UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OF THE SECURITIES
EXCHANGE ACT OF 1934
For Fiscal Year ended December 31, 2007
Commission File: 001-15849
SANTANDER BANCORP
(Exact name of Corporation as specified in its charter)
Incorporated in the Commonwealth of Puerto Rico
I.R.S. Employer Identification No. 66-0573723
207 Ponce de León Avenue
Hato Rey, Puerto Rico 00917
Telephone Number: (787) 777-4100
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
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Title of each class
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Name of each exchange on
which registered
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Common Stock, $2.50 par value
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Securities Exchange Act of 1934:
Indicate by check mark if the registrant is a well-known seasoned issuer (as defined in Rule 405 of
the Securities Act). Yes
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No
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Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act). Yes
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No
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Indicate by check mark whether the Corporation (1) has filed all reports required to be filed by
Section 13 of the Securities Exchange Act of 1934 during the preceding 12 months (for such shorter
period that the Corporation was required to file such reports) and has been subject to such filing
requirement for the past 90 days. Yes
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No
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Indicate by check mark if disclosure of delinquent files pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of the registrant’s knowledge, in
definite proxy or information statement incorporated by reference in Part III of this Form 10-K or
any amendments to this Form 10-K.
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company.
See the definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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(Do not check if a smaller reporting company)
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Smaller reporting company
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes
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No
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. As of December 31, 2007 the Corporation had 46,639,104 shares of common stock outstanding. The
aggregate market value of the common stock held by non-affiliates of the Corporation was
$37,988,701 based upon the reported closing price of $8.66 on the New York Stock Exchange on that
date.
DOCUMENTS INCORPORATED BY REFERENCE
Portions
of the Corporation’s Proxy Statement relating to the 2008 Annual Meeting of Stockholders
of the Corporation to be held on or about March 24, 2008, are incorporated herein by reference to
Item 10 through 14 of Part III.
SANTANDER BANCORP
CONTENTS
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Santander BanCorp
PART I
ITEM 1. BUSINESS
General
Santander BanCorp (the “Corporation”) is a publicly owned financial holding company, registered
under the Bank Holding Company Act of 1956, (“BHC Act”) as amended and, accordingly, subject to
the supervision and regulation by the Federal Reserve Board. The Corporation was incorporated
under the laws of the Commonwealth of Puerto Rico (“Puerto Rico” or the “Island”) to serve as the
financial holding company for Banco Santander Puerto Rico (“Banco Santander” or the “Bank”).
Banco Santander, S.A. (“Santander Spain”) currently owns 90.6% of the Corporation’s outstanding
stock, directly and through its subsidiaries. Santander Spain (SAN.MC, STD.N) is the main
financial group (“Santander Group” or “Group”) in Spain and Latin America, and the largest in the
Euro Zone by market capitalization. It is the first financial group in Spain and Latin America and
maintains an important business activity in Europe, where it reached a prominent presence in the
United Kingdom through the acquisition of Abbey National. Santander Group also owns the third
largest banking group in Portugal and Santander Consumer Finance, a leading consumer finance
franchise with presence in Germany, Italy and seven other European countries.
In Latin America, Santander Group is the leading banking franchise. In this region, the Group
maintains a leading position where it manages over $300 billion in business volumes (loans,
deposits and off-balance sheet items under management) has 4,498 offices in nine countries. In
2007, Santander reported $3,648 million in net attributable income in Latin America, 19% higher
than the prior year.
The Corporation offers a full range of financial services through its subsidiaries Banco Santander
Puerto Rico (the “Bank”), Santander Securities Corporation, Santander Insurance Agency, Inc.,
Santander Mortgage Corporation (merged with the Bank effective January 1, 2008), Santander
International Bank of Puerto Rico, Inc., Santander Asset Management Corporation, Santander
Financial Services (“SFS”), Island Insurance Corporation and Santander PR Capital Trust I. As of
December 31, 2007, the Corporation had, on a consolidated basis, total assets of $9.2 billion,
total net loans of $6.9 billion, total deposits of $5.2 billion and stockholder’s equity of $536.5
million. The Corporation also had $13.3 billion of customer financial assets under management.
Banco Santander Puerto Rico
The Corporation’s main subsidiary, Banco Santander Puerto Rico (“the Bank”), is one of the Island’s
largest financial institutions (based on number of branches and customer deposits as reported with
the Federal Deposit Insurance Corporation (“FDIC”) and the Office of the Commissioner of Financial
Institutions of Puerto Rico) with a network of 61 branches and 140 ATMs, representing one of the
largest branch franchises in Puerto Rico. As of December 31, 2007, the Bank had total assets of
approximately $7.9 billion, total deposits of $5.2 billion and stockholders’ equity of $609.7
million.
The Bank is a Puerto Rico chartered commercial bank subject to examination by the Federal Deposit
Insurance Corporation (“FDIC”) and the Commissioner of Financial Institutions of Puerto Rico
(“Commissioner”). It provides a wide range of financial products and services to a diverse customer
base that includes small and medium-size businesses, large corporations and individuals. In
addition, the Bank provides mortgage banking services through its wholly-owned subsidiary,
Santander Mortgage Corporation (“Santander Mortgage”). Effective January 1, 2008, Santander
Mortgage was merged into the Bank in order to obtain cost efficiencies and broaden the array of
products that current mortgages specialist are offering. The Bank also provides specialized
products and services to foreign customers through its wholly owned subsidiary, Santander
International Bank of Puerto Rico, Inc. (“Santander International Bank”), an international banking
entity organized under the International Banking Center Regulatory Act of Puerto Rico (“IBC Act”).
Santander Mortgage Corporation
Since
1992, the Corporation has engaged in mortgage banking through Santander
Mortgage. Effective January 1, 2008, Santander Mortgage Corporation was merged into
the Bank and ceased to operate as a separate legal entity. Santander Mortgage’s
business principally consisted in the origination and acquisition of loans secured
by residential mortgages. Santander Mortgage has engaged in the origination of
FHA-insured and VA-guaranteed single-family residential loans, which are primarily
securitized into GNMA
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mortgage-backed securities and sold to institutional or private investors in the
secondary market. Conventional loans that conform to the mortgage securitization
programs of FNMA and FHLMC are generally pooled into FNMA and FHLMC mortgage-backed
securities and sold to investors in the secondary market. Conventional loans that
do not conform to the requirements of FNMA or FHLMC, so called non-conforming loans
were generally sold to the Bank. Santander Mortgage complemented its internal loan
originations by purchasing FHA loans and VA loans from other mortgage bankers for
resale to institutional investors and other investors in the form of GNMA
mortgage-backed securities.
Santander International Bank of Puerto Rico, Inc.
Santander International Bank of Puerto Rico, Inc. (“Santander International Bank”)
is a wholly owned subsidiary of Banco Santander Puerto Rico, organized during 2001
to operate as an international banking entity under the International Banking
Center Regulatory Act of Puerto Rico. Santander International Bank was created for
the purpose of providing specialized products and services to foreign customers.
Santander Securities Corporation
Santander Securities Corporation (“Santander Securities”) is the second largest securities
broker-dealer (based on broker-dealer customer assets and mutual funds managed as reported with the
SEC and the Office of the Commissioner of Financial Institutions of Puerto Rico) in Puerto Rico
with approximately $9.4 billion in assets under management, composed of over $5.9 billion in
customer assets at the retail broker-dealer and $3.5 billion in managed gross assets and
institutional accounts at its wholly owned subsidiary, Santander Asset Management. Santander
Securities has three offices islandwide and an office in Miami, Fl.
Santander Asset Management Corporation
Santander Asset Management Corporation (“Santander Asset Management” or “SAM”) is a
wholly owned subsidiary of Santander Securities created for the purpose of managing
assets for Puerto Rico investment companies (mutual funds) and institutional
accounts. The funds managed by Santander Asset Management invest primarily in
fixed-income securities, including Puerto Rico and U.S. Government securities,
mortgage-backed and asset-backed securities and municipal obligations. Santander
Asset Management also services its institutional accounts, which consist primarily
of university endowments, insurance companies, governmental agencies, pension funds
and individual investors.
Santander Insurance Agency, Inc.
The Corporation’s subsidiary, Santander Insurance Agency, Inc. (“Santander Insurance”) was
established in October 2000 as the first financial holding company insurance operation to receive
approval from the Commissioner of Insurance of Puerto Rico (“Insurance Commissioner”). This was a
result of the Gramm-Leach-Bliley Act of 1999 (“Gramm-Leach-Bliley Act”) that authorized financial
holding companies to enter into the insurance business. Santander Insurance Agency offers a growing
base of products, including life, disability, unemployment and title insurance as a corporate
agent, and also operates as a general agent offering bid, payment and performance bonds, and
insurance to cover equipment and auto leases.
Santander Financial Services, Inc.
During the first
quarter of 2006, Santander Financial Services, Inc. (“Santander Financial
Services” or “Island Finance”) closed the acquisition of the operation and certain assets of
Island Finance Inc., the second largest consumer finance company in Puerto Rico (as reported with
the Office of the Commissioner of Financial Institutions). This acquisition further diversifies
Santander in Puerto Rico. Island Finance is a well established
consumer finance business in Puerto Rico. The company has operated in Puerto Rico for over 40
years, is one of the most recognized brand names in consumer finance and commands a 20% market
share as of September 30, 2007 (as reported with the Office of the Commissioner of Financial
Institutions). This acquisition boosted Santander’s business footprint by adding 68 consumer retail
branches and close to 157,000 clients. Santander Financial Services, Inc. through, Island Finance,
provides consumer loans and real estate-secured loans to customers, as well as sales finance
contracts through retail merchants.
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Island Insurance Corporation
In July 2006, the Corporation acquired Island Insurance Corporation, a Puerto Rico life insurance
company, duly licensed by the Puerto Rico Commissioner of Insurance. This corporation is currently
inactive.
Santander PR Capital Trust I
A statutory trust organized under the Statutory Trust Act of the state of Delaware. It was formed
for the purpose of issuing trust redeemable preferred securities issued pursuant to the acquisition
of Island Finance in 2006.
Operations
The Corporation operates a client-oriented, full-service bank, offering products and services in
the areas of commercial, mortgage and consumer banking. Insurance, securities and asset management
services are also offered through the Corporation’s various subsidiaries. The Corporation organizes
its operations in five reportable segments: Commercial Banking, Mortgage Banking, Consumer Finance,
Treasury and Investments, and Wealth Management.
While the Bank offers a wide variety of financial services to its customers, its primary products
and services are grouped into the following categories:
Commercial Banking
. The Corporation’s integrated business model is built upon the strength of its
commercial banking franchise and its distribution capabilities. This segment’s goal is to be an
agile client-service organization with the primary focus on satisfying the total financial needs of
its customers through specialized retail and wholesale banking services. These two units of the
commercial banking segment are closely interrelated and are differentiated mostly by the
composition of their respective client-bases.
Retail Banking
. The Retail Banking unit serves individual clients and
small-and medium-sized businesses providing them with a full range of financial
products and services through branches across Puerto Rico. Each branch represents an
important vehicle for distributing the retail banking solutions. Branch personnel
promote cross selling of financial products and coordinate service delivery.
Wholesale Banking
. The Wholesale Banking unit serves major corporate and
institutional clients including the public sector, not-for-profit organizations and
specialized industries such as universities, healthcare and financial institutions.
This unit also houses certain specialized services such as construction lending,
international commerce and cash management. Wholesale banking also calls into play
the substantial resources of our worldwide operations, when such involvement is deemed
appropriate or necessary to achieve the client’s financial objectives. Wholesale
banking clients are offered a full array of commercial banking products and services,
including cash management, bank card products, letters of credit and a variety of
other foreign trade-related services. This unit works closely with retail banking
branch personnel when its specialized services are required.
Mortgage Banking
. Through Santander Mortgage up to December 31, 2007 and as a Bank’s division
thereafter, this business segment, the fourth largest mortgage loan originator (based on
information on mortgage production obtained from the Office of the Commissioner of Financial
Institutions of Puerto Rico) and servicer in Puerto Rico, originates, sells, and services a variety
of residential mortgage loans. Santander Mortgage sold mortgages to the Bank for its mortgage
portfolio and to various other financial institutions through securitizations of conforming loans.
Total mortgage loan originations amounted to $562.4 million in 2007, the mortgage loan
portfolio reached $2.7 billion by year-end and the mortgage
servicing portfolio consisted of $1.1 billion serviced for other
institutions.
Consumer Finance.
The Island Finance operation provides consumer loans and real estate-secured
loans in Puerto Rico through its 68 consumer retail branches in Puerto Rico, as well as sales
finance contracts through retail merchants. Island Finance provides mostly sub-prime lending thus
entering a market segment not previously covered by the Corporation.
Treasury and Investments
. The Corporation’s Treasury Department handles its investment portfolio
and liquidity position. It also focuses on offering another level of financial service to our
clients in the form of derivative instruments that can protect the owner of small- and medium-sized
business from the impact of interest rate fluctuations.
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Wealth Management
. The Corporation’s Wealth Management segment includes the operations of its
subsidiary Santander Securities. Santander Securities offers a complete range of products and
services as part of an overall wealth management program that includes asset management and other
trust services. The combination of Santander Asset Management products and Santander Securities’
distribution capabilities has allowed the Group to provide a diverse range of high quality
investment alternatives in the Puerto Rico market.
The principal offices of the Corporation are located at 207 Ponce de León Avenue, San Juan, Puerto
Rico, and the main telephone number is (787) 777-4100. The Corporation’s Internet web site is
http://www.santandernet.com
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Forward Looking Statements
When used in this Form 10-K or future filings by Santander BanCorp with the Securities and Exchange
Commission, in the Corporation’s press releases or other public or shareholder communications, or
in oral statements made with the approval of an authorized executive officer, the word of phrases
“would be”, “will allow”, “intends to”, “will likely result”, “are expected to”, “is anticipated”,
“estimate”, “project”, “believe” , or similar expressions are intended to identify “forward looking
statements” within the meaning of the Private Securities Litigation Reform Act of 1995
.
The future results of the Corporation could be affected by subsequent events and could differ
materially from those expressed in forward-looking statements. If future events and actual
performance differ from the Corporation’s assumptions, the actual results could vary significantly
from the performance projected in the forward-looking statements.
The Corporation wishes to caution readers not to place undue reliance on any such forward-looking
statements, which speak only as of the date made, and to advise readers that various factors,
including regional and national conditions, substantial changes in levels of market interest rates,
credit and other risks of lending and investment activities, competitive and regulatory factors and
legislative changes, could affect the Corporation’s financial performance and could cause the
Corporation’s actual results for future periods to differ materially from those anticipated or
projected. The Corporation does not undertake, and specifically disclaims any obligation, to update
any forward-looking statements to reflect occurrences or unanticipated events or circumstances
after the date of such statements.
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REGULATION AND SUPERVISION
Holding Company Operations — Federal Regulation
General
Bank Holding Company Activities and Other Limitations.
The Corporation is subject to ongoing
regulation, supervision, and examination by the Board of Governors of the Federal Reserve System
(the “Federal Reserve”), under the BHC Act, as amended by the Gramm-Leach-Bliley. As a bank holding
company, the Corporation is required to file with the Federal Reserve periodic and annual reports
and other information concerning its own business operations and those of its subsidiaries. In
addition, under the provisions of the BHC Act, a bank holding company must obtain Federal Reserve
Board approval before it acquires directly or indirectly ownership or control of more than 5% of
the voting shares of a second bank. Furthermore, Federal Reserve Board approval must also be
obtained before such a company acquires all or substantially all of the assets of a second bank or
merges or consolidates with another bank holding company. The Federal Reserve Board also has
authority to issue cease and desist orders against holding companies and their non-bank
subsidiaries.
A bank holding company is prohibited under the BHC Act, with limited exceptions, from engaging,
directly or indirectly, in any business unrelated to the business of banking, or of managing or
controlling banks. One of the exceptions to these prohibitions permits ownership by a bank holding
company of the shares of any company if the Federal Reserve, after due notice and opportunity for
hearing, by regulation or order has determined that the activities of the company in question are
so closely related to the business of banking or of managing or controlling banks as to be a proper
incident thereto.
Under the Federal Reserve policy, a bank holding company such as the Corporation is expected to act
as a source of financial strength to its main banking subsidiaries and to also commit support to
them. This support may be required at times when, absent such policy, the bank holding company
might not otherwise provide such support. In the event of a bank holding company’s bankruptcy, any
commitment by the bank holding company to the federal bank regulatory agency to maintain capital of
a subsidiary bank will be assumed by the bankruptcy trustee and be entitled to a priority of
payment. In addition, any capital loans by a bank holding company to any of its subsidiary banks
must be subordinated in right of payment to deposits and to certain other indebtedness of such
subsidiary bank. The Bank is currently the only depository institution subsidiary of the
Corporation.
The Gramm-Leach-Bliley Act and the regulation enacted and promulgated under the Act have revised
and expanded the existing provisions of the BHC Act by permitting a bank holding company to elect
to become a financial holding company to engage in a full range of financial activities. The
qualification requirements provide that in order for a bank holding company to elect to be treated
as a financial holding company (and to maintain such treatment) all the subsidiary banks controlled
by the bank holding company at the time of election to become a financial holding company must be
and remain at all times well capitalized and well managed. On May 15, 2000, the Corporation elected
to become a financial holding company under the provisions of the Gramm-Leach Bliley Act.
Financial holding companies may engage, directly or indirectly, in any activity that is determined
to be (i) financial in nature, (ii) incidental to such financial activity, or (iii) complementary
to a financial activity and does not pose a substantial risk to the safety and soundness of
depository institutions or to the financial system generally. The Gramm-Leach-Bliley Act,
specifically provides that the following activities have been determined to be “financial in
nature”: (a) Lending, trust and other banking activities; (b) Insurance activities; (c) Financial
or economic advice or services; (d) Pooled investments; (e) Securities underwriting and dealing;
(f) Existing bank holding company domestic activities; (g) Existing bank holding company foreign
activities; and (h) Merchant banking activities. Santander Insurance Agency, which is a
wholly-owned subsidiary of the Corporation, offers insurance agency services. Santander Securities,
which is also a wholly-owned subsidiary of the Corporation, offers securities brokerage, dealing
and underwriting services.
In addition, the Gramm-Leach-Bliley Act specifically gives the Federal Reserve the authority, by
regulation or order, to expand the list of “financial” or “incidental” activities, but requires
consultation with the U.S. Treasury, and gives the Federal Reserve authority to allow a financial
holding company to engage in any activity that is “complementary” to a financial activity and does
not “pose a substantial risk to the safety and soundness of depository institutions or the
financial system generally.”
Under the Gramm-Leach-Bliley Act, if the Corporation fails to meet any of the requirements for
being a financial holding company and is unable to cure such deficiencies within certain prescribed
periods of time, the Federal Reserve Board could
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require the Corporation to divest control of its depository institution subsidiaries or
alternatively cease conducting financial activities that are not permissible for bank holding
companies that are not financial holding companies.
USA Patriot Act of 2001
Under Title III of the USA Patriot Act of 2001 (the “USA Patriot Act”), also known as the
International Money Laundering Abatement and Anti-Terrorism Financing Act of 2001, all financial
institutions, including the Corporation and the Bank, are required in general to identify their
customers, adopt formal and comprehensive anti-money laundering programs, scrutinize or prohibit
altogether certain transactions of special concern, and be prepared to respond to inquiries from
U.S. law enforcement agencies concerning their customers and their transactions. Additional
information-sharing among financial institutions, regulators, and law enforcement authorities is
encouraged by the presence of an exemption from the privacy provisions of the Gramm-Leach-Bliley
Act for financial institutions that comply with this provision and the authorization of the
Secretary of the Treasury to adopt rules to further encourage cooperation and information-sharing.
The U.S. Treasury Department (“Treasury”) has issued a number of regulations implementing the USA
Patriot Act that apply certain of its requirements to financial institutions. The regulations
impose new obligations on financial institutions to maintain appropriate policies, procedures and
controls to detect, prevent and report money laundering and terrorist financing. Treasury is
expected to issue a number of additional regulations that will further clarify the USA Patriot
Act’s requirements.
Failure of a financial institution to comply with the USA Patriot Act’s requirements could have
serious legal and reputational consequences for the institutions. The Corporation and the Bank
have adopted appropriate policies, procedures and controls to address compliance with the USA
Patriot Act under existing regulations, and will continue to revise and update their policies,
procedures and controls to reflect changes required by the USA Patriot Act and Treasury’s
regulations. The Corporation believes that the cost of compliance with Title III of the USA
Patriot Act is not likely to be material to the Corporation.
Privacy Policies
Under the Gramm-Leach-Bliley Act, all financial institutions are required to adopt privacy
policies, restrict the sharing of nonpublic customer data with nonaffiliated parties at the
customer’s request and establish policies and procedures to protect customer data from unauthorized
access. The Corporation and its subsidiaries have adopted policies and procedures in order to
comply with the privacy provisions of the Gramm-Leach-Bliley Act and the regulations issued
thereunder.
Dividend Restrictions
The Corporation is subject to certain restrictions generally imposed on Puerto Rico corporations
(i.e., that dividends may be paid out only from the Corporation’s net assets in excess of capital
or in the absence of such excess, from the Corporation’s net earnings for such fiscal year and/or
the preceding fiscal year). The Federal Reserve Board has also issued a policy statement that
provides that bank holding companies should generally pay dividends only out of current operating
earnings.
At present, the principal source of funds for the Corporation is dividends declared and paid by the
Bank. The ability of the Bank to declare and pay dividends on its common stock is restricted by the
Puerto Rico Banking Law (the “Banking Law”), the Federal Deposit Insurance Act and FDIC
regulations. In general terms, the Banking Law provides that when the expenditures of a bank are
greater than receipts, the excess of expenditures over receipts shall be charged against
undistributed profits of the bank and the balance, if any, shall be charged against the required
reserve fund of the bank. If there is an insufficient reserve fund to cover such balance in whole
or in part, the outstanding amount shall be charged against the bank’s capital account. The Banking
Law provides that until said capital has been restored to its original amount and the reserve fund
to 20% of the original capital, the bank may not declare any dividends.
In general terms, the Federal Deposit Insurance Act and the FDIC regulations restrict the payment
of dividends when a bank is undercapitalized, when a bank has failed to pay insurance assessments,
or when there are safety and soundness concerns regarding such bank.
Federal Home Loan Bank System
Banco Santander is a member of the Federal Home Loan Bank (FHLB) system. The FHLB system consists
of twelve regional Federal Home Loan Banks governed and regulated by the Federal Housing Finance
Board (FHFB). The Federal Home Loan Banks serve as reserve or credit facilities for member
institutions within their assigned regions. They are funded primarily from proceeds derived from
the sale of consolidated obligations of the FHLB system, and they make loans (advances) to
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members in accordance with policies and procedures established by the FHLB system and the boards of
directors of each regional FHLB.
The Bank is a member of the FHLB of New York and as such is required to acquire and hold shares of
capital stock in that FHLB in an amount equal to the greater of 1.0% of the aggregate principal
amount of its unpaid residential mortgage loans, home purchase contracts and similar obligations at
the beginning of each year, 5.0% of its FHLB advances outstanding or 1.0% of 30.0% of total assets.
The Bank is in compliance with the stock ownership rules described above with respect to such
advances, commitments and letters of credit and home mortgage loans and similar obligations. All
loans, advances and other extensions of credit made by the FHLB-NY to the Bank are secured by a
portion of the Bank’s mortgage loan portfolio, certain other investments and the capital stock of
the FHLB-NY held by the Bank. As of December 31, 2007 the Bank had $64.6 million in FHLB’s capital
stock.
Limitations on Transactions with Affiliates
Transactions between financial institutions such as the Bank and any affiliate are governed by
Sections 23A and 23B of the Federal Reserve Act. An affiliate of a financial institution is any
company or entity, which controls, is controlled by or is under common control with the financial
institution. In a holding company context, the parent bank holding company and any companies which
are controlled by such parent holding company (or by the ultimate parent company of such bank
holding company) are affiliates of the financial institution. Generally, Sections 23A and 23B of
the Federal Reserve Act (i) limit the extent to which the financial institution or its subsidiaries
may engage in “covered transactions” with any one affiliate to an amount equal to 10% of such
institution’s capital stock and surplus, and contain an aggregate limit on all such transactions
with all affiliates to an amount equal to 20% of such institution’s capital stock and surplus and
(ii) require that all such transactions be on terms substantially the same, or at least as
favorable, to the institution or subsidiary as those provided to a non-affiliate. The term “covered
transaction” includes the making of loans, purchase of assets, issuance of a guarantee and other
similar transactions. In addition, loans or other extensions of credit by the financial institution
to the affiliate are required to be collateralized in accordance with the requirements set forth in
Section 23A of the Federal Reserve Act.
The Gramm-Leach-Bliley Act amended several provisions of section 23A and 23B of the Federal Reserve
Act. The amendments provide that financial subsidiaries of banks are treated as affiliates for
purposes of sections 23A and 23B of the Federal Reserve Act, but the amendment provides that (i)
the 10% capital limit on transactions between the bank and such financial subsidiary as an
affiliate is not applicable, and (ii) the investment by the bank in the financial subsidiary does
not include retained earnings in the financial subsidiary. Certain anti-evasion provisions have
been included that relate to the relationship between any financial subsidiary of a bank and sister
companies of the bank: (1) any purchase of, or investment in, the securities of a financial
subsidiary by any affiliate of the parent bank is considered a purchase or investment by the bank;
or (2) if the Federal Reserve determines that such treatment is necessary, any loan made by an
affiliate of the parent bank to the financial subsidiary is to be considered a loan made by the
parent bank.
The Federal Reserve adopted Regulation W, effective April 1, 2003, that deals with the provisions
of Sections 23A and 23B. The regulation unifies and updates staff interpretations issued over the
years, incorporates several new interpretations and provisions (such as to clarify when
transactions with an unrelated third party will be attributed to an affiliate), and addresses new
issues arising as a result of the expanded scope of nonbanking activities engaged in by banks and
bank holding companies in recent years and authorized for financial holding companies under the
Gramm-Leach-Bliley Act.
In addition, Sections 22(h) and (g) of the Federal Reserve Act place restrictions on loans to
executive officers, directors and principal stockholders. Under Section 22(h) of the Federal
Reserve Act loans to a director, an executive officer and to a greater than 10% stockholder of a
financial institution, and certain affiliated interests of these, may not exceed, together with all
other outstanding loans to such person and affiliated interests, the financial institution’s loans
to one borrower limit, generally equal to 15% of the institution’s unimpaired capital and surplus.
Section 22(h) of the Federal Reserve Act also requires that loans to directors, executive officers
and principal stockholders be made on terms substantially the same as offered in comparable
transactions to other persons and also requires prior board approval for certain loans. In
addition, the aggregate amount of extensions of credit by a financial institution to insiders
cannot exceed the institution’s unimpaired capital and surplus. Furthermore, Section 22(g) of the
Federal Reserve Act places additional restrictions on loans to executive officers.
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Capital Requirements
The Federal Reserve has adopted capital adequacy guidelines pursuant to which it assesses the
adequacy of capital in examining and supervising a bank holding company and in analyzing
applications to it under the BHC Act. The Federal Reserve capital adequacy guidelines generally
require bank holding companies to maintain total capital equal to 8% of total risk-adjusted assets,
with at least one-half of that amount consisting of Tier I or core capital and up to one-half of
that amount consisting of Tier II or supplementary capital. Tier I capital for bank holding
companies generally consists of the sum of common stockholders’ equity and perpetual preferred
stock, subject in the case of the latter to limitations on the kind and amount of such perpetual
preferred stock which may be included as Tier I capital, less goodwill and, with certain
exceptions, intangibles. Tier II capital generally consists of hybrid capital instruments,
perpetual preferred stock which is not eligible to be included as Tier I capital; term subordinated
debt and intermediate-term preferred stock; and, subject to limitations, generally allowances for
loan losses. Assets are adjusted under the risk-based guidelines to take into account different
risk characteristics, with the categories ranging from 0% (requiring no additional capital) for
assets such as cash to 100% for the bulk of assets which are typically held by a bank holding
company, including multi-family residential and commercial real estate loans, commercial business
loans and commercial loans. Off-balance sheet items also are adjusted to take into account certain
risk characteristics.
In addition to the risk-based capital requirements, the Federal Reserve requires bank holding
companies to maintain a minimum leverage capital ratio of Tier I capital to total assets of 3.0%.
Total assets for purposes of this calculation do not include goodwill and any other intangible
assets and investments that the Federal Reserve determines should be deducted from Tier I capital.
The Federal Reserve has announced that the 3.0% Tier I leverage capital ratio requirement is the
minimum for the top-rated bank holding companies without supervisory, financial or operational
weaknesses or deficiencies or those which are not experiencing or anticipating significant growth.
Other bank holding companies will be expected to maintain Tier I leverage capital ratios of at
least 4.0% or more, depending on their overall condition. As of December 31, 2007, the Bank
exceeded each of its capital requirements and was a well-capitalized institution as defined in the
Federal Reserve regulations.
Sarbanes-Oxley
The Sarbanes-Oxley Act of 2002 (“SOA”) was enacted to address corporate and accounting fraud. SOA
contains reforms of various business practices and numerous aspects of corporate governance.
Management understands that substantially all of these requirements have been implemented pursuant
to regulations issued by the Securities and Exchange Commission (the “SEC”). The following is a
summary of certain key provisions of SOA.
SOA provides for the establishment of the Public Company Accounting Oversight Board (PCAOB) that
enforces auditing, quality control and independence standards and is funded by fees from all
publicly traded companies. SOA imposed higher standards for auditor independence and restricts
provision of consulting services by auditing firms to companies they audit. Any non-audit services
being provided to a public company audit client require pre-approval by the company’s audit
committee. In addition, SOA makes certain changes to the requirements for partner rotation after a
period of time. SOA requires chief executive officers and chief financial officers, or their
equivalent, to certify to the accuracy of periodic reports filed with the SEC, subject to civil and
criminal penalties if they knowingly or willingly violate this certification requirement. In
addition, counsel is required to report evidence of a material violation of the securities laws or
a breach of fiduciary duties to its chief executive officer or its chief legal officer, and, if
such officer does not appropriately respond, to report such evidence to the audit committee or
other similar committee of the board of directors or the board itself.
Under this law, longer prison terms apply to corporate executives who violate federal securities
laws; the period during which certain types of suits can be brought against a company or its
officers is extended and bonuses issued to top executives prior to restatement of a company’s
financial statements are now subject to disgorgement if such restatement was due to corporate
misconduct. Executives are also prohibited from insider trading during retirement plan “blackout”
periods, and loans to company executives (other than loans by financial institutions permitted by
federal rules or regulations) are restricted. In addition, the legislation accelerated the time
frame for disclosures by public companies, as they must immediately disclose any material changes
in their financial condition or operations. Directors and executive officers required to report
changes in ownership in a company’s securities must now report within two business days of the
change.
SOA also increased responsibilities and codified certain requirements relating to audit committees
of public companies and how they interact with the company’s registered public accounting firm.
Audit committee members must be independent and are barred from accepting consulting, advisory or
other compensatory fees from the issuer. In addition, companies are required to disclose whether
at least one member of the committee is a “financial expert” (as such term will be defined by the
SEC) and if not, why not. Audit committees of publicly traded companies have authority to retain
their own counsel and other advisors
10
funded by the company. Audit committees must establish procedures for receipt, retention and
treatment of complaints regarding accounting and auditing matters and procedures for confidential,
anonymous submission of employee concerns regarding questionable accounting or auditing matters.
It is the responsibility of the audit committee to hire, oversee and work on disagreements with
Company’s independent auditor.
A company’s registered public accounting firm is prohibited from performing statutorily mandated
audit services for a company if the company’s chief executive officer, chief financial officer,
controller, chief accounting officer or any person serving in equivalent positions had been
employed by such firm and participated in the audit of such company during the one-year period
preceding the audit initiation date. SOA also prohibits any officer or director of a company or
any other person acting under their direction from taking any action to fraudulently influence,
coerce, manipulate or mislead any independent public or certified accountant engaged in the audit
of the company’s financial statements for the purpose of rendering the financial statements
materially misleading. SOA also has provisions related to inclusion of internal control report and
assessment by management in the annual report to stockholders. The law also requires the company’s
registered public accounting firm that issues the audit report to attest to and report on
management’s assessment of the company’s internal controls. In addition, SOA requires that each
financial report required to be prepared in accordance with (or reconciled to) generally accepted
accounting principles and filed with the SEC reflect all material correcting adjustments that are
identified by a registered public accounting firm in accordance with generally accepted accounting
principles and rules and regulations of the SEC.
Banking Operations
General
Banks are extensively regulated under federal and state law. References under this heading to
applicable statutes or regulations are brief summaries of portions thereof which do not purport to
be complete and which are qualified in their entirety by reference to those statutes and
regulations. Any change in applicable laws or regulations may have a material adverse effect on
the business of commercial banks and bank holding companies, including the Corporation, the Bank or
Santander Spain. However, management is not aware of any current recommendations by any federal or
state regulatory authority that, if implemented, would have or would be reasonably likely to have a
material effect on the liquidity, capital resources or operations of the Bank or the Corporation.
The Bank is incorporated under the Banking Law of Puerto Rico, a “state bank” and an “insured
depository institution” under the Federal Deposit Insurance Act (“FDIA”), and a “foreign bank”
within the meaning of the International Banking Act of 1978 (“IBA”). The Bank is subject to
extensive regulation and examination by the Commissioner, the FDIC, and certain requirements
established by the Federal Reserve. The federal and Puerto Rico laws and regulations that apply to
banks regulate, among other things, the scope of their business, their investments, their reserves
against deposits, the timing of the availability of deposited funds and the nature and amount of
and collateral for certain loans. In addition to the impact of regulation, commercial banks are
affected significantly by the actions of the Federal Reserve as it attempts to control the money
supply and credit availability in order to influence the economy.
As a creditor and financial institution, the Bank is subject to certain regulations promulgated by
the Federal Reserve, including, without limitation, Regulation B (Equal Credit Opportunity Act),
Regulation DD (Truth in Savings Act), Regulation E (Electronic Funds Transfer Act), Regulation F
(Limits on Exposure to Other Banks), Regulation Z (Truth in Lending Act), Regulation CC (Expedited
Funds Availability Act), Regulation X (Real Estate Settlement Procedures Act), Regulation BB
(Community Reinvestment Act) and Regulation C (Home Mortgage Disclosure Act).
There are periodic examinations by the Commissioner and the FDIC to test the Bank’s compliance with
various statutory and regulatory requirements. This regulation and supervision establishes a
comprehensive framework of activities in which an institution can engage and is intended primarily
for the protection of the insurance fund and depositors. The regulatory structure also gives the
regulatory authorities extensive discretion in connection with their supervisory and enforcement
activities and examination policies, including policies with respect to the classification of
assets and the establishment of adequate loan loss reserves for regulatory purposes. This
enforcement authority includes, among other things, the ability to assess civil money penalties, to
issue cease-and-desist or removal orders and to initiate injunctive actions against banking
organizations and institution-affiliated parties, as defined. In general, these enforcement
actions may be initiated for violations of laws and regulations and unsafe or unsound practices.
In addition, certain actions are required by statute and implementing regulations. Other actions
or inaction may provide the basis for enforcement action, including misleading or untimely reports
filed with regulatory authorities.
11
Any change in statutory and regulatory requirements whether by the Commissioner, the FDIC or the
U.S. Congress or Puerto Rico legislature could have a material adverse impact on the Corporation,
the Bank and their operations. The Corporation cannot determine the ultimate effect of such
potential legislation, if enacted, or implementing regulations, would have upon the Corporation’s
final condition or results of operations.
Ownership and Control
Because of the Bank’s status as a bank, owners of the common stock are subject to certain
restrictions and disclosure obligations under various federal laws, including the BHC Act and the
Change in Bank Control Act (the “CBCA”). Regulations pursuant to the BHC Act generally require
prior Federal Reserve approval for an acquisition of control of an insured institution (as defined)
or holding company thereof by any person (or persons acting in concert). Control is deemed to
exist if, among other things, a person (or persons acting in concert) acquires more than 25% of any
class of voting stock of an insured institution or holding company thereof. Control is presumed to
exist subject to rebuttal, if a person (or persons acting in concert) acquires more than 10% of any
class of voting stock and either (i) the company has registered securities under Section 12 of the
Securities Exchange Act of 1934, or (ii) no person will own, control or hold the power to vote a
greater percentage of that class of voting securities immediately after the transaction. The
concept of acting in concert is very broad and also is subject to certain rebuttable presumptions,
including among others, that relatives, business partners, management officials, affiliates and
others are presumed to be acting in concert with each other and their businesses. The FDIC’s
regulations implementing the CBC Act are generally similar to those described above.
The Banking Law requires the approval of the Commissioner for changes in control of a Puerto Rico
bank. See “Banking Operations-Puerto Rico Regulation.”
FDIC Capital Requirements
Under authority granted in the FDIA, the FDIC has promulgated regulations and adopted a statement
of policy regarding the capital adequacy of state-chartered banks that are not members of the
Federal Reserve System. For purposes of the FDIA, Puerto Rico is treated as a state and the Bank
as such is a state-chartered non-member bank.
The FDIC’s capital regulations establish a minimum leverage capital requirement for state-chartered
non-member banks. For the most highly-rated banks the requirement is 4% Tier I capital, with an
additional cushion of at least 100 to 200 basis points for all other state-chartered, nonmember
banks, which effectively increases the minimum Tier I leverage ratio for such other bank from 4% to
5% or more. Under the FDIC’s regulations, the highest-rated banks are those that the FDIC
determines are not anticipating or experiencing significant growth and have well diversified risk,
including no undue interest rate risk exposure, excellent asset quality, high liquidity, good
earnings and, in general, which are considered a strong banking organization and are rated
composite 1 under the Uniform Financial Institutions Rating System. Tier I leverage or core
capital is defined as the sum of common stockholders’ equity (including retained earnings),
noncumulative perpetual preferred stock and related surplus, and minority interests in consolidated
subsidiaries, minus all intangible assets other than certain qualifying supervisory goodwill and
certain purchased mortgage servicing rights.
The FDIC also requires that state-chartered nonmember banks meet a risk-based capital standard.
The risk-based capital standard requires the maintenance of total capital (which is defined as Tier
I capital plus supplementary (Tier II) capital) to risk weighted assets of 8%. Under the standards
the FDIC applies, the Bank’s assets are assigned weights of 0% to 100% based upon credit and
certain other risks it believes are inherent in the type of asset or item. The components of Tier
I capital are equivalent to those discussed above under the 4% leverage capital standard. The
components of supplementary capital include certain perpetual preferred stock, certain mandatory
convertible securities, certain subordinated debt and intermediate preferred stock and general
allowances for loan losses. Allowance for loan losses included in supplementary capital is limited
to a maximum of 1.25% of risk-weighted assets. Overall, the amount of capital counted toward
supplementary capital cannot exceed 100% of core capital. As of December 31, 2007, the Bank
exceeded each of its core capital requirements and was a well-capitalized institution as defined in
the FDIC regulations.
In August 1995, the FDIC and other federal banking agencies published a final rule modifying their
existing risk-based capital standards to provide for consideration of interest rate risk when
assessing the capital adequacy of a bank. Under the final rule, the FDIC must explicitly include a
bank’s exposure to declines in the economic value of its capital due to changes in interest rates
as a factor in evaluating a bank’s capital adequacy. In June 1996, the FDIC and other federal
banking agencies adopted a joint policy statement on interest rate risk policy. Because market
conditions, bank structure, and bank activities vary, the agencies concluded that each bank needs
to develop its own interest rate risk management program tailored to its needs and circumstances.
The policy statement describes prudent principles and practices that are fundamental to sound
interest rate risk
12
management, including appropriate board and senior management oversight and comprehensive risk
management process that effectively identifies, measures, monitors and controls such interest rate
risk.
Failure to meet capital guidelines could subject an insured bank like the Bank to a variety of
prompt corrective actions and enforcement remedies under the FDIA (as amended by FDICIA),
including, with respect to an insured bank, the termination of deposit insurance by the FDIC, and
to certain restrictions on its business. In general terms, undercapitalized depository institutions
are prohibited from making any capital distributions (including dividends), are subject to
restrictions on borrowing from the Federal Reserve System, and are subject to growth limitations
and are required to submit capital restoration plans.
At December 31, 2007, the Bank was well capitalized. Like any other institution, the Bank’s
capital category, as determined by applying the prompt corrective action provisions of law, may not
constitute an accurate representation of the overall financial condition or prospects of the Bank,
and should be considered in conjunction with other available information regarding the Bank’s
financial condition and results of operations.
Cross-Guarantees
Under the FDIA, a depository institution (which term includes both banks and savings associations),
the deposits of which are insured by the FDIC, can be held liable for any loss incurred by, or
reasonably expected to be incurred by, the FDIC in connection with (i) the default of a commonly
controlled FDIC-insured depository institution or (ii) any assistance provided by the FDIC to any
commonly controlled FDIC-insured depository institution “in danger of default.” “Default” is
defined generally as the appointment of a conservator or a receiver and “in danger of default” is
defined generally as the existence of certain conditions indicating that a default is likely to
occur in the absence of regulatory assistance. In some circumstances (depending upon the amount of
the loss or anticipated loss suffered by the FDIC), cross-guarantee liability may result in the
ultimate failure or insolvency of one or more insured depository institution to its parent company
is subordinated to the subsidiary bank’s cross-guarantee liability with respect to commonly
controlled insured depository institutions. The Bank is currently the only FDIC insured depository
institution controlled by Santander Spain.
FDIC Deposit Insurance Assessments
Banco Santander Puerto Rico is subject to FDIC deposit insurance assessments. On February 8, 2006,
the Federal Deposit Insurance Reform Act of 2005 (the “Reform Act”) was signed by the President.
The Reform Act provides for the merger of the Bank Insurance Fund (“BIF”) and Savings Association
Insurance Fund (“SAIF”) into a single Deposit Insurance Fund, (“DIF”), increases the maximum
amount of the insurance coverage for certain retirement accounts, and possible “inflation
adjustments” in the maximum amount of coverage available with respect to other insured accounts.
In addition, it granted a one-time initial assessment credit to recognize institutions’ past
contributions to the fund.
The deposits of Banco Santander Puerto Rico are insured up to the applicable limits by the DIF of
the FDIC and are subject to the deposit insurance assessments to maintain the DIF. After 2006 the
FDIC utilized a risk based assessment system that imposed insurance premiums based upon a matrix
that took into account a bank’s capital level and supervisory rating. Premiums under that
assessment system ranged from 0 cents for each $100 of domestic deposits for well-capitalized and
well managed banks to 27 cents for each $100 of domestic deposits for the weakest institution.
Banco Santander Puerto Rico was not required to pay insurance premium to the FDIC during 2007.
Under the Reform Act, the FDIC made significant changes to its risk-based assessment system so that
effective January 1, 2007, the FDIC imposes insurance premium based upon a matrix that is designed
to more closely tie what banks pay for deposit insurance to the risk they pose. The new FDIC
risk-based assessment system imposes premium based upon factors that vary depending upon the size
of the bank. These factors are: for banks with less than $10 billion in assets- capital level,
supervisory rating, and certain financial ratios; for banks with $10 billion up to $30 billion in
assets- capital level, supervisory rating, certain financial ratios and (if at least one is
available) debt issuer ratings, and additional risk information; and for banks with over $30
billion in assets- capital level, supervisory rating, debt issuer ratings (unless none are
available in which case certain financial ratios are used), and additional risk information. The
FDIC has adopted a new base schedule of rates that the FDIC can adjust up or down, depending on the
revenue needs of the DIF, and has set initial premiums for 2007 that range from 5 cents per $100 of
domestic deposits for the banks in the lowest risk category to 43 cent per $100 of domestic
deposits for banks in the highest risk category. The new assessment system is expected to result
in increased annual assessments on the deposits of our bank subsidiaries of 5 to 7 basis points per
$100 of deposit.
On December 28, 2006, Banco Santander Puerto Rico reached an agreement to transfer two million
dollars ($2,000,000) in FDIC Assessment Credits to an unrelated financial institution for the
purchase price of one million eight hundred fifty five
13
thousand dollars ($1,855,000). Banco Santander Puerto Rico complied with Final Rule of the Reform
Act and submitted the executed Transfer Form to the FDIC’s Division of Finance. As of December 31,
2007, Banco Santander Puerto Rico still has available $422,000 in FDIC credits to offset future
assessments.
Banco Santander Puerto Rico is also subject to separate assessments to repay bonds (“FICO bonds”).
The assessment for the payment on the FICO bonds for the quarter beginning on January 1, 2007 is
1.22 cents per $100 of DIF- assessable deposits. As of December 31, 2007, Banco Santander Puerto
Rico had a DIF deposit assessment base of approximately $5.3 billion.
The FDIC may terminate the deposit insurance of any insured depository institution, including the
Bank, if it determines after a hearing that the institution has engaged or is engaging in unsafe or
unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with the FDIC. It also
may suspend deposit insurance temporarily during the hearing process for the permanent termination
of insurance. Management is aware of no existing circumstances which would result in termination
of the Bank’s insurance.
Standards for Safety and Soundness
The FDIA, as amended by FDICIA and the Riegle Community Development and Regulatory Improvement Act
of 1994, requires the FDIC and the other federal bank regulatory agencies to prescribe standards of
safety and soundness, by regulations or guidelines, relating generally to operations and
management, asset growth, asset quality, earnings, stock valuation, and compensation. The FDIC and
the other federal bank regulatory agencies adopted, effective August 9, 1995, a set of guidelines
prescribing safety and soundness standards pursuant to FDICIA, as amended. The guidelines
establish general standards relating to internal controls and information systems, internal audit
systems, loan documentation, credit underwriting, interest rate exposure, asset growth and
compensation, fees and benefits. In general, the guidelines require, among other things,
appropriate systems and practices to identify and manage the risks and exposures specified in the
guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and
describe compensation as excessive when the amounts paid are unreasonable or disproportionate to
the services performed by an executive officer, employee, director or principal shareholder.
Community Reinvestment
Under the Community Reinvestment Act (“CRA”), each insured depository institution has a continuing
and affirmative obligation, consistent with the safe and sound operation of such institution, to
help meet the credit needs of its entire community, including low-and moderate-income
neighborhoods. The CRA does not establish specific lending requirements or programs for such
institutions nor does it limit an institution’s discretion to develop the types of products and
services that it believes are best suited to its particular community, consistent with the CRA.
The CRA requires each federal banking agency, in connection with its examination of an insured
depository institution, to assess and assign one of four ratings to the institution’s record of
meeting the credit needs of its community and to take such records into account in its evaluation
of certain applications by the institution, including application for charters, branches and other
deposit facilities, relocations, mergers, consolidations, acquisitions of assets or assumptions of
liabilities and savings and loan holding company acquisitions. The CRA also requires that all
institutions make public disclosure of their CRA ratings. The Bank received a rating of
“outstanding” as of the most recent CRA report issued by the FDIC.
Office of Foreign Assets Control Regulation
The United States has imposed economic sanctions that affect transactions with designated
foreign countries, nationals and others. The U.S. Treasury Department Office of Foreign Assets
Control (“OFAC”) sanctions may contain one or more of the following elements: (i) restrictions on
trade with or investment in a sanctioned country, including prohibitions against direct or indirect
imports from and exports to a sanctioned country and prohibitions on “U.S. persons” engaging in
financial transactions relating to making investments in, or providing investment-related advice or
assistance to a sanctioned country; and (ii) a blocking of assets in which the government or
specially designated nationals of the sanctioned country have an interest, by prohibiting transfers
of property subject to U.S. jurisdiction (including property in the possession or control of U.S.
persons). Blocked assets cannot be paid out, withdrawn, set off or transferred in any manner
without a license from OFAC. Failure to comply with these sanctions could have serious legal and
reputational consequences.
14
Brokered Deposits
FDIC regulations adopted under the FDIA govern the receipt of brokered deposits by banks. Well
capitalized institutions are not subject to limitations on brokered deposits, while adequately
capitalized institutions are able to accept, renew or rollover brokered deposits only with a waiver
from the FDIC and subject to certain restrictions on the yield paid on such deposits.
Undercapitalized institutions are not permitted to accept brokered deposits. The Bank does not
believe the brokered deposits regulation has had or will have a material effect on the funding or
liquidity of the Bank, which is currently a well-capitalized institution.
Federal Limitations on Activities and Investments
The equity investments and activities as a principal of FDIC-insured state-chartered banks such as
the Bank are generally limited to those that are permissible for national banks. Under regulations
dealing with equity investments, an insured state bank generally may not directly or indirectly
acquire or retain any equity investment of a type, or in an amount, that is not permissible for a
national bank. However, an insured state bank is not prohibited from, among other things, (i)
acquiring or retaining a majority interest in a subsidiary, (ii) investing as a limited partner in
a partnership the sole purpose of which is direct or indirect investment in the acquisition,
rehabilitation or new construction of a qualified housing project, provided that such limited
partnership investments may not exceed 2% of the bank’s total assets, (iii) acquiring up to 10% of
the voting stock of a company that solely provides or reinsures director’, trustees’ and officers’
liability insurance coverage or bankers’ blanket bond group insurance coverage for insured
depository institutions, and (iv) acquiring or retaining the voting shares of a depository
institution if certain requirements are met. In addition, an insured state-chartered bank may not,
directly or indirectly through a subsidiary, engage as principal in any activity that is not
permissible for a national bank unless the FDIC has determined that such activities would pose no
risk to the insurance fund of which it is a member and the bank is in compliance with applicable
regulatory capital requirements. Any insured state-chartered bank that is directly or indirectly
engaged in any activity that is not permitted for a national bank must cease such impermissible
activity.
Interstate Branching
Effective June 1, 1997, the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the “Riegle-Neal Act”) amended the FDIA and certain other statutes to permit state and national
banks with different home states to merge across state lines, with approval of the appropriate
federal banking agency, unless the home state of a participating bank had passed legislation prior
to May 31, 1997 expressly prohibiting interstate mergers. Under the Riegle-Neal Act amendments,
once a state or national bank has established branches in a state, that bank may establish and
acquire additional branches at any location in the state of which any bank involved in the
interstate merger transaction could have established or acquired branches under applicable federal
or state law. If a state opts out of interstate branching within the specified time period, no
bank in any other state may establish a branch in the state which has opted out, whether through an
acquisition or
de novo.
For purposes of the Riegle-Neal Act’s amendments to the FDIA, the Bank is treated as a state bank
and is subject to the same restriction on interstate branching as other state banks. However, for
purposes of the IBA, the Bank is considered to be a foreign bank and may branch interstate by
merger or
de novo
to the same extent as a domestic bank in the Bank’s home state. It is not yet
possible to determine how these statutes will be harmonized, with respect either to which federal
agency will approve interstate transactions or to which “home state” determination rules will
apply.
Banking Operations-Puerto Rico Regulation
General
As a commercial bank organized under the laws of Puerto Rico the Bank is subject to the
supervision, examination and regulation of the Commissioner, pursuant to the Puerto Rico Banking
Law of 1933 (the “Banking Law”). The Banking Law contains provisions governing the incorporation
and organization, rights and responsibilities of directors, officers and stockholders as well as
the corporate powers, lending limitations, capital requirements, investment requirements and other
aspects of the Bank and its affairs. In addition, the Commissioner is given extensive rule making
power and administrative discretion under the Banking Law.
Section 12 of the Banking Law requires the prior approval of the Commissioner with respect to a
transfer of capital stock of a bank that results in a change of control of the bank. Under Section
12, a change of control is presumed to occur if a person or a group of persons acting in concert,
directly or indirectly, acquire more than 5% of the outstanding voting capital stock of the bank.
The Commissioner has interpreted the restrictions of Section 12 as applying to acquisitions of
voting securities of
15
entities controlling a bank, such as a bank holding company. Under the Banking Law, the
determination of the Commissioner whether to approve a change of control filing is final and
non-appealable.
Section 16 of the Banking Law requires every bank to maintain a legal reserve which shall not be
less than 20% of its demand liabilities, except government deposits (federal state and municipal)
which are secured by actual collateral. The reserve is required to be composed of any of the
following securities or combination thereof: (1) legal tender of the United States; (2) checks on
banks or trust companies located in any part of Puerto Rico, to be presented for collection during
the day following that on which they are received; (3) money deposited in other banks or depository
institutions, subject to immediate collection; (4) federal funds sold to any Federal Reserve Bank
and securities purchased under agreement to resell executed by the bank with such funds that are
subject to be repaid to the bank on or before the close of the next business day; and (5) any other
asset that the Commissioner determines from time to time.
Section 17 of the Banking Law permits Puerto Rico commercial banks to make loans to any one person,
firm, partnership or corporation, up to an aggregate amount of 15% the sum of: (i) paid-in
capital; (ii) reserve fund of the commercial bank; and (iii) any other components that the
Commissioner may determine from time to time. As of December 31, 2007, the legal lending limit for
the Bank under this provision was approximately $55.6 million. If such loans are secured by
collateral worth at least 25% more than the amount of the loan, the aggregate maximum amount may
reach one third of the sum of the Bank’s paid-in capital, reserve fund, retained earnings and any
other components that the Commissioner may determine from time to time. There are no restrictions
under Section 17 of the Banking Law on the amount of loans which are wholly secured by bonds,
securities and other evidences of indebtedness of the Government of the United States, of the
Commonwealth of Puerto Rico, or by bonds, not in default, of authorities, instrumentalities or
dependencies of the Commonwealth of Puerto Rico or its municipalities.
Section 17 of the Banking Law also prohibits Puerto Rico commercial banks from making loans secured
by their own stock, and from purchasing their own stock in connection therewith, unless such
purchase is necessary to prevent losses because of a debt previously contracted in good faith. The
stock so purchased by the Puerto Rico commercial bank must be sold by the bank in a public or
private sale within one year from the date of purchase.
The Banking Law provides that no officers, directors, agents or employees of a Puerto Rico
commercial bank may serve or discharge a position of officer, director, agent or employee of
another Puerto Rico commercial bank, financial company, savings and loan association, trust
company, company engaged in granting mortgage loans or any other institution engaged in the money
lending business in Puerto Rico. This prohibition is not applicable to the affiliates of a Puerto
Rico commercial bank.
Section 27 of the Banking Law also requires that at least 10% of the yearly net income of a Puerto
Rico commercial bank be credited to a reserve fund until the amount deposited to the credit of the
reserve fund is equal to 100% of total paid-in capital (common and preferred) of the commercial
bank. As of December 31, 2007, the Bank had an adequate reserve fund established.
Section 27 of the Banking Law also provides that when the expenditures of a Puerto Rico commercial
bank are greater than receipts, the excess of the expenditures over receipts shall be charged
against the undistributed profits of the bank, and the balance, if any, shall be charged against
the reserve fund, as a reduction thereof. If there is no reserve fund sufficient to cover such
balance in whole or in part, the outstanding amount shall be charged against the capital account
and no dividends shall be declared until said capital has been restored to its original amount and
the reserve fund to 20% of the original capital of the bank.
Section 14 of the Banking Law authorizes the Bank to conduct certain financial and related
activities directly or through subsidiaries, including lease financing of personal property,
operating small loans companies and mortgage loans activities. The Bank currently has two
subsidiaries, Santander Mortgage, a mortgage company (merged into the Bank on January 1, 2008), and
Santander International Bank, an international banking entity.
The Finance Board, which is composed of the Commissioner, the Secretary of the Treasury, the
Secretary of Commerce, the Secretary of Consumer Affairs, the President of the Economic Development
Bank, the President of the Government Development Bank, and the President of the Planning Board,
has the authority to regulate the maximum interest rates and finance charges that may be charged on
loans to individuals and unincorporated businesses in Puerto Rico. The current regulations of the
Finance Board provide that the applicable interest rate on loans to individuals and unincorporated
businesses, including real estate development loans but excluding certain other personal and
commercial loans secured by mortgages on real estate properties, is to be determined by free
competition. Regulations adopted by the Finance Board deregulated the
16
maximum finance charges on retail installment sales contracts, and for credit card purchases. These
regulations do not set a maximum rate for charges on retail installment sales contracts and for
credit card purchases and set aside previous regulations which regulated these maximum finance
charges. Furthermore, there is no maximum rate set for installment sales contracts involving motor
vehicles, commercial, agricultural and industrial equipment, commercial electric appliances and
insurance premiums.
IBC Act
Santander International Bank, an international banking entity, is subject to supervision and
regulation by the Commissioner of Financial Institutions under the International Banking Center
Regulatory Act (the “IBC Act”). Under the IBC Act, no sale, encumbrance, assignment, merger,
exchange or transfer of shares, interest or participation in the capital of an International
Banking Entity (IBE) may be initiated without the prior approval of the Commissioner, if by such
transaction a person would acquire, directly or indirectly, control of 10% or more of any class of
stock, interest or participation in the capital of the IBE. The IBC Act and the regulations issued
thereunder by the Commissioner (the IBC Regulations) limit the business activities that may be
carried out by an IBE. Such activities are limited in part to persons and assets located outside of
Puerto Rico. The IBC Act further provides that every IBE must have not less than $300,000 of
unencumbered assets or acceptable financial securities in Puerto Rico.
Under the IBC Act, without the prior approval of the Office of the Commissioner, Santander
International Bank may not amend its articles of incorporation or issue additional shares of
capital stock or other securities convertible into additional shares of capital stock unless such
shares are issued directly to the shareholders of Santander International Bank previously
identified in the application to organize the international banking entity, in which case
notification to the Commissioner must be given within ten (10) business days following the date of
the issue.
Pursuant to the IBC Act, Santander International Bank must maintain its original accounting books
and records in its principal place of business in Puerto Rico. Santander International Bank is also
required to submit to the Commissioner quarterly and annual reports of its financial condition and
results of operations, including annual audited financial statements.
The IBC Act empowers the Commissioner to revoke or suspend, after notice and hearing, a license
issued thereunder if, among other things, the IBE fails to comply with the IBC Act, the IBC
Regulations, or the terms of its license, or if the Commissioner finds that the business of the IBE
is conducted in a manner not consistent with the public interest.
Mortgage Banking Operations
The mortgage banking business is subject to the rules and regulations of FHA, VA, FNMA, FHLMC, HUD
and GNMA with respect to originating, processing, selling and servicing mortgage loans and the
issuance and sale of mortgage-backed securities. Those rules and regulations, among other things,
prohibit discrimination and establish underwriting guidelines which include provisions for
inspections, appraisals and required credit reports on prospective borrowers and fix maximum loan
amounts, and with respect to VA loans, fix maximum interest rates. Moreover, mortgages lenders are
required annually to submit to FHA, VA, FNMA, FHLMC, GNMA and HUD, audited financial statements,
and each regulatory entity has its own financial requirements. This business segment’s affairs are
also subject to supervision and examination by FHA, VA, FNMA, FHLMC, GNMA and HUD at all times to
assure compliance with the applicable regulations, policies and procedures. Mortgage origination
activities are subject to, among others, the Equal Credit Opportunity Act, Federal Truth-in-Lending
Act, the Real Estate Settlement Procedures Act and the regulations promulgated thereunder which,
among other things, prohibit discrimination and require the disclosure of certain basic information
to mortgagors concerning credit terms and settlement costs. The mortgage banking operation is
licensed by the Commissioner under the Puerto Rico Mortgage Banking Law (the “Mortgage Banking
Law”), and as such is subject to regulation by the Commissioner, with respect to, among other
things, licensing requirements and establishment of maximum origination fees on certain types of
mortgage loans products. Although the Bank believes that it is in compliance in all material
respects with applicable Federal and Puerto Rico laws, rules and regulations, there can be no
assurance that more restrictive laws or rules will not be adopted in the future, which could make
compliance more difficult or expensive, restricting the Bank’s ability to originate or sell
mortgage loans or sell mortgage-backed securities, further limit or restrict the amount of interest
and other fees earned from the origination of loans, or otherwise adversely affect the business or
prospects of the Bank.
Section 5 of the Mortgage Banking Law requires the prior approval of the Commissioner for the
acquisition of control of any mortgage banking institution licensed under such law. For purposes
of the Mortgage Banking Law, the term “control” means the power to direct or influence decisively,
directly or indirectly, the management or policies of a mortgage banking institution.
17
The Mortgage Banking Law provides that a transaction that results in the holding of less than 10%
of the outstanding voting securities of a mortgage banking institution shall not be considered a
change in control.
Broker Dealer Operations
Santander Securities is registered as a broker-dealer with the SEC and the Commissioner, and is
also a member of the Financial Industry Regulatory Authority (the
“FINRA”). As a
registered broker-dealer, it is subject to regulation and supervision by the SEC, the Commissioner
and the FINRA in matters relating to the conduct of its securities business, including record
keeping and reporting requirements, supervision and licensing of employees and obligations to
customers. In particular, Santander Securities is subject to the SEC’s net capital rules, which
specify minimum net capital requirements for registered broker-dealers and are designed to ensure
that broker-dealers maintain regulatory capital in relation to their liabilities and the size of
their customer business.
Insurance Operations
Santander Insurance Agency is registered as a corporate agent and general agency with the office of
the Commissioner of Insurance of Puerto Rico (the “Insurance Commissioner”). Santander Insurance
Agency is subject to regulation and supervision by the Commissioner relating to, among other
things, licensing of employees, sales practices, charging of commissions and obligations to
customers.
Island Insurance Corporation is registered as an insurance company with the office of the
Commissioner of Insurance of Puerto Rico (the “Insurance Commissioner”). Island Insurance
Corporation is subject to regulation and supervision by the Insurance Commissioner. As of December
31, 2007, this corporation is inactive.
Recent Puerto Rico Legislation
During the month of December 2007, the Governor of Puerto Rico signed Law 181 (“Law 181”). Law 181
reduces the special tax rate on long term capital gains applicable to individuals, estates and
trusts from 12.5% to 10%. In the case of the sale of real property or stock by nonresident
individuals the applicable rate will be 25%, however, if the individual is a U.S. citizen, the rate
will be 10%. The special tax rate on long term capital gains for corporations and partnerships was
reduced from 20% to 15%. The special tax rates will apply only to transactions that occurred on
July 1, 2007 and after.
Also, on December 2007, the Governor of Puerto Rico signed Law 197 (“Law 197”) which provides
certain credits when individuals purchase certain new or existing homes. The incentives are as
follows: (a) for a new constructed home that will constitute the individuals principal residence, a
credit equal to 20% of the sales price or $25,000, whichever is lower; (b) for new constructed
homes that will not constitute the individuals principal residence, a credit of 10% of the sales
price or $15,000, whichever is lower; and (c) for existing homes a credit of 10% of the sales price
or $10,000, whichever is lower. Credits under Law 197 need to be certified by the Secretary of
Treasury and the maximum amount of credits to be granted under Law 197 is $220,000,000.
Under Law 197, an individual may benefit from the credit no more than twice, the amount of credit
granted will be credited against the principal amount of the mortgage, the individual must acquire
the property before June 30, 2008, and for new constructed homes constituting the principal
residence and existing homes, the individual must live in it as his or her principal residence at
least three consecutive years. Noncompliance with this requirement will affect only the homebuyer’s
credit and not the tax credit granted to the financial institution.
The benefit for the Bank is that the credit may be used against income taxes, including estimated
taxes, for years commencing after December 31, 2007 in three installments, subject to certain
limitations, between January 1, 2008 and June 30, 2011; the credit may be ceded, sold or otherwise
transferred to any other person; and any tax credit not used in a given tax year, as certified by
the Secretary of Treasury, may be claimed as a refund.
Employees
As of December 31, 2007, the Corporation and its subsidiaries have approximately 2,622 employees.
None of its employees are represented by a collective bargaining group. The Corporation considers
its employee relations to be good.
18
Availability at our website
We make available free of charge, through our investor relations section at our internet website,
www.santandernet.com
, our Form 10-K, Form 10-Q and Form 8-K reports and all amendments to those
reports as soon as reasonably practicable after such material is electronically filed with or
furnished to the SEC.
19
ITEM 1A. RISK FACTORS
The Corporation is subject to risk in several areas. Discussed below, and elsewhere in this report,
are the various risk factors that could cause the Corporation’s financial condition and results of
operations to vary significantly from period to period. Please refer to the “Regulation and
Supervision” section of this report for more information about legislative and regulatory risks.
Also refer to the MD&A section, Quantitative and Qualitative Disclosures about Market Risk, and the
Financial Statements and Supplementary Data sections in this report for additional information
about credit, interest rate and market risks. Any factor described below or elsewhere in this
report or in our 2007 Annual Report to Stockholders could, by itself or together with one or more
other factors, have a material adverse effect on the Corporation’s financial condition and results
of operations.
General business, economic and political conditions.
The Corporation’s businesses and earnings are
affected by general economic and political conditions in Puerto Rico and the United States of
America. General business and economic conditions that could affect the Corporation include
short-term and long-term interest rates, inflation, monetary supply, fluctuations in both debt and
equity capital markets, and the strength of the United States and Puerto Rico economies. A period
of reduced economic growth or a recession has historically resulted in a reduction in lending
activity and an increase in the rate of defaults on loans. A recession may have an adverse impact
on net interest income and fee income. The Corporation may also experience significant losses on
the loan portfolio due to defaults as customers become unable to meet their obligations, which
would result in an adverse effect on earnings as higher reserves for loan losses would be required.
Geopolitical conditions can also affect the Corporation’s earnings. Acts or threats of terrorism,
actions taken by the United States or other governments in response to acts or threats of terrorism
and/or military conflicts, could affect the general business and economic conditions in Puerto
Rico, United States and abroad.
The Corporation’s financial activities and credit exposure are concentrated in Puerto Rico. As a
result, the Corporation’s financial condition and results of operations are highly dependent on
economic conditions in Puerto Rico. An extended economic slowdown, adverse political or economic
developments or natural disasters such as hurricanes, affecting Puerto Rico could result in a
reduction in lending activities and an increase in the level of non-performing assets and charge
offs, all of which would adversely affect the Corporation’s profitability.
Competition.
The Corporation operates in a highly competitive environment in Puerto Rico composed
of other local and international banks as well as mortgage banking companies, insurance companies
and brokers-dealers. Increased competition could require that the Corporation lower rates charged
on loans or increase rates offered on deposits, which could adversely affect profitability.
The Corporation’s business model is based on a diversified mix of businesses that provide a broad
range of financial products and services, delivered through multiple distribution channels. The
Corporation’s success depends, in part, on its ability to adapt its products and services to
evolving industry standards. There is increasing pressure to provide products and services at
lower prices. This can reduce the Corporation’s net interest margin and income from fee-based
products and services. In addition, the widespread adoption of new technologies, including
internet services, could require the Corporation to incur in substantial expenditures to modify or
adapt its existing products and services in order to remain competitive. The Corporation is at
risk of not being successful or timely in introducing new products and services, responding or
adapting to changes in consumer spending and saving habits, achieving market acceptance of its
products and services, or developing and maintaining loyal customers.
Interest rate risk.
Net interest income is the interest earned on loans, securities and other
assets minus the interest paid on deposits, long-term and short-term debt and other liabilities.
Net interest income is the difference between the yield on assets and the rate paid on deposits and
other sources of funding. These rates are highly sensitive to many factors beyond the
Corporation’s control, including general economic conditions and the policies of various
governmental and regulatory agencies. Changes in monetary policy, including changes in interest
rates, will influence the origination of loans, the prepayment speed of loans, the purchase of
investments, the generation of deposits and the rates received on loans and investment securities
and paid on deposits or other sources of funding. The impact of these changes may be magnified if
the Corporation does not effectively manage the relative sensitivity of its assets and liabilities
to changes in market interest rates.
Changes in interest rates could adversely affect net interest margin. Although the yield earned on
assets and funding costs tend to move in the same direction in response to changes in interest
rates, one can rise or fall faster than the other, causing the Corporation’s net interest margin to
expand or contract. The Corporation’s liabilities tend to be shorter in duration than its assets,
so they may adjust faster in response to changes in interest rates.
20
Changes in the slope of the “yield curve” — or the spread between short-term and long-term
interest rates — could also reduce the Corporation’s net interest margin. Normally, the yield
curve is upward sloping, meaning short-term rates are lower than long-term rates. However, since
the Corporation’s liabilities tend to be shorter in duration than its assets, they may adjust
faster in response to changes in interest rates. As a result, when interest rates rise, the
Corporation’s funding costs may rise faster than the yield earned on its assets causing net
interest margin to contract until the yield catches up.
The Corporation assesses its interest rate risk by estimating the effect on earnings under various
scenarios that differ based on assumptions about the direction, magnitude and speed of interest
rate changes and the slope of the yield curve. Some interest rate risk is hedged with derivatives.
However, not all interest rate risk is hedged. There is always the risk that changes in interest
rates could reduce net interest income and earnings in material amounts, especially if actual
conditions turn out to be materially different than what the Corporation expected. For example, if
interest rates rise or fall faster than the Corporation assumed, or the slope of the yield curve
changes, the Corporation may incur significant losses on debt securities held as investments. To
reduce interest rate risk, the Corporation may rebalance its investment and loan portfolios,
refinance its debt and take other strategic actions. Certain losses or expenses may be incurred
when such strategic actions are taken. Refer to the “Risk Management — Asset Liability Management”
section of the MD&A.
Credit Risk.
When the Corporation lends money or commits to lend money or enters into a contract
with a counterparty, it incurs credit risk, or the risk of losses if borrowers do not repay their
loans or counterparties fail to perform according to the term of their contract. The Corporation
allows for and reserves against credit risks based on its assessment of credit losses inherent in
its loan portfolio (including unfunded credit commitments). The process for determining the amount
of the allowance for loan losses is critical to the Corporation’s financial condition and results
of operations. It requires difficult, subjective and complex judgments, including forecasts of
economic conditions and how these economic predictions might impair the ability of borrowers to
repay their loans. As is the case with any such assessments, there is always the chance that the
Corporation will fail to identify the proper factors or that it will fail to accurately estimate
the impacts of factors that are identified.
For further discussion of credit risk and the Corporation’s credit risk management policies and
procedures, refer to “Credit Risk Management and Loan Quality” in the MD&A.
Changes in market prices of managed assets.
The Corporation earns fee income from managing assets
for others and providing brokerage services. Since investment management fees are often based on
the value of assets under management, a fall in the market prices of those assets could reduce the
Corporation’s fee income. Changes in stock market prices could affect the trading activity of
investors, reducing commissions and other fees earned from the brokerage business.
Changes in accounting standards.
The Corporation’s accounting policies are fundamental to
understanding its financial condition and results of operations. Some of these policies require
the use of estimates and assumptions that may affect the value of assets or liabilities and
financial results. Several of our accounting policies are critical because they require management
to make difficult, subjective and complex judgments about matters that are inherently uncertain and
because it is likely that materially different amounts would be reported under different conditions
or using different assumptions. For a description of the Corporation’s critical accounting
policies, refer to “Critical Accounting Policies” in the MD&A.
From time to time the Financial Accounting Standards Board (FASB), the SEC and other regulatory
bodies, change the financial accounting and reporting standards that govern the preparation of
external financial statements. These changes are beyond the Corporation’s control, can be
difficult to predict and could materially impact how it reports financial condition and results of
operations. In some cases, the Corporation could be required to apply a new or revised standard
retroactively, resulting in the restatement of prior period financial statements.
Federal and state regulations.
The Corporation, the banks and non banking subsidiaries are subject
to extensive state and federal regulation, supervision and legislation that govern almost all
aspects of its operations. These regulations protect depositors, federal deposit insurance funds,
consumers and the banking system as a whole, not stockholders. The Corporation and its non banking
subsidiaries are also heavily regulated by securities regulators. This regulation is designed to
protect investors in securities we sell or underwrite. Congress and state legislatures and foreign,
federal and state regulatory agencies continually review laws, regulations and policies for
possible changes. Changes to statutes, regulations or regulatory policies, including
interpretation or implementation of statutes, regulations or policies, could affect the Corporation
in substantial and unpredictable ways including limiting the types of financial services and
products it may offer and increasing the ability of non banks to offer competing financial services
and products. Implementation of regulatory changes could also be costly to the Corporation.
21
Governmental fiscal and monetary policy.
The Corporation’s earnings are affected by domestic and
international monetary policy. For example, the Board of Governors of the Federal Reserve System
regulates the supply of money and credit in the United States. These policies, to a large extent,
determine the Corporation’s cost of funds for lending and investing and the returns earned on those
loans and investments, both of which affect net interest margin. These policies can also affect the
value of financial instruments, such as debt securities and mortgage servicing rights as well as
affecting as borrowers by potentially increasing the risk that they may fail to repay their loans.
The Corporations earnings are also affected by the fiscal policies that are adopted by various
governmental authorities of Puerto Rico and the United States. Changes in tax laws can have a
potentially adverse impact on the Corporation’s earnings.
Changes in domestic and international monetary and fiscal policies are beyond the Corporation’s
control and are difficult to predict.
Liquidity risk.
Liquidity is essential to business and could be impaired by an inability to access
the capital markets or unforeseen outflows of cash. This situation may arise due to circumstances
that the Corporation may be unable to control, such as a general market disruption. The
Corporation’s credit ratings are important to its liquidity. A reduction in credit ratings could
adversely affect its liquidity and competitive position, increase borrowing costs, limit access to
the capital markets. For a further discussion of the Corporation’s liquidity, refer to “Liquidity
Risk” in the MD&A.
Operational risk.
The Corporation is exposed to operational risk. In its daily operations, the
Corporation relies on the continued efficacy of its technical and telecommunication systems,
operational infrastructure, relationships with third parties and the vast array of associates and
key executives in its day to day and ongoing operations. Failure by any or all of these resources
subjects the Corporation to risks that may vary in size, scale and scope. This includes but is not
limited to operational or technical failures, ineffectiveness or exposure due to interruption in
third party support as expected, the risk of fraud or theft by employees or outsiders, unauthorized
transactions by employees or operational errors (including clerical or recordkeeping errors), as
well as, the loss of key individuals or failure on the part of the key individuals to perform
properly.
Reputational risk.
The Corporation is subject to reputational risk, or the risk to earnings and
capital from negative public opinion. The Corporation’s ability to attract and retain customers and
employees could be adversely affected to the extent its reputation is damaged. The Corporation’s
failure to address, or to appear to fail to address various issues that could give rise to
reputational risk could cause harm to the Corporation and its business prospects and could lead to
litigation and regulatory action. These issues include, but are not limited to, appropriately
addressing potential conflicts of interest; legal and regulatory requirements; ethical issues;
money laundering ; privacy; properly maintaining customer and associated personal information;
record keeping; sales and trading practices; and the proper identification of the legal,
reputational, credit, liquidity, and market risks inherent in its products.
Merger risk.
There are significant risks associated with mergers. Future business acquisitions
could be material to the Corporation and could require the issuance of additional capital or
incurring of debt. In that event, the Corporation could become more susceptible to economic
downturns and competitive pressures. Merger risk includes the possibility that projected growth
opportunities and cost savings fail to be realized, and that the integration process results in the
loss of key employees, or that the disruption of ongoing business from the merger could adversely
affect the Corporation’s ability to maintain relationships with customers.
Litigation risk.
The volume of claims and the amount of damages and penalties claimed in
litigation and regulatory proceedings against financial institutions remains high. Substantial
legal liability or significant regulatory action against the Corporation could have material
adverse financial effects or cause significant reputational harm to the Corporation, which could
result in serious financial consequences.
Current Economic Condition of the Commonwealth of Puerto Rico.
The Corporation’s financial
activities and credit exposure are concentrated in Puerto Rico. As a consequence, the
Corporation’s financial condition and results of operations are highly dependent on Puerto Rico’s
economic conditions. Any business disruption resulting from a prolonged economic recession, adverse
political and economic events, and/or any natural disasters — i.e., hurricanes — could further
reduce lending activity and result in further increases in non-performing assets and charge-offs,
thus affecting the Corporation’s financial performance and profitability in the short-term.
The Puerto Rico economy is in the midst of a prolonged economic recession since the the second
quarter of 2006. The unfavorable economic conditions prevailed in fourth quarter of 2007 with
continuing weakness in the labor market. Nonfarm employment declined 1.5% and the unemployment rate
increased 1.5 percentage points to 11.1% compared to the fourth
22
quarter of 2006. Meanwhile, the construction sector, which historically played an important role in
the economy, remained stagnant as the government’s fiscal deficit and the housing market imbalances
inhibit the public and private sector from investing in new construction projects. Construction
data as of November 2007 shows that the value of construction permits and cement sales declined
3.5% and 12.3% respectively compared to the same period in 2006. On the other hand, employment
layoffs due to businesses’ adjustments to the current cycle reduced consumer earnings, while rising
oil and food prices led to a surge in inflation that eroded their purchasing power and confidence
level. As a result, retail sales adjusted for inflation remained weak with total sales declining
1.0% as of October 2007 when compared with accumulated figures for 2006. The sale of new automobile
units for the fourth quarter of 2007 — another important gauge of consumer spending health — also
remained in negative territory with sales declining by 108 units compared with the fourth quarter
of 2006.
The ongoing economic environment and uncertainties in Puerto Rico may continue to have an adverse
effect on the quality of the Corporation’s loan portfolios and may result in a rise in delinquency
rates and charge offs, until the economic condition in Puerto Rico improves. These concerns may
also impact growth in interest and non interest income. Although the Corporation’s management
utilizes its best judgment in providing for loan losses, there can be no assurance that management
has accurately estimated the level of probable loan losses or that the Corporation will not have to
increase its provisions for loan losses in the future as a result of future increases in
non-performing loans or for other reasons beyond its control. Any such increases in the
Corporation’s provisions for loan and lease losses could have a material adverse impact on the
Corporation’s future financial condition and results of operations.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
ITEM 2. PROPERTIES
As of December 31, 2007, the Corporation owned nineteen facilities, which consisted of eleven
branches and eight parking lots. The Corporation occupies one hundred
twenty-two leased branch
premises, while warehouse space is rented in one location. In
addition, office spaces are rented at
both Torre Santander buildings, in Hato Rey, Puerto Rico, at the Santander Tower in Galeria San
Patricio building, in Guaynabo, Puerto Rico, at Professional Office Park IV building, in Río
Piedras, Puerto Rico and the Operational Center building in Hato
Rey, Puerto Rico. The Corporation’s management believes that each of its facilities is well
maintained and suitable for its purpose.
During 2007, the Bank sold and leased-back certain properties as further described in the
accompanying financial statements and MD&A.
ITEM 3. LEGAL PROCEEDINGS
The Corporation is involved as plaintiff or defendant in a variety of routine litigation incidental
to the normal course of business. Management believes, based on the opinion of legal counsel, that
it has adequate defense with respect to such litigation and that any losses therefrom would not
have a material adverse effect on the consolidated results of operations or consolidated financial
condition of the Corporation.
Management believes that there are no material pending legal proceedings, other than ordinary
routine litigation incidental to the business, to which the Corporation or its subsidiary is a
party or of which any of their property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
Santander BanCorp’s Common Stock, $2.50 par value (the “Common Stock”), is traded on the New York
Stock Exchange (the “NYSE”) under the symbol “SBP”, and on the Madrid Stock Exchange (LATIBEX)
under the symbol “XSBP”, respectively. The table below sets forth, for the calendar quarters
indicated, the high and low sales prices on the NYSE during such periods.
23
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Cash
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Book
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Dividends
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Value
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Period
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High
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Low
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per Share
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per Share
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2007
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1st Quarter
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$
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19.79
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$
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17.49
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$
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0.16
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$
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12.56
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2nd Quarter
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18.87
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14.45
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0.16
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12.26
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3rd Quarter
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15.14
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10.30
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0.16
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11.36
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4th Quarter
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8.76
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7.90
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0.16
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11.50
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2006
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1st Quarter
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$
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25.98
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$
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20.10
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$
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0.16
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$
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12.06
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2nd Quarter
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25.23
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22.47
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0.16
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11.93
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3rd Quarter
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24.45
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18.89
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0.16
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12.35
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4th Quarter
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19.80
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17.46
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0.16
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12.42
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As of December 31, 2007 the approximate number of record holders of the Corporation’s Common Stock
was 132, which does not include beneficial owners whose shares are held in record names of brokers
and nominees. The last sales price for the Common Stock as quoted on the NYSE on such date was
$8.66 per share representing a market capitalization of $403.9 million as of December 31, 2007.
Dividend Policy and Dividends Paid
The payment of dividends by the Corporation will depend on the earnings, cash position and capital
needs of the Bank, its subsidiaries, general business conditions and other factors deemed relevant
by the Corporation’s Board of Directors. The ability of the Corporation to pay dividends may be
restricted also by various regulatory requirements and policies of regulatory agencies having
jurisdiction over the Corporation and the Bank.
Dividends on the Corporation’s common stock are payable when, as and if declared by the Board of
Directors of the Corporation, out of funds legally available therefor. The Corporation currently
pays regular quarterly cash dividends. During 2005, 2006 and 2007, the Corporation declared and
paid cash dividends of $0.64 per common share, for a total dividend payment to common shareholders
of $29.9 million. The annualized dividend yield for the year ended December 31, 2007 was 7.4%.
24
Stock Performance Graph
The graph below shows the cumulative stockholder return of the Common Stock of the Corporation
during the measurement period. The graph compares the return of the Common Stock of the Corporation
(identified by its official symbol as “SBP”) to the cumulative return of the Puerto Rico Stock
Index (PRSI) and the S&P Small Cap Commercial Bank Index (S6CBNK). The performance of the Common
Stock and the mentioned indexes are valued using a base value of 100. The Common Stock value as of
December 31, 2007 was $8.66. The Board of Directors of the Corporation acknowledges that the market
price of the Common Stock is influenced by numerous factors. The stock price shown in the graph is
not necessarily indicative of future performance. This stock performance graph should not be deemed
to be soliciting material under the proxy rules or incorporated by reference into any filing under
the Securities Act or the Exchange Act, unless the Corporation
specifically states otherwise.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected consolidated and other financial and operating information
for the Corporation and subsidiaries and certain statistical information as of the dates and for
the periods indicated. This information should be read in conjunction with the Corporation’s
consolidated financial statements and the sections entitled “Management’s Discussion and Analysis
of Financial Condition and Results of Operations “ and “Selected Statistical Information” appearing
elsewhere in this Annual Report. The selected Balance Sheet and Statement of Income data as of and
for the year ended December 31, 2007, 2006, 2005, 2004 and 2003 have been derived from the
Corporation’s consolidated audited financial statements.
25
Santander BanCorp and Subsidiaries
Selected Financial Data
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Year ended December 31,
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|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
(Dollars in thousands, except per data share)
|
|
|
CONDENSED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
674,210
|
|
|
$
|
618,320
|
|
|
$
|
439,605
|
|
|
$
|
363,822
|
|
|
$
|
335,784
|
|
|
Interest expense
|
|
|
362,531
|
|
|
|
327,714
|
|
|
|
212,583
|
|
|
|
140,762
|
|
|
|
132,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
311,679
|
|
|
|
290,606
|
|
|
|
227,022
|
|
|
|
223,060
|
|
|
|
203,172
|
|
|
Security gains
|
|
|
1,265
|
|
|
|
—
|
|
|
|
17,842
|
|
|
|
11,475
|
|
|
|
10,790
|
|
|
(Loss) gain on extinghuishment of debt
|
|
|
—
|
|
|
|
—
|
|
|
|
(5,959
|
)
|
|
|
—
|
|
|
|
13,638
|
|
|
Broker-dealer, asset management and insurance fees
|
|
|
68,265
|
|
|
|
56,973
|
|
|
|
53,016
|
|
|
|
51,113
|
|
|
|
49,526
|
|
|
Other income
|
|
|
78,590
|
|
|
|
61,496
|
|
|
|
60,459
|
|
|
|
54,651
|
|
|
|
36,207
|
|
|
Operating expenses
|
|
|
344,016
|
|
|
|
277,783
|
|
|
|
221,386
|
|
|
|
217,377
|
|
|
|
223,815
|
|
|
Provision for loan losses
|
|
|
147,824
|
|
|
|
65,583
|
|
|
|
20,400
|
|
|
|
26,270
|
|
|
|
49,745
|
|
|
Income tax provision (benefit)
|
|
|
4,204
|
|
|
|
22,540
|
|
|
|
30,788
|
|
|
|
9,724
|
|
|
|
(46
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(36,245
|
)
|
|
$
|
43,169
|
|
|
$
|
79,806
|
|
|
$
|
86,928
|
|
|
$
|
39,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PER PREFERRED SHARE DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,610,008
|
|
|
End of period
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Cash Dividend per Share
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2.73
|
|
|
PER COMMON SHARE DATA*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(0.78
|
)
|
|
$
|
0.93
|
|
|
$
|
1.71
|
|
|
$
|
1.86
|
|
|
$
|
0.70
|
|
|
Book value
|
|
$
|
11.50
|
|
|
$
|
12.42
|
|
|
$
|
12.19
|
|
|
$
|
11.86
|
|
|
$
|
10.20
|
|
|
Outstanding shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
46,639,104
|
|
|
|
46,639,104
|
|
|
|
46,639,104
|
|
|
|
46,639,104
|
|
|
|
46,661,248
|
|
|
End of period
|
|
|
46,639,104
|
|
|
|
46,639,104
|
|
|
|
46,639,104
|
|
|
|
46,639,104
|
|
|
|
46,639,104
|
|
|
Cash Dividend per Share
|
|
$
|
0.64
|
|
|
$
|
0.64
|
|
|
$
|
0.64
|
|
|
$
|
0.49
|
|
|
$
|
0.44
|
|
|
AVERAGE BALANCES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale and loans, net of allowance for loan losses
|
|
$
|
6,900,764
|
|
|
$
|
6,439,205
|
|
|
$
|
5,871,433
|
|
|
$
|
4,723,538
|
|
|
$
|
4,009,801
|
|
|
Allowance for loan losses (1)
|
|
|
125,897
|
|
|
|
87,465
|
|
|
|
67,956
|
|
|
|
73,518
|
|
|
|
64,909
|
|
|
Earning assets
|
|
|
8,530,213
|
|
|
|
8,262,748
|
|
|
|
7,882,180
|
|
|
|
7,300,735
|
|
|
|
6,453,419
|
|
|
Total assets
|
|
|
9,195,712
|
|
|
|
8,820,630
|
|
|
|
8,285,992
|
|
|
|
7,634,471
|
|
|
|
6,797,701
|
|
|
Deposits
|
|
|
5,221,999
|
|
|
|
5,054,687
|
|
|
|
5,082,520
|
|
|
|
4,153,245
|
|
|
|
3,749,684
|
|
|
Borrowings
|
|
|
3,089,947
|
|
|
|
2,876,720
|
|
|
|
2,415,172
|
|
|
|
2,811,152
|
|
|
|
2,322,957
|
|
|
Preferred equity
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
64,175
|
|
|
Common equity
|
|
|
573,536
|
|
|
|
563,593
|
|
|
|
576,226
|
|
|
|
495,963
|
|
|
|
526,660
|
|
|
PERIOD END BALANCES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale and loans, net of allowance for loans losses
|
|
$
|
6,911,380
|
|
|
$
|
6,836,693
|
|
|
$
|
5,954,890
|
|
|
$
|
5,490,120
|
|
|
$
|
4,136,670
|
|
|
Allowance for loan losses (1)
|
|
|
166,952
|
|
|
|
106,863
|
|
|
|
66,842
|
|
|
|
69,177
|
|
|
|
69,693
|
|
|
Earning assets
|
|
|
8,519,773
|
|
|
|
8,598,703
|
|
|
|
7,933,139
|
|
|
|
8,069,346
|
|
|
|
7,079,888
|
|
|
Total assets
|
|
|
9,160,213
|
|
|
|
9,188,168
|
|
|
|
8,271,948
|
|
|
|
8,323,647
|
|
|
|
7,366,656
|
|
|
Deposits
|
|
|
5,160,703
|
|
|
|
5,313,974
|
|
|
|
5,224,650
|
|
|
|
4,748,139
|
|
|
|
4,142,228
|
|
|
Borrowings
|
|
|
3,138,730
|
|
|
|
2,954,515
|
|
|
|
2,212,245
|
|
|
|
2,863,367
|
|
|
|
2,595,033
|
|
|
Common equity
|
|
|
536,536
|
|
|
|
579,220
|
|
|
|
568,527
|
|
|
|
553,346
|
|
|
|
475,706
|
|
Continued on the following page
26
Continued from the previous page
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
(Dollars in thousands)
|
|
|
SELECTED RATIOS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin (2)
|
|
|
3.74
|
%
|
|
|
3.63
|
%
|
|
|
3.02
|
%
|
|
|
3.33
|
%
|
|
|
3.42
|
%
|
|
Efficiency ratio (3)
|
|
|
66.32
|
%
|
|
|
66.82
|
%
|
|
|
62.97
|
%
|
|
|
62.78
|
%
|
|
|
67.06
|
%
|
|
Return on average total assets
|
|
|
(0.39
|
)%
|
|
|
0.49
|
%
|
|
|
0.96
|
%
|
|
|
1.14
|
%
|
|
|
0.59
|
%
|
|
Return on average common equity
|
|
|
(6.32
|
)%
|
|
|
7.66
|
%
|
|
|
13.85
|
%
|
|
|
17.53
|
%
|
|
|
5.54
|
%
|
|
Dividend payout
|
|
|
(82.05
|
)%
|
|
|
68.82
|
%
|
|
|
37.43
|
%
|
|
|
26.34
|
%
|
|
|
62.86
|
%
|
|
Average net loans/average total deposits
|
|
|
132.15
|
%
|
|
|
127.39
|
%
|
|
|
115.52
|
%
|
|
|
113.73
|
%
|
|
|
106.94
|
%
|
|
Average earning assets/average total assets
|
|
|
92.76
|
%
|
|
|
93.68
|
%
|
|
|
95.13
|
%
|
|
|
95.63
|
%
|
|
|
94.94
|
%
|
|
Average stockholders’ equity/average assets
|
|
|
6.24
|
%
|
|
|
6.39
|
%
|
|
|
6.95
|
%
|
|
|
6.50
|
%
|
|
|
8.69
|
%
|
|
Fee income to average assets
|
|
|
1.26
|
%
|
|
|
1.20
|
%
|
|
|
1.15
|
%
|
|
|
1.18
|
%
|
|
|
1.30
|
%
|
|
Capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I capital to risk-adjusted assets
|
|
|
7.43
|
%
|
|
|
7.87
|
%
|
|
|
9.09
|
%
|
|
|
8.63
|
%
|
|
|
8.47
|
%
|
|
Total capital to risk-adjusted assets
|
|
|
10.56
|
%
|
|
|
10.93
|
%
|
|
|
12.30
|
%
|
|
|
11.05
|
%
|
|
|
10.03
|
%
|
|
Leverage Ratio
|
|
|
5.38
|
%
|
|
|
5.81
|
%
|
|
|
6.50
|
%
|
|
|
6.43
|
%
|
|
|
5.89
|
%
|
|
Asset quality:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing loans to total loans
|
|
|
4.16
|
%
|
|
|
1.54
|
%
|
|
|
1.22
|
%
|
|
|
1.57
|
%
|
|
|
2.34
|
%
|
|
Annualized net charge-offs to average loans
|
|
|
1.25
|
%
|
|
|
0.93
|
%
|
|
|
0.38
|
%
|
|
|
0.56
|
%
|
|
|
0.91
|
%
|
|
Allowance for loan losses to period-end loans
|
|
|
2.36
|
%
|
|
|
1.54
|
%
|
|
|
1.11
|
%
|
|
|
1.24
|
%
|
|
|
1.66
|
%
|
|
Allowance for loan losses to non-performing loans
|
|
|
56.70
|
%
|
|
|
100.01
|
%
|
|
|
90.72
|
%
|
|
|
79.05
|
%
|
|
|
70.85
|
%
|
|
Allowance for loan losses to non-performing loans plus
accruing loans past-due 90 days or more
|
|
|
55.36
|
%
|
|
|
83.62
|
%
|
|
|
87.17
|
%
|
|
|
76.11
|
%
|
|
|
69.16
|
%
|
|
Non-performing assets to total assets
|
|
|
3.39
|
%
|
|
|
1.23
|
%
|
|
|
0.92
|
%
|
|
|
1.10
|
%
|
|
|
1.40
|
%
|
|
Recoveries to charge-offs
|
|
|
3.97
|
%
|
|
|
9.30
|
%
|
|
|
18.28
|
%
|
|
|
32.83
|
%
|
|
|
22.12
|
%
|
|
EARNINGS TO FIXED CHARGES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excluding interest on deposits
|
|
|
0.82
|
x
|
|
|
1.42
|
x
|
|
|
2.19
|
x
|
|
|
2.17
|
x
|
|
|
1.51
|
x
|
|
Including interest on deposits
|
|
|
0.91
|
x
|
|
|
1.20
|
x
|
|
|
1.51
|
x
|
|
|
1.68
|
x
|
|
|
1.30
|
x
|
|
EARNINGS TO FIXED CHARGES AND PREFERRED
STOCK DIVIDENDS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excluding interest on deposits
|
|
|
0.82
|
x
|
|
|
1.42
|
x
|
|
|
2.19
|
x
|
|
|
2.17
|
x
|
|
|
1.38
|
x
|
|
Including interest on deposits
|
|
|
0.91
|
x
|
|
|
1.20
|
x
|
|
|
1.51
|
x
|
|
|
1.68
|
x
|
|
|
1.23
|
x
|
|
OTHER DATA AT END OF PERIOD
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer financial assets under management
|
|
$
|
13,263,000
|
|
|
$
|
14,154,000
|
|
|
$
|
12,960,000
|
|
|
$
|
12,827,700
|
|
|
$
|
10,669,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Full services branches
|
|
|
61
|
|
|
|
61
|
|
|
|
64
|
|
|
|
65
|
|
|
|
66
|
|
|
Consumer retail branches
|
|
|
68
|
|
|
|
70
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total branches
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|
|
129
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|
|
|
131
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|
|
|
64
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|
|
|
65
|
|
|
|
66
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|
|
ATMs
|
|
|
140
|
|
|
|
144
|
|
|
|
149
|
|
|
|
150
|
|
|
|
141
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|
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|
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*
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Share and per share data is based on the average number of shares outstanding during the periods, after
giving retroactive effect in 2003, to the 10% stock dividend declared on July 9, 2004.
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Basic and diluted earning per share are the same.
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(1)
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After retroactive reclassification adjustment of the allowance for losses on off balance sheet items in 2004 corresponding to the year ended December 31, 2003.
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(2)
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On a tax equivalent basis.
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(3)
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Operating expenses less intangibles impairment charges in 2007 divided by net interest income on a tax equivalent basis, plus other income excluding
securities gains and losses, gain on sale of POS and Trust division
in 2007, gain on sale of FDIC assessment credits and gain on tax credit purchased
in 2006, (loss) gain on extinguishment of debt in 2003 and 2005 and gain on sale of building in 2004.
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27
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Description of the Business
Santander BanCorp and subsidiaries is a diversified financial holding company headquartered in San
Juan, Puerto Rico, offering a full range of financial products and services to consumers and
commercial customers through its subsidiaries. The Corporation’s subsidiaries are engaged in the
following businesses:
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•
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Commercial Banking — Banco Santander Puerto Rico
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•
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Mortgage Banking — Santander Mortgage Corporation (merged into the Bank at January 1,
2008)
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•
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Securities Brokerage and Investment Banking — Santander Securities Corporation
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•
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Asset Management — Santander Asset Management Corporation
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Consumer Finance — Santander Financial Services, Inc.
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•
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Insurance — Santander Insurance Agency, Inc. and Island Insurance Corporation
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International Banking — Santander International Bank of Puerto Rico, Inc.
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Basis of Presentation
The Corporation’s financial statements are prepared in conformity with accounting principles
generally accepted in the United States of America and with general practices within the financial
services industry, which are described in the notes to the consolidated financial statements. In
preparing the consolidated financial statements in conformity with generally accepted accounting
principles, management is required to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date
of the consolidated financial statements, and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. Accounting policies that
are critical to the overall financial statements are fully described in the “Critical Accounting
Policies” section below.
On July 9, 2004, the Corporation declared a 10% stock dividend to all common shareholders of record
as of July 20, 2004. All share and per share computations for 2003 were restated to reflect the
stock dividend.
Forward-Looking Statements
This discussion of financial results contains forward-looking statements about the Corporation.
Forward-looking statements can be identified by the fact that they do not relate strictly to
historical or current facts. They often include words or phrases like “would be”, “will allow”,
“intends to”, “will likely result”, “are expected to”, “will continue”, “is anticipated”,
“estimate”, “project”, “believe”, or similar expressions and are intended to identify “forward
looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.
The future results of the Corporation could be affected by subsequent events and could differ
materially from those expressed in forward-looking statements. If future events and actual
performance differ from the Corporation’s assumptions, the actual results could vary significantly
from the performance projected in the forward-looking statements. The Corporation wishes to caution
readers not to place undue reliance on any such forward-looking statements, which speak only as of
the date made, and to advise readers that various factors, including regional and national
conditions, substantial changes in levels of market interest rates, credit and other risks of
lending and investment activities, competitive and regulatory factors and legislative changes,
could affect the Corporation’s financial performance and could cause the Corporation’s actual
results for future periods to differ materially from those anticipated or projected. The
Corporation does not undertake, and specifically disclaims any obligation, to update any
forward-looking statements to reflect occurrences or unanticipated events or circumstances after
the date of such statements.
Overview of Management’s Discussion and Analysis of Financial Condition and Results of Operations
This overview of management’s discussion and analysis highlights selected information in this
document and may not contain all of the information that is important to the reader. For a more
complete understanding of trends, events, commitments, uncertainties, liquidity, capital resources
and critical accounting estimates, you should carefully read this entire document. All
accompanying tables, financial statements and notes included elsewhere in this report should be
considered an integral part of this analysis.
28
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.
As a provider of financial services, the Corporation’s earnings are significantly affected by
general economic and business conditions. Credit, funding, including deposit origination and fee
income generation activities are influenced by the level of business spending and investment,
consumer income, spending and savings, capital market activities, competition, customer
preferences, interest rate conditions and prevailing market rates on competing products. The
Corporation constantly monitors general business and economic conditions, industry-related trends
and indicators, competition from traditional and non-traditional financial services providers,
interest rate volatility, indicators of credit quality, demand for loans and deposits, operational
efficiencies, including systems, revenue and profitability improvement and regulatory changes in
the financial services industry, among others. The Corporation operates in a highly regulated
environment and may be adversely affected by changes in federal and local laws and regulations.
Also, competition with other financial services providers could adversely affect the Corporation’s
profitability.
The Puerto Rico economy is in the midst of a prolonged economic recession since the second quarter
of 2006. The unfavorable economic conditions prevailed in the fourth quarter of 2007 with
continuing weakness in the labor market. Nonfarm employment declined 1.5% and the unemployment rate
increased 1.5 percentage points to 11.1% compared to the fourth quarter of 2006. Meanwhile, the
construction sector, which historically played an important role in the economy, remained stagnant
as the government’s fiscal deficit and the housing market imbalances inhibit the public and private
sector from investing in new construction projects. Construction data as of November 2007 shows
that the number of construction permits and cement sales declined 3.5% and 12.3% respectively
compared to the same period in 2006. On the other hand, employment layoffs due to businesses’
adjustments to the current cycle reduced consumer earnings, while rising oil and food prices led to
a surge in inflation that eroded their purchasing power and confidence level. As a result, retail
sales adjusted for inflation remained weak with total sales declining 1.0% as of October 2007 when
compared with accumulated figures for 2006. The sale of new automobile units for the fourth quarter
of 2007 — another important gauge of consumer spending health — also remained in negative
territory with sales declining by 108 units compared with the fourth quarter of 2006.
As a result of the current unfavorable economic environment in Puerto Rico, Island Finance’s
short-term financial performance and profitability have 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. Statement 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. Because the Corporation was
unable to complete the second step of the impairment test during the third quarter and an
impairment loss was probable and could be reasonably estimated, the Corporation recorded
preliminary estimated non-cash impairment charges of approximately $34.3 million and $5.4 million,
which were recorded as reductions to goodwill and other intangible asset, respectively, during the
third quarter of 2007. The estimated impairment charges were calculated based on the market and
income approach valuation methodologies. These impairment charges did not result in cash
expenditures and will not result in future cash expenditures. The Corporation completed the second
step of the impairment test during the fourth quarter of 2007. Accordingly, during the fourth
quarter the Corporation recorded an additional non-cash impairment charge of $3.6 million. 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 comprised $26.8 of goodwill and $16.5 million
of other intangibles assets. This impairment charge did not result in cash expenditures and will
not result in future cash expenditures.
Upon the completion of the interim impairment test, the Corporation performed its annual impairment
assessment as of October 1, 2007 with the assistance of the independent valuation specialist. Based
upon their test, and after consideration of the July 1, 2007 impairment charge, the Corporation
determined that no additional impairment charge was necessary as of October 1, 2007.
29
The Corporation has taken and continues to proactively take significant measures to face the
on-going challenges presented by the Puerto Rico economy:
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Banco Santander Puerto Rico sold in 2007 its merchant business to an unrelated third party
resulting in a pre-tax gain of $12.3 million that was recognized in the fourth quarter of
2007. This transaction eliminates the need for additional capital investment to support
system enhancements required by the business and results in cost efficiencies in processing
and personnel expenses. Through a marketing alliance with the unrelated third party, BSPR
expects to offer better merchant products and services to its client base and to promote
growth in demand deposit accounts, an attractive source of funding.
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BSPR sold in 2006 to an unaffiliated third party the servicing rights with respect to the less
profitable and more labor and system intensive lines of its trust business. For the year
ended December 31, 2007, a gain of $454,000 was recognized as a result of the transferred
accounts to the third party. BSPR will continue to offer trust services related to transfer
and paying agent and IRA accounts. This transaction avoided additional capital investment
in the trust business and reduced a significant portion of the labor force dedicated to the
business.
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The Corporation maintains strict controls on operating expenses and an efficiency plan
driven to lower its current efficiency ratio. The efficiency ratio, excluding goodwill and
other intangible assets impairment charges and stock incentive compensation expense
sponsored by Santander Spain, experienced an improvement of 376 basis points to reach
63.06% for the year ended December 31, 2007 from 66.82% for the year ended December 31,
2006.
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The Corporation merged as of January 1, 2008 its mortgage banking subsidiary into the
Bank to obtain cost efficiencies and broaden the array of products that current mortgage
specialists are offering.
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The Corporation will continue to monitor non-performing assets and to deploy significant
resources to manage the non-performing loan portfolio. Management expects to improve its
collection efforts by devoting more full time employees and outside resources.
Concurrently, management will continue with its stringent underwriting and lending
criteria.
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The Corporation reported net loss of $36.2 million for the year ended December 31, 2007, or $(0.78)
per common share, a decrease of $79.4 million or 184.0% from a net income of $43.2 million for the
year ended December 31, 2006. This decrease in net income was principally due to increases in the
provision for loan losses of $82.2 million and operating expenses of $66.2 million, partially
offset by increases in net interest income of $21.1 million and $29.7 million in non-interest
income and a decrease in the provision for income tax of $18.3 million. The Corporation’s net loss
for the year ended December 31, 2007 included the goodwill and trade name impairment charges,
described above, and an after-tax compensation expense associated with certain incentive plans
sponsored by Santander Spain.
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:
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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 compensation expense under this plan amounting to $10.3 million and
$0.8 million in 2007 and 2006, respectively, at which time the liability will be
reclassified into capital as a capital contribution. The settlement of this plan will be
made by Santander Spain.
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•
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The grant of 100 shares of Santander Spain stock to all employees of Santander Group’s
operating entities as part of this year’s celebration of Santander Group’s 150th
Anniversary distributed during August of 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.
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30
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•
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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 $0.2 million in 2007.
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Loss per common share for the year ended December 31, 2007 was $0.78 a decrease of $1.71 from
earning per common share of $0.93 for the year ended December 31, 2006. Return on average common
equity (ROE) and return on average assets (ROA) were (6.32)% and (0.39)%, respectively, for the
year ended December 31, 2007, reflecting a decrease of 1,398 basis points in ROE and 88 basis
points in ROA when compared to ROE and ROA of 7.66% and 0.49%, respectively, for the year ended
December 31, 2006. The efficiency ratio (on a tax-equivalent basis) for the year ended December
31, 2007, was 66.32%, an improvement of 50 basis points compared 66.82% for the same period in
2006.
Financial results for the year ended December 31, 2007 were principally impacted by the following
items:
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non-cash impairment charges on the consumer finance business of $43.3 million resulting
in an overall net loss on Santander Financial Services, Inc. of $58.5 million for the year
ended December 31, 2007;
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a gain of $12.3 million recognized during the fourth quarter due to the sale of the
Bank’s merchant business to an unrelated third party during the first quarter of 2007.
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an increase in the provision for loan losses of $82.2 million or 125.4% for the year
ended December 31, 2007 compared to 2006. The $167.0 million allowance for loan losses as
of December 31, 2007 represents 2.36% of total loans, 56.70% of non-performing loans and
82.32% of non-performing loans excluding loans secured by real estate;
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the provision for loan losses represented 168.5% of the net charge-offs for the year
December 31, 2007;
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net interest margin expansion of 11 basis points to 3.74% for the year ended December
31, 2007 as compared to the prior year;
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an increase in net interest income on a tax equivalent basis of 6.6% to $319.2 million
for the year December 31, 2007 when compared to the prior year;
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an increase in non-interest income of $29.7 million or 25.0% for the year ended December
31, 2007, attributed mainly to gain on merchant business sold, higher fees in
broker-dealer, asset management and insurance fees, an early cancellation penalty on
certain client structured certificates of deposit, and an increase in gain on sale of
loans, trading gains and mortgage servicing rights recognized;
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an increase of $8.9 million or 3.2% in operating expenses, for the year ended December
31, 2007, excluding goodwill and other intangibles impairment charges and stock incentive
compensation expense sponsored by Santander Spain, when compared to 2006;
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after-tax compensation expense related to stock incentive plans sponsored by Santander
Spain, of $9.0 million for the year ended December 31, 2007;
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a non-cash charge of $23.1 million related to establishing a valuation allowance
against its deferred tax assets from its consumer finance business, mainly related to the
goodwill and other intangibles impairment charges and allowance for loan losses;
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sale of two properties and a certain parking spaces to an unrelated third party under a
sales and lease-back transaction resulting in gain of $32.6 million which was deferred and
is being amortized as a reduction of rent expense over the term of the related lease
agreements; and
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31
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The common stock dividend for the quarter ended December 31, 2007 was $0.16 resulting in
a current annualized dividend yield of 7.4%.
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The Corporation’s principal source of revenues is net interest income, which is the difference
between the interest earned on loans and investments and the interest paid on customer deposits and
other interest-bearing liabilities. Net interest income represents approximately 37.9% of the
Corporation’s total revenues (defined as interest income plus other income) for 2007. Net interest
income is affected by the relative amounts of interest-earning assets and interest-bearing
liabilities, and the interest rates earned or paid on these balances.
Lending activities is one of the most important aspects of the Corporation’s operations. The
economic environment and uncertainties in Puerto Rico caused reduced lending activity and impacted
the quality of the Corporation’s loan portfolio increasing the delinquency rates and charge offs.
The net loan portfolio, including loans held for sale, increased $0.1 billion, or 1.1% reaching
$6.9 billion at December 31, 2007, compared to the figures reported at December 31, 2006. As of
December 31, 2007, the allowance for loan losses reached $167.0 million, reflecting an increase of
$60.1 million or 56.3%, which includes $98.6 million related to the Bank portfolio and $68.4
million related to Island Finance portfolio. The ratio of allowance for loan losses to total loans
increased to 2.36% at December 31, 2007 from 1.54% at December 31, 2006.
Although the Corporation has diversified its sources of revenue, interest income from the loan
portfolio continues to account for the majority of total revenues, representing 72.9% of total
gross revenues for 2007. As a result, the primary influence on the Corporation’s operating results
is the demand for loans in Puerto Rico, which is significantly affected by economic conditions,
competition, the demand and supply of housing, the fiscal policies of the federal and Puerto Rico
governments and interest rate levels. Changes in interest rates, the Corporation’s principal market
risk, can significantly impact its results of operations by affecting net interest income and the
gains or losses realized on the sale of loans and securities. As described under “Risk Management”,
the Corporation uses derivative instruments to hedge, to a limited extent, its interest rate risk
in order to protect its net interest income under different interest rate scenarios.
For the year ended December 31, 2007, other income reached $148.1 million, a $29.7 million or 25.0%
increase when compared to $118.5 million for the same period in 2006 attributed mainly to gain on
merchant business sold of $12.3 million, higher fees in broker-dealer and asset management and
insurance fees of $11.3 million, an early cancellation penalty on certain client structured
certificates of deposit of $3.4 million and an increase in gain on sale of loans of $4.7 million
offset by a decrease in credit card fees of $7.0 million due to the sale of the Corporation’s
merchant business to an unrelated third party.
Broker-dealer, asset management and insurance fees accounted for 46.1% of the Corporation’s other
income and 8.3% of its total revenues for 2007. The Corporation also earns revenues from other
sources that are not as dependent on interest levels, such as bank service fees on deposit accounts
and credit card fees. Other income, including broker-dealer, asset management and insurance fees,
accounted for 18.0% of total revenues for 2007.
For the year ended December 31, 2007, compared to the same period in 2006, operating expenses
increased $66.2 million or 23.8%, of which $43.3 million relate to goodwill and other intangibles
impairment charges, $14.8 million relate to the stock compensation and $4.2 million relate to other
operating expenses of SFS. This increase was partially offset by a personnel reduction program and
stock compensation during 2006 of $10.4 million and $0.8 million, respectively. There were also
increases in salaries and other employee benefits of $7.3 million, $5.4 million in repossessed
assets provision and expenses, $4.6 million in business promotion and $0.6 million in professional
fees. These increases were partially offset by a decrease in credit card expenses of $4.3 million
due to the sale of the Corporation’s merchant business to an unrelated third party during the first
quarter of 2007. Excluding expense from stock incentive plans sponsored by Santander Spain,
expenses related to a personnel reduction program in 2006 and impairment charges recognized during
2007, operating expenses for the year ended December 31, 2007 reflected an increase of $19.4
million or 7.3% compared to the same period in 2006.
Deposits at December 31, 2007 were $5.2 billion, reflecting a decrease of $153.3 million or 2.9%
compared to deposits of $5.3 billion as of December 31, 2006.
Total borrowings at December 31, 2007 (comprised of federal funds purchased and other borrowings,
securities sold under agreements to repurchase, commercial paper issued, term and capital notes)
reflected an increase of $184.2 million or 6.2% to $3.1 billion at December 31, 2007 compared with
$3.0 billion at December 31, 2006.
As of December 31, 2007, the Company had $13.3 billion in customer financial assets under
management, reflecting a decrease of 6.3% compared with the prior year, principally as a result of
the sale of certain trust assets. This is a significant part of the financial assets of Puerto Rico
households and reflects the Corporation’s strong positioning in its primary market. Customer
32
financial assets under management include bank deposits (excluding brokered deposits),
broker-dealer customer accounts, mutual fund assets managed, and trust, institutional and private
accounts under management.
SBP common stock price per share was $8.66 as of December 31, 2007 resulting in a market
capitalization of $0.4 billion (including affiliated holdings).
During the fourth quarter of 2007, Santander BanCorp declared and paid a cash dividend of 16 cents
per common share to its shareholders of record, resulting in a current annual dividend yield of
7.4%.
Critical Accounting Policies
The consolidated financial statements of Santander BanCorp are prepared in accordance with
accounting principles generally accepted in the United States of America and with general practices
within the financial services industry. In preparing the consolidated financial statements,
management is required to make judgments, involving significant estimates and assumptions, in the
application of its accounting policies about matters that are inherently uncertain. Management
arrives at these estimates and assumptions, which may materially affect the reported amounts of
certain assets, liabilities, revenues and expenses, considering the facts and circumstances at a
specific point in time. Changes in those facts and circumstances could produce actual results that
differ from those estimates. Detailed below is a discussion of the Corporation’s critical
accounting policies. These policies are critical because they are highly dependent upon subjective
or complex judgments, assumptions and estimates. For a complete discussion of the Corporation’s
significant and critical accounting policies refer to the notes to the consolidated financial
statements and the discussion throughout this document which should be read in conjunction with
this section.
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 and construction 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.
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, auto, etc.) and applies a loss factor, which is
determined using an average history of actual net losses over the previous 12 months and other
statistical data. 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 trends. 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 audit and regulators.
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 and loss estimate components
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
33
not yet specifically identified, and as a result not fully provided for in the components 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 and loss estimate components 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 allowance for loan
losses section for further information.
Valuation of Certain Financial Instruments
. Certain financial instruments including derivatives,
hedged items, trading and investment securities available for sale, are recorded at fair value and
unrealized gains and losses are recorded in other comprehensive income or other gains and losses,
as appropriate. Fair values for most of the Corporation’s trading and investment securities are
based on listed market prices, if available. If listed market prices are not available, fair value
is determined based on other relevant factors including price quotations for similar instruments.
For securities where listed market prices are not readily available, the determination of the fair
value requires management judgment as to the benchmark to be used. Significant changes in factors
such as interest rates and accelerated prepayment rates could affect the fair value of the trading
and investment securities. Management assesses the fair value of its portfolio at least monthly.
Any impairment that is considered other than temporary is recorded in the consolidated statement of
operations.
Fair values for certain derivative contracts are derived from pricing models that consider current
market and contractual prices for the underlying financial instruments, counterparty credit risk,
as well as time value and yield curve or volatility factors underlying the positions. Management
applies judgment in determining the models used and required adjustment to such models, if any, in
the valuation process. The primary risk of material changes to the value of the derivative
instruments is the fluctuation in interest rates. However, the Corporation uses derivative
instruments principally as part of a designated hedging program so that a change in the value of a
derivative is generally offset by a corresponding change in the value of the hedged item. Changes
in these estimates may have a significant impact on the carrying amount and the related valuation
gains and losses on these financial instruments.
Management believes that its estimates of fair value are reasonable given the process of obtaining
external prices, periodic reviews of internal models by affiliated and unaffiliated experts, and
the consistent application of methodologies.
Transfers of Financial Assets
. The Corporation occasionally engages in transfers of financial
assets and accounts for them in accordance with the provisions of SFAS No. 140, “Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities — a replacement of
FASB Statement No. 125” (SFAS No. 140). Paragraph 9 of SFAS No. 140 provides that a transfer of
financial assets in which the transferor surrenders control over those financial assets shall be
accounted for as a sale to the extent that consideration other than beneficial interests in the
transferred assets is received in exchange. A transferor has surrendered control if all of the
following conditions are met: (a) the transferred assets have been isolated from the
transferor—put presumptively beyond the reach of creditors, even in bankruptcy; (b) each
transferee has the right to pledge or exchange the assets it received and no condition constrains
the transferee from taking advantage of its right to pledge or exchange; and (c) the transferor
does not maintain effective control over the transferred assets through either (i) an agreement
that both entitles and obligates the transferor to repurchase or redeem them before their maturity
or (ii) the ability to unilaterally cause the holder to return specified assets, other than through
a cleanup call. In accordance with SFAS No. 140, a gain or loss on the sale is recognized based on
the carrying amount of the financial assets involved in the transfer, allocated between the assets
transferred and the retained interests based on their relative fair value at the date of transfer.
When the Corporation transfers financial assets and the transfer fails any one of the SFAS No. 140
sales criteria, the Corporation is not permitted to derecognize the transferred financial assets
and the transaction is accounted for as a secured borrowing.
Income taxes
. In preparing the consolidated financial statements, the Corporation is required to
estimate income taxes. This involves an estimation of current income tax expense together with an
assessment of temporary differences resulting from differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for
income tax purposes. The determination of current income tax expense involves estimates and
assumptions that require the Corporation to assume certain positions based on its interpretation of
current tax regulations. The Corporation accounts for uncertain tax positions in accordance with
FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). Accordingly,
the Corporation reports a liability for unrecognized tax benefits resulting from uncertain tax
positions taken or expected to be taken in a tax return. The Corporation recognizes interest and
penalties, if any, related to unrecognized tax benefits in income tax expense. Changes in
assumptions affecting estimates may be required in the future and estimated tax liabilities may
need to be increased or decreased accordingly. The accrual for uncertain tax positions is adjusted
in light of
34
changing facts and circumstances, such as the progress of tax audits, case law and
emerging legislation. The Corporation’s effective tax rate includes the impact of tax contingency
accruals and changes to such accruals, including related interest and penalties, as considered
appropriate by management. When particular matters arise, a number of years may elapse before such
matters are audited by the taxing authorities and finally resolved. Favorable resolution of such
matters or the expiration of the statute of limitations may result in the release of uncertain tax
positions, which are recognized as a reduction to the Corporation’s effective rate in the year of
resolution. Unfavorable settlement of any particular issue could increase the effective rate and
may require the use of cash in the year of resolution.
The determination of deferred tax expense or benefit is based on changes in the carrying amounts of
assets and liabilities that generate temporary differences. The carrying value of the Corporation’s
net deferred tax assets assumes that the Corporation will be able to generate sufficient future
taxable income based on estimates and assumptions. If these estimates and related assumptions
change, the Corporation may be required to record valuation allowances against its deferred tax
assets resulting in additional income tax expense in the consolidated statements of operations.
Management evaluates its deferred tax assets on a quarterly basis and assesses the need for a
valuation allowance. A valuation allowance is established when management believes that it is more
likely than not that some portion of its deferred tax assets will not be realized. Changes in
valuation allowance from period to period are included in the Corporation’s tax provision in the
period of change. Based upon the level of historical taxable income and projections for future
taxable income, management believes it is more likely than not, the Corporation will not realize
the benefits of the deferred tax assets related to Santander Financial Services, Inc. amounting to
$23.1 million at December 31, 2007. Accordingly, a deferred tax asset valuation allowance of $23.1
million was recorded at December 31, 2007.
The Corporation accounts for uncertain tax positions in accordance with FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes” (“FIN 48”). Accordingly, the Corporation reports a
liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to
be taken in a tax return. The Corporation recognizes interest and penalties, if any, related to
unrecognized tax benefits in income tax expense.
Goodwill and other intangible assets
. The Corporation accounts for goodwill in accordance with
SFAS No. 142, “Goodwill and Other Intangible Assets.” The reporting units are tested at least
annually to determine whether their carrying value exceeds their fair market value. Should this be
the case, the value of goodwill or indefinite-lived intangibles may be impaired and written down.
Goodwill and other indefinite lived intangible assets are also tested for impairment on an interim
basis if an event occurs or circumstances change between annual tests that would more likely than
not reduce the fair value of the reporting unit below its carrying amount. If there is a
determination that the fair value of the goodwill or other identifiable intangible asset is less
than the carrying value, an impairment loss is recognized in an amount equal to the difference.
Impairment losses, if any, are reflected in operating income in the consolidated statement of
operations.
Tangible and intangible assets with finite useful lives are amortized over their estimated useful
lives. Useful lives are based on management’s estimates of the period that the assets will generate
revenue. If circumstances and conditions indicate deterioration in the value of tangible assets and
intangible assets with finite useful lives, the book value would be adjusted and a loss would be
recognized in current operations.
The Corporation uses judgment in assessing goodwill and intangible assets for impairment.
Estimates of fair value are based on projections of revenues, operating costs and cash flows of
each reporting unit considering historical and anticipated future results, general economic and
market conditions as well as the impact of planned business or operational strategies. The
valuations employ a combination of present value techniques to measure fair value and consider
market factors. Generally, the Corporation engages third party specialists to assist with its
valuations. Additionally, judgment is used in determining the useful lives of finite-lived
intangible assets. Changes in judgments and projections could result in a significantly different
estimate of the fair value of the reporting units and could result in an impairment of goodwill.
As a result of the purchase price allocations from prior acquisitions and the Corporation’s
decentralized structure, goodwill is included in multiple reporting units. Due to certain factors
such as the highly competitive environment, cyclical nature of the business in some of the
reporting units, general economic and market conditions as well as planned business or operational
strategies, among others, the profitability of the Corporation’s individual reporting units may
periodically suffer from downturns in these factors. These factors may have a relatively more
pronounced impact on the individual reporting units as compared to the Corporation as a whole and
might adversely affect the fair value of the reporting units. If material adverse conditions occur
that impact the Corporation’s reporting units, the Corporation’s reporting units, and the related
goodwill would need to be written down to an amount considered recoverable.
35
The Corporation’s goodwill, resulted from business acquisitions, and consists of $10.5 million that
resulted from the acquisition by the Bank of Banco Central Hispano Puerto Rico, $24.3 million that
resulted from the acquisition by Santander Securities of Merrill Lynch’s retail brokerage business
in Puerto Rico and $86.7 million that resulted from the acquisition of Island Finance.
The value of the goodwill is supported ultimately by revenue from the commercial banking segment,
the wealth management segment and the consumer finance segment. A decline in earnings as a result
of a lack of growth, or our inability to deliver cost effective services over sustained periods,
could lead to a perceived impairment of goodwill, which would be evaluated and, if necessary be
recorded as a write-down in the consolidated statement of operations.
On an annual basis, or more frequently if circumstances dictate, management reviews goodwill and
evaluates events or other developments that may indicate impairment in the carrying amount. The
evaluation for potential impairment is inherently complex, and involves significant judgment in the
use of estimates and assumptions.
To determine the fair value of the reporting units being evaluated for goodwill impairment, the
Corporation uses the assistance of an independent consultant. The determination of the fair value
of the reporting units (acquired segments) involves the use of estimates and assumptions including
expected results of operations, an assumed discount rate and an assumed growth rate for the
reporting units. Specifically, the independent consultant prepared analyses regarding the fair
value of equity of the Corporation’s reporting units, Commercial Banking, Wealth Management and
Consumer Finance. The consultant may use up to three separate valuation approaches:
Market Multiple Approach
: provides indications of value based upon comparisons of
the reporting unit to market values and pricing evidence of public companies in the
same or similar lines of businesses. Market ratios (pricing multiples) and
performance fundamentals relating the public companies’ stock prices (equity) or
enterprise values to certain underlying fundamental data are applied to the
reporting unit to determine indications of its fair value.
Comparable Transaction Approach
: includes an examination of recent transactions in
which companies involved in the same or similar lines of business to the reporting
unit were acquired. Acquisition values and pricing evidence are used in much the
same manner as the Market Multiple Approach for indication of the reporting unit’s
fair value.
Discounted Cash Flow Approach
: calculates the present value of the projected future
cash flows to be generated by the reporting unit using appropriate discount rates.
The discount rates are intended to reflect all associated risks of realizing the
projected future cash flows. Terminal values are computed as of the end of the last
period for which cash flows are projected to determine an estimate of the values of
the reporting unit as of that future point in time. Discounting the terminal values
back to the present and adding the present values of the future cash flows yields
indications of the reporting unit’s fair value.
Events that may indicate goodwill impairment include significant or adverse changes in the
business, economic or political climate; unanticipated competition; adverse action or assessment by
a regulator; plans for disposition of a segment; among others.
As a result of the current 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. Statement 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 SFS exceeded their fair value, thereby requiring performance of the second step of the
impairment test to calculate the amount of the impairment. Because the Corporation was unable to
complete the second step of the impairment test during the third quarter and an impairment loss was
probable and could be reasonably estimated, the Corporation recorded preliminary estimated non-cash
impairment charges of
approximately $34.3 million and $5.4 million, which were recorded as reductions to goodwill and
other intangible assets, respectively, during the third quarter of 2007. The estimated impairment
charges were calculated based on the market and income approach valuation methodologies. These
impairment charges did not result in cash expenditures and will not result in future cash
expenditures. The Corporation completed the second step of the impairment test during the fourth
quarter of 2007. Accordingly, during the fourth quarter the Corporation recorded an additional
non-cash impairment charge of $3.6 million. Based upon the completed impairment test, the
Corporation determined that the actual non-cash impairment charges as of July
36
1, 2007 were $43.3
million which comprised $26.8 of goodwill and $16.5 million of other intangibles assets. This
impairment charge did not result in cash expenditures and will not result in future cash
expenditures. Upon the completion of the interim impairment test, the Corporation performed its
annual impairment assessment as of October 1, 2007 with the assistance of the independent valuation
specialist. Based upon their test, and after consideration of the July 1, 2007 impairment charge,
the Corporation determined that no additional impairment charge was necessary as of October 1,
2007.
In assessing the recoverability of goodwill and other intangibles, the Corporation must make
assumptions regarding estimated future cash flows and other factors to determine the fair value of
the respective assets. If these estimates or their related assumptions change in the future, the
Corporation may be required to record impairment charges for these assets not previously recorded.
The key assumptions used by management to determine the fair value of the reporting units include
company specific risk elements that are consistent with the risks inherent in its current business
models for each reporting unit. Changes in judgment and estimates could result in a significantly
different estimate of the fair value of the reporting units and could result in an impairment of
goodwill and other intangibles.
Pension and Other Postemployment Benefits
. The determination of the Corporation’s obligation and
expense for pension and other postretirement benefits is dependent on the selection of certain
assumptions used by actuaries in calculating such amounts. Those assumptions are described in Note
17 to the consolidated financial statements and include, among others, the discount rate, expected
long-term rate of return on plan assets and rates of increase in healthcare costs. Management
participates in the determination of these factors, which normally undergo evaluation against
industry assumptions, among other factors. In accordance with accounting principles generally
accepted in the United States of America, actual results that differ from the Corporation’s
assumptions are accumulated and amortized over future periods and therefore, generally affect
recognized expense and recorded obligation in such future periods. The Corporation uses an
independent actuarial firm for the determination of the pension and post-retirement benefit costs
and obligations.
In September 2006, the FASB issued SFAS No. 158 which requires recognition of a plan’s over-funded
or under-funded status as an asset or liability with an offsetting adjustment to accumulated other
comprehensive income (AOCI). Actuarial gains or losses, prior service costs and transition assets
or obligations will be subsequently recognized as components of net periodic benefit costs.
Additional minimum pension liabilities (AMPL) and related intangible assets are derecognized upon
adoption of the standard.
In developing the expected return on plan assets, the Corporation considers the asset allocation,
historical returns on the types of assets held in the pension trust, the current economic
environment, as well as input from the actuaries, financial analysts and the Corporation’s
long-term inflation assumptions and interest rate scenarios. The expected rate of return for plan
assets was set at 8.5% for the years ended December 31, 2007, 2006 and 2005. In selecting a
discount rate, the Corporation considers the Moody’s long-term AA Corporate Bond yield as a guide.
At December 31, 2007, the discount rate was 6.50% for the
Corporation’s Plan and 5.75% for BCH’s Plan.
Management believes that the assumptions made are appropriate; however, significant differences in
actual experience or significant changes in assumptions may materially affect pension obligations
and future expense.
37
Results of Operations
The following financial discussion is based upon and should be read in conjunction with the
Corporation’s consolidated financial statements for the years ended December 31, 2007, 2006, and
2005.
The following table sets forth the principal components of the Corporation’s net (loss) income for
the years ended December 31, 2007, 2006 and 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
(Dollars in thousands)
|
|
|
Components of net (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
311,679
|
|
|
$
|
290,606
|
|
|
$
|
227,022
|
|
|
Provision for loan losses
|
|
|
147,824
|
|
|
|
65,583
|
|
|
|
20,400
|
|
|
Other income
|
|
|
148,120
|
|
|
|
118,469
|
|
|
|
125,358
|
|
|
Other operating expenses
|
|
|
344,016
|
|
|
|
277,783
|
|
|
|
221,386
|
|
|
Provision for income tax
|
|
|
4,204
|
|
|
|
22,540
|
|
|
|
30,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(36,245
|
)
|
|
$
|
43,169
|
|
|
$
|
79,806
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 compared to 2006.
The Corporation’s net income decreased $79.5 million or 184.0% for the year
ended December 31, 2007 compared to figures reported in 2006. This decrease was principally due to
an increase in the provision for loan losses of $82.2 million and operating expenses of $66.2
million, partially offset by an increase in net interest income of $21.1 million and in
non-interest income of $29.7 million and a decrease in the provision for income tax of $18.3
million. The increase in operating expenses was mainly due to $43.3 million of goodwill and other
intangibles impairment charges on the consumer finance segment and $14.8 million in compensation
expense related to stock incentive plans sponsored by Santander Spain. The increase in other income
was mainly due to a gain of $12.3 million recognized during the fourth quarter of 2007 due to the
sale of the Corporation’s merchant business to an unrelated third party during the first quarter of
2007 and higher fees in broker-dealer, asset management and insurance fees of $11.3 million.
2006 compared to 2005.
The Corporation’s net income decreased $36.6 million or 45.9% for the year
ended December 31, 2006 compared to figures reported in 2005. This decrease was principally due to
an increase of $56.4 million or 25.5% in other operating expenses and $45.2 million or 221.5% in
provision for loan losses and decreases of $6.9 million or 5.5% in other income. The increase in
operating expenses was mainly due to Island Finance operations and expenses related to a personnel
reduction program. These changes were partially offset by an increase in net interest income of
$63.6 million and a decrease in provision for income tax of $8.2 million.
Net Interest Income
The Corporation reported net interest income of $311.7 million, $290.6 million and $227.0 million
for the years ended December 31, 2007, 2006, and 2005, respectively.
To facilitate the comparison of assets with different tax attributes, the interest income on
tax-exempt assets under this heading and under the heading “Change in Interest Income and Interest
Expense—Volume and Rate Analysis,” has been adjusted by an amount equal to the income taxes which
would have been paid had the interest income been fully taxable. This tax equivalent adjustment is
derived using the applicable statutory tax rate and resulted in an adjustment of $7.5 million in
2007, $9.0 million in 2006 and $11.1 million in 2005.
The following table sets forth the principal components of the Corporation’s net interest income
for the years ended December 31, 2007, 2006 and 2005.
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
(Dollars in thousands)
|
|
|
Interest income — tax equivalent basis
|
|
$
|
681,755
|
|
|
$
|
627,306
|
|
|
$
|
450,664
|
|
|
Interest expense
|
|
|
(362,531
|
)
|
|
|
(327,714
|
)
|
|
|
(212,583
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income — tax equivalent basis
|
|
$
|
319,224
|
|
|
$
|
299,592
|
|
|
$
|
238,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin — tax equivalent basis (1)
|
|
|
3.74
|
%
|
|
|
3.63
|
%
|
|
|
3.02
|
%
|
|
|
|
|
|
(1)
|
|
Net interest margin for any period equals tax-equivalent net interest income divided by average interest-earning
assets for such period.
|
2007 compared to 2006
. For the year ended December 31, 2007, net interest margin, on a tax
equivalent basis, was 3.74% compared to net interest margin, on a tax equivalent basis, of 3.63%
for the same period in 2006. This increase of 11 basis points in net interest margin, on a tax
equivalent basis, was mainly due to an increase of 40 basis points in the yield on average interest
earning assets together with an increase in average interest earning assets of $267.5 million.
These increases were partially offset by an increase in the cost of interest bearing liabilities of
31 basis points and an increase in average interest bearing liabilities of $242.8 million.
Interest income, on a tax equivalent basis, increased $54.5 million or 8.7% for the year ended
December 31, 2007 compared to 2006, while interest expense increased $34.8 million or 10.6% over
the same period. The increase of $54.5 million in interest income, on a tax equivalent basis, was
due principally to a $65.1 million increase in interest income on average net loans offset by $8.5
million decrease in interest income on average investment securities.
For the year ended December 31, 2007 average interest earning assets increased $267.5 million or
3.2% and average interest bearing liabilities increased $242.8 million or 3.3% compared to the same
period in 2006. The increment in average interest earning assets compared to the previous year was
driven by an increase in average net loans of $461.6 million, which was partially offset by
decreases in average investment securities and average interest bearing deposits of $161.9 million
and $32.2 million, respectively. The increase in average net loans was due to an increase of $266.8
million or 11.0% in average mortgage loans. There was also an increase of $165.2 million or 15.0%
in the average consumer loan and consumer finance portfolios as a result of an increase in the
average consumer finance portfolio of $84.8 million as well as increases in average credit cards
and personal installment loans of $44.7 million and $35.9 million, respectively. The commercial
loan and construction loan portfolios experienced an increase of $67.9 million or 2.3% due
primarily to increases in average construction loans of $178.8 million and average retail
commercial banking loans of $61.7 million. These increases were partially offset by decrease in
average corporate loans of $150.3 million due to the settlement with an unrelated financial
institution of $232.5 million of commercial loans secured by mortgages during the second quarter of
2006. Excluding the loans settled with an unrelated financial institution in 2006, the average
commercial loan portfolio grew $300.5 million or 10.9%.
Interest expense on average interest-bearing liabilities increased by $34.8 million, or 10.6%, to
reach $362.5 million at December 31, 2007 when compared to $327.7 million for the same period in
2006. This increase was due to increases in interest expense on average interest bearing deposits
and average borrowings of $18.0 million and $15.5 million, respectively.
The increase in average interest bearing liabilities of $242.8 million for the year ended December
31, 2007, was driven by an increase in average borrowings of $193.8 million compared to the same
period in 2006. This increase was due to increments in average FHLB Advances of $279.3 million and
average federal funds purchased and other borrowings of $72.7 million to finance the operations of
Island Finance and the refinancing of other existing debt of the Corporation. There was also an
increase in average commercial paper of $5.5 million. These increases were offset by a reduction in
average repurchase agreements of $163.8 million. The average interest bearing deposits reflected an
increment of $29.6 million which comprised increase in brokered deposits and other time deposits of
$118.6 million and $56.5 million, respectively, offset by a decrease in savings and NOW accounts of
$145.5 million.
2006 compared to 2005.
For the year ended December 31, 2006, net interest margin, on a tax
equivalent basis, was 3.63% compared with 3.02% for the same period in 2005. This increase of 61
basis points in net interest margin
was mainly due to an increase of 187 basis points in
the yield on average interest earning assets primarily as a result of the acquisition of the assets
of Island Finance. Excluding the Island Finance operation, net interest margin, on a tax equivalent
basis, for the year ended December 31, 2006 is 2.80%, a decrease of 22 basis points compared to
2005. Interest income, on a tax equivalent basis increased $176.6 million or 39.2% during the year
ended December 31, 2006 compared to the same period in 2005, while interest expense increased
$115.1 million or 54.2% over the same period. The increase in interest income, on a tax equivalent
39
basis, was mainly due to an increase in interest income on average net loans of $176.9 million from
$361.7 million in 2005 to $538.7 million in 2006.
Average interest-earning assets increased $380.6 million or 4.8% to $8.3 billion at December 31,
2006 compared with December 31, 2005. The increment in average interest-earning assets compared to
the year ended December 31, 2005 was driven by an increase in average net loans of $567.8 million,
which was partially offset by decreases in average investment securities and average
interest-bearing deposits of $103.6 million and $83.6 million, respectively. The increase in
average net loans was due to an increase of $538.2 million or 28.5% in average mortgage loans as a
result of the Corporation’s continued emphasis on strengthening its residential mortgage production
capabilities. There was also an increase of $590.2 million or 115.5% in the average consumer loan
portfolio as a result of the acquisition of Island Finance. The increase in the average consumer
loan portfolio was comprised of an increase of $523.6 in consumer finance portfolio as a result of
the acquisition of Island Finance, $41.5 million in personal loans and $25.1 in credit card loans.
The increase in the consumer loan portfolio was partially offset by a decrease in the commercial
loan portfolio of $541.1 million or 15.3% due to the settlement with Doral of $608.2 million of
commercial loans secured by mortgages during the second quarter of 2006 and the settlement with R&G
of $301.3 million of commercial loans secured by mortgages during the fourth quarter of 2005.
Excluding the settlement of the loans with Doral and R&G, the average commercial loan portfolio
grew $426.3 million or 16.6%.
There was an increase of 133 basis points in the average cost of interest bearing liabilities. The
Corporation’s interest expense on average interest-bearing liabilities reflected an increase of
54.2% to $327.7 million for year ended December 31, 2006 from $212.6 million for the same period in
2005. This growth was due to increases in interest expense on total average interest-bearing
deposits of $51.2 million or 41.9% and average borrowings (including average term notes and average
subordinated notes) of $64.0 million or 70.8% for the year ended December 31, 2006 compared to
December 31, 2005. Interest expense on average time deposits increased 48.8% or $40.6 million in
2006 compared to the same period in 2005, while interest expense on savings and NOW accounts
increased $10.5 million or 27.0% over the same periods.
Average interest-bearing liabilities reached $7.4 billion as of December 31, 2006, reflecting an
increment of $549.2 million or 8.0% when compared to figures reported in 2005. The increase of
$461.5 million or 19.1% in average borrowings (including term and subordinated notes) to $2.9
billion in 2006 was due to several financing transactions incurred related the Island Finance
acquisition during the first quarter of 2006. Average time deposits (including brokered deposits)
were $2.6 billion as of December 31, 2006, an increase of $171.6 million or 6.9% (including an
increase in brokered deposits of $286.0 million or 28.7%) from $2.5 billion in 2005. The growth in
average borrowings (including term and subordinated notes) and average other time deposits were
partially offset by a decrease in average savings and NOW account of $83.9 million to $1.9 billion
as of December 31, 2006.
The following table shows average balances and, where applicable, interest amounts earned on a
tax-equivalent basis and average rates for the Corporation’s assets and liabilities and
stockholders’ equity for the years ended December 31, 2007, 2006 and 2005.
40
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Year ended December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
|
|
(Dollars in thousands)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits
|
|
$
|
85,278
|
|
|
$
|
3,343
|
|
|
|
3.92
|
%
|
|
$
|
94,890
|
|
|
$
|
4,439
|
|
|
|
4.68
|
%
|
|
$
|
133,622
|
|
|
$
|
4,065
|
|
|
|
3.04
|
%
|
|
Federal funds sold and securities
purchased under agreements to resell
|
|
|
68,477
|
|
|
|
3,456
|
|
|
|
5.05
|
%
|
|
|
91,049
|
|
|
|
4,531
|
|
|
|
4.98
|
%
|
|
|
135,928
|
|
|
|
4,187
|
|
|
|
3.08
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits
|
|
|
153,755
|
|
|
|
6,799
|
|
|
|
4.42
|
%
|
|
|
185,939
|
|
|
|
8,970
|
|
|
|
4.82
|
%
|
|
|
269,550
|
|
|
|
8,252
|
|
|
|
3.06
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
|
91,384
|
|
|
|
4,090
|
|
|
|
4.48
|
%
|
|
|
58,137
|
|
|
|
2,759
|
|
|
|
4.75
|
%
|
|
|
8,353
|
|
|
|
262
|
|
|
|
3.14
|
%
|
|
Obligations
of other U.S. government
agencies and corporations
|
|
|
635,219
|
|
|
|
29,561
|
|
|
|
4.65
|
%
|
|
|
744,923
|
|
|
|
36,417
|
|
|
|
4.89
|
%
|
|
|
857,421
|
|
|
|
42,275
|
|
|
|
4.93
|
%
|
|
Obligations of government of Puerto Rico
and political subdivisions
|
|
|
95,781
|
|
|
|
5,113
|
|
|
|
5.34
|
%
|
|
|
90,478
|
|
|
|
4,982
|
|
|
|
5.51
|
%
|
|
|
80,529
|
|
|
|
4,323
|
|
|
|
5.37
|
%
|
|
Collateralized mortgage obligations and
mortgage backed securities
|
|
|
588,719
|
|
|
|
28,422
|
|
|
|
4.83
|
%
|
|
|
692,986
|
|
|
|
32,965
|
|
|
|
4.76
|
%
|
|
|
747,944
|
|
|
|
32,200
|
|
|
|
4.31
|
%
|
|
Other
|
|
|
64,591
|
|
|
|
4,076
|
|
|
|
6.31
|
%
|
|
|
51,080
|
|
|
|
2,595
|
|
|
|
5.08
|
%
|
|
|
46,950
|
|
|
|
1,672
|
|
|
|
3.56
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
|
1,475,694
|
|
|
|
71,262
|
|
|
|
4.83
|
%
|
|
|
1,637,604
|
|
|
|
79,718
|
|
|
|
4.87
|
%
|
|
|
1,741,197
|
|
|
|
80,732
|
|
|
|
4.64
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
2,474,268
|
|
|
|
172,671
|
|
|
|
6.98
|
%
|
|
|
2,562,821
|
|
|
|
175,214
|
|
|
|
6.84
|
%
|
|
|
3,220,447
|
|
|
|
178,994
|
|
|
|
5.56
|
%
|
|
Construction
|
|
|
481,174
|
|
|
|
38,479
|
|
|
|
8.00
|
%
|
|
|
302,370
|
|
|
|
26,242
|
|
|
|
8.68
|
%
|
|
|
202,226
|
|
|
|
15,418
|
|
|
|
7.62
|
%
|
|
Consumer
|
|
|
658,137
|
|
|
|
79,531
|
|
|
|
12.08
|
%
|
|
|
577,652
|
|
|
|
63,542
|
|
|
|
11.00
|
%
|
|
|
511,094
|
|
|
|
48,631
|
|
|
|
9.52
|
%
|
|
Consumer Finance
|
|
|
608,366
|
|
|
|
139,075
|
|
|
|
22.86
|
%
|
|
|
523,610
|
|
|
|
118,077
|
|
|
|
22.55
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Mortgage
|
|
|
2,692,448
|
|
|
|
166,192
|
|
|
|
6.17
|
%
|
|
|
2,425,611
|
|
|
|
146,558
|
|
|
|
6.04
|
%
|
|
|
1,887,420
|
|
|
|
110,994
|
|
|
|
5.88
|
%
|
|
Lease financing
|
|
|
112,268
|
|
|
|
7,746
|
|
|
|
6.90
|
%
|
|
|
134,606
|
|
|
|
8,985
|
|
|
|
6.68
|
%
|
|
|
118,202
|
|
|
|
7,643
|
|
|
|
6.47
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loans
|
|
|
7,026,661
|
|
|
|
603,694
|
|
|
|
8.59
|
%
|
|
|
6,526,670
|
|
|
|
538,618
|
|
|
|
8.25
|
%
|
|
|
5,939,389
|
|
|
|
361,680
|
|
|
|
6.09
|
%
|
|
Allowance for loan losses
|
|
|
(125,897
|
)
|
|
|
|
|
|
|
|
|
|
|
(87,465
|
)
|
|
|
|
|
|
|
|
|
|
|
(67,956
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net
|
|
|
6,900,764
|
|
|
|
603,694
|
|
|
|
8.75
|
%
|
|
|
6,439,205
|
|
|
|
538,618
|
|
|
|
8.36
|
%
|
|
|
5,871,433
|
|
|
|
361,680
|
|
|
|
6.16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets/ interest
income (tax-equivalent basis)
|
|
|
8,530,213
|
|
|
|
681,755
|
|
|
|
7.99
|
%
|
|
|
8,262,748
|
|
|
|
627,306
|
|
|
|
7.59
|
%
|
|
|
7,882,180
|
|
|
|
450,664
|
|
|
|
5.72
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest-earning assets
|
|
|
665,499
|
|
|
|
|
|
|
|
|
|
|
|
557,882
|
|
|
|
|
|
|
|
|
|
|
|
403,812
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
9,195,712
|
|
|
|
|
|
|
|
|
|
|
$
|
8,820,630
|
|
|
|
|
|
|
|
|
|
|
$
|
8,285,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders’ equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings and NOW accounts
|
|
$
|
1,715,631
|
|
|
$
|
51,785
|
|
|
|
3.02
|
%
|
|
$
|
1,861,167
|
|
|
$
|
49,470
|
|
|
|
2.66
|
%
|
|
$
|
1,945,095
|
|
|
$
|
38,939
|
|
|
|
2.00
|
%
|
|
Other time deposits
|
|
|
1,419,185
|
|
|
|
65,810
|
|
|
|
4.64
|
%
|
|
|
1,362,653
|
|
|
|
57,648
|
|
|
|
4.23
|
%
|
|
|
1,476,996
|
|
|
|
46,488
|
|
|
|
3.15
|
%
|
|
Brokered deposits
|
|
|
1,401,310
|
|
|
|
73,820
|
|
|
|
5.27
|
%
|
|
|
1,282,704
|
|
|
|
66,262
|
|
|
|
5.17
|
%
|
|
|
996,741
|
|
|
|
36,785
|
|
|
|
3.69
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest-bearing deposits
|
|
|
4,536,126
|
|
|
|
191,415
|
|
|
|
4.22
|
%
|
|
|
4,506,524
|
|
|
|
173,380
|
|
|
|
3.85
|
%
|
|
|
4,418,832
|
|
|
|
122,212
|
|
|
|
2.77
|
%
|
|
Borrowings
|
|
|
2,805,003
|
|
|
|
153,951
|
|
|
|
5.49
|
%
|
|
|
2,611,231
|
|
|
|
138,500
|
|
|
|
5.30
|
%
|
|
|
2,295,932
|
|
|
|
85,740
|
|
|
|
3.73
|
%
|
|
Term Notes
|
|
|
38,223
|
|
|
|
1,278
|
|
|
|
3.34
|
%
|
|
|
40,883
|
|
|
|
1,460
|
|
|
|
3.57
|
%
|
|
|
37,158
|
|
|
|
1,229
|
|
|
|
3.31
|
%
|
|
Subordinated Notes
|
|
|
246,721
|
|
|
|
15,887
|
|
|
|
6.44
|
%
|
|
|
224,606
|
|
|
|
14,374
|
|
|
|
6.40
|
%
|
|
|
82,082
|
|
|
|
3,402
|
|
|
|
4.14
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
interest expense
|
|
|
7,626,073
|
|
|
|
362,531
|
|
|
|
4.75
|
%
|
|
|
7,383,244
|
|
|
|
327,714
|
|
|
|
4.44
|
%
|
|
|
6,834,004
|
|
|
|
212,583
|
|
|
|
3.11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non interest-bearing liabilities
|
|
|
996,103
|
|
|
|
|
|
|
|
|
|
|
|
873,793
|
|
|
|
|
|
|
|
|
|
|
|
875,762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
8,622,176
|
|
|
|
|
|
|
|
|
|
|
|
8,257,037
|
|
|
|
|
|
|
|
|
|
|
|
7,709,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity
|
|
|
573,536
|
|
|
|
|
|
|
|
|
|
|
|
563,593
|
|
|
|
|
|
|
|
|
|
|
|
576,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
9,195,712
|
|
|
|
|
|
|
|
|
|
|
$
|
8,820,630
|
|
|
|
|
|
|
|
|
|
|
$
|
8,285,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
319,224
|
|
|
|
|
|
|
|
|
|
|
$
|
299,592
|
|
|
|
|
|
|
|
|
|
|
$
|
238,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread
|
|
|
|
|
|
|
|
|
|
|
3.24
|
%
|
|
|
|
|
|
|
|
|
|
|
3.15
|
%
|
|
|
|
|
|
|
|
|
|
|
2.61
|
%
|
|
Cost of funding earning assets
|
|
|
|
|
|
|
|
|
|
|
4.25
|
%
|
|
|
|
|
|
|
|
|
|
|
3.97
|
%
|
|
|
|
|
|
|
|
|
|
|
2.70
|
%
|
|
Net interest margin (tax equivalent basis)
|
|
|
|
|
|
|
|
|
|
|
3.74
|
%
|
|
|
|
|
|
|
|
|
|
|
3.63
|
%
|
|
|
|
|
|
|
|
|
|
|
3.02
|
%
|
41
Changes in Interest Income and Interest Expense-Volume and Rate Analysis
The following table allocates changes in the Corporation’s tax equivalent interest income and
interest expense between changes in the average volume of interest-earning assets and
interest-bearing liabilities and changes in their respective interest rates for the years 2007
compared to 2006 and 2006 compared to 2005. Volume and rate variances have been calculated based
on activities in average balances over the period and changes in interest rates on average
interest-earning assets and average interest-bearing liabilities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 vs. 2006
|
|
|
2006 vs. 2005
|
|
|
|
|
Increase (decrease) due to change in:
|
|
|
Increase (decrease) due to change in:
|
|
|
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
|
|
|
(Dollars in thousands)
|
|
|
Interest Income — tax equivalent basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold and securities
purchased under agreements to resell
|
|
$
|
(1,138
|
)
|
|
$
|
63
|
|
|
$
|
(1,075
|
)
|
|
$
|
(1,679
|
)
|
|
$
|
2,023
|
|
|
$
|
344
|
|
|
Time deposits with other banks
|
|
|
(422
|
)
|
|
|
(674
|
)
|
|
|
(1,096
|
)
|
|
|
(1,400
|
)
|
|
|
1,774
|
|
|
|
374
|
|
|
Investment securities
|
|
|
(7,823
|
)
|
|
|
(633
|
)
|
|
|
(8,456
|
)
|
|
|
(4,934
|
)
|
|
|
3,920
|
|
|
|
(1,014
|
)
|
|
Loans, net
|
|
|
39,688
|
|
|
|
25,388
|
|
|
|
65,076
|
|
|
|
37,637
|
|
|
|
139,301
|
|
|
|
176,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
30,305
|
|
|
|
24,144
|
|
|
|
54,449
|
|
|
|
29,624
|
|
|
|
147,018
|
|
|
|
176,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings and NOW accounts
|
|
|
(4,060
|
)
|
|
|
6,375
|
|
|
|
2,315
|
|
|
|
(1,744
|
)
|
|
|
12,275
|
|
|
|
10,531
|
|
|
Other time deposits
|
|
|
8,455
|
|
|
|
7,265
|
|
|
|
15,720
|
|
|
|
6,118
|
|
|
|
34,519
|
|
|
|
40,637
|
|
|
Borrowings
|
|
|
10,521
|
|
|
|
4,930
|
|
|
|
15,451
|
|
|
|
12,993
|
|
|
|
39,767
|
|
|
|
52,760
|
|
|
Long-term borrowings
|
|
|
1,171
|
|
|
|
160
|
|
|
|
1,331
|
|
|
|
7,798
|
|
|
|
3,405
|
|
|
|
11,203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
16,087
|
|
|
|
18,730
|
|
|
|
34,817
|
|
|
|
25,165
|
|
|
|
89,966
|
|
|
|
115,131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (expense) — tax equivalent basis
|
|
$
|
14,218
|
|
|
$
|
5,414
|
|
|
$
|
19,632
|
|
|
$
|
4,459
|
|
|
$
|
57,052
|
|
|
$
|
61,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2007, the increase in net interest income on a tax equivalent basis was driven primarily by
increases in volume and yield earned on interest earning-assets of 40 basis points which is higher
than the increase in volume and interest rates paid on interest-bearing liabilities of 31 basis
points. The increase in interest income is attributed principally to increase in yield earned on
average net loans of 39 basis points.
During 2006, the increase in net interest income on a tax equivalent basis was driven primarily by
increases in volume and yield earned on interest earning-assets of 187 basis points which is higher
than the increase in volume and interest rates paid on interest-bearing liabilities of 133 basis
points. The increase attributed to rate on loans is a direct result of Island Finance loans which
had an average yield of 22.6% for the ten month period ended December 31, 2006. In addition the
increase in the prime rate during the year is reflected in the increase in rates for 2006.
Provision for Loan Losses
2007 compared to 2006.
The provision for loan losses increased $82.2 million or 125.4% from $65.6
million for the year ended December 31, 2006 to $147.8 million for the year ended December 31,
2007. The increase in the provision for loan losses was due primarily to increases in
non-performing loans due to the deterioration in economic conditions in Puerto Rico.
2006 compared to 2005.
The provision for loan losses increased $45.2 million or 221.5% from $20.4
million for the year ended December 31, 2005 to $65.6 million for the year ended December 31, 2006.
The increase in the provision for loan losses was due primarily to the Island Finance operation,
which registered a provision for loan losses of $43.2 million for the ten months (from acquisition)
ended December 31, 2006.
42
Refer to the discussions under “Allowance for Loan Losses” and “Risk Management” for further
analysis of the allowance for loan losses, the allocation of the allowance by loan category and
non-performing assets and related ratios.
Other Income
Other income consists of service charges on deposit accounts, other service fees, including
mortgage servicing fees and fees on credit cards, broker-dealer, asset management and insurance
fees, gains and losses on sales of securities, gain on sale of mortgage servicing rights, certain
other gains and losses and certain other income.
The following table sets forth the components of our other income for the years ended December 31,
2007, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
(Dollars In thousands)
|
|
Bank service fees on deposit accounts
|
|
$
|
13,603
|
|
|
$
|
13,349
|
|
|
$
|
12,883
|
|
|
Other service fees:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit card fees
|
|
|
10,872
|
|
|
|
17,870
|
|
|
|
15,242
|
|
|
Mortgage-servicing fees
|
|
|
3,010
|
|
|
|
2,554
|
|
|
|
2,283
|
|
|
Trust fees
|
|
|
1,914
|
|
|
|
3,004
|
|
|
|
2,912
|
|
|
Other fees
|
|
|
17,802
|
|
|
|
12,301
|
|
|
|
8,952
|
|
|
Broker-dealer, asset management and insurance fees
|
|
|
68,265
|
|
|
|
56,973
|
|
|
|
53,016
|
|
|
Gain on sale of securities, net
|
|
|
1,265
|
|
|
|
—
|
|
|
|
17,842
|
|
|
Loss on extinguishment of debt
|
|
|
—
|
|
|
|
—
|
|
|
|
(5,959
|
)
|
|
Gain on sale of loans
|
|
|
6,658
|
|
|
|
1,994
|
|
|
|
7,876
|
|
|
Trading gains
|
|
|
2,831
|
|
|
|
1,243
|
|
|
|
277
|
|
|
Gain (loss) on derivatives
|
|
|
249
|
|
|
|
(478
|
)
|
|
|
1,963
|
|
|
Other gains, net
|
|
|
18,644
|
|
|
|
4,428
|
|
|
|
4,774
|
|
|
Other
|
|
|
3,007
|
|
|
|
5,231
|
|
|
|
3,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
148,120
|
|
|
$
|
118,469
|
|
|
$
|
125,358
|
|
|
|
|
|
|
|
|
|
|
|
|
The table below details the breakdown of commissions from broker-dealer, asset management and
insurance operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
(Dollars in thousands)
|
|
|
Broker-dealer
|
|
$
|
32,147
|
|
|
$
|
25,269
|
|
|
$
|
25,542
|
|
|
Asset management
|
|
|
24,362
|
|
|
|
19,969
|
|
|
|
20,119
|
|
|
Total Santander Securities and subsidiary
|
|
|
56,509
|
|
|
|
45,238
|
|
|
|
45,661
|
|
|
Insurance
|
|
|
11,756
|
|
|
|
11,735
|
|
|
|
7,355
|
|
|
Total
|
|
$
|
68,265
|
|
|
$
|
56,973
|
|
|
$
|
53,016
|
|
2007 compared to 2006.
For the year ended December 31, 2007, other income reached $148.1 million, a
$29.7 million or 25.0% increase when compared to $118.5 million for the same period in 2006. This
increase was mainly due to a $12.3 million gain on the sale of the Corporation’s merchant business
to an unrelated third party. During 2007, the Corporation transferred its merchant business to a
subsidiary, MBPR Services, Inc. (“MBPR”) and subsequently sold the stock of MBPR to an unrelated
third party. During 2007, the Corporation provided certain processing and other services to the
third party acquirer. As part of the transaction, the Corporation entered into a long-term
marketing alliance agreement with the third party and will serve as its sponsor with the card
associations and network organizations. The Corporation expects to offer better products and
services to its merchant client base and to obtain certain cost efficiencies as a result of this
transaction.
Gain on sales of loans increased due to sales of $251.4 million for the year ended December 31,
2007 compared with sales of $174.5 million for the year ended December 31, 2006 resulting in an
increase in gain on sale of loans of $1.0 million. There was also an increase of $3.7 million in
gain on sales of loans previously charged-off during 2007 when compared with the same period in
2006. There were increases in trading gains of $1.7 million, gain on sale of securities of $1.3
million,
43
derivatives gains of $0.8 million, mortgage servicing rights recognized of $1.1 million and a
favorable change in the valuation of mortgage loans available for sale of $1.2 million for the year
ended December 31, 2007 compared with the same period in 2006. These increases were partially
offset by a gain on sale of an FDIC assessment credit of $1.9 million and a tax credit purchased of
$0.5 million during 2006, a reduction in swap income of $0.9 million and a decrease in rental
income in point-of-sale (POS) terminals of $0.7 million due to the sale of merchant business during
2007.
Bank service charges, fees and other decreased $1.9 million or 3.8% for the year ended December 31,
2007. These reductions were principally due to $7.0 million decrease in credit card fees due to a
reduction in merchant fees at POS terminals for the sale of the Corporation’s merchant business to
an unrelated third party during the first quarter of 2007, partially offset by an increase of $3.4
million in other fees related to the early cancellation of certain client structured certificates
of deposit.
Broker-dealer, asset management and insurance fees increased by $11.3 million or 19.8% to $68.3
million in 2007 basically due to improvements in broker-dealer fees of $6.7 million or 27.2% and
asset management fees of $4.4 million or 22.0% earned by Santander Securities and Santander Assets
Management, respectively. Santander Securities’ business includes securities underwriting and
distribution, sales, trading, financial planning and securities brokerage services. In addition,
Santander Securities provides investment advisory services portfolio management through its wholly
owned subsidiary, Santander Asset Management. The broker-dealer asset management and insurance
operations represented 46.1% of commissions to the Corporation’s other income for the year ended
December 31, 2007.
2006 compared to 2005.
For the year ended December 31, 2006, other income decreased $6.9 million or
5.5% compared to the same period in 2005. This decrease was due to lower gains on sale of
securities (net of the loss on extinguishment of debt) of $11.9 million and lower gain on sale of
loans of $5.9 million. There was a loss on derivatives in 2006 of $0.5 million compared to a gain
in 2005 of $2.0 million. This variance was due primarily to a loss on valuation of mortgage loans
available for sale of $1.2 million in 2006. Insurance fees reflected an increase of $4.4 million
due primarily to the effect of the Island Finance operation on the insurance operations for the
period. The Corporation recognized a gain on sale of an FDIC assessment credit of $1.9 million
during the fourth quarter of 2006.
Bank service charges, fees and other increased $6.8 million, or 16.1% for the year ended December
31, 2006. These improvements were mainly due to increases in credit cards fees, account analysis
fees, mortgage services fees and other fees of $2.7 million, $0.5 million, $0.3 million and $3.3
million, respectively.
Insurance fees reflected an increase of $4.4 million to $11.7 million in 2006 (which includes $4.7
million derived from Island Finance loans), from $7.4 million reported in the same period in 2005.
For the year ended December 31, 2006, broker-dealer and asset management fees reflected a decrease
of $0.4 million compared to the same period in 2005. The broker-dealer asset management and
insurance operations contributed 48.1% of commissions to the Corporation’s other income for the
year ended December 31, 2006.
44
Operating Expenses
The following table sets forth information as to the Corporation’s other operating expenses for the
years ended December 31, 2007, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
(Dollars in thousands)
|
|
|
Salaries
|
|
$
|
72,927
|
|
|
$
|
78,945
|
|
|
$
|
58,547
|
|
|
Pension and other benefits
|
|
|
72,815
|
|
|
|
55,428
|
|
|
|
48,775
|
|
|
Expenses deferred as loan origination costs
|
|
|
(11,484
|
)
|
|
|
(12,662
|
)
|
|
|
(12,320
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total personnel costs
|
|
|
134,258
|
|
|
|
121,711
|
|
|
|
95,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Occupancy costs
|
|
|
23,767
|
|
|
|
22,476
|
|
|
|
16,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment expenses
|
|
|
4,427
|
|
|
|
4,797
|
|
|
|
3,802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EDP servicing expense, amortization and technical services
|
|
|
39,255
|
|
|
|
40,084
|
|
|
|
31,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Communications
|
|
|
10,923
|
|
|
|
11,358
|
|
|
|
8,232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business promotion
|
|
|
15,621
|
|
|
|
11,613
|
|
|
|
11,065
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill and other intangibles impairment charges
|
|
|
43,349
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other taxes
|
|
|
12,334
|
|
|
|
11,514
|
|
|
|
8,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional fees
|
|
|
14,330
|
|
|
|
12,589
|
|
|
|
9,844
|
|
|
Amortization of intangibles
|
|
|
3,828
|
|
|
|
4,081
|
|
|
|
1,697
|
|
|
Printing and supplies
|
|
|
2,137
|
|
|
|
1,939
|
|
|
|
1,775
|
|
|
Credit card expenses
|
|
|
6,198
|
|
|
|
10,741
|
|
|
|
8,844
|
|
|
Insurance
|
|
|
4,029
|
|
|
|
2,810
|
|
|
|
2,461
|
|
|
Examinations & FDIC assessment
|
|
|
2,194
|
|
|
|
1,914
|
|
|
|
1,809
|
|
|
Transportation and travel
|
|
|
2,981
|
|
|
|
2,802
|
|
|
|
2,242
|
|
|
Repossessed assets provision and expenses
|
|
|
7,482
|
|
|
|
1,879
|
|
|
|
1,871
|
|
|
Collections and related legal costs
|
|
|
1,239
|
|
|
|
1,542
|
|
|
|
1,461
|
|
|
All other
|
|
|
15,664
|
|
|
|
13,933
|
|
|
|
14,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating expenses
|
|
|
60,082
|
|
|
|
54,230
|
|
|
|
46,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non personnel expenses
|
|
|
209,758
|
|
|
|
156,072
|
|
|
|
126,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
$
|
344,016
|
|
|
$
|
277,783
|
|
|
$
|
221,386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Efficiency ratio-on a tax equivalent basis
|
|
|
66.32
|
%
|
|
|
66.82
|
%
|
|
|
62.97
|
%
|
|
Personnel cost to average assets
|
|
|
1.46
|
%
|
|
|
1.38
|
%
|
|
|
1.15
|
%
|
|
Other operating expenses to average assets
|
|
|
2.28
|
%
|
|
|
1.77
|
%
|
|
|
1.53
|
%
|
|
Assets per employee
|
|
$
|
3,494
|
|
|
$
|
3,929
|
|
|
$
|
5,199
|
|
2007 compared to 2006.
For the year ended December 31, 2007, the Efficiency Ratio, on a tax
equivalent basis, was 66.32% reflecting an improvement of 50 basis points compared to 66.82% for
the year ended December 31, 2006. This improvement was mainly the result of higher net interest and
non-interest income. For the year ended December 31, 2007, compared to the same period in 2006,
operating expenses increased $66.2 million or 23.8%. As a previously discussed, during 2007, the
Corporation recorded a non-cash impairment charges of $43.3 million which comprised $26.8 of
goodwill and $16.5 million of other intangibles assets. During 2007, the Corporation recognized
$14.8 million of stock compensation expenses related to various stock compensation plans sponsored
by Santander Spain. Excluding the effect of these incentives plans, the Efficiency Ratio, on a tax
equivalent basis, would have been 63.06%, a 376 basis point improvement over the same period in
2006.
Operating expenses reflected increases of $4.2 million relate to other operating expenses of SFS,
$7.2 million in salaries and other employee benefits, $5.4 million in repossessed assets provision
and expenses, $4.6 million in business promotion and $0.6 million in professional fees. These
increases were partially offset by a decrease in credit card expenses of $4.3 million due to the
sale of the Corporation’s merchant business to an unrelated third party during the first quarter of
2007. Excluding stock incentive plans expense and impairment charges recognized during 2007 and
stock incentive plans expense for 2006, operating expenses for the year ended December 31, 2007
reflected an increase of $8.9 million or 3.2% compared to the same period in 2006.
45
2006 compared to 2005.
For the year ended December 31, 2006, the Efficiency Ratio, on a tax
equivalent basis, was 66.82% reflecting an increase of 385 basis points compared to 62.97% for the
year ended December 31, 2005. This increase was mainly the result of higher operating expenses
during the year ended December 31, 2006 resulting in part from expenses related to a personnel
reduction program. Payments pursuant to the personnel reduction program reached $10.4 million for
the year ended December 31, 2006. Excluding these personnel reduction expenses, the Efficiency
Ratio was 64.31%, a 134 basis point increase for the year ended December 31, 2006 compared to the
same period in 2005. In addition, during the fourth quarter of 2006, operating expenses were
impacted by a pension plan curtailment pursuant to the Corporation’s decision to freeze its defined
benefit pension plan, resulting in the recognition of an additional expense of $0.9 million. The
Corporation also recognized $0.8 million pursuant to a Long Term Incentive Plan to certain
employees. The Corporation’s parent company, Santander Spain, sponsors a Long Term Incentive Plan
(the “Plan”) for certain of its employees and those of its subsidiaries, including the Corporation.
The Plan contains service, performance and market conditions. In December 2006, the Corporation’s
Board of Directors approved the Plan, which provides for settlement in cash to the participating
employees. The Corporation will accrue the liability and recognize monthly compensation expense
over the fourteen month period from December 2006 to January 2008, when the plan becomes
exercisable. The cost of the plan will be reimbursed to the
Corporation by Santander Spain at
which time it would be recognized as a capital contribution. As of December 31, 2006 the
performance and market conditions of the plan were met and the Corporation therefore recognized a
compensation expense of $810,000 related to the Plan.
For the year ended December 31, 2006, operating expenses increased $56.4 million or 25.5% from
$221.4 million for the year ended December 31, 2005 to $277.8 million for the same period in 2006.
This increase was due to operating expenses of Island Finance of $44.5 million and expenses related
to a personnel reduction program of $10.4 million in 2006. For the year ended December 31, 2006
there were increases in salaries and employee benefits of $26.7 million together with an increase
in other operating expenses of $29.7 million. Island Finance salaries and employee benefits were
$21.1 million for the ten months (since acquisition) ended December 31, 2006 and other operating
expenses were $23.4 million. Increases in salaries and employee benefits due to the Island Finance
operation of $21.1 million, payments pursuant to the personnel reduction program of $10.4 million,
the pension plan curtailment of $0.9 million and long-term incentive plan of $0.8 million, were
partially offset by decreases in accruals for performance compensation of $4.4 million and $1.5
million in temporary personnel.
The increase of $29.7 million in other operating expenses (which includes Island Finance operating
expenses of $23.4 million) was comprised, principally, of increases of $8.5 million in EDP
servicing, amortization and technical services, $5.7 million in occupancy costs, $3.1 million in
communications, $3.1 million in other taxes, $2.7 million in professional fees, $2.4 million in
amortization of intangibles and $1.9 million in credit card expenses. EDP servicing amortization
and technical services included EDP servicing fees of $2.3 million paid by Island Finance to Wells
Fargo pursuant to a servicing agreement where the latter will continue to provide EDP servicing on
the loan portfolio for a period of eighteen months from the acquisition date.
Excluding Island Finance expenses and expenses related to personnel reductions, operating expenses
reflected an increase of $1.5 million or 0.7% for the year ended December 31, 2006 compared to
December 31, 2005. There were increases in EDP servicing, amortization and technical services of
$4.1 million, credit card expenses of $1.5 million and other taxes of $1.0 million, which were
partially offset by a decrease of $4.8 million in salaries and other employee benefits.
Income Taxes
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%. However, 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. A temporary two-year surtax of 2.5% applicable to taxable years beginning after
December, 31, 2004, increased the maximum marginal corporate income tax rate from 39% to 41.5% for
2005 and 2006. An additional 2% surtax was imposed on the Corporation for a period of one year
commencing on January 1, 2006 as a result of the Puerto Rico Government deficit. These surtaxes
increased the maximum marginal corporate income tax rate to 43.5% for the year ended December 31,
2006. These surtaxes are no longer in effect.
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 a dividend
received deduction of 100% on dividends received from controlled subsidiaries subject to taxation
in Puerto Rico.
46
Puerto Rico international banking entities, or IBE’s, such as Santander International Bank, are
currently exempt from taxation under Puerto Rico law. During 2004, the Legislature of Puerto Rico
and the Governor of Puerto Rico approved a law amending the IBE Act. This law imposes income taxes
at normal statutory rates on each IBE that operates as a unit of a bank, if the IBE’s net income
generated after December 31, 2003 exceeds 40% of the bank’s net income in the taxable year
commenced on July 1, 2003, 30% of the bank’s net income in the taxable year commencing on July 1,
2004, and 20% of the bank’s net income in the taxable year commencing on July 1, 2005, and
thereafter. It does not impose income taxation on an IBE that operates as a subsidiary of a bank as
is the case of SIB.
The Corporation adopted the provisions of FIN No. 48 on January 1, 2007. As a result of the
implementation of FIN 48, the Corporation recognized a decrease of $0.5 million to the January 1,
2007 balance of retained earnings and an increase in the liability for unrecognized tax benefits.
As of the date of adoption and after the impact of recognizing the increase in the liability noted
above, the Corporation’s liability for unrecognized tax benefits totaled $12.7 million, which
included $1.8 million of interest and penalties.
In assessing the realizability 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. amounting to $23.1 million at December 31, 2007. Accordingly, a deferred
tax asset valuation allowance of $23.1 million was recorded at December 31, 2007.
2007 compared to 2006.
The 2007 provision for income tax was $4.2 million, which reflects a
decrease of $18.3 million or 81.4% over 2006. The decrease in the provision for income tax during
2007 was due primarily to lower taxable income in 2007 compared to 2006 and the elimination of the
temporary surtaxes imposed by the Commonwealth of Puerto Rico for fiscal years 2005 and 2006. Refer
to Note 15 of the consolidated financial statements for additional information.
For the year ended December 31, 2007 the Corporation recorded a non-cash charge of $23.1 million
related to establishing a valuation allowance against its deferred tax assets from its consumer
finance segment, primarily related to the goodwill and trade name impairment charges. In accordance
with SFAS No. 109 “Accounting for Income Taxes” (SFAS No. 109), management evaluates its deferred
income taxes on a quarterly basis to determine if valuation allowances are required. SFAS No. 109
prescribes that an entity conduct an assessment to determine whether valuation allowances should
established based on the consideration of all available evidence using a “more likely than not”
criteria. In reaching such determination, significant weighting is given to data and evidence that
can be objectively verified. The Corporation currently has substantial net operating loss
carryforwards from its consumer finance segment. The Corporation has recorded a 100% valuation
allowance against the deferred tax assets from its consumer finance segment due to the uncertainty
of their ultimate realization.
2006 compared to 2005.
The provision for income tax was $22.5 million (or 34.3% pretax earnings), a
decrease of $8.2 million or 26.8% for the year ended December 31, 2006 compared to $30.8 million
(or 27.8% of pretax earnings) for the same period in 2005. The decrease in the provision for income
tax during 2006 was due in primarily to lower taxable income in 2006 compared to 2005 and was
partially offset by the increase in tax rates due to special surtaxe imposed on the Corporation,
refer to Note 15 of the consolidated financial statements for additional information.
47
Financial Condition
Assets
The Corporation’s total assets as of December 31, 2007 reached $9.2 billion remaining basically
flat when compared to December 31, 2006. As of December 31, 2007, there was an increase of $74.7
million in net loans, including loans held for sale compared to December 31, 2006 balances. The
investment securities portfolio decreased $123.9 million, from $1.5 billion as of December 31, 2006
to $1.3 billion as of December 31, 2007.
There was an increase in other assets of $144.0 million, which consisted, mainly, of $108.1 million
in accounts receivable, $20.7 in derivative assets, $13.4 million in deferred tax assets and $10.3
million in real estate owned properties. This increase in other assets was partially offset by a
decrease in goodwill and other intangibles of $44.1 million and a decrease in bank premises and
equipment of $26.8 million due to a sale and lease-back transaction with two unaffiliated third
parties for the Bank’s two principal properties.
Short Term Investments and Interest-bearing Deposits in Other Financial Institutions
The Corporation sells federal funds, purchases securities under agreements to resell and deposits
funds in interest-bearing accounts in other financial institutions to help meet liquidity
requirements and provide temporary holdings until the funds can be otherwise invested or utilized.
As of December 31, 2007, 2006 and 2005, the Corporation had interest-bearing deposits, federal
funds sold and securities purchased under agreements to resell as detailed below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
(Dollars in thousands)
|
|
|
Interest-bearing deposits
|
|
$
|
6,606
|
|
|
$
|
52,235
|
|
|
$
|
109,867
|
|
|
Federal funds sold
|
|
|
82,434
|
|
|
|
35,412
|
|
|
|
15,000
|
|
|
Securities purchased under agreements to resell
|
|
|
—
|
|
|
|
37,995
|
|
|
|
77,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
89,040
|
|
|
$
|
125,642
|
|
|
$
|
202,296
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Portfolio
The following tables set forth the Corporation’s investments in government securities and certain
other financial investments at December 31, 2007 and 2006, by contractual maturity, giving
comparative carrying and fair values and average yield for each of the categories. The Corporation
has evaluated the conditions under which it might sell its investment securities. As a result,
most of its investment securities have been classified as available for sale. The Corporation may
decide to sell some of the securities classified as available for sale either as part of its
efforts to manage its interest rate risk, or in response to changes in interest rates, prepayment
risk or similar economic factors. Investment securities available for sale are carried at fair
value and unrealized gains and losses net of taxes on these investments are included in accumulated
other comprehensive income or loss, which is a separate component of stockholders’ equity.
Gains or losses on sales of investment securities available for sale are recognized when realized
and are computed on the basis of specific identification. At December 31, 2007, 2006 and 2005,
investment securities available for sale were $1.3 billion, $1.4 billion and $1.6 billion,
respectively.
Investment securities held to maturity are carried at cost, adjusted for premium amortization and
discount accretion. The Corporation classifies as investment securities held to maturity those
investments for which the Corporation has the intent and ability to hold until maturity. There were
no investment securities held to maturity as of December 31, 2007, 2006 and 2005.
Other investment securities include debt, equity or other securities that do not have readily
determinable fair values and are stated at amortized cost. The Corporation includes in this
category stock owned to comply with regulatory requirements, such as Federal Home Loan Bank (FHLB)
stock.
The Corporation acquires certain securities for trading purposes and carries its trading account at
fair value. Financial instruments including, to a limited extent, derivatives, such as option
contracts, are used in dealing and other trading activities and are carried at fair value. The
Corporation classifies as trading those securities that are acquired and held principally for the
48
purpose of selling them in the near term. Realized and unrealized changes in fair value are
recorded separately in the trading profit or loss account as part of the results of operations in
the period in which the changes occur. At December 31, 2007, 2006 and 2005, the Corporation had
$68.5 million, $50.8 million and $37.7 million of securities held for trading, respectively.
The following table presents the carrying value and fair value of the Corporation’s investment
portfolio by major category as of the December 31, 2007, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
Available for Sale
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
|
$
|
64,455
|
|
|
$
|
64,455
|
|
|
$
|
63,995
|
|
|
$
|
63,995
|
|
|
$
|
24,576
|
|
|
$
|
24,576
|
|
|
U.S. Agency Notes
|
|
|
609,223
|
|
|
|
609,223
|
|
|
|
658,340
|
|
|
|
658,340
|
|
|
|
727,199
|
|
|
|
727,199
|
|
|
P.R. Government Obligations
|
|
|
49,288
|
|
|
|
49,288
|
|
|
|
55,942
|
|
|
|
55,942
|
|
|
|
53,600
|
|
|
|
53,600
|
|
|
Mortgage-backed Securities
|
|
|
545,182
|
|
|
|
545,182
|
|
|
|
631,437
|
|
|
|
631,437
|
|
|
|
754,231
|
|
|
|
754,231
|
|
|
Foreign Securities
|
|
|
50
|
|
|
|
50
|
|
|
|
75
|
|
|
|
75
|
|
|
|
75
|
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,268,198
|
|
|
$
|
1,268,198
|
|
|
$
|
1,409,789
|
|
|
$
|
1,409,789
|
|
|
$
|
1,559,681
|
|
|
$
|
1,559,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The tables below summarize the contractual maturity of the Corporation’s available for sale, held
to maturity investment securities and other investment securities at December 31, 2007, 2006 and
2005:
49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
After One
|
|
|
After Five Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within
|
|
|
Year to
|
|
|
to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One Year
|
|
|
Five Years
|
|
|
Ten Years
|
|
|
Over Ten Years
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Avg
|
|
|
Carrying
|
|
|
Avg
|
|
|
Carrying
|
|
|
Avg
|
|
|
Carrying
|
|
|
Avg
|
|
|
Carrying
|
|
|
Fair
|
|
|
Avg
|
|
|
|
|
Value
|
|
|
Yield
|
|
|
Value
|
|
|
Yield
|
|
|
Value
|
|
|
Yield
|
|
|
Value
|
|
|
Yield
|
|
|
Value
|
|
|
Value
|
|
|
Yield
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
U.S. Treasury
|
|
$
|
64,455
|
|
|
|
3.92
|
%
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
64,455
|
|
|
$
|
64,455
|
|
|
|
3.92
|
%
|
|
U.S. Agency Notes
|
|
|
253,423
|
|
|
|
2.84
|
%
|
|
|
355,800
|
|
|
|
3.91
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
609,223
|
|
|
|
609,223
|
|
|
|
3.40
|
%
|
|
P.R. Government
Obligations
|
|
|
1,367
|
|
|
|
3.99
|
%
|
|
|
19,775
|
|
|
|
4.44
|
%
|
|
|
15,111
|
|
|
|
5.21
|
%
|
|
|
13,035
|
|
|
|
5.73
|
%
|
|
|
49,288
|
|
|
|
49,288
|
|
|
|
5.00
|
%
|
|
Mortgage-backed
Securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
225,124
|
|
|
|
4.40
|
%
|
|
|
320,058
|
|
|
|
5.41
|
%
|
|
|
545,182
|
|
|
|
545,182
|
|
|
|
4.99
|
%
|
|
Foreign Securities
|
|
|
—
|
|
|
|
—
|
|
|
|
50
|
|
|
|
4.65
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
50
|
|
|
|
50
|
|
|
|
4.65
|
%
|
|
Other Securities
|
|
|
64,559
|
|
|
|
5.50
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
64,559
|
|
|
|
64,559
|
|
|
|
5.50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Securities
|
|
$
|
383,804
|
|
|
|
5.00
|
%
|
|
$
|
375,625
|
|
|
|
3.90
|
%
|
|
$
|
240,235
|
|
|
|
5.28
|
%
|
|
$
|
333,093
|
|
|
|
5.01
|
%
|
|
$
|
1,332,757
|
|
|
$
|
1,332,757
|
|
|
|
4.24
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
After One
|
|
|
After Five Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within
|
|
|
Year to
|
|
|
to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One Year
|
|
|
Five Years
|
|
|
Ten Years
|
|
|
Over Ten Years
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Avg
|
|
|
Carrying
|
|
|
Avg
|
|
|
Carrying
|
|
|
Avg
|
|
|
Carrying
|
|
|
Avg
|
|
|
Carrying
|
|
|
Fair
|
|
|
Avg
|
|
|
|
|
Value
|
|
|
Yield
|
|
|
Value
|
|
|
Yield
|
|
|
Value
|
|
|
Yield
|
|
|
Value
|
|
|
Yield
|
|
|
Value
|
|
|
Value
|
|
|
Yield
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
U.S. Treasury
|
|
$
|
63,995
|
|
|
|
5.14
|
%
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
63,995
|
|
|
$
|
63,995
|
|
|
|
5.14
|
%
|
|
U.S. Agency Notes
|
|
|
188,503
|
|
|
|
4.82
|
%
|
|
|
469,837
|
|
|
|
3.89
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
658,340
|
|
|
|
658,340
|
|
|
|
4.15
|
%
|
|
P.R. Government
Obligations
|
|
|
948
|
|
|
|
3.85
|
%
|
|
|
15,482
|
|
|
|
4.26
|
%
|
|
|
24,565
|
|
|
|
5.28
|
%
|
|
|
14,947
|
|
|
|
5.79
|
%
|
|
|
55,942
|
|
|
|
55,942
|
|
|
|
5.10
|
%
|
|
Mortgage-backed
Securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
631,437
|
|
|
|
4.99
|
%
|
|
|
631,437
|
|
|
|
631,437
|
|
|
|
4.99
|
%
|
|
Foreign Securities
|
|
|
25
|
|
|
|
7.50
|
%
|
|
|
50
|
|
|
|
4.65
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
75
|
|
|
|
75
|
|
|
|
5.60
|
%
|
|
Other Securities
|
|
|
50,710
|
|
|
|
5.50
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
50,710
|
|
|
|
50,710
|
|
|
|
5.50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Securities
|
|
$
|
304,181
|
|
|
|
5.00
|
%
|
|
$
|
485,369
|
|
|
|
3.90
|
%
|
|
$
|
24,565
|
|
|
|
5.28
|
%
|
|
$
|
646,384
|
|
|
|
5.01
|
%
|
|
$
|
1,460,499
|
|
|
$
|
1,460,499
|
|
|
|
4.64
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
After One
|
|
|
After Five Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within
|
|
|
Year to
|
|
|
to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One Year
|
|
|
Five Years
|
|
|
Ten Years
|
|
|
Over Ten Years
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Avg
|
|
|
Carrying
|
|
|
Avg
|
|
|
Carrying
|
|
|
Avg
|
|
|
Carrying
|
|
|
Avg
|
|
|
Carrying
|
|
|
Fair
|
|
|
Avg
|
|
|
|
|
Value
|
|
|
Yield
|
|
|
Value
|
|
|
Yield
|
|
|
Value
|
|
|
Yield
|
|
|
Value
|
|
|
Yield
|
|
|
Value
|
|
|
Value
|
|
|
Yield
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
U.S. Treasury
|
|
$
|
24,576
|
|
|
|
3.85
|
%
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
24,576
|
|
|
$
|
24,576
|
|
|
|
3.85
|
%
|
|
U.S. Agency Notes
|
|
|
254,610
|
|
|
|
2.96
|
%
|
|
|
259,152
|
|
|
|
3.68
|
%
|
|
|
213,437
|
|
|
|
4.15
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
727,199
|
|
|
|
727,199
|
|
|
|
3.57
|
%
|
|
P.R. Government
Obligations
|
|
|
12,790
|
|
|
|
4.93
|
%
|
|
|
9,877
|
|
|
|
4.07
|
%
|
|
|
27,215
|
|
|
|
4.83
|
%
|
|
|
3,718
|
|
|
|
6.35
|
%
|
|
|
53,600
|
|
|
|
53,600
|
|
|
|
4.82
|
%
|
|
Mortgage-backed
Securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
754,231
|
|
|
|
5.00
|
%
|
|
|
754,231
|
|
|
|
754,231
|
|
|
|
5.00
|
%
|
|
Foreign Securities
|
|
|
—
|
|
|
|
—
|
|
|
|
75
|
|
|
|
5.60
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
75
|
|
|
|
75
|
|
|
|
5.60
|
%
|
|
Other Securities
|
|
|
41,862
|
|
|
|
5.00
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
41,862
|
|
|
|
41,862
|
|
|
|
5.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Securities
|
|
$
|
333,838
|
|
|
|
3.36
|
%
|
|
$
|
269,104
|
|
|
|
3.70
|
%
|
|
$
|
240,652
|
|
|
|
4.22
|
%
|
|
$
|
757,949
|
|
|
|
5.01
|
%
|
|
$
|
1,601,543
|
|
|
$
|
1,601,543
|
|
|
|
4.33
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
Loan Portfolio
The following table analyzes the Corporation’s loans by type of loan, including loans held for
sale, as of December 31, 2007, 2006, 2005, 2004 and 2003.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Total
|
|
|
|
|
Amount
|
|
|
Loans
|
|
|
Amount
|
|
|
Loans
|
|
|
Amount
|
|
|
Loans
|
|
|
Amount
|
|
|
Loans
|
|
|
Amount
|
|
|
Loans
|
|
|
|
|
(Dollars in thousands)
|
|
|
Commercial, industrial and agricultural:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail commercial banking:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Middle-market
|
|
$
|
1,614,751
|
|
|
|
22.8
|
%
|
|
$
|
1,662,566
|
|
|
|
23.9
|
%
|
|
$
|
1,574,459
|
|
|
|
26.1
|
%
|
|
$
|
1,439,609
|
|
|
|
25.9
|
%
|
|
$
|
1,354,879
|
|
|
|
32.2
|
%
|
|
Agricultural
|
|
|
63,204
|
|
|
|
0.9
|
%
|
|
|
59,315
|
|
|
|
0.9
|
%
|
|
|
61,531
|
|
|
|
1.0
|
%
|
|
|
62,198
|
|
|
|
1.1
|
%
|
|
|
62,925
|
|
|
|
1.5
|
%
|
|
SBA
|
|
|
63,825
|
|
|
|
0.9
|
%
|
|
|
66,734
|
|
|
|
1.0
|
%
|
|
|
69,763
|
|
|
|
1.2
|
%
|
|
|
72,963
|
|
|
|
1.3
|
%
|
|
|
72,060
|
|
|
|
1.7
|
%
|
|
Factor liens
|
|
|
18,252
|
|
|
|
0.3
|
%
|
|
|
20,553
|
|
|
|
0.3
|
%
|
|
|
16,696
|
|
|
|
0.3
|
%
|
|
|
16,818
|
|
|
|
0.3
|
%
|
|
|
18,291
|
|
|
|
0.4
|
%
|
|
Other
|
|
|
4,688
|
|
|
|
0.1
|
%
|
|
|
6,965
|
|
|
|
0.1
|
%
|
|
|
40,072
|
|
|
|
0.7
|
%
|
|
|
11,978
|
|
|
|
0.2
|
%
|
|
|
2,754
|
|
|
|
0.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail commercial banking
|
|
|
1,764,720
|
|
|
|
25.0
|
%
|
|
|
1,816,133
|
|
|
|
26.2
|
%
|
|
|
1,762,521
|
|
|
|
29.3
|
%
|
|
|
1,603,566
|
|
|
|
28.8
|
%
|
|
|
1,510,909
|
|
|
|
35.9
|
%
|
|
Corporate banking
|
|
|
765,310
|
|
|
|
10.8
|
%
|
|
|
673,566
|
|
|
|
9.7
|
%
|
|
|
1,205,664
|
|
|
|
20.0
|
%
|
|
|
1,598,443
|
|
|
|
28.8
|
%
|
|
|
753,839
|
|
|
|
17.9
|
%
|
|
Construction
|
|
|
484,237
|
|
|
|
6.8
|
%
|
|
|
435,182
|
|
|
|
6.3
|
%
|
|
|
213,705
|
|
|
|
3.5
|
%
|
|
|
199,799
|
|
|
|
3.6
|
%
|
|
|
209,655
|
|
|
|
5.0
|
%
|
|
Lease Financing
|
|
|
92,641
|
|
|
|
1.3
|
%
|
|
|
132,655
|
|
|
|
1.9
|
%
|
|
|
125,168
|
|
|
|
2.1
|
%
|
|
|
112,152
|
|
|
|
2.0
|
%
|
|
|
105,849
|
|
|
|
2.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Commercial
|
|
|
3,106,908
|
|
|
|
43.9
|
%
|
|
|
3,057,536
|
|
|
|
44.1
|
%
|
|
|
3,307,058
|
|
|
|
54.9
|
%
|
|
|
3,513,960
|
|
|
|
63.2
|
%
|
|
|
2,580,252
|
|
|
|
61.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal (installment and other
loans)
|
|
|
433,490
|
|
|
|
6.1
|
%
|
|
|
412,952
|
|
|
|
5.9
|
%
|
|
|
397,169
|
|
|
|
6.6
|
%
|
|
|
319,204
|
|
|
|
5.7
|
%
|
|
|
287,590
|
|
|
|
6.8
|
%
|
|
Automobile
|
|
|
—
|
|
|
|
0.0
|
%
|
|
|
2
|
|
|
|
0.0
|
%
|
|
|
610
|
|
|
|
0.0
|
%
|
|
|
6,434
|
|
|
|
0.1
|
%
|
|
|
21,232
|
|
|
|
0.5
|
%
|
|
Credit Cards
|
|
|
240,858
|
|
|
|
3.4
|
%
|
|
|
193,260
|
|
|
|
2.8
|
%
|
|
|
169,416
|
|
|
|
2.8
|
%
|
|
|
128,622
|
|
|
|
2.3
|
%
|
|
|
95,362
|
|
|
|
2.3
|
%
|
|
Consumer Finance
|
|
|
611,114
|
|
|
|
8.6
|
%
|
|
|
625,266
|
|
|
|
9.0
|
%
|
|
|
—
|
|
|
|
0.0
|
%
|
|
|
—
|
|
|
|
0.0
|
%
|
|
|
—
|
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Consumer
|
|
|
1,285,462
|
|
|
|
18.1
|
%
|
|
|
1,231,480
|
|
|
|
17.7
|
%
|
|
|
567,195
|
|
|
|
9.4
|
%
|
|
|
454,260
|
|
|
|
8.2
|
%
|
|
|
404,184
|
|
|
|
9.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
2,682,362
|
|
|
|
37.9
|
%
|
|
|
2,649,128
|
|
|
|
38.1
|
%
|
|
|
2,141,358
|
|
|
|
35.6
|
%
|
|
|
1,583,418
|
|
|
|
28.5
|
%
|
|
|
1,219,091
|
|
|
|
29.0
|
%
|
|
Commercial
|
|
|
3,600
|
|
|
|
0.1
|
%
|
|
|
5,412
|
|
|
|
0.1
|
%
|
|
|
6,121
|
|
|
|
0.1
|
%
|
|
|
7,659
|
|
|
|
0.1
|
%
|
|
|
2,836
|
|
|
|
0.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Mortgage
|
|
|
2,685,962
|
|
|
|
38.0
|
%
|
|
|
2,654,540
|
|
|
|
38.2
|
%
|
|
|
2,147,479
|
|
|
|
35.7
|
%
|
|
|
1,591,077
|
|
|
|
28.6
|
%
|
|
|
1,221,927
|
|
|
|
29.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans, net of unearned interest
and deferred fees
|
|
$
|
7,078,332
|
|
|
|
100.0
|
%
|
|
$
|
6,943,556
|
|
|
|
100.0
|
%
|
|
$
|
6,021,732
|
|
|
|
100.0
|
%
|
|
$
|
5,559,297
|
|
|
|
100.0
|
%
|
|
$
|
4,206,363
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The loan portfolio, including loans held for sale, reflected an increase of 1.9% or $134.8 million,
reaching $7.1 billion at December 31, 2007, compared to the figures reported as of December 31,
2006.
The Corporation experienced a growth in construction loan portfolio of $49.1 million or 11.3% year
over year to reach $484.2 million. There was an increase in consumer loans (credit cards and
personal installment loans, excluding consumer finance) of $68.1 million or 11.2% when compared
with the same figures in 2006. For the year ended December 31, 2007 residential mortgage loan
origination was $562.4 million or 38.6%, significantly less than the $915.7 million originated
during the same period in 2006. For the year ended December 31, 2007, mortgage loans sold were
$251.4 million versus $174.5 million during the prior year.
51
Allowance for Loan Losses
The Corporation systematically assesses the overall risks in its loan portfolio and establishes and
maintains an allowance for probable losses thereon. The allowance for loan losses is maintained at
a level sufficient to provide for estimated loan losses based on the evaluation of known and
inherent risks in its loan portfolio. Management evaluates the adequacy of the allowance for loan
losses on a monthly basis. This evaluation involves the exercise of judgment and the use of
assumptions and estimates that are subject to revision, as more information becomes available. In
determining the allowance, management considers the portfolio risk characteristics, prior loss
experience, prevailing and projected economic conditions, loan impairment measurements and the
results of its internal audit and regulatory agencies’ loan reviews. Based on current and expected
economic conditions, the expected level of net loan losses and the methodology established to
evaluate the adequacy of the allowance for loan losses, management considers that the allowance for
loan losses is adequate to absorb probable losses in the Corporation’s loan portfolio.
Commercial and construction loans over a predetermined amount are individually evaluated for
impairment, on a quarterly basis, following the provisions of SFAS No. 114, “Accounting by
Creditors of a Loan.” A loan is impaired when based on current information and events; it is
probable that the Corporation will be unable to collect all amounts due according to the
contractual terms of the loan agreement. The impairment loss, if any, on each individual loan
identified as impaired is measured based on the present value of expected cash flows discounted at
the loan’s effective interest rate, except as a practical expedient, impairment may be measured
based on the loan’s observable market price, or the fair value of the collateral, if the loan is
collateral dependent. Substantially all of the Corporation’s impaired loans are measured on the
basis of the fair value of the collateral, net of estimated disposition costs. The Corporation
maintains a detailed analysis of all loans identified as impaired with their corresponding
allowances and the specific component of the allowance is computed on a quarterly basis. Additions,
deletions or adjustments to the analysis are tracked and formal justification is documented
detailing the rationale for such adjustments.
For small, homogeneous type of loans, a general allowance is computed based on average historical
loss experience or ratios for each corresponding type of loans (consumer, credit cards, residential
mortgages, auto, etc.). The methodology of accounting for all probable losses is made in
accordance with the guidance provided by SFAS No. 5, “Accounting for Contingencies.” In
determining the general allowance, the Corporation applies a loss factor for each type of loan
based on the average historical net charge off for the previous
twelve months for each
portfolio adjusted for other statistical loss estimates, as deemed appropriate. Historical loss
rates are reviewed at least quarterly and adjusted based on changes in actual collections and
charge off experience as well as significant factors that in management’s judgment reflect the
impact of any current conditions on loss recognition. Factors that management considers in the
analysis of the general reserve include the effect of the trends in the nature and volume of loans
(delinquency, charge-offs and non-accrual loans), changes in the mix or type of collateral, asset
quality trends, changes in the internal lending policies and credit standards, collection practices
and examination results from bank regulatory agencies.
The determination of the allowance for loan losses under SFAS No. 5 is based on historical loss
experience by loan type, management judgment of the quantitative factors (historical net
charge-offs, statistical loss estimates, etc.), as well as qualitative factors (current economic
conditions, portfolio composition,
delinquency trends, industry concentrations, etc.), which result in the final determination of the
provision for loan losses to maintain a level of allowance for loan losses deemed to be adequate.
The Corporation’s methodology for allocating the allowance among the different parts of the
portfolio or different elements of the allowance is based on the historical loss percentages for
each type or pool of loan (consumer, commercial, construction, mortgage and other), after assigning
the specific allowances for impaired loans on an individual review process. The sum of specific
allowances for impaired loans plus the general allowances for each type of loan not specifically
examined constitutes the total allowance for loan losses at the end of any reporting period.
An additional or unallocated reserve is maintained to cover the effect of probable economic
deterioration above and beyond what is reflected in the asset-specific component of the allowance.
This component represents management’s view that given the complexities of the lending portfolio
and the assessment process, including the inherent imprecision in the financial models used in the
loss forecasting process, there are estimable losses that have been incurred but not yet
specifically identified, and as a result not fully provided for in the asset-specific and general
valuation components of the allowance. The level of the unallocated reserve may change periodically
after evaluating factors impacting assumptions used in the calculation of the asset specific
component of the reserve.
On a quarterly basis, management reviews its determination of the allowance for loan losses which
includes the specific allowance computed according to the provisions of SFAS No. 114 and the
general allowance for small, homogenous type of
52
loans, which is based on historical loss
percentages for each type or pool of loan. This analysis also considers loans classified by the
internal loan review department, the internal auditors, the in-house Watch System Unit, and banking
regulators.
The Corporation has not changed any aspects of its overall approach in the determination of the
allowance for loan losses, and there have been no material changes in assumptions or estimation
techniques, as compared to prior periods. The methodology for determining the allowance for loan
losses for the recently acquired Island Finance portfolio is the same as the methodology used in
determining the allowance for the rest of the Corporation’s consumer portfolios.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
(Dollars in thousands)
|
|
|
Balance at beginning of year
|
|
$
|
106,863
|
|
|
$
|
66,842
|
|
|
$
|
69,177
|
|
|
$
|
69,693
|
|
|
$
|
56,906
|
|
|
Allowance acquired (Island Finance)
|
|
|
—
|
|
|
|
35,104
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Provision for loan losses
|
|
|
147,824
|
|
|
|
65,583
|
|
|
|
20,400
|
|
|
|
26,270
|
|
|
|
49,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
254,687
|
|
|
|
167,529
|
|
|
|
89,577
|
|
|
|
95,963
|
|
|
|
106,822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses charged to the allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
10,375
|
|
|
|
9,792
|
|
|
|
8,044
|
|
|
|
19,250
|
|
|
|
9,198
|
|
|
Construction
|
|
|
2,710
|
|
|
|
—
|
|
|
|
1,438
|
|
|
|
—
|
|
|
|
499
|
|
|
Mortgage
|
|
|
1,768
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Consumer
|
|
|
29,281
|
|
|
|
16,679
|
|
|
|
17,351
|
|
|
|
18,969
|
|
|
|
36,544
|
|
|
Consumer Finance
|
|
|
44,484
|
|
|
|
38,345
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Leasing
|
|
|
2,742
|
|
|
|
2,071
|
|
|
|
986
|
|
|
|
1,658
|
|
|
|
1,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91,360
|
|
|
|
66,887
|
|
|
|
27,819
|
|
|
|
39,877
|
|
|
|
47,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
1,192
|
|
|
|
2,463
|
|
|
|
1,686
|
|
|
|
5,271
|
|
|
|
4,478
|
|
|
Construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
433
|
|
|
Mortgage
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7
|
|
|
Consumer
|
|
|
904
|
|
|
|
1,677
|
|
|
|
2,646
|
|
|
|
7,341
|
|
|
|
5,127
|
|
|
Consumer Finance
|
|
|
1,088
|
|
|
|
1,314
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Leasing
|
|
|
441
|
|
|
|
767
|
|
|
|
752
|
|
|
|
479
|
|
|
|
501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,625
|
|
|
|
6,221
|
|
|
|
5,084
|
|
|
|
13,091
|
|
|
|
10,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans charged-off
|
|
|
87,735
|
|
|
|
60,666
|
|
|
|
22,735
|
|
|
|
26,786
|
|
|
|
37,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
166,952
|
|
|
$
|
106,863
|
|
|
$
|
66,842
|
|
|
$
|
69,177
|
|
|
$
|
69,693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses to year-end loans
|
|
|
2.36
|
%
|
|
|
1.54
|
%
|
|
|
1.11
|
%
|
|
|
1.24
|
%
|
|
|
1.66
|
%
|
|
Recoveries to charge-offs
|
|
|
3.97
|
%
|
|
|
9.30
|
%
|
|
|
18.28
|
%
|
|
|
32.83
|
%
|
|
|
22.12
|
%
|
|
Net charge-offs to average loans
|
|
|
1.25
|
%
|
|
|
0.93
|
%
|
|
|
0.38
|
%
|
|
|
0.56
|
%
|
|
|
0.91
|
%
|
|
Allowance for loan losses to net charge-offs
|
|
|
190.29
|
%
|
|
|
176.15
|
%
|
|
|
294.00
|
%
|
|
|
258.26
|
%
|
|
|
187.71
|
%
|
|
Allowance for loan losses to non-performing
loans
|
|
|
56.70
|
%
|
|
|
100.01
|
%
|
|
|
90.72
|
%
|
|
|
79.05
|
%
|
|
|
70.85
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
168.49
|
%
|
|
|
108.11
|
%
|
|
|
89.73
|
%
|
|
|
98.07
|
%
|
|
|
134.44
|
%
|
|
Average loans
|
|
|
2.10
|
%
|
|
|
1.00
|
%
|
|
|
0.34
|
%
|
|
|
0.55
|
%
|
|
|
1.23
|
%
|
Island
Finance loans acquired pursuant to the Asset Purchase Agreement on
February 28, 2006 was
subject to a guarantee by Wells Fargo of up to $21.0 million (maximum reimbursement amount) for net
losses in excess of $34.0 million, occurring on or prior to the 15th month anniversary of the
acquisition. The Corporation was provided with an additional guarantee of up to $7.0 million for net
losses incurred in the acquired loan portfolio in excess of $34.0 million during months 16 to 18 of
the anniversary, subject to the maximum aggregate reimbursement amount of $21.0 million. The
Corporation claimed and recovered $12.8 million and $8.2 million for 2007 and 2006, respectively, from Wells
Fargo’s guarantee.
53
During the third quarter of 2004, the Corporation reclassified its reserves related to unfunded
lending commitments and standby letters of credit from the allowance for the loan losses to other
liabilities. Prior period amounts have been reclassified to conform to the current presentation.
Changes in the reserve for unfunded commitments and standby letters of credit were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
(Dollars in thousands)
|
|
|
Balance at beginning of year
|
|
$
|
1,864
|
|
|
$
|
1,666
|
|
|
$
|
1,269
|
|
|
$
|
879
|
|
|
$
|
1,050
|
|
|
Provision (credit) for unfunded lending
commitments and stand by letters of credit
|
|
|
(29
|
)
|
|
|
198
|
|
|
|
397
|
|
|
|
390
|
|
|
|
(171
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
1,835
|
|
|
$
|
1,864
|
|
|
$
|
1,666
|
|
|
$
|
1,269
|
|
|
$
|
879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 compared to 2006.
The allowance for loan losses increased $60.1 million to $167.0 million
from $106.9 million as of December 31, 2006. The prolonged economic recession and uncertainties in
Puerto Rico caused reduced lending activity and impacted the quality of the Corporation’s loan
portfolio, increasing delinquency rates and charge offs.
The Corporation’s allowance for loan losses was $167.0 million or 2.36% of period-end loans at
December 31, 2007, 82 basis points higher than the level 1.54% reported as of December 31, 2006.
The increase in this ratio was partially due to an increment in non-performing loans during the
year. Non-performing loans increased $187.6 million or 175.6% to
$294.4 million as of December 31,
2007 from $106.9 million as of December 31, 2006. The non-performing loans of Island Finance
reached $37.4 million, a $12.7 million or 51.3% increase as of December 31, 2007 when compared the
prior year. The $294.4 million of non-performing loans was
comprised of $257.0 million of
commercial, residential and consumer loans in the Bank portfolio and $37.4 million in the consumer
finance portfolio.
The ratio
of allowance for loan losses to non-performing loans was 56.70% and 100.01% for the years
ended December 31, 2007 and 2006, respectively, decreasing 43.31 percentage points due to higher
level of non-performing figures reported. Excluding non-performing mortgage loans, this ratio was
82.32% as of December 31, 2007, reflecting a decrease of 153.51 percentage points when compared
with 235.83% as of December 31, 2006.
The annualized ratio of net charge-offs to average loans for the year ended December 31, 2007 was
1.25%, increasing 32 basis points from 0.93% for the year ended December 31, 2006. This change was
due to an increment in net charge-offs of $27.1 million or 44.6% when compared with figures
reported in 2006. This increase was mainly due to an increase in consumer loan charge-offs of $18.7
million in 2007.
2006 compared to 2005
. The allowance for loan losses increased $40.0 million to $106.9 million
from $66.8 million as of December 31, 2005. The most significant change in the allowance for loan
losses was due to the acquisition of Island Finance which had an allowance for loan losses of $41.3
million as of December 31, 2006.
The Corporation’s allowance for loan losses was $106.7 million or 1.54% of period-end loans at
December 31, 2006, a 43 basis points increase over 1.11% reported as of December 31, 2005. The
increase in this ratio was partially due to an increment in non-performing loans during the period.
Non-performing loans increased $33.2 million or 45.0% to $106.9 million as of December 31, 2006
from $73.7 million as of December 31, 2005. The non-performing loans of Island Finance portfolio
reached $24.7 million at December 31, 2006.
The ratio of allowance for loan losses to non-performing loans reflected an increase of 929 basis
points to 100.01% during the year ended 2006 when compared to 90.72% for the same period in 2005.
This increase was a result of an increase in the provision for loans losses related to Island
Finance portfolio. Excluding non-performing mortgage loans, this ratio is 235.8% and 235.5% as of
December 31, 2006 and 2005, respectively.
54
The annualized ratio of net charge-off to average loans for the year ended December 31, 2006 was
0.93%, increasing 55 basis points from 0.38% for the year ended December 31, 2005. This change was
due to an increment in average gross loans of $0.6 billion or 10.0% when compared with figures
reported in 2005, related to the Island Finance loan portfolio acquired. Losses charged to the
allowance amounted to $66.9 million in 2006, an increase of $39.1 million when compared $27.8
million of losses charged to the allowance in 2005. This increase was due to Island Finance
charge-offs of $38.3 million in 2006.
Broken down by major loan categories, the allowance for loan losses for each of the five years in
the period ended December 31, 2007 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
% of loans
|
|
|
|
|
|
|
% of loans
|
|
|
|
|
|
|
% of loans
|
|
|
|
|
|
|
% of loans
|
|
|
|
|
|
|
% of loans
|
|
|
|
|
|
|
|
|
in each
|
|
|
|
|
|
|
in each
|
|
|
|
|
|
|
in each
|
|
|
|
|
|
|
in each
|
|
|
|
|
|
|
in each
|
|
|
|
|
|
|
|
|
category to
|
|
|
|
|
|
|
category to
|
|
|
|
|
|
|
category to
|
|
|
|
|
|
|
category to
|
|
|
|
|
|
|
category to
|
|
|
|
|
Amount
|
|
|
Total Loans
|
|
|
Amount
|
|
|
Total Loans
|
|
|
Amount
|
|
|
Total Loans
|
|
|
Amount
|
|
|
Total Loans
|
|
|
Amount
|
|
|
Total Loans
|
|
|
|
|
(Dollars in thousands)
|
|
|
Commercial
|
|
$
|
29,883
|
|
|
|
35.8
|
%
|
|
$
|
29,846
|
|
|
|
49.3
|
%
|
|
$
|
27,765
|
|
|
|
49.3
|
%
|
|
$
|
29,469
|
|
|
|
57.6
|
%
|
|
$
|
26,219
|
|
|
|
53.8
|
%
|
|
Construction
|
|
|
23,735
|
|
|
|
6.8
|
%
|
|
|
3,128
|
|
|
|
3.5
|
%
|
|
|
1,456
|
|
|
|
3.5
|
%
|
|
|
1,208
|
|
|
|
3.6
|
%
|
|
|
1,194
|
|
|
|
5.0
|
%
|
|
Consumer
|
|
|
33,641
|
|
|
|
9.5
|
%
|
|
|
20,099
|
|
|
|
9.4
|
%
|
|
|
30,664
|
|
|
|
9.4
|
%
|
|
|
30,832
|
|
|
|
8.2
|
%
|
|
|
33,751
|
|
|
|
9.6
|
%
|
|
Consumer Finance
|
|
|
68,359
|
|
|
|
8.6
|
%
|
|
|
41,281
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Mortgage
|
|
|
7,379
|
|
|
|
38.0
|
%
|
|
|
9,249
|
|
|
|
35.7
|
%
|
|
|
2,415
|
|
|
|
35.7
|
%
|
|
|
4,250
|
|
|
|
28.6
|
%
|
|
|
3,318
|
|
|
|
29.1
|
%
|
|
Lease financing
|
|
|
1,292
|
|
|
|
1.3
|
%
|
|
|
555
|
|
|
|
2.1
|
%
|
|
|
2,128
|
|
|
|
2.1
|
%
|
|
|
2,068
|
|
|
|
2.0
|
%
|
|
|
2,922
|
|
|
|
2.5
|
%
|
|
Unallocated
|
|
|
2,663
|
|
|
|
—
|
|
|
|
2,705
|
|
|
|
—
|
|
|
|
2,414
|
|
|
|
—
|
|
|
|
1,350
|
|
|
|
—
|
|
|
|
2,289
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
166,952
|
|
|
|
100.0
|
%
|
|
$
|
106,863
|
|
|
|
100.0
|
%
|
|
$
|
66,842
|
|
|
|
100.0
|
%
|
|
$
|
69,177
|
|
|
|
100.0
|
%
|
|
$
|
69,693
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under the caption “Unallocated” the Corporation maintains an unallocated reserve for loan losses of
$2.7 million as of December 31, 2007. The unallocated reserve is maintained to cover the effect of
probable economic deterioration above and beyond what is reflected in the asset-specific component
of the allowance. This component represents management’s view that given the complexities of the
lending portfolio and the assessment process, including the inherent imprecision in the financial
models used in the loss forecasting process, there are estimable losses that have been incurred but
not yet specifically identified, and as a result not fully provided for in the asset-specific
component of the allowance. The level of the unallocated reserve may change periodically after
evaluating factors impacting assumptions used in the calculation of the asset specific component of
the reserve.
At December 31, 2007, 2006 and 2005, the portion of the allowance for loan losses related to
impaired loans was $25.6 million, $4.4 million and $2.2 million, respectively. Please refer to
Notes 1 and 5 to the consolidated financial statements for further information.
Liabilities
The principal sources of funding for the Corporation are its equity capital, core deposits from
retail and commercial clients, and wholesale deposits and borrowings raised in the interbank and
commercial markets.
As of December 31, 2007, total liabilities amounted $8.6 billion, remaining basically flat when
compared to figures reported as of December 31, 2006. There were increases in federal funds sold
and other borrowings of $323.7 million or 19.9% and commercial paper of $74.9 million or 35.8% as
of December 31, 2007. These increases were partially offset by decreases in securities sold under
agreements to repurchase and interest bearing deposits of $195.0 or 23.5% and $162.6 million or
3.6%, respectively. Deposits of $5.2 billion at December 31, 2007 reflected a decrease of $153.3
million or 2.9%, compared to deposits of $5.3 billion as of December 31, 2006, which comprised a
decrease in customer deposits of $263.4 million or 6.7% offset by an increase in brokered deposits
of $110.6 million or 8.2%.
On October 3, 2007, the Corporation and SFS, entered into a Bridge Facility Agreement (the
“Facility”) with National Australia Bank Limited, through its offshore banking unit (the “Lender”).
The proceeds of the Facility were used to refinance the outstanding indebtedness incurred under the
previously announced agreement among the Corporation, SFS and Banco Santander Puerto Rico, and for
general corporate purposes. Under the Facility, the Corporation and SFS had available $235 million
and $465 million, respectively, all of which was drawn on October 3, 2007. The amounts drawn under
the Facility
55
(the “Loan”) bear interest at an annual rate equal to the applicable LIBOR rate plus
0.265% per annum, commencing on the date of the initial drawdown. Interest under the Loan is
payable in monthly interest periods due on the 24
th
day of each month, with the first
monthly interest payment due on November 24, 2007. The Corporation and SFS did not pay any facility
fee or commission to the Lender in connection with the Loan. The entire principal balance of the
Loan is due and payable on March 24, 2008.
Upon the occurrence and during the continuance of an Event of Default (as defined in the Facility)
under the Facility, the Lender shall have the right to declare the outstanding balance of the Loan,
together with
accrued interest and any other amount owing to the Lender, 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 Facility are several and not joint. However, the Corporation and SFS are jointly and severally
responsible for all other amounts payable under the Facility. All amounts payable by the
Corporation and SFS under the Facility shall be made without set-off or counter-claim, and free and
clear of any withholding or deduction in respect of taxes, levies, imposts, deductions, charges,
withholdings or duties of any nature imposed or levied on such payments. The Loan is guaranteed by
Santander Spain. The Corporation and SFS will each pay Santander Spain a guarantee fee equal to 10
basis points (0.1%) of the principal amount of the Loan.
The Corporation also completed the private placement of $125 million of Trust Preferred Securities
(“Preferred Securities”) and issued Junior Subordinated Debentures in the aggregate principal
amount of $129 million in connection with the issuance of the Preferred Securities. The Preferred
Securities are fully and unconditionally guaranteed (to the extent described in the guarantee
agreement between the Corporation and the guarantee trustee, for the benefit of the holders from
time to time of the Preferred Securities) by the Corporation. The Trust Preferred Securities were
acquired by an affiliate of the Corporation. In connection with the issuance of the Preferred
Securities, the Corporation issued an aggregate principal amount of $129,000,000 of its 7.00%
Junior Subordinated Debentures, Series A, due July 1, 2037.
The following table sets forth the Corporation’s average daily balance of liabilities for the years
ended December 31, 2007, 2006 and 2005 by source, together with the average interest rates paid
thereon.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
Average
|
|
|
Total
|
|
|
Average
|
|
|
Average
|
|
|
Total
|
|
|
Average
|
|
|
Average
|
|
|
Total
|
|
|
Average
|
|
|
|
|
Balance
|
|
|
Liabilities
|
|
|
Cost
|
|
|
Balance
|
|
|
Liabilities
|
|
|
Cost
|
|
|
Balance
|
|
|
Liabilities
|
|
|
Cost
|
|
|
|
|
(Dollars in thousands)
|
|
|
Savings deposits
|
|
$
|
1,715,631
|
|
|
|
19.9
|
%
|
|
|
3.02
|
%
|
|
$
|
1,861,167
|
|
|
|
22.5
|
%
|
|
|
2.66
|
%
|
|
$
|
1,945,095
|
|
|
|
25.2
|
%
|
|
|
2.00
|
%
|
|
Time deposits
|
|
|
2,820,495
|
|
|
|
32.7
|
%
|
|
|
4.95
|
%
|
|
|
2,645,357
|
|
|
|
32.0
|
%
|
|
|
4.68
|
%
|
|
|
2,473,737
|
|
|
|
32.1
|
%
|
|
|
3.37
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits
|
|
|
4,536,126
|
|
|
|
52.6
|
%
|
|
|
4.22
|
%
|
|
|
4,506,524
|
|
|
|
54.6
|
%
|
|
|
3.85
|
%
|
|
|
4,418,832
|
|
|
|
57.3
|
%
|
|
|
2.77
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds, repos, and
commercial paper and other borrowings
|
|
|
2,805,003
|
|
|
|
32.5
|
%
|
|
|
5.49
|
%
|
|
|
2,611,231
|
|
|
|
31.6
|
%
|
|
|
5.30
|
%
|
|
|
2,295,932
|
|
|
|
29.8
|
%
|
|
|
3.73
|
%
|
|
Term and subordinated notes
|
|
|
284,944
|
|
|
|
3.3
|
%
|
|
|
6.02
|
%
|
|
|
265,489
|
|
|
|
3.2
|
%
|
|
|
5.96
|
%
|
|
|
119,240
|
|
|
|
1.5
|
%
|
|
|
3.74
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total borrowings
|
|
|
3,089,947
|
|
|
|
35.8
|
%
|
|
|
5.54
|
%
|
|
|
2,876,720
|
|
|
|
34.8
|
%
|
|
|
5.36
|
%
|
|
|
2,415,172
|
|
|
|
31.3
|
%
|
|
|
3.73
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
7,626,073
|
|
|
|
88.4
|
%
|
|
|
4.75
|
%
|
|
|
7,383,244
|
|
|
|
89.4
|
%
|
|
|
4.44
|
%
|
|
|
6,834,004
|
|
|
|
88.6
|
%
|
|
|
3.11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing deposits
|
|
|
685,875
|
|
|
|
8.0
|
%
|
|
|
0.00
|
%
|
|
|
548,163
|
|
|
|
6.6
|
%
|
|
|
0.00
|
%
|
|
|
663,688
|
|
|
|
8.6
|
%
|
|
|
0.00
|
%
|
|
Other liabilities
|
|
|
310,228
|
|
|
|
3.6
|
%
|
|
|
0.00
|
%
|
|
|
325,620
|
|
|
|
3.9
|
%
|
|
|
0.00
|
%
|
|
|
212,074
|
|
|
|
2.8
|
%
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest-bearing liabilities
|
|
|
996,103
|
|
|
|
11.6
|
%
|
|
|
0.00
|
%
|
|
|
873,783
|
|
|
|
10.6
|
%
|
|
|
0.00
|
%
|
|
|
875,762
|
|
|
|
11.4
|
%
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
$
|
8,622,176
|
|
|
|
100.0
|
%
|
|
|
4.20
|
%
|
|
$
|
8,257,027
|
|
|
|
100.0
|
%
|
|
|
3.97
|
%
|
|
$
|
7,709,766
|
|
|
|
100.0
|
%
|
|
|
2.76
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007, total deposits were $5.2 billion, reflecting a decrease of $153.3 million,
or 2.9%, over deposits of $5.3 billion as of December 31, 2006.
56
The following tables set forth additional details on the Corporation’s average deposit base for the
years ended December 31, 2007, 2006 and 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
Average Total Deposits
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
(Dollars in thousands)
|
|
|
Private Demand
|
|
$
|
684,923
|
|
|
$
|
547,416
|
|
|
$
|
626,829
|
|
|
Public Demand
|
|
|
953
|
|
|
|
747
|
|
|
|
36,859
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing
|
|
|
685,876
|
|
|
|
548,163
|
|
|
|
663,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings Accounts
|
|
|
657,044
|
|
|
|
792,791
|
|
|
|
859,623
|
|
|
NOW and Super NOW accounts
|
|
|
401,104
|
|
|
|
412,696
|
|
|
|
470,595
|
|
|
Government NOW accounts
|
|
|
657,483
|
|
|
|
655,680
|
|
|
|
614,877
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Savings Accounts
|
|
|
1,715,631
|
|
|
|
1,861,167
|
|
|
|
1,945,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under $100,000
|
|
|
262,561
|
|
|
|
259,255
|
|
|
|
231,916
|
|
|
$100,000 and over
|
|
|
2,557,934
|
|
|
|
2,386,102
|
|
|
|
2,241,821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Time Deposits
|
|
|
2,820,495
|
|
|
|
2,645,357
|
|
|
|
2,473,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Interest Bearing Deposits
|
|
|
4,536,126
|
|
|
|
4,506,524
|
|
|
|
4,418,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Deposits
|
|
$
|
5,222,002
|
|
|
$
|
5,054,687
|
|
|
$
|
5,082,520
|
|
|
|
|
|
|
|
|
|
|
|
|
The Corporation’s most important source of funding is its costumer deposits. Total average deposits
reached $5.2 billion for the year ended December 31, 2007, an increase of 3.3% compared with
figures reported in 2006. This increment was mainly due to an increase of $175.1 million or 6.6% in
average time deposits and $137.7 million or 25.1% in average non-interest bearing deposits. These
increases were offset by $145.5 million or 7.8% decrease in average savings and NOW accounts.
Average non-interest bearing deposits are the least expensive sources of funding used by
Corporation and represent 8.0%, 6.6% and 8.6% of the Corporation average total liabilities for the
years ended December 31, 2007, 2006 and 2005. Total average deposits represented 60.6%, 61.2% and
65.9% of the total average liabilities of the Corporation as of December 31, 2007, 2006 and 2005,
respectively.
The following table sets forth the maturities of time deposits of $100,000 or more as of December
31, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(Dollars in thousands)
|
|
|
Three months or less
|
|
$
|
1,105,405
|
|
|
$
|
896,638
|
|
|
Over three months through six months
|
|
|
365,957
|
|
|
|
302,716
|
|
|
Over six months through twelve months
|
|
|
79,576
|
|
|
|
377,998
|
|
|
Over twelve months
|
|
|
948,841
|
|
|
|
963,659
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,499,779
|
|
|
$
|
2,541,011
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2007, the Corporation’s customer deposits (average balance)
consisted of $685.9 million in non interest-bearing-checking accounts and $4.5 billion of
interest-bearing deposits. The increase in average interest-bearing deposits was primarily in time
deposits greater than $100,000, which reflected an increment of 7.2% or $161.2 million.
57
The average balance of the Corporation’s total borrowings increased 7.4% or $213.2 million from
$2.9 billion for the year ended December 31, 2006 to $3.1 billion for the year ended December 31,
2007. This increase was due to increments in average FHLB Advances of $279.3 million and average
federal funds purchased and other borrowings of $72.7 million. There was also an increase in
average commercial paper of $5.5 million. These increases were offset by a reduction in average
securities sold under agreements to repurchase of $163.8 million.
The Corporation’s current funding strategy is to continue to use various alternative funding
sources taking into account their relative cost, their availability and the general asset and
liability management strategy of the Corporation, placing a stronger emphasis on obtaining client
deposits and reducing reliance on borrowings maintaining adequate levels of liquidity and to meet
funding requirements.
For further information regarding the Corporation’s borrowings, see Notes 11 and 12 to the
consolidated financial statements.
Capital and Dividends
The Corporation does not expect favorable or unfavorable trends that would materially affect our
capital resources.
As an investment-grade rated entity by several nationally recognized rating agencies, the
Corporation has access to a variety of capital issuance alternatives in the United States and
Puerto Rico capital markets. The Corporation continuously monitors its capital raising
alternatives. The Corporation may issue additional capital in the future, as needed, to maintain
its “well-capitalized” status.
Stockholders’ equity was $536.5 million or 5.9% of total assets at December 31, 2007, compared to
$579.2 million or 6.3% of total assets at December 31, 2006. The $42.7 million change in
stockholders’ equity was composed by net loss of $36.2 million, dividends declared $29.8 million
and cumulative effect of adoption of FIN No. 48 of $0.5 million. This reduction was offset by an
increase in accumulated other comprehensive gain of $19.7 million and stock incentive plan expense
recognized as capital contribution of $4.2 million for the period.
During 2007 and 2006 the Corporation declared and paid annual cash dividends of $0.64 per common
share to common shareholders, respectively. The Corporation’s current annualized dividend yield is
7.4% and 3.6% for December 31, 2007 and 2006, respectively.
The Corporation adopted and implemented various Stock Repurchase Programs in May 2000, December
2000 and June 2002. Under these programs the Corporation acquired 3% of the then outstanding
common shares. During November 2002, the Corporation started a fourth Stock Repurchase program
under which it may acquire 3% of its outstanding common shares. In November 2002, the Board of
Directors authorized the Corporation to repurchase up to 928,204 shares, or approximately 3%, of
its shares of outstanding common stock. The Board felt that the Corporation’s shares of common
stock represented an attractive investment at prevailing market prices at the time of the adoption
of the common stock repurchase program and that, given the relatively small amount of the program,
the stock repurchases would not have a significant impact on liquidity and capital positions. The
program has no time limitation and management is authorized to effect repurchases at its
discretion. The authorization permits the Corporation to repurchase shares from time to time in the
open market or in privately negotiated transactions. The timing and amount
of any repurchases will depend on many factors, including the Corporation’s capital structure, the
market price of the common stock and overall market conditions. All of the repurchased shares will
be held by the Corporation as treasury stock and reserved for future issuance for general corporate
purposes.
During the years ended December 31, 2007 and 2006, the Corporation did not repurchase any shares of
common stock. As of December 31, 2007, the Corporation had repurchased 4,011,260 shares of its
common stock under these programs at a cost of $67.6 million. Management believes that the
repurchase program has not had a significant effect on the Corporation’s liquidity and capital
positions.
The Corporation has a Dividend Reinvestment Plan and a Cash Purchase Plan wherein holders of common
stock have the opportunity to automatically invest cash dividends to purchase more shares of the
Corporation’s common stock. Shareholders may also make, as frequently as once a month, optional
cash payments for investment in additional shares of the Corporation’s common stock.
At December 31, 2007, the Corporation’s common stock price per share was $8.66 representing an
aggregate shareholder value of $403.9 million (including affiliated holdings).
58
The Corporation is subject to various regulatory capital requirements administered by federal
banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Corporation’s consolidated financial statements. The regulations require
the Corporation to meet specific capital guidelines that involve quantitative measures of assets,
liabilities, and certain off-balance sheet items as calculated under regulatory accounting
practices. The Corporation’s capital classification is also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors.
The Corporation’s common stock is listed on the New York Stock Exchange (“NYSE”) and on the Madrid
Stock Exchange (LATIBEX). The symbol on the NYSE and on the LATIBEX for the common stock is “SBP”
and “XSBP,” respectively. There were approximately 132 holders of record of the Corporation’s
common stock as of December 31, 2007, not including beneficial owners whose shares are held in
names of brokers or other nominees.
As of December 31, 2007, the Bank was classified as a “well capitalized” institution under the
regulatory framework for prompt corrective action. At December 31, 2007, the Corporation continued
to exceed the regulatory risk-based capital requirements. Tier I capital to risk-adjusted assets
and total capital ratios of the Corporation at December 31, 2007 were 7.43% and 10.56%,
respectively, and the leverage ratio was 5.38%. Refer to notes 1 and 24 in the consolidated
financial statements for additional information.
Capital Adequacy Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To be Well Capitalized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For Minimum Capital
|
|
|
|
|
|
Under Prompt Corrective
|
|
|
|
Actual
|
|
|
|
|
|
Adequacy
|
|
|
|
|
|
Action Provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
Ratio
|
|
|
|
|
|
Amount
|
|
Ratio
|
|
|
|
Amount
|
|
Ratio
|
|
|
|
|
|
Must be
|
|
Must be
|
|
|
|
|
|
Must be
|
|
Must be
|
|
|
|
(Dollars in thousands)
|
|
December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to Risk Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Santander BanCorp
|
|
$
|
696,909
|
|
|
|
10.56
|
%
|
|
|
>
|
|
|
$
|
528,134
|
|
|
|
>
8.00
|
%
|
|
|
|
|
|
|
N/A
|
|
|
|
|
|
|
Banco Santander
|
|
|
647,482
|
|
|
|
10.91
|
%
|
|
|
>
|
|
|
|
474,647
|
|
|
|
>
8.00
|
%
|
|
|
>
|
|
|
$
|
593,309
|
|
|
|
>
10.00
|
%
|
|
Tier I (to Risk Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Santander BanCorp
|
|
|
490,259
|
|
|
|
7.43
|
%
|
|
|
>
|
|
|
|
264,067
|
|
|
|
>
4.00
|
%
|
|
|
|
|
|
|
N/A
|
|
|
|
|
|
|
Banco Santander
|
|
|
573,022
|
|
|
|
9.66
|
%
|
|
|
>
|
|
|
|
237,324
|
|
|
|
>
4.00
|
%
|
|
|
>
|
|
|
|
355,986
|
|
|
|
>
6.00
|
%
|
|
Leverage (to average assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Santander BanCorp
|
|
|
490,259
|
|
|
|
5.38
|
%
|
|
|
>
|
|
|
|
273,297
|
|
|
|
>
3.00
|
%
|
|
|
|
|
|
|
N/A
|
|
|
|
|
|
|
Banco Santander
|
|
|
573,022
|
|
|
|
6.84
|
%
|
|
|
>
|
|
|
|
251,493
|
|
|
|
>
3.00
|
%
|
|
|
>
|
|
|
|
419,155
|
|
|
|
>
5.00
|
%
|
|
December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to Risk Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Santander BanCorp
|
|
$
|
723,269
|
|
|
|
10.93
|
%
|
|
|
>
|
|
|
$
|
529,191
|
|
|
|
>
8.00
|
%
|
|
|
|
|
|
|
N/A
|
|
|
|
|
|
|
Banco Santander
|
|
|
651,350
|
|
|
|
11.10
|
%
|
|
|
>
|
|
|
|
469,346
|
|
|
|
>
8.00
|
%
|
|
|
>
|
|
|
$
|
586,683
|
|
|
|
>
10.00
|
%
|
|
Tier I (to Risk Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Santander BanCorp
|
|
|
520,794
|
|
|
|
7.87
|
%
|
|
|
>
|
|
|
|
264,596
|
|
|
|
>
4.00
|
%
|
|
|
|
|
|
|
N/A
|
|
|
|
|
|
|
Banco Santander
|
|
|
583,941
|
|
|
|
9.95
|
%
|
|
|
>
|
|
|
|
234,673
|
|
|
|
>
4.00
|
%
|
|
|
>
|
|
|
|
352,010
|
|
|
|
>
6.00
|
%
|
|
Leverage (to average assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Santander BanCorp
|
|
|
520,794
|
|
|
|
5.81
|
%
|
|
|
>
|
|
|
|
269,000
|
|
|
|
>
3.00
|
%
|
|
|
|
|
|
|
N/A
|
|
|
|
|
|
|
Banco Santander
|
|
|
583,941
|
|
|
|
7.15
|
%
|
|
|
>
|
|
|
|
244,857
|
|
|
|
>
3.00
|
%
|
|
|
>
|
|
|
|
408,095
|
|
|
|
>
5.00
|
%
|
|
December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to Risk Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Santander BanCorp
|
|
$
|
726,939
|
|
|
|
12.30
|
%
|
|
|
>
|
|
|
$
|
472,889
|
|
|
|
>
8.00
|
%
|
|
|
|
|
|
|
N/A
|
|
|
|
|
|
|
Banco Santander
|
|
|
638,181
|
|
|
|
11.05
|
%
|
|
|
>
|
|
|
|
462,187
|
|
|
|
>
8.00
|
%
|
|
|
>
|
|
|
$
|
577,734
|
|
|
|
>
10.00
|
%
|
|
Tier I (to Risk Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Santander BanCorp
|
|
|
537,319
|
|
|
|
9.09
|
%
|
|
|
>
|
|
|
|
236,445
|
|
|
|
>
4.00
|
%
|
|
|
|
|
|
|
N/A
|
|
|
|
|
|
|
Banco Santander
|
|
|
570,056
|
|
|
|
9.87
|
%
|
|
|
>
|
|
|
|
231,093
|
|
|
|
>
4.00
|
%
|
|
|
>
|
|
|
|
346,640
|
|
|
|
>
6.00
|
%
|
|
Leverage (to average assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Santander BanCorp
|
|
|
537,319
|
|
|
|
6.51
|
%
|
|
|
>
|
|
|
|
247,593
|
|
|
|
>
3.00
|
%
|
|
|
|
|
|
|
N/A
|
|
|
|
|
|
|
Banco Santander
|
|
|
570,056
|
|
|
|
6.98
|
%
|
|
|
>
|
|
|
|
245,222
|
|
|
|
>
3.00
|
%
|
|
|
>
|
|
|
|
408,703
|
|
|
|
>
5.00
|
%
|
59
Goodwill and Intangible Assets
Total goodwill and intangibles at December 31, 2007, 2006 and 2005 consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
(Dollars in millions)
|
|
|
Mortgage Servicing Rights
|
|
$
|
9.6
|
|
|
$
|
8.4
|
|
|
$
|
8.0
|
|
|
Advisory Servicing Rights
|
|
|
1.6
|
|
|
|
1.8
|
|
|
|
1.3
|
|
|
Intangible Pension Asset
|
|
|
—
|
|
|
|
—
|
|
|
|
0.8
|
|
|
Trade Name
|
|
|
18.3
|
|
|
|
23.7
|
|
|
|
—
|
|
|
Customer Relationships
|
|
|
—
|
|
|
|
9.7
|
|
|
|
—
|
|
|
Non-compete Agreement
|
|
|
0.7
|
|
|
|
3.8
|
|
|
|
—
|
|
|
Goodwill:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail Banking
|
|
|
10.5
|
|
|
|
10.5
|
|
|
|
10.5
|
|
|
Wealth Management
|
|
|
24.3
|
|
|
|
24.3
|
|
|
|
24.3
|
|
|
Consumer Finance
|
|
|
86.7
|
|
|
|
113.5
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
151.7
|
|
|
$
|
195.7
|
|
|
$
|
44.9
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill and intangible assets were $121.5 million and $30.2 million at December 31, 2007, compared
with $148.3 million and $47.4 million at December 31, 2006. The decrease in Goodwill and intangible
assets was principally due to non-cash impairment charges of goodwill and other intangibles of
$43.4 million for the consumer finance segment recognized during 2007.
Goodwill assigned to the Commercial Banking segment is related to the acquisition of Banco Central
Hispano Puerto Rico in 1996, the goodwill assigned to the Wealth Management segment is related to
the acquisition of Merrill Lynch’s retail brokerage business in Puerto Rico by Santander Securities
Corporation in 2000 and goodwill assigned to the Consumer Finance segment is related to the
acquisition of Island Finance in 2006. Based on management’s assessment of the value of the
Corporation’s goodwill, which includes an independent valuation, among others, management
determined that the Corporation’s goodwill and other intangibles assets related to the consumer
finance segment were impaired for the year ended December 31, 2007.
As a result of the current unfavorable economic environment in Puerto Rico, Island Finance’s
short-term financial performance and profitability have 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. Statement 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 SFS exceeded their fair value, thereby requiring performance of the second step of the
impairment test to calculate the amount of the impairment. Because the Corporation was unable to
complete the second step of the impairment test during the third quarter and an impairment loss was
probable and could be reasonably estimated, the Corporation recorded preliminary estimated non-cash
impairment charges of approximately $34.3 million and $5.4 million, which were recorded as
reductions to goodwill and other intangible asset, respectively, during the third quarter of 2007.
The estimated impairment charges were calculated based on the market and income approach valuation
methodologies. These impairment charges did not result in cash expenditures and will not result in
future cash expenditures. The Corporation completed the second step of the impairment test during
the fourth quarter of 2007. Accordingly, during the fourth quarter the Corporation recorded an
additional non-cash impairment charge of $3.6 million. 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 comprised $26.8 of goodwill and $16.5 million
of other intangibles assets. This impairment charge did not result in cash expenditures and will
not result in future cash expenditures.
Upon the completion of the interim impairment test, the Corporation performed its annual impairment
assessment as of October 1, 2007 with the assistance of the independent valuation specialist. Based
upon their test, and after consideration of the July 1, 2007 impairment charge, the Corporation
determined that no additional impairment charge was necessary as of October 1, 2007.
60
Contractual Obligations and Commercial Commitments
As disclosed in the notes to the consolidated financial statements, the Corporation has certain
obligations and commitments to make future payments under contracts. At December 31, 2007, the
aggregate contractual obligations and commercial commitments were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by Period
|
|
|
|
|
as of December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
More
|
|
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
|
|
than
|
|
|
|
|
Total
|
|
|
1 year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
5 years
|
|
|
|
|
(Dollars in thousands)
|
|
|
Contractual Obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds purchased and
other borrowings
|
|
$
|
1,952,110
|
|
|
$
|
1,952,110
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Securities sold under
agreements to repurchase
|
|
|
635,597
|
|
|
|
60,597
|
|
|
|
375,000
|
|
|
|
—
|
|
|
|
200,000
|
|
|
Commercial paper
|
|
|
284,482
|
|
|
|
284,482
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Subordinated notes
|
|
|
247,170
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
247,170
|
|
|
Term notes
|
|
|
19,371
|
|
|
|
—
|
|
|
|
4,265
|
|
|
|
15,106
|
|
|
|
—
|
|
|
Operating lease obligations
|
|
|
130,902
|
|
|
|
22,976
|
|
|
|
34,438
|
|
|
|
8,912
|
|
|
|
64,576
|
|
|
Pension plan contribution
|
|
|
1,875
|
|
|
|
1,875
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,271,507
|
|
|
$
|
2,322,040
|
|
|
$
|
413,703
|
|
|
$
|
24,018
|
|
|
$
|
511,746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Commercial Commitments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lines of credit and
financial guarantees written
|
|
|
134,470
|
|
|
|
68,138
|
|
|
|
1,076
|
|
|
|
64,905
|
|
|
|
351
|
|
|
Commitments to extend credit
|
|
|
1,530,017
|
|
|
|
1,530,017
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,664,487
|
|
|
$
|
1,598,155
|
|
|
$
|
1,076
|
|
|
$
|
64,905
|
|
|
$
|
351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61
Recent Accounting Pronouncements
Refer to Note 1 to the consolidated financial statements for a description of each of the
pronouncements and management’s assessment as to the impact of the adoptions.
ITEM 7A. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Risk Management
The Corporation has specific policies and procedures which structure and delineate the management
of risks, particularly those related to credit, interest rate exposure and liquidity risk. Risks
are identified, measured and monitored through various committees including the Asset and
Liability, Credit and Investment Committees, among others.
Credit Risk Management and Loan Quality
The lending activity of the Corporation represents its core function, and as such, the quality and
effectiveness of the loan origination and credit risk areas are imperative to management for the
growth and success of the Corporation. The importance of the Corporation’s lending activity has
been considered when establishing functional responsibilities, organizational reporting, lending
policies and procedures, and various monitoring processes and controls.
Critical risk management responsibilities include establishing sound lending standards, monitoring
the quality of the loan portfolio, establishing loan rating systems, assessing reserves and loan
concentrations, supervising document control and accounting, providing necessary training and
resources to credit officers, implementing lending policies and loan documentation procedures,
identifying problem loans as early as possible, and instituting procedures to ensure appropriate
actions to comply with laws and regulations.
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.
The Corporation has also established an internal risk rating system and internal classifications
which serve as timely identification of the loan quality issues affecting 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.
The Corporation’s gross loan portfolio as of December 31, 2007, 2006 and 2005 amounted to $7.1
billion, $6.9 billion and $6.0 billion, respectively, which represented 83.1%, 80.7% and 75.9%,
respectively, of the Corporation’s total earning assets. The loan portfolio is distributed among
various types of credit, including commercial business loans, commercial real estate loans,
construction loans, small business loans, consumer lending and residential mortgage loans. The
credit risk exposure provides for diversification among specific industries, specific types of
business, and related individuals. As of December 31, 2007, there was no obligor group that
represented more than 2.5% of the Corporation’s total loan portfolio.
Obligors resident or having a principal place of business in Puerto Rico comprised approximately
99% of the Corporation’s loan portfolio.
As of December 31, 2007, the Corporation had over 306,000 consumer loan customers and over 8,000
commercial loan customers. As of such date, the Corporation had 52 clients with commercial loans
outstanding over $10.0 million. Although the Corporation has generally avoided cross-border loans,
the Corporation had approximately $33.6 million in cross-border loans as of December 31, 2007,
which are collateralized with real estate in the United States of America, cash and marketable
securities.
The Corporation makes a substantial number of loans to sub-prime borrowers mainly through Island
Finance. At December 31, 2007, approximately 62% of Island Finance’s loan portfolio was sub-prime
(borrowers with credit scores of 660 or below).
62
The actual rates of delinquencies, foreclosures and losses on these loans could be higher than
anticipated during economic slowdowns. Management believes that it has adequate reserves for loan
losses as of December 31, 2007 to cover possible losses on this portfolio.
Industry Risk
Commercial loans, including commercial real estate and construction loans, amounted to $3.1 billion
as of December 31, 2007. The Corporation accepts various types of collateral to guarantee specific
loan obligations. As of December 31, 2007, the use of real estate as loan collateral has resulted
in a portfolio of approximately $1.7 billion, or 55.3% of the commercial loan portfolio. In
addition, as of such date, loans secured by cash collateral and marketable securities amounted to
$332.7 million, or 11.0% of the commercial loan portfolio. Commercial loans guaranteed by federal
or local government amounted to $25.7 million as of December 31, 2007, which represents 0.9% of the
commercial loan portfolio. The remaining commercial loan portfolio had $253.9 million partially
secured by other types of collateral including, among others, equipment, accounts receivable, and
inventory. As of December 31, 2007, unsecured commercial loans represented $703.9 million or 23.3%
of commercial loans receivable; however, the majority of these loans were backed by personal
guarantees.
In addition to the commercial loan portfolio indicated above, as of December 31, 2007, the
Corporation had $1.5 billion in unused commitments under commercial lines of credit. These credit
facilities are typically structured to mature within one year. As of December 31, 2007, stand-by
letters of credit amounted to $134.5 million.
The commercial loan portfolio is distributed among the different economic sectors and there are no
concentrations of credit consisting of direct, indirect, or contingent obligations in any specific
borrower, an affiliated group of borrowers, or borrowers engaged in or dependent on one industry.
The Corporation provides for periodic reviews of industry trends and the credits’ susceptibility to
external factors.
Government Risk
As of December 31, 2007, $673.7 million of the Corporation’s investment securities represented
exposure to the U.S. government in the form of U.S. Treasury securities and federal agency
obligations. In addition, as of such date, $40.0 million of residential mortgages and $73.5
million in commercial loans were insured or guaranteed by the U.S. Government or its agencies
through the Small Business Administration (SBA) and Rural Development Programs. Furthermore, as of
December 31, 2007, there were $49.3 million of investment securities representing obligations of
the Commonwealth of Puerto Rico, its agencies, instrumentalities and political subdivisions as well
as $8.6 million of mortgage loans and $269.2 million in commercial loans issued to or guaranteed by
Puerto Rico government agencies, instrumentalities, political subdivisions and municipalities. As
of December 31, 2007, the Corporation’s credit exposure to the Commonwealth of Puerto Rico and its
political subdivisions and municipalities was $327.0 million composed of $277.8 million in credit
facilities and $49.3 million in outstanding bonds and other obligations. The Corporation believes
that the credit exposure to the Commonwealth of Puerto Rico and its political subdivisions and
municipalities is manageable. The Commonwealth of Puerto Rico has a long-standing record of
supporting all of its debt obligations. It has never defaulted in the payment of principal or
interest on any public debt. The Corporation’s level of exposure is manageable given the fact that
its outstanding loans and investment securities have either one or more of the following
characteristics: (i) investment grade rated counterparties, (ii) identifiable source of repayment,
(iii) high ranking in repayment priority or (iv) tangible collateral. Collateral for the
Corporation’s credit exposure to the Commonwealth of Puerto Rico consists of $10.5 million in real
estate. In addition, $102.3 million are loans or obligations to various Municipalities for which
payments are secured by the full faith, credit and unlimited taxing power of the Municipalities.
The Corporation anticipates recovery of the amortized cost of these securities at maturity. Since
the Corporation has the ability and intent to hold these investments until a recovery of fair
value, which may be maturity, and the contractual term of these investments do not permit the
issuer to settle the securities at a price less than the amortized cost, the Corporation does not
consider these investments to be other-than-temporarily impaired at December 31, 2007.
63
Non-performing Assets and Past Due Loans
The following table sets forth non-performing assets as of December 31, 2007, 2006, 2005, 2004 and
2003.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
(Dollars in thousands)
|
|
|
Commercial, Industrial and Agricultural
|
|
$
|
21,236
|
|
|
$
|
15,549
|
|
|
$
|
14,326
|
|
|
$
|
27,975
|
|
|
$
|
30,884
|
|
|
Construction
|
|
|
141,140
|
|
|
|
3,966
|
|
|
|
3,414
|
|
|
|
11,200
|
|
|
|
10,085
|
|
|
Mortgage
|
|
|
80,805
|
|
|
|
51,341
|
|
|
|
45,292
|
|
|
|
36,252
|
|
|
|
42,107
|
|
|
Consumer
|
|
|
10,818
|
|
|
|
7,590
|
|
|
|
4,747
|
|
|
|
6,808
|
|
|
|
9,312
|
|
|
Consumer Finance
|
|
|
37,412
|
|
|
|
24,731
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Lease Financing
|
|
|
2,334
|
|
|
|
2,783
|
|
|
|
3,340
|
|
|
|
2,715
|
|
|
|
4,027
|
|
|
Restructured Loans
|
|
|
693
|
|
|
|
892
|
|
|
|
2,560
|
|
|
|
2,560
|
|
|
|
1,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing loans
|
|
|
294,438
|
|
|
|
106,852
|
|
|
|
73,679
|
|
|
|
87,510
|
|
|
|
98,368
|
|
|
Total repossessed assets
|
|
|
16,447
|
|
|
|
6,173
|
|
|
|
2,706
|
|
|
|
3,937
|
|
|
|
4,989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing assets
|
|
$
|
310,885
|
|
|
$
|
113,025
|
|
|
$
|
76,385
|
|
|
$
|
91,447
|
|
|
$
|
103,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruing loans past-due 90 days or more
|
|
$
|
7,162
|
|
|
$
|
20,938
|
|
|
$
|
2,999
|
|
|
$
|
3,377
|
|
|
$
|
2,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing loans to total loans
|
|
|
4.16
|
%
|
|
|
1.54
|
%
|
|
|
1.22
|
%
|
|
|
1.57
|
%
|
|
|
2.34
|
%
|
|
Non-performing loans plus accruing loans
past due 90 days or more to total loans
|
|
|
4.26
|
%
|
|
|
1.84
|
%
|
|
|
1.27
|
%
|
|
|
1.63
|
%
|
|
|
2.40
|
%
|
|
Non-performing assets to total assets
|
|
|
3.39
|
%
|
|
|
1.23
|
%
|
|
|
0.92
|
%
|
|
|
1.10
|
%
|
|
|
1.40
|
%
|
|
Interest lost
|
|
$
|
7,708
|
|
|
$
|
3,112
|
|
|
$
|
2,111
|
|
|
$
|
2,351
|
|
|
$
|
3,127
|
|
Non-performing assets consist of past-due commercial loans, construction loans, lease financing and
closed-end consumer loans with principal or interest payments over 90 days on which no interest
income is being accrued, and mortgage loans with principal or interest payments over 120 days past
due on which no interest income is being accrued, renegotiated loans and other real estate owned.
Once a loan is placed on non-accrual status, interest is recorded as income only to the extent of
the Corporation’s management expectations regarding the full collectibility of principal and
interest on such loans. The interest income that would have been realized had these loans been
performing in accordance with their original terms amounted to $7.7 million, $3.1 million and $2.1
million in 2007, 2006 and 2005, respectively.
Non-performing
loans to total loans as of December 31, 2007 were 4.16%, a 262 basis point increase
compared to the 1.54% reported as of December 31, 2006. Non-performing loans at December 31, 2007
amounted to $294.4 million comprised of Island Finance non-performing loans of $37.4 million and
$257.0 million of non-performing loans of the Bank. The Corporation’s non-performing loans (excluding
Island Finance non-performing loans) reflected an increase of
$174.9 million or 213.0% compared to
non-performing loans as of December 31, 2006. The increase of non-performing loans (excluding
Island Finance non-performing loans) is principally due to construction loans and residential
mortgage non-performing loans which increased $137.2 million and $29.5 million, respectively, when compared to
December 31, 2006. Historically, the residential mortgage portfolio experienced the lowest rates of
losses. The non-performing loans in commercial, consumer and consumer finance loans also reflected increases
during the year ended December 31, 2007 of $5.7 million and $15.9 million, respectively.
Repossessed assets increased $10.3 million or 166.4% to $16.4 million at December 31, 2007, from
$6.2 million at December 31, 2006.
As of December 31, 2007, the coverage ratio (allowance for loan losses to total non-performing
loans) decreased to 56.70% in 2007 from 100.01% in 2006. Excluding non-performing mortgage loans
(for which the Corporation has historically had a minimal loss
experience) this ratio is 82.32% at
December 31, 2007 compared to 235.83% as of December 31, 2006.
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
64
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.
Potential Problem Loans
As a general rule, the Corporation closely monitors certain loans not disclosed under
“Non-performing Assets and Past Due Loans” but that represent a greater than normal credit risk.
These loans are not included under the non-performing category, but management provides close
supervision of their performance. The identification process is implemented through various risk
management procedures, such as periodic review of customer relationships, a risk grading system, an
internal watch system and a loan review process. This classification system enables management to
respond to changing circumstances and to address the risk that may arise from changing business
conditions or any other factors that bear significantly on the overall condition of these loans.
The principal amounts of loans under this category as of December 31, 2007 and 2006 were
approximately $194.9 million and $55.9 million, respectively.
Asset and Liability Management
The Corporation’s policy with respect to asset and 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 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. The Corporation had a one-year cumulative gap of $2.4 billion as of December
31, 2007. 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.
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
are managed within limits established by the Board of Directors. The following table sets forth the
repricing of the Corporation’s interest earning assets and interest-bearing liabilities at December
31, 2007 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 periods presented due to the
differing repricing dates within the period. In preparing the interest rate gap report, several
assumptions were considered. All assets and liabilities are reported according to their repricing
characteristics. For example, a commercial loan maturing in five years with monthly variable
interest rate payments is stated in the column of “up to 90 days”. The investment portfolio is
reported considering the effective duration of the securities. Expected prepayments and remaining
terms are considered for the residential mortgage portfolio. Core deposits are reported in
accordance with their effective duration. Effective duration of core deposits is based on price
and volume elasticity to market rates. The Corporation reviews on a monthly basis the effective
duration of core deposits. Assets and liabilities with embedded options are stated based on full valuation of the
asset/liability and the option to ascertain their effective duration.
65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Sensitivity
|
|
|
|
|
As of December 31, 2007
|
|
|
|
|
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
|
|
$
|
290,217
|
|
|
$
|
28,862
|
|
|
$
|
330,651
|
|
|
$
|
537,509
|
|
|
$
|
76,080
|
|
|
$
|
—
|
|
|
$
|
137,938
|
|
|
$
|
1,401,257
|
|
|
Deposits with Other
Banks
|
|
|
84,346
|
|
|
|
3,750
|
|
|
|
—
|
|
|
|
4,840
|
|
|
|
—
|
|
|
|
—
|
|
|
|
114,200
|
|
|
|
207,136
|
|
|
Loan Portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
1,287,996
|
|
|
|
296,796
|
|
|
|
377,155
|
|
|
|
217,772
|
|
|
|
241,901
|
|
|
|
95,604
|
|
|
|
105,447
|
|
|
|
2,622,671
|
|
|
Construction
|
|
|
454,391
|
|
|
|
2,981
|
|
|
|
11,964
|
|
|
|
8,789
|
|
|
|
3,773
|
|
|
|
2,668
|
|
|
|
(329
|
)
|
|
|
484,237
|
|
|
Consumer
|
|
|
373,869
|
|
|
|
221,742
|
|
|
|
444,105
|
|
|
|
199,976
|
|
|
|
47,133
|
|
|
|
—
|
|
|
|
(1,363
|
)
|
|
|
1,285,462
|
|
|
Mortgage
|
|
|
79,902
|
|
|
|
248,428
|
|
|
|
640,813
|
|
|
|
564,096
|
|
|
|
1,016,001
|
|
|
|
135,308
|
|
|
|
1,414
|
|
|
|
2,685,962
|
|
|
Fixed and Other Assets
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
473,488
|
|
|
|
473,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
|
2,570,721
|
|
|
|
802,559
|
|
|
|
1,804,688
|
|
|
|
1,532,982
|
|
|
|
1,384,888
|
|
|
|
233,580
|
|
|
|
830,795
|
|
|
|
9,160,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External Funds Purchased:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Paper
|
|
|
284,482
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
284,482
|
|
|
Repurchase Agreements
|
|
|
10,591
|
|
|
|
125,006
|
|
|
|
300,000
|
|
|
|
200,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
635,597
|
|
|
Federal Funds and
other borrowings
|
|
|
1,945,000
|
|
|
|
7,110
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,952,110
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of Deposit
|
|
|
1,260,506
|
|
|
|
972,574
|
|
|
|
463,859
|
|
|
|
62,126
|
|
|
|
24,602
|
|
|
|
3,585
|
|
|
|
(15,691
|
)
|
|
|
2,771,561
|
|
|
Demand Deposits and
Savings Accounts
|
|
|
111,566
|
|
|
|
—
|
|
|
|
157,543
|
|
|
|
485,801
|
|
|
|
—
|
|
|
|
—
|
|
|
|
547
|
|
|
|
755,457
|
|
|
Transactional Accounts
|
|
|
335,905
|
|
|
|
231,007
|
|
|
|
563,528
|
|
|
|
503,245
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,633,685
|
|
|
Senior and
Subordinated Debt
|
|
|
—
|
|
|
|
—
|
|
|
|
4,815
|
|
|
|
10,681
|
|
|
|
251,045
|
|
|
|
—
|
|
|
|
—
|
|
|
|
266,541
|
|
|
Other Liabilities and
Capital
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
860,780
|
|
|
|
860,780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and
Capital
|
|
|
3,948,050
|
|
|
|
1,335,697
|
|
|
|
1,489,745
|
|
|
|
1,261,853
|
|
|
|
275,647
|
|
|
|
3,585
|
|
|
|
845,636
|
|
|
|
9,160,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-Balance Sheet
Financial Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps
(Assets)
|
|
|
2,416,936
|
|
|
|
437,363
|
|
|
|
651,674
|
|
|
|
1,089,162
|
|
|
|
223,906
|
|
|
|
6,000
|
|
|
|
—
|
|
|
|
4,825,041
|
|
|
Interest Rate Swaps
(Liabilities)
|
|
|
(2,950,660
|
)
|
|
|
(427,524
|
)
|
|
|
(281,459
|
)
|
|
|
(1,071,974
|
)
|
|
|
(87,424
|
)
|
|
|
(6,000
|
)
|
|
|
—
|
|
|
|
(4,825,041
|
)
|
|
Caps
|
|
|
7,381
|
|
|
|
5,855
|
|
|
|
629
|
|
|
|
—
|
|
|
|
897
|
|
|
|
—
|
|
|
|
—
|
|
|
|
14,762
|
|
|
Caps Final Maturity
|
|
|
(7,381
|
)
|
|
|
(5,855
|
)
|
|
|
(629
|
)
|
|
|
—
|
|
|
|
(897
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(14,762
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAP
|
|
|
(1,911,053
|
)
|
|
|
(523,299
|
)
|
|
|
685,158
|
|
|
|
288,317
|
|
|
|
1,245,723
|
|
|
|
229,995
|
|
|
|
(14,841
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative GAP
|
|
$
|
(1,911,053
|
)
|
|
$
|
(2,434,352
|
)
|
|
$
|
(1,749,194
|
)
|
|
$
|
(1,460,877
|
)
|
|
$
|
(215,154
|
)
|
|
$
|
14,841
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative GAP to
earning assets
|
|
|
-22.00
|
%
|
|
|
-28.02
|
%
|
|
|
-20.14
|
%
|
|
|
-16.82
|
%
|
|
|
-2.48
|
%
|
|
|
0.17
|
%
|
|
|
|
|
|
|
|
|
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 first 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.
66
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 most 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
objective is to simulate a dynamic gap analysis enabling a more accurate interest rate risk
assessment.
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 $40 million of maximum NIM loss for a 1%
parallel shock and $150 million maximum MVE loss for a 1% parallel shock. These limits are
established annually at the beginning of year and are changed as warranted by market conditions and
the Corporation’s tolerance for possible losses. The limits established for 2006 were $30 million
maximum NIM loss for a 1% parallel shock and $135 million maximum MVE loss for a 1% parallel shock.
As of December 31, 2007, 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 $24.6 million if
market rates were to increase 100 basis points immediately and parallel across the yield curve,
less than the $40 million limit. For purposes of the Market Value Shock Report it was determined
that the Corporation had a potential loss of approximately $96.4 million if market rates were to
increase 100 basis points immediately parallel across the yield curve, less than the $150 million
limit. The tables below present a summary of the Corporation’s net interest margin and market value
shock reports, considering several scenarios as of December 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INTEREST MARGIN SHOCK REPORT
|
|
|
|
December 31, 2007
|
|
(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
|
|
$
|
399.2
|
|
|
$
|
379.2
|
|
|
$
|
368.3
|
|
|
$
|
357.1
|
|
|
$
|
345.4
|
|
|
$
|
332.5
|
|
|
$
|
307.9
|
|
|
Sensitivity
|
|
$
|
42.1
|
|
|
$
|
22.1
|
|
|
$
|
11.2
|
|
|
|
|
|
|
$
|
(11.7
|
)
|
|
$
|
(24.6
|
)
|
|
$
|
(49.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MARKET VALUE SHOCK REPORT
|
|
|
|
December 31, 2007
|
|
(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
|
|
$
|
738.8
|
|
|
$
|
711.0
|
|
|
$
|
674.3
|
|
|
$
|
632.3
|
|
|
$
|
580.9
|
|
|
$
|
535.9
|
|
|
$
|
445.3
|
|
|
Sensitivity
|
|
$
|
106.5
|
|
|
$
|
78.7
|
|
|
$
|
42.0
|
|
|
|
|
|
|
$
|
(51.4
|
)
|
|
$
|
(96.4
|
)
|
|
$
|
(187.0
|
)
|
As of December 31, 2007 the Corporation had a liability sensitive profile as explained by the
negative gap, the NIM shock report and the MVE shock report. Management feels comfortable with the
current level of market risk on the balance sheet, and it will change the market risk profile of
the Corporation as market conditions vary. 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, macroeconomic factors as well as legal, fiscal and other factors
which could lead to shifts in the asset liability mix.
67
Derivatives
The Corporation uses derivative financial instruments mostly as hedges of interest rate risk,
changes in fair value of assets and liabilities and to secure future cash flows. Refer to Notes 1
and 20 to the consolidated financial statements for details of the Corporation’s derivative
transactions as of December 31, 2007 and 2006.
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.
68
Hedging Activities:
The following table summarizes the derivative contracts designated as hedges as of December 31,
2007, 2006 and 2005, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
|
|
|
|
|
Notional
|
|
|
|
|
|
|
Gain
|
|
|
Income
|
|
|
(Dollars in thousands)
|
|
Amounts *
|
|
|
Fair Value
|
|
|
(Loss)
|
|
|
(Loss)**
|
|
|
Cash Flow Hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps
|
|
|
650,000
|
|
|
|
(2,027
|
)
|
|
|
—
|
|
|
|
(1,023
|
)
|
|
Fair Value Hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps
|
|
|
937,863
|
|
|
|
(4,425
|
)
|
|
|
(465
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
1,587,863
|
|
|
$
|
(6,452
|
)
|
|
$
|
(465
|
)
|
|
$
|
(1,023
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
|
|
|
|
|
Notional
|
|
|
|
|
|
|
Gain
|
|
|
Income
|
|
|
(Dollars in thousands)
|
|
Amounts *
|
|
|
Fair Value
|
|
|
(Loss)
|
|
|
(Loss)**
|
|
|
Cash Flow Hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
36
|
|
|
Interest Rate Swaps
|
|
|
825,000
|
|
|
|
(351
|
)
|
|
|
—
|
|
|
|
(214
|
)
|
|
Fair Value Hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps
|
|
|
1,189,740
|
|
|
|
(22,065
|
)
|
|
|
64
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
2,014,740
|
|
|
$
|
(22,416
|
)
|
|
$
|
64
|
|
|
$
|
(178
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
|
|
|
|
|
Notional
|
|
|
|
|
|
|
Gain
|
|
|
Income
|
|
|
(Dollars in thousands)
|
|
Amounts *
|
|
|
Fair Value
|
|
|
(Loss)
|
|
|
(Loss)**
|
|
|
Cash Flow Hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency
|
|
$
|
117,725
|
|
|
$
|
2,182
|
|
|
$
|
—
|
|
|
$
|
(36
|
)
|
|
Interest Rate Swaps
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,369
|
|
|
Fair Value Hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps
|
|
|
1,408,772
|
|
|
|
(26,880
|
)
|
|
|
28
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
1,526,497
|
|
|
$
|
(24,698
|
)
|
|
$
|
28
|
|
|
$
|
1,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
The notional amount represents the gross sum of long and short
|
|
|
|
**
|
|
Net of tax
|
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 the income
statement.
69
As of December 31, 2007, the total amount, net of tax, included in accumulated other comprehensive
income pertaining to the cash flow hedges was an unrealized loss of $1.0 million. As of December
31, 2006, the total amount, net of tax, included in accumulated other comprehensive income
pertaining to the cash flow hedges was an unrealized loss of $214,000. As of December 31, 2005, the
total amount, net of tax, included in accumulated other comprehensive income pertaining to the cash
flow hedges was an unrealized gain of $1.3 million.
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 of the changes in the market
value of the hedged item and the 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 the income statement.
The fair value hedges have maturities through the year 2032 as of December 31, 2007 and December
31, 2006. The weighted-average rate paid and received on these contracts as of December 31, 2007
is 5.10% and 5.39%, respectively and 5.37% and 4.84%, respectively, as of December 31, 2006,
respectively.
The $0.9 billion and $1.2 billion fair value hedges are associated to the swapping of fixed rate
debt as of December 31, 2007 and 2006, respectively. 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, payments 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. 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, an independent division from the
treasury department. Among other things, this group is responsible for: policy, analysis,
methodology and reporting of anything related to market risk and credit risk. The following table
summarizes the aggregate notional amounts and the reported derivative assets or liabilities (i.e.
the fair value of the derivative contracts) as of December 31, 2007 and 2006 and 2005,
respectively:
70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
Notional
|
|
|
|
|
|
|
Gain
|
|
|
(Dollars in thousands)
|
|
Amounts *
|
|
|
Fair Value
|
|
|
(Loss)
|
|
|
Interest Rate Contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps
|
|
$
|
3,237,179
|
|
|
$
|
257
|
|
|
$
|
679
|
|
|
Interest Rate Caps
|
|
|
14,762
|
|
|
|
—
|
|
|
|
—
|
|
|
Other
|
|
|
1,451
|
|
|
|
45
|
|
|
|
35
|
|
|
Equity Derivatives
|
|
|
267,124
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
3,520,516
|
|
|
$
|
302
|
|
|
$
|
714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
|
Notional
|
|
|
|
|
|
|
Gain
|
|
|
(Dollars in thousands)
|
|
Amounts *
|
|
|
Fair Value
|
|
|
(Loss)
|
|
|
Interest Rate Contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps
|
|
$
|
3,628,108
|
|
|
$
|
(421
|
)
|
|
$
|
(592
|
)
|
|
Interest Rate Caps
|
|
|
70,984
|
|
|
|
3
|
|
|
|
2
|
|
|
Other
|
|
|
1,988
|
|
|
|
9
|
|
|
|
49
|
|
|
Equity Derivatives
|
|
|
307,056
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
4,008,136
|
|
|
$
|
(409
|
)
|
|
$
|
(541
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
|
|
Notional
|
|
|
|
|
|
|
Gain
|
|
|
(Dollars in thousands)
|
|
Amounts *
|
|
|
Fair Value
|
|
|
(Loss)
|
|
|
Interest Rate Contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps
|
|
$
|
2,176,521
|
|
|
$
|
171
|
|
|
$
|
(344
|
)
|
|
Interest Rate Caps
|
|
|
73,422
|
|
|
|
2
|
|
|
|
13
|
|
|
Other
|
|
|
7,270
|
|
|
|
(40
|
)
|
|
|
(43
|
)
|
|
Equity Derivatives
|
|
|
269,917
|
|
|
|
—
|
|
|
|
2,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
2,527,130
|
|
|
$
|
133
|
|
|
$
|
1,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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*
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The notional amount represents the gross sum of long and short
|
Liquidity Risk
Liquidity risk is the risk that not enough cash will be generated from either assets or liabilities
to meet deposit withdrawals or contractual loan funding. The Corporation’s general policy is to
maintain liquidity adequate to ensure our ability to honor withdrawals of deposits, make repayments
at maturity of other liabilities, extend loans and meet working capital needs. The Corporation’s
principal sources of liquidity are capital, core deposits from retail and commercial clients, and
wholesale deposits raised in the inter-bank and commercial markets. The Corporation manages
liquidity risk by maintaining diversified short-term and long-term sources through the Federal
funds market, commercial paper program, repurchase agreements and retail certificate of deposit
programs. As of December 31, 2007 the Corporation had $1.5 billion in unsecured lines of credit
($1.4 billion available) and $4.6 billion in collateralized lines of credit with banks and
financial entities ($3.1 billion available). All securities in portfolio are highly rated and very
liquid, enabling us to treat them as a secondary source of liquidity.
The Corporation does not have significant usage or limitations on its ability to upstream or
downstream funds as a method of liquidity. However, there are certain tax constraints when
borrowing funds (excluding the placement of deposits) from Santander Spain or affiliates because
Puerto Rico’s tax code requires local corporations to withhold 29% of the interest income paid to
non-resident affiliates. The Corporation does not face significant limitations to its ability to
downstream funds to its affiliates. The current intra-group credit line for the Corporation is
$1.3 billion.
71
Liquidity is derived from capital, reserves and the securities portfolio. The Corporation has
established lines of credit with foreign and domestic banks, has access to U.S. markets through its
commercial paper program and also has broadened its relations in the federal funds and repurchase
agreement markets to increase the availability of other sources of funds and to augment liquidity
as necessary.
In December 2006, the Corporation and Santander Financial Services, entered into a Bridge
Facility Agreement (the “Agreement”) with National Australia Bank Limited (the “NABL”). The
proceeds of the Agreement were used to refinance the outstanding indebtedness incurred in
connection with the previously announced amended and restated loan agreement with Lloyds TBS Bank
PLC and for general corporate purposes. Under the Agreement, the Corporation and Santander
Financial had available $275 million and $525 million, respectively, all of which was drawn. The
amounts drawn under the Agreement (the “Loan”) bear interest at an annual rate equal to the 3 month LIBOR rate plus 0.10% per annum.
Pursuant to the Agreement, the Company and Santander Financial will pay the NABL a facility fee
(the “Facility Fee”) of 0.02% of the principal amount of the Loan within three days of the
execution of the Agreement. The entire principal balance of the Loan was due and payable on
September 21, 2007.
On September 21, 2007, the Corporation and SFS entered into a fully-collateralized Bridge Facility
Agreement (the “Facility”) with Banco Santander Puerto Rico. The proceeds of the Facility were used
to refinance the outstanding indebtedness incurred under the bridge facility agreement among the
Corporation, SFS and National Australia Bank Limited, and for general corporate purposes. Under the
Facility, the Corporation and SFS had available $235 million and $445 million, respectively. The
Facility is fully-collateralized by a certificate of deposit in the amount of $680 million opened
by Santander Spain, and provided as security for the Facility pursuant to the terms of a Security
Agreement, Pledge and Assignment between the Bank and Santander Spain. The Corporation and SFS each
have agreed to pay a fee of 0.10%, on an annualized basis, to Santander Spain in connection with
its agreement to collateralize the loan with the deposit. The amounts drawn under the Facility (the
“Loan”) bear interest at an annual rate equal to the applicable LIBOR rate plus 0.10% per annum.
Interest under the Loan was 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 due and payable on October 3, 2007.
On October 3, 2007, the Corporation and SFS, entered into a Bridge Facility Agreement (the
“Facility”) with National Australia Bank Limited, through its offshore banking unit (the “Lender”).
The proceeds of the Facility were used to refinance the outstanding indebtedness incurred under the
previously announced agreement among the Corporation, SFS and Banco Santander Puerto Rico, and for
general corporate purposes. Under the Facility, the Corporation and SFS had available $235 million
and $465 million, respectively, all of which was drawn on October 3, 2007. The amounts drawn under
the Facility (the “Loan”) bear interest at an annual rate equal to the applicable LIBOR rate plus
0.265% per annum, commencing on the date of the initial drawdown. Interest under the Loan is
payable in monthly interest periods due on the 24
th
day of each month, with the first
monthly interest payment due on November 24, 2007. The Corporation and SFS did not pay any facility
fee or commission to the Lender in connection with the Loan. The entire principal balance of the
Loan is due and payable on March 24, 2008. Upon the occurrence and during the continuance of an
Event of Default (as defined in the Facility) under the Facility, the Lender shall have the right
to declare the outstanding balance of the Loan, together with accrued interest and any other amount
owing to the Lender, 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 Facility are several
and not joint. However, the Corporation and SFS are jointly and severally responsible for all other
amounts payable under the Facility. All amounts payable by the Corporation and SFS under the
Facility shall be made without set-off or counter-claim, and free and clear of any withholding or
deduction in respect of taxes, levies, imposts, deductions, charges, withholdings or duties of any
nature imposed or levied on such payments. The Loan is guaranteed by Santander Spain. The
Corporation and SFS will each pay Santander Spain a guarantee fee equal to 10 basis points (0.1%)
of the principal amount of the Loan.
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.
In April 2007, the Bank transferred its merchant business to a subsidiary, MBPR Services, Inc.
(“MBPR”). The Bank subsequently sold the stock of MBPR to an unrelated third party. For an interim
period ended October 31, 2007, the Bank
72
provided certain processing and other services to the third
party acquirer. The gain on the transaction of $12.3 million was recognized in the forth quarter of
2007. As part of the transaction, the Bank entered into a long-term marketing alliance agreement
with the third party and will serve as its sponsor with the card associations and network
organizations. The Bank expects to offer better products and services to its merchant client base
and to obtain certain cost efficiencies as a result of this transaction.
The Corporation has a high credit rating, which permits the Corporation to utilize various
alternative funding sources. The Corporation’s current ratings are as follows:
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Standard
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Fitch
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& Poor’s
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IBCA
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Short-term funding
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A-1+
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F1+
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Long-term funding
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AA
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AA-
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Management monitors liquidity levels each month. The focus is on the liquidity ratio, which
compares net liquid assets (all liquid assets not subject to collateral or repurchase agreements)
against total liabilities plus contingent liabilities. As of December 31, 2007, the Corporation
had a liquidity ratio of 7.5%. At December 31, 2007, the Corporation had total available liquid
assets of $0.6 billion. The Corporation believes that it has sufficient liquidity to meet current
obligations.
The Corporation does not contemplate material uncertainties in the rolling over of deposits, both
retail and wholesale, and is not engaged in capital expenditures that would materially affect the
capital and liquidity positions. Should any deficiency arise for seasonal or more critical reasons,
the Bank would make recourse to alternative sources of funding such as the commercial paper
program, its lines of credit with domestic and national banks, unused collateralized lines with
Federal Home Loan Banks and others.
Maturity and Interest Rate Sensitivity of Interest-Earning Assets as of December 31, 2007
The following table sets forth an analysis by type and time remaining to maturity of the
Corporation’s loans and securities portfolio as of December 31, 2007. Loans are stated before
deduction of the allowance for loan losses and include loans held for sale.
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As of December 31, 2007
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Maturities and/or Next Repricing Date
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After One Year
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|
|
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Through Five Years
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After Five Years
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One Year
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Fixed
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|
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Variable
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Fixed
|
|
|
Variable
|
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|
|
|
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or Less
|
|
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Interest Rates
|
|
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Interest Rates
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Interest Rates
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|
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Interest Rates
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Total
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(Dollars in thousands)
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|
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|
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Cash and Cash
Equivalents and
other
Interest-bearing
deposits
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|
$
|
207,136
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|
|
$
|
—
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|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
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|
|
$
|
207,136
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|
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Investment Portfolio
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|
|
319,079
|
|
|
|
868,159
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|
|
|
—
|
|
|
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214,019
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|
|
|
—
|
|
|
|
1,401,257
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|
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Loans:
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Commercial
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1,073,164
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538,553
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265,949
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440,974
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|
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211,390
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|
|
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2,530,030
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Construction
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193,792
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15,015
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|
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216,466
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—
|
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|
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58,964
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|
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484,237
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Consumer
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|
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223,911
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|
|
|
266,960
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|
|
|
—
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|
|
|
183,478
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|
|
|
—
|
|
|
|
674,349
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|
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Consumer Finance
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|
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204,741
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|
|
|
362,480
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|
|
|
18,530
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|
|
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8,848
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|
|
|
16,514
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|
|
|
611,113
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|
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Mortgage
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|
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328,331
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|
|
|
1,204,910
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|
|
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—
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|
|
1,152,721
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|
|
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—
|
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|
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2,685,962
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|
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Leasing
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|
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30,058
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|
|
|
56,373
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|
|
|
4,213
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|
|
|
1,978
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|
|
|
19
|
|
|
|
92,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total
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$
|
2,580,212
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|
|
$
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3,312,450
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|
|
$
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505,158
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|
|
$
|
2,002,018
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|
|
$
|
286,887
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|
|
$
|
8,686,725
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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73
Capital Expenditures
The following table reflects capital expenditures for the years ended December 31, 2007, 2006 and
2005.
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|
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|
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|
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2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
(Dollars in thousands)
|
|
|
Headquarters/branches
|
|
$
|
1,770
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|
|
$
|
1,217
|
|
|
$
|
4,194
|
|
|
Data processing equipment
|
|
|
1,438
|
|
|
|
2,907
|
|
|
|
2,583
|
|
|
Software
|
|
|
1,981
|
|
|
|
5,818
|
|
|
|
6,111
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|
|
Office furniture and equipment
|
|
|
1,257
|
|
|
|
2,161
|
|
|
|
3,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,446
|
|
|
$
|
12,103
|
|
|
$
|
16,026
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2005, the Corporation’s capital expenditures reflected an increase in office furniture and
headquarters/branches. The Corporation invested in new facilities to relocate Santander Securities,
as well as, in new branches of Banco Santander and remodeling of several existing branches. The
increase in data processing equipment and software were pursuant to standard maintenance and
improvement procedures.
Environmental Matters
Under various environmental laws and regulations, a lender may be liable as an “owner” or
“operator” for the costs of investigation or remediation of hazardous substances at any mortgaged
property or other property of a borrower or at its owned or leased property regardless of whether
the lender knew of, or was responsible for, the hazardous substances. In addition, certain cities
in which some of the Corporation’s assets are located impose a statutory lien, which may be prior
to the lien of the mortgage, for costs incurred in connection with a cleanup of hazardous
substances.
Some of the Corporation’s mortgaged properties and owned and leased properties may contain
hazardous substances or are located in the vicinity of properties that are contaminated. As a
result, the value of such properties may decrease, the borrower’s ability to repay the loan may be
affected, the Corporation’s ability to foreclose on certain properties may be affected or the
Corporation may be exposed to potential environmental liabilities. The Corporation, however, is not
aware of any such environmental costs or liabilities that would have a material adverse effect on
the Corporation’s results of operations or financial condition.
Puerto Rico Income Taxes
The Corporation is subject to Puerto Rico income tax. The maximum statutory regular corporate tax
rate that the Corporation is subject to under the P.R. Code is 39%. In computing its net income
subject to the regular income tax, the Corporation is entitled to exclude from its gross income,
interest derived on obligations of the Commonwealth of Puerto Rico and its agencies,
instrumentalities and political subdivisions, obligations of the United States Government and its
agencies and instrumentalities, certain FHA and VA loans and certain GNMA securities. In computing
its net income subject to the regular income tax the Corporation is entitled to claim a deduction
for ordinary and necessary expenses, worthless debts, interest and depreciation, among others. The
Corporation’s deduction for interest is reduced in the same proportion that the average adjusted
basis of its exempt obligations bears to the average adjusted basis of its total assets.
The Corporation is also subject to an alternative minimum tax of 22% imposed on its alternative
minimum tax net income. In general, the Corporation’s alternative minimum net income is an amount
equal to its net income determined for regular income tax purposes, as adjusted for certain items
of tax preference. To the extent that the Corporation’s alternative minimum tax for a taxable year
exceeds its regular tax, such excess is required to be paid by the Corporation as an alternative
minimum tax. An alternative minimum tax paid by the Corporation in any taxable year may be claimed
by the Corporation as a credit in future taxable years against the excess of its regular tax over
the alternative minimum tax in such years, and such credits do not expire.
Under the P.R. Code, corporations are not permitted to file consolidated tax returns with their
subsidiaries and affiliates. However, the Corporation is entitled to a 100% dividend received
deduction with respect to dividends received from Banco
74
Santander Puerto Rico, Santander Securities
Corporation, Santander Insurance Agency, or any other Puerto Rico corporation subject to tax under
the P.R. Code and in which the Corporation owns at least 80% of the value of its stock or voting
power.
Interest paid by the Corporation to non-resident foreign corporations is not subject to Puerto Rico
income tax, provided such foreign corporation is not related to the Corporation. Dividends paid by
the Corporation to non-resident foreign corporations and individuals (whether resident or not) are
subject to a Puerto Rico income tax of 10%.
Puerto Rico international banking entities, or IBE’s, are currently exempt from taxation under
Puerto Rico law. During 2004, the Legislature of Puerto Rico and the Governor of Puerto Rico
approved a law amending the IBE Act. This law imposes income taxes at normal statutory rates on
each IBE that operates as a unit of a bank, if the IBE’s net income generated after December 31,
2003 exceeds 40 percent of the bank’s net income in the taxable year commenced on July 1, 2003, 30
percent of the bank’s net income in the taxable year commencing on July 1, 2004, and 20 percent of
the bank’s net income in the taxable year commencing on July 1, 2005, and thereafter. It does not
impose income taxation on an IBE that operates as a subsidiary of a bank.
On August 1, 2005 a temporary, two-year surtax of 2.5% applicable to corporations was enacted. This
surtax is applicable to taxable years beginning after December 31, 2004 and increased the maximum
marginal corporate income tax rate from 39% to 41.5%. An additional 2% surtax was imposed on the
Corporation for a period of one year commencing on January 1, 2006 as a result of the Puerto Rico
Government’s budget deficit. These surtaxes increased the maximum marginal corporate income tax
rate from 39% to 43.5% for the year ended December 31, 2006. These surtaxes are no longer in
effect.
The Corporation adopted the provisions of FIN No .48 on January 1, 2007. As a result of the
implementation of FIN 48, the Corporation recognized a decrease of $0.5 million to the January 1,
2007 balance of retained earnings and an increase in the liability for unrecognized tax benefits.
As of the date of adoption and after the impact of recognizing the increase in the liability noted
above, the Corporation’s liability for unrecognized tax benefits totaled $12.7 million, which
included $1.8 million of interest and penalties.
The Corporation recognizes interest and penalties related to uncertain tax positions in income tax
expense. For the year ended December 31, 2007, the Corporation recognized $1.4 million of interest
and penalties for uncertain tax positions recognized during 2007 and $3.8 million on a new tax
positions recognized during 2007. At December 31, 2007, the Corporation had $10.4 million of
unrecognized tax benefits which, if recognized, would decrease the effective income tax rate in
future periods.
The Corporation recognized a tax benefit of $1.6 million as a result of the expiration of the
statute of limitations related to the uncertain tax positions.
United States Income Taxes
The Corporation, the Bank, Santander Securities and Santander Insurance Agency are corporations
organized under the laws of Puerto Rico. Accordingly, the Corporation, the Bank, Santander
Securities and Santander Insurance Agency are subject to United States income tax under the
Internal Revenue Code of 1986, as amended to the date hereof (the “Code”) only on certain income
from sources within the United States or effectively connected with a United States trade or
business.
75
CERTIFICATION PURSUANT TO SECTION 303A.12(a) OF THE
NEW YORK STOCK EXCHANGE LISTED COMPANY MANUAL
Santander BanCorp’s Chief Executive Officer, Chief Operating Officer and Chief Accounting Officer
have filed with the Securities and Exchange Commission the certifications required by Section 302
of the Sarbanes-Oxley Act of 2002 as Exhibits 31.1, 31.2 and 31.3 to Santander BanCorp’s 2007 Form
10-K. In addition, on June 20, 2007, Santander BanCorp’s CEO certified to the New York Stock
Exchange that he was not aware of any violation by the Corporation of the NYSE corporate governance
listing standards. The foregoing certification was unqualified.
By: /s/ José Ramón González
President and Chief Executive Officer
By: /s/ Carlos M. García
Senior Executive Vice President and
Chief Operating Officer
By:/s/ María Calero
Executive Vice President and
Chief Accounting Officer
76
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Delottte & Touche LLP
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Torre Chardón
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350 Chardón Avenue - Suite 700
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San Juan, PR 00918-2140
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USA
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Tel: +1 787 759 7171
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Fax: +1 787 756 6340
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www.deloitte.com
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Santander Bancorp
San Juan, Puerto Rico
We have audited the internal control over financial reporting of Santander Bancorp and
subsidiaries (the “Corporation”) as of December 31, 2007, based on criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. The Corporation’s management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal control over
financial reporting, included in the accompanying Management’s Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion on the Corporation’s internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or
under the supervision of, the company’s principal executive and principal financial officers, or
persons performing similar functions, and effected by the company’s board of directors, management,
and other personnel to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary
to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance
with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition
of the company’s assets that could have a material effect on the financial statements.
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Member of
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Deloitte Touche Tohmatsu
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76-a
Because of the inherent limitations of internal control over financial reporting,
including the possibility of collusion or improper management override of controls, material
misstatements due to error or fraud may not be prevented or detected on a timely basis. Also,
projections of any evaluation of the effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
In our opinion, the Corporation maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2007, based on the criteria established in
Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements as of and for the year ended
December 31, 2007 of the Corporation and our report dated
March 17, 2008 expressed an unqualified
opinion on those financial statements.
March 17,
2008
Stamp No. 2293216
affixed to original.
76-b
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Deloitte & Touche LLP
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Torre Chardón
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350 Chardón Avenue - Suite 700
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San Juan, PR 00918-2140
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USA
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Tel: +1 787 759 7171
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Fax: +1 787 756 6340
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www.deloitte.com
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of
Santander Bancorp
San Juan, Puerto Rico
We have audited the accompanying consolidated balance sheets of Santander Bancorp and
subsidiaries (the “Corporation”, a Puerto Rico corporation and a subsidiary of Santander Central
Hispano, S.A.) as of December 31, 2007 and 2006, and the related consolidated statements of
operations, changes in stockholders’ equity, comprehensive income, and cash flows for each of the
three years in the period ended December 31,2007. These financial statements are the responsibility
of the Corporation’s management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of Santander Bancorp and subsidiaries as of December 31,2007 and
2006, and the results of their operations and their cash flows for each of the three years in the
period ended December 31,2007, in conformity with accounting principles generally accepted in the
United States of America.
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Corporation’s internal control over financial reporting as of
December 31, 2007, based on the criteria established in
Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated March 17, 2008 expressed an unqualified opinion on the Corporation’s internal control
over financial reporting.
March 17,2008
Stamp No. 2293217
affixed to original.
76-c
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|
|
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|
Member
of
Deloitte Touche Tohmatsu
|
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Santander BanCorp and Subsidiaries
Consolidated Balance Sheets-December 31, 2007 and 2006
(Dollars in thousands, except share data)
|
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|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents:
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
118,096
|
|
|
$
|
125,077
|
|
|
Interest-bearing deposits
|
|
|
1,167
|
|
|
|
780
|
|
|
Federal funds sold and securities purchased under agreements to resell
|
|
|
82,434
|
|
|
|
73,407
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents
|
|
|
201,697
|
|
|
|
199,264
|
|
|
|
|
|
|
|
|
|
|
Interest-Bearing Deposits
|
|
|
5,439
|
|
|
|
51,455
|
|
|
Trading Securities, at fair value
|
|
|
|
|
|
|
|
|
|
Securities pledged that can be repledged
|
|
|
15,965
|
|
|
|
—
|
|
|
Other trading securities
|
|
|
52,535
|
|
|
|
50,792
|
|
|
|
|
|
|
|
|
|
|
Total trading securities
|
|
|
68,500
|
|
|
|
50,792
|
|
|
|
|
|
|
|
|
|
|
Investment Securities Available for Sale,
at fair value:
|
|
|
|
|
|
|
|
|
|
Securities pledged that can be repledged
|
|
|
667,361
|
|
|
|
867,944
|
|
|
Other investment securities available for sale
|
|
|
600,837
|
|
|
|
541,845
|
|
|
|
|
|
|
|
|
|
|
Total investment securities available for sale
|
|
|
1,268,198
|
|
|
|
1,409,789
|
|
|
|
|
|
|
|
|
|
|
Other Investment Securities,
at amortized cost
|
|
|
64,559
|
|
|
|
50,710
|
|
|
Loans Held for Sale,
net
|
|
|
141,902
|
|
|
|
196,277
|
|
|
Loans,
net
|
|
|
6,769,478
|
|
|
|
6,640,416
|
|
|
Accrued Interest Receivable
|
|
|
80,029
|
|
|
|
102,244
|
|
|
Premises and Equipment,
net
|
|
|
29,523
|
|
|
|
56,299
|
|
|
Goodwill
|
|
|
121,482
|
|
|
|
148,300
|
|
|
Intangible Assets
|
|
|
30,203
|
|
|
|
47,427
|
|
|
Other Assets
|
|
|
379,203
|
|
|
|
235,195
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,160,213
|
|
|
$
|
9,188,168
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
Non interest-bearing
|
|
$
|
755,457
|
|
|
$
|
746,089
|
|
|
Interest-bearing
|
|
|
4,405,246
|
|
|
|
4,567,885
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
|
5,160,703
|
|
|
|
5,313,974
|
|
|
|
|
|
|
|
|
|
|
Federal Funds Purchased and Other Borrowings
|
|
|
1,952,110
|
|
|
|
1,628,400
|
|
|
Securities Sold Under Agreements to Repurchase
|
|
|
635,597
|
|
|
|
830,569
|
|
|
Commercial Paper Issued
|
|
|
284,482
|
|
|
|
209,549
|
|
|
Term Notes
|
|
|
19,371
|
|
|
|
41,529
|
|
|
Subordinated Capital Notes
|
|
|
247,170
|
|
|
|
244,468
|
|
|
Accrued Interest Payable
|
|
|
77,356
|
|
|
|
91,245
|
|
|
Other Liabilities
|
|
|
246,888
|
|
|
|
249,214
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
8,623,677
|
|
|
|
8,608,948
|
|
|
|
|
|
|
|
|
|
|
Contingencies and Commitments (Notes 12, 16, 17, 20 and 21)
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY:
|
|
|
|
|
|
|
|
|
|
Series A Preferred stock, $25 par value; 10,000,000 shares authorized, none issued and outstanding
|
|
|
—
|
|
|
|
—
|
|
|
Common stock, $2.50 par value; 200,000,000 shares authorized, 50,650,364 shares issued;
46,639,104 shares outstanding in December 2007 and 2006
|
|
|
126,626
|
|
|
|
126,626
|
|
|
Capital paid in excess of par value
|
|
|
308,373
|
|
|
|
304,171
|
|
|
Treasury stock at cost, 4,011,260 shares in December 2007 and 2006
|
|
|
(67,552
|
)
|
|
|
(67,552
|
)
|
|
Accumulated other comprehensive loss, net of tax
|
|
|
(24,478
|
)
|
|
|
(44,213
|
)
|
|
Retained earnings:
|
|
|
|
|
|
|
|
|
|
Reserve fund
|
|
|
139,250
|
|
|
|
137,511
|
|
|
Undivided profits
|
|
|
54,317
|
|
|
|
122,677
|
|
|
|
|
|
|
|
|
|
|
Total stockholders’ equity
|
|
|
536,536
|
|
|
|
579,220
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,160,213
|
|
|
$
|
9,188,168
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
77
Santander BanCorp and Subsidiaries
Consolidated Statements of Operations
Years Ended December 31, 2007, 2006 and 2005
(Dollars in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Interest Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
599,581
|
|
|
$
|
535,327
|
|
|
$
|
359,415
|
|
|
Investment securities
|
|
|
67,830
|
|
|
|
74,023
|
|
|
|
71,938
|
|
|
Interest-bearing deposits
|
|
|
3,344
|
|
|
|
4,439
|
|
|
|
4,065
|
|
|
Federal funds sold and securities purchased under agreements to resell
|
|
|
3,455
|
|
|
|
4,531
|
|
|
|
4,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
674,210
|
|
|
|
618,320
|
|
|
|
439,605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
191,415
|
|
|
|
173,380
|
|
|
|
122,212
|
|
|
Securities sold under agreements to repurchase and other borrowings
|
|
|
155,229
|
|
|
|
139,960
|
|
|
|
86,969
|
|
|
Subordinated capital notes
|
|
|
15,887
|
|
|
|
14,374
|
|
|
|
3,402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
362,531
|
|
|
|
327,714
|
|
|
|
212,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
311,679
|
|
|
|
290,606
|
|
|
|
227,022
|
|
|
Provision for Loan Losses
|
|
|
147,824
|
|
|
|
65,583
|
|
|
|
20,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses
|
|
|
163,855
|
|
|
|
225,023
|
|
|
|
206,622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank service charges, fees and other
|
|
|
47,201
|
|
|
|
49,078
|
|
|
|
42,272
|
|
|
Broker-dealer, asset management and insurance fees
|
|
|
68,265
|
|
|
|
56,973
|
|
|
|
53,016
|
|
|
Gain on sale of securities
|
|
|
1,265
|
|
|
|
—
|
|
|
|
17,842
|
|
|
Loss on extinguishment of debt
|
|
|
—
|
|
|
|
—
|
|
|
|
(5,959
|
)
|
|
Gain on sale of loans
|
|
|
6,658
|
|
|
|
1,994
|
|
|
|
7,876
|
|
|
Other income
|
|
|
24,731
|
|
|
|
10,424
|
|
|
|
10,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
148,120
|
|
|
|
118,469
|
|
|
|
125,358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
134,258
|
|
|
|
121,711
|
|
|
|
95,002
|
|
|
Occupancy costs
|
|
|
23,767
|
|
|
|
22,476
|
|
|
|
16,811
|
|
|
Equipment expenses
|
|
|
4,427
|
|
|
|
4,797
|
|
|
|
3,802
|
|
|
EDP servicing, amortization and technical assistance
|
|
|
39,255
|
|
|
|
40,084
|
|
|
|
31,589
|
|
|
Communication expenses
|
|
|
10,923
|
|
|
|
11,358
|
|
|
|
8,232
|
|
|
Business promotion
|
|
|
15,621
|
|
|
|
11,613
|
|
|
|
11,065
|
|
|
Goodwill and other intangibles impairment charges
|
|
|
43,349
|
|
|
|
—
|
|
|
|
—
|
|
|
Other taxes
|
|
|
12,334
|
|
|
|
11,514
|
|
|
|
8,443
|
|
|
Other operating expenses
|
|
|
60,082
|
|
|
|
54,230
|
|
|
|
46,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other operating expenses
|
|
|
344,016
|
|
|
|
277,783
|
|
|
|
221,386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before provision for income tax
|
|
|
(32,041
|
)
|
|
|
65,709
|
|
|
|
110,594
|
|
|
Provision for Income Tax
|
|
|
4,204
|
|
|
|
22,540
|
|
|
|
30,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (Loss) Income Available to Common Shareholders
|
|
$
|
(36,245
|
)
|
|
$
|
43,169
|
|
|
$
|
79,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted (Loss) Earnings per Common Share
|
|
$
|
(0.78
|
)
|
|
$
|
0.93
|
|
|
$
|
1.71
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
78
Santander BanCorp and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
Years Ended December 31, 2007, 2006 and 2005
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Common Stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
$
|
126,626
|
|
|
$
|
126,626
|
|
|
$
|
126,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
|
126,626
|
|
|
|
126,626
|
|
|
|
126,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Paid in Excess of Par Value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
304,171
|
|
|
|
304,171
|
|
|
|
304,171
|
|
|
Capital contribution
|
|
|
4,202
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
|
308,373
|
|
|
|
304,171
|
|
|
|
304,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury Stock at cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
(67,552
|
)
|
|
|
(67,552
|
)
|
|
|
(67,552
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
|
(67,552
|
)
|
|
|
(67,552
|
)
|
|
|
(67,552
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Loss, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
(44,213
|
)
|
|
|
(41,591
|
)
|
|
|
(6,818
|
)
|
|
Unrealized net gain (loss) on investment securities available
for sale, net of tax
|
|
|
18,227
|
|
|
|
(587
|
)
|
|
|
(34,031
|
)
|
|
Unrealized net (loss) gain on cash flow hedges, net of tax
|
|
|
(1,023
|
)
|
|
|
(178
|
)
|
|
|
1,333
|
|
|
Minimum pension benefit (liability), net of tax
|
|
|
2,531
|
|
|
|
(1,750
|
)
|
|
|
(2,075
|
)
|
|
Adoption of SFAS No. 158, net of tax
|
|
|
—
|
|
|
|
(107
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
|
(24,478
|
)
|
|
|
(44,213
|
)
|
|
|
(41,591
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve Fund:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
137,511
|
|
|
|
133,759
|
|
|
|
126,820
|
|
|
Transfer from undivided profits
|
|
|
1,739
|
|
|
|
3,752
|
|
|
|
6,939
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
|
139,250
|
|
|
|
137,511
|
|
|
|
133,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Undivided Profits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
|
122,677
|
|
|
|
113,114
|
|
|
|
70,099
|
|
|
Net (loss) income
|
|
|
(36,245
|
)
|
|
|
43,169
|
|
|
|
79,806
|
|
|
Transfer to reseve fund
|
|
|
(1,739
|
)
|
|
|
(3,752
|
)
|
|
|
(6,939
|
)
|
|
Deferred tax benefit amortization
|
|
|
(3
|
)
|
|
|
(5
|
)
|
|
|
(3
|
)
|
|
Common stock cash dividends
|
|
|
(29,849
|
)
|
|
|
(29,849
|
)
|
|
|
(29,849
|
)
|
|
Cummulative effect of adoption of FIN No.48
|
|
|
(524
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
|
54,317
|
|
|
|
122,677
|
|
|
|
113,114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders’ equity
|
|
$
|
536,536
|
|
|
$
|
579,220
|
|
|
$
|
568,527
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
79
Santander BanCorp and Subsidiaries
Consolidated Statements of Comprehensive Income
Years Ended December 31, 2007, 2006 and 2005
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Comprehensive (loss) income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(36,245
|
)
|
|
$
|
43,169
|
|
|
$
|
79,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains (losses) on investment securities available for sale, net of tax
|
|
|
18,170
|
|
|
|
(926
|
)
|
|
|
(18,298
|
)
|
|
Reclassification adjustment for gains (losses) included in net (loss) income, net of tax
|
|
|
57
|
|
|
|
339
|
|
|
|
(15,733
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) on investment securities available for sale, net of tax
|
|
|
18,227
|
|
|
|
(587
|
)
|
|
|
(34,031
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized (loss) gain on derivative used for cash flow hedges, net of tax
|
|
|
(1,023
|
)
|
|
|
(178
|
)
|
|
|
1,333
|
|
|
Minimum pension benefit (liability), net of tax
|
|
|
2,531
|
|
|
|
(1,750
|
)
|
|
|
(2,075
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss), net of tax
|
|
|
19,735
|
|
|
|
(2,515
|
)
|
|
|
(34,773
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (loss) income
|
|
$
|
(16,510
|
)
|
|
$
|
40,654
|
|
|
$
|
45,033
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
80
Santander BanCorp and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 2007, 2006 and 2005
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(36,245
|
)
|
|
$
|
43,169
|
|
|
$
|
79,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net (loss) income to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
16,276
|
|
|
|
17,595
|
|
|
|
13,184
|
|
|
Deferred tax (benefit) provision
|
|
|
(23,833
|
)
|
|
|
(2,123
|
)
|
|
|
2,854
|
|
|
Provision for loan losses
|
|
|
147,824
|
|
|
|
65,583
|
|
|
|
20,400
|
|
|
Goodwill and other intangibles impairment charges
|
|
|
43,349
|
|
|
|
—
|
|
|
|
—
|
|
|
Gain on sale of securities
|
|
|
(1,265
|
)
|
|
|
—
|
|
|
|
(17,842
|
)
|
|
Gain on sale of loans
|
|
|
(6,658
|
)
|
|
|
(1,994
|
)
|
|
|
(7,876
|
)
|
|
Gain on sale of mortgage-servicing rights
|
|
|
(132
|
)
|
|
|
(170
|
)
|
|
|
(83
|
)
|
|
(Gain) loss on derivatives
|
|
|
(249
|
)
|
|
|
477
|
|
|
|
(1,964
|
)
|
|
Trading gains
|
|
|
(2,831
|
)
|
|
|
(1,243
|
)
|
|
|
(277
|
)
|
|
Net (discount) premium amortization (accretion) on securities
|
|
|
(6,782
|
)
|
|
|
(3,421
|
)
|
|
|
3,586
|
|
|
Net (discount) premium amortization (accretion) on loans
|
|
|
(1,793
|
)
|
|
|
(3,994
|
)
|
|
|
1,155
|
|
|
Stocks granted to employees
|
|
|
4,202
|
|
|
|
—
|
|
|
|
—
|
|
|
Purchases and originations of loans held for sale
|
|
|
(556,838
|
)
|
|
|
(908,272
|
)
|
|
|
(748,086
|
)
|
|
Proceeds from sales of loans
|
|
|
305,183
|
|
|
|
180,463
|
|
|
|
253,902
|
|
|
Repayments of loans held for sale
|
|
|
22,511
|
|
|
|
6,579
|
|
|
|
12,196
|
|
|
Proceeds from sales of trading securities
|
|
|
2,553,127
|
|
|
|
9,750,934
|
|
|
|
1,609,771
|
|
|
Purchases of trading securities
|
|
|
(2,576,040
|
)
|
|
|
(9,755,086
|
)
|
|
|
(1,612,989
|
)
|
|
Net change in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in accrued interest receivable
|
|
|
22,215
|
|
|
|
(24,280
|
)
|
|
|
(33,280
|
)
|
|
Increase in other assets
|
|
|
(116,664
|
)
|
|
|
(70,230
|
)
|
|
|
(10,303
|
)
|
|
(Decrease) increase in accrued interest payable
|
|
|
(13,889
|
)
|
|
|
26,085
|
|
|
|
42,494
|
|
|
(Decrease) increase in other liabilities
|
|
|
(37,657
|
)
|
|
|
31,899
|
|
|
|
19,708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustments
|
|
|
(229,944
|
)
|
|
|
(691,198
|
)
|
|
|
(453,450
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(266,189
|
)
|
|
|
(648,029
|
)
|
|
|
(373,644
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in interest-bearing deposits
|
|
|
46,016
|
|
|
|
49,578
|
|
|
|
(51,034
|
)
|
|
Proceeds from sales of investment securities available for sale
|
|
|
149,413
|
|
|
|
—
|
|
|
|
906,150
|
|
|
Proceeds from maturities of investment securities available for sale
|
|
|
36,258,629
|
|
|
|
29,621,084
|
|
|
|
23,250,923
|
|
|
Purchases of investment securities available for sale
|
|
|
(36,323,477
|
)
|
|
|
(29,591,661
|
)
|
|
|
(23,949,534
|
)
|
|
Purchases of other investments
|
|
|
(13,849
|
)
|
|
|
(8,848
|
)
|
|
|
(4,362
|
)
|
|
Repayment of securities and securities called
|
|
|
100,631
|
|
|
|
125,448
|
|
|
|
173,462
|
|
|
(Payments on) proceeds from derivative transactions
|
|
|
(434
|
)
|
|
|
(392
|
)
|
|
|
2,303
|
|
|
Purchases of mortgage loans
|
|
|
—
|
|
|
|
—
|
|
|
|
(289,881
|
)
|
|
Net decrease in loans
|
|
|
15,083
|
|
|
|
359,889
|
|
|
|
292,987
|
|
|
Proceeds from sales of mortgage-servicing rights
|
|
|
132
|
|
|
|
170
|
|
|
|
83
|
|
|
Proceeds from sale of buildings
|
|
|
56,750
|
|
|
|
—
|
|
|
|
—
|
|
|
Payment for the acquisition of net assets of consumer finance company, net
of cash and cash equivalents acquired
|
|
|
—
|
|
|
|
(740,761
|
)
|
|
|
—
|
|
|
Payment for the acquisition of net assets of insurance company, net of cash
and cash equivalents acquired
|
|
|
—
|
|
|
|
(2,074
|
)
|
|
|
—
|
|
|
Purchases of premises and equipment
|
|
|
(3,694
|
)
|
|
|
(5,611
|
)
|
|
|
(9,076
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
285,200
|
|
|
|
(193,178
|
)
|
|
|
322,021
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
81
Santander BanCorp and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 2007, 2006 and 2005
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in deposits
|
|
|
(168,296
|
)
|
|
|
89,349
|
|
|
|
489,835
|
|
|
Net increase (decrease) in federal funds purchased and other borrowings
|
|
|
323,710
|
|
|
|
859,554
|
|
|
|
(11,488
|
)
|
|
Net decrease in securities sold under agreements to repurchase
|
|
|
(194,972
|
)
|
|
|
(117,198
|
)
|
|
|
(401,677
|
)
|
|
Net increase (decrease) in commercial paper issued
|
|
|
74,933
|
|
|
|
(124,770
|
)
|
|
|
(295,225
|
)
|
|
Net (decrease) increase in term notes
|
|
|
(22,158
|
)
|
|
|
1,314
|
|
|
|
8,758
|
|
|
Issuance of subordinated capital notes
|
|
|
54
|
|
|
|
124,078
|
|
|
|
49,852
|
|
|
Dividends paid
|
|
|
(29,849
|
)
|
|
|
(29,849
|
)
|
|
|
(29,849
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(16,578
|
)
|
|
|
802,478
|
|
|
|
(189,794
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CHANGE IN CASH AND CASH EQUIVALENTS
|
|
|
2,433
|
|
|
|
(38,729
|
)
|
|
|
(241,417
|
)
|
|
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
|
|
|
199,264
|
|
|
|
237,993
|
|
|
|
479,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF YEAR
|
|
$
|
201,697
|
|
|
$
|
199,264
|
|
|
$
|
237,993
|
|
|
|
|
|
|
|
|
|
|
|
|
(Concluded)
The accompanying notes are an integral part of these financial statements.
82
Santander BanCorp and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 2007, 2006 and 2005
1. Summary of Significant Accounting Policies and Other Matters:
The accounting and reporting policies of Santander BanCorp (the “Corporation”), a 91% owned
subsidiary of Banco Santander, S.A. (Santander Group), conform with accounting principles generally
accepted in the United States of America (hereinafter referred to as “generally accepted accounting
principles” or “GAAP”) and with general practices within the financial services industry.
Following is a summary of the Corporation’s most significant accounting policies:
Nature of Operations and Use of Estimates
Santander BanCorp is a financial holding company offering a full range of financial services
through its wholly owned banking subsidiary Banco Santander Puerto Rico and Subsidiaries (the
“Bank”). The Corporation also engages in broker-dealer, asset management, mortgage banking,
consumer finance, international banking, insurance agency services and insurance products through
its subsidiaries, Santander Securities Corporation, Santander Asset
Management Corporation, Santander Mortgage
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 consolidated financial statements in conformity with generally accepted accounting
principles, management is required to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date
of the consolidated financial statements, and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. Material estimates that
are particularly susceptible to significant change in the near term relate to the determination of
the allowance for loan losses, impairment of goodwill and other intangibles, income taxes, and the
valuation of foreclosed real estate, deferred tax assets and financial instruments.
Principles of Consolidation
The consolidated financial statements include the accounts of the Corporation, the Bank and the
Bank’s wholly owned subsidiaries, Santander Mortgage Corporation and 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 was merged into the Bank
and ceased to operate as a separate legal entity.
Cash equivalents
All highly liquid instruments with a maturity of three months or less, when acquired or generated,
are considered cash equivalents.
Securities Purchased/Sold under Agreements to Resell/Repurchase
Repurchase and resell agreements are treated as collateralized financing transactions and are
carried at the amounts at which the assets will be subsequently reacquired or resold.
The counterparties to securities purchased under resell agreements maintain effective control over
such securities and accordingly, those securities are not reflected in the Corporation’s
consolidated balance sheets. The Corporation monitors the market value of the underlying
securities as compared to the related receivable, including accrued interest, and requests
additional collateral where deemed appropriate.
83
The Corporation maintains effective control over assets sold under agreements to repurchase;
accordingly, such securities continue to be carried on the consolidated balance sheets.
Investment Securitie
s
Investment securities are classified in four categories and accounted for as follows:
|
|
•
|
|
Debt securities that the Corporation has the intent and ability to hold to maturity are
classified as securities held to maturity and reported at cost adjusted for premium
amortization and discount accretion. The Corporation may not sell or transfer
held-to-maturity securities without calling into question its intent to hold other
securities to maturity, unless a nonrecurring or unusual event that could not have been
reasonably anticipated has occurred.
|
|
|
|
|
•
|
|
Debt and equity securities that are bought and held principally for the purpose of
selling them in the near term are classified as trading securities and reported at fair
value with unrealized gains and losses included in results of operations. Financial
instruments including, to a limited extent, derivatives, such as option contracts, are used
by the Corporation in dealing and other trading activities and are carried at fair value.
Interest revenue and expense arising from trading instruments are included in the
consolidated statements of operations as part of net interest income.
|
|
|
|
|
•
|
|
Debt and equity securities not classified as either securities held to maturity or
trading securities, and which have a readily available fair value, are classified as
securities available for sale and reported at fair value, with unrealized gains and losses
reported, net of tax, in accumulated other comprehensive income (loss). The specific
identification method is used to determine realized gains and losses on sales of securities
available for sale, which are included in gain (loss) on sale of investment securities in
the consolidated statements of operations.
|
|
|
|
|
•
|
|
Investments in debt, equity or other securities, that do not have readily determinable
fair values, are classified as other investment securities in the consolidated balance
sheets. These securities are stated at cost. Stock that is owned by the Corporation to
comply with regulatory requirements, such as Federal Home Loan Bank (FHLB) stock, is
included in this category.
|
The amortization of premiums is deducted and the accretion of discounts is added to net interest
income based on a method which approximates the interest method over the outstanding life of the
related securities. The cost of securities sold is determined by specific identification. For
securities available for sale, held to maturity and other investment securities, the Corporation
reports separately in the consolidated statements of operations, net realized gains or losses on
sales of investment securities and unrealized loss valuation adjustments considered other than
temporary, if any.
Derivative Financial Instruments
The Corporation uses derivative financial instruments mostly as hedges of interest rate risk,
changes in fair value of assets and liabilities and to secure future cash flows.
All of the Corporation’s derivative instruments are recognized as assets 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”).
In the case of a qualifying fair value hedge, changes in the value of the derivative instruments
that have been highly effective are recognized in current period results of operations along with
the change in value of the designated hedged item. If the hedge relationship is terminated, hedge
accounting is discontinued and any balance related to the derivative is recognized in current
operations, and the fair value adjustment to the hedged item continues to be reported as part of
the basis of the item and is amortized to earnings as a yield adjustment. 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 results of operations.
84
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.
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 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.
Acquired Loans
AICPA Statement of Position 03-3, “Accounting for Certain loans or Debt Securities Acquired in a
Transfer” (“SOP 03-3”) which became effective for loans acquired in fiscal years subsequent to
December 31, 2004, requires that purchased impaired loans be recorded at fair value and prohibits
the carryover of an allowance for loan losses on certain loans acquired in a business combination
accounted for as a purchase. Pursuant to SOP 03-3, for certain acquired loans that have experienced
deterioration of credit quality between origination and the Corporation’s acquisition of the loans,
the amount paid for the loans reflects the Corporation’s determination that it is probable that the
Corporation will be unable to collect all amounts due according to the loan’s contractual terms.
Certain of the loans acquired in connection with the acquisition of Island Finance had experienced
credit deterioration since the date of origination to the date of acquisition and were accounted
for under SOP 03-3. At acquisition, the Corporation reviewed each loan to determine whether there
was evidence of deterioration of credit quality since origination and if it was probable that the
Corporation would be unable to collect all amounts due according to the loans’ contractual terms.
For these loans, the excess of undiscounted contractual cash flows over the undiscounted cash flows
estimated at the time of acquisition is not accreted into income (nonaccretable difference). The
amount representing the excess of cash flows estimated at acquisition over the purchase price is
accreted into purchase discount earned over the life of the loan (accretable yield).
The nonaccretable difference is not accreted into income. If cash flows cannot be reasonably
estimated for any loan, and collection is not probable, the cost recovery method of accounting may
be used. Under the cost recovery method, any amounts received are applied against the recorded
amount of the loan.
85
Subsequent to acquisition, if cash flow projections improve, and it is determined that the amount
and timing of the cash flows related to the nonaccretable difference are reasonably estimable and
collection is probable, the corresponding decrease in the nonaccretable difference is transferred
to the accretable discount and is accreted into interest income over the remaining life of the
loans. If cash flow projections deteriorate subsequent to acquisition, the decline is accounted
for through the allowance for loan losses.
There is judgment involved in estimating the amount of the loans’ future cash flows. The amount
and timing of actual cash flows could differ materially from management’s estimates, which could
materially affect the Corporation’s financial condition and results of operations.
Off-Balance Sheet Instruments
In the ordinary course of business, the Corporation enters into off-balance sheet instruments
consisting of commitments to extend credit, stand by letters of credit and financial guarantees.
Such financial instruments are recorded in the consolidated financial statements when they are
funded or when related fees are incurred or received. The Corporation periodically evaluates the
credit risks inherent in these commitments, and establishes loss allowances for such risks if and
when these are deemed necessary.
The Corporation recognized as liabilities the fair value of the obligations undertaken in issuing
the guarantees under the standby letters of credit issued or modified after December 31, 2002, net
of the related amortization at inception. The fair value approximates the unamortized fees received
from the customers for issuing the standby letters of credit. The fees are deferred and recognized
on a straight-line basis over the commitment period. Standby letters of credit outstanding at
December 31, 2007 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.
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 collectibility 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.
86
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.
In April 2007, the Bank transferred its merchant business to a subsidiary, MBPR Services, Inc.
(“MBPR”). The Bank subsequently sold the stock of MBPR to an unrelated third party. For an interim
period that ended October 30, 2007, the Bank provided certain processing and other services to the
third party acquirer. The gain on the transaction of $12.3 million was recognized in the fourth
quarter of 2007. As part of the transaction, the Bank entered into a long-term marketing alliance
agreement with the third party and will serve as its sponsor with the card associations and network
organizations. The Bank expects to offer better products and services to its merchant client base
and to obtain certain cost efficiencies as a result of this transaction.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation and amortization which is
computed utilizing the straight-line method over the estimated useful lives of the assets that
range between three and fifty years. Leasehold improvements are stated at cost and are amortized
using the straight-line method over the estimated useful lives of the assets or the term of the
lease, whichever is lower. Gains or losses on dispositions are reflected in current operations.
Costs of maintenance and repairs that do not improve or extend the lives of the respective assets
are charged to expense as incurred. Costs of renewals and improvements are capitalized. When
assets are sold or disposed of, their cost and related accumulated depreciation are removed from
the accounts and any gain or loss is reflected in earnings when realized.
Other Real Estate
Other real estate, normally obtained through foreclosure or other workout situations, is included
in other assets and stated at the lower of fair value or carrying value minus estimated costs to
sell. Upon foreclosure, the recorded amount of the loan is written-down, if applicable, to the
fair value less estimated costs of disposal of the real estate acquired, by charging the allowance
for loan losses. Subsequent to foreclosure, any losses in the carrying value of the asset resulting
from periodic valuations of the properties are charged to expense in the period incurred. Gains or
losses on disposition of other real estate and related operating income and maintenance expenses
are included in current operations.
Goodwill and Intangible Assets
The Corporation accounts for goodwill in accordance with SFAS No. 142, “Goodwill and Other
Intangible Assets.” The reporting units are tested for impairment annually to determine whether
their carrying value exceeds their fair market value. Should this be the case, the value of
goodwill or indefinite-lived intangibles may be impaired and written down. Goodwill and other
indefinite lived intangible assets are also tested for impairment on an interim basis if an event
occurs or circumstances change between annual tests that would more likely than not reduce the fair
value of the reporting unit below its carrying amount. If there is a determination that the fair
value of the goodwill or other identifiable intangible asset is less than the carrying value, an
impairment loss is recognized in an amount equal to the difference. Impairment losses, if any, are
reflected in operating expenses in the consolidated statement of operations.
87
In accordance with SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”,
the Corporation reviews finite-lived intangible assets for impairment whenever an event occurs or
circumstances change which indicate that the carrying amount of such assets may not be fully
recoverable. Determination of recoverability is based on the estimate of undiscounted future cash
flows resulting from the use of the asset and its eventual disposition. Measurement of an
impairment loss is based on the fair value of the asset compared to its carrying value. If the fair
value of the asset is determined to be less that the carrying value, an impairment loss is incurred
in the amount equal to the difference. Impairment losses, if any, are reflected in operation
expenses in the consolidated statements of operations.
The Corporation uses judgment in assessing goodwill and intangible assets for impairment.
Estimates of fair value are based on projections of revenues, operating costs and cash flows of
each reporting unit considering historical and anticipated future results, general economic and
market conditions as well as the impact of planned business or operational strategies. The
valuations employ a combination of present value techniques to measure fair value and consider
market factors. Generally, the Corporation engages third party specialists to assist with its
valuations. Additionally, judgment is used in determining the useful lives of finite-lived
intangible assets. Changes in judgments and projections could result in a significantly different
estimate of the fair value of the reporting units and could result in an impairment of goodwill.
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
The Corporation’s mortgage-servicing rights (“MSRs”) are stated at the lower of carrying value or
fair value at each balance sheet date. 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 year ended December 31, 2007. An impairment loss amounting
to $51,000 and $214,000 was recognized for the years ended December 31, 2006 and 2005,
respectively.
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 balances.
The Corporation recognizes as a separate asset the right to service mortgage loans for others
whenever those servicing rights are acquired. The Corporation acquires MSRs by purchasing or
originating loans and selling or securitizing those loans (with the servicing rights retained) and
allocates the total cost of the mortgage loans sold to the MSRs (included in intangible assets in
the accompanying consolidated balance sheets) and the loans based on their relative fair values.
Further, mortgage-servicing rights are assessed for impairment based on the fair value of those
rights. MSRs are amortized over the estimated life of the related servicing income. Mortgage
loan-servicing fees, which are based on a percentage of the principal balances of the mortgages
serviced, are credited to income as mortgage payments are collected.
Mortgage loans serviced for others are not included in the accompanying consolidated balance
sheets. At December 31, 2007 and 2006, the unpaid principal balances of mortgage loans serviced
for others amounted to approximately $1,056,000,000 and $818,364,000, respectively. In connection
with these mortgage-servicing activities, the Corporation administered escrow and other custodial
funds which amounted to approximately $3,254,000 and $2,958,000 at December 31, 2007 and 2006,
respectively.
88
Trust Services
In connection with its trust activities, the Corporation administers and is custodian of assets
amounting to approximately $1,113,000,000 and $3,718,000,000 at December 31, 2007 and December 31,
2006, respectively. Due to the nature of trust activities, these assets are not included in the
Corporation’s consolidated balance sheets. In December 2006, the Corporation sold to an
unaffiliated third party the servicing rights with respect to the following trust accounts:
personal trust, customer employee benefit plans, guardianship accounts, insurance trust, escrow
accounts and securities custody accounts. No gain or loss was recognized on this transaction on
December 2006. For the year ended 2007, a gain of $454,000 was recognized as a result of the
completion of the transfer of trust accounts. Since December 31, 2006, the Corporation’s Trust
Division is focusing its efforts on transfer and paying agent and Individual Retirement Account
(IRA) services.
While the assets and operations of the Trust Division of the Corporation meet the definition of
“discontinued operations,” as defined in SFAS No. 144, “Accounting for the Impairment or Disposal
of Long-Lived Assets,” the Corporation has not segregated the Division’s assets and results of
operation, as the amounts are immaterial.
Broker-dealer and Asset Management Commissions
Commissions of the Corporation’s broker-dealer operations are composed of brokerage commission
income and expenses recorded on a trade date basis and proprietary securities transactions recorded
on a trade date basis. Investment banking revenues include gains, losses and fees net of syndicate
expenses, arising from securities offerings in which the Corporation acts as an underwriter or
agent. Investment banking management fees are recorded on offering date, sales concessions on trade
date, and underwriting fees at the time the underwriting is completed and the income is reasonably
determinable. Revenues from portfolio and other management and advisory fees include fees and
advisory charges resulting from the asset management of certain funds and are recognized over the
period when services are rendered.
Insurance Commissions
The Corporation’s insurance agency operation earns commissions on the sale of insurance policies
issued by unaffiliated insurance companies. Commission revenue is reported net of the provision for
commission returns on insurance policy cancellations, which is based on management’s estimate of
future insurance policy cancellations as a result of historical turnover rates by types of credit
facilities subject to insurance.
Treasury Stock
Treasury stock is recorded at cost and is carried as a reduction of stockholders’ equity in the
consolidated balance sheets. As of December 31, 2007 treasury stock has not been retired or
reissued.
Income Taxes
The Corporation uses the asset and liability balance sheet method for the recognition of deferred
tax assets and liabilities for the expected future tax consequences of events that have been
recognized in the Corporation’s financial statements or tax returns. Deferred income tax assets
and liabilities are determined for differences between financial statement and tax bases of assets
and liabilities that will result in taxable or deductible amounts in the future. The computation
is based on enacted tax laws and rates applicable to periods in which the temporary differences are
expected to be recovered or settled. Valuation allowances are established, when necessary, to
reduce deferred tax assets to the amount that is more likely than not to be realized.
The Corporation accounts for uncertain tax positions in accordance with FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes” (“FIN 48”). Accordingly, the Corporation reports a
liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to
be taken in a tax return. The Corporation recognizes interest and penalties, if any, related to
unrecognized tax benefits in income tax expense.
Earnings Per Common Share
Basic and diluted earnings per common share are computed by dividing net income available to common
stockholders, by the weighted average number of common shares outstanding during the period. The
Corporation’s average number of common shares outstanding, used in the computation of earnings per
common share were 46,639,104 for the years ended December 31, 2007, 2006 and 2005. Basic and
diluted earnings per common share are the same since no stock options or other potentially dilutive
common shares were outstanding during the years ended December 31, 2007, 2006 and 2005.
89
Statements of Cash Flows
Supplemental Disclosures of Cash Flow Information:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
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|
|
2005
|
|
|
|
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(Dollars in thousands)
|
|
|
Cash paid during the year for:
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|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
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$
|
376,420
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|
|
$
|
301,619
|
|
|
$
|
195,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
23,648
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|
|
$
|
34,937
|
|
|
$
|
6,713
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash transactions:
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|
|
|
|
|
|
|
|
|
|
|
|
|
Long term incentive plans (See Note 18)
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$
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14,762
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|
|
$
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—
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|
|
$
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—
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|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum pension benefit (liability) (See Note 17)
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|
$
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2,531
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|
|
$
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(1,750
|
)
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|
$
|
(2,075
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)
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|
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|
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Initial adoption of SFAS No. 158 (See Note 17)
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$
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—
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|
|
$
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(107
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)
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|
$
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—
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|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
Contribution
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$
|
4,202
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|
|
$
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|
|
|
$
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|
|
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|
|
|
|
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Recent Accounting Pronouncements that Affect the Corporation
The adoption of the following accounting pronouncements did not have a material impact on the
Corporation’s consolidated results of operations and financial condition:
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•
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FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes
” (“FIN 48”). In
July 2006, the FASB issued FIN 48,
“Accounting for Uncertainty in Income Taxes—an
interpretation of FASB Statement No. 109”
, which clarifies the accounting for uncertainty
in tax positions. This Interpretation requires that the Corporation recognize in the
financial statements, the impact of a tax position, if that position is more likely than
not of being sustained on audit, based on the technical merits of the position. In
evaluating the more-likely-than-not recognition threshold, a Corporation should presume the
tax position will be subject to examination by a taxing authority with full knowledge of
all relevant information. The provisions of FIN 48 were effective on January 1, 2007 and
resulted in a reduction of retained earnings of $524,000.
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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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•
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SFAS No. 157, “Fair Value Measurements.”
In September 2006, the FASB issued SFAS No.
157, “Fair Value Measurements,” which provides enhanced guidance for using fair value to
measure assets and liabilities. SFAS No. 157 establishes a common definition of fair value,
provides a framework for measuring fair value under U.S. GAAP and expands disclosure
requirements about fair value measurements. SFAS No. 157 is effective for financial
statements issued in fiscal years beginning after November 15, 2007, and interim periods
within those fiscal years. The Corporation is currently evaluating the impact, if any, the
adoption of SFAS No. 157 will have on the Corporation’s consolidated financial statements,
including disclosures.
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•
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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,” which
permits entities to choose to measure many financial instruments and certain other items at
fair value. The objective is to improve financial reporting by providing entities with the
opportunity to mitigate volatility in reported earnings caused by measuring related assets
and liabilities differently without having to apply complex hedge accounting provisions.
This statement is effective as of the beginning of an entity’s first fiscal year that
begins after November 15, 2007. The Corporation is currently evaluating the impact, if any,
the adoption of SFAS No. 159 will have on the Corporation’s consolidated financial
statements, including disclosures.
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•
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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
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90
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adoption of FSP FIN No. 39-1 in 2008 did not have a material
impact on the Corporation’s consolidated financial statements and disclosures.
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•
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SOP 07-01“Clarification of the Scope of the Audit and Accounting Guide Investment
Companies and Accounting by Parent Companies and Equity Method Investors for Investments in
Investment Companies.”
The Statement of Position 07-1 (“SOP 07-01”), issued in June 2007,
provides guidance for determining whether an entity is within the scope of the American
Institute of Certified Public Accountants (“AICPA”) Audit and Accounting Guide for
Investment Companies (“the AICPA Guide”). Additionally, it provides guidance as to whether
a parent company or an equity method investor can apply the specialized industry accounting
principles of the AICPA Guide. SOP 07-01 was to be effective for fiscal years beginning on
or after December 15, 2007. On February of 2008, the FASB issued a final staff position
that indefinitely defers the effective dates of SOP 07-01 and, for entities that meet the
definition of an “investment company” in SOP 07-01, of FSP FIN 46(R)-7, “Application of
FASB Interpretation No. 46(R) to Investment Companies.” The FASB decision was in response
to several implementation issues that arose after SOP 07-01 was issued. Nevertheless,
management is evaluating the impact, if any, that the adoption of SOP 07-01 may have on its
consolidated financial statements and disclosures.
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•
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FSP FIN No. 46(R) — 7 “Application of FASB Interpretation No. 46(R) to Investment
Companies.”
In May 2007, the FASB issued Staff Position FSP FIN No.46(R) -7, which amends
the scope of the exception on FIN No.46(R) to indicate that investments accounted for at
fair value, in accordance with the specialized accounting guidance in the AICPA Guide, are
not subject to consolidation under FIN No. 46(R). Management is evaluating the impact, if
any, that the adoption of this interpretation may have on its consolidated financial
statements and disclosures. As indicated under the guidance of SOP 07-01, which was
previously described, the implementation of FSP FIN No. 46(R) -7 is indefinitely delayed
until further notification by the FASB.
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•
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SFAS No. 141-R “Statement of Financial Accounting Standards No. 141(R), Business
Combinations (a revision of SFAS No. 141.)”
In December 2007, the FASB issued SFAS No.
141(R) “Business Combinations.” SFAS No. 141(R) will significantly change how entities
apply the acquisition method to business combinations. The most significant changes
affecting how the Corporation will account for business combinations under this statement
include the following: the acquisition date will be the date the acquirer obtains control;
all (and only) identifiable assets acquired, liabilities assumed, and noncontrolling
interests in the acquiree will be stated at fair value on the acquisition date; assets or
liabilities arising from noncontractual contingencies will be measured at their acquisition
date at fair value only if it is more likely than not that they meet the definition of an
asset or liability on the acquisition date; adjustments subsequently made to the
provisional amounts recorded on the acquisition date will be made retroactively during a
measurement period not to exceed one year; acquisition-related restructuring costs that do
not meet the criteria in SFAS No. 146 “Accounting for Costs Associated with Exit or
Disposal Activities” will be expensed as incurred; transaction costs will be expensed as
incurred; reversals of deferred income tax valuation allowances and income tax
contingencies will be recognized in earnings subsequent to the measurement period; and the
allowance for loan losses of an acquiree will not be permitted to be recognized by the
acquirer. Additionally, SFAS 141(R) will require new and modified disclosures surrounding
subsequent changes to acquisition-related contingencies, contingent consideration,
noncontrolling interests, acquisition-related transaction costs, fair values and cash flows
not expected to be collected for acquired loans, and an enhanced goodwill rollforward. The
Corporation will be required to prospectively apply SFAS 141(R) to all business
combinations completed on or after January 1, 2009. Early adoption is not permitted. For
business combinations in which the acquisition date was before the effective date, the
provisions of SFAS 141(R) will apply to the subsequent accounting for deferred income tax
valuation allowances and income tax contingencies and will require any changes in those
amounts to be recorded in earnings. Management will be evaluating the effects that SFAS
141(R) will have on the financial condition, results of operations, liquidity, and the
disclosures that will be presented on the consolidated financial statements.
|
|
|
|
|
•
|
|
SFAS No. 160 “Statement of Financial Accounting Standards No. 160, Noncontrolling
Interest in Consolidated Financial Statements, an amendment of ARB No. 51.”
In December
2007, the FASB issued SFAS No. 160, which amends ARB No. 51, to establish accounting and
reporting standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. SFAS No. 160 will require entities to classify
noncontrolling interests as a component of stockholders’ equity on the consolidated
financial statements and will require subsequent changes in ownership interests in a
subsidiary to be accounted for as an equity transaction. Additionally, SFAS No. 160 will
require entities to recognize a gain or loss upon the loss of control of a subsidiary and
to remeasure any ownership interest retained at fair value on that date. This statement
also requires expanded disclosures that clearly identify and distinguish between the
interests of the parent and the interests of the noncontrolling owners. SFAS 160 is
effective on a prospective basis for fiscal years, and interim periods within those fiscal
years, beginning on or after December 15, 2008, except for the presentation and disclosure
requirements, which are required to be applied retrospectively. Early
|
91
|
|
|
|
adoption is not permitted. Management will be evaluating the effects, if any, that the
adoption of this statement will have on its consolidated financial statements.
|
|
|
•
|
|
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 Corporation is currently evaluating the potential
impact of adopting this SAB 109.
|
|
|
|
|
•
|
|
Staff Position (FSP) FAS 140-d, “Accounting for Transfers of Financial Assets and
Repurchase Financing Transactions"(“FSP FAS 140-d”).
In February 2008, the FASB issued FASB
Staff Position (FSP) FAS 140-d, “Accounting for Transfers of Financial Assets and
Repurchase Financing Transactions.” The objective of this FSP is to provide implementation
guidance on whether the security transfer and contemporaneous repurchase financing
involving the transferred financial asset must be evaluated as one linked transaction or
two separate de-linked transactions. Current practice records the transfer as a sale and
the repurchase agreement as a financing. The FSP requires the recognition of the transfer
and the repurchase agreement as one linked transaction, unless all of the following
criteria are met: (1) the initial transfer and the repurchase financing are not
contractually contingent on one another; (2) the initial transferor has full recourse upon
default, and the repurchase agreement’s price is fixed and not at fair value; (3) the
financial asset is readily obtainable in the marketplace and the transfer and repurchase
financing are executed at market rates; and (4) the maturity of the repurchase financing is
before the maturity of the financial asset. The scope of this FSP is limited to transfers
and subsequent repurchase financings that are entered into contemporaneously or in
contemplation of one another. The FSP will be effective for the Corporation on January 1,
2009. Early adoption is prohibited. The Corporation will be evaluating the potential impact
of adopting this FSP.
|
2. Trading Securities:
Proceeds from sales of trading securities during 2007, 2006 and 2005 were approximately
$2,553,127,000, $9,750,934,000 and $1,609,771,000, respectively. Net gains of approximately
$2,660,000, $1,117,000 and $1,099,000 were realized during 2007, 2006 and 2005, respectively.
During 2007, 2006 and 2005, an unrealized holding gain of $3,000, $96,000 and a loss of $294,000
were recognized, respectively. Trading gain on futures transactions of $168,000 and $30,000 was
realized in 2007 and 2006 and trading losses on futures transactions of $528,000 was realized in
2005.
92
3. Investment Securities Available for Sale:
The amortized cost, gross unrealized gains and losses, fair value and weighted average yield of
investment securities available for sale by contractual maturity are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 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 but within 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
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
|
|
|
|
|
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
|
|
$
|
252,497
|
|
|
$
|
29
|
|
|
$
|
28
|
|
|
$
|
252,498
|
|
|
|
4.90
|
%
|
|
After one year to five years
|
|
|
485,258
|
|
|
|
—
|
|
|
|
15,421
|
|
|
|
469,837
|
|
|
|
3.89
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
737,755
|
|
|
|
29
|
|
|
|
15,449
|
|
|
|
722,335
|
|
|
|
4.24
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commonwealth of Puerto Rico and its subdivisions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within one year
|
|
|
950
|
|
|
|
—
|
|
|
|
2
|
|
|
|
948
|
|
|
|
3.85
|
%
|
|
After one year to five years
|
|
|
16,005
|
|
|
|
—
|
|
|
|
523
|
|
|
|
15,482
|
|
|
|
4.26
|
%
|
|
After five years to ten years
|
|
|
24,966
|
|
|
|
6
|
|
|
|
407
|
|
|
|
24,565
|
|
|
|
5.28
|
%
|
|
Over ten years
|
|
|
14,781
|
|
|
|
166
|
|
|
|
—
|
|
|
|
14,947
|
|
|
|
5.79
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56,702
|
|
|
|
172
|
|
|
|
932
|
|
|
|
55,942
|
|
|
|
5.10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Over ten years
|
|
|
653,521
|
|
|
|
—
|
|
|
|
22,084
|
|
|
|
631,437
|
|
|
|
4.99
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within one year
|
|
|
25
|
|
|
|
—
|
|
|
|
—
|
|
|
|
25
|
|
|
|
7.50
|
%
|
|
After one year to five years
|
|
|
50
|
|
|
|
—
|
|
|
|
—
|
|
|
|
50
|
|
|
|
4.65
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75
|
|
|
|
—
|
|
|
|
—
|
|
|
|
75
|
|
|
|
5.60
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,448,053
|
|
|
$
|
201
|
|
|
$
|
38,465
|
|
|
$
|
1,409,789
|
|
|
|
4.57
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
93
The number of positions, fair value and unrealized losses at 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months
|
|
|
12 months or more
|
|
|
Total
|
|
|
|
|
Number
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
|
|
|
|
|
of
|
|
|
Fair
|
|
|
Unrealized
|
|
|
of
|
|
|
Fair
|
|
|
Unrealized
|
|
|
of
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
|
Positions
|
|
|
Value
|
|
|
Losses
|
|
|
Positions
|
|
|
Value
|
|
|
Losses
|
|
|
Positions
|
|
|
Value
|
|
|
Losses
|
|
|
|
|
(Dollars in thousands)
|
|
|
Treasury and agencies
of the United States
Government
|
|
|
5
|
|
|
$
|
228,590
|
|
|
$
|
57
|
|
|
|
4
|
|
|
$
|
152,132
|
|
|
$
|
360
|
|
|
|
9
|
|
|
$
|
380,722
|
|
|
$
|
417
|
|
|
Commonwealth of Puerto
Rico and its subdivisions
|
|
|
1
|
|
|
|
9,162
|
|
|
|
118
|
|
|
|
18
|
|
|
|
30,420
|
|
|
|
632
|
|
|
|
19
|
|
|
|
39,582
|
|
|
|
750
|
|
|
Mortgage-backed
securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
31
|
|
|
|
545,182
|
|
|
|
11,350
|
|
|
|
31
|
|
|
|
545,182
|
|
|
|
11,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
$
|
237,752
|
|
|
$
|
175
|
|
|
|
53
|
|
|
$
|
727,734
|
|
|
$
|
12,342
|
|
|
|
59
|
|
|
$
|
965,486
|
|
|
$
|
12,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Corporation evaluates its investment securities for other-than-temporary impairment on a
quarterly basis or earlier if other factors indicative of potential impairment exist. An
impairment charge in the consolidated statements of income is recognized when the decline in the
fair value of the securities below their cost basis is judged to be other-than-temporary. The
Corporation considers various factors in determining whether it should recognize an impairment
charge, including, but not limited to the length of time and extent to which the fair value has
been less than its cost basis, expectation of recoverability of its original investment in the
securities and the Corporation’s intent and ability to hold the securities for a period of time
sufficient to allow for any forecasted recovery of fair value up to (or beyond) the cost of the
investment.
As of December 31, 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 of 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 amortized
cost of the investment. Since the Corporation has the ability and intent to hold these investments
until a recovery of fair value, which may be maturity, the Corporation does not consider these
investments to be other-than-temporarily impaired at December 31, 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 not be settled at a price less than the amortized cost of the Corporation’s
investment. The decline in market value is attributable to changes in interest rates and not
credit quality and since the Corporation has the ability and intent to hold these investments
until a recovery of fair value, which may be maturity, the Corporation does not consider these
investments to be other-than-temporarily impaired at December 30, 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.
Proceeds from sales of investment securities available for sale were approximately $149,413,000 and
$906,150,000 in 2007 and 2005, respectively. There were no sales of investment securities available
for sale during 2006. Gross gains of approximately $1,265,000 and
$17,850,000 were realized in 2007
and 2005, respectively. Gross loss of approximately $7,800 was realized in 2005.
94
4. Assets Pledged:
At December 31, 2007 and 2006, investment securities and loans were pledged to secure deposits of
public funds. The classification and
carrying amount of pledged assets, which the secured parties are not permitted to sell or repledge
as of December 31, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(Dollars in thousands)
|
|
|
Investment
Securities available for sale
|
|
|
415,278
|
|
|
|
356,728
|
|
|
Loans
|
|
|
306,557
|
|
|
|
313,582
|
|
|
Other
|
|
|
—
|
|
|
|
22,004
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
721,835
|
|
|
$
|
692,314
|
|
|
|
|
|
|
|
|
|
Pledge
securities, that the creditor has the right or contract to repledge,
are presented separately on the consolidated balance sheet.
At December 31, 2007 and 2006, investment securities with a carrying value of approximately
$683,326,000 and $867,944,000, respectively, were pledged to securities sold under agreements to
repurchase.
5. Loans:
The Corporation’s loan portfolio at December 31 consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(Dollars in thousands)
|
|
|
Commercial and industrial
|
|
$
|
2,530,806
|
|
|
$
|
2,489,959
|
|
|
Consumer
|
|
|
672,888
|
|
|
|
604,619
|
|
|
Consumer Finance
|
|
|
946,209
|
|
|
|
849,036
|
|
|
Leasing
|
|
|
98,987
|
|
|
|
143,836
|
|
|
Construction
|
|
|
486,284
|
|
|
|
438,573
|
|
|
Mortgage
|
|
|
2,539,811
|
|
|
|
2,453,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,274,985
|
|
|
|
6,979,452
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned income and deferred fees/costs:
|
|
|
|
|
|
|
|
|
|
Commercial
and Industrial
|
|
|
(3,459
|
)
|
|
|
(8,404
|
)
|
|
Consumer Finance
|
|
|
(335,096
|
)
|
|
|
(223,769
|
)
|
|
Allowance for loan losses
|
|
|
(166,952
|
)
|
|
|
(106,863
|
)
|
|
|
|
|
|
|
|
|
|
Loans, net
|
|
$
|
6,769,478
|
|
|
$
|
6,640,416
|
|
|
|
|
|
|
|
|
|
95
At December 31, the recorded investment in loans that were considered impaired is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(Dollars in thousands)
|
|
|
Impaired loans with related allowance
|
|
$
|
152,907
|
|
|
$
|
19,069
|
|
|
Impaired loans that did not require allowance
|
|
|
52,681
|
|
|
|
38,170
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans
|
|
$
|
205,588
|
|
|
$
|
57,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for impaired loans
|
|
$
|
25,594
|
|
|
$
|
4,360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans measured based on fair value of collateral
|
|
$
|
81,260
|
|
|
$
|
57,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans measured based on discounted cash flows
|
|
$
|
124,328
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income recognized on impaired loans
|
|
$
|
705
|
|
|
$
|
419
|
|
|
|
|
|
|
|
|
|
The average balance of impaired loans for the years ended December 31, 2007 and 2006 was
approximately $105 million and $53 million, respectively.
The following schedule reflects the approximate outstanding principal amount and the effect on
earnings of non-accruing loans and past due loans still on an
interest accrual basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
(Dollars in thousands)
|
|
|
Principal balance as of December 31
|
|
$
|
294,438
|
|
|
$
|
106,852
|
|
|
$
|
73,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income which would have been recorded had the
loans not been classified as non-accruing
|
|
$
|
7,708
|
|
|
$
|
3,112
|
|
|
$
|
2,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans past due ninety days or more and still accruing interest
|
|
$
|
7,162
|
|
|
$
|
20,938
|
|
|
$
|
2,999
|
|
|
|
|
|
|
|
|
|
|
|
|
96
6. Allowance for Loan Losses:
Changes in the allowance for loan losses are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
(Dollars in thousands)
|
|
|
Balance at beginning of year
|
|
$
|
106,863
|
|
|
$
|
66,842
|
|
|
$
|
69,177
|
|
|
Allowance acquired (Island Finance)
|
|
|
—
|
|
|
|
35,104
|
|
|
|
—
|
|
|
Provision for loan losses
|
|
|
147,824
|
|
|
|
65,583
|
|
|
|
20,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
254,687
|
|
|
|
167,529
|
|
|
|
89,577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses charged to the allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
10,375
|
|
|
|
9,792
|
|
|
|
8,044
|
|
|
Construction
|
|
|
2,710
|
|
|
|
—
|
|
|
|
1,438
|
|
|
Mortgage
|
|
|
1,768
|
|
|
|
—
|
|
|
|
—
|
|
|
Consumer
|
|
|
29,281
|
|
|
|
16,679
|
|
|
|
17,351
|
|
|
Consumer Finance
|
|
|
44,484
|
|
|
|
38,345
|
|
|
|
—
|
|
|
Leasing
|
|
|
2,742
|
|
|
|
2,071
|
|
|
|
986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91,360
|
|
|
|
66,887
|
|
|
|
27,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
1,192
|
|
|
|
2,463
|
|
|
|
1,686
|
|
|
Consumer
|
|
|
904
|
|
|
|
1,677
|
|
|
|
2,646
|
|
|
Consumer Finance
|
|
|
1,088
|
|
|
|
1,314
|
|
|
|
—
|
|
|
Leasing
|
|
|
441
|
|
|
|
767
|
|
|
|
752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,625
|
|
|
|
6,221
|
|
|
|
5,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans charged-off
|
|
|
87,735
|
|
|
|
60,666
|
|
|
|
22,735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
166,952
|
|
|
$
|
106,863
|
|
|
$
|
66,842
|
|
|
|
|
|
|
|
|
|
|
|
|
7. Premises and Equipment:
The Corporation’s premises and equipment at December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful life
|
|
|
|
|
|
|
|
|
|
in years
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
Land
|
|
|
|
$
|
5,273
|
|
|
$
|
6,926
|
|
|
Buildings
|
|
50
|
|
|
9,940
|
|
|
|
39,875
|
|
|
Equipment
|
|
3-10
|
|
|
43,498
|
|
|
|
52,399
|
|
|
Leasehold improvements
|
|
Various
|
|
|
27,030
|
|
|
|
29,713
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85,741
|
|
|
|
128,913
|
|
|
Accumulated depreciation and amortization
|
|
|
|
|
(56,218
|
)
|
|
|
(72,614
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Premises and
Equipment, net
|
|
|
|
$
|
29,523
|
|
|
$
|
56,299
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization of premises and equipment for the years ended December 31, 2007, 2006
and 2005 were approximately $8.1 million, $7.6 million and $6.1 million, respectively.
On December 20, 2007, the Bank, after a bidding process that included the participation of several
potential purchasers, consummated sale and lease-back transactions (the “Agreements”) with two
unaffiliated third parties for the Bank’s two principal properties and 200 parking spaces in a
parking facility currently under construction, which pending acquisition from
97
Crefisa, Inc., an
affiliate. The two properties are (i) the Banco Santander Headquarters Building, a seven story
corporate headquarters building located at 207 Ponce de León Avenue, Hato Rey, Puerto Rico,
including a related parking facility (the “Headquarters Facility”); and (ii) the Santander
Operations Facility, a nine story building located at No. 3 Arterial Hostos
Avenue, New San Juan Center, Hato Rey, Puerto Rico (the “Operations Facility”). The Bank has
entered into an agreement with Crefisa to purchase 200 parking spaces in a parking facility under
construction, at terms and conditions similar to those that Crefisa has under an option agreement
with the developer of the parking facility. The Headquarters Facility and the Operations Facility
were sold on an “as-is, where-is” basis for a sales prices of $31.5 million and $25.3 million in
cash, respectively, and resulted in a gain which has been deferred (as described below) of $20.0
million and $12.6 million, respectively. The sales price of the 200 parking spaces is $5.5 million
which equals the purchase price that they will be acquired from Crefisa, Inc., and accordingly
there is no gain or loss on such transaction.
In connection with the execution of the Agreements, the Bank entered into long-term lease
agreements for the properties and the parking spaces. The lease agreements are for an initial term
of fifteen (15) years, commencing on December 20, 2007 (the “Effective Date”) for the properties
and June 2008 for the parking spaces, and ending on December 31, 2022. The Bank may extend each
lease for two (2) consecutive five (5) year periods (the “Option Terms”), on substantially the same
terms and conditions; provided, that, in the case of the Headquarters Facility, the Bank may, at
its discretion, extend the lease for all or a portion of the building, as described in the lease
agreements. Commencing on the Effective Date and continuing throughout the initial term, the Bank
will pay a monthly rent of $224,270 for the Headquarters Facility, $174,542 for the Operations
Facility, and $25,000 for the parking spaces, subject to certain escalation provisions (related to
changes in the U.S. CPI) described in the lease agreements. In addition, the monthly rent payable
under each of the agreements is subject to a fair market value adjustment at the beginning of each
of Option Terms. Management has classified these leases as operating leases. The gain on the sale
of the properties, which aggregated $32.6 million, is being amortized in proportion to the related
gross rental charged to expense over the lease term of the properties.
As of December 31, 2007, the Corporation owned nineteen facilities, which consisted of eleven
branches and eight parking lots. The Corporation occupies twenty-two leased branch premises, while
warehouse space is rented in one location. In addition, office spaces
are rented at both Torre
Santander buildings, in Hato Rey Puerto Rico, at the Santander Tower in Galeria San Patricio
building, in Guaynabo, Puerto Rico, at Professional Office Park IV building, in Río Piedras,
Puerto Rico and at the Operational Center in Hato Rey, Puerto Rico. The Corporation’s management believes that each of its facilities is well maintained
and suitable for its purpose.
8. Goodwill and Other Intangible Assets:
Goodwill
The Corporation has assigned goodwill to reporting units at the time of acquisition. Goodwill was
allocated to the Commercial Banking segment, the Wealth Management segment and the Consumer Finance
segment as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(Dollars in thousands)
|
|
|
Commercial Banking
|
|
$
|
10,537
|
|
|
$
|
10,537
|
|
|
Wealth Management
|
|
|
24,254
|
|
|
|
24,254
|
|
|
Consumer Finance
|
|
|
86,691
|
|
|
|
113,509
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
121,482
|
|
|
$
|
148,300
|
|
|
|
|
|
|
|
|
|
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 current unfavorable economic environment in Puerto
Rico, Island Finance’s short-term
financial performance and profitability have declined significantly during 2007, caused by reduced
lending activity and increases in nonperforming 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. Statement 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. Because the Corporation was unable to complete the second
step of the impairment test during the third quarter and an impairment loss was probable and could
be reasonably estimated, the Corporation recorded preliminary estimated non-cash impairment charges
of approximately $34.3 million and $5.4 million, which were recorded as reductions to goodwill and
other intangible asset,
98
respectively, during the third quarter of 2007. The estimated impairment
charges were calculated based on the market and income approach valuation methodologies. These
impairment charges did not result in cash expenditures and will not result in future cash
expenditures. The Corporation completed the second step of the impairment test during the fourth
quarter of 2007.
Accordingly, during the fourth quarter the Corporation recorded an additional non-cash impairment
charge of $3.6 million. 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). This impairment charge did not result in
cash expenditures and will not result in future cash expenditures.
Upon the completion of the interim impairment test, the Corporation performed its annual impairment
assessment as of October 1, 2007 with the assistance of the independent valuation specialist. Based
upon their test, and after consideration of the July 1, 2007 impairment charge, the Corporation
determined that no additional impairment charge was necessary as of October 1, 2007.
Other Intangible Assets
Other intangible assets at December 31, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(Dollars in thousands)
|
|
|
Commercial Banking — Mortgage-servicing rights
|
|
$
|
9,631
|
|
|
$
|
8,433
|
|
|
Wealth Management — Advisory-servicing rights
|
|
|
1,572
|
|
|
|
1,750
|
|
|
Consumer Finance:
|
|
|
|
|
|
|
|
|
|
Trade name
|
|
|
18,300
|
|
|
|
23,700
|
|
|
Customer relationships
|
|
|
—
|
|
|
|
9,717
|
|
|
Non-compete agreements
|
|
|
700
|
|
|
|
3,827
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
30,203
|
|
|
$
|
47,427
|
|
|
|
|
|
|
|
|
|
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. Customer relationships and non-compete agreements are intangible assets related
to the acquisition of Island Finance. As discussed above, these intangibles were deemed impaired of July 1, 2007 and
written down by $16.5 million. Non-compete agreement is being
amortized over 1 year.
Amortization of the other
intangibles assets for the period ended December 31, 2007, 2006 and
2005 were approximately $3.8 million, $4.1 million and $1.7 million,
respectively.
The estimated amortization expense for each of the next five years and thereafter of the finite
lived intangible assets is the following:
|
|
|
|
|
|
|
Year
|
|
Amortization
|
|
|
|
|
(in thousands)
|
|
2008
|
|
$
|
2,553
|
|
|
2009
|
|
|
2,462
|
|
|
2010
|
|
|
2,149
|
|
|
2011
|
|
|
1,768
|
|
|
2012
|
|
|
1,415
|
|
|
Thereafter
|
|
|
1,556
|
|
|
|
|
|
|
|
|
|
$
|
11,903
|
|
|
|
|
|
|
99
9. Other Assets:
Other assets at December 31 consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(Dollars in thousands)
|
|
|
Deferred tax assets, net (Note 15)
|
|
$
|
37,199
|
|
|
$
|
23,796
|
|
|
Accounts receivable
|
|
|
217,993
|
|
|
|
109,877
|
|
|
Securities sold not delivered, net
|
|
|
—
|
|
|
|
2,945
|
|
|
Repossesed assets
|
|
|
16,448
|
|
|
|
6,173
|
|
|
Software, net
|
|
|
8,069
|
|
|
|
9,214
|
|
|
Prepaid expenses
|
|
|
14,224
|
|
|
|
17,437
|
|
|
Customers’ liabilities on acceptances
|
|
|
783
|
|
|
|
3,938
|
|
|
Derivative assets
|
|
|
79,969
|
|
|
|
59,260
|
|
|
Other
|
|
|
4,518
|
|
|
|
2,555
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
379,203
|
|
|
$
|
235,195
|
|
|
|
|
|
|
|
|
|
Amortization of software assets for the period ended December 31,
2007, 2006 and 2005 were approximately $4.4 million, $5.9 million and
$5.4 million, respectively.
10. Deposits:
At December 31, 2007 and 2006, interest-bearing deposits, including time deposits, amounted to
$4,405 million and $4,568 million, respectively. At December 31, 2007 and 2006, time deposits
amounted to approximately $2,772 million and $2,807 million, respectively, of which approximately
$927 million and $1,019 million, respectively, mature after one year.
Maturities of time deposits for the next five years and thereafter follow:
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
Amount
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
2008
|
|
$
|
1,844,150
|
|
|
|
|
2009
|
|
|
99,988
|
|
|
|
|
2010
|
|
|
215,428
|
|
|
|
|
2011
|
|
|
124,070
|
|
|
|
|
2012
|
|
|
120,626
|
|
|
|
|
Thereafter
|
|
|
367,299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,771,561
|
|
|
|
|
|
|
|
|
100
The detail of deposits and interest expense are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Carrying
|
|
|
Interest
|
|
|
Carrying
|
|
|
Interest
|
|
|
Carrying
|
|
|
Interest
|
|
|
|
|
Amount
|
|
|
Expense
|
|
|
Amount
|
|
|
Expense
|
|
|
Amount
|
|
|
Expense
|
|
|
|
|
(Dollars in thousands)
|
|
|
Non interest bearing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private demand
|
|
$
|
755,077
|
|
|
$
|
—
|
|
|
$
|
745,685
|
|
|
$
|
—
|
|
|
$
|
644,794
|
|
|
$
|
—
|
|
|
Public demand
|
|
|
380
|
|
|
|
—
|
|
|
|
404
|
|
|
|
—
|
|
|
|
27,431
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
755,457
|
|
|
|
—
|
|
|
|
746,089
|
|
|
|
—
|
|
|
|
672,225
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
|
|
|
608,195
|
|
|
|
20,673
|
|
|
|
707,695
|
|
|
|
21,668
|
|
|
|
855,579
|
|
|
|
18,072
|
|
|
NOW and other transactions
|
|
|
1,025,490
|
|
|
|
31,112
|
|
|
|
1,053,612
|
|
|
|
27,802
|
|
|
|
1,090,342
|
|
|
|
19,563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,633,685
|
|
|
|
51,785
|
|
|
|
1,761,307
|
|
|
|
49,470
|
|
|
|
1,945,921
|
|
|
|
37,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under $100,000
|
|
|
271,782
|
|
|
|
13,715
|
|
|
|
265,567
|
|
|
|
12,833
|
|
|
|
244,504
|
|
|
|
8,592
|
|
|
$100,000 and over
|
|
|
2,499,779
|
|
|
|
125,915
|
|
|
|
2,541,011
|
|
|
|
111,077
|
|
|
|
2,362,000
|
|
|
|
75,985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,771,561
|
|
|
|
139,630
|
|
|
|
2,806,578
|
|
|
|
123,910
|
|
|
|
2,606,504
|
|
|
|
84,577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,160,703
|
|
|
$
|
191,415
|
|
|
$
|
5,313,974
|
|
|
$
|
173,380
|
|
|
$
|
5,224,650
|
|
|
$
|
122,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11. Other Borrowings:
Following are summaries of borrowings as of and for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
1,952,110
|
|
|
$
|
635,597
|
|
|
$
|
284,482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average indebtedness outstanding during the year
|
|
$
|
1,669,534
|
|
|
$
|
756,117
|
|
|
$
|
379,351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum amount outstanding during the year
|
|
$
|
2,000,220
|
|
|
$
|
851,578
|
|
|
$
|
676,957
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average interest rate for the year
|
|
|
5.49
|
%
|
|
|
5.48
|
%
|
|
|
5.48
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Average interest rate at year-end
|
|
|
5.02
|
%
|
|
|
5.43
|
%
|
|
|
5.31
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
|
Federal Funds
|
|
|
Securities Sold
|
|
|
Commercial
|
|
|
|
|
Purchased and
|
|
|
Under Agreements
|
|
|
Paper
|
|
|
|
|
Other Borrowings
|
|
|
to Repurchase
|
|
|
Issued
|
|
|
|
|
(Dollars in thousands)
|
|
|
Amount outstanding at year-end
|
|
$
|
1,628,400
|
|
|
$
|
830,569
|
|
|
$
|
209,549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average indebtedness outstanding during the year
|
|
$
|
1,317,477
|
|
|
$
|
919,899
|
|
|
$
|
373,855
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum amount outstanding during the year
|
|
$
|
1,828,400
|
|
|
$
|
986,759
|
|
|
$
|
750,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average interest rate for the year
|
|
|
5.36
|
%
|
|
|
5.31
|
%
|
|
|
5.09
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Average interest rate at year-end
|
|
|
5.41
|
%
|
|
|
5.45
|
%
|
|
|
5.33
|
%
|
|
|
|
|
|
|
|
|
|
|
|
101
Federal funds purchased and other borrowings, securities sold under agreements to repurchase and
commercial paper issued mature as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
December 31, 2006
|
|
|
|
|
(In thousands)
|
|
|
Federal funds purchased and other borrowings:
|
|
|
|
|
|
|
|
|
|
Within thirty days
|
|
$
|
502,110
|
|
|
$
|
—
|
|
|
Thirty to ninety days
|
|
|
825,000
|
|
|
|
—
|
|
|
Over ninety days
|
|
|
625,000
|
|
|
|
1,628,400
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,952,110
|
|
|
$
|
1,628,400
|
|
|
|
|
|
|
|
|
|
|
Securities sold under agreements to repurchase:
|
|
|
|
|
|
|
|
|
|
Within thirty days
|
|
$
|
10,591
|
|
|
$
|
480,563
|
|
|
Over ninety days
|
|
|
625,006
|
|
|
|
350,006
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
635,597
|
|
|
$
|
830,569
|
|
|
|
|
|
|
|
|
|
|
Commercial paper issued:
|
|
|
|
|
|
|
|
|
|
Within thirty days
|
|
$
|
284,482
|
|
|
$
|
209,549
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007 and 2006 the weighted average maturity of Federal funds purchased and other
borrowings over ninety days was 7.16 months and 10.63 months, respectively.
As of December 31, 2007, securities sold under agreements to repurchase (classified by
counterparty) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Special Financing, Inc.
|
|
|
255,590
|
|
|
|
279,786
|
|
|
|
49.09
|
|
|
First Puerto Rico Daily Liquidity Fund, Inc.
|
|
|
5,007
|
|
|
|
7,000
|
|
|
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
635,597
|
|
|
$
|
683,326
|
|
|
|
33.34
|
|
|
|
|
|
|
|
|
|
|
|
|
102
The following investment securities were sold under agreements to repurchase:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
Carrying
|
|
|
|
|
|
|
Fair
|
|
|
Weighted-
|
|
|
|
|
Value of
|
|
|
|
|
|
|
Value of
|
|
|
Average
|
|
|
|
|
Underlying
|
|
|
Balance of
|
|
|
Underlying
|
|
|
Interest
|
|
|
Underlying Securities
|
|
Securities
|
|
|
Borrowings
|
|
|
Securities
|
|
|
Rate
|
|
|
|
|
(Dollars in thousands)
|
|
|
Obligations of U.S. Government agencies and corporations
|
|
$
|
270,821
|
|
|
$
|
250,006
|
|
|
$
|
270,821
|
|
|
|
4.79
|
%
|
|
Mortgage-backed securities
|
|
|
412,505
|
|
|
|
385,591
|
|
|
|
412,505
|
|
|
|
5.22
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
683,326
|
|
|
$
|
635,597
|
|
|
$
|
683,326
|
|
|
|
5.05
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
|
Carrying
|
|
|
|
|
|
|
Fair
|
|
|
Weighted-
|
|
|
|
|
Value of
|
|
|
|
|
|
|
Value of
|
|
|
Average
|
|
|
|
|
Underlying
|
|
|
Balance of
|
|
|
Underlying
|
|
|
Interest
|
|
|
Underlying Securities
|
|
Securities
|
|
|
Borrowings
|
|
|
Securities
|
|
|
Rate
|
|
|
|
|
(Dollars in thousands)
|
|
|
Obligations of U.S. Government agencies and corporations
|
|
$
|
309,367
|
|
|
$
|
287,569
|
|
|
$
|
309,367
|
|
|
|
5.66
|
%
|
|
Mortgage-backed securities
|
|
|
558,577
|
|
|
|
543,000
|
|
|
|
558,577
|
|
|
|
5.31
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
867,944
|
|
|
$
|
830,569
|
|
|
$
|
867,944
|
|
|
|
5.44
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12. Subordinated Capital Notes, Term Notes and Trust Preferred Securities:
Subordinated Capital Notes
Subordinated capital notes at December 31 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(Dollars in thousands)
|
|
|
Subordinated notes with fixed interest of 6.30% maturing June 1, 2032
|
|
$
|
73,260
|
|
|
$
|
71,749
|
|
|
Subordinated notes with fixed interest of 6.10% maturing June 1, 2032
|
|
|
50,236
|
|
|
|
49,099
|
|
|
Subordinated notes with fixed interest of 6.75% maturing July 1, 2036
|
|
|
125,000
|
|
|
|
125,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
248,496
|
|
|
|
245,848
|
|
|
Unamortized discount
|
|
|
(1,326
|
)
|
|
|
(1,380
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
247,170
|
|
|
$
|
244,468
|
|
|
|
|
|
|
|
|
|
103
Term Notes
Term notes payable outstanding at December 31 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(Dollars in thousands)
|
|
|
Term notes
maturing January 29, 2010 linked to the S&P 500 index
|
|
$
|
4,815
|
|
|
$
|
30,000
|
|
|
Term notes maturing May 31, 2011 with fixed interest 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
|
|
|
|
47,000
|
|
|
Unamortized discount
|
|
|
(2,444
|
)
|
|
|
(5,471
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
19,371
|
|
|
$
|
41,529
|
|
|
|
|
|
|
|
|
|
The term notes issued contain certain general covenants related to financial ratios, among others.
The Corporation was in compliance with such covenants at December 31, 2007.
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. The trust
is a 100% owned subsidiary of the Corporation and is consolidated pursuant to the provisions of FIN
46R, “Consolidation of Variable Interest Entities”. 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.
13. Reserve Fund:
The Banking Law of Puerto Rico requires that a reserve fund be created and that annual transfers of
at least 10% of the Bank’s annual net income be made, until such fund equals 100% of total paid-in
capital, on common and preferred stock. Such transfers restrict the retained earnings, which would
otherwise be available for dividends. At December 31, 2007 and 2006, the reserve fund amounted to
approximately $139.3 million and $137.5 million, respectively.
14. Common Stock Transactions:
During 2007 and 2006, the Corporation declared and paid quarterly cash dividends of $0.16 per
common share.
The Corporation adopted and implemented Stock Repurchase Programs in May 2000, December 2000 and
June 2001. Under these programs, the Corporation acquired 3% of its then outstanding common
shares. During November 2002, the Corporation started a fourth Stock Repurchase Program under which
it may acquire up to 3% of its outstanding common shares. As of December 31, 2007 and 2006, a
total of 4,011,260 common shares with a cost of approximately $67,552,000 had been repurchased
under these programs and are recorded as treasury stock in the accompanying consolidated balance
sheets.
The Corporation started a Dividend Reinvestment and Cash Purchase Plan in May 2000 under which
holders of common stock have the opportunity to automatically invest cash dividends to purchase
more shares of the Corporation. Stockholders may also make, as frequently as once a month,
optional cash payments for investment in additional shares of common stock.
104
15. Income Tax:
The Corporation is subject to regular or the alternative minimum tax, whichever is higher. The
effective tax rate is lower than the statutory rate primarily because interest income on certain
United States and Puerto Rico debt securities is exempt from Puerto Rico income taxes.
The Corporation is also subject to federal income tax on its United States (U.S.) source income.
However, the Corporation had no taxable U.S. income for each of the three years in the period ended
December 31, 2007. The Corporation is not subject to federal income tax on U.S. Treasury
securities that qualify as portfolio interest.
On August 1, 2005, a temporary two-year surtax of 2.5% applicable to Puerto Rico corporations was
enacted. This surtax is applicable to taxable years beginning after December 31, 2004 and increases
the maximum marginal corporate income tax rate from 39% to 41.5% for the years ended December 31,
2005 and 2006. An additional 2% surtax was imposed on the Corporation for a period of one year
commencing on January 1, 2006 as a result of the Puerto Rico Government’s budget deficit. This
surtax increases the maximum marginal corporate income tax rate to 43.5% for the year ended
December 31, 2006.
Puerto Rico international banking entities, or IBE’s, are currently exempt from taxation under
Puerto Rico law. During 2004, the Legislature of Puerto Rico and the Governor of Puerto Rico
approved a law amending the IBE Act. This law imposes income taxes at normal statutory rates on
each IBE that operates as a unit of a bank, if the IBE’s net income generated after December 31,
2003 exceeds 40 percent of the bank’s net income in the taxable year commenced on July 1, 2003, 30
percent of the bank’s net income in the taxable year commencing on July 1, 2004, and 20 percent of
the bank’s net income in the taxable year commencing on July 1, 2005, and thereafter. It does not
impose income taxation on an IBE that operates as a subsidiary of a bank as in the case of our
subsidiary, Santander International Bank. However, there cannot be any assurance that the IBE Act
will not be modified in the future in a manner to reduce the tax benefits available to an IBE that
operates as a subsidiary of a bank.
The components of the provision for income tax for the years ended December 31 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
(Dollars in thousands)
|
|
|
Current tax provision
|
|
$
|
28,037
|
|
|
$
|
24,663
|
|
|
$
|
27,934
|
|
|
Deferred tax (benefit) provision
|
|
|
(23,833
|
)
|
|
|
(2,123
|
)
|
|
|
2,854
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income tax
|
|
$
|
4,204
|
|
|
$
|
22,540
|
|
|
$
|
30,788
|
|
|
|
|
|
|
|
|
|
|
|
|
The difference between the income tax provision and the amount computed using the statutory rate is
due to the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
|
|
|
(Dollars in thousands)
|
|
|
Income tax at statutory rate
|
|
$
|
(12,496
|
)
|
|
|
(39
|
%)
|
|
$
|
25,626
|
|
|
|
39
|
%
|
|
$
|
43,131
|
|
|
|
39
|
%
|
|
Benefits of net tax-exempt income
|
|
|
(6,249
|
)
|
|
|
(19
|
%)
|
|
|
(5,684
|
)
|
|
|
(9
|
%)
|
|
|
(10,250
|
)
|
|
|
(9
|
%)
|
|
Lapse of
statutes of limitations
|
|
|
(1,571
|
)
|
|
|
(5
|
%)
|
|
|
(2,000
|
)
|
|
|
(3
|
%)
|
|
|
(3,700
|
)
|
|
|
(3
|
%)
|
|
Effect of surtaxes
|
|
|
—
|
|
|
|
0
|
%
|
|
|
2,269
|
|
|
|
3
|
%
|
|
|
1,867
|
|
|
|
1
|
%
|
|
Deferred tax valuation allowance
|
|
|
23,103
|
|
|
|
72
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
1,417
|
|
|
|
4
|
%
|
|
|
2,329
|
|
|
|
4
|
%
|
|
|
(260
|
)
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income tax
|
|
$
|
4,204
|
|
|
|
13
|
%
|
|
$
|
22,540
|
|
|
|
34
|
%
|
|
$
|
30,788
|
|
|
|
28
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
105
Deferred income taxes reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the amounts used for income
tax purposes. Significant components of the Corporation’s deferred tax assets and liabilities at
December 31, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(Dollars in thousands)
|
|
|
Deferred Tax Assets-
|
|
|
|
|
|
|
|
|
|
Unrealized
loss on investment securities available for sale
|
|
$
|
2,902
|
|
|
$
|
12,375
|
|
|
Allowance for loan losses
|
|
|
28,680
|
|
|
|
5,188
|
|
|
Long term incentive plans
|
|
|
6,788
|
|
|
|
2,788
|
|
|
Deferred gain on sale of properties
|
|
|
4,966
|
|
|
|
170
|
|
|
Postretirement and pension benefits
|
|
|
9,961
|
|
|
|
11,579
|
|
|
Amortization
of intangibles and impairment charges
|
|
|
3,047
|
|
|
|
—
|
|
|
Insurance cancellations
|
|
|
2,255
|
|
|
|
1,135
|
|
|
Other
|
|
|
5,785
|
|
|
|
3,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64,384
|
|
|
|
36,572
|
|
|
|
|
|
|
|
|
|
|
Deferred Tax Liabilities-
|
|
|
|
|
|
|
|
|
|
Net deferred
loan origination costs
|
|
|
(1,160
|
)
|
|
|
(1,155
|
)
|
|
Unrealized gain on derivatives
|
|
|
—
|
|
|
|
(337
|
)
|
|
Amortization of intangibles
|
|
|
—
|
|
|
|
(8,718
|
)
|
|
Mortgage-servicing rights and other
|
|
|
(2,922
|
)
|
|
|
(2,566
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,082
|
)
|
|
|
(12,776
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(23,103
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Deferred tax
asset, net
|
|
$
|
37,199
|
|
|
$
|
23,796
|
|
|
|
|
|
|
|
|
|
Under the Puerto Rico Income Tax Law, the Corporation and its subsidiaries are treated as separate
taxable entities and are not entitled to file consolidated tax returns.
The
Corporation adopted the provisions of FIN 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.
As of the date of adoption and after the impact of recognizing the increase in the liability noted
above, the Corporation’s liability for unrecognized tax benefits totaled $12.7 million, which
included $1.8 million of interest and penalties. A reconciliation of beginning and ending amount of
the accrual for uncertain income tax positions is as follows:
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
Balance at January 1, 2007
|
|
$
|
12,676
|
|
|
Additions for tax positions of prior years
|
|
|
2,980
|
|
|
Additions for tax positions of current year
|
|
|
2,422
|
|
|
Lapse of statutes of limitations
|
|
|
(1,571
|
)
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
16,507
|
|
|
|
|
|
|
The Corporation’s policy is to report interest and
penalties related to unrecognized tax benefits in income tax
expense.
For the year ended December 31, 2007, the Corporation recognized $1.4 million of interest
and penalties for uncertain tax positions recognized during 2007. As of
December 31, 2007, the related accrued interest approximated $2.6
million. At December 31, 2007, the
Corporation had $10.4 million 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 statues
of limitation, changes in management’s judgment about the level
of uncertainty, status of examinations, litigation and legislative
activity, and the addition or elimination of uncertain tax
positions. As of December 31, 2007, the following years remain
subject to examination Puerto Rico — 2003 through 2006. The
Corporation does not anticipate a significant change to the total
amount of unrecognized tax benefits within the next 12 months.
The Corporation recognized a tax benefit of $1.6 million as a result of the expiration of the
statute of limitations related to the uncertain tax positions.
At December 31, 2007, Santander Financial Services had approximately $1.1 million in Puerto Rico
Income Tax Operating Loss Carryforward, which if not utilized will begin to expire in 2013.
106
In assessing the realizability 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. amounting to $23.1 million at December 31, 2007. Accordingly, a deferred
tax asset valuation allowance of $23.1 million was recorded at December 31, 2007.
16. Contingencies and Commitments:
The Corporation is involved as plaintiff or defendant in a variety of routine litigation incidental
to the normal course of business. Management believes, based on the opinion of legal counsel, that
it has adequate defense with respect to such litigation and that any losses therefrom will not have
a material adverse effect on the consolidated results of operations or consolidated financial
position of the Corporation.
The Corporation leases certain operating facilities under non-cancelable operating leases,
including leases with related parties, and has other agreements expiring at various dates through
2025. Rent expense charged to operations related to these leases was approximately $10,721,000,
$10,269,000 and $6,927,000 for 2007, 2006 and 2005, respectively. At December 31, 2007, the
minimum unexpired commitments for leases and other commitments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
Leases
|
|
|
Other commitments
|
|
|
Total
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
2008
|
|
$
|
14,914
|
|
|
$
|
8,062
|
|
|
$
|
22,976
|
|
|
2009
|
|
|
13,204
|
|
|
|
—
|
|
|
|
13,204
|
|
|
2010
|
|
|
11,395
|
|
|
|
—
|
|
|
|
11,395
|
|
|
2011
|
|
|
9,839
|
|
|
|
—
|
|
|
|
9,839
|
|
|
2012
|
|
|
8,912
|
|
|
|
—
|
|
|
|
8,912
|
|
|
Thereafter
|
|
|
64,576
|
|
|
|
—
|
|
|
|
64,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
122,840
|
|
|
$
|
8,062
|
|
|
$
|
130,902
|
|
|
|
|
|
|
|
|
|
|
|
|
17. Employee Benefits Plan:
Pension Plan
The Corporation maintains a qualified noncontributory defined benefit pension plan (the
“Corporation’s Plan”), which covers substantially all eligible employees of the Corporation and its
subsidiaries. The plan was organized in 1978 under the laws of the Commonwealth of Puerto Rico and
is subject to the provisions of the Employee Retirement Income Security Act of 1974 (“ERISA”).
The Corporation’s policy is to contribute to the plan normal costs that are charged to operations.
However, in no event may contributions exceed the maximum or minimum limits prescribed by ERISA and
the Puerto Rico Income Tax Act.
In 2006, the Corporation elected to freeze its defined benefit pension plan effective December 31,
2006. The plan will not be settled at this time, but no new employees will participate in the
Corporation’s Plan. The Corporation recorded a $754,000 loss on curtailment of its defined benefit
pension plan through current operations.
In connection with the acquisition of Banco Santander Central Hispano Puerto Rico (“BCHPR”) in
1996, the Bank became the administrator of the acquired financial institution’s noncontributory
defined benefit pension plan (the “BCH Plan”). It is management’s intention to keep this pension
plan in a frozen status. Active participants of BCHPR’s pension plan who became employees of the
Bank were included in the Bank’s pension plan effective January 1, 1997. Beneficiaries of BCHPR’s
plan are receiving benefits from this plan. This plan is also subject to the provisions of ERISA.
The Corporation’s Plan uses a December 31 measurement date while the BCH Plan uses a November 30
measurement date.
During 2006, the FASB issued SFAS No. 158 which requires recognition of a plan’s over-funded or
under-funded status as an asset or liability with an offsetting adjustment to accumulated other
comprehensive income (AOCI). Actuarial gains or losses,
107
prior service costs and transition assets
or obligations will be subsequently recognized as components of net periodic benefit costs.
Additional minimum pension liabilities (AMPL) and related intangible assets are derecognized upon
adoption of the standard.
Amounts included in AOCI (pre-tax) as of December 31, 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
Post retirement
|
|
|
|
|
|
|
|
Plans
|
|
|
Benefit Plans
|
|
|
Total
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
Net transition asset
|
|
$
|
(16
|
)
|
|
$
|
—
|
|
|
$
|
(16
|
)
|
|
Net actuarial loss
|
|
|
25,505
|
|
|
|
52
|
|
|
|
25,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
25,489
|
|
|
$
|
52
|
|
|
$
|
25,541
|
|
|
|
|
|
|
|
|
|
|
|
|
The amounts in AOCI that are expected to be recognized as components of net periodic benefit cost
during 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
Post retirement
|
|
|
|
|
|
|
|
Plans
|
|
|
Benefit Plans
|
|
|
Total
|
|
|
|
|
(Dollars in thousands)
|
|
|
Net transition asset
|
|
$
|
(2
|
)
|
|
$
|
—
|
|
|
$
|
(2
|
)
|
|
Net actuarial loss
|
|
|
717
|
|
|
|
8
|
|
|
|
725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
715
|
|
|
$
|
8
|
|
|
$
|
723
|
|
|
|
|
|
|
|
|
|
|
|
|
108
The following presents the funded status of the Corporation’s Plan at December 31,
based on the actuarial assumptions described below.
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(Dollars in thousands)
|
|
|
Change in projected benefit obligation:
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation at beginning of year
|
|
$
|
39,444
|
|
|
$
|
38,287
|
|
|
Service cost-benefits earned during the year
|
|
|
—
|
|
|
|
1,762
|
|
|
Interest cost on projected benefit obligation
|
|
|
2,279
|
|
|
|
2,369
|
|
|
Actuarial (gain) loss
|
|
|
(3,243
|
)
|
|
|
3,558
|
|
|
Benefit distributions
|
|
|
(1,557
|
)
|
|
|
(1,333
|
)
|
|
Effect of plan curtailment
|
|
|
—
|
|
|
|
(5,199
|
)
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation at end of year
|
|
|
36,923
|
|
|
|
39,444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
|
30,266
|
|
|
|
25,833
|
|
|
Actual return on plan assets
|
|
|
1,288
|
|
|
|
3,090
|
|
|
Employer contributions
|
|
|
5,743
|
|
|
|
2,676
|
|
|
Benefit distributions
|
|
|
(1,557
|
)
|
|
|
(1,333
|
)
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
|
35,740
|
|
|
|
30,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status
|
|
|
(1,183
|
)
|
|
|
(9,178
|
)
|
|
Unrecognized net actuarial gain
|
|
|
6,756
|
|
|
|
8,984
|
|
|
Unrecognized transition amount
|
|
|
(16
|
)
|
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
Prepaid (accrued) pension benefit
|
|
$
|
5,557
|
|
|
$
|
(212
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized on the consolidated balance sheets consist of:
|
|
|
|
|
|
|
|
|
|
Accrued benefit liability, net of prepaid benefit cost
|
|
$
|
(1,183
|
)
|
|
$
|
(8,966
|
)
|
|
Accumulated other comprehensive income
|
|
|
6,740
|
|
|
|
8,966
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
5,557
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in minimum liability included in
other comprehensive income
|
|
$
|
(2,225
|
)
|
|
$
|
1,228
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation
|
|
$
|
36,923
|
|
|
$
|
39,444
|
|
|
Accumulated benefit obligation
|
|
$
|
36,923
|
|
|
$
|
39,444
|
|
|
Fair value of plan assets
|
|
$
|
35,740
|
|
|
$
|
30,266
|
|
For each of the three years in the period ended December 31, the pension costs for the
Corporation’s Plan included the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
(Dollars in thousands)
|
|
|
Service cost during the year
|
|
$
|
—
|
|
|
$
|
1,762
|
|
|
$
|
1,670
|
|
|
Interest cost on projected benefit obligation
|
|
|
2,279
|
|
|
|
2,369
|
|
|
|
2,106
|
|
|
Expected return on assets
|
|
|
(2,718
|
)
|
|
|
(2,228
|
)
|
|
|
(2,210
|
)
|
|
Net amortization
|
|
|
411
|
|
|
|
773
|
|
|
|
525
|
|
|
Curtailment loss
|
|
|
—
|
|
|
|
754
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost
|
|
$
|
(28
|
)
|
|
$
|
3,430
|
|
|
$
|
2,091
|
|
|
|
|
|
|
|
|
|
|
|
|
109
Assumptions used to determine benefit obligation for the Corporation’s Plan as of December 31,
included:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Discount rate
|
|
|
6.50
|
%
|
|
|
5.75
|
%
|
|
|
6.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate of compensation increase
|
|
|
n/a
|
|
|
|
3.00
|
%
|
|
|
3.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumptions used to determine net periodic pension cost for the Corporation’s Plan as of December
31 included:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Discount rate
|
|
|
5.75
|
%
|
|
|
6.00
|
%
|
|
|
6.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate of compensation increase
|
|
|
n/a
|
|
|
|
3.00
|
%
|
|
|
3.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected return on plan assets
|
|
|
8.50
|
%
|
|
|
8.50
|
%
|
|
|
8.50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In developing the expected long-term rate of return assumption, the Corporation evaluated input
from the Corporation’s Plan actuaries, financial analysts and the Corporation’s long-term inflation
assumptions and interest rate scenarios. Projected returns by such consultants are based on broad
equity and bond indices. The Corporation also considered historical returns on its plan assets. The
Corporation anticipates the investment managers for the plan will generate annual long term rate of
returns of at least 7.50%.
The Corporation’s Plan asset allocations at December 31, by asset category are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
Asset Category:
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
56
|
%
|
|
|
62
|
%
|
|
Debt securities
|
|
|
38
|
%
|
|
|
36
|
%
|
|
Other
|
|
|
6
|
%
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
The expected contribution to the Corporation’s Plan for 2008 is $989,617.
110
The following presents the funded status of the BCH Plan at November 30, based on
the actuarial assumptions described below:
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(Dollars in thousands)
|
|
|
Change in projected benefit obligation
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation at beginning of year
|
|
$
|
32,889
|
|
|
$
|
32,967
|
|
|
Interest cost on projected benefit obligation
|
|
|
1,838
|
|
|
|
1,998
|
|
|
Actuarial loss
|
|
|
195
|
|
|
|
1,751
|
|
|
Benefit distributions
|
|
|
(1,991
|
)
|
|
|
(3,827
|
)
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation at end of year
|
|
|
32,931
|
|
|
|
32,889
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
|
25,385
|
|
|
|
24,725
|
|
|
Actual return on plan assets
|
|
|
1,991
|
|
|
|
1,797
|
|
|
Employer contributions
|
|
|
2,240
|
|
|
|
2,690
|
|
|
Benefit distributions
|
|
|
(1,991
|
)
|
|
|
(3,827
|
)
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
|
27,625
|
|
|
|
25,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status
|
|
|
(5,306
|
)
|
|
|
(7,504
|
)
|
|
Contributions after measurement date and/or
before end of year
|
|
|
610
|
|
|
|
—
|
|
|
Unrecognized actuarial gain
|
|
|
18,749
|
|
|
|
20,549
|
|
|
|
|
|
|
|
|
|
|
Prepaid pension benefit
|
|
$
|
14,053
|
|
|
$
|
13,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized on the consolidated balance sheets consist of:
|
|
|
|
|
|
|
|
|
|
Accrued benefit liability, net of prepaid benefit cost
|
|
$
|
(4,696
|
)
|
|
$
|
(7,504
|
)
|
|
Accumulated other comprehensive income
|
|
|
18,749
|
|
|
|
20,549
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
14,053
|
|
|
$
|
13,045
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in minimum liability included
in other comprehensive income
|
|
$
|
(1,801
|
)
|
|
$
|
1,640
|
|
|
|
|
Projected benefit obligation
|
|
$
|
32,931
|
|
|
$
|
32,889
|
|
|
Accumulated benefit obligation
|
|
$
|
32,931
|
|
|
$
|
32,889
|
|
|
Fair value of plan assets
|
|
$
|
27,625
|
|
|
$
|
25,385
|
|
For each of the three years in the period ended November 30, the pension costs for the BCH
Plan included the following components. Effective November 30, 1996, the benefits in this plan
were frozen.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
(Dollars in thousands)
|
|
|
Interest cost on projected benefit obligation
|
|
$
|
1,838
|
|
|
$
|
1,998
|
|
|
$
|
1,936
|
|
|
Expected return on assets
|
|
|
(2,170
|
)
|
|
|
(2,199
|
)
|
|
|
(2,092
|
)
|
|
Net amortization
|
|
|
513
|
|
|
|
513
|
|
|
|
440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost
|
|
$
|
181
|
|
|
$
|
312
|
|
|
$
|
284
|
|
|
|
|
|
|
|
|
|
|
|
|
111
Assumptions used to determine benefit obligation for the BCH Plan as of November 30, included:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Discount rate
|
|
|
5.75
|
%
|
|
|
5.75
|
%
|
|
|
6.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate of compensation increase
|
|
|
n/a
|
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumptions used to determine net periodic pension cost for the BCH Plan as
of November 30 included:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Discount rate
|
|
|
5.75
|
%
|
|
|
6.00
|
%
|
|
|
6.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate of compensation increase
|
|
|
n/a
|
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected return on plan assets
|
|
|
8.50
|
%
|
|
|
8.50
|
%
|
|
|
8.50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
In developing the expected long-term rate of return assumption, the Corporation evaluated input
from the BCH Plan’s actuaries, financial analysts and the Corporation’s long-term inflation
assumptions and interest rate scenarios. Projected returns by such consultants are based on broad
equity and bond indices. The Corporation also considered historical returns on its plan assets. The
Corporation anticipates that the BCH Plan’s investment managers for the plan will generate annual
long term rate of returns of at least 7.50%.
The Corporation’s asset allocations for the BCH Plan at November 30 by asset category are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
Asset Category:
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
57
|
%
|
|
|
56
|
%
|
|
Debt securities
|
|
|
36
|
%
|
|
|
37
|
%
|
|
Other
|
|
|
7
|
%
|
|
|
7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
The expected contribution to the BCH Plan for 2008 is $885,401.
The Corporation’s investment policy with respect to the Corporation’s Plan and the BCH Plan is to
optimize, without undue risk, the total return on investment of the Plan assets after inflation,
within a framework of prudent and reasonable portfolio risk. The investment portfolio is
diversified in multiple asset classes to reduce portfolio risk, and assets may be shifted between
asset classes to reduce volatility when warranted by projections of the economic and/or financial
market environment, consistent with ERISA diversification principles. The Corporation’s target
asset allocations for both plans are 60% equity and 40% fixed/variable income. As circumstances and
market conditions change, these allocations may be amended to reflect the most appropriate
distribution given the new environment consistent with the investment objectives.
112
Expected future benefit payments for the plans at the end of their respective fiscal years are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation’s
|
|
BCH
|
|
|
|
Plan
|
|
Plan
|
|
|
|
(Dollars in thousands)
|
|
2008
|
|
$
|
1,581
|
|
|
$
|
1,816
|
|
|
2009
|
|
|
1,618
|
|
|
|
1,897
|
|
|
2010
|
|
|
1,694
|
|
|
|
2,061
|
|
|
2011
|
|
|
1,782
|
|
|
|
2,394
|
|
|
2012
|
|
|
1,866
|
|
|
|
2,776
|
|
|
2013 through 2017
|
|
|
10,797
|
|
|
|
15,815
|
|
Savings Plan
The Corporation also provides three contributory savings plans pursuant to Section 1165(e) of the
Puerto Rico Internal Revenue Code for substantially all the employees of the Corporation.
Investments in the plans are participant-directed, and employer matching contributions are
determined based on the specific provisions of each plan. Employees are fully vested in the
employer’s contribution after three and five years of service, respectively. The Corporation’s
contributions for the years ended December 31, 2007, 2006 and 2005, amounted to $1,476,000,
$1,554,000 and $1,374,000, respectively.
18.
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 compensation expense under this plan amounting to $10.3 million and
$0.8 million in 2007 and 2006, respectively. The cost of this plan will be reimbursed to
the Corporation by Santander Spain, at which time the liability will be reclassified into
capital as a capital contribution.
|
|
|
|
|
•
|
|
The grant of 100 shares of Santander Spain stock to all
employees of Santander Spain’s
operating entities as part of this year’s celebration of Santander Group 150th Anniversary
distributed during August of 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
or 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 $0.2 million in 2007.
|
113
19. Related Party Transactions:
The Corporation engages in transactions with affiliated companies in the ordinary course of its
business. At December 31, 2007, 2006 and 2005 and for the year ended, the Corporation had the
following transactions with related parties:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
(Dollars in thousands)
|
|
Deposits from related parties
|
|
$
|
17,344
|
|
|
$
|
60,062
|
|
|
$
|
40,905
|
|
|
Interest-bearing deposits with affiliates
|
|
|
1,106
|
|
|
|
555
|
|
|
|
389
|
|
|
Other borrowings with an affiliate
|
|
|
—
|
|
|
|
—
|
|
|
|
118,846
|
|
|
Loans to directors, officers, and related parties
(on substantially the same terms and credit risks
as loans to third parties)
|
|
|
3,288
|
|
|
|
4,388
|
|
|
|
5,929
|
|
|
Technical assistance income for services rendered
|
|
|
2,769
|
|
|
|
2,893
|
|
|
|
2,214
|
|
|
EDP services received
|
|
|
13,461
|
|
|
|
14,527
|
|
|
|
11,841
|
|
|
Technical assistance expense for software development
|
|
|
199
|
|
|
|
595
|
|
|
|
384
|
|
|
Rental income
|
|
|
441
|
|
|
|
319
|
|
|
|
—
|
|
|
Fair value of derivative financial instruments
purchased from affiliates
|
|
|
(26,917
|
)
|
|
|
21,780
|
|
|
|
19,286
|
|
|
Fair value of derivative financial instruments
sold to affiliates
|
|
|
354
|
|
|
|
1,000
|
|
|
|
118
|
|
114
20. Derivative Financial Instruments:
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
|
|
|
1,498,381
|
|
|
|
(43,589
|
)
|
|
|
(44,068
|
)
|
|
|
—
|
|
|
Interest rate swaps
|
|
|
242,000
|
|
|
|
(534
|
)
|
|
|
315
|
|
|
|
—
|
|
|
Loan commitments
|
|
|
1,451
|
|
|
|
45
|
|
|
|
35
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
249
|
|
|
$
|
(1,023
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006, the Corporation had the following derivative financial instruments
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) for
|
|
|
Comprehensive
|
|
|
|
|
|
|
|
|
|
|
|
|
the year
|
|
|
Income (Loss)*
|
|
|
|
|
Notional
|
|
|
|
|
|
|
ended
|
|
|
for the year ended
|
|
|
|
|
Value
|
|
|
Fair Value
|
|
|
Dec. 31, 2006
|
|
|
Dec. 31, 2006
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
CASH FLOW HEDGES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
825,000
|
|
|
$
|
(351
|
)
|
|
$
|
—
|
|
|
$
|
(214
|
)
|
|
Foreign currency swaps
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
36
|
|
|
FAIR VALUE HEDGES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
|
1,189,740
|
|
|
|
(22,065
|
)
|
|
|
64
|
|
|
|
—
|
|
|
OTHER DERIVATIVES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
153,528
|
|
|
|
33,512
|
|
|
|
7,057
|
|
|
|
—
|
|
|
Embedded options on stock-indexed deposits
|
|
|
153,528
|
|
|
|
(33,512
|
)
|
|
|
(7,057
|
)
|
|
|
—
|
|
|
Interest rate caps
|
|
|
36,889
|
|
|
|
68
|
|
|
|
12
|
|
|
|
—
|
|
|
Customer interest rate caps
|
|
|
34,095
|
|
|
|
(65
|
)
|
|
|
(10
|
)
|
|
|
—
|
|
|
Customer interest rate swaps
|
|
|
1,619,554
|
|
|
|
(52
|
)
|
|
|
3,021
|
|
|
|
—
|
|
|
Interest rate swaps
|
|
|
1,621,555
|
|
|
|
479
|
|
|
|
(3,216
|
)
|
|
|
—
|
|
|
Interest rate swaps
|
|
|
387,000
|
|
|
|
(849
|
)
|
|
|
(397
|
)
|
|
|
|
|
|
Loan commitments
|
|
|
1,988
|
|
|
|
9
|
|
|
|
49
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(477
|
)
|
|
$
|
(178
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
115
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 flow hedges. As of December 31, 2007, the
Corporation had outstanding $650 million of interest rate swaps designed as cash flow hedges. As of
December 31, 2007 and December 31, 2006 the total amount, net of tax, included in accumulated other
comprehensive income was an unrealized loss of $1.0 million and $0.2 million, respectively, of
which the Corporation expects to reclassify approximately $1.1 million into earnings during the
first quarter of 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. For the year ended December 31, 2007, the Corporation recognized a
loss of approximately $465,000 on fair value hedges due to hedge ineffectiveness, which is included
in other income in the consolidated statements of operations.
As of December 31, 2006, the Corporation also had outstanding interest rate swap agreements with a
notional amount of approximately $1.2 billion, maturing through the year 2032. The weighted
average rate paid and received on these contracts is 5.37% and 4.84%, respectively. As of December
31, 2006, the Corporation had retail fixed rate certificates of deposit amounting to approximately
$1.0 billion and a subordinated note amounting to approximately $125 million swapped to create a
floating rate source of funds. For the year ended December 31, 2006, the Corporation recognized a
gain of approximately $64,000 on fair value hedges due to hedge ineffectiveness, which is included
in other income in the consolidated statements of operations.
The Corporation issues certificates of deposit, individual retirement accounts and notes with
returns linked to the different equity indexes, which constitute embedded derivative instruments
that are bifurcated from the host deposit and recognized on the consolidated balance sheets. The
Corporation enters into option agreements in order to manage the interest rate risk on these
deposits and notes; however, these options have not been designated for hedge accounting, therefore
gains and losses on the market value of both the embedded derivative instruments and the option
contracts are marked to market through results of operations and recorded in other gains and losses
in the consolidated statements of operations. For the year ended December 31, 2007, a loss of
approximately $0.1 million was recorded on embedded options on stock-indexed deposits and notes and
a gain of approximately $0.1 million was recorded on the option contracts. For the year ended
December 31, 2006, a loss of approximately $7.1 million was recorded on embedded options on
stock-indexed deposits and notes and a gain of approximately $7.1 million was recorded on the
option contracts.
The Corporation enters into certain derivative transactions to provide derivative products to
customers, which includes interest rate caps, collars and swaps, and simultaneously covers the
Corporation’s position with related and unrelated third parties under substantially the same terms
and conditions. These derivatives are not linked to specific assets and liabilities on the
consolidated balance sheets or to forecasted transactions in an accounting hedge relationship and,
therefore, do not qualify for hedge accounting. These derivatives are carried at fair value with
changes in fair value recorded as part of other income. For the year ended December 31, 2007 and
the year ended December 31, 2006, the Corporation recognized a gain on these transactions of
$364,000 and a loss of $195,000, respectively.
To a lesser extent, the Corporation enters into freestanding derivative contracts as a proprietary
position taker, based on market expectations or on benefits from price differentials between
financial instruments and markets. These derivatives are not linked to specific assets and
liabilities on the consolidated balance sheets or to forecasted transactions in an accounting hedge
relationship and, therefore, do not qualify for hedge accounting. These derivatives are carried at
fair value with changes in fair value recorded as part of other income. For the year ended December
31, 2007 and the year ended December 31, 2006, the Corporation recognized a gain of $315,000 and a
loss of $397,000, 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
133. As of December 31, 2007, the Corporation had loan commitments outstanding for approximately
$1.5 million and recognized a gain of $35,000 on these commitments. At December 31, 2006, the
Corporation had loan commitments outstanding for approximately $2.0 million and recognized a gain
of $49,000 on these commitments.
116
21. Financial Instruments with Off-Balance Sheet Risk:
In the normal course of business, the Corporation is a party to transactions of financial
instruments with off-balance sheet risk to meet the financing needs of its customers. These
financial instruments may include commitments to extend credit, standby letters of credit,
financial guarantees and interest rate caps, swaps and floors written. Those instruments involve,
to varying degrees, elements of credit and interest rate risk in excess of the amount recognized on
the consolidated balance sheets. The contract or notional amounts of those instruments reflect the
extent of involvement the Corporation has in the different classes of financial instruments.
The Corporation’s exposure to credit loss, in the event of nonperformance by the counterparties to
the financial instrument for commitments to extend credit and standby letters of credit and
financial guarantees written, is represented by the contractual notional amounts of those
instruments.
The Corporation uses the same credit policies in making commitments and conditional obligations as
it does for on-balance sheet instruments. The contract amount of financial instruments with
off-balance sheet risk, whose amounts represent credit risk as of December 31, 2007 and 2006, was
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(Dollars in thousands)
|
|
|
Standby letters of credit and financial guarantees written
|
|
$
|
134,470
|
|
|
$
|
184,959
|
|
|
|
|
|
|
|
|
|
|
Commitments to extend credit, approved loans not yet
disbursed and unused lines of credit
|
|
$
|
1,530,017
|
|
|
$
|
1,666,490
|
|
|
|
|
|
|
|
|
|
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. At December 31, 2007 and 2006, the Corporation’s liabilities include $1,479,000 and
$2,241,000, respectively, which represents the fair value of the obligations undertaken in issuing
the guarantees under the standby letters of credit issued or modified after December 31, 2002, net
of the related amortization since inception. The fair value approximates the unamortized fees
received from the customers for issuing the standby letters of credit. The fees are deferred and
recognized on a straight-line basis over the commitment period. Standby letters of credit
outstanding at December 31, 2007 had terms ranging from one month to six years. The contract
amounts of the standby letters of credit of approximately $134,470,000 at December 31, 2007,
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.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation
of any condition established in the contract. Commitments generally have fixed expiration dates or
other termination clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Corporation evaluates each customer’s credit worthiness on
a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Corporation
upon extension of credit, is based on management’s credit evaluation of the counterparty.
Collateral held varies but may include accounts receivable, inventory, property, plant and
equipment, income-producing commercial properties and real estate. The Corporation holds
collateral as guarantee for most of these financial instruments. The Corporation’s commitment to
extend credit, approved loans not yet disbursed and unused lines of credit amounted to
approximately $1.5 billion and $1.7 billion at December 31, 2007 and 2006, respectively, and had a
fair value of $1.5 billion and $1.7 billion, respectively.
117
22. Fair Value of Financial Instruments:
The following methods and assumptions were used to estimate the fair value of each class of
financial instrument. The fair value estimates are made at a discrete point in time based on
relevant market information and information about the financial instrument. Because no market
exists for a significant portion of the Corporation’s financial instruments, fair value estimates
are based on judgments regarding future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. These estimates are
subjective in nature and involve uncertainties and matters of significant judgment and therefore
cannot be determined with precision. Changes in assumptions could significantly affect the
estimates.
In addition, the fair value estimates are based on existing on- and off-balance sheet financial
instruments without attempting to estimate the value of anticipated future business and the value
of assets and liabilities that are not considered financial instruments. In the case of
investments and mortgage-backed securities, the tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on fair value estimates and have not been
considered in many of the estimates.
Cash and Cash Equivalents and Interest-bearing Deposits
The carrying amount of cash and cash equivalents and interest-bearing accounts is a reasonable
estimate of fair value.
Trading Securities, Investment Securities Available for Sale and Other Investments
The fair value of securities is estimated based on bid prices published in financial newspapers or
bid quotations received from securities dealers. If a quoted market price is not available, fair
value is estimated using quoted market prices for similar securities.
Loans
Fair values are estimated for portfolios of loans with similar financial characteristics. Loans
are segregated by type such as commercial, consumer, mortgage, construction and other loans. Each
loan category is further segmented into fixed and adjustable interest rate terms and by performing
and non-performing.
The fair value of performing loans, except residential mortgages, is calculated by discounting
scheduled cash flows at market discount rates that reflect the credit and interest rate risk
inherent in the loan. For performing residential mortgage loans, fair value is computed by
discounting contractual cash flows adjusted for prepayment estimates using a discount rate based on
secondary market sources adjusted to reflect differences in servicing costs.
Mortgage loans available for sale are carried at the lower of cost or market and therefore
approximate fair value.
Fair value for non-performing loans, and loans with payments in arrears, is based on recent
internal or external appraisals. If appraisals are not available, estimated cash flows are
discounted using a rate commensurate with the risk associated with the estimated cash flows.
Assumptions regarding credit risks, cash flows, and discount rates are judgmentally determined
using available market information and specific borrower information.
Accrued Interest Receivable
The carrying amount of accrued interest receivable is a reasonable estimate of its fair value.
Deposits
The fair value of deposits with no stated maturity, such as demand deposits, savings and NOW
accounts, money market and checking accounts is equal to the amount payable on demand as of
December 31, 2007 and 2006, respectively. The fair value of fixed maturity certificates of deposit
is based on the discounted value of contractual cash flows. The discount rate is estimated using
the rates currently offered for deposits of similar remaining maturities.
118
Federal Funds Purchased and Other Borrowings
The carrying amount of federal funds purchased and other borrowings is a reasonable estimate of
fair value.
Securities Sold under Agreement to Repurchase
The carrying amount of securities sold under agreement to repurchase is a reasonable estimate of
fair value.
Commercial Paper Issued
The fair value of commercial paper issued is based on discounted cash flows using an estimated
discount rate based on the Corporation’s incremental borrowing rates currently offered for similar
debt instruments.
Subordinated Capital Notes and Term Notes
The fair value of variable rate subordinated capital notes and fluctuating annual rate term notes
is equal to the balance as of December 31, 2007 and 2006, since such notes are tied to floating
rates. The fair value of the fixed annual rate term notes is based on discounted cash flows, which
consider an estimated discount rate currently offered for similar borrowings.
Accrued Interest Payable
The carrying amount of accrued interest payable is a reasonable estimate of fair value.
Standby Letters of Credit and Commitments to Extend Credit
The fair value of commitments to extend credit, financial guarantees and letters of credit is based
on judgment regarding future expected loss experience, current economic conditions and the
counterparties’ credit standings.
Interest Rate Swap Agreements and Caps
The fair value of interest rate swaps and caps is estimated using the prices currently charged to
enter into similar agreements, taking into consideration the remaining terms of the agreements.
119
Following are the cost and fair value of financial instruments as of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Carrying
|
|
|
|
|
|
|
Carrying
|
|
|
|
|
|
|
|
Amount
|
|
|
Fair Value
|
|
|
Amount
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
Consolidated balance sheets financial instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and all interest-bearing deposits
|
|
$
|
207,136
|
|
|
$
|
207,136
|
|
|
$
|
250,719
|
|
|
$
|
250,719
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading securities
|
|
$
|
68,500
|
|
|
$
|
68,500
|
|
|
$
|
50,792
|
|
|
$
|
50,792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available for sale
|
|
$
|
1,268,198
|
|
|
$
|
1,268,198
|
|
|
$
|
1,409,789
|
|
|
$
|
1,409,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other investment securities
|
|
$
|
64,559
|
|
|
$
|
64,559
|
|
|
$
|
50,710
|
|
|
$
|
50,710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale
|
|
$
|
141,902
|
|
|
$
|
141,902
|
|
|
$
|
196,277
|
|
|
$
|
196,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
6,769,478
|
|
|
$
|
7,137,915
|
|
|
$
|
6,640,416
|
|
|
$
|
6,829,732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued interest receivable
|
|
$
|
80,029
|
|
|
$
|
80,029
|
|
|
$
|
102,244
|
|
|
$
|
102,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non interest-bearing
|
|
$
|
755,457
|
|
|
$
|
755,457
|
|
|
$
|
746,089
|
|
|
$
|
746,089
|
|
|
Interest-bearing
|
|
|
4,405,246
|
|
|
|
4,404,647
|
|
|
|
4,567,885
|
|
|
|
4,582,696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,160,703
|
|
|
$
|
5,160,104
|
|
|
$
|
5,313,974
|
|
|
$
|
5,328,785
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds purchased and other borrowings
|
|
$
|
1,952,110
|
|
|
$
|
1,952,110
|
|
|
$
|
1,628,400
|
|
|
$
|
1,628,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold under agreements to repurchase
|
|
$
|
635,597
|
|
|
$
|
635,597
|
|
|
$
|
830,569
|
|
|
$
|
830,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper issued
|
|
$
|
284,482
|
|
|
$
|
284,502
|
|
|
$
|
209,549
|
|
|
$
|
210,935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated capital and term notes
|
|
$
|
266,541
|
|
|
$
|
285,982
|
|
|
$
|
285,997
|
|
|
$
|
303,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued interest payable
|
|
$
|
77,356
|
|
|
$
|
77,356
|
|
|
$
|
91,245
|
|
|
$
|
91,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Contract or
|
|
|
|
|
|
|
Contract or
|
|
|
|
|
|
|
|
Notional
|
|
|
|
|
|
|
Notional
|
|
|
|
|
|
|
|
Amount
|
|
|
Fair Value
|
|
|
Amount
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
Off balance sheet financial instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standby letters of credit and financial
guarantees written
|
|
$
|
134,470
|
|
|
$
|
(1,479
|
)
|
|
$
|
184,959
|
|
|
$
|
(2,241
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments to extend credit, approved loans
not yet disbursed and unused lines of credit
|
|
$
|
1,530,017
|
|
|
$
|
(1,530
|
)
|
|
$
|
1,666,490
|
|
|
$
|
(1,667
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23. Significant Group Concentrations of Credit Risk:
Most of the Corporation’s business activities are with customers located within Puerto Rico. The
Corporation has a diversified loan portfolio with no significant concentration in any economic
sector.
120
24. Regulatory Matters:
The Corporation and the Bank are subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can initiate certain
mandatory and possibly additional discretionary actions by regulators that, if undertaken, could
have a direct material effect on the Corporation’s consolidated financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective action, the
Corporation and the Bank must meet specific capital guidelines that involve quantitative measures
of the assets, liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Corporation’s and the Bank’s capital classification is also subject to
qualitative judgments by the regulators about components, risk weightings, and other factors.
Prompt corrective action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy require the Corporation
and the Bank to maintain minimum amounts and ratios, as indicated below, of Total and Tier I
capital (as defined) to risk-weighted assets (as defined), and of Tier I capital (as defined) to
average assets (as defined). In management’s opinion, the Corporation and the Bank met all capital
adequacy requirements to which they were subject as of December 31, 2007 and 2006.
At December 31, 2007 and 2006, the Corporation’s required and actual regulatory capital amounts and
ratios follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
Required
|
|
Actual
|
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Total Capital (to Risk Weighted Assets)
|
|
$
|
528,134
|
|
|
|
8
|
%
|
|
$
|
696,909
|
|
|
|
10.56
|
%
|
|
Tier I Capital (to Risk Weighted Assets)
|
|
$
|
264,067
|
|
|
|
4
|
%
|
|
$
|
490,259
|
|
|
|
7.43
|
%
|
|
Leverage Ratio
|
|
$
|
273,298
|
|
|
|
3
|
%
|
|
$
|
490,259
|
|
|
|
5.38
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
Required
|
|
Actual
|
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Total Capital (to Risk Weighted Assets)
|
|
$
|
529,191
|
|
|
|
8
|
%
|
|
$
|
723,269
|
|
|
|
10.93
|
%
|
|
Tier I Capital (to Risk Weighted Assets)
|
|
$
|
264,596
|
|
|
|
4
|
%
|
|
$
|
520,794
|
|
|
|
7.87
|
%
|
|
Leverage Ratio
|
|
$
|
269,000
|
|
|
|
3
|
%
|
|
$
|
520,794
|
|
|
|
5.81
|
%
|
121
As of December 31, 2007, the Bank qualified as a well-capitalized institution under the
regulatory framework. To be categorized as well capitalized, an institution must maintain minimum
total risk-based, Tier I risk based and Tier I leverage ratios as set forth in the table below. At
December 31, 2007, there are no conditions or events that management believes to have changed the
Bank’s category since the regulator’s last notification.
At December 31, 2007 and 2006, the Bank’s required and actual regulatory capital amounts and ratios
follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
Required
|
|
Actual
|
|
Well-Capitalized
|
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Ratio
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Total Capital (to Risk Weighted Assets)
|
|
$
|
474,647
|
|
|
|
8
|
%
|
|
$
|
647,482
|
|
|
|
10.91
|
%
|
|
|
>
|
|
|
|
10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I Capital (to Risk Weighted Assets)
|
|
$
|
237,324
|
|
|
|
4
|
%
|
|
$
|
573,022
|
|
|
|
9.66
|
%
|
|
|
>
|
|
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage Ratio
|
|
$
|
251,493
|
|
|
|
3
|
%
|
|
$
|
573,022
|
|
|
|
6.84
|
%
|
|
|
>
|
|
|
|
5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
Required
|
|
Actual
|
|
Well-Capitalized
|
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Ratio
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Total Capital (to Risk Weighted Assets)
|
|
$
|
469,346
|
|
|
|
8
|
%
|
|
$
|
651,350
|
|
|
|
11.10
|
%
|
|
|
>
|
|
|
|
10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I Capital (to Risk Weighted Assets)
|
|
$
|
234,673
|
|
|
|
4
|
%
|
|
$
|
583,941
|
|
|
|
9.95
|
%
|
|
|
>
|
|
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage Ratio
|
|
$
|
244,857
|
|
|
|
3
|
%
|
|
$
|
583,941
|
|
|
|
7.15
|
%
|
|
|
>
|
|
|
|
5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
122
25. Segment Information:
Types of Products and Services
The Corporation has five (four in 2005) reportable segments: Commercial Banking, Mortgage Banking,
Consumer Finance, Treasury and Investments and Wealth Management. Insurance operations and
International Banking are other lines of business in which the Corporation commenced its
involvement during 2000 and 2001, respectively, and are included in the “Other” column below since
they did not meet the quantitative thresholds for disclosure of segment information.
Measurement of Segment Profit or Loss and Segment Assets
The Corporation’s reportable business segments are strategic business units that offer distinctive
products and services that are marketed through different channels. These are managed separately
because of their unique technology, marketing and distribution requirements.
The following present financial information of reportable segments as of and for the years ended
December 31, 2007, 2006 and 2005. General corporate expenses and income taxes have not been added
or deducted in the determination of operating segment profits. The “Other” column includes
insurance and international banking operations and the items necessary to reconcile the identified
segments to the reported consolidated amounts. Included in the “Other” column are expenses of the
internal audit, investors’ relations, strategic planning, administrative services, mail, marketing,
public relations, electronic data processing departments and comptroller’s departments. The
“Eliminations” column includes all intercompany eliminations for consolidation purposes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
Commercial
|
|
Mortgage
|
|
Consumer
|
|
Treasury and
|
|
Wealth
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
|
Banking
|
|
Banking
|
|
Finance
|
|
Investments
|
|
Management
|
|
Other
|
|
Eliminations
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total external revenue
|
|
$
|
351,120
|
|
|
$
|
190,889
|
|
|
$
|
144,027
|
|
|
$
|
75,821
|
|
|
$
|
64,378
|
|
|
$
|
46,671
|
|
|
$
|
(50,576
|
)
|
|
$
|
822,330
|
|
|
Intersegment revenue
|
|
|
9,458
|
|
|
|
13,571
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,074
|
|
|
|
25,473
|
|
|
|
(50,576
|
)
|
|
|
—
|
|
|
Interest income
|
|
|
299,105
|
|
|
|
168,238
|
|
|
|
140,881
|
|
|
|
71,418
|
|
|
|
2,667
|
|
|
|
24,607
|
|
|
|
(32,706
|
)
|
|
|
674,210
|
|
|
Interest expense
|
|
|
99,409
|
|
|
|
102,038
|
|
|
|
36,898
|
|
|
|
116,669
|
|
|
|
3,613
|
|
|
|
30,081
|
|
|
|
(26,177
|
)
|
|
|
362,531
|
|
|
Depreciation and
amortization
|
|
|
4,092
|
|
|
|
2,066
|
|
|
|
3,645
|
|
|
|
816
|
|
|
|
1,220
|
|
|
|
4,437
|
|
|
|
—
|
|
|
|
16,276
|
|
|
Segment income (loss)
before income tax
|
|
|
79,406
|
|
|
|
51,596
|
|
|
|
(57,991
|
)
|
|
|
(47,203
|
)
|
|
|
16,359
|
|
|
|
(66,544
|
)
|
|
|
(7,664
|
)
|
|
|
(32,041
|
)
|
|
Segment assets
|
|
|
4,014,385
|
|
|
|
2,752,186
|
|
|
|
684,115
|
|
|
|
1,533,832
|
|
|
|
130,229
|
|
|
|
537,792
|
|
|
|
(492,326
|
)
|
|
|
9,160,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
Commercial
|
|
Mortgage
|
|
Consumer
|
|
Treasury and
|
|
Wealth
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
|
Banking
|
|
Banking
|
|
Finance
|
|
Investments
|
|
Management
|
|
Other
|
|
Eliminations
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total external
revenue
|
|
$
|
311,451
|
|
|
$
|
175,877
|
|
|
$
|
121,159
|
|
|
$
|
80,630
|
|
|
$
|
49,865
|
|
|
$
|
64,956
|
|
|
$
|
(67,149
|
)
|
|
$
|
736,789
|
|
|
Intersegment revenue
|
|
|
11,472
|
|
|
|
8,698
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,400
|
|
|
|
45,579
|
|
|
|
(67,149
|
)
|
|
|
—
|
|
|
Interest income
|
|
|
268,806
|
|
|
|
162,572
|
|
|
|
118,154
|
|
|
|
80,275
|
|
|
|
2,283
|
|
|
|
41,359
|
|
|
|
(55,129
|
)
|
|
|
618,320
|
|
|
Interest expense
|
|
|
87,654
|
|
|
|
90,423
|
|
|
|
34,738
|
|
|
|
113,878
|
|
|
|
3,183
|
|
|
|
46,096
|
|
|
|
(48,258
|
)
|
|
|
327,714
|
|
|
Depreciation and
amortization
|
|
|
5,567
|
|
|
|
1,852
|
|
|
|
3,633
|
|
|
|
776
|
|
|
|
1,030
|
|
|
|
4,737
|
|
|
|
—
|
|
|
|
17,595
|
|
|
Segment income
(loss)
before income tax
|
|
|
95,180
|
|
|
|
60,595
|
|
|
|
(1,287
|
)
|
|
|
(38,101
|
)
|
|
|
13,185
|
|
|
|
(56,442
|
)
|
|
|
(7,421
|
)
|
|
|
65,709
|
|
|
Segment assets
|
|
|
3,929,196
|
|
|
|
2,715,577
|
|
|
|
805,173
|
|
|
|
1,684,649
|
|
|
|
100,585
|
|
|
|
506,587
|
|
|
|
(553,599
|
)
|
|
|
9,188,168
|
|
123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
|
Commercial
|
|
Mortgage
|
|
Treasury and
|
|
Wealth
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
|
Banking
|
|
Banking
|
|
Investments
|
|
Management
|
|
Other
|
|
Eliminations
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Total external revenue
|
|
$
|
246,704
|
|
|
$
|
173,477
|
|
|
$
|
90,838
|
|
|
$
|
49,714
|
|
|
$
|
21,270
|
|
|
$
|
(17,040
|
)
|
|
$
|
564,963
|
|
|
Intersegment revenue
|
|
|
10,237
|
|
|
|
2,025
|
|
|
|
—
|
|
|
|
1,452
|
|
|
|
3,326
|
|
|
|
(17,040
|
)
|
|
|
—
|
|
|
Interest income
|
|
|
208,098
|
|
|
|
164,261
|
|
|
|
77,447
|
|
|
|
1,697
|
|
|
|
(638
|
)
|
|
|
(11,260
|
)
|
|
|
439,605
|
|
|
Interest expense
|
|
|
59,348
|
|
|
|
60,998
|
|
|
|
96,100
|
|
|
|
2,003
|
|
|
|
5,629
|
|
|
|
(11,495
|
)
|
|
|
212,583
|
|
|
Depreciation and
amortization
|
|
|
5,774
|
|
|
|
1,808
|
|
|
|
642
|
|
|
|
731
|
|
|
|
4,229
|
|
|
|
—
|
|
|
|
13,184
|
|
|
Segment income (loss)
before income tax
|
|
|
67,257
|
|
|
|
98,249
|
|
|
|
(9,956
|
)
|
|
|
13,835
|
|
|
|
(57,861
|
)
|
|
|
(930
|
)
|
|
|
110,594
|
|
|
Segment assets
|
|
|
3,536,945
|
|
|
|
2,837,931
|
|
|
|
1,887,680
|
|
|
|
90,109
|
|
|
|
210,134
|
|
|
|
(290,851
|
)
|
|
|
8,271,948
|
|
Reconciliation of Segment Information to Consolidated Amounts
Information for the Corporation’s reportable segments in relation to the consolidated totals at
December 31, follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
(Dollars in thousands)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues for reportable segments
|
|
$
|
826,235
|
|
|
$
|
733,421
|
|
|
$
|
557,040
|
|
|
Other revenues
|
|
|
46,671
|
|
|
|
70,517
|
|
|
|
24,963
|
|
|
Elimination of intersegment revenues
|
|
|
(50,576
|
)
|
|
|
(67,149
|
)
|
|
|
(17,040
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated revenues
|
|
$
|
822,330
|
|
|
$
|
736,789
|
|
|
$
|
564,963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income before tax of reportable segments
|
|
$
|
42,167
|
|
|
$
|
127,299
|
|
|
$
|
167,609
|
|
|
Income (loss) before tax of other segments
|
|
|
(66,544
|
)
|
|
|
(54,169
|
)
|
|
|
(56,085
|
)
|
|
Elimination of intersegment profits
|
|
|
(7,664
|
)
|
|
|
(7,421
|
)
|
|
|
(930
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated income before tax
|
|
$
|
(32,041
|
)
|
|
$
|
65,709
|
|
|
$
|
110,594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets for reportable segments
|
|
$
|
9,114,747
|
|
|
$
|
9,146,499
|
|
|
$
|
8,257,552
|
|
|
Assets not attributed to segments
|
|
|
537,792
|
|
|
|
595,268
|
|
|
|
305,247
|
|
|
Elimination of intersegment assets
|
|
|
(492,326
|
)
|
|
|
(553,599
|
)
|
|
|
(290,851
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated assets
|
|
$
|
9,160,213
|
|
|
$
|
9,188,168
|
|
|
$
|
8,271,948
|
|
|
|
|
|
|
|
|
|
|
|
|
124
26. Quarterly Results (Unaudited):
The following table reflects the unaudited quarterly results of the Corporation during the years
ended December 31, 2007, 2006 and 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended 2007
|
|
|
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
|
|
|
|
|
|
|
(Dollars in thousands, except per share data)
|
|
|
|
|
|
Interest Income
|
|
$
|
167,077
|
|
|
$
|
168,242
|
|
|
$
|
170,149
|
|
|
$
|
168,742
|
|
|
Net Interest Income
|
|
|
79,402
|
|
|
|
78,197
|
|
|
|
76,039
|
|
|
|
78,041
|
|
|
Net Interest Income after Provision
for Loan Losses
|
|
|
57,378
|
|
|
|
47,347
|
|
|
|
28,689
|
|
|
|
30,441
|
|
|
Income (Loss) before Provision for
Income Tax
|
|
|
19,383
|
|
|
|
5,505
|
|
|
|
(55,011
|
)
|
|
|
(1,918
|
)
|
|
Net Income (Loss)
|
|
|
11,729
|
|
|
|
4,096
|
|
|
|
(50,099
|
)
|
|
|
(1,971
|
)
|
|
|
|
Earnings (Loss) per Common Share
|
|
|
0.25
|
|
|
|
0.09
|
|
|
|
(1.07
|
)
|
|
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended 2006
|
|
|
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
|
|
|
|
|
|
|
(Dollars in thousands, except per share data)
|
|
|
|
|
|
Interest Income
|
|
$
|
132,084
|
|
|
$
|
158,534
|
|
|
$
|
162,086
|
|
|
$
|
165,616
|
|
|
Net Interest Income
|
|
|
62,786
|
|
|
|
77,856
|
|
|
|
74,708
|
|
|
|
75,256
|
|
|
Net Interest Income after Provision
for Loan Losses
|
|
|
55,248
|
|
|
|
61,881
|
|
|
|
54,308
|
|
|
|
53,586
|
|
|
Income before Provision for Income Tax
|
|
|
21,951
|
|
|
|
18,383
|
|
|
|
9,692
|
|
|
|
15,683
|
|
|
Net Income
|
|
|
13,356
|
|
|
|
11,028
|
|
|
|
8,726
|
|
|
|
10,059
|
|
|
|
|
Earnings per Common Share
|
|
|
0.29
|
|
|
|
0.23
|
|
|
|
0.19
|
|
|
|
0.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended 2005
|
|
|
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
|
|
|
|
|
|
|
(Dollars in thousands, except per share data)
|
|
|
|
|
|
Interest Income
|
|
$
|
101,388
|
|
|
$
|
104,050
|
|
|
$
|
112,470
|
|
|
$
|
121,697
|
|
|
Net Interest Income
|
|
|
56,108
|
|
|
|
54,262
|
|
|
|
55,577
|
|
|
|
61,075
|
|
|
Net Interest Income after Provision
for Loan Losses
|
|
|
49,408
|
|
|
|
50,212
|
|
|
|
50,927
|
|
|
|
56,075
|
|
|
Income before Provision for Income Tax
|
|
|
33,130
|
|
|
|
28,016
|
|
|
|
23,693
|
|
|
|
25,755
|
|
|
Net Income
|
|
|
25,914
|
|
|
|
19,633
|
|
|
|
17,395
|
|
|
|
16,864
|
|
|
|
|
Earnings per Common Share
|
|
|
0.56
|
|
|
|
0.42
|
|
|
|
0.37
|
|
|
|
0.36
|
|
125
27. Santander BanCorp (Parent Company Only) Financial Information
:
The following condensed financial information presents the financial position of the Parent Company
only, as of December 31, 2007 and 2006, and the results of its operations and its cash flows for
each of the years in the three year period ended December 31, 2007.
The net income of Santander Bancorp (parent company only) is nominally greater than the
consolidated net income of Santander BanCorp and subsidiaries, because it includes a transaction
between Santander BanCorp’s wholly owned subsidiaries, Banco
Santander Puerto Rico and Santander Securities Corporation,
which has a different accounting treatment in the stand-alone financial statements of each of these
entities. Such transaction is eliminated in consolidation.
Santander Bancorp
Balance Sheet Information December 31, 2007 and 2006
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
11,875
|
|
|
$
|
15,890
|
|
|
Interest-bearing deposits
|
|
|
30,079
|
|
|
|
51,000
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents
|
|
|
41,954
|
|
|
|
66,890
|
|
|
Loans
|
|
|
235,469
|
|
|
|
262,824
|
|
|
Investment in Subsidiaries
|
|
|
755,670
|
|
|
|
786,731
|
|
|
Accrued Interest Receivable
|
|
|
6,534
|
|
|
|
10,414
|
|
|
Other Assets
|
|
|
921
|
|
|
|
787
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,040,548
|
|
|
$
|
1,127,646
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
Borrowings
|
|
$
|
235,000
|
|
|
$
|
275,000
|
|
|
Subordinated Capital Notes
|
|
|
251,045
|
|
|
|
248,343
|
|
|
Accrued Interest Payable
|
|
|
5,830
|
|
|
|
9,290
|
|
|
Other Liabilities
|
|
|
10,073
|
|
|
|
14,202
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
501,948
|
|
|
|
546,835
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY:
|
|
|
|
|
|
|
|
|
|
Common stock, $2.50 par value; 200,000,000 shares authorized, 50,650,364 shares issued;
46,639,104 shares outstanding at December 31, 2007 and 2006
|
|
|
126,626
|
|
|
|
126,626
|
|
|
Capital paid in excess of par value
|
|
|
556,192
|
|
|
|
552,195
|
|
|
Treasury stock at cost, 4,011,260 shares at December 31, 2007 and 2006
|
|
|
(67,552
|
)
|
|
|
(67,552
|
)
|
|
Accumulated other comprehensive loss from unconsolidated subsidiaries, net of tax
|
|
|
(24,478
|
)
|
|
|
(44,213
|
)
|
|
Retained earnings-
|
|
|
|
|
|
|
|
|
|
Undivided loss
|
|
|
(52,188
|
)
|
|
|
13,755
|
|
|
|
|
|
|
|
|
|
|
Total stockholders’ equity
|
|
|
538,600
|
)
|
|
|
580,811
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,040,548
|
|
|
$
|
1,127,646
|
|
|
|
|
|
|
|
|
|
126
Santander BanCorp
Statements of Operations Information
Years Ended December 31, 2007, 2006 and 2005
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Interest Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
17,883
|
|
|
$
|
42,472
|
|
|
$
|
5,629
|
|
|
Interest-bearing deposits
|
|
|
1,867
|
|
|
|
1,952
|
|
|
|
848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
19,750
|
|
|
|
44,424
|
|
|
|
6,477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings
|
|
|
13,931
|
|
|
|
34,661
|
|
|
|
4,253
|
|
|
Term and subordinated capital notes
|
|
|
16,157
|
|
|
|
14,619
|
|
|
|
3,402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
30,088
|
|
|
|
49,280
|
|
|
|
7,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest loss
|
|
|
(10,338
|
)
|
|
|
(4,856
|
)
|
|
|
(1,178
|
)
|
|
Other
(Loss) Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
(loss) gains
|
|
|
(10
|
)
|
|
|
40
|
|
|
|
(122
|
)
|
|
Equity in (losses) earnings of subsidiaries
|
|
|
(24,524
|
)
|
|
|
50,327
|
|
|
|
83,617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other
(loss) income
|
|
|
(24,534
|
)
|
|
|
50,367
|
|
|
|
83,495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional fees
|
|
|
844
|
|
|
|
1,419
|
|
|
|
1,149
|
|
|
Other taxes
|
|
|
(615
|
)
|
|
|
475
|
|
|
|
285
|
|
|
Other operating expenses
|
|
|
774
|
|
|
|
376
|
|
|
|
202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other operating expenses
|
|
|
1,003
|
|
|
|
2,270
|
|
|
|
1,636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Income before provision (benefit) for income tax
|
|
|
(35,875
|
)
|
|
|
43,241
|
|
|
|
80,681
|
|
|
Provision
(Benefit) for Income Tax
|
|
|
(88
|
)
|
|
|
16
|
|
|
|
(55
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (Loss) Income
|
|
$
|
(35,787
|
)
|
|
$
|
43,225
|
|
|
$
|
80,736
|
|
|
|
|
|
|
|
|
|
|
|
|
127
Santander BanCorp
Statements of Cash Flows Information
Years Ended December 31, 2007, 2006 and 2005
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(35,787
|
)
|
|
$
|
43,225
|
|
|
$
|
80,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments
to reconcile net (loss) income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in losses (earnings) of subsidiaries, net of dividends received
|
|
|
54,487
|
|
|
|
(15,684
|
)
|
|
|
(51,225
|
)
|
|
Deferred tax (benefit) provision
|
|
|
(88
|
)
|
|
|
16
|
|
|
|
(55
|
)
|
|
Decrease (increase) in other assets and accrued interest receivable
|
|
|
3,746
|
|
|
|
(6,564
|
)
|
|
|
(3,759
|
)
|
|
(Decrease) increase in other liabilities and accrued interest payable
|
|
|
(7,502
|
)
|
|
|
8,314
|
|
|
|
9,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustments
|
|
|
50,643
|
|
|
|
(13,918
|
)
|
|
|
(45,479
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
14,856
|
|
|
|
29,307
|
|
|
|
35,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease (increase) in loans
|
|
|
27,355
|
|
|
|
(123,389
|
)
|
|
|
(96,435
|
)
|
|
Investment in subsidiary
|
|
|
—
|
|
|
|
(147,029
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
27,355
|
|
|
|
(270,418
|
)
|
|
|
(96,435
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of borrowings
|
|
|
235,000
|
|
|
|
1,000,000
|
|
|
|
118,846
|
|
|
Repayment of borrowings
|
|
|
(275,000
|
)
|
|
|
(843,846
|
)
|
|
|
(30,000
|
)
|
|
Issuance of subordinated capital notes
|
|
|
2,702
|
|
|
|
127,370
|
|
|
|
48,385
|
|
|
Dividends paid
|
|
|
(29,849
|
)
|
|
|
(29,849
|
)
|
|
|
(29,849
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(67,147
|
)
|
|
|
253,675
|
|
|
|
107,382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CHANGE IN CASH AND CASH EQUIVALENTS
|
|
|
(24,936
|
)
|
|
|
12,564
|
|
|
|
46,204
|
|
|
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
|
|
|
66,890
|
|
|
|
54,326
|
|
|
|
8,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF YEAR
|
|
$
|
41,954
|
|
|
$
|
66,890
|
|
|
$
|
54,326
|
|
|
|
|
|
|
|
|
|
|
|
|
128
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Corporation maintains a system of disclosure controls and procedures that are designed to
provide reasonable assurance that material information, which is required to be timely disclosed,
is accumulated and communicated to management in a timely manner. An evaluation of the
effectiveness of the design and operation of our disclosure controls and procedures (as defined in
Rules 13a-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)) was performed as of
the end of the period covered by this report. This evaluation was performed under the supervision
and with the participation of the Corporation’s Chief Executive Officer and Chief Accounting
Officer. Based upon that evaluation, the Chief Executive Officer and Chief Accounting Officer
concluded that the Corporation’s disclosure controls and procedures are effective to provide
reasonable assurance that information required to be disclosed by the Corporation in the
Corporation’s reports that it files or submits under the Exchange Act is accumulated and
communicated to management, including its Chief Executive Officer and Chief Accounting Officer, as
appropriate, to allow timely decisions regarding required disclosure and are effective to provide
reasonable assurance that such information is recorded, processed, summarized and reported within
the time periods specified by the SEC’s rules and forms.
Management’s Report on Internal Control over Financial Reporting
Management of the Corporation is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities
Exchange Act of 1934. The Corporation’s internal control over financial reporting is designed to
provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with accounting principles generally
accepted in the United States of America (“GAAP”).
All internal control systems, no matter how well designed, have inherent limitations. Therefore,
even those systems determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation. Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements.
Management has assessed the effectiveness of the Corporation’s internal control over financial
reporting as of December 31, 2007, based on the criteria set forth by the Committee of Sponsoring
Organizations (“COSO”) of the Treadway Commission in their Internal Control — Integrated Framework.
In making its assessment of internal control over financial reporting, management has concluded
that the Corporation’s internal control over financial reporting was effective as of December 31,
2007.
The Corporation’s independent registered public accounting firm, Deloitte & Touche LLP, has
audited the effectiveness of the Corporation’s internal control over financial reporting. Their
report appears herein.
129
Change in Internal Control Over Financial Reporting
None
ITEM 9B. OTHER INFORMATION
None
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information contained under the captions “Principal Holders of Capital Stock”, “Section 16(a)
Beneficial Ownership Reporting Compliance”, “Board of Directors”, “Nominees for Election”,
“Meetings of the Board of Directors and Committees” and “Executive Officers” of the Corporation’s
definitive Proxy Statement to be filed with the SEC on or about
March 24, 2008, is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information under the caption “Compensation of Executive Officers” of the definitive Proxy
Statement to be filed with the SEC on or about March 24, 2008, is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The information under the caption “Principal Holders of Capital Stock” of the definitive Proxy
Statement to be filed with the SEC on or about March 24, 2008, is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information under the caption “Transactions with Related Parties” of the definitive Proxy
Statement to be filed with the SEC on or about March 24, 2008, is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information under the caption “Disclosure of Audit Fees” of the definitive Proxy Statement to
be filed with the SEC on or about March 24, 2008, is incorporated herein by reference.
130
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES
|
|
A.
|
|
The following documents are incorporated by reference from Item 8 hereof:
|
|
|
|
(1) Consolidated Financial Statements:
|
|
Reports of Independent Registered Public Accounting Firm
|
|
Consolidated Balance Sheets at December 31, 2007 and 2006
|
|
Consolidated Statements of Operations for the Years Ended
December 31, 2007, 2006, and 2005
|
|
Consolidated Statements of Changes in Stockholders’ Equity
for the Years Ended December 31, 2007, 2006 and 2005
|
|
Consolidated
Statements of Comprehensive (Loss) Income
for the Years Ended December 31, 2007, 2006 and 2005
|
|
Consolidated Statements of Cash Flows for the Years
Ended December 31 2007, 2006 and 2005
|
|
Notes to Consolidated Financial Statements
December 31, 2007, 2006 and 2005
|
|
|
(2)
|
Financial Statement Schedules are not presented because the information
is not applicable or is included in the Consolidated Financial Statements described
in A (1) above or in the notes thereto.
|
|
|
|
|
(3)
|
The exhibits listed on the Exhibit Index on page 133 of this report are
filed herewith or are incorporated herein by reference.
|
131
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, there
unto duly authorized
|
|
|
|
|
|
|
|
SANTANDER BANCORP
(REGISTRANT)
|
|
|
|
|
Dated: 03/17/2008
|
By:
|
/s/ JOSE RAMON GONZALEZ
|
|
|
|
|
Director and Vice Chairman
|
|
|
|
|
President and Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dated: 03/17/2008
|
By:
|
/s/ CARLOS M. GARCIA
|
|
|
|
|
Director
|
|
|
|
|
Senior Executive Vice President and
Chief Operating Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dated: 03/17/2008
|
By:
|
/s/ MARIA CALERO
|
|
|
|
|
Director
|
|
|
|
|
Executive Vice President and
Chief Accounting Officer
|
|
|
|
Pursuant to the requirement of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of this Registrant and in the capacities and
on the dates indicated.
|
|
|
|
|
|
|
/s/ GONZALO DE LAS HERAS
|
|
Chairman
|
|
03/17/2008
|
|
|
|
|
|
|
|
/s/ JESUS M. ZABALZA
|
|
Director
|
|
03/17/2008
|
|
|
|
|
|
|
|
/s/ VICTOR ARBULU
|
|
Director
|
|
03/17/2008
|
|
|
|
|
|
|
|
/s/ ROBERTO VALENTIN
|
|
Director
|
|
03/17/2008
|
|
|
|
|
|
|
|
/s/ STEPHEN FERRISS
|
|
Director
|
|
03/17/2008
|
132
EXHIBIT INDEX
|
|
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
Reference
|
|
(2.0)
|
|
Agreement and Plan of Merger-Banco Santander Puerto Rico and
Santander BanCorp
|
|
Exhibit 3.3 8-A12B
|
|
|
|
|
|
|
|
(2.1)
|
|
Stock Purchase Agreement Santander BanCorp and Banco Santander
Central Hispano, S.A.
|
|
Exhibit 2.1 10K-12/31/00
|
|
|
|
|
|
|
|
(2.2)
|
|
Stock Purchase Agreement dated as of November 28, 2003 by and among
Santander BanCorp, Administración de Bancos Latinoamericanos
Santander, S.L. and Santander Securities Corporation
|
|
Exhibit 2.2 10Q-06/30/04
|
|
|
|
|
|
|
|
(2.3)
|
|
Settlement Agreement between Santander BanCorp and Administración
de Bancos Latinoamericanos Santander, S.L.
|
|
Exhibit 2.3 10Q-06/30/04
|
|
|
|
|
|
|
|
(3.1)
|
|
Articles of Incorporation
|
|
Exhibit 3.1 8-A12B
|
|
|
|
|
|
|
|
(3.2)
|
|
Bylaws
|
|
Exhibit 3.1 8-A12B
|
|
|
|
|
|
|
|
(4.1)
|
|
Authoring and Enabling Resolutions 7% Noncumulative Perpetual
Monthly Income Preferred Stock, Series A
|
|
Exhibit 4.1 10Q-06/30/04
|
|
|
|
|
|
|
|
(4.2)
|
|
Offering Circular for $30,000,000 Banco Santander PR Stock Market Growth
Notes Linked to the S&P 500 Index
|
|
Exhibit 4.6 10Q-03/31/04
|
|
|
|
|
|
|
|
(4.3)
|
|
Private Placement Memorandum Santander BanCorp $75,000,000 6.30%
Subordinated Notes
|
|
Exhibit 4.3 10KA-12/31/04
|
|
|
|
|
|
|
|
(4.4)
|
|
Private Placement Memorandum Santander BanCorp $50,000,000 6.10%
Subordinated Notes
|
|
Exhibit 4.4 10K-12/31/05
|
|
|
|
|
|
|
|
(4.5)
|
|
Indenture dated as of February 28, 2006, between the Santander BanCorp and
Banco Popular de Puerto Rico
|
|
Exhibit 4.6 10Q-03/31/06
|
|
|
|
|
|
|
|
(4.6)
|
|
First Supplemental Indenture, dated as of February 28, 2006, between Santander
Bancorp and Banco Popular de Puerto Rico
|
|
Exhibit 4.7 10Q-03/31/06
|
|
|
|
|
|
|
|
(4.7)
|
|
Amended and Restated Declaration of Trust and Trust Agreement, dated as of
February 28, 2006, among Santander BanCorp, Banco Popular de Puerto Rico
Wilmintong Trust Company, the Administrative Trustees named therein and
the holders from time to time, of the undivided beneficial ownership interest in
The Assets of the Trust.
|
|
Exhibit 4.8 10-Q-03/31/06
|
|
|
|
|
|
|
|
(4.8)
|
|
Guarantee Agreement, dated as of February 28, 2006 between Santander
BanCorp and Banco Popular de Puerto Rico
|
|
Exhibit 4.9 10-Q-03/31/06
|
|
|
|
|
|
|
|
(4.9)
|
|
Global Capital Securities Certificate
|
|
Exhibit 4.10 10Q-03/31/06
|
|
|
|
|
|
|
|
(4.10)
|
|
Certificate of Junior Subordinated Debenture
|
|
Exhibit 4.11 10Q-03/31/06
|
|
|
|
|
|
|
|
(10.1)
|
|
Contract for Systems Maintenance between ALTEC & Banco
Santander Puerto Rico
|
|
Exhibit 10A 10K-12/31/02
|
|
|
|
|
|
|
|
(10.2)
|
|
Employment Contract-José Ramón González
|
|
Exhibit 10.1 8K-01/04/07
|
|
|
|
|
|
|
|
(10.3)
|
|
Employment Contract-Carlos M. García
|
|
Exhibit 10.2 8K-01/04/07
|
|
|
|
|
|
|
|
(10.4)
|
|
Deferred Compensation Contract-María Calero
|
|
Exhibit 10C 10K-12/31/02
|
|
|
|
|
|
|
|
(10.5)
|
|
Information Processing Services Agreement between America Latina
Tecnología de Mexico, SA and Banco Santander Puerto Rico, Santander
International Bank of Puerto Rico and Santander Investment International
Bank, Inc.
|
|
Exhibit 10A 10Q-06/30/03
|
|
|
|
|
|
|
|
(10.6)
|
|
Employment Contract-Roberto Córdova
|
|
Exhibit 10.3 10Q-03/31/05
|
|
|
|
|
|
|
|
(10.7)
|
|
Employment Contract-Bartolomé Vélez
|
|
Exhibit 10.7 10K-12/31/06
|
|
|
|
|
|
|
|
(10.8)
|
|
Employment Contract-Lillian Díaz
|
|
Exhibit 10.5 10Q-03/31/05
|
|
|
|
|
|
|
|
(10.9)
|
|
Technology Assignment Agreement between CREFISA, Inc. and Banco
Santander Puerto Rico
|
|
Exhibit 10.12 10KA-12/31/04
|
|
|
|
|
|
|
|
(10.10)
|
|
Altair System License Agreement between CREFISA, Inc. and Banco
Santander Puerto Rico
|
|
Exhibit 10.13 10KA-12/31/04
|
|
|
|
|
|
|
|
(10.11)
|
|
2005 Employee Stock Option Plan
|
|
Exhibit B Def14-03/26/05
|
|
|
|
|
|
|
|
(10.12)
|
|
Asset Purchase Agreement by and among Wells Fargo & Company, Island
Finance Puerto Rico, Inc., Island Finance Sales Finance Corporation and
Santander BanCorp and Santander Financial Services, Inc. for the purpose
and sale of certain assets of Island Finance Puerto Rico, Inc. and Island
Finance Sales Corporation dated as of January 22, 2006.
|
|
Exhibit 10.1 8K-01/25/06
|
133
EXHIBIT INDEX – Con’t
|
|
|
|
|
|
|
Exhibit No.
|
|
Exhibit Description
|
|
Reference
|
|
(10.13)
|
|
Employment Contract-Tomás Torres
|
|
Exhibit 10.16 10Q-09/30/06
|
|
|
|
|
|
|
|
(10.14)
|
|
Employment Contract-Eric Delgado
|
|
Exhibit 10.17 10Q-09/30/06
|
|
|
|
|
|
|
|
(10.15)
|
|
Agreement of Benefits Coverage Agreed with Officers of Grupo Santander
|
|
Exhibit 10.18 10K-12/31/06
|
|
|
|
|
|
|
|
(10.16)
|
|
Employment Contract-Justo Muñoz
|
|
Exhibit 10.18 10Q-06/30/07
|
|
|
|
|
|
|
|
(10.17)
|
|
Bridge Facility Agreement among Santander BanCorp, Santander Financial
Services, Inc. and National Australia Bank Limited.
|
|
Exhibit 10.1 8K-10/09/07
|
|
|
|
|
|
|
|
(10.18)
|
|
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
|
|
Exhibit 10.18
|
|
|
|
|
|
|
|
(10.19)
|
|
Option Agreement among Crefisa, Inc., D&D Investment Group, S.E.,
and Quisqueya 12, Inc.
|
|
Exhibit 10.19
|
|
|
|
|
|
|
|
(10.20)
|
|
Merge Agreement among Banco Santander Puerto Rico and Santander
Mortgage Corporation
|
|
Exhibit 10.20
|
|
|
|
|
|
|
|
(10.21)
|
|
Regulations for the first and second cycle of The Share Plan (“Long Term
Incentive Plan”) among Santander BanCorp and Santander Spain
|
|
Exhibit 10.21
|
|
|
|
|
|
|
|
(12)
|
|
Computation of Ratio of Earnings to Fixed Charges
|
|
Exhibit 12
|
|
|
|
|
|
|
|
(14)
|
|
Code of Ethics
|
|
Exhibit 14 10-KA-12/31/04
|
|
|
|
|
|
|
|
(21)
|
|
Subsidiaries of the Registrants
|
|
Exhibit 21
|
|
|
|
|
|
|
|
(31.1)
|
|
Certification from the Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
Exhibit 31.1
|
|
|
|
|
|
|
|
(31.2)
|
|
Certification from the Chief Operating Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
Exhibit 31.2
|
|
|
|
|
|
|
|
(31.3)
|
|
Certification from the Chief Accounting Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
Exhibit 31.3
|
|
|
|
|
|
|
|
(32.1)
|
|
Certification from the Chief Executive Officer, Chief Operating Officer and
Chief Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
|
|
Exhibit 32.1
|
134
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March 17,
2008
Stamp No. 2293216
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