|
|
|
14,068
|
|
|
|
1,344,981
|
|
|
|
171,000
|
|
|
|
—
|
|
|
|
3,865,127
|
|
|
Caps
|
|
|
1,259
|
|
|
|
—
|
|
|
|
467
|
|
|
|
792
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,518
|
|
|
Caps Final Maturity
|
|
|
1,259
|
|
|
|
—
|
|
|
|
467
|
|
|
|
792
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,518
|
|
|
|
|
|
|
GAP
|
|
$
|
(700,550
|
)
|
|
$
|
(1,123,519
|
)
|
|
$
|
650,028
|
|
|
$
|
(379,765
|
)
|
|
$
|
1,324,757
|
|
|
$
|
169,046
|
|
|
$
|
60,003
|
|
|
$
|
—
|
|
|
|
|
|
|
Cumulative GAP
|
|
$
|
(700,550
|
)
|
|
$
|
(1,824,069
|
)
|
|
$
|
(1,174,041
|
)
|
|
$
|
(1,553,806
|
)
|
|
$
|
(229,049
|
)
|
|
$
|
(60,003
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
Cumulative interest rate gap to
earning assets
|
|
|
-9.06
|
%
|
|
|
-23.60
|
%
|
|
|
-15.19
|
%
|
|
|
-20.10
|
%
|
|
|
-2.96
|
%
|
|
|
-0.78
|
%
|
|
|
|
|
|
|
|
|
Interest rate risk is the primary market risk to which the Corporation is exposed. Nearly all
of the Corporation’s interest rate risk arises from instruments, positions and transactions entered
into for purposes other than trading. They include loans, investment securities, deposits,
short-term borrowings, senior and subordinated debt and derivative financial instruments used for
asset and liability management.
As part of its interest rate risk management process, the Corporation analyzes on an ongoing
basis the profitability of the balance sheet structure, and how this structure will react under
different market scenarios. In order to carry out this task, management prepares three
standardized reports with detailed information on the sources of interest income and expense: the
“Financial Profitability Report”, the “Net Interest Income Shock Report” and the “Market Value
Shock Report”. The former report deals with historical data while the latter two deal with expected
future earnings.
The Financial Profitability Report identifies individual components of the Corporation’s
non-trading portfolio independently with their corresponding interest income or expense. It uses
the historical information at the end of each month to track the yield of such components and to
calculate net interest income for such time period.
76
The Net Interest Income Shock Report uses a simulation analysis to measure the amount of net
interest income the Corporation would have from its operations throughout the next twelve months
and the sensitivity of these earnings to assumed shifts in market interest rates throughout the
same period. The important assumptions of this analysis are: ( i ) rate shifts are parallel and
immediate throughout the yield curve; (ii) rate changes affect all assets and liabilities equally;
(iii) interest-bearing demand accounts and savings passbooks will run off in a period of one year;
and (iv) demand deposit accounts will run off in a period of one to three years. Cash flows from
assets and liabilities are assumed to be reinvested at market rates in similar instruments. The
object is to simulate a dynamic gap analysis enabling a more accurate interest rate risk
assessment.
The ALCO monitors interest rate gaps in combination with net interest margin (NIM) sensitivity
and duration of market value equity (MVE).
NIM sensitivity analysis captures the maximum acceptable net interest margin loss for a one
percent parallel change of all interest rates across the curve. Duration of market value equity
analysis entails a valuation of all interest bearing assets and liabilities under parallel
movements in interest rates. The ALCO has established limits of $35 million of NIM sensitivity for
a 1% parallel shock and $140 million of MVE sensitivity for a 1% parallel shock.
As of September 30, 2008, it was determined for purposes of the Net Interest Income Shock
Report that the Corporation had a potential loss in net interest income of approximately $9.2
million if market rates were to increase 100 basis points immediately parallel across the yield
curve, less than the $35.0 million limit. For purposes of the Market Value Shock Report it was
determined that the Corporation had a potential loss of approximately $70.9 million if market rates
were to increase 100 basis points immediately parallel across the yield curve, less than the $140.0
million limit. The tables below present a summary of the Corporation’s net interest margin and
market value shock reports, considering several scenarios as of September 30, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INTEREST MARGIN SHOCK REPORT
|
|
|
|
September 30, 2008
|
|
(In millions)
|
|
-200 BP’s
|
|
-100 BP’s
|
|
-50 BP’s
|
|
Base Case
|
|
+50 BP’s
|
|
+100 BP’s
|
|
+200 BP’s
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Interest Margin
|
|
$
|
406.0
|
|
|
$
|
405.4
|
|
|
$
|
399.9
|
|
|
$
|
395.4
|
|
|
$
|
391.1
|
|
|
$
|
386.2
|
|
|
$
|
380.5
|
|
|
Sensitivity
|
|
$
|
10.6
|
|
|
$
|
10.0
|
|
|
$
|
4.5
|
|
|
|
|
|
|
$
|
(4.3
|
)
|
|
$
|
(9.2
|
)
|
|
$
|
(14.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MARKET VALUE SHOCK REPORT
|
|
|
|
September 30, 2008
|
|
(In millions)
|
|
-200 BP’s
|
|
-100 BP’s
|
|
-50 BP’s
|
|
Base Case
|
|
+50 BP’s
|
|
+100 BP’s
|
|
+200 BP’s
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market Value of Equity
|
|
$
|
767.5
|
|
|
$
|
746.7
|
|
|
$
|
722.0
|
|
|
$
|
693.8
|
|
|
$
|
655.5
|
|
|
$
|
622.9
|
|
|
$
|
563.3
|
|
|
Sensitivity
|
|
$
|
73.7
|
|
|
$
|
52.9
|
|
|
$
|
28.2
|
|
|
|
|
|
|
$
|
(38.3
|
)
|
|
$
|
(70.9
|
)
|
|
$
|
(130.5
|
)
|
As of September 30, 2008 the Corporation had a liability sensitive profile as explained by the
negative gap, the NIM shock report and the MVE shock report. Any decision to reposition the balance
sheet is taken by the ALCO committee, and is subject to compliance with the established risk
limits. Some factors that could lead to shifts in policy could be, but are not
limited to, changes in views on interest rate markets, monetary policy, and macroeconomic
factors as well as legal, fiscal and other factors which could lead to shifts in the asset
liability mix.
77
Liquidity Risk
Liquidity risk is the risk that not enough cash will be generated from either assets or
liabilities to meet deposit withdrawals or contractual loan funding. The Corporation’s general
policy is to maintain liquidity adequate to ensure its ability to honor withdrawals of deposits,
make repayments at maturity of other liabilities, extend loans and meet its own working capital
needs. The Corporation’s principal sources of liquidity are capital, core deposits from retail and
commercial clients, and wholesale deposits raised in the inter-bank and commercial markets. The
Corporation manages liquidity risk by maintaining diversified short-term and long-term sources
through the Federal funds market, commercial paper program, repurchase agreements and retail
certificate of deposit programs. As of September 30, 2008, the Corporation had $1.5 billion in
unsecured lines of credit ($610.1 million available) and $4.0 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 Rico’s 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 Corporation’s 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, 2008, Santander BanCorp (the “Corporation”) and Santander Financial Services,
Inc., a wholly owned subsidiary of the Corporation (“Santander Financial”), entered into a
collateralized loan agreement (the “Loan Agreement”) with Banco Santander Puerto Rico (the “Bank”).
Under the Loan Agreement, the Bank advanced $200 million and $430 million (the “Loans”) to the
Corporation and Santander Financial, respectively. The proceeds of the Loans were used to refinance
the outstanding indebtedness incurred under the previously announced loan agreement 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.
The Loans bear interest at a fixed rate of 4.4343% per annum. Interest is payable at maturity
of the Loans. The Corporation and Santander Financial did not pay any fee or commission to the Bank
in connection with the Loans. The entire principal balance of the Loans is due and payable on
September 24, 2009. Upon the occurrence and during the continuance of an Event of Default (as
defined in the Loan Agreement) under the Loan Agreement, the Bank shall have the right to declare
the outstanding balance of the Loans, together with accrued interest and any other amount owing to
the Bank, due and payable on demand or immediately due for payment. In addition, the Corporation
and Santander Financial will be required to pay interest on any overdue amounts at a default rate
that is equal to the fixed interest rate payable on the Loans plus 2% per annum. The Corporation’s
and Santander Financial’s obligations to pay interest and principal under the Loan Agreement are
several and not joint. However, the Corporation and Santander Financial are jointly and severally
responsible for all other amounts payable under the Loan Agreement, including any indemnification
payments due to the Bank thereunder.
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, 2008, the Corporation
had a liquidity ratio of 6.69%. At September 30, 2008, the Corporation had total available liquid
assets of $531.6 million. The Corporation believes it has sufficient liquidity to meet current
obligations.
78
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.
79
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 Corporation’s
management, including the Chief Executive Officer, the Chief Operating Officer and the Chief
Accounting Officer (as the Corporation’s principal financial officer), conducted an evaluation of
the effectiveness of the design and operation of the Corporation’s 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, the Chief Operating Officer and
the Chief Accounting Officer (as the Corporation’s principal financial officer) concluded that the
design and operation of these disclosure controls and procedures were effective.
The adoption of Financial Accounting Standard’s Board Statements No. 157 “Fair Value
Measurements” (“SFAS 157”) and No. 159 “Fair Value Option” (“SFAS 159”) effective January 1, 2008
is a significant event to the Corporation and could represent a material change in financial
reporting. Changes to certain processes, valuation models and methodologies 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 adoption of SFAS 157 and
SFAS 159 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 2008 annual management report on
internal control over financial reporting.
Changes in Internal Controls
With the exception of the adoption of SFAS 157 and 159, there have been no changes in the
Corporation’s internal controls over financial reporting during the three-month and six-month
periods covered by this Quarterly Report on Form 10-Q that have materially affected, or are
reasonably likely to materially affect, the Corporation’s internal controls over financial
reporting.
80
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 therefrom
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 Corporation’s Annual Report on Form 10K for the year ended
December 31, 2007.
ITEM 1A. RISK FACTORS
There are
no material changes in risk factors as previously disclosed under Item 1A of the
Corporation’s Form 10-K for the year ended December 31, 2007.
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
81
ITEM 5 — OTHER INFORMATION
None
82
ITEM 6 — EXHIBITS
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Exhibit No.
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Description
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Reference
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(2.0)
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Agreement and Plan of Merger-Banco Santander Puerto Rico and
Santander BanCorp
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Exhibit 3.3 8-A12B
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(2.1)
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Stock Purchase Agreement Santander BanCorp and Banco Santander
Central Hispano, S.A.
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Exhibit 2.1 10K-12/31/00
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(2.2)
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Stock Purchase Agreement dated as of November 28, 2003 by and among
Santander BanCorp, Administración de Bancos Latinoamericanos
Santander, S.L. and Santander Securities Corporation
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Exhibit 2.2 10Q-06/30/04
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(2.3)
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Settlement Agreement between Santander BanCorp and Administración
de Bancos Latinoamericanos Santander, S.L.
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Exhibit 2.3 10Q-06/30/04
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(3.1)
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Articles of Incorporation
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Exhibit 3.1 8-A12B
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(3.2)
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Bylaws
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Exhibit 3.1 8-A12B
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(4.1)
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Authoring and Enabling Resolutions 7% Noncumulative Perpetual
Monthly Income Preferred Stock, Series A
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Exhibit 4.1 10Q-06/30/04
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(4.2)
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Offering Circular for $30,000,000 Banco Santander PR Stock
Market Growth Notes Linked to the S&P 500 Index
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Exhibit 4.6 10Q-03/31/04
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(4.3)
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Private Placement Memorandum Santander BanCorp $75,000,000 6.30%
Subordinated Notes
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Exhibit 4.3 10KA-12/31/04
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(4.4)
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Private Placement Memorandum Santander BanCorp $50,000,000 6.10%
Subordinated Notes
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Exhibit 4.4 10K-12/31/05
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(4.5)
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Indenture dated as of February 28, 2006, between the Santander BanCorp and
Banco Popular de Puerto Rico
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Exhibit 4.6 10Q-03/31/06
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(4.6)
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First Supplemental Indenture, dated as of February 28, 2006, between Santander
Bancorp and Banco Popular de Puerto Rico
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Exhibit 4.7 10Q-03/31/06
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(4.7)
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Amended and Restated Declaration of Trust and Trust Agreement, dated as of
February 28, 2006, among Santander BanCorp, Banco Popular de Puerto Rico
Wilmintong Trust Company, the Administrative Trustees named therein and
the holders from time to time, of the undivided beneficial ownership interest
in The Assets of the Trust.
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Exhibit 4.8 10-Q-03/31/06
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(4.8)
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Guarantee Agreement, dated as of February 28, 2006 between Santander
BanCorp and Banco Popular de Puerto Rico
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Exhibit 4.9 10-Q-03/31/06
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(4.9)
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Global Capital Securities Certificate
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Exhibit 4.10 10Q-03/31/06
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(4.10)
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Certificate of Junior Subordinated Debenture
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Exhibit 4.11 10Q-03/31/06
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(10.1)
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Contract for Systems Maintenance between ALTEC & Banco
Santander Puerto Rico
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Exhibit 10A 10K-12/31/02
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(10.2)
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Employment Contract-Carlos M. García
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Exhibit 10.2 8K-01/04/07
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(10.3)
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Deferred Compensation Contract-María Calero
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Exhibit 10C 10K-12/31/02
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(10.4)
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Information Processing Services Agreement between America Latina
Tecnología de Mexico, SA and Banco Santander Puerto Rico, Santander
International Bank of Puerto Rico and Santander Investment International
Bank, Inc.
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Exhibit 10A 10Q-06/30/03
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(10.5)
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Employment Contract-Lillian Díaz
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Exhibit 10.5 10Q-03/31/05
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(10.6)
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Technology Assignment Agreement between CREFISA, Inc. and Banco
Santander Puerto Rico
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Exhibit 10.12 10KA-12/31/04
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(10.7)
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Altair System License Agreement between CREFISA, Inc. and Banco
Santander Puerto Rico
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Exhibit 10.13 10KA-12/31/04
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(10.8)
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2005 Employee Stock Option Plan
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Exhibit B Def14-03/26/05
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(10.9)
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Asset Purchase Agreement by and among Wells Fargo & Company, Island
Finance Puerto Rico, Inc., Island Finance Sales Finance Corporation and
Santander BanCorp and Santander Financial Services, Inc. for the purpose
and sale of certain assets of Island Finance Puerto Rico, Inc. and Island
Finance Sales Corporation dated as of January 22, 2006.
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Exhibit 10.1 8K-01/25/06
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83
EXHIBIT INDEX — Con’t
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Exhibit No.
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Exhibit
Description
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Reference
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(10.10)
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Employment Contract-Tomás Torres
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Exhibit 10.16 10Q-09/30/06
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(10.11)
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Employment Contract-Eric Delgado
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Exhibit 10.17 10Q-09/30/06
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(10.12)
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Agreement of Benefits Coverage Agreed with Officers of Grupo Santander
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Exhibit 10.18 10K-12/31/06
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(10.13)
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Employment Contract-Justo Muñoz
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Exhibit 10.18 10Q-06/30/07
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(10.14)
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Sales and Leaseback Agreement with Corporación Hato Rey Uno
and Corporación Hato Rey Dos for the Bank’s two principal properties and
certain parking spaces
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Exhibit 10.18 10K-12/31/07
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(10.15)
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Option Agreement among Crefisa, Inc., D&D Investment Group, S.E.,
and Quisqueya 12, Inc.
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Exhibit 10.19 10K-12/31/07
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(10.16)
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Merge Agreement among Banco Santander Puerto Rico and Santander
Mortgage Corporation
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Exhibit 10.20 10K-12/31/07
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(10.17)
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Regulations for the first and second cycle of The Share Plan (“Long Term
Incentive Plan”) among Santander BanCorp and Santander Spain
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Exhibit 10.21 10K-12/31/07
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(10.18)
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Loan Agreement Agreement between Santander BanCorp, Santander Financial
Services, Inc. and Banco Santander Puerto Rico
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Exhibit 10.1 8K-09/24/08
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(10.19)
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Employment Contract-Juan Moreno Blanco
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Exhibit 10.19
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(12)
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Computation of Ratio of Earnings to Fixed Charges
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Exihbit 12
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(14)
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Code of Ethics
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Exhibit 14 10-KA-12/31/04
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(22)
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Registrant’s Proxy Statement for the April 30, 2007 Annual
Meeting of Stockholders
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Def14A-03/24/08
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(31.1)
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Certification from the Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
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Exhibit 31.1
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(31.2)
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Certification from the Chief Operating Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
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Exhibit 31.2
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(31.3)
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Certification from the Chief Accounting Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
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Exhibit 31.3
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(32.1)
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Certification from the Chief Executive Officer, Chief Operating Officer and
Chief Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
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Exhibit 32.1
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84
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.
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SANTANDER BANCORP
Name of Registrant
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Dated: November 10, 2008
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By:
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/s/ Juan Moreno
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President and Chief Executive Officer
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Dated: November 10, 2008
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By:
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/s/ Carlos M. García
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Senior Executive Vice President and
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Chief Operating Officer
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Dated: November 10, 2008
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By:
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/s/ María Calero
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Executive Vice President and
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Chief Accounting Officer
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85
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